<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1998
SECURITIES ACT FILE NO. 333-42055
INVESTMENT COMPANY ACT FILE NO. 811-08543
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 1
(CHECK APPROPRIATE BOX OR BOXES)
--------------
MUNIHOLDINGS FLORIDA INSURED FUND II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
--------------
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
ARTHUR ZEIKEL
MUNIHOLDINGS FLORIDA INSURED FUND II
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. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 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.
--------------
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. [_]
--------------
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 PRICE(2) FEE(3)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest ($.10 par
value).................................... 7,705,000 shares(1) $15.00 $115,575,000 $39,178
</TABLE>
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(1) Includes 1,005,000 shares subject to the Underwriter's over-allotment
option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$303 was previously paid. $38,875 was transmitted in connection with this
filing.
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<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND II
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
Pages............................. Inside Front and Outside Back Cover
Pages; Underwriting
3.Fee Table and Synopsis.............. Prospectus Summary; Fee Table
4.Financial Highlights................ Not Applicable
5.Plan of Distribution................ Prospectus Summary; Net Asset Value;
Underwriting
6.Selling Shareholders................ Not Applicable
7.Use of Proceeds..................... Use of Proceeds; Investment Objective
and Policies
8.General Description of the
Registrant........................ Prospectus Summary; The Fund;
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.......................... Trustees and Officers; Investment
Advisory and Management Arrangements;
Custodian; Transfer Agent, Dividend
Disbursing Agent and Registrar
10.Capital Stock, Long-Term Debt, and
Other Securities.................. Description of Shares
11.Defaults and Arrears on Senior
Securities........................ Not Applicable
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.......................... Trustees 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
Practices......................... Portfolio Transactions
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>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 7, 1998
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
6,700,000 SHARES
MUNIHOLDINGS FLORIDA INSURED FUND II
COMMON SHARES
--------------
MuniHoldings Florida Insured Fund II (the "Fund") is a newly organized, non-
diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal income tax. The Fund also
seeks to offer shareholders the opportunity to own shares the value of which is
exempt from Florida intangible personal property tax. The Fund seeks to achieve
its investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal income tax and which enables
shares of the Fund to be exempt from Florida intangible personal property tax.
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
Shares described herein, the Fund intends to offer shares of preferred shares
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred shares. There can be no assurance, however, that
preferred shares 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 SHARES. SEE "RISKS AND SPECIAL CONSIDERATIONS OF
LEVERAGE" AND "DESCRIPTION OF CAPITAL SHARES."
(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............. $15.00 None $15.00
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Total(4).............. $100,500,000 None $100,500,000
</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 Common Shares 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 1,005,000 shares to cover over-allotments. If all such shares
are purchased, the total Price to Public and Proceeds to Fund will be
$115,575,000. 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 January
, 1998.
--------------
MERRILL LYNCH & CO.
--------------
The date of this Prospectus is January , 1998.
<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
Shares of the Fund. Application will be made to list the Fund's Common Shares
on the New York Stock Exchange. However, during an initial period which is not
expected to exceed two weeks from the date of this Prospectus, the Fund's
Common 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 Common
Shares. Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period.
The issuance of the preferred shares will result in leveraging of the Common
Shares. Although the terms of the preferred share offering will be determined
by the Fund's Board of Trustees, it is anticipated that the preferred shares
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 share
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 Shares with a potentially higher yield.
The Underwriter may engage in transactions that stabilize, maintain, or
otherwise affect the price of the Fund's Common Shares. Such transactions may
include stabilizing, the purchase of the Fund's Common Shares 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 Florida Insured Fund II (the "Fund") is a newly
organized, non-diversified, closed-end management investment
company. See "The Fund."
THE
OFFERING The Fund is offering 6,700,000 Common Shares at an initial offering
price of $15.00 per share. The Common Shares are 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 1,005,000 additional Common 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 income tax. The Fund also
AND seeks to provide shareholders with the opportunity to own shares
POLICIES the value of which is exempt from Florida intangible personal
property tax. The Fund seeks to achieve its investment objective by
investing primarily in a portfolio of long-term, investment grade
municipal obligations the interest on which, in the opinion of bond
counsel to the issuer, is exempt from Federal income tax and which
enable shares of the Fund to be exempt from Florida intangible
personal property tax ("Florida 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 Florida Municipal Bonds, except at times when, in
the judgment of the Investment Adviser, Florida 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 Florida
Municipal Bonds and at least 80% of its assets in Florida Municipal
Bonds and other long-term municipal obligations paying interest
exempt from Federal income tax, but which do not enable Fund shares
to be exempt from Florida intangible personal property tax
("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 income tax or
have significant assets subject to Florida intangible personal
property tax. See "Investment Objective and Policies."
LISTING
Prior to this offering, there has been no public market for the
Common Shares of the Fund. Application will be made to list the
Fund's Common Shares on the New York Stock Exchange. However,
during an initial period which is not expected to exceed two weeks
from the date of this Prospectus, the Fund's shares of Common
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 of Common 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 Shares described herein.
To leverage the Common Shares, the Fund intends to offer preferred
shares within three months after completion of this offering
representing approximately 40% of the Fund's capital immediately
after the issuance of such preferred shares. There can be no
assurance, however, that preferred shares representing such
percentage of the Fund's capital will actually be issued. The
issuance of the preferred shares will result in the leveraging of
the Common Shares. Although the terms of the preferred share
offering will be determined by the Fund's Board of Trustees, it is
anticipated that the preferred shares 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 share offering will be invested in longer-term
obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred shares will be borne
by the Fund and will reduce the net asset value of the Common
Shares. Additionally, under certain circumstances, when the Fund is
required to allocate taxable income to holders of preferred shares,
it is anticipated that the terms of the preferred shares 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 Shares with a potentially higher yield. Investors should
note, however, that leverage creates certain risks for holders of
Common Shares, including higher volatility of both the net asset
value and market value of the Common Shares. Since any decline in
the value of the Fund's investments will be borne entirely by
holders of Common Shares, 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 Common Shares. Additionally,
fluctuations in the dividend rates on, and the amount of taxable
income allocable to, the preferred shares will affect the yield to
holders of Common Shares. See "Risks and Special Considerations of
Leverage." Upon issuance of the preferred shares, holders of the
Common Shares will receive all net income of the Fund remaining
after payment of dividends (and any Additional Distribution) on the
preferred shares and will generally be entitled to a pro rata share
of net realized capital gains. Upon any liquidation of the Fund,
the holders of preferred shares will be entitled to receive
liquidating distributions (expected to equal the original purchase
price per preferred share plus any accumulated and unpaid dividends
thereon and any accumulated and unpaid Additional Distribution)
before any distribution is made to holders of Common Shares. See
"Description of Capital Shares--Preferred Shares."
4
<PAGE>
Holders of preferred shares, voting as a separate class, will be
entitled to elect two of the Fund's Trustees, and holders of common
and preferred shares, voting together as a single class, will be
entitled to elect the remaining Trustees. If, at any time,
dividends on the Fund's preferred shares were to be in arrears in
an amount equal to two full years of dividend payments, the holders
of all outstanding preferred shares, voting as a separate class,
would be entitled to elect a majority of the Fund's Trustees. The
holders of preferred shares will also vote separately on certain
other matters as required under the Fund's Declaration of Trust,
the Investment Company Act of 1940, as amended (the "1940 Act") and
Massachusetts law, but otherwise will have equal voting rights with
holders of Common Shares (one vote per share) and will vote
together with holders of Common Shares as a single class. See
"Description of Capital Shares--Preferred Shares--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
shares. 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 shares
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 Shares will be reduced, and the Fund's leveraged
capital structure could result in a lower rate of return to holders
of Common Shares than if the Fund were not leveraged. The Fund will
have the authority to redeem the preferred shares for any reason
and may redeem all or part of the preferred shares if it
anticipates that the Fund's leveraged capital structure will result
in a lower rate of return to holders of the Common Shares than that
obtainable if the Common Shares were unleveraged for any
significant amount of time.
Prior to the time it offers the preferred shares, the Fund intends
to apply for ratings on such shares from one or more nationally
recognized statistical ratings organizations ("NRSROs"). The Fund
believes that obtaining a rating for the preferred shares will
enhance the marketability of the preferred shares and thereby
reduce the dividend rate on the preferred shares from that which
the Fund would be required to pay if the preferred shares were not
rated.
INVESTMENT
ADVISER Fund Asset Management, L.P. is the Fund's investment adviser and is
responsible for the management of the Fund's investment portfolio
and for providing administrative services to the Fund. For its
services, the Fund pays the Investment Adviser a monthly fee at the
annual rate of 0.55 of 1% of the Fund's average weekly net assets,
including proceeds from the sale of preferred stock. 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 140 registered management investment
companies. The Investment Adviser also offers portfolio management
and portfolio analysis services to individuals and institutions. As
of November 30, 1997, the Investment Adviser and MLAM had a total
of approximately $273.9 billion in investment
5
<PAGE>
company and other portfolio assets under management (approximately
$34.1 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
Shares. From and after issuance of the preferred shares, monthly
distributions to holders of Common Shares will consist of
substantially all net investment income remaining after the payment
of dividends (and any Additional Distribution) on the preferred
shares. It is expected that the Fund will commence paying dividends
to holders of Common Shares 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 Shares and,
after issuance of the preferred shares, on a pro rata basis to
holders of Common Shares and preferred shares. When capital gains
or other taxable income is allocated to holders of preferred shares
under certain circumstances, it is anticipated that the terms of
the preferred shares 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 Shares unless asset
coverage (as defined in the 1940 Act) with respect to the Fund's
preferred shares is at least 200%. If the Fund issues preferred
shares representing 40% of its capital after the time of issuance,
its asset coverage with respect to the preferred shares will be
approximately 250%. If the Fund's ability to make distributions on
its Common Shares 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 Shares.
See "Taxes."
AUTOMATIC All dividend and capital gains distributions will be automatically
DIVIDEND reinvested in additional Common Shares of the Fund unless a
REINVESTMENTshareholder 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 Common Shares of the Fund through Merrill Lynch in
FUND this offering will have an investment option consisting of the
INVESTMENT right to reinvest the net proceeds from a sale of such shares (the
OPTION "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 Common Shares
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. 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 Shares of the Fund are designed primarily for long-term investors
and should not be considered a vehicle for trading purposes. The net asset
value of the Fund's Common Shares 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 Florida
Municipal Bonds and, therefore, it is more susceptible to factors adversely
affecting issuers of Florida Municipal Bonds than is a municipal bond fund that
is not concentrated in issuers of Florida Municipal Bonds to this degree. See
"Investment Objective and Policies--Special Considerations Relating to Florida
Municipal Bonds" and Appendix I, "Economic and Other Conditions in Florida."
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 IBCA, 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
shares. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. It is
not anticipated that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments that may be characterized as
derivatives. These investments include various types of options transactions
and futures and options thereon. Such investments also may consist of non-
municipal tax-exempt securities and securities the potential investment return
on which is based on the change in particular measurements of value or interest
rates ("indexed securities"), including securities the potential investment
7
<PAGE>
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 Shares 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 Shares, hedging transactions will result in a larger
impact on the net asset value of the Common Shares than would be the case if
the Common Shares 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 shares 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.
The Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. See "Description of Capital
Shares--Certain Provisions of the Declaration of Trust."
It is possible that the Fund may not be able to fully dispose of all of its
assets subject to Florida intangible personal property tax by the last business
day of the calendar year. This would subject shares of the Fund to Florida
intangible personal property tax. See "Taxes."
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 Common
Shares):
Management Fees(a)(b)................................................. 0.55%
Interest Payments on Borrowed Funds................................... None
Other Expenses(b)..................................................... 0.12%
----
Total Annual Expenses(b)............................................ 0.67%
====
</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 0.67% (assuming no leverage) and 1.23% (assuming
leverage) and (2) a 5% annual return throughout the
periods:
Assuming No Leverage.................................. $ 7 $21 $37 $ 83
Assuming Leverage..................................... $13 $39 $68 $149
</TABLE>
- --------
(a) See "Investment Advisory and Management Arrangements"--page 29.
(b) In the event that the Fund utilizes leverage by issuing preferred shares
in an amount of approximately 40% of the Fund's capital, it is estimated
that, as a percentage of net assets attributable to Common Shares, the
Management Fees would be 0.92%, Other Expenses would be 0.31% and Total
Annual Expenses would be 1.23%. 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 Florida Insured Fund II (the "Fund") is a newly organized, non-
diversified, closed-end management investment company. The Fund was organized
under the laws of The Commonwealth of Massachusetts on November 17, 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 Shares, 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 income tax. The Fund also seeks to provide
shareholders with the opportunity to own shares the value of which is exempt
from Florida intangible personal property tax. 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
Florida, its political subdivisions, agencies and instrumentalities and by
other qualifying issuers that pay interest that, in the opinion of bond
counsel to the issuer, is exempt from Federal income tax and that enables
shares of the Fund to be exempt from Florida intangible personal property tax
("Florida Municipal Bonds"). The Fund will seek to achieve its investment
objective by seeking to invest substantially all (a minimum of 80%) of its
assets in Florida Municipal Bonds, except at times when, in the judgment of
the Investment Adviser, Florida 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 Florida 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 investment objective
of the Fund is a fundamental policy that may not be changed without a vote of
a majority of the Fund's outstanding voting securities, as defined below
10
<PAGE>
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 Shares.
The Fund ordinarily does not intend to realize significant investment income
not exempt from Federal income tax or have significant assets subject to
Florida intangible personal property tax. To the extent that suitable Florida
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 that, in the
opinion of bond counsel to the issuer, pay interest exempt from Federal income
tax but which would not enable Fund shares to be exempt from Florida
intangible personal property tax ("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 Florida 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 Florida Municipal Bonds and
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 Florida
Municipal Bonds or Municipal Bonds. Certain Non-Municipal Tax-Exempt
Securities may be characterized as derivative instruments. Non-Municipal Tax-
Exempt Securities will be considered "Florida Municipal Bonds" or "Municipal
Bonds" for purposes of the Fund's investment objective and policies.
Investment in Common Shares of the Fund offers several potential benefits.
The Fund offers investors the opportunity to receive income exempt from
Federal income tax and to hold Fund shares exempt from Florida intangible
personal property tax by investing in a professionally managed portfolio
comprised primarily of investment grade insured Florida Municipal Bonds.
Investment in the Fund also relieves the investor of the burdensome
administrative details involved in managing a portfolio of Florida Municipal
Bonds. Additionally, the Investment Adviser will seek to enhance the yield on
the Common Shares by leveraging the Fund's capital structure through the
issuance of preferred shares. 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 Florida Municipal Bonds and Municipal Bonds in which
the Fund will primarily invest are those Florida 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
11
<PAGE>
are A-1+ 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 Florida 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 Florida 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 Florida
Municipal Bonds or Municipal Bonds are covered by insurance policies issued by
insurers whose claims-paying ability is rated AAA by S&P or Fitch 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 Florida 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 Florida 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 common shares 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 Florida Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term Florida Municipal Bonds and Municipal Bonds with a
maturity of between three years and ten years. The Fund may invest in short-
term, tax-exempt securities, short-term U.S. Government securities, repurchase
agreements or cash. Such short-term
12
<PAGE>
securities or cash will not exceed 20% of its total assets except during
interim periods pending investment of the net proceeds of public offerings of
the Fund's securities or in anticipation of the repurchase or redemption of
the Fund's securities and temporary periods when, in the opinion of the
Investment Adviser, prevailing market or economic conditions warrant. The Fund
does not ordinarily intend to realize significant interest income not exempt
from Federal income tax or to hold assets which would subject Fund shares to
Florida intangible personal property taxes.
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 Florida 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 Fund
will seek to limit its investments to municipal bonds insured under insurance
policies 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
or Fitch or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be at all times available. See
Appendix III to this Prospectus for a brief description of S&P's, Fitch's and
Moody's insurance claims-paying ability ratings. Currently, it is anticipated
that a majority of the insured Florida Municipal Bonds and Municipal Bonds in
the Fund's portfolio will be insured by the following insurance companies that
satisfy the foregoing criteria: AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company, Financial Security Assurance and Municipal Bond
Investors Assurance Corporation. The Fund also may purchase Florida Municipal
Bonds and Municipal Bonds covered by insurance issued by any other insurance
company that satisfies the foregoing criteria. It is anticipated that
initially a majority of insured Florida 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 criteria set
forth above that guarantee the payment of principal and interest on specified
eligible Florida Municipal Bonds and Municipal Bonds purchased by the Fund. A
Florida 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 Florida 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 Florida Municipal Bonds
and Municipal Bonds beneficially owned by the Fund. In the event of a sale of
any Florida 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 Florida 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
Trustees 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 .02 of 1% to .25 of 1% of the principal amount of the Florida
Municipal Bonds and Municipal Bonds covered by such Policies. The estimate is
based on the expected composition of the Fund's portfolio of Florida 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 Florida 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 Florida 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 that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate 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's ability to manage
the portfolio may be limited to the extent the Fund holds defaulted
securities, which may limit its ability in certain circumstances to purchase
other Florida 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 with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Trustees determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or discontinue its policy of maintaining
insurance for all or any of the Florida 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 all
circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Florida Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured Florida 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 FLORIDA MUNICIPAL BONDS AND MUNICIPAL BONDS
Florida 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 (such as water, sewer, gas, electricity, solid
waste, heath care, transportation, education and housing 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 bonds are issued by or on behalf of public authorities to
finance various privately operated facilities, including pollution control
facilities or other specialized facilities. For purposes of this Prospectus,
such obligations are referred to as Municipal Bonds if the interest paid
thereon is exempt from Federal income tax and as Florida Municipal Bonds if
the interest thereon is exempt from Federal income tax and such obligations
are issued by or on behalf of the State of Florida, its political
subdivisions, agencies and instrumentalities or are obligations of other
qualifying Florida issuers, even though such bonds may be "private activity
bonds" as discussed below.
The two principal classifications of Florida Municipal Bonds and Municipal
Bonds are "general obligation" bonds and "revenue" bonds, which latter
category includes industrial development bonds ("IDBs") and, for bonds issued
after August 15, 1986, private activity bonds. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. The taxing power of any governmental entity
may be limited, however, by provisions of its state constitution or laws, and
an entity's creditworthiness will depend on many factors, including potential
erosion of the tax base due to population declines, natural disasters,
declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax
base, state legislative proposals or voter initiatives to limit ad valorem
real property taxes and the extent to which the entity relies on Federal or
state aid, access to capital markets or other factors beyond the state or
entity's control. Accordingly, the capacity of the issuer of a general
obligation bond as to the timely payment of interest and the repayment of
principal when due is affected by the issuer's maintenance of its tax base.
Revenue 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; accordingly, the timely payment of interest and
the repayment of principal in accordance with the terms of the revenue or
special obligation bond is a function of the economic viability of such
facility or such revenue source.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a loan
or lease arrangement to a private entity for the purpose of financing
construction or improvement of a facility to be used by the private entity.
Such bonds are secured primarily by revenues derived from loan repayments or
lease payments due from the entity which may or may not be guaranteed by a
parent company or otherwise secured. IDBs and private activity bonds are
generally not secured by a pledge of the taxing power of the issuer of such
bonds. Therefore, an investor should be aware that repayment of such bonds
generally depends on the revenues of a private entity and be aware of the
risks that such an investment may entail. Continued ability of an entity to
generate sufficient revenues for the payment of principal and interest on such
bonds will be affected by many factors including the size of the entity,
capital structure, demand for its products or services, competition, general
economic conditions, government regulation and the entity's dependence on
revenues for the operation of the particular facility being financed. The Fund
may also invest in "moral obligation" bonds,
15
<PAGE>
which are normally issued by special purpose authorities. If an issuer of
moral obligation bonds is unable to meet its obligations, repayment of such
bonds becomes a moral commitment, but not a legal obligation of the state or
municipality in question.
The Fund may invest in Florida Municipal Bonds and Municipal Bonds (and Non-
Municipal Tax-Exempt Securities) the return on which is based on a particular
index or value or interest rates. For example, the Fund may invest in Florida
Municipal Bonds and Municipal Bonds that pay interest based on an index of
Florida Municipal Bond or Municipal Bond interest rates or based on the value
of gold or some other commodity. The principal amount payable upon maturity of
certain Florida 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 Florida
Municipal Bonds and Municipal Bonds, the Fund's return on such Florida
Municipal Bonds and Municipal Bonds will be subject to risk with respect to
the value of the particular index. Interest and principal payable on the
Florida Municipal Bonds and Municipal Bonds may also be based on relative
changes among particular indices. Also, the Fund may invest in so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market rates increase and
increase as short-term market rates decline. The Fund's return on such types
of Florida Municipal Bonds and Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) will be subject to risk with respect to the value of the
particular index, which may include reduced or eliminated interest payments
and losses of invested principal. 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
which 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 will generally 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 that contain limitations on the
extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets. The Investment Adviser believes,
however, that indexed and inverse floating obligations represent flexible
portfolio management instruments for the Fund which allow the Fund to seek
potential investment rewards, hedge other portfolio positions or vary the
degree of investment leverage relatively efficiently under different market
conditions.
Also included within the general category of Florida 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 called "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 type of
financing that has not yet developed the depth of marketability associated
with more conventional securities. Certain investments in lease obligations
may be illiquid. The Fund may not invest in illiquid lease obligations if such
investments, together with all other illiquid investments, would exceed 15% of
the Fund's total assets. The Fund may, however, invest without regard to such
limitation in lease obligations which the Investment Adviser, pursuant to
16
<PAGE>
guidelines that have been adopted by the Board of Trustees and subject to the
supervision of the Board, determines to be liquid. The Investment Adviser will
deem lease obligations to be liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moody's, or BBB or
better by S&P or Fitch. Unrated lease obligations, or those rated below
investment grade, will be considered liquid if the obligations come to the
market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to obligations rated below
investment grade, the Investment Adviser must, among other things, also review
the creditworthiness of the entity obligated to make payment under the lease
obligation and make certain specified determinations based on such factors as
the existence of a rating or credit enhancement such as insurance, the
frequency of trades or quotes for the obligation and the willingness of
dealers to make a market in the obligation.
The value of bonds and other fixed-income obligations may fall when interest
rates rise and rise when interest rates fall. In general, bonds and other
fixed-income obligations with longer maturities will be subject to greater
volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal conditions, it is generally
anticipated that the Fund's average weighted maturity would be in excess of
ten years.
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 Florida Municipal Bonds and Municipal Bonds for investment
by the Fund.
SPECIAL CONSIDERATIONS RELATING TO FLORIDA MUNICIPAL BONDS
The Fund ordinarily will invest at least 80% of its total assets in Florida
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of Florida Municipal Bonds than is a municipal bond mutual
fund that is not concentrated in issuers of Florida Municipal Bonds to this
degree. Many different social, environmental and economic factors may affect
the financial condition of Florida and its political subdivisions. From time
to time Florida and its political subdivisions have encountered financial
difficulties. Florida is highly dependent upon sales and uses taxes, which
account for the majority of its General Fund revenues. The Florida
Constitution does not permit a state or local personal income tax. The
structure of personal income in Florida is also different from the rest of the
nation in that the State has a proportionally greater retirement age
population that is dependent upon transfer payments (social security, pension
benefits, etc.). Such transfer payments can be affected by Federal
legislation. Florida's economic growth is also highly dependent upon other
factors such as changes in population growth, tourism, interest rates and
hurricane activity. In combination, the two amendments to Florida Constitution
may limit the State's ability to raise revenues. In combination, the two
amendments may have an adverse effect on the finances of Florida and its
political subdivisions. The Investment Adviser does not believe that the
current economic conditions in Florida will have a significant adverse effect
on the Fund's ability to invest in investment grade Florida Municipal Bonds.
For a discussion of economic and other conditions in the State of Florida, see
Appendix I, "Economic and Other Conditions in Florida."
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
17
<PAGE>
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 Shares pursuant to
tender offers or otherwise to redeem or repurchase preferred shares 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 Florida 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.
Indexed and Inverse Floating Obligations. The Fund may invest in Florida
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 Florida 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 Florida 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 Florida 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 Florida Municipal Bond or Municipal
Bond issuer's right to call all or a portion of such Florida 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 Florida Municipal Bonds or Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Florida Municipal Bond or Municipal Bond will expire without
value. The economic effect of holding both the Call Right and the related
Florida Municipal Bond or Municipal Bond is identical to holding a Florida
Municipal Bond or Municipal Bond as a non-callable security.
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<PAGE>
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts ("financial futures contracts") and options
thereon. While the Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of the Common Shares, the net asset value of
the Common Shares 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 Shares, hedging transactions will
result in a larger impact on the net asset value of the Common Shares than
would be the case if the Common Shares 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 shares 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 Trustees 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 Florida 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.
19
<PAGE>
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the sale
will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities 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 Florida 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 Florida 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.
20
<PAGE>
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 Trustees, 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
Florida 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.
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 Florida
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.
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<PAGE>
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 volume of trading in the exchange markets with respect to Florida
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.
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<PAGE>
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately three months after the completion of the offering of
shares of Common Shares, the Fund intends to offer shares of preferred shares
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred shares. There can be no assurance, however, that
preferred shares representing such percentage of the Fund's capital will
actually be issued. The issuance of the preferred shares will result in the
leveraging of the Common Shares. Although the terms of the preferred shares
offering will be determined by the Fund's Board of Trustees, it is anticipated
that the preferred shares 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 shares offering will be invested in longer-term
obligations in accordance with the Fund's investment objective. Issuance and
ongoing expenses of the preferred shares will be borne by the Fund and will
reduce the net asset value of the Common Shares. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to holders
of preferred shares, it is anticipated that the terms of the preferred shares
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 shares and the longer-term rates
received by the Fund will provide holders of Common Shares with a potentially
higher yield.
Utilization of leverage, however, involves certain risks to the holders of
Common Shares. For example, issuance of the preferred shares may result in
higher volatility of the net asset value of the Common Shares and potentially
more volatility in the market value of the Common Shares. In addition,
fluctuations in the short-term and medium-term dividend rates on, and the
amount of taxable income allocable to, the preferred shares will affect the
yield to holders of Common Shares. So long as the Fund, taking into account
the costs associated with the preferred shares 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 shares, the effect of leverage will be to cause holders of Common
Shares 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 Shares 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 Shares. 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 shares approaches the net return on the Fund's
investment portfolio, the benefit of leverage to holders of Common Shares will
be reduced, and if the current dividend rate (and any Additional Distribution)
on the preferred shares 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 Shares than if the Fund were not leveraged. Similarly,
since both the cost associated with the issuance of preferred shares and any
decline in the value of the
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<PAGE>
Fund's investments (including investments purchased with the proceeds from any
preferred share offering) will be borne entirely by holders of Common Shares,
the effect of leverage in a declining market would result in a greater
decrease in net asset value to holders of Common Shares 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 Shares. 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 Shares dividend
payments. If the Fund's current investment income were not sufficient to meet
dividend requirements on either the Common Shares or the preferred shares, 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 shares for
any reason and may redeem all or part of the preferred shares 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
Shares than that obtainable if the Common Shares were unleveraged, (ii) the
asset coverage for the preferred shares 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 Shares in tender offers, or (iii) in order to
maintain the asset coverage guidelines established by the NRSROs that have
rated the preferred shares. Redemption of the preferred shares or insufficient
investment income to make dividend payments, may reduce the net asset value of
the Common Shares 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 shares
that pays dividends at a rate that generally will be adjusted every 28 days in
an amount representing approximately 40% of the Fund's capital at an annual
dividend rate of 3.50% payable on such preferred shares 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 1.00%.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Shares of the leverage obtained by the issuance of
preferred shares representing approximately 40% 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
shareholders 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 Shares Return................... (15)% (8)% (1)% 6% 13%
</TABLE>
Leveraging of the Common Shares cannot be fully achieved until preferred
shares are issued and the proceeds of the offering of preferred shares have
been invested in long-term Florida 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 Shares as noted above, or in anticipation
of such changes, the Fund may attempt to shorten the average maturity of its
investment portfolio,
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<PAGE>
which would tend to offset the negative impact of leverage on holders of
Common Shares. The Fund also may attempt to reduce the degree to which it is
leveraged by redeeming preferred shares pursuant to the provisions of the
Fund's Certificate of Designation establishing the rights and preferences of
the preferred shares or otherwise purchasing preferred shares. Purchases and
redemptions of preferred shares, 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
preferred shares or preferred shares that the Fund previously issued but later
repurchased or redeemed.
The Fund intends to apply for ratings of the preferred shares 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 managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies. Ratings on preferred shares 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 preferred shares
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 shares (expected to equal the original purchase price of the
outstanding preferred shares 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 Shares 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 preferred shares representing
approximately 40% of the Fund's capital, the net asset value of the Fund's
portfolio is expected to be approximately 250% of the liquidation value of the
Fund's preferred shares. To the extent possible, the Fund intends to purchase
or redeem preferred shares from time to time to maintain coverage of preferred
shares of at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred shares, may not be changed without the approval
of the holders of a majority of the Fund's outstanding Common Shares (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
Common Shares represented at a meeting at which more than 50% of the
outstanding Common Shares are represented or (ii) more than 50% of the
outstanding shares). Subsequent to the issuance of the preferred shares, the
following investment restrictions may not be changed without the approval of a
majority of the outstanding Common Shares and of the outstanding preferred
shares, voting together as a class, and the approval of a majority of the
outstanding preferred shares, voting separately as a 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.
25
<PAGE>
5. Make loans to other persons, except that the Fund may purchase Florida
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.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Trustees 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 shares 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 shares 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 Florida 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 Florida
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
Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in
which it acts as principal. 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.
26
<PAGE>
TRUSTEES AND OFFICERS
Information about the Trustees, 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 Trustee, executive officer and the portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (65)--President and Trustee (1)(2)--Chairman of the Investment
Adviser (which term, as used herein, includes its corporate predecessors) and
MLAM (which term, as used herein, includes its corporate predecessors) since
1997; President of the Investment Adviser from 1977 to 1997; President of MLAM
from 1977 to 1997; President and Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 1997; Executive Vice President of ML & Co.
since 1990.
Ronald W. Forbes (57)--Trustee (2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York
at Albany, since 1989.
Cynthia A. Montgomery (45)--Trustee (2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate
School of Business Administration, The University of Michigan from 1979 to
1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.
Charles C. Reilly (66)--Trustee (2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania, from 1989
to 1990; Partner, Small Cities Cable Television since 1986.
Kevin A. Ryan (65)--Trustee (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.
Richard R. West (59)--Trustee (2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984 and Dean from 1984 to 1993, and currently Dean Emeritus
of New York University, Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company) and Alexander's Inc. (real estate company).
Terry K. Glenn (57)--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 Merrill
Lynch Funds Distributor, Inc. ("MLFD") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (53)--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 (37)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997 and Director of Taxation
of MLAM since 1990.
27
<PAGE>
Kenneth A. Jacob (46)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997.
Robert A. DiMella, CFA (31)--Vice President and Portfolio Manager (1)(2)--
Vice President of MLAM since 1997; Assistant Vice President of MLAM from 1995
to 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995; Assistant
Portfolio Manager with Prudential Investment Advisers from 1992 to 1993.
Gerald M. Richard (48)--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 and Treasurer since 1984.
Patrick D. Sweeney (43)--Secretary (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Trustee 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.
In the event that the Fund issues preferred shares, in connection with the
election of the Fund's Trustees, holders of shares of preferred shares, voting
as a separate class, will be entitled to elect two of the Fund's Trustees, and
the remaining Trustees will be elected by all holders of capital shares,
voting as a single class. See "Description of Capital Shares."
COMPENSATION OF TRUSTEES
The Fund pays each Trustee not affiliated with the Investment Adviser an
annual fee of $2,000 per year plus $400 per meeting attended, together with
such Trustee'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 Trustees not affiliated with the Investment Adviser, an annual fee
of $900. The Chairman of the Audit Committee receives an additional fee of
$1,000 per year.
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Trustees 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-
affiliated Trustees.
<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 TRUSTEE FROM FUND FUND EXPENSE TRUSTEES
- --------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Ronald W. Forbes (1)........ $2,650 None $142,500
Cynthia A. Montgomery (1)... $2,650 None $142,500
Charles C. Reilly (1)....... $3,150 None $293,833
Kevin A. Ryan (1)........... $2,650 None $142,500
Richard R. West (1)......... $2,650 None $269,833
</TABLE>
- --------
(1) In addition to the Fund, the Trustees serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Forbes (29 registered investment
companies consisting of 42 portfolios); Ms. Montgomery (29 registered
investment companies consisting of 42 portfolios); Mr. Reilly (47
registered investment companies consisting of 60 portfolios); Mr. Ryan (29
registered investment companies consisting of 42 portfolios); and Mr. West
(48 registered investment companies consisting of 70 portfolios).
28
<PAGE>
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 140 other
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of November 30, 1997, the Investment Adviser and MLAM had a total of
approximately $273.9 billion in investment company and other portfolio assets
under management (approximately $34.1 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 supervision of
the Board of Trustees of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees.
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. Robert A. DiMella 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 .55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the issuance of
preferred shares, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the preferred shares). 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 Trustees 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, share 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 shares,
Securities and Exchange Commission fees, fees and expenses of unaffiliated
Trustees, 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.
29
<PAGE>
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 Trustees of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Trustees who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
its 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 Trustees 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 Trustees 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.
30
<PAGE>
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provided supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses
of the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information.
The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Under
the 1940 Act, except as permitted by exemptive order, persons affiliated with
the Fund are prohibited from dealing with the Fund as principal in the
purchase and sale of securities. Since transactions in the over-the-counter
market usually involve transactions with dealers acting as principal for their
own account, the Fund will not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions except that,
pursuant to an exemptive order obtained by the Investment Adviser, the Fund
may engage in principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities. See "Investment Restrictions." An
affiliated person of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis.
The Fund may also 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. 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 Shares. It is expected that the Fund will commence paying dividends to
holders of Common Shares within approximately 90 days of the date of this
Prospectus. From and after issuance of the preferred shares, monthly
distributions to holders of Common Shares normally will consist of
substantially all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the preferred shares. All net
realized capital gains (including new categories of capital gains, as
discussed below), if any, will be distributed pro rata at least annually to
holders of Common Shares and any preferred shares. While any preferred shares
are outstanding, the Fund may not declare any cash dividend or other
distribution on its Common Shares, unless at the time of such declaration, (i)
all accumulated
31
<PAGE>
preferred share 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 shares (expected to
equal the original purchase price of the outstanding preferred shares 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 Shares 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 would have adverse tax consequences for
holders of Common Shares. See "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of Common Shares may be
automatically reinvested in Common Shares of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. 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. 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
32
<PAGE>
financed with the proceeds of an issue of "industrial development bonds" or
"private activity bonds," if any, held by the Fund.
The Fund has applied for a ruling from the Florida Department of Revenue
that shares of the Fund will be exempt from Florida intangible personal
property tax in the following year, if, on the last business day of any
calendar year, the Fund's assets consist solely of assets exempt from Florida
intangible personal property tax ("asset requirement"). Although there is no
assurance that the Florida Department of Revenue will issue a favorable ruling
on this issue, the Florida Department of Revenue has previously issued similar
rulings. The Florida Department of Revenue has the authority to revoke or
modify a previously issued ruling; however, if a ruling is revoked or
modified, the revocation or modification is prospective only. Prior to receipt
of the ruling from the Florida Department of Revenue, the Fund will rely on an
opinion of Florida counsel for the Fund, Holland & Knight LLP, stating that
Fund shares will be exempt from Florida intangible personal property tax if
the asset requirement is met. This opinion is based on existing Florida law
and interpretive authority which could be changed at any time retroactively.
While the opinion represents the best judgment of Holland & Knight LLP, the
legal conclusions reached therein are not binding on the Florida Department of
Revenue, and there is no assurance that the legal conclusions will not be
challenged by the Department of Revenue or in judicial or administrative
proceedings. Thus, under Florida counsel's opinion or if a favorable ruling is
issued, and if the asset requirement is met, shares of the Fund owned by
Florida residents will be exempt from Florida intangible personal property
tax. Assets exempt from Florida intangible personal property tax include
Florida Municipal Bonds, obligations of the United States Government or its
agencies, and cash.
The Fund may from time to time hold assets that are not exempt from Florida
intangible personal property tax. It is possible that the Fund may not be able
to fully dispose of all of its assets subject to Florida intangible personal
property tax by the last business day of the calendar year. This would subject
shares of the Fund to Florida intangible personal property tax. If shares of
the Fund are subject to Florida intangible personal property tax because the
asset requirement is not met, only that portion of the value of Fund shares
equal to the portion of the net asset value of the Fund that is attributable
to obligations of the United States Government will be exempt from taxation.
The Fund will attempt to monitor its portfolio so that on the last business
day of each calendar year the Fund's assets consist solely of assets exempt
from Florida intangible personal property tax.
Dividends paid by the Fund to individuals who are Florida residents are not
subject to personal income taxation by Florida, because Florida does not
impose a personal income tax. Distributions of investment income and capital
gains by the Fund will be subject to Florida corporate income taxes, state
taxes in states other than Florida and local taxes in cities other than those
in Florida. Shareholders not subject to taxation by Florida do not benefit
from the fact that shares of the Fund will be exempt from the Florida
intangible personal property tax. 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.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions
will be considered taxable ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating
33
<PAGE>
the amounts of any exempt-interest dividends, ordinary income dividends or
capital gain dividends, as well as the amount of capital gain dividends in the
different categories of capital gain referred to above. 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 (the "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 (including the
additional categories of capital gains, discussed above). 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 Shares and preferred shares
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 Shares and preferred shares in
proportion to the total dividends paid to each class during the taxable year,
or otherwise as required by applicable law. Capital gain dividends (including
the additional categories of capital gains, discussed above) 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 shares pursuant to the allocation rules described above, the terms
of the preferred shares may require the Fund to make an additional
distribution to or otherwise compensate such holders for the tax liability
resulting from such allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and that benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" that could subject certain investors
in such bonds, including shareholders of the Fund, to an increased alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after its taxable year-end the
portion of its dividends declared during the year that constitutes an item of
tax preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable
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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 preferred shares 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 Shares 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 preferred shares 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 shares that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such preferred
shares are "preferential" under the Code and, therefore, not eligible for the
dividends paid deduction. The Fund intends to issue preferred shares that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the Service to that effect. If the Fund
ultimately relies solely on a legal opinion when it issues such preferred
shares, there is no assurance that the Service would agree that dividends on
the preferred shares are not preferential. If the Service successfully
disallowed the dividends paid deduction for dividends on the preferred shares,
the Fund could be disqualified as a RIC. In this case, dividends on the Common
Shares 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 of the shareholders,
including shareholders who do not participate in the dividend reinvestment
plan. Thus, shareholders who do not participate in the dividend reinvestment
plan might be required to report as ordinary income a portion of their
distributions equal to their allocable share of the discount.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under
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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 investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
FLORIDA TAXATION OF THE FUND
If the Fund does not have a taxable nexus to Florida, such as through the
location within the state of the Fund's activities or those of the Investment
Adviser, under present Florida law, the Fund is not subject to Florida
corporate income taxation. Additionally, if the Fund's assets do not have a
taxable situs in Florida on January 1 of each calendar year, the Fund will not
be subject to Florida intangible personal property tax. If the Fund has a
taxable nexus to Florida or the Fund's assets have a taxable situs in Florida,
the Fund will be subject to Florida taxation.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and Florida tax laws presently
in effect. For the complete provisions, reference should be made to the
pertinent Code sections, the Treasury Regulations promulgated thereunder and
Florida tax laws. The Code
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and the Treasury Regulations, as well as the Florida 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 Shares otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by The Bank of New York,
as agent for shareholders in administering the Plan (the "Plan Agent"), in
additional Common Shares of the Fund. Holders of Common Shares 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 The Bank of New
York, 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 The Bank of New York, 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 Common Shares. 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 Common Shares from the Fund ("newly
issued shares") or (ii) by purchase of outstanding Common Shares 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 Shares is equal to or less than the market price per Common Shares 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 Shares 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 Common Shares commence trading on the New York Stock
Exchange, participants in the Plan will receive any dividends in newly issued
shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten
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days. If, before the Plan Agent has completed its open-market purchases, the
market price of a Common Share 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 101 Barclay Street, New York, New York 10286.
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MUTUAL FUND INVESTMENT OPTION
Purchasers of Common Shares 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
Common Shares 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 Common Shares 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 Common Share 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 Common Share, 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 preferred shares is divided by the total
number of Common Shares outstanding at such time. Expenses, including the fees
payable to the Investment Adviser, are accrued daily.
The Florida 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 Trustees. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. Florida 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 Trustees. The Board of Trustees 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 Trustees.
It is the intention of the Investment Adviser, subject to guidelines
established by the Board of Trustees of the Fund, to hold insured Florida
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 Adviser will consider the following factors in determining the
effective value of insured Florida Municipal Bonds
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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 Shares 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 SHARES
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, par value $.10 per share. The Board of Trustees may authorize
separate classes of shares together with such preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as may be determined from
time to time by the Trustees. Pursuant to such authority, the Trustees have
authorized the issuance of an unlimited number of Common Shares together with
preferred shares. Within approximately three months after completion of the
offering of the Common Shares described herein, the Fund intends to offer
preferred shares representing approximately 40% of the Fund's capital
immediately after the issuance of such preferred shares. There is no assurance
that such preferred shares will be issued.
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust of the Fund contains an express
disclaimer of shareholder liability for acts or obligations of the Fund and
provides for indemnification and reimbursement of expenses out of the Fund's
property for any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations. Given the nature of the Fund's assets
and operations, the possibility of the Fund being unable to meet its
obligations is remote and, in the opinion of Massachusetts counsel to the
Fund, the risk to Fund shareholders is remote.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to any shareholder, nor is any
Trustee, officer, employee of agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or
her own bad faith, willful misfeasance, gross negligence, or reckless
disregard of their duties. It also provides that all third persons shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
COMMON SHARES
Common Shares, 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.
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So long as any shares of the Fund's preferred shares are outstanding,
holders of Common Shares will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on
preferred shares have been paid and unless asset coverage (as defined in the
1940 Act) with respect to preferred shares would be at least 200% after giving
effect to such distributions. See "Preferred Shares" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 Common Shares of the Fund for $100,005. As of the date of
this Prospectus, the Investment Adviser owned 100% of the outstanding Common
Shares of the Fund. The Investment Adviser may be deemed to control the Fund
until such time as it owns less than 25% of the outstanding shares of the
Fund.
PREFERRED SHARES
It is anticipated that the Fund's preferred shares will be issued in one or
more series, with rights as determined by the Board of Trustees, by action of
the Board of Trustees without the approval of the holders of Common Shares.
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 Shares have no preemptive right to purchase any
preferred shares that might be issued. It is anticipated that the net asset
value per the preferred shares will equal its original purchase price per
share plus accumulated dividends per share.
The Fund's Board of Trustees has declared its intention to authorize an
offering of preferred shares (representing approximately 40% of the Fund's
capital immediately after the issuance of such preferred shares) within
approximately three months after completion of the offering of Common Shares,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
shares is likely to achieve the benefits to the holders of Common Shares
described in the Prospectus. Although the terms of the preferred shares,
including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Trustees (subject to
applicable law and the Fund's Declaration of Trust), the initial series of
preferred shares 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
shares, it is anticipated that the terms of the preferred shares 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 shares will be as stated
below. The Fund's Declaration of Trust, as amended, together with any
Certificate of Designation, 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 preferred
shares 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
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any distribution of assets is made to holders of Common Shares. After payment
of the full amount of the liquidating distribution to which they are entitled,
the preferred shareholders 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 preferred shares will have
equal voting rights with holders of Common Shares (one vote per share) and
will vote together with holders of Common Shares as a single class.
In connection with the election of the Fund's trustees, holders of preferred
shares, voting as a separate class, will be entitled to elect two of the
Fund's trustees, and the remaining trustees will be elected by all holders of
capital shares, voting as a single class. So long as any preferred shares are
outstanding, the Fund will have not less than five trustees. If at any time
dividends on the Fund's preferred shares shall be unpaid in an amount equal to
two full years' dividends thereon, the holders of all outstanding preferred
shares, voting as a separate class, will be entitled to elect a majority of
the Fund's trustees 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
preferred shares, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of shares ranking prior to any
series of preferred shares with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred shares.
Redemption Provisions. It is anticipated that preferred shares 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. Preferred
shares 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
shares specified by the rating agencies that issue ratings on the preferred
shares.
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
The Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees 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 trustee 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 trustee elected by
all the holders of capital shares may be removed only by action of such
holders, and a trustee elected by the holders of preferred shares may be
removed only by action of such holders.
In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 66 2/3% of the Fund's capital shares 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,
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(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 Trustees fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's capital shares
is required. Following the proposed issuance of the preferred shares, 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 preferred
shares then entitled to be voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Declaration of Trust. The amendment would
have to be declared advisable by the Board of Trustees 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 capital shares
(including any preferred shares) 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 Trustees
fixed in accordance with the by-laws), and, assuming preferred shares are
issued, the affirmative vote of a majority of outstanding preferred shares 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 common shares 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 Shares
would no longer be listed on a stock exchange.
Conversion to an open-end investment company would also require redemption
of all outstanding preferred shares 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 Trustees has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Massachusetts 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 The
Bank of New York, 90 Washington Street, New York, New York 10286.
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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 6,700,000 Common Shares 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
Common Shares 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 Common Shares 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 Common Shares 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 Common Shares purchased in the offering on
or before January , 1998.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 1,005,000 additional Common Shares to
cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the Common Shares. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Common Shares.
If the Underwriter creates a short position in the Common Shares in
connection with the offering, i.e., if it sells more Common Shares than are
set forth on the cover page of this Prospectus, the Underwriter may reduce
that short position by purchasing Common Shares in the open market. The
Underwriter also may elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases Common Shares in the
open market to reduce the Underwriter's short position or to stabilize the
price of the Common Shares, it may reclaim the amount of the selling
concession from the selling group members who sold those Common Shares 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 Common
Shares. Application will be made to list the Fund's Common Shares on the New
York Stock Exchange. However, during an initial period which is not expected
to exceed two weeks from the date of this Prospectus, the Fund's Common Shares
will not be listed on any securities exchange. Additionally, during such
period, the Underwriter does not intend to make a market
44
<PAGE>
in the Fund's Common 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.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the Common
Shares of the Fund will be The Bank of New York, 101 Barclay Street, New York,
New York 10286.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood llp, New
York, New York. Brown & Wood llp will rely as to matters of Massachusetts law
on the opinion of Bingham Dana LLP, Boston, Massachusetts. Certain information
under the caption "Taxes" relating to matters of Florida law will be passed
upon for the Fund and the Underwriter by Holland & Knight LLP, Tampa, Florida.
EXPERTS
The statement of assets, liabilities and capital of the Fund included in
this Prospectus has been so included in reliance on the report of ,
independent auditors, and on their authority as experts in auditing and
accounting. The selection of independent auditors is subject to ratification
by shareholders of the Fund.
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholder of MuniHoldings Florida Insured Fund
II:
We have audited the accompanying statement of assets, liabilities and
capital of MuniHoldings Florida Insured Fund II as of , 1998. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniHoldings
Florida Insured Fund II as of , 1998 in conformity with generally
accepted accounting principles.
46
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND II
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 1998
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Deferred organization expenses and offering costs (Note 1)..........
--------
Total assets......................................................
--------
LIABILITIES
Accrued expenses (Note 1)...........................................
--------
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Shares, par value $.10 per share; unlimited shares
authorized; 6,667 shares issued and outstanding (Note 1)........... $ 667
Paid-in Capital in excess of par.................................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per common share
(Note 1)........................................................... $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was organized under the laws of the Commonwealth of Massachusetts
on November 17, 1997 as a closed-end, non-diversified management investment
company and has had no operations other than the sale to Fund Asset
Management, L.P. (the "Investment Adviser") of an aggregate of 6,667 shares
for $100,005 on , 1998. The General Partner of the Investment
Adviser is an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a five-year period beginning with the commencement of operations of the Fund.
Direct costs relating to the public offering of the Fund's shares will be
charged to capital at the time of issuance of shares.
NOTE 2. 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 .55 of 1% of the
average weekly net assets of the Fund.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
47
<PAGE>
APPENDIX I
ECONOMIC AND OTHER CONDITIONS IN FLORIDA
The following information is a brief summary of factors affecting the
economy of the State of Florida (the "State") and does not purport to be a
complete description of such factors. Other factors will affect issuers. The
summary is based upon one or more publicly available offering statements
relating to debt offerings of the State; however, it has not been updated nor
will it be updated during the year. The Fund has not independently verified
the information.
Throughout the 1980s, the State's unemployment rate has, generally, tracked
below that of the nation. In the nineties, the trend was reversed, until 1995
and 1996, when the State's unemployment rate again tracked below the national
average. The State's unemployment rate is projected to be 5.3% in 1996-97 and
1997-98. The average rate of unemployment for both the State and the nation,
coincidentally, since 1987 is 6.2%. (The projections set forth in this
Appendix were obtained from a report, prepared by the Revenue and Economic
Analysis Unit of the Executive Office of the Governor for the State of
Florida, contained within a recent official statement, dated August 4, 1997,
for a State of Florida debt offering.)
Personal income in the State has grown at a strong pace and has generally
outperformed both the nation as a whole and the Southeast in particular. From
1985 through 1995, the State's per capita income rose an average 5.0% per
year, while the national per capita income increased an average of 4.9%. Real
personal income in Florida is estimated to increase 4.7% in both 1996-97 and
1997-98 while real personal income per capita is projected to grow at 2.3% in
1996-97 and 2.4% in 1997-98.
The structure of Florida's income differs from that of the nation and the
southeast. Because Florida has a proportionally greater retirement age
population, property income (dividends, interest, and rent) and transfer
payments (social security and pension benefits, among other sources of income)
are a relatively more important source of income. For example, Florida's
employment income in 1995 represented 60.6% of total personal income, while
the nation's share of total personal income in the form of wages and salaries
and other labor benefits was 70.8%. Florida's income is dependent upon
transfer payments controlled by the federal government.
The State's strong population growth is one fundamental reason why its
economy has typically performed better than the nation as a whole. In 1980,
the State was ranked seventh among the 50 states with a population of 9.7
million people. The State has grown dramatically since then and as of April 1,
1996 ranked fourth with an estimated population of 14.4 million. For the years
1987 through 1996, the State's average annual rate of population increase has
been approximately 2.3% as compared to an approximately 1.0% for the nation as
a whole. While annual growth in the State's population is expected to decline
somewhat, it is still expected to grow close to 230,000 new residents per year
throughout the 1990s.
Tourism is one of the State's most important industries. 42.9 million people
visited the State in 1995, according to the Florida Department of Commerce.
Tourism arrivals are expected to increase by 3.1% this fiscal year and 4.7%
next year. By the end of the fiscal year, 42.7 million domestic and
international tourists are expected to have visited the State. In 1997-98,
tourist arrivals should approximate 44.7 million. Florida tourism appears to
be recovering from the effects of negative publicity regarding crime against
tourists in the state. Factors such as "product maturity" of a Florida
vacation package, higher prices, and more aggressive marketing by competing
vacation destinations, could contribute to a tourism slowdown.
48
<PAGE>
Florida's dependency on the highly cyclical construction and construction-
related manufacturing sectors has declined. For example, total contract
construction employment as a share of total non-farm employment was a little
over 5% in 1996. Florida, nevertheless, has had a dynamic construction
industry, with single and multi-family housing starts accounting for
approximately 8.1% of total U.S. housing starts, while the State's population
was 5.5% of the nation's population in 1996. Total housing starts were 118,400
in 1996. A driving force behind Florida's construction industry is its rapid
growth in population. In Florida, single and multi-family housing starts in
1996-97 are projected to reach a combined level of 116,100, while increasing
115,500 next year. Multi-family starts have been slow to recover, but are
showing stronger growth now and should maintain a level of nearly 30,300 in
1996-97 and 30,900 in 1997-98. Total construction expenditures are forecasted
to increase 7.6% in this year and increase 3.1% next year. This represents a
slower pace of growth than what was originally projected.
Financial operations of the State covering all receipts and expenditures are
maintained through the use of four funds--the General Revenue Fund, Trust
Funds, the Working Capital Fund, and beginning in fiscal year 1994-95, the
Budget Stabilization Fund. In fiscal year 1995-96, the State derived
approximately 66% of its total direct revenues to these funds from State taxes
and fees. Federal funds and other special revenues accounted for the remaining
revenues. Major sources of tax revenues to the General Revenue Fund are the
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax, which amounted to 69%, 7%, 4% and 4%, respectively, of total
General Revenue Funds available. State expenditures are categorized for budget
and appropriation purposes by type of fund and spending unit, which are
further subdivided by line item. In fiscal year 1995-96, expenditures from the
General Revenue Fund for education, health and welfare, and public safety
amounted to approximately 51%, 31% and 14%, respectively, of total General
Revenues.
The Sales and Use Tax is the greatest single source of tax receipts in the
State. For the State fiscal year ended June 30, 1996, receipts from this
source were $11,461 million, an increase of 7.4% from fiscal year 1994-95. The
second largest source of State tax receipts is the Motor Fuel Tax. The
estimated collections from this source during the fiscal year ending June 30,
1996, were $1,923.0 million. Alcoholic beverage tax revenues totalled $441.5
million for the State fiscal year ending June 30, 1996, an increase of $4.2
million from the previous year. The receipts of corporate income tax for the
fiscal year ended June 30, 1996 were $1,162.7 million, an increase of 9.3%
from fiscal year 1994-95. Gross Receipt tax collections for fiscal year 1995-
96 totalled $543.3 million, an increase of 6.9% over the previous fiscal year.
Documentary stamp tax collections totalled $775.2 million during fiscal year
1995-96, posting an 11.5% increase from the previous fiscal year. The
intangible personal property tax is a tax on stocks, bonds, notes,
governmental leaseholds, certain limited partnership interests, mortgages and
other obligations secured by liens on Florida realty, and other intangible
personal property. Total collections from intangible personal property taxes
were $895.9 million during the fiscal year ending June 30, 1996, a 9.5%
increase from the previous fiscal year. Severance taxes totalled $77.2 million
during fiscal year 1995-96, up 26.1% from the previous fiscal year. In
November 1986, the voters of the State approved a constitutional amendment to
allow the State to operate a lottery. Fiscal year 1995-96 produced ticket
sales of $2.07 billion of which education received approximately $788.1
million.
For fiscal year 1997-98 the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $17,553.9 million, a 5.6%
increase over 1996-97. The $16,321.6 million in estimated revenues represent a
4.8% increase over the analogous figure in 1996. With combined General
Revenue, Working Capital Fund and Budget Stabilization Fund appropriations at
$16,716.5 million, unencumbered reserves at the end of 1997-98 are estimated
at $837.4 million.
49
<PAGE>
The State Constitution does not permit a state or local personal income tax.
An amendment to the State Constitution by the electors of the State would be
required in order to impose a personal income tax in the State.
Property valuations for homestead property are subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption is limited to 3% or the change in the Consumer Price Index,
whichever is less. If the property changes ownership or homestead status, it
is to be re-valued at full just value on the next tax roll. Although the
impact of the growth cap cannot be determined, it may have the effect of
causing local government units in the State to rely more on non-ad valorem tax
revenues to meet operating expenses and other requirements normally funded
with ad valorem tax revenues.
An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are
required to be transferred to the Budget Stabilization Fund until the fund
reaches the maximum balance specified in Section 19(g) of Article III of the
State Constitution, and thereafter is required to be refunded to taxpayers as
provided by general law. The limitation on State revenues imposed by the
amendment may be increased by the Legislature, by a two-thirds vote of each
house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of Bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception
of State matching funds used to fund elective expansions made after July 1,
1994; (iii) proceeds from the State lottery returned as prizes; (iv) receipts
of the Florida Hurricane Catastrophe Fund; (v) balances carried forward from
prior fiscal years; (vi) taxes, licenses, fees and charges for services
imposed by local, regional, or school district governing bodies; or (vii)
revenue from taxes, licenses, fees and charges for services required to be
imposed by any amendment or revision to the State Constitution after July 1,
1994. The amendment took effect on January 1, 1995 and is applicable to State
fiscal year 1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation will
itself be the subject of court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State
which are subject to, and limited by, the amendment, the future distribution
of such State revenues may be adversely affected by the amendment.
50
<PAGE>
Hurricanes continue to endanger the coastal and interior portions of
Florida. Substantial damage resulted from Hurricane Andrew in 1992. The 1995
hurricane season also experienced a record number of tropical storms and
hurricanes which caused substantial damage. During 1996 hurricane season and
thus far during 1997 hurricane season the State has suffered considerably less
damage than in 1995.
According to the Florida General Purposes Financial Statements for fiscal
year ended June 30, 1996 as of June 30, 1996, the State had a high bond rating
from Moody's Investors Service, Inc. (Aa), Standard & Poor's Ratings Services
(AA) and Fitch Investors Service, Inc. (AA) on all of its general obligation
bonds. Outstanding general obligation bonds at June 30, 1996 totalled almost
$7.4 billion and were issued to finance capital outlay for educational
projects of both local school districts, community colleges and state
universities, environmental protection and highway construction. The State has
issued over $805 billion of general obligation bonds since July 1, 1996.
Due to investments in certain derivatives, Escambia County, Florida in 1994
sustained notable losses which may in the future affect their operations. As
reported in the local press, several lawsuits have resulted regarding such
investments.
In late October, 1996, the Florida Auditor General notified the Governor's
office that seventeen municipalities or special districts are in a state of
financial emergency (including the Orlando-Orange County Expressway Authority
and the Pinellas Suncoast Transit Authority) and that another twenty-five
municipalities or special districts might be in a state of financial emergency
(including the City of Miami). For these purposes, a state of emergency is
considered two consecutive years of budget deficits. Municipalities or special
districts that may be in a state of financial emergency are those that the
Auditor General was unable to conclude had sufficient revenues to cover their
deficits. The operations of all these entities mentioned in the Auditor
General's communication may be adversely affected by their financial
condition.
51
<PAGE>
APPENDIX II
RATINGS OF MUNICIPAL BONDS
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.
Note: Those 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.
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<PAGE>
Short-term Notes: The four ratings of Moody's for short-term notes 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. . . [p]rotection commonly regarded as required of an investment
security is present . . . there is specific risk."
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:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of 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 well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
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 may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor'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 based on circumstances.
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<PAGE>
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--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 Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest rated issues only in small
degree. The Obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation. While
CC such debt will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.
Debt rated "D" is in payment default. The "D" rating category is used
D when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition
or the taking of similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. 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 designation 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 an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
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<PAGE>
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP- Strong capacity to pay principal and interest. An issue determined to
1 possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP- Satisfactory capacity to pay principal and interest with some
2 vulnerability to adverse financial and economic changes over the term of
the notes.
SP- Speculative capacity to pay principal and interest.
3
DESCRIPTION OF FITCH IBCA, 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.
55
<PAGE>
Bonds carrying 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.
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.
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,"
56
<PAGE>
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 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds are in imminent default in payment of interest or
principal.
DDD, DD, 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.
57
<PAGE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
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.
58
<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 Florida 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
Florida 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 Florida
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 Florida 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") or
Fitch IBCA, Inc. ("Fitch") or Aaa from Moody's Investors Service, Inc.
("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 or
Fitch. Capacity to honor insurance contracts is considered by S&P and Fitch 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. A Fitch insurance claims-paying ability rating provides an
assessment of an insurance company's financial strength and, therefore, its
ability to pay policy and contract claims under the terms indicated. An
insurer with an insurance claims-paying ability rating of AAA has the highest
rating assigned by Fitch. The ability to pay claims is adjudged by Fitch to be
extremely strong for insurance companies with this highest rating. In the
opinion of Fitch, foreseeable business and economic risk factors should not
have any material adverse impact on the ability of these insurers to pay
claims. In Fitch's opinion, profitability, overall balance sheet strength,
capitalization and liquidity are all at very secure levels and are unlikely to
be affected by potential adverse underwriting, investment or cyclical events.
59
<PAGE>
An insurance claims-paying ability rating of S&P, Fitch 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, Fitch 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.
60
<PAGE>
APPENDIX IV
TAXABLE EQUIVALENT YIELDS FOR 1998
<TABLE>
<CAPTION>
TAXABLE INCOME* A TAX-EXEMPT YIELD OF
- ---------------------------- --------------------------------------
SINGLE 1998 FEDERAL
RETURN JOINT RETURN TAX BRACKET 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
------ ----------------- ------------ ----- ----- ----- ------ ------ ------
IS EQUAL TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,351-
$ 61,400 $ 42,351-$102,300 28.00% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42%
$ 61,401-
$128,100 $102,301-$155,950 31.00% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87%
$128,101-
$278,450 $155,951-$278,450 36.00% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72%
Over
$278,450 Over $278,450 39.60% 8.28% 9.11% 9.93% 10.76% 11.59% 12.41%
</TABLE>
- --------
* Because Florida does not impose a personal income tax, this table reflects
only the effect of exemption from Federal income tax. 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. Income also may be
subject to certain state and local taxes. For investors who pay alternative
minimum tax, tax-exempt yields may be equivalent to lower taxable yields
than those shown above. The tax rates shown above do not apply to corporate
taxpayers. The tax characteristics of the Fund are described more fully
elsewhere in this Prospectus. Consult your tax adviser for further details.
This chart is for illustrative purposes only and cannot be taken as an
indication of anticipated Fund performance.
61
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN 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............................... 23
Investment Restrictions.................................................... 25
Trustees and Officers...................................................... 27
Investment Advisory and Management Arrangements............................ 29
Portfolio Transactions..................................................... 30
Dividends and Distributions................................................ 31
Taxes...................................................................... 32
Automatic Dividend Reinvestment Plan....................................... 37
Mutual Fund Investment Option.............................................. 39
Net Asset Value............................................................ 39
Description of Capital Shares.............................................. 40
Custodian.................................................................. 43
Underwriting............................................................... 44
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 45
Legal Opinions............................................................. 45
Experts.................................................................... 45
Independent Auditors' Report............................................... 46
Statement of Assets, Liabilities and Capital............................... 47
Appendix I................................................................. 48
Appendix II................................................................ 52
Appendix III............................................................... 59
Appendix IV................................................................ 61
</TABLE>
---------------
UNTIL APRIL , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON SHARES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,700,000 SHARES
MUNIHOLDINGS FLORIDA INSURED FUND II
COMMON SHARES
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
JANUARY , 1998
CODE 19002-0198
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 , 1998
(2) Exhibits:
(a)--Declaration of Trust(a)
(b)--By-Laws(a)
(c)--Not applicable
(d)(1)--Portions of the Declaration of Trust and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(b)
(d)(2)--Form of specimen certificate for Common Shares of the Registrant
(e)--Form of Automatic 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)--Form of Custodian Contract between the Fund and*
(k)--Form of Registrar, Transfer Agency and Service Agreement between
the Fund and*
(l)--Opinion and Consent of Brown & Wood llp*
(m)--Not applicable
(n)(1)--Opinion and Consent of Holland & Knight LLP
(n)(2)--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) Filed on December 11, 1997 as an Exhibit to the Registrant's Registration
Statement on Form N-2.
(b) Reference is made to Section 3.4, Article V, Article VI (sections 1, 2, 4,
5 and 7), Article VIII, Article IX and Article X of the Registrant's
Declaration of Trust, filed as Exhibit (a) 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 Exhibits (h)(1) and (h)(2).
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..................................................... $ *
New York Stock Exchange listing fee................................... *
Printing (other than share certificates).............................. *
Engraving and printing share 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 Shares, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of good faith and reasonable
belief as to the best interests of the Trust, had been adjudicated, it
would have been adjudicated in favor of such person. The rights accruing to
any person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no person may satisfy any
right of indemnity or reimbursement granted herein or in Section 5.1 or to
which he may be otherwise entitled except out of the property of the Trust,
and no Shareholder shall be personally liable to any person with respect to
any claim for indemnity or reimbursement or otherwise. The Trustees may
make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."
C-2
<PAGE>
The Registrant's By-Laws provide that insofar as the conditional advancing
of indemnification moneys pursuant to Section 5.3 of the Declaration of Trust
for actions based upon the Investment Company Act of 1940 may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined he is
entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.
In Section 8 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to trustees, 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 trustee, officer or controlling
person of the Fund in connection with any successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
will be filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following open-end registered 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
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund,
C-3
<PAGE>
Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc.,
Debt Strategies Fund, 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.,
MuniHoldings California Insured Fund, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings New York Insured Fund,
Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest Florida Fund, 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
registered 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 Convertible Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and
Wiley, a division of MLAM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisory Trust.
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 Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646.
The address of the Investment Adviser, MLAM, Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. also is P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower,
World Financial Center, 250 Vesey Street, New York, New York 10281-1213.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of all or substantially all of the investment companies
described in the preceding paragraphs and also hold the same positions with
all or substantially all of the investment companies advised by MLAM as they
do with those advised by the Investment Adviser. Messrs. Giordano, Harvey,
Kirstein and Monagle are directors or officers of one or more of such
companies.
C-4
<PAGE>
<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
MLAM
Princeton Services.... General Partner General Partner of MLAM
Arthur Zeikel......... Chairman (since December 10, 1997) Chairman (since December 10,
President (prior to December 10, 1997) and President (prior to
1997) December 10, 1997) of MLAM;
President and Director of
Princeton Services; Director of
MLFDS; Executive Vice President
of ML & Co.
Jeffrey M. Peek....... President (since December 10, 1997) President (since December 10,
1997) of MLAM; President and
Director (since December 10,
1997) 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 MLFD; Director of
MLFDS; President of Princeton
Administrators, L.P.
Linda L. Federici..... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Vincent R. Giordano... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Elizabeth A. Griffin.. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Norman R. Harvey...... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Michael J. Senior Vice President Senior Vice President of MLAM;
Hennewinkel.......... Senior Vice President of
Princeton Services
Philip L. Kirstein.... Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM;
Secretary Senior Vice President, General
Counsel, Secretary and Director
of Princeton Services
Ronald M. Kloss....... Senior Vice President Senior Vice President and
and Controller Controller of MLAM; Senior Vice
President and Controller of
Princeton Services
Debra Landsman-Yaros.. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Vice
President of MLFD
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
Stephen M. M. Miller.. Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Senior Vice President Senior Vice President of MLAM; Senior Vice
Jr................... President of Princeton Services
Michael L. Quinn...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of Merrill
Lynch, Pierce, Fenner & Smith Incorporated
from 1989 to 1995
Richard L. Reller..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director of
MLFD
Gerald M. Richard..... Senior Vice President Senior Vice President and Treasurer of MLAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD
Gregory D. Upah....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Welburn..... 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.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the Common Shares
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 Common Share declines more than 10% from its net asset value per
Common Share as of the effective date of this Registration Statement, or (2)
its net asset value per Common Share 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-6
<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 6th day of January 1998.
MUNIHOLDINGS FLORIDA INSURED FUND II
(Registrant)
/s/ Terry K. Glenn
By__________________________________
(TERRY K. GLENN, EXECUTIVE VICE
PRESIDENT)
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/ Arthur Zeikel* President and
- ------------------------------------- Trustee (Principal
(ARTHUR ZEIKEL) Executive Officer)
/s/ Gerald M. Richard* Treasurer (Principal
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
/s/ Ronald W. Forbes* Trustee
- -------------------------------------
(RONALD W. FORBES)
/s/ Cynthia A. Montgomery* Trustee
- -------------------------------------
(CYNTHIA A. MONTGOMERY)
/s/ Charles C. Reilly* Trustee
- -------------------------------------
(CHARLES C. REILLY)
/s/ Kevin A. Ryan* Trustee
- -------------------------------------
(KEVIN A. RYAN)
/s/ Richard R. West* Trustee
- -------------------------------------
(RICHARD R. WEST)
/s/ Terry K. Glenn January 6, 1998
*By: ________________________________
(TERRY K. GLENN, ATTORNEY-IN-FACT)
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------ ---
<C> <S> <C>
(d)(2) --Form of specimen certificate
(e) --Form of Automatic Dividend Reinvestment Plan
(g) --Form of Investment Advisory Agreement
(h)(1) --Form of Purchase Agreement
(h)(2) --Merrill Lynch Standard Dealer Agreement
(n)(1) --Opinion and Consent of Holland & Knight LLP
</TABLE>
<PAGE>
EXHIBIT (d)(2)
COMMON STOCK COMMON STOCK
PAR VALUE $.10 PAR VALUE $.10
CUSIP
See Reverse For Certain
Definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
MUNIHOLDINGS FLORIDA INSURED FUND II
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF MuniHoldings
Florida Insured Fund II transferable on the books of the Corporation by the
holder in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be subject to all of the provisions of the Articles
of Incorporation and of the By-Laws of the Corporation, and of all the
amendments from time to time made thereto. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
President Secretary
Countersigned and Registered:
THE BANK OF NEW YORK
Transfer Agent and Registrar
Authorized Signature
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND II
The Corporation has the authority to issue stock of more than one class. A
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class of stock
which the Corporation is authorized to issue and the differences in the relative
rights and preferences between the shares of each class to the extent that they
have been set, and the authority of the Board of Directors to set the relative
rights and preferences of subsequent classes and series, will be furnished by
the Corporation to any stockholder, without charge, upon request to the
Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--
_______Custodian_______
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to
Minors Act _________
(State)
JT TEN --as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- ----------------------------------------- ______________________________
_________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
_________________________________________________________________________
_________________________________________________________________________
__________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably
constitute and appoint___________________________________________________
_________________________________________________________________________
<PAGE>
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated:__________________
Signature:___________________________________
NOTICE: The signature to this assignment must correspond with the
name as written upon the face of the certificate, in every
particular, without alteration or enlargement, or any change
whatever.
Signature Guaranteed:____________________________________
-----------------------------------------------------------
Signatures must be guaranteed by an "eligible guarantor
institution" as such term is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934.
-----------------------------------------------------------
<PAGE>
EXHIBIT (e)
MUNIHOLDINGS FLORIDA INSURED FUND II
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, __________, will act as Agent for me, and
--------------------
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present shares of common stock, par value $.10 per share
("Common Stock"), of MUNIHOLDINGS FLORIDA INSURED FUND II (the "Fund") are
registered, and will automatically put into effect for me the dividend
reinvestment option of the Plan as of the first record date for a dividend or
capital gains distribution (collectively referred to herein as a "dividend"),
payable at the election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan
---------------------------------
constitutes an election by me to receive dividends in shares of Common Stock
whenever the Fund declares a dividend. In such event, the dividend amount shall
automatically be made payable to me entirely in shares of Common Stock which
shall be acquired by the Agent for my account, depending upon the circumstances
described in paragraph 3, either (i) through receipt of additional shares of
unissued but authorized shares of Common Stock from the Fund ("newly-issued
shares") as described in paragraph 6 or (ii) by purchase of outstanding shares
of Common Stock on the open market ("open-market purchases") as described in
paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open-Market Purchases.
---------------------------------------------------------------------
If on the payment date for the dividend (the "valuation date"), the net asset
value per share of the Common Stock, as defined in paragraph 8, is equal to or
less than the market price per share of the Common Stock, as defined in
paragraph 8, plus estimated brokerage commissions (such condition being referred
to herein as "market premium"), the Agent shall invest the dividend amount in
newly-issued shares on my behalf as described in paragraph 6. If on the
valuation date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Agent shall
invest the dividend amount in shares acquired on my behalf in open-market
purchases as described in paragraph 7.
4. Purchase Period for Open-Market Purchases. In the event of a market
-----------------------------------------
discount on the valuation date, the Agent shall have until the last business day
before the next ex-dividend date with respect to the shares of Common Stock or
in no event more than 30 days after the valuation date (the "last purchase
date") to invest the dividend amount in shares acquired in open-market purchases
except where temporary curtailment or suspension of purchases is necessary to
comply with applicable provisions of federal securities laws.
<PAGE>
5. Failure to Complete Open-Market Purchases During Purchase Period.
-----------------------------------------------------------------
If the Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period because the market discount has shifted to
a market premium or otherwise, the Agent will invest the uninvested portion of
the dividend amount in newly-issued shares at the close of business on the last
purchase date as described in paragraph 4; except that the Agent may not acquire
newly-issued shares after the valuation date under the foregoing circumstances
unless it has received a legal opinion that registration of such shares is not
required under the Securities Act of 1933, as amended, or unless the shares to
be issued are registered under such Act.
6. Acquisition of Newly-Issued Shares. In the event that all or part
----------------------------------
of the dividend amount is to be invested in newly-issued shares, you shall
automatically receive such newly-issued shares of Common Stock, including
fractions, for my account, and the number of additional newly-issued shares of
Common Stock to be credited to my account shall be determined by dividing the
dollar amount of the dividend on my shares to be invested in newly-issued shares
by the net asset value per share of Common Stock on the date the shares are
issued (the valuation date in the case of an initial market premium or the last
purchase date in case the Agent is unable to complete open-market purchases
during the purchase period); provided, that the maximum discount from the then
current market price per share on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the
--------------------------------------
dividend amount is to be invested in shares of Common Stock acquired in open-
market purchases, you shall apply the amount of such dividend on my shares (less
my pro rata share of brokerage commissions incurred with respect to your open-
market purchases) to the purchase on the open-market of shares of the Common
Stock for my account. Open-market purchases may be made on any securities
exchange where the Common Stock is traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as you shall determine. My funds held by you uninvested will not bear
interest, and it is understood that, in any event, you shall have no liability
in connection with any inability to purchase shares within 30 days after the
initial date of such purchase as herein provided, or with the timing of any
purchases affected. You shall have no responsibility as to the value of the
Common Stock acquired for my account. For the purposes of cash investments you
may commingle my funds with those of other shareholders of the Fund for whom you
similarly act as Agent, and the average price (including brokerage commissions)
of all shares purchased by you as Agent in the open market shall be the price
per share allocable to me in connection with open-market purchases.
2
<PAGE>
8. Meaning of Market Price and Net Asset Value. For all purposes of the
-------------------------------------------
Plan: (a) the market price of the Common Stock on a particular date shall be the
last sales price on the New York Stock Exchange (the "Exchange") on that date,
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such stock on the Exchange on such date and
(b) net asset value per share of the Common Stock on a particular date shall be
as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold my
----------------------------------------------------
shares of Common Stock acquired pursuant to the Plan, together with the shares
of other shareholders of the Fund acquired pursuant to the Plan, in
noncertificated form in your name or that of your nominee. You will forward to
me any proxy solicitation material and will vote any shares so held for me only
in accordance with the proxy returned by me to the Fund. Upon my written
request, you will deliver to me, without charge, a certificate or certificates
for the full shares held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my
-------------
account as soon as practicable but not later than 60 days after the date
thereof.
11. Fractional Interests. Although I may from time to time have an
--------------------
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
12. Stock Dividends or Share Purchase Rights. Any stock dividends or
----------------------------------------
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains
-----------
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan by
----------------------
notifying you in writing. Such termination will be effective immediately if my
notice is received by you not less than ten days prior to any dividend or
distribution record
3
<PAGE>
date; otherwise such termination will be effective on the first trading day
after the payment date for such dividend or distribution with respect to any
subsequent dividend or distribution. The Plan may be terminated by you or the
Fund upon notice in writing mailed to me at least 90 days prior to any record
date for the payment of any dividend or distribution by the Fund. Upon any
termination you will cause a certificate or certificates for the full shares
held for me under the Plan and cash adjustment for any fraction to be delivered
to me without charge. If I elect by notice to you in writing in advance of such
termination to have you sell part or all of my shares and remit the proceeds to
me, you are authorized to deduct brokerage commissions for this transaction from
the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or
-----------------
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date, thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
my account, all dividends and distributions payable on Common Stock of the Fund
held in my name or under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
16. Extent of Responsibility of Agent. You shall at all times act in good
---------------------------------
faith and agree to use your best efforts within reasonable limits to insure the
accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall not be liable for loss or
damage due to errors unless such error is caused by your negligence, bad faith,
or willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the
-------------
laws of the State of New York without regard to its conflicts of laws
provisions.
4
<PAGE>
EXHIBIT (g)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the __th day of __________, 1997, by and between
MUNIHOLDINGS FLORIDA INSURED FUND II, a Massachusetts business trust (the
"Fund"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (the
"Investment Adviser").
W I T N E S S E T H:
----------------------------
WHEREAS, the Fund is engaged in business as a closed-end, non-diversified,
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE>
ARTICLE I
---------
Duties of the Investment Adviser
--------------------------------
The Fund hereby employs the Investment Adviser to act as investment
adviser of the Fund and to furnish, or arrange for its affiliates to furnish,
the investment advisory services described below, subject to the policies of,
review by and overall control of the Board of Trustees of the Fund, for the
period and on the terms and conditions set forth in this Agreement. The
Investment Adviser hereby accepts such employment and agrees during such period,
at its own expense, to render, or arrange for the rendering of, such services
and to assume the obligations herein set forth for the compensation provided for
herein. The Investment Adviser and its affiliates for all purposes herein shall
be deemed to be independent contractors and, unless otherwise expressly provided
or authorized, shall have no authority to act for or represent the Fund in any
way or otherwise be deemed agents of the Fund.
(a) Administrative Services. The Investment Adviser shall perform, or
-----------------------
arrange for its affiliates to perform, the management and administrative
services necessary for the operation of the Fund, including administering
shareholder accounts and handling shareholder relations pursuant to an
Administration Agreement of even date herewith.
(b) Investment Advisory Services. The Investment Adviser shall
----------------------------
provide, or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the
2
<PAGE>
latter from time to time may consider necessary for the proper supervision of
the assets of the Fund, shall furnish continuously an investment program for the
Fund and shall determine from time to time which securities shall be purchased,
sold or exchanged and what portion of the assets of the Fund shall be held in
the various securities in which the Fund invests, options, futures, options on
futures or cash, subject always to the restrictions of the Declaration of Trust
and the By-Laws of the Fund, as amended from time to time, the provisions of the
Investment Company Act and the statements relating to the Fund's investment
objective, investment policies and investment restrictions as the same are set
forth in filings made by the Fund under the Federal securities laws. The
Investment Adviser shall make decisions for the Fund as to the manner in which
voting rights, rights to consent to corporate action and any other rights
pertaining to the Fund's portfolio securities shall be exercised. Should the
Board of Trustees at any time, however, make any definite determination as to
investment policy and notify the Investment Adviser thereof in writing, the
Investment Adviser shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked. The Investment Adviser shall take, on behalf of the Fund, all
actions which it deems necessary to implement the investment policies determined
as provided above, and in particular to place all orders for the purchase or
sale of portfolio securities for the Fund's account with brokers or
3
<PAGE>
dealers selected by it, and to that end, the Investment Adviser is authorized as
the agent of the Fund to give instructions to the custodian of the Fund as to
deliveries of securities and payments of cash for the account of the Fund. In
connection with the selection of such brokers or dealers and the placing of such
orders with respect to assets of the Fund, the Investment Adviser is directed at
all times to seek to obtain execution and prices within the policy guidelines
determined by the Board of Trustees and set forth in filings made by the Fund
under the Federal securities laws. Subject to this requirement and the
provisions of the Investment Company Act, the Securities Exchange Act of 1934,
as amended, and other applicable provisions of law, the Investment Adviser may
select brokers or dealers with which it or the Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
--------------------------------------------------------
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Investment Adviser. The Investment Adviser shall provide the
----------------------
staff and personnel necessary to perform its obligations under this Agreement,
shall assume and pay or cause
4
<PAGE>
to be paid all expenses incurred in connection with the maintenance of such
staff and personnel, and, at its own expense, shall provide the office space,
facilities, equipment and necessary personnel which it is obligated to provide
under Article I hereof, and shall pay all compensation of officers of the Fund
and all Trustees of the Fund who are affiliated persons of the Investment
Adviser.
(b) The Fund. The Fund assumes, and shall pay or cause to be paid,
--------
all other expenses of the Fund including, without limitation: taxes, expenses
for legal and auditing services, costs of printing proxies, share certificates,
shareholder reports and prospectuses, charges of the custodian, any sub-
custodian and transfer agent, charges of any auction agent and broker dealers in
connection with preferred shares of the Fund, expenses of portfolio
transactions, Securities and Exchange Commission fees, expenses of registering
the common shares and preferred shares under Federal, state and foreign laws,
fees and actual out-of-pocket expenses of Trustees who are not affiliated
persons of the Investment Adviser, accounting and pricing costs (including the
daily calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or nonrecurring expenses, and other expenses
properly payable by the Fund. It also is understood that the Fund will
reimburse the Investment Adviser for its costs incurred in providing accounting
services to the Fund.
5
<PAGE>
ARTICLE III
-----------
Compensation of the Investment Adviser
--------------------------------------
(a) Investment Advisory Fee. For the services rendered, the
-----------------------
facilities furnished and the expenses assumed by the Investment Adviser, the
Fund shall pay to the Investment Adviser at the end of each calendar month a fee
based upon the average weekly value of the net assets of the Fund at the annual
rate of 0.55 of 1.0% (0.55%) of the average weekly net assets of the Fund (i.e.,
the average weekly value of the total assets of the Fund, minus the sum of
accrued liabilities of the Fund and accumulated dividends on outstanding
preferred shares), commencing on the day following effectiveness hereof. 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. It is understood that the
liquidation preference of any outstanding preferred shares (other than
accumulated dividends) is not considered a liability in determining the Fund's
average weekly net assets. If this Agreement becomes effective subsequent to
the first day of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fee as set forth
above. Subject to the
6
<PAGE>
provisions of subsection (b) hereof, payment of the Investment Adviser's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated by subsection (b) hereof. During
any period when the determination of net asset value is suspended by the Board
of Trustees, the average net asset value of a share for the last week prior to
such suspension for this purpose shall be deemed to be the net asset value at
the close of each succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the
-------------------
Fund, including amounts payable to the Investment Adviser pursuant to subsection
(a) hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its investment advisory fee by the extent of such excess and, if required
pursuant to any such laws or regulations, will reimburse the Fund in the amount
of such excess; provided, however, to the extent permitted by law, there shall
-------- -------
be excluded from such expenses the amount of any interest, taxes, distribution
fees, brokerage fees and commissions and extraordinary expenses (including but
not limited to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Fund. Whenever the
expenses of the Fund exceed a pro rata portion of
7
<PAGE>
the applicable annual expense limitations, the estimated amount of reimbursement
under such limitations shall be applicable as an offset against the monthly
payment of the fee due to the Investment Adviser. Should two or more such
expense limitations be applicable as at the end of the last business day of the
month, that expense limitation which results in the largest reduction in the
Investment Adviser's fee shall be applicable.
ARTICLE IV
----------
Limitation of Liability of the Investment Adviser
-------------------------------------------------
The Investment Adviser shall not be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
---------
Activities of the Investment Adviser
------------------------------------
The services of the Investment Adviser to the Fund are not to be
deemed to be exclusive; the Investment Adviser and any person controlled by or
under common control with the Investment
8
<PAGE>
Adviser (for purposes of this Article V referred to as "affiliates") are free to
render services to others. It is understood that trustees, officers, employees
and shareholders of the Fund are or may become interested in the Investment
Adviser and its affiliates, as directors, officers, employees, partners and
shareholders or otherwise, and that directors, officers, employees, partners and
shareholders of the Investment Adviser and of its affiliates are or may become
similarly interested in the Fund, and that the Investment Adviser and directors,
officers, employees, partners and shareholders of its affiliates may become
interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above
written and shall remain in force until _________ __, 1999 and thereafter, but
only so long as such continuance specifically is approved at least annually by
(i) the Board of Trustees of the Fund, or by the vote of a majority of the
outstanding voting securities of the Fund, and (ii) by the vote of a majority of
those Trustees who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Board of Trustees or by vote of a majority of the
outstanding voting securities of the Fund, or by
9
<PAGE>
the Investment Adviser, on sixty (60) days' written notice to the other party.
This Agreement shall terminate automatically in the event of its assignment.
ARTICLE VII
-----------
Amendment of this Agreement
---------------------------
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Trustees who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
----------
Governing Law
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York and the
10
<PAGE>
applicable provisions of the Investment Company Act. To the extent that the
applicable laws of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
ARTICLE X
---------
Personal Liability
------------------
The Declaration of Trust establishing MuniHoldings Florida Insured
Fund II, dated November 17, 1997, a copy of which, together with all amendments
thereto ("Declaration"), is on file in the office of the Secretary of the
Commonwealth of Massachusetts, provides that the name "Muniholdings Florida
Insured Fund II" refers to the Trustees under the Declaration collectively as
Trustees, but not as individuals personally; and no Trustee, shareholder,
officer, employee or agent of the Fund shall be held to any personal liability,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs of the Fund, but
the "Trust Property" only shall be liable.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MUNIHOLDINGS FLORIDA INSURED FUND II
By: ______________________________
Authorized Signatory
ATTEST:
____________________
Secretary
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
ATTEST:
_____________________
Secretary
12
<PAGE>
EXHIBIT (h)(1)
__________ Shares
MUNIHOLDINGS FLORIDA INSURED FUND II
(a Massachusetts business trust)
Common Shares
(Par Value $0.10 Per Share)
PURCHASE AGREEMENT
------------------
_________ __, 1997
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1201
Dear Sirs and Mesdames:
MuniHoldings Florida Insured Fund II, a Massachusetts business trust (the
"Fund"), and Fund Asset Management, L.P., a Delaware limited partnership (the
"Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the
sale by the Fund and the purchase by the Underwriter of __________ common shares
of beneficial interest, par value $.10 per share, of the Fund (the "Common
Shares"), and, with respect to the grant by the Fund to the Underwriter of the
option described in Section 2 hereof to purchase all or any part of _________
additional Common Shares to cover over-allotments. The aforesaid __________
shares (the "Initial Shares"), together with all or any part of the _________
additional Common Shares subject to the option described in Section 2 hereof
(the "Option Shares"), hereinafter are referred to collectively as the "Shares".
Prior to the purchase and public offering of the Shares by the Underwriter,
the Fund and the Underwriter shall enter into an agreement substantially in the
form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may
take the form of an exchange of any standard form of written telecommunication
between the Fund and the Underwriter and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Shares
will be governed by this Agreement, as
<PAGE>
supplemented by the Pricing Agreement. From and after the date of the execution
and delivery of the Pricing Agreement, this Agreement shall be deemed to
incorporate the Pricing Agreement.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No. 333-
_____) and a related preliminary prospectus for the registration of the Shares
under the Securities Act of 1933, as amended (the "1933 Act"), the Investment
Company Act, and the rules and regulations of the Commission under the 1933 Act
and the Investment Company Act (together, the "Rules and Regulations"), and has
filed such amendments to such registration statement on Form N-2, if any, and
such amended preliminary prospectuses as may have been required to the date
hereof. The Fund will prepare and file such additional amendments thereto and
such amended prospectuses as hereafter may be required. Such registration
statement (as amended at the time it becomes effective, if applicable) and the
prospectus constituting a part thereof (including in each case the information,
if any, deemed to be a part thereof pursuant to Rule 430A(b) or Rule 434 of the
Rules and Regulations), as from time to time amended or supplemented pursuant to
the 1933 Act, are referred to hereinafter as the "Registration Statement" and
the "Prospectus", respectively; except that if any revised prospectus shall be
provided to the Underwriter by the Fund for use in connection with the offering
of the Shares which differs from the Prospectus on file at the Commission at the
time the Registration Statement becomes effective (whether such revised
prospectus is required to be filed by the Fund pursuant to Rule 497(c) or Rule
497(h) of the Rules and Regulations), the term "Prospectus" shall refer to each
such revised prospectus from and after the time it is first provided to the
Underwriter for such use. If the Fund elects to rely on Rule 434 under the
Rules and Regulations, all references to the Prospectus shall be deemed to
include, without limitation, the form of prospectus and the term sheet, taken
together, provided to the Underwriter by the Fund in reliance on Rule 434 under
the 1933 Act (the "Rule 434 Prospectus"). If the Fund files a registration
statement to register a portion of the Shares and relies on Rule 462(b) for such
registration statement to become effective upon filing with the Commission (the
"Rule 462 Registration Statement"), then any reference to "Registration
Statement" herein shall be deemed to include both the registration statement
referred to above (No. 333-_____) and the Rule 462 Registration Statement, as
each such registration statement may be amended pursuant to the 1933 Act.
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems
2
<PAGE>
advisable after the Registration Statement becomes effective and the Pricing
Agreement has been executed and delivered.
SECTION 1. Representations and Warranties. (a) The Fund and the Adviser
each severally represents and warrants to the Underwriter as of the date hereof
and as of the date of the Pricing Agreement (such later date hereinafter being
referred to as the "Representation Date") as follows:
(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act, the Investment
Company Act and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective, at
the Representation Date and at Closing Time referred to in Section 2, the
Prospectus (unless the term "Prospectus" refers to a prospectus which has
been provided to the Underwriter by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file with the
Commission at the time the Registration State ment becomes effective, in
which case at the time such prospectus first is provided to the Underwriter
for such use) will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Fund in writing by the
Underwriter expressly for use in the Registration Statement or in the
Prospectus.
(ii) The accountants who certified the statement of assets,
liabilities and capital included in the Registration Statement are
independent public accountants as required by the 1933 Act and the Rules
and Regulations.
(iii) The statement of assets, liabilities and capital included in the
Registration Statement presents fairly the financial position of the Fund
as at the date indicated and said statement has been prepared in conformity
with generally accepted accounting principles.
(iv) Since the respective dates as of which information is given in
the Registration Statement and in the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the
condition,
3
<PAGE>
financial or otherwise, of the Fund, or in the earnings, business affairs
or business prospects of the Fund, whether or not arising in the ordinary
course of business, (B) there have been no transactions entered into by the
Fund which are material to the Fund other than those in the ordinary course
of business and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Fund on any class of its capital shares.
(v) The Fund has been duly organized and is validly existing as a
voluntary association (commonly referred to as a business trust) in good
standing under the laws of the Commonwealth of Massachusetts and has power
and authority to own, lease and operate its properties and conduct its
business as described in the Registration Statement; the Fund is duly
qualified to transact business and is in good standing in each jurisdiction
in which such qualification is required; and the Fund has no subsidiaries.
(vi) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified, management investment
company, and no order of suspension or revocation of such registration has
been issued or proceedings therefor initiated or threatened by the
Commission.
(vii) The authorized, issued and outstanding shares of beneficial
interest of the Fund are as set forth in the Prospectus under the caption
"Description of Capital Shares"; the Shares have been duly authorized for
issuance and sale to the Underwriter pursuant to this Agreement and, when
issued and delivered by the Fund pursuant to this Agreement against payment
of the consideration set forth in the Pricing Agreement, will be validly
issued and fully paid and nonassessable; the Shares conform in all material
respects to all statements relating thereto contained in the Registration
Statement; and the issuance of the Shares to be purchased by the
Underwriter is not subject to preemptive rights.
(viii) The Fund is not in violation of its Declaration of Trust, as
amended (the "Declaration of Trust"), or its by-laws, as amended (the "By-
Laws"), or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which it is a party or by which it or its properties may be
bound; and the execution and delivery of this Agreement, the Pricing
Agreement and the Investment Advisory Agreement and the Custody Agreement
referred to in the Registration Statement (as used herein, the "Advisory
Agreement" and the "Custody Agreement", respectively) and
4
<PAGE>
the consummation of the transactions contemplated herein and therein have
been duly authorized by all necessary corporate action and will not
conflict with or constitute a breach of, or a default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Fund pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which the Fund is a party or by which it may be bound or to which any of
the property or assets of the Fund is subject, nor will such action result
in any violation of the provisions of the Declaration of Trust or the By-
Laws of the Fund, or, to the best knowledge of the Fund and the Adviser,
any law, administrative regulation or administrative or court decree; and
no consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Fund of the
transactions contemplated by this Agreement, the Pricing Agreement, the
Advisory Agreement and the Custody Agreement, except such as has been
obtained under the Investment Company Act or as may be required under the
1933 Act or state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriter.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in
the Prospectus and the Fund has not received any notice of proceedings
relating to the revocation or modification of any such licenses, permits,
covenants, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Fund, threatened against or affecting, the Fund, which
might result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Fund, or might
materially and adversely affect the properties or assets of the Fund; and
there are no material contracts or documents of the Fund which are required
to be filed as exhibits to the Registration Statement by the 1933 Act, the
Investment Company Act or the Rules and Regulations which have not been so
filed.
(xi) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required.
5
<PAGE>
(xii) The Fund owns or possesses, or can acquire on reasonable terms,
adequate trademarks, service marks and trade names necessary to conduct its
business as described in the Registration Statement, and the Fund has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, service marks or trade names which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the conduct of the
business, operations, financial condition or income of the Fund.
(b) The Adviser represents and warrants to the Underwriter as of the date
hereof and as of the Representation Date as follows:
(i) The Adviser has been duly organized as a limited partnership
under the laws of the State of Delaware, with power and authority to
conduct its business as described in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Investment Advisers
Act"), and is not prohibited by the Investment Advisers Act or the
Investment Company Act, or the rules and regulations under such acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement has been duly authorized, executed and delivered
by the Adviser; the Advisory Agreement has been duly authorized, executed
and delivered by the Adviser and constitutes a valid and binding obligation
of the Adviser, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization or other laws
relating to or affecting creditors' rights and to general equitable
principles; and neither the execution and delivery of this Agreement or the
Advisory Agreement, nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of any of
the terms and provisions of, or constitute, with or without the giving of
notice or the lapse of time or both, a default under, any agreement or
instrument to which the Adviser is a party or by which it is bound, or any
law, order, rule or regulation applicable to it of any jurisdiction, court,
Federal or state regulatory body, administrative agency or other
governmental body, stock exchange or securities association having
jurisdiction over the Adviser or its respective properties or operations.
6
<PAGE>
(iv) The Adviser has the financial resources available to it necessary
for the performance of its services and obligations as contemplated in the
Prospectus.
(v) Any advertisement approved by the Adviser for use in the public
offering of the Shares pursuant to Rule 482 under the Rules and Regulations
(an "Omitting Prospectus") complies with the requirements of such Rule 482.
(c) Any certificate signed by any officer of the Fund or the Adviser and
delivered to the Underwriter or to counsel to the Fund and the Underwriter shall
be deemed a representation and warranty by the Fund or the Adviser, as the case
may be, to the Underwriter, as to the matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, the Fund agrees to
sell the Initial Shares to the Underwriter and the Underwriter agrees to
purchase the Initial Shares from the Fund, at the price per share set forth in
the Pricing Agreement.
(i) If the Fund has elected not to rely upon Rule 430A under the
Rules and Regulations, the initial public offering prices and the purchase
price per share to be paid by the Underwriter for the Shares have been
determined and set forth in the Pricing Agreement, dated the date hereof,
and an amendment to the Registration Statement and the Prospectus will be
filed before the Registration Statement becomes effective.
(ii) If the Fund has elected to rely upon Rule 430A under the Rules and
Regulations, the purchase price per share to be paid by the Underwriter for
the Shares shall be an amount equal to the applicable initial public
offering price, less an amount per share to be determined by agreement
between the Underwriter and the Fund. The initial public offering price
per share shall be a fixed price based upon the number of Shares purchased
in a single transaction to be determined by agreement between the
Underwriter and the Fund. The initial public offering price and the
purchase price, when so determined, shall be set forth in the Pricing
Agreement. In the event that such prices have not been agreed upon and the
Pricing Agreement has not been executed and delivered by all parties
thereto by the close of business on the fourth business day following the
date of this Agreement, this Agreement shall terminate forthwith, without
liability of any party to any other party, except as provided in Section 4,
unless otherwise agreed to by the Fund, the Adviser and the Underwriter.
7
<PAGE>
In addition, on the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the Fund
hereby grants an option to the Underwriter to purchase all or any part of the
Option Shares at the price per share set forth above. The option hereby granted
will expire 45 days after the date hereof (or, if the Fund has elected to rely
upon Rule 430A under the Rules and Regulations, 45 days after the execution of
the Pricing Agreement) and may be exercised only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Shares upon notice by the Underwriter to the Fund
setting forth the number of Option Shares as to which the Underwriter is then
exercising the option and the time, date and place of payment and delivery for
such Option Shares. Any such time and date of delivery (a "Date of Delivery")
shall be determined by the Underwriter but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to
Closing Time, as hereinafter defined, unless otherwise agreed upon by the
Underwriter and the Fund.
(b) Payment of the purchase price for, and delivery of certificates for,
the Initial Shares shall be made at the office of Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557, or at such other place as shall be
agreed upon by the Underwriter and the Fund, at 9:00 A.M. on the third business
day following the date the Registration Statement becomes effective or, if the
Fund has elected to rely upon Rule 430A under the Rules and Regulations, the
third business day after execution of the Pricing Agreement (or, if pricing
takes place after 4:30 P.M. on either the date the Registration Statement
becomes effective or the date of execution of the Pricing Agreement, as
applicable, the fourth business day after such applicable date), or such other
time not later than ten business days after such date as shall be agreed upon by
the Underwriter and the Fund (such time and date of payment and delivery herein
being referred to as "Closing Time"). In addition, in the event that any or all
of the Option Shares are purchased by the Underwriter, payment of the purchase
price for, and delivery of certificates for, such Option Shares shall be made at
the above-mentioned office of Brown & Wood LLP, or at such other place as shall
be agreed upon mutually by the Fund and the Underwriter, on each Date of
Delivery as specified in the notice from the Underwriter to the Fund. Payment
shall be made to the Fund by a Federal Funds check or checks or similar same-day
funds payable to the order of the Fund, against delivery to the Underwriter of
certificates for the Shares to be purchased by it. Certificates for the Initial
Shares and Option Shares shall be in such denominations and registered in such
names as the Underwriter may request in writing at least two business days
before Closing Time or the Date of Delivery, as the case may be. The
certificates for the Initial Shares and the Option Shares will be made available
by
8
<PAGE>
the Fund for examination by the Underwriter not later than 10:00 A.M. on the
last business day prior to Closing Time or the Date of Delivery, as the case may
be.
SECTION 3. Covenants of the Fund. The Fund covenants with the Underwriter
as follows:
(a) The Fund will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and will advise the
Underwriter promptly as to the time at which the Registration Statement and
any amendments thereto (including any post-effective amendment) becomes so
effective and (ii) if required, to cause the issuance of any orders
exempting the Fund from any provisions of the Investment Company Act, and
the Fund will advise the Underwriter promptly as to the time at which any
such orders are granted.
(b) The Fund will notify the Underwriter immediately, and will
confirm the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendments thereto (including any post-effective
amendment), (ii) of the receipt of any comments from the Commission, (iii)
of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (v) of the issuance by
the Commission of an order of suspension or revocation of the notification
on Form N-8A of registration of the Fund as an investment company under the
Investment Company Act or the initiation of any proceeding for that
purpose. The Fund will make every reasonable effort to prevent the
issuance of any stop order described in subsec tion (vi) hereunder or any
order of suspension or revocation described in subsection (vii) hereunder
and, if any such stop order or order of suspension or revocation is issued,
to obtain the lifting thereof at the earliest possible moment. If the Fund
elects to rely on Rule 434 under the Rules and Regulations, the Fund will
prepare a term sheet that complies with the requirements of Rule 434 under
the Rules and Regulations and the Fund will provide the Underwriter with
copies of the form of Rule 434 Prospectus, in such number as the
Underwriter may reasonably request by the close of business in New York on
the business day immediately succeeding the date of the Pricing Agreement.
(c) The Fund will give the Underwriter notice of its intention to
file any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus
(including any
9
<PAGE>
revised prospectus which the Fund proposes for use by the Underwriter in
connection with the offering of the Shares, which differs from the
prospectus on file at the Commission at the time the Registration Statement
becomes effective, whether such revised prospectus is required to be filed
pursuant to Rule 497(c) or Rule 497(h) of the Rules and Regulations or any
term sheet prepared in reliance on Rule 434 of the Rules and Regulations),
whether pursuant to the Investment Company Act, the 1933 Act, or otherwise,
and will furnish the Underwriter with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such amendment or supplement
to which the Underwriter reasonably shall object.
(d) The Fund will deliver to the Underwriter, as soon as practicable,
two signed copies of the notification of registration and registration
statement as originally filed and of each amendment thereto, in each case
with two sets of the exhibits filed therewith, and also will deliver to the
Underwriter a conformed copy of the registration statement as originally
filed and of each amendment thereto (but without exhibits to the
registration statement or any such amendment) for the Underwriter.
(e) The Fund will furnish to the Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the
1933 Act, such number of copies of the Prospectus (as amended or
supplemented) as the Underwriter reasonably may request for the purposes
contemplated by the 1933 Act, or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in
the opinion of counsel to the Fund and the Underwriter, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, the Fund forthwith will amend or supplement the Prospectus by
preparing and furnishing to the Underwriter a reasonable number of copies
of an amendment or amendments of or a supplement or supplements to, the
Prospectus (in form and substance satisfactory to counsel to the Fund and
the Underwriter), so that, as so amended or supplemented, the Prospectus
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading.
(g) The Fund will endeavor, in cooperation with the Underwriter, to
qualify the Shares for offering and sale under the applicable securities
laws of such states and
10
<PAGE>
other jurisdictions of the United States as the Underwriter may designate,
and will maintain such qualifications in effect for a period of not less
than one year after the date hereof. The Fund will file such statements
and reports as may be required by the laws of each jurisdiction in which
the Shares have been qualified as above provided.
(h) The Fund will make generally available to its security holders as
soon as practicable, but no later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the Rules and Regulations) covering a twelve-
month period beginning not later than the first day of the Fund's fiscal
quarter next following the "effective" date (as defined in said Rule 158)
of the Registration Statement.
(i) Between the date of this Agreement and the termination of any
trading restrictions or Closing Time, whichever is later, the Fund will
not, without your prior consent, offer or sell, or enter into any agreement
to sell, any equity or equity related securities of the Fund other than the
Shares and shares of Common Shares issued in reinvestment of dividends or
distributions.
(j) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance
upon Rule 430A of the Rules and Regulations, then immediately following the
execution of the Pricing Agreement, the Fund will prepare, and file or
transmit for filing with the Commission in accordance with such Rule 430A
and Rule 497(h) of the Rules and Regulations, copies of the amended
Prospectus, or, if required by such Rule 430A, a post-effective amendment
to the Registration Statement (including an amended Prospectus), containing
all information so omitted.
(k) The Fund will use its best efforts to effect the listing of the
Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than four weeks from the date of the Prospectus.
SECTION 4. Payment of Expenses. The Fund will pay all expenses incident
to the performance of its obligations under this Agreement, including, but not
limited to, expenses relating to (i) the printing and filing of the registration
statement as originally filed and of each amendment thereto, (ii) the printing
of this Agreement and the Pricing Agreement, (iii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriter, (iv) the fees
and disbursements of the Fund's counsel and accountants, (v) the qualification
of the Shares under securities laws in accordance with the provisions of Section
3(g) of this Agreement, including filing fees and any
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reasonable fees or disbursements of counsel in connection therewith and in
connection with the preparation of the Blue Sky Survey, (vi) the printing and
delivery to the Underwriter of copies of the registration statement as
originally filed and of each amendment thereto, of the preliminary prospectus,
and of the Prospectus and any amendments or supplements thereto, (vii) the
printing and delivery to the Underwriter of copies of the Blue Sky Survey,
(viii) the fees and expenses incurred with respect to the filing with the
National Association of Securities Dealers, Inc. and (ix) the fees and expenses
incurred with respect to the listing of the Shares on the New York Stock
Exchange.
If this Agreement is terminated by the Underwriter in accordance with the
provisions of Section 5 or Section 9(a)(i), the Fund or the Adviser shall
reimburse the Underwriter for all of its reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of counsel to the Fund and the
Underwriter. In the event the transactions contemplated hereunder are not
consummated, the Adviser agrees to pay all of the costs and expenses set forth
in the first paragraph of this Section 4 which the Fund would have paid if such
transactions had been consummated.
SECTION 5. Conditions of Underwriter's Obligations. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser herein contained, to the performance by
the Fund and the Adviser of their respective obligations hereunder, and to the
following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., on the date of this Agreement, or at a later time and date
not later, however, than 5:30 P.M. on the first business day following the
date hereof, or at such later time and date as may be approved by the
Underwriter, and at Closing Time no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission. If the
Fund has elected to rely upon Rule 430A of the Rules and Regulations, the
price of the Shares and any price-related information previously omitted
from the effective Registration Statement pursuant to such Rule 430A shall
have been transmitted to the Commission for filing pursuant to Rule 497(h)
of the Rules and Regulations within the prescribed time period, and prior
to Closing Time the Fund shall have provided evidence satisfactory to the
Underwriter of such timely filing, or a post-effective amendment providing
such information shall have been filed promptly and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
12
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(b) At Closing Time, the Underwriter shall have received:
(1) The favorable opinion, dated as of Closing Time, of Brown &
Wood LLP, counsel to the Fund and the Underwriter, to the effect that:
(i) The Fund has been duly organized and is validly
existing as a voluntary association (commonly referred to as a
business trust) in good standing under the laws of the
Commonwealth of Massachusetts.
(ii) The Fund has power and authority to own, lease and
operate its properties and conduct its business as described in
the Registration Statement and in the Prospectus.
(iii) The Fund is duly qualified to transact business and is
in good standing in each jurisdiction in which such qualification
is required.
(iv) The Shares have been duly authorized for issuance and
sale to the Underwriter pursuant to this Agreement and, when
issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in the Pricing
Agreement, will be validly issued and fully paid and
nonassessable (except for certain possible liability of
shareholders described in the Prospectus under "Description of
Capital Shares"); the issuance of the Shares is not sub ject to
preemptive rights; and the authorized capital shares conform as
to legal matters in all material respects to the description
thereof in the Registration Statement under the caption
"Description of Capital Shares".
(v) This Agreement and the Pricing Agreement each has been
duly authorized, executed and delivered by the Fund and each
complies with all applicable provisions of the Investment Company
Act.
(vi) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop
order suspending the effectiveness of the Registration Statement
has been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission.
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(vii) At the time the Registration Statement became effective
and at the Representation Date, the Registration Statement (other
than the financial statements included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the Investment
Company Act and the Rules and Regulations. The Rule 434
Prospectus conforms to the requirements of Rule 434 in all
material respects.
(viii) To the best of their knowledge and information, there
are no legal or governmental proceedings pending or threatened
against the Fund which are required to be disclosed in the
Registration Statement, other than those disclosed therein.
(ix) To the best of their knowledge and information, there
are no contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments of the Fund required to be described
or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to
therein or filed as exhibits thereto, the descriptions thereof
are correct in all material respects, references thereto are
correct, and no default exists in the due performance or
observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument so described, referred
to or filed.
(x) No consent, approval, authorization or order of any
court or governmental authority or agency is required in
connection with the sale of the Shares to the Underwriter, except
such as has been obtained under the 1933 Act, the Investment
Company Act or the Rules and Regulations or such as may be
required under state securities laws; and to the best of their
knowledge and information, the execution and delivery of this
Agreement, the Pricing Agreement, the Advisory Agreement and the
Custody Agreement and the consummation of the transactions
contemplated herein and therein will not conflict with or
constitute a breach of, or a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Fund pursuant to, any contract,
indenture, mortgage, loan agreement, note, lease or other
14
<PAGE>
instrument to which the Fund is a party or by which it may be
bound or to which any of the property or assets of the Fund is
subject, nor will such action result in any violation of the
provisions of the Declaration of Trust or the By-Laws of the
Fund, or any law or administrative regulation, or, to the best of
their knowledge and information, administrative or court decree.
(xi) The Advisory Agreement and the Custody Agreement have
each been duly authorized and approved by the Fund and comply as
to form in all material respects with all applicable provisions
of the Investment Company Act, and each has been duly executed by
the Fund.
(xii) The Fund is registered with the Commission under the
Investment Company Act as a closed-end, non-diversified
management investment company, and all required action has been
taken by the Fund under the 1933 Act, the Investment Company Act
and the Rules and Regulations to make the public offering and
consummate the sale of the Shares pursuant to this Agreement; the
provisions of the Declaration of Trust and the By-Laws of the
Fund comply as to form in all material respects with the
requirements of the Investment Company Act; and, to the best of
their knowledge and information, no order of suspension or
revocation of such registration under the Investment Company Act,
pursuant to Section 8(e) of the Investment Company Act, has been
issued or proceedings therefor initiated or threatened by the
Commission.
(xiii) The information in the Prospectus under the caption
"Taxes" (other than information related to Florida law as to
which no opinion need be rendered), to the extent that it
constitutes matters of law or legal conclusions, has been
reviewed by them and is correct in all material respects.
(2) The favorable opinion, dated as of Closing Time, of Holland
& Knight LLP, special Florida counsel to the Fund, to the effect that:
(i) The information in the Prospectus under the caption
"Taxes", to the extent that it constitutes matters of Florida law
or legal conclusions involving matters of Florida law, has
15
<PAGE>
been reviewed by them and is correct in all material respects.
(ii) Nothing has come to their attention that would lead
them to believe that the information in the Registration
Statement under the caption "Investment Objective and Policies -
Special Considerations Relating to Florida Municipal Bonds and
Municipal Bonds" and in Appendix I entitled "Economic and Other
Conditions in Florida", at the time it became effective or at the
Representation Date, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading or that the information under such caption and in such
appendix in the Prospectus, at the Representation Date, (unless
the term "Prospectus" refers to a prospectus which has been
provided to the Underwriter by the Fund for use in connection
with the offering of the Shares which differs from the Prospectus
on file at the Commission at the time the Registration Statement
becomes effective, in which case at the time they are first
provided to the Underwriter for such use) or at Closing Time,
included an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading.
(3) The favorable opinion, dated as of Closing Time, of Philip
L. Kirstein, Esq., General Counsel to the Adviser, in form and
substance satisfactory to counsel to the Underwriter, to the effect
that:
(i) The Adviser has been duly organized as a limited
partnership under the laws of the State of Delaware, with power
and authority to conduct its business as described in the
Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser
under the Investment Advisers Act and is not prohibited by the
Investment Advisers Act or the Investment Company Act, or the
rules and regulations under such Acts, from acting under the
Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been
duly authorized, executed and
16
<PAGE>
delivered by the Adviser, and the Advisory Agreement constitutes
a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization or other laws relating to
or affecting creditors' rights and to general equity principles;
and, to the best of his knowledge and information, neither the
execution and delivery of this Agreement or the Advisory
Agreement nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach
of, any of the terms and provisions of, or constitute, with or
without the giving of notice or the lapse of time or both, a
default under, any agreement or instrument to which the Adviser
is a party or by which the Adviser is bound, or any law, order,
rule or regulation applicable to the Adviser of any jurisdiction,
court, Federal or state regulatory body, administrative agency or
other governmental body, stock exchange or securities association
having jurisdiction over the Adviser or its properties or
operations.
(iv) To the best of his knowledge and information, the
description of the Adviser in the Registration Statement and in
the Prospectus does not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(4) In giving their opinion required by subsection (b)(1) of this
Section, Brown & Wood LLP additionally shall state that nothing has come to
their attention that would lead them to believe that the Registration
Statement (other than the financial statements included therein, as to
which no opinion need be rendered), at the time it became effective or at
the Representation Date, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (other than the financial statements included therein, as to
which no opinion need be rendered), at the Representation Date (unless the
term "Prospectus" refers to a prospectus which has been provided to the
Underwriter by the Fund for use in connection with the offering of the
Shares which differs from the Prospectus on file at the Commission at the
time the Registration Statement becomes effective, in which case at the
time it first is provided to the Underwriter for such use) or at Closing
Time, included an untrue statement
17
<PAGE>
of a material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. In giving their opinion, Brown &
Wood LLP may rely as to matters involving the laws of the Commonwealth of
Massachusetts upon the opinion of Bingham Dana LLP. Bingham Dana LLP and
Brown & Wood LLP may rely, as to matters of fact, upon certificates and
written statements of officers and employees of and accountants for the
Fund and the Adviser and of public officials.
(c) At Closing Time, (i) the Registration Statement and the
Prospectus shall contain all statements which are required to be stated
therein in accordance with the 1933 Act, the Investment Company Act and the
Rules and Regulations and in all material respects shall conform to the
requirements of the 1933 Act, the Investment Company Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus
shall contain any untrue state ment of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and no action,
suit or proceeding at law or in equity shall be pending or, to the
knowledge of the Fund or the Adviser, threatened against the Fund or the
Adviser which would be required to be set forth in the Prospectus other
than as set forth therein, (ii) there shall not have been, since the date
as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, of the Fund or in its
earnings, business affairs or business prospects, whether or not arising in
the ordinary course of business, from that set forth in the Prospectus,
(iii) the Adviser shall have the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Prospectus, and (iv) no proceedings shall be pending
or, to the knowledge of the Fund or the Adviser, threatened against the
Fund or the Adviser before or by any Federal, state or other commission,
board or administrative agency wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property,
financial condition or income of either the Fund or the Adviser other than
as set forth in the Prospectus, and the Underwriter shall have received, at
Closing Time, a certificate of the President or the Treasurer of the Fund
and of the President or a Vice President of the Adviser dated as of Closing
Time, evidencing compliance with the appropriate provisions of this
subsection (c).
(d) At Closing Time, the Underwriter shall have received
certificates, dated as of Closing Time, (i) of the President or the
Treasurer of the Fund to the effect that
18
<PAGE>
the representations and warranties of the Fund contained in Section 1(a)
are true and correct with the same force and effect as though expressly
made at and as of Closing Time and, (ii) of the President or a Vice
President of the Adviser to the effect that the representations and
warranties of the Adviser contained in Sections 1(a) and (b) are true and
correct with the same force and effect as though expressly made at and as
of Closing Time.
(e) At the time of execution of this Agreement, the Underwriter shall
have received from Deloitte & Touche LLP a letter, dated such date in form
and substance satisfactory to the Underwriter, to the effect that:
(i) they are independent accountants with respect to the Fund
within the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the statement of assets, liabilities and
capital examined by them and included in the Registration Statement
complies as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the Investment Company Act
and the Rules and Regulations; and
(iii) they have performed specified procedures, not constituting
an audit, including a reading of the latest available interim
financial statements of the Fund, a reading of the minute books of the
Fund, inquiries of officials of the Fund responsible for financial
accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and
procedures nothing came to their attention that caused them to believe
that at the date of the latest available statement of assets,
liabilities and capital read by such accountants, or at a subsequent
specified date not more than three days prior to the date of this
Agreement, there was any change in the capital shares or net assets of
the Fund as compared with amounts shown on the statement of assets,
liabilities and capital included in the Prospectus.
(f) At Closing Time, the Underwriter shall have received from
Deloitte & Touche LLP a letter, dated as of Closing Time, to the effect
that they reaffirm the statements made in the letter furnished pursuant to
subsection (e) of this Section, except that the "specified date" referred
to shall be a date not more than three days prior to Closing Time.
19
<PAGE>
(g) At Closing Time, counsel to the Underwriter shall have been
furnished with such documents and opinions as they may reasonably require
for the purpose of enabling them to pass upon the issuance and sale of the
Shares as herein contemplated and to pass upon related proceedings, or in
order to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Fund and the Adviser in connection with the
organization and registration of the Fund under the Investment Company Act
and the issuance and sale of the Shares as herein and therein contemplated
shall be satisfactory in form and sub stance to the Underwriter.
(h) In the event the Underwriter exercises its option provided in
Section 2 hereof to purchase all or any portion of the Option Shares, the
representations and warranties of the Fund and the Adviser contained herein
and the statements in any certificate furnished by the Fund and the Adviser
hereunder shall be true and correct as of each Date of Delivery, and the
Underwriter shall have received:
(i) Certificates, dated the Date of Delivery, of the President
or the Treasurer of the Fund and of the President or a Vice President
of the Adviser confirming that the information contained in the
certificate delivered by each of them at Closing Time pursuant to
Section 5(c) or 5(d), as the case may be, remains true as of such Date
of Delivery.
(ii) The favorable opinions of Brown & Wood LLP, counsel to the
Fund and the Underwriter, Holland & Knight LLP, special Florida
counsel to the Fund and Philip L. Kirstein, Esq., General Counsel of
the Adviser, each in form and substance satisfactory to the
Underwriter, dated such Date of Delivery, relating to the Option
Shares and otherwise to the same effect as the opinions required by
Sections 5(b)(1), (2), (3) and (4) respectively.
(iii) A letter from Deloitte & Touche LLP, in form and substance
satisfactory to the Underwriter and dated such Date of Delivery,
substantially the same in scope and substance as the letter furnished
to the Underwriter pursuant to Section 5(e), except that the
"specified date" in the letter furnished pursuant to this Section 5(h)
shall be a date not more than three days prior to such Date of
Delivery.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Underwriter by notice to the
20
<PAGE>
Fund at any time at or prior to Closing Time, and such termination shall be
without liability of any party to any other party except as provided in Section
4.
SECTION 6. Indemnification. (a) The Fund and the Adviser jointly and
severally agree to indemnify and hold harmless the Underwriter and each person,
if any, who controls the Underwriter within the meaning of Section 15 of the
1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the information deemed to be part of
the Registration Statement pursuant to Rule 430A or Rule 434 of the Rules
and Regulations, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever (including the fees and
disbursements of counsel chosen by the Underwriter) reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter
21
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expressly for use in the Registration Statement (or any amendment thereto),
including the information deemed to be part of the Registration Statement
pursuant to Rule 430A or Rule 434 of the Rules and Regulations, or any
preliminary prospectus or in the Prospectus (or any amendment or supplement
thereto).
Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a trustee, officer or controlling
person of the Fund, such indemnity agreement is subject to the undertaking of
the Fund in the Registration Statement.
(b) The Underwriter agrees to indemnify and hold harmless the Fund and the
Adviser, their respective trustees and directors, each of the Fund's officers
who signed the Registration Statement, and each person, if any, who controls the
Fund or the Adviser within the meaning of Section 15 of the 1933 Act, against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto) or in
any preliminary prospectus or in the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Fund by the Underwriter expressly for use in the Registration Statement
(or any amendment thereto), including the information deemed to be part of the
Registration Statement pursuant to Rule 430A or Rule 434 of the Rules and
Regulations, or any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto) in reliance upon and in conformity with written
information furnished to the Fund by the Underwriter expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudicial as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be
22
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liable for the fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6 (a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses incurred by such indemnified party, as incurred, (i) in such proportion
as is appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the offering
of the Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in
23
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connection with the offering of the Shares pursuant to this Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Shares pursuant to this Agreement (before deducting
expenses) received by the Fund, less the total underwriting commission received
by the Underwriter, and the total underwriting commission received by the
Underwriter, in each case as set forth on the cover of the Prospectus, or, if
Rule 434 is used, the corresponding location on the term sheet, bear to the
aggregate initial public offering price of the Shares as set forth on such
cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriter were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
24
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For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each officer or trustee of the
Fund and partner of the Adviser, respectively, trustee of the Fund who signed
the Registration Statement, and each person, if any, who controls the Fund and
the Adviser within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Fund.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
the Pricing Agreement, or contained in certificates of officers of the Fund or
of the Adviser submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriter or controlling person, or by or on behalf of the Fund or the Adviser
and shall survive delivery of the Shares to the Underwriter.
SECTION 9. Termination of Agreement. (a) The Underwriter, may terminate
this Agreement by written notice to the Fund, at any time at or prior to Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Fund or the Adviser,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States, any outbreak of hostilities or escalation thereof or other calamity or
crisis or any change or development involving a prospective change in national
or international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Underwriter
impracticable to market the Shares or enforce contracts for the sale of the
Shares, or (iii) if trading in the Common Shares has been suspended or
materially limited by the Commission or if trading generally on either the New
York Stock Exchange or the American Stock Exchange or in the NASDAQ National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices for securi ties have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
Federal or New York authorities. As used in this subsection (a), the term
"Prospectus" means the Prospectus in the form first used to confirm sales of the
Shares.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and
25
<PAGE>
provided further that Sections 1, 6, 7 and 8 shall survive such termination and
remain in full force and effect.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of written telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated at Merrill Lynch World Headquarters, World Financial
Center, North Tower, New York, New York 10281-1201, Attention: Richard Bruce,
Vice President; notices to the Fund or to the Adviser shall be directed to each
of them at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attention:
Arthur Zeikel, President.
SECTION 11. Parties. This Agreement and the Pricing Agreement shall inure
to the benefit of and be binding upon the Underwriter, the Fund, the Adviser and
their respective successors. Nothing expressed or mentioned in this Agreement
or in the Pricing Agreement is intended or shall be construed to give any
person, firm or corporation, other than the parties hereto and their respective
successors and the controlling persons and officers, directors and trustees
referred to in Sections 6 and 7 and their heirs and legal representatives, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. This Agreement and the Pricing Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the parties hereto and thereto and their respective
successors, and said controlling persons and officers, directors and trustees
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Shares from the Underwriter shall
be deemed to be a successor merely by reason of such purchase.
SECTION 12. Liability of Shareholders, Trustees and Officers. This
agreement is executed by or on behalf of the trustees of the Fund solely in
their capacity as such trustees, and shall not constitute their personal
obligation either jointly or severally in their individual capacities. No
trustee, officer or shareholder of the Fund shall be liable for any obligations
of the Fund under this instrument and the Fund shall be solely liable therefor;
all parties hereto shall look solely to the Fund property for the payment of any
claim, or the performance of any obligation, hereunder.
SECTION 13. Governing Law and Time. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the laws of the
State of New York applicable to agreements made and to be performed in said
State. Specified times of day refer to New York City time.
26
<PAGE>
If the foregoing is in accordance with your understanding of our Agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a single binding agreement between the
Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
MUNIHOLDINGS FLORIDA INSURED FUND II
By: ___________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: ___________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: __________________________
Authorized Officer
27
<PAGE>
Exhibit A
__________ Shares
MuniHoldings Florida Insured Fund II
(a Massachusetts business trust)
Common Shares
(Par Value $.10 Per Share)
PRICING AGREEMENT
-----------------
_________ __, 1997
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Dear Sirs and Mesdames:
Reference is made to the Purchase Agreement, dated _________ __, 1997 (the
"Purchase Agreement"), relating to the purchase by Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") of the above
common shares of beneficial interest, par value $.10 per share (the "Initial
Shares"), of MuniHoldings Florida Insured Fund II (the "Fund") and relating to
the option granted to the Underwriter to purchase up to an additional _________
common shares of beneficial interest, par value $.10 per share, of the Fund to
cover over-allotments in connection with the sale of the Initial Shares (the
"Option Shares"). The Initial Shares and all or any part of the Option Shares
collectively are referred to herein as the "Shares".
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with the
Underwriter as follows:
1. The initial public offering price per share for the Shares,
determined as provided in said Section 2, and the purchase price per share
for the Shares to be paid by the Underwriter, shall be $15.00.
2. Fund Asset Management, L.P. will pay, or arrange for an affiliate
to pay, a commission to the Underwriter in
A-1
<PAGE>
the amount of $ per share for the Shares purchased by the Underwriter.
This agreement is executed by or on behalf of the trustees of the Fund
solely in their capacity as such trustees, and shall not constitute their
personal obligation either jointly or severally in their individual capacities.
No trustee, officer or shareholder of the Fund shall be liable for any
obligations of the Fund under this instrument and the Fund shall be solely
liable therefor; all parties hereto shall look solely to the Fund property for
the payment of any claim, or the performance of any obligation, hereunder.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund in accordance with its terms.
Very truly yours,
MUNIHOLDINGS FLORIDA INSURED FUND II
By:___________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: __________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ___________________________
Authorized Officer
A-2
<PAGE>
EXHIBIT (h)(2)
Revised October 29, 1990
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
-------------------------
Dear Sirs:
In connection with public offerings of securities underwritten by us, or by
a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute your
reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"). Upon our request, you
will advise us of the identity of any dealer to whom you allow such a discount
and any Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
<PAGE>
2. You represent that you are a dealer actually engaged in the investment
banking or securities business and that you are either (i) a member in good
standing of the NASD or (ii) a dealer with its principal place of business
located outside the United States, its territories or possessions and not
registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its territories or its possessions or to persons who are
nationals thereof or residents therein. Non-member foreign dealers and banks
agree, in making any sales, to comply with the NASD's interpretation with
respect to free-riding and withholding. In accepting a selling concession where
we are acting as Representative of the Underwriters, in accepting a reallowance
from us whether or not we are acting as such Representative, and in allowing a
discount to any other person, you agree to comply with the provisions of Section
24 of Article III of the Rules of Fair Practice of the NASD, and, in addition,
if you are a non-member foreign dealer or bank, you agree to comply, as though
you were a member of the NASD, with the provisions of Sections 8 and 36 of
Article III of such Rules of Fair Practice and to comply with Section 25 of
Article III thereof as that Section applies to a non-member foreign dealer or
bank. You represent that you are fully familiar with the above provisions of
the Rules of Fair Practice of the NASD.
3. If the securities have been registered under the Securities Act of 1933
(the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities of
an issuer that is not required to file reports under the Securities Exchange Act
of 1934 (the "1934 Act"), you agree that you will not sell any of the securities
to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such other place
as we may advise), at the offering price less the concession allowed to you, on
such date as we may
2
<PAGE>
advise, by certified or official bank check in New York Clearing House funds (or
such other funds as we may advise), payable to our order, against delivery of
the securities to be purchased by you. We shall have authority to make
appropriate arrangements for payment for and/or delivery through the facility of
The Depository Trust Company or any such other depository or similar facility
for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of securities
covered by this Agreement you will, upon our request as Representative of the
Underwriters, report to us the amount of securities purchased by you which then
remains unsold and will, upon our request, sell to us for the account of one or
more of the Underwriters such amount of such unsold securities as we may
designate, at the offering price less an amount to be determined by us not in
excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered by
this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
3
<PAGE>
11. Any notice from us shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunications to you at the
above address or at such other address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this Agreement,
the price restrictions contained in Paragraph 1 hereof and the provisions of
Paragraphs 6 and 7 hereof shall terminate as to such offering at the close of
business on the 45th day after the securities are released for sale or, as to
any or all such provisions, at such earlier time as we may advise. All other
provisions of this Agreement shall remain operative and in full force and effect
with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New York.
Please confirm your agreement hereto by signing the enclosed duplicate copy
hereof in the place provided below and returning such signed duplicate copy to
us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Fred F. Hessinger
--------------------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
- ----------------------------------
Name of Dealer
- ----------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
4
<PAGE>
HOLLAND & KNIGHT LLP
400 North Ashley Drive, Suite 2300
Tampa, Florida 33602-4300
January 7, 1998
MuniHoldings Florida Insured Fund II
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Gentlemen:
You have requested our opinion as special Florida tax counsel to
MuniHoldings Florida Insured Fund II (the "Fund") concerning the Florida
intangible personal property tax (the "Intangible Tax") treatment of Fund shares
owned by Florida residents.
FACTS AND ASSUMPTIONS
In rendering this opinion, we have reviewed the Registration Statement
for the Fund dated January 7, 1998 (the "Registration Statement"). We have
assumed that the statements contained in the Registration Statement provide an
accurate and complete description of the facts and circumstances concerning the
establishment and operation of the Fund. We have made no independent
determination regarding such facts and circumstances and, therefore, have relied
upon the Registration Statement for purposes of this letter. Any changes to the
Registration Statement may affect the conclusions stated herein.
DISCUSSION
Chapter 199, Florida Statutes, imposes an annual tax of 2.0 mills on
each dollar of the just valuation of intangible personal property which has a
taxable situs in Florida. See Fla. Stat. (S) 199.032. The annual intangible tax
---
does not apply, however, to notes and other obligations for the payment of money
that are secured by a mortgage or other lien upon real property situated in
Florida. Id.
--
<PAGE>
MuniHoldings Florida Insured Fund II
January 7, 1998
Page 2
Intangible personal property is subject to the annual tax at its just
valuation as of January 1 of each year. Fla. Stat. (S) 199.103. Unless
exempt, shares or units of companies or trusts registered under the Investment
Company Act of 1940, as amended, are valued at the net asset value of such
shares or units on the last business day of the previous calendar year. Fla.
Stat. (S) 199.103(2).
Intangible personal property has a taxable situs in Florida if it is
owned, managed, or controlled by a Florida resident on January 1 of the tax
year. In addition, intangible personal property owned by a business or other
artificial entity can acquire a Florida taxable situs if the business or entity
acquires a "commercial domicile" in Florida. Fl. Stat. (S) 199.175(1)(b).
Certain types of intangible personal property are exempt from the
annual intangible tax. For example, money is exempt from the tax. Fla. Stat.
(S) 199.185(1)(a). For this purpose, the term "money" includes, without
limitation, United States legal tender, certificates of deposit, cashier's and
certified checks, bills of exchange, drafts, the cash equivalent of annuities
and life insurance policies, and similar instruments. Fla. Stat. (S)
199.023(2).
In addition, notes, bonds, and other obligations issued by the State of
Florida or its municipalities, counties, and other taxing districts ("Florida
Municipal Bonds"), or by the United States government and its agencies are
exempt from the tax. Fla. Stat. (S) 199.185(1)(d); see also 31 U.S.C.
--- ----
(S) 3124(a). Units of an investment trust are exempt from the annual
intangible tax if the trust's portfolio of assets consists solely of assets
exempt from the annual intangible tax. Fla. Stat. (S) 199.185(1)(i). To
qualify for the exemption, the trust must be registered under the Investment Act
of 1940, as amended. Id.
--
The Florida statutory provisions do not specify the date on which the
exempt or non-exempt status of investment trust units is determined.
Nevertheless, the statutory provision requiring that investment trust units be
valued on the last business day of the previous calendar year suggests that
such day is the relevant date. Accordingly, if on such date, the Fund's
portfolio of investments consists solely of Florida Municipal Bonds, U.S.
Government Obligations, and other assets exempt from the Florida intangible
tax, the entire net asset value of a share of the Fund is exempt from the
Florida intangible tax.
<PAGE>
MuniHoldings Florida Insured Fund II
January 7, 1998
Page 3
OPINION
Based upon the foregoing, we are of the opinion that if, at the close of
business on the last business day of the calendar year, the assets held by the
Fund consist solely of assets exempt from the Intangible Tax, then the Fund
shares owned by Florida residents will be exempt from Intangible Tax in the next
succeeding year.
SCOPE OF OPINION
The scope of this opinion is expressly limited to the Florida Intangible
Tax consequences of ownership of Fund shares by Florida residents. Our opinion
has not been requested and none is expressed with respect to any other tax
consequences arising from the establishment or operation of the Fund or from the
ownership of Fund shares. The opinion stated in this letter is based upon the
existing provisions of the Florida Statutes and the Florida Administrative Code,
existing Florida court decisions, and current Florida Department of Revenue
published technical assistance advisements. Any of these authorities could be
changed at any time, and any such changes may be retroactive. Furthermore, such
a change could significantly modify the statements and conclusions expressed in
this letter.
This letter is governed by, and shall be interpreted in accordance with,
the Legal Opinion Accord of the American Bar Association Section of Business Law
(1991) (the "Accord"). As a consequence, this letter is subject to a number of
qualifications, exceptions, definitions, limitations on coverage, and other
limitations, all as more particularly described in the Accord, and this letter
should be read in conjunction therewith.
The advice contained in this letter represents our best judgement as to
the probable outcome of the tax issues discussed and is not binding on the
Department of Revenue. Moreover, we can give no assurance that the Department of
Revenue will not challenge our conclusions. Although the conclusions we express
are based on our best interpretations of existing law and what we believe a
court would conclude if presented with the applicable issues, we can give no
assurance that our interpretations would be followed if the issues became the
subject of judicial or administrative proceedings. The conclusions stated in
this letter also assume that if any of our conclusions are challenged, the facts
and arguments in support of the conclusions will be properly presented and
appropriately argued before an administrative or judicial tribunal.
<PAGE>
MuniHoldings Florida Insured Fund II
January 7, 1998
Page 4
We consent to the filing of this opinion letter as an exhibit to the
Registration Statement. Finally, we have undertaken no obligation to update
this opinion for changes in facts or law occurring subsequent to the date of
this letter.
Very truly yours,
HOLLAND & KNIGHT LLP
/s/ Douglas A. Wright
Douglas A. Wright
