As filed with the Securities and Exchange Commission on October 4, 1999
Securities Act File No. 333-______
Investment Company Act File No. 811-08573
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No.
|_| Post-Effective Amendment No.
(Check appropriate box or boxes)
----------------------
MuniHoldings California Insured Fund II, Inc.
(Exact Name of Registrant as Specified in Its Charter)
(609) 282-2800
(Area Code and Telephone Number)
----------------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)
----------------------
Terry K. Glenn
MuniHoldings California Insured Fund II, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
----------------------
Copies to:
Frank P. Bruno, ESQ. Michael J. Hennewinkel, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
One World Trade Center 800 Scudders Mill Road
New York, NY 10048-0557 Plainsboro, NJ 08536
----------------------
Approximate Date Of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective under the Securities Act of 1933.
----------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
===============================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Amount Being Offering Price Aggregate Offering Registration
Title of Securities Being Registered Registered (1) Per Unit (1) Price (1) Fee(3)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par value)............. 30,789,947 $13.42 $413,201,089 $114,870
- ---------------------------------------------------------------------------------------------------------------
Auction Market Preferred Stock, Series C.. 3,200 $25,000 (2) $80,000,000 $ 22,240
- ---------------------------------------------------------------------------------------------------------------
Auction Market Preferred Stock, Series D.. 2,960 $25,000 (2) $74,000,000 $ 20,572
- ---------------------------------------------------------------------------------------------------------------
Auction Market Preferred Stock, Series E.. 3,640 $25,000 (2) $91,000,000 $ 25,298
===============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Represents the liquidation preference of a share of preferred stock after
the reorganization.
(3) Paid by wire transfer to the designated lockbox of the Securities and
Exchange Commission in Pittsburgh, Pennsylvania.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
----------------------
NOTICE OF ANNUAL MEETINGS OF STOCKHOLDERS
----------------------
TO BE HELD ON DECEMBER 15, 1999
TO THE STOCKHOLDERS OF
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
NOTICE IS HEREBY GIVEN that the annual meetings of stockholders (the
"Meetings") of MuniHoldings California Insured Fund II, Inc. ("California
Insured II"), MuniHoldings California Insured Fund, Inc. ("California Insured"),
MuniHoldings California Insured Fund III Inc. ("California Insured III") and
MuniHoldings California Insured Fund IV, Inc. ("California Insured IV") will be
held at the offices of Merrill Lynch Asset Management, L.P., 800 Scudders Mill
Road, Plainsboro, New Jersey on Wednesday, December 15, 1999 at 8:45 a.m.
Eastern time (for California Insured), 9:00 a.m. Eastern time (for California
Insured II), 9:15 a.m. Eastern time (for California Insured III) and 9:30 a.m.
Eastern time (for California Insured IV) for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization
(the "Agreement and Plan of Reorganization") contemplating (i) the
acquisition of substantially all of the assets and the assumption of
substantially all of the liabilities of California Insured by California
Insured II, in exchange solely for an equal aggregate value of
newly-issued shares of Common Stock of California Insured II ("California
Insured II Common Stock") and shares of a newly-created series of Auction
Market Preferred Stock ("AMPS") of California Insured II to be designated
Series C ("California Insured II Series C AMPS") and the distribution by
California Insured of such California Insured II Common Stock to the
holders of Common Stock of California Insured and such California Insured
II Series C AMPS to the holders of Series A and Series B AMPS of
California Insured; (ii) the acquisition of substantially all of the
assets and the assumption of substantially all of the liabilities of
California Insured III by California Insured II, in exchange solely for an
equal aggregate value of newly-issued shares of California Insured II
Common Stock and shares of a newly-created series of AMPS of California
Insured II to be designated Series D ("California Insured II Series D
AMPS") and the distribution by California Insured III of such California
Insured II Common Stock to the holders of Common Stock of California
Insured III and such California Insured II Series D AMPS to the holders of
Series A and Series B AMPS of California Insured III; and (iii) the
acquisition of substantially all of the assets and the assumption of
substantially all of the liabilities of California Insured IV by
California Insured II, in exchange solely for an equal aggregate value of
newly-issued shares of California Insured II Common Stock and shares of a
newly-created series of AMPS of California Insured II to be designated
Series E ("California Insured II Series E AMPS") and the distribution by
California Insured IV of such California Insured II Common Stock to the
holders of Common Stock of California Insured IV and such California
Insured II Series E AMPS to the holders of Series A and Series B AMPS of
California Insured IV. A vote in favor of this proposal also will
constitute a vote in favor of the liquidation and dissolution of each of
California Insured, California Insured III and California Insured IV and
the termination of their respective registration under the Investment
Company Act of 1940;
<PAGE>
(2) To elect a Board of Directors of each of California Insured II,
California Insured, California Insured III and California Insured IV to
serve for the ensuing year;
(3) (a) For the stockholders of California Insured, California
Insured II and California Insured IV only: To consider and act upon a
proposal to ratify the selection of Deloitte & Touche LLP to serve as
independent auditors of each of California Insured II and California
Insured IV for the respective Fund's current fiscal year; and
(b) For the stockholders of California Insured III only: To consider
and act upon a proposal to ratify the selection of Ernst & Young LLP to
serve as independent auditors of California Insured III for the current
fiscal year; and
(4) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
The Boards of Directors of California Insured II, California Insured,
California Insured III and California Insured IV have fixed the close of
business on October 20, 1999 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meetings or any
adjournment thereof.
A complete list of the stockholders of California Insured II, California
Insured, California Insured III and California Insured IV entitled to vote at
the Meetings will be available and open to the examination of any stockholder of
California Insured II, California Insured, California Insured III or California
Insured IV, respectively, for any purpose germane to the Meetings during
ordinary business hours from and after December 1, 1999, at the offices of
California Insured II, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meetings. Stockholders who do not
expect to attend the Meetings in person are requested to complete, date and sign
the enclosed form of proxy applicable to their fund and return it promptly in
the envelope provided for that purpose. The enclosed proxy is being solicited on
behalf of the Board of Directors of California Insured II, California Insured,
California Insured III or California Insured IV, as applicable.
By Order of the Boards of Directors
WILLIAM E. ZITELLI, JR.
Secretary of MuniHoldings California Insured
Fund, Inc., MuniHoldings California Insured
Fund III, Inc. and MuniHoldings California
Insured Fund IV, Inc.
ALICE A. PELLEGRINO
Secretary of MuniHoldings California Insured Fund
II, Inc.
Plainsboro, New Jersey
Dated: November , 1999
2
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not use this prospectus to sell securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and is not soliciting an offer to buy
these securities in any State where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED OCTOBER 4, 1999
PROXY STATEMENT AND PROSPECTUS
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011
(609) 282-2800
----------------------
ANNUAL MEETINGS OF STOCKHOLDERS
----------------------
DECEMBER 15, 1999
This Joint Proxy Statement and Prospectus is furnished to you as a
stockholder of one of the funds listed above. An Annual Meeting of the
stockholders of each of these funds will be held on December 15, 1999 to
consider several items that are listed below and discussed in greater detail
elsewhere in this Proxy Statement and Prospectus. The Board of Directors of each
of the funds is requesting its stockholders to submit a proxy to be used at the
Annual Meeting to vote the shares held by the stockholder submitting the proxy.
The proposals to be considered at the Annual Meetings are:
1. To approve or disapprove an Agreement and Plan of Reorganization
among the funds;
2. To elect a Board of Directors for each of the funds;
3. To ratify the selection of the independent auditors of each of the
funds; and
4. To transact such other business as may properly come before the
Annual Meetings or any adjournment thereof.
The Agreement and Plan of Reorganization that you are being asked to
consider involves a transaction that will be referred to in this Proxy Statement
and Prospectus as the Reorganization. The Reorganization involves the
combination of four funds into one. The four funds are:
MuniHoldings California Insured Fund II, Inc. ("California Insured II"),
which will be the surviving fund
MuniHoldings California Insured Fund, Inc. ("California Insured")
MuniHoldings California Insured Fund III, Inc. ("California Insured III")
MuniHoldings California Insured Fund IV, Inc. ("California Insured IV")
California Insured, California Insured III and California Insured IV are
sometimes referred to herein collectively as the "Acquired Funds" and, together
with California Insured II, as the "Funds."
In the Reorganization, California Insured II will acquire substantially
all of the assets and assume substantially all of the liabilities of each of the
Acquired Funds solely in exchange for shares of its Common Stock, par value $.10
per share, and shares of newly-created series of its Auction Market Preferred
Stock ("AMPS"), with a par value of $.10 per share and a liquidation preference
of $25,000 per share. The Acquired Funds will distribute the Common Stock and
AMPS received in the Reorganization to their respective stockholders and will
then liquidate and dissolve and terminate their registration under the
Investment Company Act. California Insured II will continue to operate as a
registered closed-end investment company with the investment objective and
policies described in this Proxy Statement and Prospectus, and will change its
name to MuniHoldings California Insured Fund, Inc.
In the Reorganization, California Insured II will issue shares of its
Common Stock and AMPS to each of the Acquired Funds based on the value of the
assets transferred to California Insured II by that Acquired Fund. These shares
will then be distributed by each Acquired Fund to its stockholders based on the
value of the shares held by each stockholder just prior to the Reorganization. A
holder of Common Stock of an Acquired Fund will
<PAGE>
receive Common Stock of California Insured II and a holder of AMPS of an
Acquired Fund will receive shares of one of the newly-created series of AMPS of
California Insured II.
This Proxy Statement and Prospectus serves as a prospectus of California
Insured II in connection with the issuance of California Insured II Common Stock
and three newly-created series of California Insured II AMPS in the
Reorganization.
----------------------
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Proxy Statement and
Prospectus. Any representation to the contrary is a criminal offense.
----------------------
The date of this Proxy Statement and Prospectus is November__, 1999.
The Proxy Statement and Prospectus sets forth information about California
Insured II, California Insured, California Insured III and California Insured IV
that stockholders of the Funds should know before considering the Reorganization
and should be retained for future reference. Each of the Funds has authorized
the solicitation of proxies in connection with the Reorganization solely on the
basis of this Proxy Statement and Prospectus and the accompanying documents.
The address of the principal executive offices of California Insured II,
California Insured, California Insured III and California Insured IV is 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone number is
(609) 282-2800.
The Common Stock of each of the Funds is listed on the New York Stock
Exchange (the "NYSE") under the symbols "MUC" (California Insured II), "CLH"
(California Insured), "MCF" (California Insured III) and "CIL" (California
Insured IV). Subsequent to the Reorganization, shares of California Insured II
Common Stock will continue to be listed on the NYSE under the symbol "MUC".
Reports, proxy materials and other information concerning any of the Funds may
be inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
2
<PAGE>
TABLE OF CONTENTS
PAGE
----
INTRODUCTION ............................................................... 5
ITEM 1. THE REORGANIZATION ................................................ 6
SUMMARY .................................................................... 6
California Municipal Bonds .............................................. 15
Interest Rate and Credit Risk ........................................... 15
Non-diversification ..................................................... 15
Rating Categories ....................................................... 15
Private Activity Bonds .................................................. 15
Portfolio Insurance ..................................................... 15
Leverage ................................................................ 15
Portfolio Management .................................................... 16
Inverse Floating Obligations ............................................ 16
Options and Futures Transactions ........................................ 17
Antitakeover Provisions ................................................. 17
Ratings Considerations .................................................. 17
COMPARISON OF THE FUNDS .................................................... 18
Financial Highlights .................................................... 18
Investment Objective and Policies ....................................... 23
Portfolio Insurance ..................................................... 24
Description of California Municipal Bonds and Municipal Bonds ........... 26
Special Considerations Relating to California Municipal Bonds ........... 26
Other Investment Policies ............................................... 27
Information Regarding Options and Futures Transactions .................. 28
Investment Restrictions ................................................. 30
Rating Agency Guidelines ................................................ 32
Portfolio Composition ................................................... 32
Portfolio Transactions .................................................. 34
Portfolio Turnover ...................................................... 34
Net Asset Value ......................................................... 35
Capital Stock ........................................................... 35
Management of the Funds ................................................. 37
Code of Ethics .......................................................... 39
Voting Rights ........................................................... 39
Stockholder Inquiries ................................................... 40
Dividends and Distributions ............................................. 40
Automatic Dividend Reinvestment Plan .................................... 41
Mutual Fund Investment Option ........................................... 43
Liquidation Rights of Holders of AMPS ................................... 43
Tax Rules Applicable to the Funds and their Stockholders ................ 43
AGREEMENT AND PLAN OF REORGANIZATION ....................................... 47
General ................................................................. 47
Procedure ............................................................... 48
Terms of the Agreement and Plan of Reorganization ....................... 49
Potential Benefits to Common Stockholders of the Funds as a Result of
the Reorganization ................................................... 51
Surrender and Exchange of Stock Certificates ............................ 52
Tax Consequences of the Reorganization .................................. 53
Capitalization .......................................................... 54
ITEM 2. ELECTION OF DIRECTORS ............................................. 56
Committee and Board Meetings ............................................ 58
Compliance with Section 16(a) of the Securities Exchange Act of 1934 .... 59
Interested Persons ...................................................... 59
3
<PAGE>
PAGE
----
Compensation of Directors ............................................. 59
Officers of the Funds ................................................. 59
ITEM 3. SELECTION OF INDEPENDENT AUDITORS ................................ 60
INFORMATION CONCERNING THE ANNUAL MEETINGS ............................... 60
Date, Time and Place of Meetings ...................................... 60
Solicitation, Revocation and Use of Proxies ........................... 60
Record Date and Outstanding Shares .................................... 60
Security Ownership of Certain Beneficial Owners and Management ........ 61
Voting Rights and Required Vote ....................................... 61
ADDITIONAL INFORMATION ................................................... 62
Year 2000 Issues ...................................................... 63
CUSTODIAN ................................................................ 63
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR .................. 63
LEGAL PROCEEDINGS ........................................................ 64
LEGAL OPINIONS ........................................................... 64
EXPERTS .................................................................. 64
STOCKHOLDER PROPOSALS .................................................... 64
INDEX TO FINANCIAL STATEMENTS ............................................ F-1
EXHIBIT I INFORMATION PERTAINING TO EACH FUND ......................... I-1
EXHIBIT II AGREEMENT AND PLAN OF REORGANIZATION ........................ II-1
EXHIBIT III ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA ................. III-1
EXHIBIT IV RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER ............. IV-1
EXHIBIT V PORTFOLIO INSURANCE ......................................... V-1
4
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of California
Insured II, California Insured, California Insured III and California Insured IV
for use at the Meetings to be held at the offices of Merrill Lynch Asset
Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey on
December 15, 1999, at the time specified for each Fund in Exhibit I to this
Proxy Statement and Prospectus. The mailing address for each of the Funds is
P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate mailing date of
this Proxy Statement and Prospectus is November ___, 1999.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation to
the Secretary of California Insured II, California Insured, California Insured
III or California Insured IV, as applicable, at the address indicated above or
by voting in person at the appropriate Meeting. All properly executed proxies
received prior to the Meetings will be voted at the Meetings in accordance with
the instructions marked thereon or otherwise as provided therein. Unless
instructions to the contrary are marked, proxies will be voted "FOR" each of the
following items: (1) to approve the Agreement and Plan of Reorganization among
California Insured II, California Insured, California Insured III and California
Insured IV (the "Agreement and Plan of Reorganization"); (2) to elect a Board of
Directors of each Fund to serve for the ensuing year; and (3) to ratify the
selection of independent auditors for each of the Funds for its current fiscal
year.
With respect to Item 1, assuming a quorum is present at the Meetings,
approval of the Agreement and Plan of Reorganization will require the
affirmative vote of stockholders representing (i) a majority of the outstanding
shares of California Insured II Common Stock and California Insured II AMPS,
voting together as a single class, and a majority of the outstanding shares of
California Insured II AMPS, Series A and B, voting together as a single class,
(ii) a majority of the outstanding shares of California Insured Common Stock and
California Insured AMPS, voting together as a single class, and a majority of
the outstanding shares of California Insured AMPS, Series A and B, voting
together as a single class, (iii) a majority of the outstanding shares of
California Insured III Common Stock and California Insured III AMPS, voting
together as a single class, and a majority of the outstanding shares of
California Insured III AMPS, Series A and B, voting together as a single class
and (iv) a majority of the outstanding shares of California Insured IV Common
Stock and California Insured IV AMPS, voting together as a single class, and a
majority of the outstanding shares of California Insured IV AMPS, Series A and
B, voting separately as a class. Because of the requirement that the Agreement
and Plan of Reorganization be approved by stockholders of all four Funds, the
Reorganization will not take place if stockholders of any one Fund do not
approve the Agreement and Plan of Reorganization.
With respect to Item 2, holders of shares of AMPS of each of the Funds are
entitled to elect two Directors of that Fund, and holders of shares of AMPS and
Common Stock, voting together as a single class, are entitled to elect the
remaining Directors of that Fund. Assuming a quorum is present at the Meetings,
election of the two Directors of each Fund to be elected by the holders of AMPS,
voting separately as a class, will require the affirmative vote of a plurality
of the votes cast by the holders of shares of a Fund's AMPS, represented at the
Meeting and entitled to vote; and election of the remaining Directors of each
Fund will require the affirmative vote of a plurality of the votes cast by the
holders of shares of that Fund's Common Stock and AMPS, represented at the
Meeting and entitled to vote, voting together as a single class.
With respect to Item 3, assuming a quorum is present at the Meetings,
approval of the ratification of the selection of independent auditors of a Fund
will require the affirmative vote of a majority of the votes cast by the holders
of shares of Common Stock and AMPS of that Fund represented at the Meeting in
person or by proxy, and entitled to vote, voting together as a single class.
The Board of Directors of each of the Funds has fixed the close of
business on October 20, 1999 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the
Meetings or any adjournment thereof. Stockholders on the Record Date will be
entitled to one vote for each share held, with no shares having cumulative
voting rights. At the Record Date, each Fund had outstanding the number of
shares of Common Stock and AMPS indicated in Exhibit I. To the knowledge of the
management of each of
5
<PAGE>
the Funds, no person owned beneficially more than 5% of the respective
outstanding shares of either class of capital stock of any Fund at the Record
Date.
The Boards of Directors of the Funds know of no business other than that
discussed in Items 1, 2 and 3 above that will be presented for consideration at
the Meetings. If any other matter is properly presented, it is the intention of
the persons named in the enclosed proxy to vote in accordance with their best
judgment.
ITEM 1. THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained in this Proxy Statement and
Prospectus and in the Agreement and Plan of Reorganization attached hereto as
Exhibit II.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of California Insured by
California Insured II and the subsequent distribution of California Insured II
Common Stock and California Insured II Series C AMPS to the holders of
California Insured Common Stock and California Insured AMPS, Series A and Series
B, respectively; (ii) the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of California Insured III by
California Insured II and the subsequent distribution of California Insured II
Common Stock and California Insured II Series D AMPS to the holders of
California Insured III Common Stock and California Insured III AMPS, Series A
and Series B, respectively; (iii) the acquisition of substantially all of the
assets and the assumption of substantially all the liabilities of California
Insured IV by California Insured II and the subsequent distribution of
California Insured II Common Stock and California Insured II Series E AMPS to
the holders of California Insured IV Common Stock and California Insured IV
AMPS, Series A and Series B, respectively; (iv) the subsequent deregistration
and dissolution of each of California Insured, California Insured III and
California Insured IV; and (v) the subsequent change of name of California
Insured II to MuniHoldings California Insured Fund, Inc.
At meetings of the Boards of Directors of each of the Funds, the Board of
Directors of each of the Funds unanimously approved the Reorganization. Subject
to obtaining the necessary approvals from the stockholders of each of the Funds,
the Board of Directors of each Acquired Fund also deemed advisable the
deregistration of the Fund under the Investment Company Act of 1940, as amended
(the "Investment Company Act") and its dissolution under the laws of the State
of Maryland, and the Board of Directors of California Insured II deemed
advisable the change in the corporate name of the Fund to MuniHoldings
California Insured Fund, Inc. The Reorganization requires approval of the
stockholders of each of the four Funds. The Reorganization will not take place
if the stockholders of any one Fund do not approve the Agreement and the Plan of
Reorganization.
Each of the Funds seeks to provide stockholders with current income exempt
from Federal income tax and California income taxes. Each of the Funds 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
California income taxes. Under normal circumstances, at least 80% of each Fund's
total 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.
Each of the Funds is a non-diversified, leveraged, closed-end management
investment company registered under the Investment Company Act. If the
stockholders of the Funds approve the Reorganization, (i) California Insured II
Common Stock and California Insured II Series C AMPS will be issued to
California Insured in exchange for the assets of California Insured; (ii)
California Insured II Common Stock and California Insured II Series D AMPS will
be issued to California Insured III in exchange for the assets of California
Insured III; (iii) California Insured II Common Stock and California Insured II
Series E AMPS will be issued to California Insured IV in exchange for the assets
of California Insured IV; and (iv) California Insured, California Insured III
and California Insured IV will distribute these shares to their respective
stockholders as provided in the Agreement and Plan of Reorganization. After the
Reorganization, each of California Insured, California Insured
6
<PAGE>
III and California Insured IV will terminate its registration under the
Investment Company Act and its incorporation under Maryland law, and California
Insured II will change its name to MuniHoldings California Insured Fund, Inc.
Based upon their evaluation of all relevant information, the Directors of
each of the Funds have determined that the Reorganization will potentially
benefit the holders of Common Stock of that Fund. Specifically, after the
Reorganization, stockholders of each of the Acquired Funds will remain invested
in a closed-end fund with an investment objective and policies substantially
similar to the Acquired Fund's investment objective and policies and that uses
substantially the same management personnel. In addition, it is anticipated that
common stockholders of each of the Funds will be subject to a reduced overall
operating expense ratio based on the anticipated pro forma combined total
operating expenses and the combined total assets of the surviving fund after the
Reorganization.The Boards also considered the relative tax positions of the
Funds' portfolios. It is not anticipated that the Reorganization will directly
benefit the holders of shares of AMPS of any of the Funds; however, the
Reorganization will not adversely affect the holders of shares of any series of
AMPS of any of the Funds and the expenses of the Reorganization will not be
borne by the holders of shares of AMPS of any of the Funds.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approval, provided
that the Funds have obtained prior to that time a favorable private letter
ruling from the Internal Revenue Service (the "IRS") concerning the tax
consequences of the Reorganization as set forth in the Agreement and Plan of
Reorganization or an opinion of counsel to the same effect. Under the Agreement
and Plan of Reorganization, however, the Board of Directors of any Fund may
cause the Reorganization to be postponed or abandoned in certain circumstances
should such Board determine that it is in the best interests of the stockholders
of that Fund to do so. The Agreement and Plan of Reorganization may be
terminated, and the Reorganization abandoned, whether before or after approval
by the Funds' stockholders, at any time prior to the Exchange Date (as defined
below), (i) by mutual consent of the Boards of Directors of all of the Funds or
(ii) by the Board of Directors of any Fund if any condition to that Fund's
obligations has not been fulfilled or waived by such Fund's Board of Directors.
Pro Forma Fee Table for Common Stockholders of California Insured II,
California Insured, California Insured III, California Insured IV and
the Combined Fund as of June 30, 1999 (Unaudited)(a)
<TABLE>
<CAPTION>
Actual
-----------------------------------------------------
California California California California Pro Forma
Insured II Insured Insured III Insured IV Combined
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Common Stockholder Transaction Expenses
Maximum Sales Load (as a percentage
of offering price)......................... None (b) None (b) None (b) None (b) None (c)
Dividend Reinvestment Plan Fees............... None None None None None
Annual Expenses (as a percentage of net assets
attributable to Common Stock at June 30,
1999)(d)......................................
Investment Advisory Fees(e)...................... 0.92% 0.91% 0.95% 0.92% 0.92%
Interest Payments on Borrowed Funds.............. None None None None None
Other Expenses................................... 0.37% 0.37% 0.41% 0.36% 0.28%
---- ---- ---- ---- ----
Total Annual Expenses(e)......................... 1.29% 1.28% 1.36% 1.28% 1.20%
==== ==== ==== ==== ====
</TABLE>
- ----------
(a) No information is presented with respect to AMPS because no Fund's
operating expenses are, or expenses of the Reorganization will be, borne
by the holders of AMPS of any of the Funds. Generally, AMPS are sold at a
fixed liquidation preference of $25,000 per share and investment return is
set at an auction.
(b) Shares of Common Stock purchased in the secondary market may be subject to
brokerage commissions or other charges.
(c) No sales load will be charged on the issuance of shares in the
Reorganization. Shares of Common Stock are not available for purchase from
the Funds but may be purchased through a broker-dealer subject to
individually negotiated commission rates.
(d) The pro forma annual operating expenses for the combined fund are
projections for a 12-month period.
(e) Based on average net assets of each Fund and the combined fund, excluding
assets attributable to AMPS. If assets attributable to AMPS are included,
the Investment Advisory Fee for each Fund and the combined fund would be
0.55% and the Total Annual Expenses would be 0.77%, 0.77%, 0.79%, 0.77%
and 0.71%, respectively.
7
<PAGE>
Example:
Cumulative Expenses Paid on Shares of Common Stock
for the Periods Indicated:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) the operating expense ratio for
each Fund (as a percentage of net assets attributable to
Common Stock) set forth in the table above and (2) a 5%
annual return throughout the period:
California Insured II....................................... $13 $41 $71 $156
California Insured.......................................... $13 $41 $70 $155
California Insured III...................................... $14 $43 $74 $164
California Insured IV....................................... $13 $41 $70 $155
Combined Fund*.............................................. $12 $38 $66 $145
</TABLE>
- --------
* Assumes that the Reorganization had taken place on June 30, 1999.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a common stockholder of each of the Funds will bear
directly or indirectly as compared to the costs and expenses that would be borne
by such investors taking into account the Reorganization. The Example set forth
above assumes that shares of Common Stock were purchased in the initial
offerings and the reinvestment of all dividends and distributions and uses a 5%
annual rate of return as mandated by Securities and Exchange Commission (the
"SEC") regulations. The Example should not be considered a representation of
past or future expenses or annual rates of return. Actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
Example. See "Comparison of the Funds" and "The Reorganization -- Potential
Benefits to Common Stockholders of the Funds as a Result of the Reorganization."
Business of California
Insured II....................... California Insured II was incorporated
under the laws of the State of Maryland
on December 8, 1997 and commenced
operations on February 27, 1998.
California Insured II is a
non-diversified, leveraged, closed-end
management investment company whose
investment objective is to provide
stockholders with current income exempt
from Federal and California income
taxes. California Insured II seeks to
achieve its investment objective by
investing primarily in a portfolio of
long-term investment grade obligations,
the interest on which, in the opinion
of bond counsel to the issuer, is
exempt from Federal and California
income taxes ("California Municipal
Bonds"). Under normal circumstances, at
least 80% of California Insured II's
total 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. See "Comparison of the
Funds -- Investment Objectives and
Policies."
California Insured II has outstanding
Common Stock and two series of AMPS,
designated Series A and Series B, which
shall be referred to herein
collectively as "California Insured II
AMPS." As of August 31, 1999 California
Insured II had net assets of
$229,546,273.
8
<PAGE>
Business of
California Insured............... California Insured was incorporated
under the laws of the State of Maryland
on April 24, 1997 and commenced
operations on September 19, 1997.
California Insured is a
non-diversified, leveraged, closed-end
manage-ment investment company whose
investment objective is to provide
stockholders with current income exempt
from Federal and California income
taxes. California Insured seeks to
achieve its objective by investing
primarily in a portfolio of California
Municipal Bonds. Under normal
circumstances, at least 80% of
California Insured II's total 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. See "Comparison of the Funds
-- Investment Objectives and Policies."
California Insured has outstanding
Common Stock and two series of AMPS,
designated Series A and Series B, which
shall be referred to herein
collectively as "California Insured
AMPS." As of August 31, 1999,
California Insured had net assets of
$197,647,294.
Business of California
Insured III...................... California Insured III was incorporated
under the laws of the State of Maryland
on August 17, 1998 and commenced
operations on September 25, 1998.
California Insured III is a
non-diversified, leveraged, closed-end
management investment company whose
investment objective is to provide
stockholders with current income exempt
from Federal and California income
taxes. California Insured III seeks to
achieve its investment objective by
investing primarily in a portfolio of
California Municipal Bonds. Under
normal circumstances, at least 80% of
California Insured III's total 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. See "Comparison of the Funds
-- Investment Objectives and Policies."
California Insured III has outstanding
Common Stock and two series of AMPS,
designated Series A and Series B, which
shall be referred to herein
collectively as "California Insured III
AMPS." As of August 31, 1999,
California Insured III had net assets
of $171,516,719.
Business of California
Insured IV....................... California Insured IV was incorporated
under the laws of the State of Maryland
on November 23, 1998 and commenced
operations on January 29, 1999.
California Insured IV is a
non-diversified, leveraged, closed-end
management investment company whose
investment objective is to provide
stockholders with current income exempt
from Federal and California income
taxes. California Insured IV seeks to
achieve its investment objective by
investing primarily in a
9
<PAGE>
portfolio of California Municipal
Bonds. Under normal circumstances, at
least 80% of California Insured IV's
total 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. See "Comparison of the
Funds -- Investment Objectives and
Policies."
California Insured IV has outstanding
Common Stock and two series of AMPS,
designated Series A and Series B (the
"California Insured IV AMPS"). As of
August 31, 1999, California Insured IV
had net assets of $219,907,927.
Comparison of the Funds............ Investment Objectives and Policies. The
Funds have substantially similar
investment objectives and policies. All
four Funds seek to provide current
income exempt from Federal and
California income taxes and seek to
invest substantially (at least 65%) of
its assets in California Municipal
Bonds except when there is an
insufficient supply of California
Municipal Bonds at appropriate prices.
Under normal circumstances, at least
80% of each Fund's total 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. See
"Comparison of the Funds -- Investment
Objectives and Policies."
Capital Stock. Each Fund has
outstanding both Common Stock and AMPS.
The Common Stock of each of the Funds
is traded on the NYSE. As of August 31,
1999, (i) the net asset value per share
of California Insured II Common Stock
was $13.62 and the market price per
share was $13.25; (ii) the net asset
value per share of California Insured
Common Stock was $14.13 and the market
price per share was $14.00; (iii) the
net asset value per share of California
Insured III Common Stock was $12.96 and
the market price per share was
$12.9375; and (iv) the net asset value
per share of California Insured IV
Common Stock was $13.04 and the market
price per share was $13.4375. The AMPS
of each of the Funds have a liquidation
preference of $25,000 per share and are
sold principally at auctions. See
"Comparison of the Funds -- Capital
Stock."
Auctions generally have been held and will
be held every seven days for each
series of AMPS of each of the Funds
unless the applicable Fund elects,
subject to certain limitations, to have
a special dividend period. In
connection with the Reorganization, a
holder of AMPS of an Acquired Fund may
receive California Insured II AMPS with
a dividend payment date and an auction
date that fall on a day of the week
that is different from the schedule of
the AMPS of the Acquired Fund that he
or she holds. See "Comparison of the
Funds -- Capital Stock." The following
table
10
<PAGE>
provides information about the dividend
rates for each series of AMPS of each
of the Funds as of a recent auction.
Auction Dividend
Date Fund Series Rate
------------ ------ ------ --------
September 20, 1999 California Insured II A 3.40%
September 17, 1999 California Insured II B 3.00%
September 20, 1999 California Insured A 3.40%
September 23, 1999 California Insured B 3.60%
September 21, 1999 California Insured III A 3.10%
September 22, 1999 California Insured III B 3.10%
September 21, 1999 California Insured IV A 3.00%
September 20, 1999 California Insured IV B 3.40%
Advisory Fees. The investment adviser
for each of the Funds is Fund Asset
Management, L.P. ("FAM"). FAM is an
affiliate of MLAM, and both FAM and
MLAM are owned and controlled by
Merrill Lynch & Co., Inc. ("ML & Co.").
The principal business address of FAM
is 800 Scudders Mill Road, Plainsboro,
New Jersey 08536. The Asset Management
Group of ML & Co. (which includes FAM)
acts as investment adviser for over 100
other registered investment companies
and also offers portfolio management
and portfolio analysis services to
individuals and institutional accounts.
FAM is responsible for the management
of each Fund's investment portfolio and
for providing administrative services
to each Fund. Robert A. DiMella serves
as the portfolio manager for California
Insured II and for California Insured;
Robert A. DiMella and Walter C.
O'Connor serve as the portfolio
managers for California Insured III and
for California Insured IV. After the
Reorganization, Mr. DiMella will serve
as portfolio manager of the combined
fund.
Pursuant to separate investment
advisory agreements between each Fund
and FAM, each Fund pays FAM a monthly
fee at the annual rate of 0.55% of such
Fund's average weekly net assets,
including assets acquired from the sale
of AMPS. Subsequent to the
Reorganization, FAM will continue to
receive compensation at the rate of
0.55% of the average weekly net assets,
including assets acquired from the sale
of AMPS, of the combined fund. See
"Comparison of the Funds -- Management
of the Funds."
Other Significant Fees. The Bank of New
York is the custodian, transfer agent,
dividend disbursing agent and registrar
for the Common Stock of California
Insured II and California Insured.
State Street Bank and Trust Company is
the custodian, transfer agent, dividend
disbursing agent and registrar for the
Common Stock of California Insured III
and California Insured IV. The Bank of
New York is the transfer agent,
dividend disbursing agent, registrar
and
11
<PAGE>
auction agent for each Fund's AMPS. The
principal business addresses are as
follows: The Bank of New York, 90
Washington Street, New York, New York
10286 (for its custodial services) and
101 Barclay Street, New York, New York
10286 (for its transfer and auction
agency services); State Street Bank and
Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. See
"Comparison of the Funds -- Management
of the Funds."
Overall Expense Ratio. As of June 30,
1999, the overall annualized operating
expense ratio for California Insured II
was 1.29%, based on average net assets
of approximately $141.1 million
excluding AMPS, and 0.77%, based on
average net assets of approximately
$237.1 million including AMPS; the
overall annualized operating expense
ratio for California Insured was 1.28%,
based on average net assets of
approximately $123.0 million excluding
AMPS, and 0.77%, based on average net
assets of approximately $203.0 million
including AMPS; the overall annualized
operating expense ratio for California
Insured III was 1.36%, based on average
net assets of approximately $103.0
million excluding AMPS, and 0.79%,
based on average net assets of
approximately $177.0 million including
AMPS; and the overall annualized
operating expense ratio for California
Insured IV was 1.28%, based on average
net assets of approximately $136.0
million excluding AMPS, and 0.77%,
based on average net assets of
approximately $227.0 million including
AMPS. If the Reorganization had taken
place on June 30, 1999, the estimated
pro forma combined annualized operating
expense ratio for the combined fund
would have been 1.20%, based on average
net assets of approximately $503.0
million excluding AMPS, and 0.71%,
based on average net assets of
approximately $844.0 million including
AMPS.
Purchases and Sales of Common Stock and
AMPS. Purchase and sale procedures for
the Common Stock of each of the Funds
are identical, and investors typically
purchase and sell shares of Common
Stock of the Funds through a registered
broker-dealer on the NYSE, thereby
incurring a brokerage commission set by
the broker-dealer. Alternatively,
investors may purchase or sell shares
of Common Stock of the Funds through
privately negotiated transactions with
existing stockholders.
Purchase and sale procedures for the
AMPS of each of the Funds also are
identical. Such AMPS generally are
purchased and sold at separate auctions
conducted on a regular basis by The
Bank of New York, as the auction agent
for each Fund's AMPS (the "Auction
Agent"). Unless otherwise permitted by
the Funds, existing and potential
holders of AMPS only may participate in
auctions through their broker-dealers.
Broker-dealers submit the orders of
their respective
12
<PAGE>
customers who are existing and
potential holders of AMPS to the
Auction Agent. On or prior to each
auction date for the AMPS (the business
day next preceding the first day of
each dividend period), each holder may
submit orders to buy, sell or hold AMPS
to its broker-dealer. Outside of these
auctions, shares of AMPS may be
purchased or sold through
broker-dealers for the AMPS in a
secondary trading market maintained by
the broker-dealers. However, there can
be no assurance that a secondary market
will develop or if it does develop,
that it will provide holders with a
liquid trading market for the AMPS of
any of the Funds.
Ratings of AMPS. The AMPS of each Fund
have each been assigned a rating of AAA
from Standard & Poor's ("S&P") and
"aaa" from Moody's Investors Service,
Inc. ("Moody's"). See "Comparison of
the Funds -- Rating Agency Guidelines."
Portfolio Insurance. Each of the Funds
has a similar policy with respect to
obtaining insurance for portfolio
securities. Under normal circumstances,
at least 80% of each Fund's assets will
be invested in municipal obligations
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. See "Comparison of the
Funds -- Investment Objectives and
Policies -- Portfolio Insurance."
Ratings of Municipal Obligations. Each
of the Funds will invest only in
municipal obligations that at the time
of purchase are considered investment
grade.
Portfolio Transactions. The portfolio
transactions in which the Funds may
engage are similar, as are the
procedures for such transactions. See
"Comparison of the Funds -- Portfolio
Transactions."
Dividends and Distributions. The
methods of dividend payment and
distributions are similar for all of
the Funds, both with respect to the
Common Stock and the AMPS of each Fund.
See "Comparison of the Funds --
Dividends and Distributions."
Net Asset Value. The net asset value per
share of Common Stock of each Fund is
determined after the close of business
on the NYSE (generally, 4:00 p.m.,
Eastern time) on the last business day
in each week. For purposes of
determining the net asset value of a
share of Common Stock of each Fund, the
value of the securities held by the
Fund plus any cash or other assets
(including interest accrued but not yet
received) minus all liabilities
(including accrued expenses) and the
aggregate liquidation value of the
outstanding shares of AMPS of the Fund
is divided by the total number of
shares of Common Stock of the Fund
outstanding at such time. Expenses,
including fees payable to FAM, are
accrued daily. See "Comparison of the
Funds -- Net Asset Value."
13
<PAGE>
Voting Rights. The corresponding voting
rights of the holders of shares of each
Fund's Common Stock are substantially
similar. Likewise, the corresponding
voting rights of the holders of shares
of each Fund's AMPS are substantially
similar. See "Comparison of the Funds
-- Capital Stock."
Stockholder Services. An automatic
dividend reinvestment plan is available
to holders of shares of each Fund's
Common Stock. The plans are similar for
the four Funds. See "Comparison of the
Funds -- Automatic Dividend
Reinvestment Plan." Other stockholder
services, including the provision of
annual and semi-annual reports, are the
same for the four Funds.
Outstanding Securities of California Insured II, California Insured, California
Insured III and California Insured IV as of August 31, 1999
<TABLE>
<CAPTION>
Amount Outstanding
Amount Held By Exclusive of Amount
Amount Fund for its Own Shown in Previous
Title of Class Authorized Account Column
- ------------------------------------------------ ----------- ---------------- -------------------
<S> <C> <C> <C>
California Insured II
Common Stock ..................................... 199,996,160 -0- 9,806,948
AMPS ............................................ 3,840 -0- 3,840
California Insured
Common Stock ..................................... 199,996,800 -0- 8,327,187
AMPS ............................................ 3,200 -0- 3,200
California Insured III
Common Stock ..................................... 199,997,040 -0- 7,521,774
AMPS ............................................ 2,960 -0- 2,960
California Insured IV
Common Stock ..................................... 199,996,360 -0- 9,866,667
AMPS ............................................ 3,640 -0- 3,640
</TABLE>
Tax Considerations................. The Funds have jointly requested a
private letter ruling from the IRS with
respect to the Reorganization to the
effect that, among other things, no
Fund will recognize gain or loss on the
transaction and the stockholders of the
Acquired Funds will not recognize gain
or loss on the exchange of their shares
for California Insured II Common Stock
(except to the extent that a common
stockholder in an Acquired Fund
receives cash representing an interest
in less than a full share of California
Insured II Common Stock in the
Reorganization) or California Insured
II Series C AMPS, Series D AMPS or
Series E AMPS. The consummation of the
Reorganization is subject to the
receipt of such ruling or of an opinion
of counsel to the same effect. The
Reorganization will not affect the
status of California Insured II as a
regulated investment company (a "RIC")
under the Internal Revenue Code of
1986, as amended (the "Code"). Each of
the Acquired Funds will liquidate
pursuant to the Reorganization. See
"Agreement and Plan of Reorganization
-- Tax Consequences of the
Reorganization."
14
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since each of the four Funds invests primarily in a portfolio of
California Municipal Bonds, any risks inherent in such investments are equally
applicable to all four Funds and will be similarly pertinent to the combined
fund after the Reorganization. It is expected that the Reorganization itself
will not adversely affect the rights of holders of shares of Common Stock or of
any series of AMPS of any of the Funds or create additional risks.
California Municipal Bonds
Each of the Funds ordinarily invests at least 65% of its portfolio in
California Municipal Bonds. As a result, each Fund is more exposed to risks
affecting issuers of California Municipal Bonds than is a municipal bond fund
that invests more widely. See "Comparison of the Funds -- Special Considerations
Relating to California Municipal Bonds" and Exhibit III-"Economic and Other
Conditions in California."
Interest Rate and Credit Risk
Each Fund invests in municipal bonds, which are subject to interest rate
and credit risk. Interest rate risk is the risk that prices of municipal bonds
generally increase when interest rates decline and decrease when interest rates
increase. Prices of longer-term securities generally change more in response to
interest rate changes than prices of shorter-term securities. Credit risk is the
risk that the issuer will be unable to pay the interest or principal when due.
The degree of credit risk depends on both the financial condition of the issuer
and the terms of the obligation.
Non-diversification
Each Fund is registered as a "non-diversified" investment company. This
means that the Fund may invest a greater percentage of its assets in a single
issuer than a diversified investment company. Since a Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more exposed to the effects of any single economic, political or
regulatory occurrence than a more widely-diversified fund. Even as a
non-diversified fund, each Fund must still meet the diversification requirements
of applicable Federal income tax law.
Rating Categories
The Funds intend to invest in municipal bonds that are rated investment
grade by S&P, Moody's or Fitch IBCA, Inc. ("Fitch") or are considered by FAM to
be of comparable quality. Obligations rated in the lowest investment grade
category may have certain speculative characteristics.
Private Activity Bonds
Each Fund may invest in certain tax-exempt securities classified as
"private activity bonds." These bonds may subject certain investors in a Fund to
the Federal alternative minimum tax.
Portfolio Insurance
Each of the Funds is subject to certain investment restrictions imposed by
guidelines of the insurance companies that issue portfolio insurance. The Funds
do not believe these guidelines prevent FAM from managing the Funds' portfolios
in accordance with the Funds' investment objective and policies.
Leverage
Use of leverage, through the issuance of AMPS, involves certain risks to
holders of Common Stock of each of the Funds. For example, each Fund's issuance
of AMPS may result in higher volatility of the net asset value of its Common
Stock and potentially more volatility in the market value of its Common Stock.
In addition, changes in the short-term and medium-term dividend rates on, and
the amount of taxable income allocable to, the AMPS will affect the yield to
holders of Common Stock. Under certain circumstances, when a Fund is required to
allocate taxable income to holders of AMPS, the Fund may be required to make an
additional distribution to such holders in an amount approximately equal to the
tax liability resulting from that allocation (an "Additional Distribution").
Leverage will allow holders of each Fund's Common Stock to realize a higher
current rate of return than if the Fund were not leveraged as long as the Fund,
while accounting for its costs and operating
15
<PAGE>
expenses, is able to realize a higher net return on its investment portfolio
than the then-current dividend rate (and any Additional Distribution) paid on
the AMPS. Similarly, since a pro rata portion of each Fund's net realized
capital gains is generally payable to holders of the Fund's Common Stock, the
use of leverage will increase the amount of such gains distributed to holders of
the Fund's Common Stock. However, short-term, medium-term and long-term interest
rates change from time to time as do their relationships 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 each Fund may be invested. To the
extent that the current dividend rate (and any Additional Distribution) on the
AMPS approaches the net return on a Fund's investment portfolio, the benefit of
leverage to holders of Common Stock will be decreased. If the current dividend
rate (and any Additional Distribution) on the AMPS were to exceed the net return
on a Fund's portfolio, holders of Common Stock would receive a lower rate of
return than if the Fund were not leveraged. Similarly, since both the costs of
issuing AMPS and any decline in the value of a Fund's investments (including
investments purchased with the proceeds from any AMPS offering) will be borne
entirely by holders of the Fund's Common Stock, the effect of leverage in a
declining market would result in a greater decrease in net asset value to
holders of Common Stock than if the Fund were not leveraged. If a Fund is
liquidated, holders of that Fund's AMPS will be entitled to receive liquidating
distributions before any distribution is made to holders of Common Stock of that
Fund.
In an extreme case, a decline in net asset value could affect each Fund's
ability to pay dividends on its Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a RIC under the
Federal tax laws. See "Comparison of the Funds -- Tax Rules Applicable to the
Funds and their Stockholders." However, each Fund intends to take all measures
necessary to make Common Stock dividend payments. If a Fund's current investment
income is ever insufficient to meet dividend payments on either the Common Stock
or the AMPS, the Fund may have to liquidate certain of its investments. In
addition, each Fund has the authority to redeem its AMPS for any reason and may
redeem all or part of its AMPS under the following circumstances:
o if the Fund anticipates that its leveraged capital structure will result
in a lower rate of return for any significant amount of time to holders of
the Common Stock than the Fund can obtain if the Common Stock were not
leveraged,
o if the asset coverage for the AMPS declines below 200%, either as a
result of a decline in the value of the Fund's portfolio investments or as
a result of the repurchase of Common Stock in tender offers or
otherwise,or
o in order to maintain the asset coverage established by Moody's and S&P
in rating the AMPS.
Redemption of the AMPS or insufficient investment income to make dividend
payments, may reduce the net asset value of the Common Stock and require the
Fund to liquidate a portion of its investments at a time when it may be
disadvantageous to do so.
Portfolio Management
The portfolio management strategies of the Funds are the same. In the
event of an increase in short-term or medium-term rates or other change in
market conditions to the point where a Fund's leverage could adversely affect
holders of Common Stock as noted above, or in anticipation of such changes, each
Fund may attempt to shorten the average maturity of its investment portfolio,
which would tend to offset the negative impact of leverage on holders of its
Common Stock. Each Fund also may attempt to reduce the degree to which it is
leveraged by redeeming AMPS pursuant to the provisions of the Fund's Articles
Supplementary establishing the rights and preferences of the AMPS or otherwise
purchasing shares of AMPS. Purchases and sales or redemptions of AMPS, whether
on the open market or in negotiated transactions, are subject to limitations
under the Investment Company Act. If market conditions subsequently change, each
Fund may sell previously unissued shares of AMPS or shares of AMPS that the Fund
previously issued but later repurchased or redeemed.
Inverse Floating Obligations
A Fund's investments in "inverse floating obligations" or "residual
interest bonds" provide investment leverage because their market value increases
or decreases in response to market changes at a greater rate than fixed rate,
long term tax exempt securities. The market values of such securities are more
volatile than the market values of fixed rate, tax exempt securities.
16
<PAGE>
Options and Futures Transactions
Each Fund may engage in certain options and futures transactions to reduce
its exposure to interest rate movements. If a Fund incorrectly forecasts market
values, interest rates or other factors, that Fund's performance could suffer.
Each Fund also may suffer a loss if the other party to the transaction fails to
meet its obligations. The Funds are not required to use hedging and may choose
not to do so.
Antitakeover Provisions
The Articles of Incorporation of each of the Funds (in each case the
"Charter") include provisions that could limit the ability of other entities or
persons to acquire control of that Fund or to change the composition of its
Board of Directors. Such provisions could limit the ability of stockholders to
sell their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund.
Ratings Considerations
The Funds have received ratings of their AMPS of AAA from S&P and "aaa"
from Moody's. In order to maintain these ratings, the Funds are required to
maintain portfolio holdings meeting specified guidelines of such rating
agencies. These guidelines may impose asset coverage requirements that are more
stringent than those imposed by the Investment Company Act.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings of the AMPS are not recommendations to purchase, hold or sell shares
of AMPS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
address the likelihood that a holder of shares of AMPS will be able to sell such
shares in an auction. The ratings are based on current information furnished to
Moody's and S&P by the Funds and FAM and information obtained from other
sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information. The Common Stock of the
Funds has not been rated by a nationally recognized statistical rating
organization.
The Board of Directors of each of the Funds, without stockholder approval,
may amend, alter or repeal certain definitions or restrictions which have been
adopted by the Fund pursuant to the rating agency guidelines, in the event the
Fund receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to shares of
AMPS.
17
<PAGE>
COMPARISON OF THE FUNDS
Financial Highlights
California Insured II
The financial information in the table below, has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. The following per share data and
ratios have been derived from information provided in the financial statements
of the Fund.
<TABLE>
<CAPTION>
For the Period
For the Year Ended February 27, 1998+
June 30, 1999 to June 30, 1998
------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance
Net asset value, beginning of period .............................. $ 14.96 $ 15.00
-------- --------
Investment income - net ........................................... 1.13 .38
-------- --------
Realized and unrealized gain (loss) on investments - net .......... (.57) .01
-------- --------
Total from investment operations .................................. .56 .39
-------- --------
Less dividends and distributions to Common Stock shareholders:
Investment income - net ...................................... (.80) (.21)
-------- --------
Realized gain on investments - net ........................... (.03) --
-------- --------
Total dividends and distributions to Common Stock shareholders .... (.83) (.21)
-------- --------
Capital charge resulting from issuance of Common Stock ............ -- (.03)
-------- --------
Effect of Preferred Stock activity: +++
Dividends and distributions to Preferred Stock shareholders:
Investment income - net ...................................... (.30) (.10)
-------- --------
Realized gain on investments - net ........................... (.01) --
-------- --------
Capital charge resulting from issuance of Preferred Stock ....... -- (.09)
-------- --------
Total effect of Preferred Stock activity .......................... (.31) (.19)
-------- --------
Net asset value, end of period .................................... $ 14.38 $ 14.96
======== ========
Market price per share, end of period ............................. $ 13.00 $ 15.00
======== ========
Total Investment Return:**
Based on market price per share ................................... (8.34)% 1.42%#
======== ========
Based on net asset value per share ................................ 1.66% 1.15%#
======== ========
Ratios Based on Average Net Assets of
Common Stock:
Total expenses, net of reimbursement*** ........................... 1.09% .38%*
======== ========
Total expenses*** ................................................. 1.23% 1.19%*
======== ========
Total investment income - net*** .................................. 7.42% 8.00%*
======== ========
Amount of Dividends to Preferred Stockholders ..................... 1.93% 2.15%*
======== ========
Investment Income Net, to Common Stockholders ..................... 5.49% 5.85%*
======== ========
Ratios Based on Average Net Assets++***
Expenses, net of reimbursement .................................... .67% .24%*
======== ========
Expenses .......................................................... .75% .75%*
======== ========
Investment income - net ........................................... 4.53% 5.05%*
Ratios Based on Average Net Assets of Preferred Stock:
Dividends to Preferred Stock Shareholders ......................... 3.02% 3.65%*
======== ========
Supplemental Data:
Net assets, net of Preferred Stock, end of period (in thousands) .. $141,073 $146,717
======== ========
Preferred Stock outstanding, end of period (in thousands) ......... $ 96,000 $ 96,000
======== ========
Portfolio turnover ................................................ 82.36% 64.17%
======== ========
Dividends Per Share on Preferred Stock Outstanding
Series A - investment income - net ................................ $ 775 $ 262
======== ========
Series B - investment income - net ................................ $ 735 $ 257
======== ========
Leverage:
Asset coverage per $1,000 ......................................... $ 2,470 $ 2,528
======== ========
</TABLE>
- ----------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ Includes Common and Preferred Stock average net assets.
+++ The Fund's Preferred Stock was issued on March 19, 1998.
# Aggregate total investment return.
18
<PAGE>
California Insured
The financial information in the table below, except for the leverage
information, which is unaudited and has been provided by FAM, has been audited
in conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. The following per share data and
ratios have been derived from information provided in the financial statements
of the Fund.
<TABLE>
<CAPTION>
For the Period
For the Year Ended September 19, 1997+
August 31, 1999## to August 31, 1998
--------------- ------------------
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ............................... $ $ 15.00
-------- --------
Investment income - net ............................................ 1.10
Realized and unrealized gain (loss) on investments - net ........... .96
-------- --------
Total from investment operations ................................... 2.06
-------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income - net .................................. (.75)
Realized gain on investments - net ....................... --
-------- --------
Total dividends and distributions to
Common Stock shareholders .................................... (.75)
-------- --------
Capital charge resulting from issuance of Common Stock ............. (.05)
-------- --------
Effect of Preferred Stock activity:++
Dividends and distributions to Preferred
Stock shareholders:
Investment income - net ...................................... (.28)
Realized gain on investments - net ........................... --
Capital charge resulting from issuance of
Preferred Stock .............................................. (.10)
-------- --------
Total effect of Preferred Stock activity ........................... (.38)
-------- --------
Net asset value, end of period ..................................... $ $ 15.88
======== ========
Market price per share, end of period .............................. $ $15.4375
======== ========
Total Investment Return:**
Based on market price per share .................................... 8.06%#
========
Based on net asset value per share ................................. 11.16%#
========
Ratios Based on Average Net Assets of Common Stock
Expenses, net of reimbursement*** .................................. .76%*
======== ========
Total expenses*** .................................................. 1.20%*
======== ========
Total investment income - net*** ................................... 7.68%*
======== ========
Amount of Dividends to Preferred Stockholders ...................... 1.97%*
======== ========
Investment income - net, to Common Stockholders .................... 5.72%*
======== ========
Ratios Based on Total Average Net Assets:+++***
Expenses, net of reimbursement ..................................... .47%*
========
Expenses ........................................................... .75%*
========
Investment income - net ............................................ 4.77%*
Ratios Based on Average Net Assets of Preferred Stock:
Dividends to Preferred Stock Shareholders .......................... % 3.28%*
======== ========
Supplemental Data:
Net assets, net of Preferred Stock, end of period (in thousands) ... $ $131,982*
======== ========
Preferred Stock outstanding, end of period (in thousands) .......... $ $ 80,000
======== ========
Portfolio turnover ................................................. 71.37%
======== ========
Dividends Per Share on Preferred Stock Outstanding:
Series A - investment income - net ................................. $ $ 735
======== ========
Series B - investment income - net ................................. $ $ 739
======== ========
Leverage:
Asset coverage per $1,000 .......................................... $ $ 2,650
======== ========
</TABLE>
- ----------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Shares was issued on October 7, 1997.
+++ Includes Common and Preferred Stock average net assets.
# Aggregate total investment return.
## To be filed by amendment.
19
<PAGE>
California Insured III
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Ernst & Young
LLP, independent auditors. The following per share data and ratios have been
derived from information provided in the financial statements of the Fund.
<TABLE>
<CAPTION>
For the Period
September 25, 1998+ to
May 31, 1999
------------
<S> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ............................... $ 15.00
--------
Investment income - net ............................................ .74
Realized and unrealized gain (loss) on investments - net ........... (.61)
--------
Total from investment operations ................................... .13
--------
Less dividends to Common Stock shareholders:
Investment income - net ............................................ (.48)
--------
Capital charge resulting from issuance of Common Stock ............. (.03)
--------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income - net ...................................... (.18)
Capital charge resulting from issuance of Preferred Stock .... (.09)
--------
Total effect of Preferred Stock activity ........................... (.27)
--------
Net asset value, end of period ..................................... $ 14.35
========
Market price per share, end of period .............................. $ 13.25
========
Total Investment Return:**
========
Based on market price per share .................................... (8.70)%#
========
Based on net asset value per share ................................. (1.12)%#
========
Ratios Based on Average Net Assets of Common Stock:
Total expenses, net of reimbursement*** ............................ .62%*
========
Total expenses*** .................................................. 1.24%*
========
Total investment income - net*** ................................... 7.53%*
========
Amount of Dividends to Preferred Stockholders ...................... 1.87%*
========
Investment income - Net, to Common Stockholders .................... 5.66%*
========
Ratios Based on Total Average Net Assets+++***
Expenses, net of reimbursement ..................................... .39%*
========
Expenses ........................................................... .77%*
========
Investment income - net ............................................ 4.68%*
========
Supplemental Data:
Net assets, net of Preferred Stock, end of period (in thousands) ... $107,928
========
Preferred Stock outstanding, end of period (in thousands) .......... $ 74,000
========
Portfolio turnover ................................................. 60.32%
========
Dividends Per Share on Preferred Stock Outstanding:
Series A - investment income - net ................................. $ 460
========
Series B - investment income - net ................................. $ 477
========
Leverage:
Asset coverage per $1,000 .......................................... $ 2,458
========
</TABLE>
- ----------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on October 19, 1998.
+++ Includes Common and Preferred Stock average net assets.
# Aggregate total investment return.
20
<PAGE>
California Insured IV
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. The following per share data and ratios have
been derived from information provided in the financial statements of the Fund.
<TABLE>
<CAPTION>
For the
Period
January 29, 1999+
to September 30,
1999##
----------------
<S> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period...................................................
Investment income - net..........................................................
Realized and unrealized gain (loss) on investments- net..........................
Total from investment operations.......................................................
Less dividends and distributions to Common Stock shareholders:.........................
Investment income - net..........................................................
Realized gain on investment - net................................................
Total dividends and distributions to CommonStock shareholders..........................
Capital charge resulting from issuance of Common Stock.................................
Effect of Preferred Stock activity:++..................................................
Dividends and distributions to Preferred Stock shareholders:
Investment income - net..........................................................
Realized gain on investments - net...............................................
Capital charge resulting from issuance of Preferred Stock........................
Total effect of Preferred Stock activity...............................................
Net asset value, end of period.........................................................
Market price per share, end of period..................................................
Total Investment Return:**
Based on market price per share........................................................
Based on net asset value per share.....................................................
Ratios Based on Average Net Assets
Attributable to Common Stock:***.......................................................
Expenses, net of reimbursement.........................................................
Expenses .............................................................................
Investment income - net................................................................
Amount of Dividends to Preferred Stockholders..........................................
Investment Income Net, to Common Stockholders..........................................
Ratios Based on Total Average Net Assets...............................................
Expenses, net of reimbursement.........................................................
Expenses .............................................................................
Investment income - net................................................................
Supplemental Data:
Net assets, net of Preferred Stock, end of period (in thousands).......................
Preferred Stock outstanding, end of period (in thousands)..............................
Portfolio turnover.....................................................................
Dividends Per Share on Preferred Stock Outstanding:....................................
Investment income - net................................................................
Leverage:
Asset coverage per $1,000..............................................................
</TABLE>
- ----------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result insubstantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Does not reflect the effect of dividends to Preferred Shares shareholders.
+ Commencement of operations.
++ The Fund's Preferred Shares was issued on February 22, 1999.
# Aggregate total investment return.
## To be filed by amendment.
21
<PAGE>
Per Share Data for Common Stock*
Traded on the New York Stock Exchange (unaudited)
California Insured II
<TABLE>
<CAPTION>
Premium
(Discount)
to Net
Market Price($)** Net Asset Value ($) Asset Value (%)
-------------------- ------------------- -----------------
Quarter Ended* High Low High Low High Low
-------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998+.................. 15.75 15.00 15.04 14.82 3.96 0.20
June 30, 1998.................... 15.75 14.6875 15.21 14.44 5.70 (1.89)
September 30, 1998............... 15.50 14.125 15.72 14.95 2.23 (5.16)
December 31, 1998................ 16.625 15.00 16.09 15.32 3.16 (3.35)
March 31, 1999................... 15.50 14.625 15.57 14.69 (0.45) (5.09)
June 30, 1999.................... 14.75 12.75 15.47 14.32 (4.22) (10.71)
September 30, 1999...............
</TABLE>
California Insured
<TABLE>
<CAPTION>
Premium
(Discount)
to Net
Market Price($)** Net Asset Value ($) Asset Value (%)
-------------------- ------------------- -----------------
Quarter Ended* High Low High Low High Low
-------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
November 30, 1997++ ............ 16.125 15.00 15.18 14.68 6.36 0.00
February 28, 1998................ 16.375 14.43755 15.95 15.20 3.56 (4.18)
May 31, 1998..................... 16.00 14.9375 15.63 14.92 5.75 (3.04)
August 31, 1998.................. 15.875 15.00 15.88 15.45 2.35 (3.63)
November 30, 1998................ 16.4375 15.25 16.58 15.83 1.49 (4.27)
February 28, 1999................ 16.625 15.125 16.14 15.67 4.70 (3.57)
May 31, 1999..................... 15.6875 14.0625 15.88 15.42 (0.27) (8.69)
August 31, 1999..................
</TABLE>
California Insured III
<TABLE>
<CAPTION>
Premium
(Discount)
to Net
Market Price($)** Net Asset Value ($) Asset Value (%)
-------------------- ------------------- -----------------
Quarter Ended* High Low High Low High Low
-------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
November 30, 1998+++............. 15.875 14.8125 15.43 14.73 5.92 (2.51)
February 28, 1999................ 16.00 14.25 15.02 14.64 6.25 (4.30)
May 31, 1999..................... 15.125 13.125 14.88 14.34 2.40 (7.67)
August 31, 1999..................
</TABLE>
California Insured IV
<TABLE>
<CAPTION>
Premium
(Discount)
to Net
Market Price($)** Net Asset Value ($) Asset Value (%)
-------------------- ------------------- -----------------
Quarter Ended* High Low High Low High Low
-------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999++++ .............. 15.50 14.25 15.06 14.73 3.47 (4.62)
June 30, 1999.................... 15.00 12.5625 15.04 13.72 0.82 (9.81)
September 30, 1999...............
</TABLE>
- ----------
* Calculations are based upon shares of Common Stock outstanding at the end
of each quarter.
** As reported in the consolidated transaction operating system.
+ For the period February 27, 1998 to March 31, 1998.
++ For the period September 19, 1997 to November 30, 1997.
+++ For the period September 25, 1998 to November 30, 1998.
++++ For the period January 29, 1999 to March 31, 1999.
As indicated in the tables above, for the periods shown, the Common Stock
of the Funds generally has traded at prices close to net asset value, with
premiums or discounts to net asset value of less than 10% being reflected in the
market value of the shares from time to time. Although there is no reason to
believe that this
22
<PAGE>
pattern should be affected by the Reorganization, it is not possible to predict
whether shares of the surviving fund will trade at a premium or discount to net
asset value following the Reorganization, or what the extent of any such premium
or discount might be.
Investment Objective and Policies
The structure, organization and investment policies of the Funds are
substantially similar, with the differences among the four Funds set forth
below. Each Fund seeks as a fundamental investment objective current income
exempt from Federal and California income taxes. The investment objective of
each Fund is a fundamental policy that may not be changed without a vote of a
majority of the Fund's outstanding voting securities.
Each Fund seeks to achieve its investment objective by investing primarily
in a portfolio of California Municipal Bonds. At all times, at least 65% of each
Fund's total assets will be invested in California Municipal Bonds and at least
80% of each Fund's total assets will be invested in California Municipal Bonds
and in other long-term municipal obligations exempt from Federal income tax but
not California income taxes ("Municipal Bonds"), except during interim periods
pending investment of the net proceeds of public offerings of its securities and
during temporary defensive periods. At times, each Fund may seek to hedge its
portfolio through the use of futures and options transactions to reduce
volatility in the net asset value of its shares of Common Stock. Under normal
circumstances, at least 80% of each Fund's total 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.
Ordinarily, none of the Funds intends to realize significant investment
income subject to Federal and California income taxes. To the extent FAM
considers that suitable California Municipal Bonds are not available for
investment, the Funds may purchase Municipal Bonds. Each 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 a Federal alternative minimum tax.
Each Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in California Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act. Other Non-Municipal Tax-Exempt Securities could include trust certificates
or other instruments evidencing interests in one or more long-term California
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 "California Municipal Bonds" or "Municipal Bonds"
for purposes of a Fund's investment objective and policies.
The investment grade California Municipal Bonds and Municipal Bonds in
which each Fund primarily invests are those California Municipal Bonds and
Municipal Bonds that are rated at the date of purchase in the four highest
rating categories of S&P, Moody's or Fitch or, if unrated, are considered to be
of comparable quality by FAM. In the case of long-term debt, the investment
grade rating categories are AAA through BBB for S&P and Fitch and Aaa through
Baa for Moody's. 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-3 for Moody's and
F-1+ through F-3 for Fitch. In the case of tax-exempt commercial paper, the
investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through
Prime-3 for Moody's and F-1+ through F-3 for Fitch. Obligations ranked in the
lowest investment grade rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-3
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. In assessing the quality of California Municipal
Bonds and Municipal Bonds with respect to the foregoing requirements, FAM takes
into account the portfolio insurance as well as the nature of any letters of
credit or similar credit enhancement to which particular California Municipal
Bonds and Municipal Bonds are entitled and the creditworthiness of the insurance
company or financial institution that provided such insurance or credit
enhancements. Consequently, if California Municipal Bonds or Municipal Bonds are
covered by insurance policies issued by insurers whose claims-paying ability is
rated AAA by S&P or Fitch or Aaa by Moody's, FAM may consider such municipal
obligations to be equivalent to AAA- or Aaa- rated securities, as the case may
be, even though such California Municipal Bonds or Municipal Bonds would
generally be assigned a lower rating if
23
<PAGE>
the rating were based primarily upon the credit characteristics of the issuers
without regard to the insurance feature. The insured California Municipal Bonds
and Municipal Bonds must also comply with the standards applied by the insurance
carriers in determining eligibility for portfolio insurance. See Exhibit IV --
"Ratings of Municipal Bonds and Commercial Paper" and Exhibit V -- "Portfolio
Insurance."
Each of the Funds may invest in 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 each Fund may invest are tax-exempt
obligations, in the opinion of counsel to the issuer, that contain a floating or
variable interest rate adjustment formula and a 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 each 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. Each 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
for Federal income tax purposes.
The average maturity of each Fund's portfolio securities varies based upon
FAM's assessment of economic and market conditions. The net asset value of the
shares of common stock of a closed-end investment company, such as each 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, such as that used by the Funds.
Each Fund intends to invest primarily in long-term California Municipal
Bonds and Municipal Bonds with a maturity of more than ten years. However, each
Fund may also invest in short-term tax-exempt securities, short-term U.S.
Government securities, repurchase agreements or cash. Such short-term securities
or cash will not exceed 20% of each Fund's total assets except during interim
periods pending investment of the net proceeds from 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 FAM, prevailing
market or economic conditions warrant.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act in
the proportion of its total assets that it may invest in securities of a single
issuer. However, each Fund's investments are limited so as to qualify the Fund
for the special tax treatment afforded RICs under the Federal tax laws. To
qualify, among other requirements, each Fund limits 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 Investment Company Act must satisfy the
foregoing 5% requirement with respect to 75% of its total assets. To the extent
that any 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 assets of each of the
Funds will be invested in California Municipal Bonds and Municipal Bonds either
(i) insured under an insurance policy purchased by each of the Funds, or (ii)
insured under an insurance policy obtained by the issuer thereof or any other
party. Each of the Funds will seek to limit their investments to municipal
obligations 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 available.
See Exhibit V to this Proxy Statement and Prospectus for a brief description of
insurance claims-paying ability ratings of S&P, Moody's and Fitch. Currently, it
is anticipated that a majority of the insured
24
<PAGE>
California Municipal Bonds and Municipal Bonds in each Fund's portfolio will be
insured by the following insurance companies which satisfy the foregoing
criteria: AMBAC Indemnity Corporation, Financial Guaranty Insurance Company,
Financial Security Assurance and Municipal Bond Investors Assurance Corporation.
Each Fund also may purchase California Municipal Bonds and Municipal Bonds
covered by insurance issued by any other insurance company that satisfies the
foregoing criteria. A majority of insured California Municipal Bonds and
Municipal Bonds held by each Fund will be insured under policies obtained by
parties other than the Fund.
Each 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 payment of principal and interest on
specified eligible California Municipal Bonds and Municipal Bonds purchased by
the Funds. A California Municipal Bond or 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 of an insured California Municipal
Bond or 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.
The Policies will be effective only as to insured California Municipal
Bonds and Municipal Bonds beneficially owned by a Fund. In the event of a sale
of any California Municipal Bonds and Municipal Bonds held by a 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 an insured California Municipal Bond or Municipal Bond or the
value of the shares of a Fund.
The insurer will not have the right to withdraw coverage on securities
insured by its Policies and held by a Fund so long as such securities remain in
the Fund's portfolio. In addition, the insurer may not cancel its Policies for
any reason except failure to pay premiums when due. The Board of Directors of
each Fund reserves 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 its
portfolio is reduced thereby. FAM estimates that the cost of the annual premiums
for the Policies of each Fund currently range from approximately .02 of 1% to
.15 of 1% of the principal amount of the California Municipal Bonds and
Municipal Bonds covered by such Policies. The estimate is based on the expected
composition of each Fund's portfolio of California Municipal Bonds and Municipal
Bonds. Additional information regarding the Policies is set forth in Exhibit V
to this Proxy Statement and Prospectus. In instances in which a Fund purchases
California Municipal Bonds and Municipal Bonds insured under policies obtained
by parties other than the Fund, the Fund does not pay the premiums for such
policies; rather, the cost of such policies may be reflected in the purchase
price of the California Municipal Bonds and Municipal Bonds.
It is the intention of FAM to retain any insured securities that are in
default or in significant risk of default and to place a value on the insurance,
which ordinarily will be the difference between the market value of the
defaulted security and the market value of similar securities which are not in
default. In certain circumstances, however, FAM 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. FAM's ability to
manage the portfolio of a Fund may be limited to the extent it holds defaulted
securities, which may limit its ability in certain circumstances to purchase
other California Municipal Bonds and Municipal Bonds. See "Net Asset Value"
below for a more complete description of each 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 each Fund. In the event the Board of Directors of a Fund 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 may discontinue its policy of
maintaining insurance for all or any of the California Municipal Bonds and
Municipal Bonds held in the Fund's portfolio. Although FAM 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 California Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured California Municipal Bonds or Municipal Bonds
are subject to market risk (i.e., fluctuations in market value as a result of
changes in prevailing interest rates).
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Description of California Municipal Bonds and Municipal Bonds
California Municipal Bonds and Municipal Bonds include debt obligations
issued to obtain funds for various public purposes, including construction of a
wide range of public facilities, refunding of outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of private activity
bonds ("PABs") are issued by or on behalf of public authorities to finance
various privately operated facilities, including, among other things, airports,
public ports, mass commuting facilities and multi-family housing projects as
well as facilities for water supply, gas, electricity, sewage or solid waste
disposal. For purposes of this Proxy Statement and Prospectus, such obligations
are considered Municipal Bonds if the interest paid thereon is exempt from
Federal income tax and as California Municipal Bonds if the interest thereon is
exempt from Federal and California income taxes, even though such bonds may be
PABs as discussed below. Also, for purposes of this Proxy Statement and
Prospectus, Non-Municipal Tax-Exempt Securities as discussed above will be
considered California Municipal Bonds or Municipal Bonds.
The two principal classifications of California Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which latter
category includes PABs and, for bonds issued on or before August 15, 1986,
industrial development bonds or IDBs. General obligation bonds are secured by
the issuer's pledge of faith, credit and taxing power for the repayment of
principal and the payment of interest. Revenue or special obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as from the user of the facility being financed.
PABs are in most cases revenue bonds and do not generally constitute the pledge
of the credit or taxing power of the issuer of such bonds. The repayment of the
principal and the payment of interest on such IDBs depends solely on the ability
of the user of the facility financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. California Municipal Bonds and Municipal Bonds may
also include "moral obligation" bonds, which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment but
not a legal obligation of the state or municipality in question.
Each Fund may purchase California Municipal Bonds and Municipal Bonds
classified as PABs. Interest received on certain PABs is treated as an item of
"tax preference" for purposes of the Federal alternative minimum tax and may
impact the overall tax liability of investors in the Fund. There is no
limitation on the percentage of each Fund's assets that may be invested in
California Municipal Bonds and Municipal Bonds the interest on which is treated
as an item of "tax preference" for purposes of the Federal alternative minimum
tax. See "Comparison of the Funds -- Tax Rules Applicable to the Funds and their
Stockholders."
Also included within the general category of California Municipal Bonds
and Municipal Bonds are certificates of participation ("COPs") executed and
delivered for the benefit of government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. COPs represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations do
not constitute general obligations of the issuer for which the issuer's
unlimited taxing power is pledged, a lease obligation frequently is backed by
the issuer's covenant to budget for, appropriate and make the payments due under
the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the property
in the event of foreclosure might prove difficult.
Federal tax legislation has limited and may continue to limit the types
and volume of bonds the interest on which is excludable from income for Federal
income tax purposes. As a result, this legislation and legislation that may be
enacted in the future may affect the availability of California Municipal Bonds
and Municipal Bonds for investment by the Funds.
Special Considerations Relating to California Municipal Bonds
Each Fund ordinarily will invest at least 65% of its total assets in
California Municipal Bonds and, therefore, is more susceptible to factors
adversely affecting issuers of California Municipal Bonds than is a municipal
bond fund that is not concentrated in issuers of California Municipal Bonds to
this degree. As a consequence of the
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economic recession in the early 1990's, the State of California's long-term debt
rating was lowered by each of the three rating agencies, S&P, Fitch and Moody's.
Since Fiscal Year 1995-96, however, the State's financial condition has improved
markedly. As a result, S&P, Fitch and Moody's have upgraded their ratings to
AA-, AA- and Aa3, respectively. No assurance can be given that ratings will not
be lowered in the future. FAM does not believe that the current economic
conditions in California will have a significant adverse effect on the ability
of the Fund to invest in high quality California Municipal Bonds. For a
discussion of economic and other conditions in the State of California, see
Exhibit III, "Economic and Other Conditions in California."
Other Investment Policies
The Funds have adopted certain other policies as set forth below:
Borrowings. Each Fund is authorized to borrow amounts of up to 5% of the
value of its total assets at the time of such borrowings; provided, however,
that each Fund is authorized to borrow moneys in amounts of up to 331/3% of the
value of its total assets at the time of such borrowings to finance the
repurchase of its own common stock pursuant to tender offers or otherwise to
redeem or repurchase shares of preferred stock or for temporary, extraordinary
or emergency purposes. Borrowings by each Fund (commonly known, as with the
issuance of preferred stock, 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. Each Fund may
purchase or sell California Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms. These
transactions arise when securities are purchased or sold by a Fund with payment
and delivery taking place in the future. The purchase will be recorded on the
date that the Fund enters into the commitment, and the value of the obligation
thereafter will 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. Each Fund may invest in
California Municipal Bonds and Municipal Bonds yielding a return based on a
particular index of value or interest rates. For example, each Fund may invest
in California Municipal Bonds and Municipal Bonds that pay interest based on an
index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain California Municipal Bonds and Municipal Bonds also may be
based on the value of an index. To the extent a Fund invests in these types of
Municipal Bonds, the Fund's return on such California Municipal Bonds and
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Also, a 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). Each Fund may purchase synthetically-created
inverse floating obligations evidenced by custodial or trust receipts.
Generally, income on inverse floating obligations 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, a
Fund may purchase inverse floating obligations with shorter-term maturities or
limitations on the extent to which the interest rate may vary. FAM believes that
indexed and inverse floating obligations represent a flexible portfolio
management instrument for the Funds that allows FAM to vary the degree of
investment leverage relatively efficiently under different market conditions.
Call Rights. Each of the Funds may purchase a California Municipal Bond or
Municipal Bond issuer's rights to call all or a portion of such California
Municipal Bond or Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related California Municipal Bonds or Municipal
Bonds, subject to certain conditions. A Call Right that is not exercised prior
to the maturity of the related California Municipal Bond or Municipal Bond will
expire without value. The economic effect of holding both the Call Right and the
related California Municipal Bond or Municipal Bond is identical to holding a
California Municipal Bond or Municipal Bond as a non-callable security.
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Repurchase Agreements. The Funds 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 Funds 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 Funds 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.
Information Regarding Options and Futures Transactions
Each Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While each Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common stock, the net asset value of the common stock will fluctuate. There can
be no assurance that a Fund's hedging transactions will be effective. In
addition, because of the leveraged nature of the Common Stock, hedging
transactions will result in a larger impact on the net asset value of the Common
Stock than would be the case if the Common Stock were not leveraged.
Furthermore, a Fund may only engage in hedging activities from time to time and
may not necessarily be engaging in hedging activities when movements in interest
rates occur. No Fund has an obligation to enter into hedging transactions and
each may choose not to do so.
Certain Federal income tax requirements may limit a Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to stockholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to stockholders. In addition,
in order to obtain ratings of the AMPS from one or more NRSROs, a Fund may be
required to limit its use of hedging techniques in accordance with the specified
guidelines of such rating organizations. See "Rating Agency Guidelines" below.
The following is a description of the options and futures transactions in
which each Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of a Fund are not fundamental policies and
may be modified by the Board of Directors of the Fund without the approval of
the Fund's stockholders.
Writing Covered Call Options. Each Fund is authorized to write (i.e.,
sell) covered call options with respect to California Municipal Bonds and
Municipal Bonds it owns, thereby giving the holder of the option the right to
buy the underlying security covered by the option from the Fund at the stated
exercise price until the option expires. Each 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.
Each Fund receives 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, a 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. Each Fund may engage
in closing transactions in order to terminate outstanding options that it has
written.
Purchase of Options. Each 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 its 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
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on which it has written call options, or on securities which it intends to
purchase. A 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. Each Fund is authorized to
purchase and sell certain financial futures contracts and options thereon solely
for the purposes of hedging its investments in California Municipal Bonds and
Municipal Bonds against declines in value and hedging against increases in the
cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract to
take delivery of the type of financial instrument covered by the contract or, in
the case of index-based financial futures contracts, to make and accept a cash
settlement, at a specific future time for a specified price. A sale of financial
futures contracts may provide a hedge against a decline in the value of
portfolio securities because such depreciation may be offset, in whole or in
part, by an increase in the value of the position in the financial futures
contracts or options. A purchase of financial futures contracts may provide a
hedge against an increase in the cost of securities intended to be purchased,
because such appreciation may be offset, in whole or in part, by an increase in
the value of the position in the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker equal to
approximately 5% of the contract amount must be deposited with the broker. This
amount is known as initial margin. Subsequent payments to and from the broker,
called variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the financial
futures contract more or less valuable.
Each Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of
40 large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging California Municipal
Bonds and Municipal Bonds that the Fund holds or anticipates purchasing against
adverse changes in interest rates. Each Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and sell
put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by its Board of Directors, each 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
FAM should determine that there is normally sufficient correlation between the
prices of such financial futures contracts and the California Municipal Bonds
and Municipal Bonds in which the Fund invests to make such hedging appropriate.
Over-The-Counter Options. Each Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC option
transactions are two-party contracts with price and terms negotiated by the
buyer and seller.
Restrictions on OTC Options. Each 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
Funds are 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 otherwise might be realized.
Risk Factors in Financial Futures Contracts and Options Thereon. Use 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, a 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
different from those of 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
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options and California Municipal Bonds and Municipal Bonds may be adversely
affected by economic, political, legislative or other developments which have a
disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a Fund being deemed a
"commodity pool," as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
financial futures contracts and options thereon (i) for bona fide hedging
purposes, without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) for non-hedging purposes, if, immediately
thereafter the sum of the amount of initial margin deposits on the Fund's
existing futures positions and option premiums entered into for non-hedging
purposes do not exceed 5% of the market value of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses on any such transactions. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When a 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,
FAM believes that, because each Fund will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of a Fund will not subject the Fund to the risks associated with
speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to California
Municipal Bonds 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.
Each 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 option or futures transaction. The inability
to close options and futures positions also could have an adverse impact on a
Fund's ability to hedge effectively its portfolio. There is also the risk of
loss by a 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
reached or exceeded the daily limit on a number of consecutive trading days.
If it is not possible to close a financial futures position entered into
by a 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
FAM 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 a Fund or move in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction that is not fully or partially offset by an increase in the
value of portfolio securities. As a result, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
Furthermore, the Fund will only engage in hedging transactions from time to time
and may not necessarily be engaging in hedging transactions when movements in
interest rates occur.
Investment Restrictions
The Funds have identical investment restrictions. The following are
fundamental investment restrictions of each Fund and may not be changed without
the approval of the holders of a majority of the outstanding shares of Common
Stock and the outstanding shares of AMPS and any other preferred stock, voting
together as a single class, and a majority of the outstanding shares of AMPS and
any other preferred stock, voting separately as a
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class. (For this purpose and under the Investment Company Act, "majority" means
for each such class the lesser of (i) 67% of the shares of each class of capital
stock represented at a meeting at which more than 50% of the outstanding shares
of each class of capital stock are represented or (ii) more than 50% of the
outstanding shares of each class of capital stock.) No Fund may:
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 companies that invest in real estate or interests
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 Investment Company Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 (the "Securities Act")
in selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase
California Municipal Bonds, Municipal Bonds and other debt securities and enter
into repurchase agreements in accordance with its investment objective, policies
and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided, that for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by each Fund, which may be
changed by the Board of Directors without shareholder approval, provide that no
Fund may:
a. Purchase securities of other investment companies, except to the extent
that such purchases are permitted by applicable law. Applicable law currently
prohibits the Fund from purchasing the securities of other investment companies
except if immediately thereafter not more than (i) 3% of the total outstanding
voting stock of such company is owned by the Fund, (ii) 5% of the Fund's total
assets, taken at market value, would be invested in any one such company, (iii)
10% of the Fund's total assets, taken at market value, would be invested in such
securities, and (iv) the Fund, together with other investment companies having
the same investment adviser and companies controlled by such companies, owns not
more than 10% of the total outstanding stock of any one closed-end investment
company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction (3)
above or except as may be necessary in connection with transactions in financial
futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities (the deposit or payment by the Fund of initial or
variation margin in connection with financial futures contracts and options
thereon is not considered the purchase of a security on margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on California Municipal Bonds, Municipal
Bonds, U.S. Government obligations and related indices or otherwise in
connection with bona fide hedging activities and may purchase and sell Call
Rights to require mandatory tender for the purchase of related California
Municipal Bonds and Municipal Bonds.
If a percentage restriction on 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.
For so long as shares of AMPS are rated by Moody's, no Fund will change
these additional investment restrictions unless it receives written confirmation
from Moody's that engaging in such transactions would not impair the rating then
assigned to the shares of AMPS by Moody's.
FAM and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") are owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co.").
Because of the affiliation of Merrill Lynch with FAM, each Fund is prohibited
from engaging in certain transactions involving Merrill Lynch except pursuant to
an exemptive order
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or otherwise in compliance with the provisions of the Investment Company 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 Funds to effect principal transactions with Merrill Lynch in
high quality, short-term, tax-exempt securities subject to conditions set forth
in such order. The Funds 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.
Rating Agency Guidelines
Each Fund intends that, so long as shares of its AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's and
S&P in connection with the Fund's receipt of a rating for such shares on or
prior to their date of original issue of at least "aaa" from Moody's and AAA
from S&P. Moody's and S&P, which are nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines for rating AMPS have been
developed by Moody's and S&P in connection with issuances of asset-backed and
similar securities, including debt obligations and variable rate preferred
stock, generally on a case-by-case basis through discussions with the issuers of
these securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be varied sufficiently and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law but have been adopted by each Fund in
order to satisfy current requirements necessary for Moody's and S&P to issue the
above-described ratings for shares of AMPS, which ratings generally are relied
upon by institutional investors in purchasing such securities. The guidelines
provide a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable
requirements under the Investment Company Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of the ratings altogether. In addition, any rating agency
providing a rating for the shares of AMPS, at any time, may change or withdraw
any such rating. As set forth in the Articles Supplementary of each Fund, the
Board of Directors, without stockholder approval, may modify certain definitions
or restrictions that have been adopted by the Fund pursuant to the rating agency
guidelines, provided the Board of Directors has obtained written confirmation
from Moody's and S&P that any such change would not impair the ratings then
assigned by Moody's and S&P to the AMPS. See "The Reorganization -- Risk Factors
and Special Considerations -- Ratings Considerations."
For so long as any shares of a Fund's AMPS are rated by Moody's or S&P, as
the case may be, a Fund's use of options and financial futures contracts and
options thereon will be subject to certain limitations mandated by the rating
agencies.
Portfolio Composition
There are small differences in concentration among the categories of
issuers of the California Municipal Bonds and Municipal Bonds held in the
portfolios of the Funds. For California Insured II, as of August 31, 1999, the
highest concentration of California Municipal Bonds and Municipal Bonds was in
General Obligation Bonds, Education and Housing, accounting for 31%, 16% and 10%
of the Fund's portfolio, respectively; for California Insured, the highest
concentration was in General Obligation Bonds, Hospitals/Healthcare and
Transportation, accounting for 24%, 14% and 13% of the Fund's portfolio; for
California Insured III, the highest concentration was in Water & Sewer
Utilities, General Obligation Bonds and Electric & Gas Utilities accounting for
20%, 17% and 11% of the Fund's portfolio; and for California Insured IV, the
highest concentration was in General Obligation Bonds, Water & Sewer Utilities
and Other Revenue Bonds accounting for 27%, 23% and 9% of the Fund's portfolio.
Although the investment portfolios of all four Funds must satisfy the same
standards of credit quality, the actual securities owned by each Fund are
different, as a result of which there are certain differences in the composition
of the four investment portfolios. The tables below set forth rating information
for the California Municipal Bonds and Municipal Bonds held by each Fund, as of
a certain date.
32
<PAGE>
California Insured II
As of August 31, 1999, approximately 99% of the market value of California
Insured II's portfolio was invested in long-term municipal obligations and
approximately 1% of the market value of California Insured II's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of California Insured II's
long-term municipal obligation investment portfolio as of _____________.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
- ---- -------- ------ -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 40 $214,753 95.7%
A A 2 6,598 2.9
BBB Baa 1 3,115 1.4
-- -------- ------
47 $224,466 100.0%
== ======== ======
</TABLE>
- ----------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by
a plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A and Baa
ratings. See Exhibit IV -- "Ratings of Municipal Bonds and Commercial
Paper."
California Insured
As of August 31, 1999, approximately 99% of the market value of California
Insured's portfolio was invested in long-term municipal obligations and
approximately 1% of the market value of California Insured's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of California Insured's
long-term municipal obligation investment portfolio as of _____________.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
- ---- -------- ------ -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 43 $193,993 100.0%
-- -------- ------
43 $193,993 100.0%
== ======== ======
</TABLE>
- ----------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by
a plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A and Baa
ratings. See Exhibit IV -- "Ratings of Municipal Bonds and Commercial
Paper."
California Insured III
As of August 31, 1999, approximately 92% of the market value of California
Insured III's portfolio was invested in long-term municipal obligations and
approximately 8% of the market value of California Insured III's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of California Insured III's
long-term municipal obligation investment portfolio as of _____________.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
- ---- -------- ------ -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 39 $150,411 96.5%
AA Aa 1 2,391 1.5
BBB Baa 1 3,115 2.0
-- -------- -----
41 $155,917 100.0%
== ======== =====
</TABLE>
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by
a plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A and Baa
ratings. See Exhibit IV -- "Ratings of Municipal Bonds and Commercial
Paper."
California Insured IV
As of August 31, 1999, approximately 94% of the market value of California
Insured IV's portfolio was invested in long-term municipal obligations and
approximately 6% of the market value of California Insured IV's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of California Insured IV's
long-term municipal obligation investment portfolio as of _____________.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
- ---- -------- ------ -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 51 $199,130 97.1%
AA Aa 2 6,035 2.9
-- -------- -----
53 $205,165 100.0%
== ======== =====
</TABLE>
- ----------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by
a plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A and Baa
ratings. See Exhibit IV -- "Ratings of Municipal Bonds and Commercial
Paper."
33
<PAGE>
Portfolio Transactions
The procedures for engaging in portfolio transactions are the same for
each of the Funds. Subject to policies established by the Board of Directors of
each Fund, FAM is primarily responsible for the execution of each Fund's
portfolio transactions. In executing such transactions, FAM seeks to obtain the
best results for each 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 FAM generally seeks reasonably
competitive commission rates, the Funds do not necessarily pay the lowest
commission or spread available.
None of the Funds has any 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 provide supplemental investment
research to FAM, including Merrill Lynch, may receive orders for transactions by
a Fund. Information so received will be in addition to, and not in lieu of, the
services required to be performed by FAM under its investment advisory
agreements with the Funds, and the expenses of FAM will not necessarily be
reduced as a result of the receipt of such supplemental information.
Each Fund invests in securities that are primarily traded in the
over-the-counter markets, and each Fund normally deals 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 Investment
Company Act, except as permitted by exemptive order, persons affiliated with a
Fund are prohibited from dealing with the Fund as principals in the purchase and
sale of securities. Since transactions in the over-the-counter markets usually
involve transactions with dealers acting as principals for their own account,
the Funds do 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 FAM, a Fund may engage in principal transactions
with Merrill Lynch in high quality, short-term, tax-exempt securities. An
affiliated person of a Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis.
The Funds also may 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 Funds may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
The Board of Directors of each Fund has considered the possibility of
recapturing for the benefit of the Funds brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions, by conducting portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by Merrill
Lynch could be offset against the investment advisory fees paid by the Fund to
FAM. After considering all factors deemed relevant, the Directors of each Fund
made a determination not to seek such recapture. The Directors will reconsider
this matter from time to time.
Periodic auctions are conducted for the AMPS of each of the Funds by the
Auction Agent for the Funds. The auctions require the participation of one or
more broker-dealers, each of whom enters into an agreement with the Auction
Agent. After each auction, the Auction Agent pays a service charge, from funds
provided by the issuing Fund, to each broker-dealer at the annual rate of .25%,
calculated on the basis of the purchase price of shares of the relevant AMPS
placed by such broker-dealer at such auction.
Portfolio Turnover
Generally, no Fund purchases securities for short-term trading profits.
However, any of the Funds may dispose of securities without regard to the time
that they have been held when such action, for defensive or other reasons,
appears advisable to FAM. (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 a 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.) A high portfolio turnover rate results in greater
transaction costs, which are borne directly by the Fund, and also has certain
tax consequences for stockholders. The portfolio turnover rate for each of the
Funds for the periods indicated is set forth below:
California Insured II Period
Febuary 27, 1998+ Year
to 6/30/98 Ended 6/30/99
----------------- -------------
64.17% 82.36%
34
<PAGE>
California Insured Period
September 19, 1997+ Year
to 8/31/98 Ended 8/31/99
------------------- -------------
71.37% ____%
California Insured III Period
September 25, 1998+
to 5/31/99
-------------------
60.32%
California Insured IV Period
January 29, 1999+
to 9/30/99
-----------------
--%
- ----------
+ Commencement of operations
Net Asset Value
The net asset value per share of Common Stock of each Fund is determined
after the close of business on the NYSE (generally, 4:00 p.m., Eastern time) on
the last business day in each week. For purposes of determining the net asset
value of a share of Common Stock of each Fund, the value of the securities held
by the Fund plus any cash or other assets (including interest accrued but not
yet received) minus all liabilities (including accrued expenses) and the
aggregate liquidation value of the outstanding shares of AMPS is divided by the
total number of shares of Common Stock outstanding at such time. Expenses,
including the fees payable to FAM, are accrued daily.
The California Municipal Bonds and Municipal Bonds in which each Fund
invests are traded primarily in the over-the-counter markets. In determining net
asset value, each Fund uses the valuations of portfolio securities furnished by
a pricing service approved by its Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. California Municipal Bonds and Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of each Fund under the general
supervision of the Board of Directors of the Fund. The Board of Directors of
each Fund has determined in good faith that the use of a pricing service is a
fair method of determining the valuation of portfolio securities. Positions in
futures contracts are valued at closing prices for such contracts established by
the exchange on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Board of Directors of each Fund.
Each Fund determines and makes available for publication the net asset
value of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities are
published in Barron's, the Monday edition of The Wall Street Journal, and the
Monday and Saturday editions of The New York Times.
Capital Stock
Each of the Funds has outstanding both Common Stock and AMPS. The Common
Stock of each of the Funds is traded on the NYSE. The shares of California
Insured II Common Stock commenced trading on the NYSE on March 2, 1998. As of
August 31, 1999, the net asset value per share of California Insured II Common
Stock was $13.62 and the market price per share was $13.25. The shares of
California Insured Common Stock commenced trading on the NYSE on September 22,
1997. As of August 31, 1999, the net asset value per share of California Insured
Common Stock was $14.13 and the market price per share was $14.00. The shares of
California Insured III Common Stock commenced trading on the NYSE on September
28, 1998. As of August 31, 1999, the net asset value per share of California
Insured III Common Stock was $12.96 and the market price per share was $12.9375.
The shares of California Insured IV Common Stock commenced trading on the NYSE
on February 8, 1999. As of August 31, 1999, the net asset value per share of
California Insured IV Common Stock was $13.04 and the market price per share was
$13.4375.
35
<PAGE>
Each Fund is authorized to issue 200,000,000 shares of capital stock, all
of which shares initially were classified as Common Stock. The Board of
Directors of each Fund is authorized to classify or reclassify any unissued
shares of capital stock by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. In connection with each
respective Fund's offering of shares of AMPS, California Insured II reclassified
3,840 shares of unissued capital stock as AMPS, California Insured reclassified
3,200 shares of unissued capital stock as AMPS, California Insured III
reclassified 2,960 shares of unissued capital stock as AMPS and California
Insured IV reclassified 3,640 shares of unissued capital stock as AMPS.
Common Stock
Holders of each Fund's Common Stock are entitled to share equally in
dividends declared by the Fund's Board of Directors payable to holders of the
Common Stock and in the net assets of the Fund available for distribution to
holders of the Common Stock after payment of the preferential amounts payable to
holders of any outstanding preferred stock. See "Voting Rights" and "Liquidation
Rights of Holders of AMPS" below. Holders of a Fund's Common Stock do not have
preemptive or conversion rights and shares of a Fund's Common Stock are not
redeemable. The outstanding shares of Common Stock of each Fund are fully paid
and nonassessable.
So long as any shares of a Fund's AMPS or any other preferred stock are
outstanding, holders of the Fund's Common Stock will not be entitled to receive
any dividends of or other distributions from the Fund unless all accumulated
dividends on outstanding shares of the Fund's AMPS and any other preferred stock
have been paid, and unless asset coverage (as defined in the Investment Company
Act) with respect to such AMPS and any other preferred stock would be at least
200% after giving effect to such distributions.
Preferred Stock
The AMPS of each of the Funds have a similar structure. The AMPS of each
Fund are shares of preferred stock of the Fund that entitle their holders to
receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor, at a rate per annum that may vary for the
successive dividend periods. The AMPS of all of the Funds have liquidation
preferences of $25,000 per share; none of the Fund's AMPS are traded on any
stock exchange or over-the-counter. Each Fund's AMPS can be purchased at an
auction or through broker-dealers who maintain a secondary market in the AMPS.
Auctions generally have been held and will be held every seven days for
the AMPS of each of the Funds, unless the applicable Fund elects, subject to
certain limitations, to declare a special dividend period. The following table
provides information about the dividend rates for each series of AMPS of each of
the Funds as of a recent auction.
Dividend
Auction Date Fund Series Rate
------------ ---------------------- ------ --------
September 20, 1999 California Insured II A 3.40%
September 17, 1999 California Insured II B 3.00%
September 20, 1999 California Insured A 3.40%
September 23, 1999 California Insured B 3.60%
September 21, 1999 California Insured III A 3.10%
September 22, 1999 California Insured III B 3.10%
September 21, 1999 California Insured IV A 3.00%
September 20, 1999 California Insured IV B 3.40%
Under the Investment Company Act, each Fund is permitted to have
outstanding more than one series of preferred stock as long as no single series
has priority over another series as to the distribution of assets of the Fund or
the payment of dividends. Holders of a Fund's preferred stock do not have
preemptive rights to purchase any shares of AMPS or any other preferred stock
that might be issued. The net asset value per share of a Fund's AMPS equals its
liquidation preference plus accumulated dividends per share.
The redemption provisions pertaining to the AMPS of each Fund are
substantially similar. It is anticipated that shares of AMPS of each Fund will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference of $25,000 per share plus accumulated but unpaid
dividends (whether or not earned or declared) to the date of redemption plus,
under certain circumstances, a redemption premium. Shares of AMPS will also be
subject to mandatory redemption at a price equal to their liquidation preference
plus accumulated but unpaid dividends (whether or not earned or declared) to the
date of redemption upon the occurrence of certain specified events, such as the
failure of the Fund to maintain the asset coverage for the AMPS specified by
Moody's and S&P in connection with their issuance of ratings on the AMPS.
36
<PAGE>
Certain Provisions of the Charter
Each Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the Fund
or to change the composition of its Board of Directors and could have the effect
of depriving stockholders of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund. A Director may be removed from office with or
without cause by vote of the holders of at least 66 2/3% of the votes entitled
to be voted on the matter. A Director elected by all of the holders of capital
stock may be removed only by action of such holders, and a Director elected by
the holders of AMPS and any other preferred stock may be removed only by action
of the holders of AMPS and any other preferred stock.
In addition, the Charter of each Fund requires the favorable vote of the
holders of at least 66 2/3% of all of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
o a merger or consolidation or statutory share exchange of the Fund
with any other corporation or entity,
o 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
o a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in accordance
with the by-laws, in which case the affirmative vote of a majority of all of the
votes entitled to be cast by stockholders of the Fund, voting as a single class,
is required. Such approval, adoption or authorization of the foregoing also
would require the favorable vote of at least a majority of the Fund's shares of
preferred stock then entitled to be voted thereon, including the AMPS, voting as
a separate class.
In addition, conversion of a Fund to an open-end investment company would
require an amendment to the Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
stockholders. Such an amendment would require the affirmative vote of the
holders of at least 66 2/3% of the Fund's outstanding shares of capital stock
(including the AMPS and any other preferred stock) entitled to be voted on the
matter, voting as a single class (or a majority of such shares if the amendment
was previously approved, adopted or authorized by at least two-thirds of the
total number of Directors fixed in accordance with the by-laws), and the
affirmative vote of at least a majority of outstanding shares of preferred stock
of a Fund (including the AMPS), voting as a separate class. Such a vote also
would satisfy a separate requirement in the Investment Company Act that the
change be approved by the stockholders. Stockholders of an open-end investment
company may require the company to redeem their shares of common stock at any
time (except in certain circumstances as authorized by or under the Investment
Company Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of a redemption. All redemptions will be made in
cash. If the Fund is converted to an open-end investment company, it could be
required to liquidate portfolio securities to meet requests for redemption and
the Common Stock no longer would be listed on a stock exchange. Conversion to an
open-end investment company would also require redemption of all outstanding
shares of preferred stock (including the AMPS) and would require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the issuance of senior securities, the borrowing of money and the
purchase of illiquid securities.
The Board of Directors of each Fund has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the Investment Company Act, are in the best interests of
stockholders generally. Reference should be made to the Charter of each Fund on
file with the SEC for the full text of these provisions.
Management of the Funds
Directors and Officers. The Boards of Directors of California Insured,
California Insured III and California Insured IV currently consist of the same
seven persons, five of whom are not "interested persons," as defined in the
Investment Company Act, of any of those Funds. The Board of Directors of
California Insured II currently consists of seven persons, five of whom are not
"interested persons" of California Insured II. Terry K. Glenn serves as a
Director and President of each of the Funds, and Arthur Zeikel serves as a
Director of each of the Funds. The Directors of each Fund are responsible for
the overall supervision of the operations of the Fund and
37
<PAGE>
perform the various duties imposed on the directors of investment companies by
the Investment Company Act and under applicable Maryland law. The Funds have the
same slate of officers with a few exceptions. For further information regarding
the Directors and officers of each Fund, see "Item 2. Election of Directors" and
Exhibit I -- "Information Pertaining to Each Fund."
Robert A. DiMella serves as the portfolio manager for California Insured
II and California Insured. Robert A. DiMella and Walter C. O'Connor serve as the
portfolio managers for California Insured III and California Insured IV. Mr.
DiMella will continue to serve as the portfolio manager of the combined fund
after the Reorganization. The portfolio managers are primarily responsible for
the management of the applicable Fund's portfolio. Biographical information
about Messrs. DiMella and O'Connor is contained in Exhibit I -- "Information
Pertaining to Each Fund."
Management and Advisory Arrangements. FAM, which is owned and controlled
by ML & Co., serves as the investment adviser for each of the Funds pursuant to
separate investment advisory agreements that, except for their termination
dates, are identical. FAM provides each Fund with the same investment advisory
and management services. The Asset Management Group of ML & Co. (which includes
FAM) acts as the investment adviser to more than 100 other registered investment
companies and offers services to individuals and institutional accounts. As of
________, the Asset Management Group had a total of approximately $_____ billion
in investment company and other portfolio assets under management (approximately
$_______ billion of which were invested in municipal securities). This amount
includes assets managed for certain affiliates of FAM. FAM is a limited
partnership, the partners of which are ML & Co. and Princeton Services, Inc. The
principal business address of FAM is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
Each Fund's investment advisory agreement with FAM provides that, subject
to the supervision of the Board of Directors of the Fund, FAM is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security for each Fund rests with
FAM, subject to review by the Board of Directors of the Fund.
FAM provides the portfolio management for each of the Funds. Such
portfolio management considers analyses from various sources (including
brokerage firms with which each Fund does business), makes the necessary
investment decisions, and places orders for transactions accordingly. FAM also
is responsible for the performance of certain administrative and management
services for each Fund.
For the services provided by FAM under each Fund's investment advisory
agreement, the Fund pays 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 assets acquired from the sale of preferred stock,
minus the sum of accrued liabilities of the Fund and accumulated dividends on
its shares of preferred stock). For purposes of this calculation, average weekly
net assets are determined at the end of each month on the basis of the average
net assets of the Fund for each week during the month. The assets for each
weekly period are determined by averaging the net assets at the last business
day of a week with the net assets at the last business day of the prior week.
Each Fund's investment advisory agreement obligates FAM to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with investment and
economic research, trading and investment management of the Fund, as well as the
compensation of all Directors of the Fund who are affiliated persons of FAM or
any of its affiliates. Each Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, expenses for legal and
auditing services, taxes, costs of printing proxies, listing fees, stock
certificates and stockholder reports, charges of the custodian and the transfer
agent, dividend disbursing agent and registrar, fees and expenses with respect
to the issuance of AMPS, SEC fees, fees and expenses of unaffiliated Directors,
accounting and pricing costs, insurance, interest, brokerage costs, litigation
and other extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund. FAM provides accounting services to each Fund, and
each Fund reimburses FAM for its respective costs in connection with such
services.
Unless earlier terminated as described below, the investment advisory
agreement between each Fund and FAM will continue from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund's Common Stock and AMPS, voting together as a
single class, and (b) by a majority of the Directors of the Fund who are not
parties to such contract or "interested persons," as defined in the Investment
Company Act, of any such party. The contract is not assignable and it may be
38
<PAGE>
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the vote of the stockholders of the Fund.
Securities held by a Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which FAM or its
affiliates act as an adviser. Because of different objectives or other factors,
a particular security may be bought for an advisory client when other clients
are selling the same security. If purchases or sales of securities by FAM for a
Fund or other funds for which it acts as investment adviser or for 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. Transactions effected by FAM (or
its affiliates) on behalf of more than one of its clients during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, causing an adverse effect on price.
Code of Ethics
The Board of Directors of each of the Funds has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act that incorporates the
Code of Ethics of FAM (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of FAM and, as described
below, impose additional, more onerous, restrictions on Fund investment
personnel.
The Codes require that all employees of FAM 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 FAM
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 FAM. Furthermore, the
Codes provide for trading "blackout periods" that prohibit trading by investment
personnel of each of the Funds within periods of trading by the Fund in the same
(or equivalent) security (15 or 30 days depending upon the transaction).
Voting Rights
Voting rights are identical for the holders of shares of each Fund's
Common Stock. Holders of each Fund's Common Stock are entitled to one vote for
each share held and will vote with the holders of any outstanding shares of the
Fund's AMPS or other preferred stock on each matter submitted to a vote of
holders of Common Stock, except as set forth below.
Stockholders of each Fund are entitled to one vote for each share held.
The shares of each Fund's Common Stock, AMPS and any other preferred stock do
not have cumulative voting rights, which means that the holders of more than 50%
of the shares of a Fund's Common Stock, AMPS and any other preferred stock
voting for the election of Directors can elect all of the Directors standing for
election by such holders, and, in such event, the holders of the remaining
shares of a Fund's Common Stock, AMPS and any other preferred stock will not be
able to elect any of such Directors.
Voting rights of the holders of each Fund's AMPS are identical. Except as
otherwise indicated below, and except as otherwise required by applicable law,
holders of shares of a Fund's AMPS will be entitled to one vote per share on
each matter submitted to a vote of the Fund's stockholders and will vote
together with the holders of shares of the Fund's Common Stock as a single
class.
In connection with the election of a Fund's Directors, holders of shares
of a Fund's AMPS, voting separately as a class, shall be entitled at all times
to elect two of the Fund's Directors, and the remaining Directors will be
elected by holders of shares of the Fund's Common Stock and shares of the Fund's
AMPS and any other preferred stock, voting together as a single class. In
addition, if at any time dividends on outstanding shares of a Fund's AMPS shall
be unpaid in an amount equal to at least two full years' dividends thereon or if
at any time holders of any shares of a Fund's preferred stock are entitled,
together with the holders of shares of the Fund's AMPS, to elect a majority of
the Directors of the Fund under the Investment Company Act, then the number of
Directors constituting the Board of Directors automatically shall be increased
by the smallest number that, when added to the two Directors elected exclusively
by the holders of shares of AMPS and any other preferred stock as described
above, would constitute a majority of the Board of Directors as so increased by
such smallest number, and at a special meeting of stockholders which will be
called and held as soon as practicable, and at all subsequent
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meetings at which Directors are to be elected, the holders of shares of the
Fund's AMPS and any other preferred stock, voting separately as a class, will be
entitled to elect the smallest number of additional Directors that, together
with the two Directors which such holders in any event will be entitled to
elect, constitutes a majority of the total number of Directors of the Fund as so
increased. The terms of office of the persons who are Directors at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment in full, all dividends payable on all outstanding shares
of AMPS and any other preferred stock for all past dividend periods, the
additional voting rights of the holders of shares of AMPS and any other
preferred stock as described above shall cease, and the terms of office of all
of the additional Directors elected by the holders of shares of AMPS and any
other preferred stock (but not of the Directors with respect to whose election
the holders of shares of Common Stock were entitled to vote or the two Directors
the holders of shares of AMPS and any other preferred stock have the right to
elect in any event) will terminate automatically.
The affirmative vote of the holders of a majority of the outstanding
shares of a Fund's AMPS, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock 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 stock.
Stockholder Inquiries
Stockholder inquiries with respect to any of the Funds may be addressed to
such Fund by telephone at (609) 282-2800 or at the address set forth on the
cover page of this Proxy Statement and Prospectus.
Dividends and Distributions
The Funds' current policies with respect to dividends and distributions
relating to shares of their Common Stock are identical. Each Fund intends to
distribute all of its net investment income. Dividends from such net investment
income are declared and paid monthly to holders of a Fund's Common Stock.
Monthly distributions to holders of a Fund's Common Stock normally consist of
substantially all of the net investment income remaining after the payment of
dividends on the Fund's AMPS. All net realized long-term or short-term capital
gains, if any, are distributed at least annually, pro rata to holders of shares
of a Fund's Common Stock and AMPS. While any shares of a Fund's AMPS are
outstanding, the Fund may not declare any cash dividend or other distribution on
the Fund's Common Stock, unless at the time of such declaration (1) all
accumulated dividends on the Fund's AMPS have been paid, and (2) 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
Fund's outstanding shares of AMPS. This limitation on a Fund's ability to make
distributions on its Common Stock under certain circumstances could impair the
ability of the Fund to maintain its qualification for taxation as a regulated
investment company under the Federal tax laws which would have an adverse impact
on stockholders. See "Comparison of the Funds -- Tax Rules Applicable to the
Funds and their Stockholders."
Similarly, the Funds' current policies with respect to dividends and
distributions on shares of their AMPS are identical. The holders of shares of a
Fund's AMPS are entitled to receive, when, as and if declared by the Board of
Directors of the Fund, out of funds legally available therefor, cumulative cash
dividends on their shares. Dividends on a Fund's shares of AMPS so declared and
payable shall be paid (i) in preference to and in priority over any dividends so
declared and payable on the Fund's Common Stock, and (ii) to the extent
permitted under the Code and to the extent available, out of net tax-exempt
income earned on the Fund's investments. Dividends for each Fund's AMPS are paid
through The Depository Trust Company ("DTC") (or a successor securities
depository) on each dividend payment date. DTC's normal procedures now provide
for it to distribute dividends in same-day funds to agent members, who in turn
are expected to distribute such dividends to the person for whom they are acting
as agent in accordance with the instructions of such person. Prior to each
dividend payment date, the relevant Fund is required to deposit with the Auction
Agent sufficient funds for the payment of such declared dividends. None of the
Funds intends to establish any reserves for the payment of dividends, and no
interest will be payable in respect of any dividend payment or payment on the
shares of a Fund's AMPS which may be in arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on California Municipal Bonds, are exempt from Federal income tax and
California income taxes, subject to the possible application of the Federal
alternative minimum tax. However, each Fund is required to allocate net capital
gains and other income subject to regular Federal income tax and California
income taxes, if any, proportionately between shares
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of its Common Stock and shares of its AMPS in accordance with the current
position of the IRS described herein. See "Tax Rules Applicable to the Funds and
their Shareholders" below. Each Fund notifies the Auction Agent of the amount of
any net capital gains or other taxable income to be included in any dividend on
shares of AMPS prior to the auction establishing the applicable rate for such
dividend. The Auction Agent in turn notifies each broker-dealer whenever it
receives any such notice from a Fund, and each broker-dealer then notifies its
customers who are holders of the Fund's AMPS. Each Fund also may include such
income in a dividend on shares of its AMPS without giving advance notice thereof
if it increases the dividend by an additional amount to offset the tax effect
thereof. The amount of taxable income allocable to shares of a Fund's AMPS will
depend upon the amount of such income realized by the Fund and other factors,
but generally is not expected to be significant.
For information concerning the manner in which dividends and distributions
to holders of each Fund's Common Stock may be reinvested automatically in shares
of the Fund's Common Stock, see "Automatic Dividend Reinvestment Plan" below.
Dividends and distributions will be subject to tax treatment as discussed below,
whether they are reinvested in shares of a Fund or received in cash.
If any Fund retroactively allocates any net capital gains or other income
subject to regular Federal income tax and California income taxes to shares of
its AMPS without having given advance notice thereof as described above, which
only may happen when such allocation is made as a result of the redemption of
all or a portion of the outstanding shares of its AMPS or the liquidation of the
Fund, the Fund will make certain payments to holders of shares of its AMPS to
which such allocation was made to offset substantially the tax effect thereof.
In no other instances will the Fund be required to make payments to holders of
shares of its AMPS to offset the tax effect of any reallocation of net capital
gains or other taxable income.
Automatic Dividend Reinvestment Plan
Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, a
"Plan"), unless a holder of a Fund's Common Stock elects otherwise, all dividend
and capital gains distributions are automatically reinvested by either The Bank
of New York or State Street Bank and Trust Company, as applicable, as agent for
stockholders in administering the Plan (as applicable, the "Plan Agent"), in
additional shares of the Fund's Common Stock. The Bank of New York is the Plan
Agent for California Insured II and will be the Plan Agent following the
Reorganization. Holders of a Fund's Common Stock who elect not to participate in
the Plan receive all distributions in cash paid by check mailed directly to the
stockholder of record (or, if the shares are held in street or other nominee
name, then to such nominee) by The Bank of New York or State Street Bank and
Trust Company, as applicable, as dividend paying agent. Such stockholders 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 or State Street Bank and Trust Company, as applicable, 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 capital
gains distribution.
Whenever a Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in the Plan receive cash, and participants in the Plan
receive the equivalent in shares of the Fund's Common Stock. The shares are
acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional unissued
but authorized shares of the Fund's Common Stock from the Fund ("newly-issued
shares") or (ii) by purchase of outstanding shares of the Fund's Common Stock on
the open market ("open-market purchases"), on the NYSE or elsewhere. If on the
payment date for the dividend, the net asset value per share of the Fund's
Common Stock is equal to or less than the market price per share of the Fund's
Common Stock plus estimated brokerage commissions (such condition being referred
to herein as "market premium"), the Plan Agent invests the dividend amount in
newly-issued shares on behalf of the participant. The number of newly-issued
shares of the Fund's Common Stock to be credited to the participant's account is
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 invests the dividend amount in shares
acquired on behalf of the participant in open-market purchases.
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In the event of a market discount on the dividend payment date, the Plan
Agent has 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. Each Fund intends to pay monthly
income dividends. Therefore, the period during which open-market purchases can
be made exists only from the payment date on the dividend through the date
before the next "ex-dividend" date, which typically is approximately ten days.
If, before the Plan Agent has completed its open-market purchases, the market
price of a share of a Fund's Common Stock exceeds the net asset value per share,
the average per share purchase price 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 ceases making open-market purchases and invests 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 stockholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders for tax records. Shares in the account of
each Plan participant are held by the Plan Agent in non-certificated form in the
name of the participant, and each stockholder's proxy includes 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 stockholders such as banks, brokers or nominees which 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 stockholders as representing the total amount registered in the record
stockholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There are no brokerage charges with respect to shares issued directly by
any Fund as a result of dividends or capital gains distributions payable either
in shares or in cash. However, each participant pays 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 does not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Comparison of the Funds -- Tax
Rules Applicable to the Funds and their Stockholders."
Stockholders participating in the Plan may receive benefits not available
to stockholders not participating in the Plan. If the market price (plus
commissions) of a Fund's shares of Common Stock is higher than net asset value,
participants in the Plan receive shares of the Fund's Common Stock at less than
they otherwise could purchase them and 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 less than net asset value,
participants receive distributions of 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 of shares at prices below the net asset value. Also, since the
Funds normally do not redeem their shares, the price on resale may be more or
less than the net asset value. See "Comparison of the Funds -- Tax Rules
Applicable to the Funds and their stockholders" for a discussion of the tax
consequences of the Plan.
Each Fund reserves the right to amend or terminate its Plan. There is no
direct service charge to participants in the Plan; however, each Fund reserves
the right to amend its Plan to include a service charge payable by the
participants.
After the Reorganization, a holder of shares of an Acquired Fund who has
elected to receive dividends in cash will continue to receive dividends in cash;
all other holders will have their dividends automatically reinvested in shares
of the combined fund. However, if a stockholder owns shares in an Acquired Fund
and in California Insured II, after the Reorganization, the stockholder's
election with respect to the dividends of California Insured II will control
unless the stockholder specifically elects a different option at that time.
Following the Reorganization, all correspondence should be directed to the Plan
Agent, The Bank of New York, at 101 Barclay Street, New York, New York 10286.
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Mutual Fund Investment Option
A holder of Common Stock of any Fund, who purchased his or her shares
through Merrill Lynch in the Fund's initial public offering, has the right to
reinvest the net proceeds from a sale of such shares in Class D shares of
certain Merrill Lynch-sponsored open-end funds without the imposition of an
initial sales charge, if certain conditions are satisfied. A holder of Common
Stock of an Acquired Fund who qualifies for this option will have the same
option with respect to the shares of California Insured II Common Stock received
in the Reorganization.
Liquidation Rights of Holders of AMPS
Upon any liquidation, dissolution or winding up of any Fund, whether
voluntary or involuntary, the holders of shares of the Fund's AMPS will be
entitled to receive, out of the assets of the Fund available for distribution to
stockholders, before any distribution or payment is made upon any shares of the
Fund's Common Stock or any other capital stock of the Fund ranking junior in
right of payment upon liquidation to AMPS, $25,000 per share together with the
amount of any dividends accumulated but unpaid (whether or not earned or
declared) thereon to the date of distribution, and after such payment the
holders of AMPS will be entitled to no other payments except for any additional
dividends. If such assets of the Fund shall be insufficient to make the full
liquidation payment on the AMPS and liquidation payments on any other
outstanding class or series of preferred stock of the Fund ranking on a parity
with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of shares of AMPS and the holders of shares of
such other class or series ratably in proportion to the respective preferential
amounts to which they are entitled. After payment of the full amount of
liquidation distribution to which they are entitled, the holders of shares of a
Fund's AMPS will not be entitled to any further participation in any
distribution of assets by the Fund except for any additional dividends. A
consolidation, merger or share exchange of a Fund with or into any other entity
or entities or a sale, whether for cash, shares of stock, securities or
properties, of all or substantially all or any part of the assets of the Fund
shall not be deemed or construed to be a liquidation, dissolution or winding up
of the Fund for this purpose.
Tax Rules Applicable to the Funds and their Stockholders
The tax consequences of investing in shares of Common Stock or AMPS of
each of the Funds are identical. Each of the Funds has elected and qualified
(except for California Insured IV, which will elect in its first tax return and
will qualify) for the special tax treatment afforded RICs under the Code. As a
result, in any taxable year in which they distribute an amount equal to at least
90% of taxable net income and 90% of tax-exempt net income (see below), the
Funds are not subject to Federal income tax to the extent that they distribute
their net investment income and net realized capital gains. In all taxable years
through the taxable year of the Reorganization, each Fund has distributed
substantially all of its income. California Insured II intends to continue to
distribute substantially all of its income following the Reorganization.
Each Fund is qualified 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 a Fund's 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 is qualified to pay
exempt-interest dividends to its stockholders. Exempt-interest dividends are
dividends or any part thereof paid by a Fund which are attributable to interest
on tax-exempt obligations and designated by the Fund as exempt-interest
dividends in a written notice mailed to stockholders within 60 days after the
close of its taxable year. To the extent that the dividends distributed to a
Fund's stockholders are derived from interest income exempt from Federal income
tax under Code Section 103(a) and are properly designated as exempt-interest
dividends, they are excludable from a stockholder'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 benefits and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry a Fund's shares is not
deductible for Federal income tax purposes to the extent attributable to
exempt-interest dividends. A tax adviser should be consulted with respect to
whether exempt-interest dividends retain the exclusion under Code Section 103(a)
if a stockholder would be treated as a "substantial user" or "related person"
under Code Section 147(a) with respect to property financed with the proceeds
from an issue of "industrial development bonds" or "private activity bonds," if
any, held by a Fund.
So long as, at the close of each quarter of the Fund's taxable year, at
least 50% of the value of the Fund's total assets consists of California
Municipal Bonds, the portion of exempt-interest dividends paid from interest
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received by a Fund from California Municipal Bonds also is exempt from
California income tax. However, exempt-interest dividends paid to a corporate
stockholder are subject to California state franchise tax and will not be exempt
from California taxation. Stockholders subject to income taxation by states
other than California realize a lower after-tax rate of return than California
stockholders since the dividends distributed by a Fund generally are not exempt,
to any significant degree, from income taxation by such other states. Each Fund
informs its stockholders annually as to the portion of the Fund's distributions
that constitutes exempt-interest dividends and the portion that is exempt from
California income taxes. Interest on indebtedness incurred or continued to
purchase or carry a Fund's shares is not deductible for Federal income tax or
California personal income tax purposes to the extent attributable to
exempt-interest dividends.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the currently outstanding
AMPS of each of the Funds, as well as the Series C, D and E AMPS to be issued by
California Insured II, are substantially similar, but not identical, to the AMPS
discussed in the revenue ruling. In the opinion of Brown & Wood LLP, counsel to
all four Funds, the shares of each Fund's currently outstanding AMPS, as well as
the Series C, D and E AMPS to be issued by California Insured II, constitute
stock, and distributions with respect to shares of such AMPS (other than
distributions in redemption of shares of AMPS subject to Section 302(b) of the
Code) will constitute dividends to the extent of current and accumulated
earnings and profits as calculated for Federal income tax purposes.
Nevertheless, the IRS could take a contrary position, asserting, for example,
that the shares of AMPS constitute debt. If this position were upheld, the
discussion of the treatment of distributions below would not apply to holders of
shares of AMPS. Instead, distributions by each Fund to holders of shares of its
AMPS would constitute interest, whether or not they exceed the earnings and
profits of the Fund, would be included in full in the income of the recipient
and taxed as ordinary income. Counsel believes that such a position, if asserted
by the IRS, would be unlikely to prevail.
To the extent that a Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered taxable ordinary income for Federal income tax and California income
tax purposes. Distributions, if any, from an excess of net long-term capital
gains over net short-term capital losses derived from the sale of securities or
from certain transactions in futures or options ("capital gain dividends") are
taxable as long-term capital gains for Federal income tax purposes, regardless
of the length of time the stockholder has owned Fund shares, and for California
income tax purposes will be treated as capital gains which are taxed at ordinary
income rates. Certain categories of capital gains are taxable at different rates
for Federal income tax purposes. Generally not later than 60 days after the
close of its taxable year, a Fund provides its shareholders with a written
notice designating the amounts of any exempt-interest dividends and capital gain
dividends, as well as any amount of capital gain dividends in the different
categories of capital gain referred to above. Distributions by a Fund, whether
from exempt-interest income, ordinary income or capital gains, are not eligible
for the dividends received deduction for corporations under the Code.
A loss realized on a sale or exchange of shares of a Fund is disallowed if
other Fund shares are acquired (whether under the Automatic Dividend
Reinvestment Plan or otherwise) within a 61-day period beginning 30 days before
and ending 30 days after the date that the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
All or a portion of a 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 stockholders. Any loss upon the sale or
exchange of Fund shares held for six months or less is treated as long-term
capital loss to the extent of exempt-interest dividends received by the
stockholder. In addition, such loss is disallowed to the extent of any capital
gain dividends received by the stockholder. Distributions in excess of a Fund's
earnings and profits first will 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).
If a Fund pays a dividend in January which was declared in the previous October,
November or December to stockholders of record on a specified date in one of
such months, then such dividend is treated for tax purposes as paid by the Fund
and received by its stockholders on December 31 of the year in which such
dividend was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two
or more classes of shares it may designate distributions made to each class in
any year as consisting of no more than such class' proportionate share of
particular types of income, including exempt-interest dividends and capital gain
dividends. A class's proportionate share of a particular type of income is
determined according to the percentage of total dividends
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paid by the RIC during such year that was paid to such class. Consequently, when
Common Stock and one or more series of AMPS are outstanding, each Fund intends
to designate distributions made to the classes as consisting of particular types
of income in accordance with each class's proportionate share of such income.
After the Reorganization, California Insured II will, likewise, so designate
distributions with respect to its Common Stock and its AMPS, Series A, B, C, D
and E. Each Fund may notify the Auction Agent of the amount of any net capital
gains and other taxable income to be included in any dividend on shares of its
AMPS prior to the auction establishing the applicable rate for such dividend.
Except for the portion of any dividend that a Fund informs the Auction Agent
will be treated as capital gains or other taxable income, the dividends paid on
the shares of AMPS constitute exempt-interest dividends. Alternatively, each
Fund may include such income in a dividend on shares of its AMPS without giving
advance notice thereof if it increases the dividend by an additional amount to
offset the tax effect thereof. The amount of net capital gains and ordinary
income allocable to shares of a Fund's AMPS (the "taxable distribution") depends
upon the amount of such gains and income realized by the Fund and the total
dividends paid by the Fund on shares of its Common Stock and shares of its AMPS
during a taxable year, but the taxable distribution generally is not
significant.
In the opinion of Brown & Wood LLP, counsel to all four Funds, under
current law the manner in which each Fund allocates, and California Insured II
will allocate, items of tax-exempt income, net capital gains, and other taxable
income, if any, among shares of Common Stock and outstanding AMPS (including,
for California Insured II, Series A and B AMPS and the newly issued series of
AMPS) will be respected for Federal income tax purposes. However, the tax
treatment of additional dividends may affect a Fund's calculation of each class'
allocable share of capital gains and other taxable income. In addition, there is
currently no direct guidance from the IRS or other sources specifically
addressing whether a Fund's method for allocating tax-exempt income, net capital
gains and other taxable income among shares of Common Stock and the outstanding
series of AMPS will be respected for Federal income tax purposes, and it is
possible that the IRS could disagree with counsel's opinion and attempt to
reallocate a Fund's net capital gains or other taxable income. In the event of a
reallocation, some of the dividends identified by a Fund as exempt-interest
dividends to holders of shares of its AMPS could be recharacterized as
additional capital gains or other taxable income. In the event of such
recharacterization, a Fund is not required to make payments to such stockholders
to offset the tax effect of such reallocation. In addition, a reallocation could
cause a Fund to be liable for income tax and excise tax on all reallocated
taxable income. Brown & Wood LLP has advised each Fund that, in its opinion, if
the IRS were to challenge in court a Fund's allocations of income and gain, the
IRS would be unlikely to prevail. The opinion of Brown & Wood LLP, however,
represents only its best legal judgment and is not binding on the IRS or the
courts.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
it 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 does not apply to
the tax-exempt income of RICs, such as the Funds, that pay exempt-interest
dividends.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The alternative minimum tax
applies to interest received on "private activity bonds" issued after August 7,
1986. "Private activity bonds" are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified as
an item of "tax preference" which could subject investors in such bonds,
including stockholders of the Funds, to an increased Federal alternative minimum
tax. Each Fund purchases such "private activity bonds" and reports to
stockholders within 60 days after calendar year-end the portion of its dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to a Federal alternative minimum tax based, in part, on certain
differences between taxable income as adjusted for other tax preferences and the
corporation's "adjusted current earnings" which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by a
Fund is included in adjusted current earnings, a corporate stockholder may be
required to pay a Federal alternative minimum tax on exempt-interest dividends
paid by such Fund.
Each of the Funds 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 each of the Funds may be required to accrue and distribute
income before amounts
45
<PAGE>
due under the obligations are paid. In addition, it is possible that all or a
portion of the interest payments on such nontraditional instruments could be
recharacterized as taxable ordinary income.
If at any time when shares of AMPS are outstanding a Fund does not meet
the asset coverage requirements of the Investment Company Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent such
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. If a Fund
were to fail to qualify as a RIC, some or all of the distributions paid by the
Fund would be fully taxable to stockholders for Federal income and California
income tax purposes. Upon any failure to meet the asset coverage requirements of
the Investment Company Act, a Fund, in its sole discretion, may redeem shares of
AMPS in order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its stockholders of failing to qualify as a
RIC. There can be no assurance, however, that any such action would achieve such
objectives.
As noted above, a Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Funds have issued and that California
Insured II contemplates issuing may raise an issue as to whether distributions
on such preferred stock are "preferential" under the Code and, therefore, not
eligible for the dividends paid deduction. Counsel has advised the Funds that
the outstanding preferred stock and the preferred stock to be issued by
California Insured II will not result in the payment of a preferential dividend.
If a Fund ultimately relies solely on a legal opinion when it issues such
preferred stock, there is no assurance that the IRS would agree that dividends
on the preferred stock are not preferential. If the IRS successfully disallowed
the dividends paid deduction for dividends on the preferred stock, the Funds
could be disqualified as RICs. In this case, dividends paid by the Funds on the
Common Stock and the AMPS would not be exempt from Federal income taxes.
Additionally, the Funds would be subject to the Federal alternative minimum tax.
Under certain circumstances when a Fund is required to allocate taxable
income to the AMPS, it will pay Additional Distributions to holders of shares of
AMPS. The Federal income tax consequences of Additional Distributions under
existing law are uncertain. The Funds treat and California Insured II intends to
continue to treat a holder as receiving a dividend distribution in the amount of
any Additional Distribution only as and when such Additional Distribution is
paid. An Additional Distribution generally is designated by a Fund as an
exempt-interest dividend except as otherwise required by applicable law.
However, the IRS may assert that all or part of an Additional Distribution is a
taxable dividend either in the taxable year for which the allocation of taxable
income is made or in the taxable year in which the Additional Distribution is
paid.
The value of shares acquired pursuant to a Fund's dividend reinvestment
plan is generally excluded from gross income to the extent that the cash amount
reinvested would be excluded from gross income. If, when a 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 Fund's dividend reinvestment plan. Thus, shareholders who do
not participate in the dividend reinvestment plan, as well as dividend
reinvestment plan participants, might be required to report as ordinary income a
portion of their distributions equal to the allocable share of the discount.
Under certain provisions of the Code, some stockholders may be subject to
a 31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with a 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
stockholder is not otherwise subject to backup withholding.
Ordinary income dividends paid to stockholders who are nonresident aliens
or foreign entities are subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
46
<PAGE>
The Code provides that every stockholder 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 Funds) during
the taxable year.
Tax Treatment of Options and Futures Transactions. Each Fund may purchase
or sell municipal bond index financial futures contracts and interest rate
financial futures contracts on U.S. Government securities. Each Fund may also
purchase and write call and put options on such financial futures contracts. In
general, unless an election is available to a 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 a 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 a 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 a Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, a 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.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and California income and
corporate franchise tax laws presently in effect. For the complete provisions,
reference should be made to the pertinent Code sections, the Treasury
Regulations promulgated thereunder and the applicable tax laws. The Code and the
Treasury Regulations, as well as the California income and corporate franchise
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, foreign, state or local tax consequences of an
investment in a Fund.
AGREEMENT AND PLAN OF REORGANIZATION
General
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
II), (i) California Insured II will acquire substantially all of the assets, and
will assume substantially all of the liabilities, of California Insured, in
exchange solely for shares of an equal aggregate value of California Insured II
Common Stock and California Insured II Series C AMPS to be issued by California
Insured II, (ii) California Insured II will acquire substantially all of the
assets, and will assume substantially all of the liabilities, of California
Insured III, in exchange solely for shares of an equal aggregate value of
California Insured II Common Stock and California Insured II Series D AMPS to be
issued by California Insured II and (iii) California Insured II will acquire
substantially all of the assets, and will assume substantially all of the
liabilities, of California Insured IV, in exchange solely for shares of an equal
aggregate value of California Insured II Common Stock and California Insured II
Series E AMPS to be issued by California Insured II. The number of shares of
California Insured II Common Stock issued to each Acquired Fund will have an
aggregate net asset value equal to the aggregate net asset value of the shares
of Common Stock of that Acquired Fund (except that cash will be paid in lieu of
any fractional shares), and the number of shares of California Insured II Series
C AMPS, California Insured II Series D AMPS and California Insured II Series E
AMPS issued to California Insured, California Insured III and California Insured
IV, respectively, will have an aggregate liquidation preference and value equal
to the aggregate liquidation preference and value of each such Fund's AMPS. Upon
receipt by the Acquired Funds of such shares, the Acquired Funds will (i)
distribute the shares of California Insured II Common Stock to the holders of
California Insured Common Stock, California Insured III Common Stock and
California Insured IV Common Stock, as applicable, in exchange for their shares
of Common Stock in the Acquired Funds and (ii) distribute the shares of
California Insured II Series C AMPS to the holders of California Insured AMPS,
Series A and B, the shares of California Insured II Series D AMPS to the holders
of California Insured III AMPS, Series A and B, and the shares of California
Insured II Series E AMPS to the holders of California Insured IV AMPS, Series A
and B, in exchange for their shares of AMPS in the Acquired Funds. California
Insured II will file Articles Supplementary establishing the powers, rights and
preferences of the California Insured II Series C AMPS, the California Insured
47
<PAGE>
II Series D AMPS and the California Insured II Series E AMPS with the State
Department of Assessments and Taxation of Maryland (the "Maryland Department")
prior to the closing of the Reorganization. As soon as practicable after the
date that the Reorganization takes place (the "Exchange Date"), each of the
Acquired Funds will file Articles of Dissolution with the Maryland Department to
effect the formal dissolution of such Funds, and will dissolve. California
Insured II will file an amendment to its Charter with the Maryland Department to
change its name to MuniHoldings California Insured Fund, Inc.
Each of the Acquired Funds will distribute the shares of California
Insured II Common Stock and the shares of California Insured II Series C AMPS,
California Insured II Series D AMPS or California Insured II Series E AMPS
received by it pro rata to its holders of record of Common Stock and AMPS, as
applicable, in exchange for such stockholders' shares in the Acquired Funds.
Such distribution would be accomplished by opening new accounts on the books of
California Insured II in the names of the common and preferred stockholders of
each of the Acquired Funds and transferring to those stockholder accounts the
California Insured II Common Stock or California Insured II AMPS previously
credited on those books to the accounts of the Acquired Funds. Each newly-opened
account on the books of California Insured II for the previous holders of Common
Stock of the Acquired Funds would represent the respective pro rata number of
shares of California Insured II Common Stock (rounded down, in the case of
fractional shares, to the next largest number of whole shares) due such holder
of Common Stock. No fractional shares of California Insured II Common Stock will
be issued. In lieu thereof, California Insured II's transfer agent, The Bank of
New York, will aggregate all fractional shares of California Insured II Common
Stock and sell the resulting whole shares on the NYSE for the account of all
holders of fractional interests, and each such holder will be entitled to the
pro rata share of the proceeds from such sale upon surrender of the Common Stock
certificates of the applicable Acquired Fund. Similarly, each newly-opened
account on the books of California Insured II for the previous holders of AMPS
of an Acquired Fund would represent the respective pro rata number of shares of
California Insured II Series C AMPS, California Insured II Series D AMPS or
California Insured II Series E AMPS due such holder of AMPS. See "Surrender and
Exchange of Stock Certificates" below for a description of the procedures to be
followed by the stockholders of the Acquired Funds to obtain their California
Insured II Common Stock (and cash in lieu of fractional shares, if any). Because
AMPS are held in "street name" by the Depository Trust Company, all transfers
are accomplished by book entry and no surrender of share certificates
representing AMPS is necessary.
Accordingly, as a result of the Reorganization, every holder of Common
Stock of an Acquired Fund would own shares of California Insured II Common Stock
that (except for cash payments received in lieu of fractional shares) would have
an aggregate net asset value immediately after the Exchange Date equal to the
aggregate net asset value of that stockholder's Common Stock immediately prior
to the Exchange Date. Since the California Insured II Common Stock would be
issued at net asset value and the shares of Common Stock of the Acquired Fund
would be valued at net asset value for the purposes of the exchange the holders
of Common Stock of each of the Funds will not be diluted as a result of the
Reorganization. Similarly, since the California Insured II Series C AMPS,
California Insured II Series D AMPS and California Insured II Series E AMPS
would be issued at a liquidation preference and value per share equal to the
liquidation preference and value per share of the AMPS of the Acquired Funds,
holders of AMPS of each of the Funds will not be diluted as a result of the
Reorganization. However, as a result of the Reorganization, a stockholder of any
of the Funds likely will hold a reduced percentage of ownership in the larger
combined entity than he or she did in any of the constituent Funds.
Procedure
At meetings of the Boards of Directors of each of the Acquired Funds, and
at a meeting of the Board of Directors of California Insured II, the Board of
Directors of each of the Funds, including all of the Directors who are not
"interested persons," as defined in the Investment Company Act, of the
applicable Fund, unanimously approved the Agreement and Plan of Reorganization
and the submission of such Agreement and Plan of Reorganization to the
stockholders of each of the Funds for approval.
Also, the Board of Directors of California Insured II approved the filing
of Articles Supplementary establishing the powers, rights and preferences of the
California Insured II Series C AMPS, the California Insured II Series D AMPS and
the California Insured II Series E AMPS in order that they may be distributed to
holders of AMPS of each of the Acquired Funds as part of the Reorganization and
approved the filing of an amendment to the Charter of California Insured II to
change the Fund's name to "MuniHoldings California Insured Fund, Inc."
48
<PAGE>
As a result of such Board approvals, the Funds have jointly filed this
proxy statement with the SEC soliciting a vote of the stockholders of each of
the Funds to approve the Reorganization. The costs of such solicitation are to
be paid by California Insured II after the Reorganization so as to be borne
equally and exclusively on a per share basis by the holders of Common Stock of
each of the Funds. Annual meetings of stockholders of the Funds will be held on
December 15, 1999. If the stockholders of all four Funds approve the
Reorganization, the Reorganization will take place as soon as practicable after
such approval, provided that the Funds have obtained prior to that time a
favorable private letter ruling from the IRS concerning the tax consequences of
the Reorganization as set forth in the Agreement and Plan of Reorganization or
an opinion of counsel to the same effect.
The Boards of Directors of California Insured II, California Insured,
California Insured III and California Insured IV recommend that the stockholders
of the respective Funds approve the Agreement and Plan of Reorganization.
Terms of the Agreement and Plan of Reorganization
The following is a summary of the significant terms of the Agreement and
Plan of Reorganization. This summary is qualified in its entirety by reference
to the Agreement and Plan of Reorganization, attached hereto as Exhibit II.
Valuation of Assets and Liabilities. The respective assets of each of the
Funds will be valued on the business day prior to the Exchange Date (the
"Valuation Date"). The valuation procedures are the same for all four Funds: net
asset value per share of the Common Stock of each Fund will be determined after
the close of business on the NYSE (generally, 4:00 P.M., Eastern time) on the
Valuation Date. For the purpose of determining the net asset value of a share of
Common Stock of each Fund, the value of the securities held by the issuing Fund
plus any cash or other assets (including interest accrued but not yet received)
minus all liabilities (including accrued expenses) and the aggregate liquidation
value of the outstanding shares of AMPS of the issuing Fund is divided by the
total number of shares of Common Stock of the issuing Fund outstanding at such
time. Daily expenses, including the fees payable to FAM, will accrue on the
Valuation Date.
The California Municipal Bonds and Municipal Bonds in which each Fund
invests are traded primarily in the over-the-counter markets. In determining net
asset value on the Valuation Date, each Fund will use the valuations of
portfolio securities furnished by a pricing service approved by the Boards of
Directors of the Funds. The pricing service typically values portfolio
securities at the bid price or the yield equivalent when quotations are readily
available. California Municipal Bonds and Municipal Bonds for which quotations
are not readily available will be valued at fair market value on a consistent
basis as determined by the pricing service using a matrix system to determine
valuations. The Boards of Directors of the Funds have determined in good faith
that the use of a pricing service is a fair method of determining the valuation
of portfolio securities. Positions in financial futures contracts will be valued
on the Valuation Date at closing prices for such contracts established by the
exchange on which they are traded, or if market quotations are not readily
available, will be valued at fair value on a consistent basis using methods
determined in good faith by the Board of Directors.
Distribution of California Insured II Common Stock, California Insured II
Series C AMPS, California Insured II Series D AMPS and California Insured II
Series E AMPS. On the Exchange Date, California Insured II will issue to each
Acquired Fund a number of shares of California Insured II Common Stock the
aggregate net asset value of which will equal the respective aggregate net asset
value of shares of Common Stock of the Acquired Fund on the Valuation Date. Each
holder of Common Stock of an Acquired Fund will receive the number of shares of
California Insured II Common Stock corresponding to his or her proportionate
interest in the respective aggregate net asset value of the Common Stock of the
Acquired Fund, as applicable.
On the Exchange Date, California Insured II also will issue (i) to
California Insured a number of shares of California Insured II Series C AMPS,
the aggregate liquidation preference and value of which will equal the aggregate
liquidation preference and value of California Insured AMPS on the Valuation
Date, (ii) to California Insured III a number of shares of California Insured II
Series D AMPS, the aggregate liquidation preference and value of which will
equal the aggregate liquidation preference and value of California Insured III
AMPS on the Valuation Date and (iii) to California Insured IV a number of shares
of California Insured II Series E AMPS, the aggregate liquidation preference and
value of which will equal the aggregate liquidation preference and value of
California Insured IV AMPS on the Valuation Date. Each holder of AMPS of an
Acquired Fund will receive the number of shares of California Insured II Series
C AMPS, California Insured II Series D AMPS or California Insured II Series E
AMPS corresponding to his or her proportionate interest in the aggregate
liquidation
49
<PAGE>
preference and value of the AMPS of the Acquired Fund. No sales charge or fee of
any kind will be charged to stockholders of the Acquired Funds in connection
with their receipt of California Insured II Common Stock or AMPS in the
Reorganization. Holders of certain series of AMPS of the Acquired Funds will
find that the auction date and dividend payment date for the California Insured
II AMPS received in the Reorganization fall on different days of the week than
the auction date and dividend payment date of the AMPS currently held. Any such
change in the auction date and dividend payment date will not adversely affect
the value of a holder's AMPS. It is anticipated that (i) the auction for
California Insured II Series C AMPS will be held on Thursday; California Insured
Series A AMPS are auctioned on Monday and the California Insured Series B AMPS
are auctioned on Thursday; (ii) the auction for California Insured II Series D
AMPS will be held on Wednesday; the California Insured III Series A AMPS are
auctioned on Tuesday and the California Insured III Series B AMPS are auctioned
on Wednesday; and (iii) the auction for California Insured II Series E AMPS will
be held on Tuesday; the California Insured IV Series A AMPS are auctioned on
Tuesday, but the California Insured IV Series B AMPS are auctioned on Monday.
The auction procedures for all of the AMPS are substantially the same. As a
result of the Reorganization, the last dividend period for the AMPS of each
Acquired Fund prior to the Exchange Date may be shorter than the dividend period
for such AMPS determined as set forth in the applicable Articles Supplementary.
Expenses. California Insured II shall pay, subsequent to the Exchange
Date, all expenses incurred in connection with the Reorganization, including,
but not limited to, all costs related to the preparation and distribution of
materials distributed to each Fund's Board of Directors, expenses incurred in
connection with the preparation of the Agreement and Plan of Reorganization, a
registration statement on Form N-14 and a private letter ruling request
submitted to the IRS, SEC and state securities commission filing fees and legal
and audit fees in connection with the Reorganization, costs of printing and
distributing this Proxy Statement and Prospectus, legal fees incurred preparing
each Fund's board materials, attending each Fund's board meetings and preparing
the minutes, accounting fees associated with each Fund's financial statements,
stock exchange fees, rating agency fees, portfolio transfer taxes (if any) and
any similar expenses incurred in connection with the Reorganization. In this
regard, expenses of the Reorganization will be deducted from the assets of the
combined fund so as to be borne equally and exclusively on a per share basis by
the holders of Common Stock of each of the Funds. No Fund shall pay any expenses
of its respective stockholders arising out of or in connection with the
Reorganization.
Required Approvals. Under Articles of Incorporation of each Fund (as
amended to date and including Articles Supplementary establishing the powers,
rights and preferences of the AMPS of each Fund), relevant Maryland law and the
rules of the NYSE, stockholder approval of the Agreement and Plan of
Reorganization requires the affirmative vote of stockholders representing more
than 50% of the outstanding shares of Common Stock and AMPS, voting together as
a single class, and more than 50% of the AMPS, voting separately as a class.
Because of the requirement that the Agreement and Plan of Reorganization be
approved by the stockholders of all four Funds, the Reorganization will not take
place if the stockholders of any one Fund do not approve the Agreement and Plan
of Reorganization.
Deregistration and Dissolution/Change of Name. Following the transfer of
the assets and liabilities of the Acquired Funds and the distribution of shares
of California Insured II Common Stock, California Insured II Series C AMPS,
California Insured II Series D AMPS and California Insured II Series E AMPS to
stockholders of the Acquired Funds, in accordance with the foregoing, each of
the Acquired Funds will terminate its registration under the Investment Company
Act and its incorporation under Maryland law and will withdraw its authority to
do business in any state where it is required to do so. California Insured II
will file an amendment to its Charter with the Maryland Department to change its
name to MuniHoldings California Insured Fund, Inc.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the terms
therein. The obligations of each Fund pursuant to the Agreement and Plan of
Reorganization are subject to various conditions, including a registration
statement on Form N-14 being declared effective by the Commission, approval by
the stockholders of each of the Funds, favorable IRS rulings or an opinion of
counsel being received as to tax matters, an opinion of counsel as to securities
matters being received and the continuing accuracy of various representations
and warranties of the Funds being confirmed by the respective parties.
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Directors of any of the Funds may cause the Reorganization to be
postponed or abandoned under certain circumstances should such Board determine
that it is in the best interests of the stockholders of its respective Fund to
do so. The
50
<PAGE>
Agreement and Plan of Reorganization may be terminated, and the Reorganization
abandoned at any time (whether before or after adoption thereof by the
stockholders of any of the Funds) prior to the Exchange Date, or the Exchange
Date may be postponed: (i) by mutual consent of the Boards of Directors of the
four Funds and (ii) by the Board of Directors of any Fund if any condition to
that Fund's obligations set forth in the Agreement and Plan of Reorganization
has not been fulfilled or waived by such Board.
Potential Benefits to Common Stockholders of the Funds as a Result of the
Reorganization
In approving the Reorganization, the Board of Directors of each Fund
identified certain benefits that are likely to result from the Reorganization,
including lower aggregate operating expenses per share of Common Stock, greater
efficiency and flexibility in portfolio management and a more liquid trading
market for the shares of Common Stock of the combined fund. With respect to each
of the Acquired Funds, following the Reorganization their respective
stockholders will remain invested in a closed-end fund that has investment
objectives and policies substantially similar to those of the Acquired Fund. The
Boards also considered the possible risks and costs of combining the Funds, and
examined the relative credit strength, maturity characteristics, mix of type and
purpose, and yield of the Funds' portfolios of California Municipal Bonds and
Municipal Bonds and the costs involved in a transaction such as the
Reorganization. The Boards noted the many similarities between the Funds,
including their substantially similar investment objectives and investment
policies, their use of substantially the same management personnel and their
similar portfolios of California Municipal Bonds and Municipal Bonds. The Boards
also considered the relative tax positions of each of the Funds' portfolios.
Based on these factors, the Boards concluded that the Reorganization will
potentially benefit the stockholders of each Fund in that it (i) presents no
significant risks that would outweigh the benefits discussed above and (ii)
involves minimal costs (including relatively minor legal, accounting and
administrative costs).
The surviving fund that would result from the Reorganization would have a
larger asset base than any of the Funds has currently. Based on data presented
by FAM, the Board of each Fund believes that administrative expenses for a
larger combined fund would be less than the aggregate expenses for the
individual Funds, resulting in a lower expense ratio for common stockholders of
the combined fund and higher earnings per common share. In particular, certain
fixed costs, such as costs of printing stockholder reports and proxy statements,
legal expenses, audit fees, mailing costs and other expenses will be spread
across a larger asset base, thereby lowering the expense ratio for the combined
fund. To illustrate the potential economies of scale, the table below shows the
annualized operating expense ratio of each Fund, based on average net assets
both excluding and including assets attributable to AMPS as of June 30, 1999.
<TABLE>
<CAPTION>
Total annualized Average net Total annualized Average net
operating assets, excluding operating assets, including
expense ratio, AMPS expense ratio, AMPS
Fund excluding AMPS (in millions) including AMPS (in millions)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California Insured II 1.29% $141.1 0.77% $237.1
- ----------------------------------------------------------------------------------------------------
California Insured 1.28% $123.0 0.77% $203.0
- ----------------------------------------------------------------------------------------------------
California Insured III 1.36% $103.0 0.79% $177.0
- ----------------------------------------------------------------------------------------------------
California Insured IV 1.28% $136.0 0.77% $227.0
- ----------------------------------------------------------------------------------------------------
Combined Fund(1) 1.20% $503.0 0.71% $844.0
- ----------------------------------------------------------------------------------------------------
</TABLE>
- ----------
1 Assumes Reorganization had taken place on June 30, 1999.
Management projections estimate that California Insured II will have net
assets in excess of $844.0 million including assets attributable to AMPS upon
completion of the Reorganization. A larger asset base should provide benefits in
portfolio management. After the Reorganization, California Insured II should be
able to purchase larger amounts of California Municipal Bonds and Municipal
Bonds at more favorable prices than any of the Funds separately and, with this
greater purchasing power, request improvements in the terms of the California
Municipal Bonds and Municipal Bonds (e.g., added indenture provisions covering
call protection, sinking funds and audits for the benefit of large holders)
prior to purchase.
Based on the foregoing, the Boards concluded that the Reorganization is in
the best interests of the stockholders of each of the Funds because the
Reorganization presents no significant risks or costs (including legal,
accounting and administrative costs) that would outweigh the benefits discussed
above.
In approving the Reorganization, the Board of Directors of each Fund
determined that the Reorganization is in the best interests of that Fund and,
with respect to net asset value and liquidation preference, that the interests
of existing stockholders of that Fund would not be diluted as a result of the
Reorganization. Although the
51
<PAGE>
Reorganization is expected to result in a reduction in net asset value per share
of the combined fund after the Reorganization of approximately $.01 as a result
of the estimated costs of the Reorganization, management of each Fund advised
its Board that it expects that such costs would be recovered within [18] months
after the Exchange Date due to a decrease in the operating expense ratio.
It is not anticipated that the Reorganization directly would benefit the
holders of shares of AMPS of any of the Funds; however, the Reorganization will
not adversely affect the holders of shares of AMPS of any of the Funds and the
expenses of the Reorganization will not be borne by the holders of shares of
AMPS of any of the Funds.
Surrender and Exchange of Stock Certificates
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of Common Stock of any one of the
Acquired Funds will be entitled to receive, upon surrender of his or her
certificate or certificates, a certificate or certificates representing the
number of shares of California Insured II Common Stock distributable with
respect to such holder's shares of Common Stock of the Acquired Fund, together
with cash in lieu of any fractional shares of Common Stock. Promptly after the
Exchange Date, the transfer agent for the California Insured II Common Stock
will mail to each holder of certificates formerly representing shares of Common
Stock of an Acquired Fund a letter of transmittal for use in surrendering his or
her certificates for certificates representing shares of California Insured II
Common Stock and cash in lieu of any fractional shares of Common Stock.
Shares of AMPS are held in "street name" by the Depository Trust Company,
and all transfers will be accomplished by book entry. Surrender of physical
certificates for AMPS is not required.
<TABLE>
<CAPTION>
If prior to the Reorganization you held: After the Reorganization, you will hold:
- ---------------------------------------- ----------------------------------------
<S> <C>
California Insured II Common Stock California Insured II Common Stock*
California Insured II Series A AMPS California Insured II Series A AMPS*
California Insured II Series B AMPS California Insured II Series B AMPS*
California Insured Common Stock California Insured II Common Stock*
California Insured Series A AMPS California Insured II Series C AMPS*
California Insured Series B AMPS California Insured II Series C AMPS*
California Insured III Common Stock California Insured II Common Stock*
California Insured III Series A AMPS California Insured II Series D AMPS*
California Insured III Series B AMPS California Insured II Series D AMPS*
California Insured IV Common Stock California Insured II Common Stock*
California Insured IV Series A AMPS California Insured II Series E AMPS*
California Insured IV Series B AMPS California Insured II Series E AMPS*
</TABLE>
- ----------
* After the Reorganization, California Insured II will file an amendment to
its charter to change its name to MuniHoldings California Insured Fund,
Inc.
Please do not send in any stock certificates at this time. Upon
consummation of the Reorganization, common stockholders of the Acquired Funds
will be furnished with instructions for exchanging their stock certificates for
California Insured II stock certificates and, if applicable, cash in lieu of
fractional shares.
From and after the Exchange Date, certificates formerly representing
shares of Common Stock or AMPS of an Acquired Fund will be deemed for all
purposes to evidence ownership of the number of full shares of California
Insured II Common Stock, California Insured II Series C AMPS, California Insured
II Series D AMPS or California Insured II Series E AMPS distributable with
respect to the shares of the Acquired Fund held before the Reorganization as
described above and as shown in the table above, provided that, until such stock
certificates have been so surrendered, no dividends payable to the holders of
record of Common Stock or AMPS of an Acquired Fund as of any date subsequent to
the Exchange Date will be paid to the holders of such outstanding stock
certificates. Dividends payable to holders of record of shares of Common Stock
or AMPS of California Insured II, as of any date after the Exchange Date and
prior to the exchange of certificates by any stockholder of an Acquired Fund,
will be paid to such stockholder, without interest, at the time such stockholder
surrenders his or her stock certificates for exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of any Acquired Fund. If, after the Exchange Date, certificates
representing shares of Common Stock or AMPS of an Acquired Fund are presented to
California Insured II, they will be canceled and exchanged for certificates
representing
52
<PAGE>
Common Stock or AMPS of California Insured II, as applicable, and cash in lieu
of fractional shares of Common Stock, if any, distributable with respect to such
Common Stock or AMPS in the Reorganization.
Tax Consequences of the Reorganization
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Each of the four Funds has elected and
qualified (except that California Insured IV will elect and qualify) for the
special tax treatment afforded RICs under the Code, and California Insured II
intends to continue to so qualify after the Reorganization. The Funds have
jointly requested a private letter ruling from the IRS that for Federal income
tax purposes: (i) the exchange of assets by each Acquired Fund for California
Insured II stock, as described, will constitute a reorganization within the
meaning of Section 361(a)(1)(C) of the Code, and each of the Acquired Funds and
California Insured II will be deemed a "party" to a reorganization within the
meaning of Section 368(b) of the Code; (ii) in accordance with Section 368(a) of
the Code, no gain or loss will be recognized to the Acquired Funds as a result
of the Reorganization or on the distribution of California Insured II Common
Stock and California Insured II Series C AMPS, California Insured II Series D
AMPS or California Insured II Series E AMPS to the respective stockholders of
the Acquired Funds under Section 361(c)(1) of the Code; (iii) under Section 1032
of the Code, no gain or loss will be recognized to California Insured II as a
result of the Reorganization; (iv) in accordance with Section 354(a)(1) of the
Code, no gain or loss will be recognized to the stockholders of the Acquired
Funds on the receipt of California Insured II Common Stock and California
Insured II Series C AMPS, California Insured II Series D AMPS or California
Insured II Series E AMPS in exchange for their corresponding shares of Common
Stock or AMPS of an Acquired Fund (except to the extent that common stockholders
receive cash representing an interest in fractional shares of California Insured
II in the Reorganization); (v) in accordance with Section 362(b) of the Code,
the tax basis of the assets of the Acquired Funds in the hands of California
Insured II will be the same as the tax basis of such assets in the hands of the
Acquired Fund that transferred them immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the California Insured II Common
Stock, California Insured II Series C AMPS, California Insured II Series D AMPS
or California Insured II Series E AMPS received by the stockholders of the
Acquired Fund in the Reorganization will be equal to the tax basis of the Common
Stock or AMPS of the Acquired Funds surrendered in exchange; (vii) in accordance
with Section 1223 of the Code, a stockholder's holding period for the California
Insured II Common Stock, California Insured II Series C AMPS, California Insured
II Series D AMPS or California Insured II Series E AMPS will be determined by
including the period for which such stockholder held the Common Stock or AMPS of
the Acquired Fund exchanged therefor, provided that such shares were held as a
capital asset; (viii) in accordance with Section 1223 of the Code, California
Insured II's holding period with respect to the assets of the Acquired Funds
transferred will include the period for which such assets were held by the
Acquired Fund; (ix) the payment of cash to common stockholders of an Acquired
Fund in lieu of fractional shares of California Insured II Common Stock will be
treated as though the fractional shares were distributed as part of the
Reorganization and then redeemed, with the result that such stockholders will
have short- or long-term capital gain or loss to the extent that the cash
distribution differs from the stockholder's basis allocable to the California
Insured II fractional shares; and (x) the taxable year of each of the Acquired
Funds will end on the effective date of the Reorganization and pursuant to
Section 381(a) of the Code and regulations thereunder, California Insured II
will succeed to and take into account certain tax attributes of the Acquired
Funds, such as earnings and profits, capital loss carryovers and method of
accounting.
As noted in the discussion under "Comparison of the Funds -- Tax Rules
Applicable to the Funds and Their Stockholders," a Fund must distribute annually
at least 90% of its net taxable and tax-exempt income. A distribution only will
be counted for this purpose if it qualifies for the dividends paid deduction
under the Code. In the opinion of Brown & Wood LLP, the issuance of California
Insured II Series C AMPS, California Insured II Series D AMPS and California
Insured II Series E AMPS pursuant to the Reorganization in addition to the
already existing California Insured II Series A AMPS and California Insured II
Series B AMPS will not cause distributions on any series of California Insured
II AMPS to be treated as preferential dividends ineligible for the dividends
paid deduction. It is possible, however, that the IRS may assert that, because
there are several series of AMPS, distributions on such shares are preferential
under the Code and therefore not eligible for the dividends paid deduction. If
the IRS successfully disallowed the dividends paid deduction for dividends on
the AMPS, California Insured II could lose the special tax treatment afforded
RICs. In this case, dividends on the shares of California Insured II Common
Stock and AMPS would not be exempt from Federal income tax. Additionally,
California Insured II would be subject to the Federal alternative minimum tax.
53
<PAGE>
Under Section 381(a) of the Code, California Insured II will succeed to
and take into account certain tax attributes of the Acquired Funds, including,
but not limited to, earnings and profits, any net operating loss carryovers, any
capital loss carryovers and method of accounting. The Code, however, contains
special limitations with regard to the use of net operating losses, capital
losses and other similar items in the context of certain reorganizations,
including tax-free reorganizations pursuant to Section 368(a)(1)(C) of the Code,
which could reduce the benefit of these attributes to California Insured II.
Stockholders should consult their tax advisers regarding the effect of the
Reorganization in light of their individual circumstances. As the foregoing
relates only to Federal income tax consequences, stockholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Reorganization.
Regulated Investment Company Status. The Funds have elected and qualified
(except that California Insured IV, will elect in its first tax return and will
qualify) for taxation as RICs under Sections 851-855 of the Code, and after the
Reorganization California Insured II intends to continue to so qualify.
Capitalization
The following table sets forth as of June 30, 1999 (i) the capitalization
of California Insured II, (ii) the capitalization of California Insured, (iii)
the capitalization of California Insured III, (iv) the capitalization of
California Insured IV and (v) the pro forma capitalization of the combined fund
as adjusted to give effect to the Reorganization.
54
<PAGE>
Pro Forma Capitalization of California Insured II, California Insured,
California Insured III, California Insured IV and
the Combined Fund as of June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Combined
California California California California Pro Forma Fund as
Insured II Insured Insured III Insured IV Adjustment adjusted(a)
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Assets:
Net Assets Attributable to
Common Stock ............. $141,072,922 $122,965,165 $102,980,211 $135,971,107 $(3,467,983) $499,521,422
Net Assets Attributable to
AMPS ..................... $ 96,000,000 $ 80,000,000 $ 74,000,000 $ 91,000,000 -- $341,000,000
Shares Outstanding:
Common Stock ............. 9,806,948 8,327,187 7,521,774 9,866,667 34,974,124(b)
AMPS
Series A .............. 1,920 1,600 1,480 1,820 1,920
Series B .............. 1,920 1,600 1,480 1,820 1,920
Series C .............. -- -- -- -- 3,200(b)
Series D .............. -- -- -- -- 2,960(b)
Series E .............. -- -- -- -- 3,640(b)
Net Asset Value Per Share:
Common Stock ............. $14.38 $14.77 $13.69 $13.78 -- $14.28(c)
AMPS ..................... $25,000 $25,000 $25,000 $25,000 -- $25,000
</TABLE>
- ----------
(a) The adjusted balances are presented as if the Reorganization had been
consummated on June 30, 1999 and are for informational purposes only.
Assumes distribution of undistributed net investment income and
undistributed realized capital gains. No assurance can be given as to how
many shares of California Insured II Common Stock that stockholders of
California Insured, California Insured III or California Insured IV will
receive on the Exchange Date, and the foregoing should not be relied upon
to reflect the number of shares of California Insured II Common Stock that
actually will be received on or after such date.
(b) Assumes the issuance of 25,167,176 shares of California Insured II
Common Stock and three newly-created series of AMPS consisting of 3,200
Series C shares, 2,960 Series D shares and 3,640 Series E shares,
respectively, in exchange for the net assets of each of California
Insured, California Insured III and California Insured IV. The number of
shares issued was based on the net asset value of each Fund, net of
distributions, on June 30, 1999.
(c) Net Asset Value Per Share of Common Stock after distribution of
undistributed net investment income and undistributed realized capital
gains.
55
<PAGE>
ITEM 2. ELECTION OF DIRECTORS
At the Meetings, the Board of Directors for each of the Funds will be
elected to serve until the next Annual Meeting of Stockholders and until their
successors are elected and qualified. If the stockholders of all of the Funds
approve the Reorganization, then the Board of Directors of California Insured II
elected at the Meetings will serve as the Board of the combined fund, until its
next Annual Meeting of Stockholders. If the stockholders of any Fund vote
against the Reorganization, then the Board of Directors of each Fund elected at
the Meetings will continue to serve until the next Annual Meeting of
Stockholders of each Fund. It is intended that all properly executed proxies
will be voted (unless such authority has been withheld in the proxy) as follows:
(1) All proxies of the holders of shares of AMPS of any Fund, voting
separately as a class, will be voted in favor of the two persons
designated as Directors to be elected by the holders of shares of AMPS of
that Fund; and
(2) All proxies of the holders of shares of Common Stock and AMPS of any
Fund, voting together as a single class, will be voted in favor of the
five persons designated as Directors to be elected by the holders of
shares of Common Stock and AMPS of that Fund.
The Boards of Directors of the Funds know of no reason why any of these
nominees will be unable to serve, but in the event of any such unavailability,
the proxies received will be voted for such substitute nominee or nominees as
the appropriate Board of Directors may recommend.
Certain information concerning the nominees is set forth below. Additional
information concerning the nominees and other information relevant to the
election of Directors is set forth in Exhibit I.
TO BE ELECTED BY STOCKHOLDERS OF CALIFORNIA INSURED II
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships(1)
- ------------------------------- --- ---------------------------------------
Terry K. Glenn(1)(3)* ......... 59 Executive Vice President of the Manager
P. O. Box 9011 and Merrill Lynch Asset Management,
Princeton, New Jersey L.P. ("MLAM") (which terms as used
08543-9011 herein include their corporate
predecessors) since 1983; Executive
Vice President and Director of
Princeton Services, Inc. ("Princeton
Services") since 1993; President of
Princeton Funds Distributor, Inc.
("PFD") since 1986 and Director thereof
since 1991; President of Princeton
Administrators, L.P. ("Princeton
Administrators") since 1988.
James H. Bodurtha(1)(2)(3) .... 55 Director and Executive Vice President,
36 Popponesset Road The China Business Group, Inc. since
Cotuit, Massachusetts 02635 1996; Chairman and Chief Executive
Officer, China Enterprise Management
Corporation from 1993 to 1996;
Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders &
Dempsey from 1980 to 1993.
Herbert I. London(1)(2)(3) .... 60 John M. Olin Professor of Humanities,
2 Washington Square Village New York University since 1993 and
New York, New York 10012 Professor since 1980; President, Hudson
Institute since 1997 and Trustee
thereof since 1980; Dean, Gallatin
Division of New York University from
1976 to 1993; Distinguished Fellow,
Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon
Corp. from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to
1993; Limited Partner, Hypertech LP in
1996.
56
<PAGE>
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships(1)
---------------- --- ---------------------------------------
Robert R. Martin(1)(2)(3) ..... 72 Chairman and Chief Executive Officer,
513 Grand Hill Kinnard Investments, Inc. from 1990 to
St. Paul, Minnesota 55103 1993; Executive Vice President, Dain
Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977
to 1985 and Chairman thereof in 1979;
Director, Securities Industry
Association from 1981 to 1982 and
Public Securities Association from 1979
to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee,
Northland College since 1992.
Joseph L. May(1)(2)(3) ........ 70 Attorney in private practice since
424 Church Street 1984; President, May and Athens Hosiery
Suite 2000 Mills Division. Wayne- Gossard
Nashville, Tennessee 37219 Corporation from 1954 to 1983: Vice
President, Wayne-Gossard Corporation
from 1972 to 1983; Chairman, The May
Corporation (personal holding company)
from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold(1)(2)(3) ...... 47 Professor, Harvard Business School
Morgan Hall since 1989 and Associate Professor from
Solders Field 1983 to 1989; Trustee, The Common Fund
Boston, Massachusetts 02163 since 1989; Director, Quantec Limited
since 1991, TIBCO from 1994 to 1996 and
Genbel Securities Limited and Genbel
Bank since 1999.
Arthur Zeikel(1)(3)* .......... 67 Chairman of the Manager and MLAM from
300 Woodland Avenue 1997 to 1999 and President thereof from
Westfield, New Jersey 07090 1977 to 1997; Chairman of Princeton
Services from 1997 to 1999, Director
thereof from 1993 to 1999 and President
thereof from 1993 to 1997; Executive
Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") from 1990 to 1999.
TO BE ELECTED BY STOCKHOLDERS OF EACH OF THE ACQUIRED FUNDS
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships(1)
---------------- --- ---------------------------------------
Terry K. Glenn(1)(3)* ......... 59 Executive Vice President of the Manager
P. O. Box 9011 and MLAM since 1983; Executive Vice
Princeton, New Jersey President and Director of Princeton
08543-9011 Services since 1993; President of PFD
since 1986 and Director thereof since
1991; President of Princeton
Administrators since 1988.
Ronald W. Forbes(1)(2)(3) ..... 59 Professor of Finance, School of
1400 Washington Avenue Business, State University of New York
Albany, New York 12222 at Albany, since 1989; Consultant,
Urban Institute, Washington, D.C. since
1995.
Cynthia A. Montgomery(1)(2)(3) 47 Professor, Harvard Business School
Harvard Business School since 1989; Associate Professor, J.L.
Soldiers Field Road Kellogg Graduate School of Management,
Boston, Massachusetts 02163 Northwestern University from 1985 to
1989; Assistant Professor, Graduate
57
<PAGE>
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(1)(2)(3) .... 68 Self-employed financial consultant
9 Hampton Harbor Road since 1990; President and Chief
Hampton Bays, New York 11946 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 from 1986 to
1997.
Kevin A. Ryan(1)(2)(3) ........ 67 Founder and current Director of The
127 Commonwealth Avenue Boston University Center for the
Chestnut Hill, Advancement of Ethics and Character;
Massachusetts 02167 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(1)(2)(3) ...... 61 Professor of Finance since 1984, and
Box 604 Dean from 1984 to 1993, and currently
Genoa, Nevada 89411 Dean Emeritus of New York University,
Leonard N. Stern School of Business
Administration; Director of Bowne &
Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding
company) and Alexander's Inc. (real
estate company).
Arthur Zeikel(1)(3)* .......... 67 Chairman of FAM and MLAM from 1997 to
300 Woodland Avenue 1999; President of FAM and MLAM from
Westfield, New Jersey 07090 1977 to 1997; Chairman of Princeton
Services from 1997 to 1999, Director
thereof from 1993 to 1999 and President
thereof from 1993 to 1997; Executive
Vice President of ML & Co. from 1990 to
1999.
- ----------
(1) Each of the nominees is a director, trustee or member of an advisory board
of one or more additional investment companies for which FAM, MLAM or
their affiliates act as investment adviser. See "Compensation of Board
Members" in Exhibit I.
(2) Member of Audit Committee of the Board of Directors.
(3) Please see Exhibit I for information, with respect to each Fund,
indicating the names of the nominees to be elected by holders of AMPS,
voting separately as a class, and the names of the nominees to be elected
by holders of Common Stock and AMPS, voting together as a single class.
* Interested person, as defined in the Investment Company Act, of each of
the Funds.
Committee and Board Meetings
The Board of each Fund has a standing Audit Committee, which consists of
Board members who are not "interested persons" of the Fund within the meaning of
the Investment Company Act. The principal purpose of the Audit Committee is to
review the scope of the annual audit conducted by the Fund's independent
auditors and the evaluation by such auditors of the accounting procedures
followed by the Fund. The non-interested Board members have retained independent
legal counsel to assist them in connection with these duties. No Fund's Board
has a nominating committee.
During each Fund's last fiscal year, each of the Board members then in
office attended at least 75% of the aggregate of the total number of meetings of
the Board held during the fiscal year and, if a member, of the total number of
meetings of the Audit Committee held during the period for which he or she
served. See Exhibit I for further information about Audit Committee and Board
meetings.
58
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and directors of each Fund and persons
who own more than ten percent of a registered class of the Fund's equity
securities, to file reports of ownership and changes in ownership on Forms 3, 4
and 5 with the SEC and the NYSE. Officers, directors and greater than ten
percent stockholders are required by SEC regulations to furnish the Fund with
copies of all Forms 3, 4 and 5 they file.
Based solely on each Fund's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its most recent
fiscal year, and written representations from certain reporting persons that
they were not required to file Form 5 with respect to the most recent fiscal
year, each Fund believes that all of its officers, directors, greater than ten
percent beneficial owners and other persons subject to Section 16 of the
Exchange Act because of the requirements of Section 30 of the Investment Company
Act, i.e., any advisory board member, investment adviser or affiliated person of
the Fund's investment adviser, have complied with all filing requirements
applicable to them with respect to transactions during the Fund's most recent
fiscal year, except that [ ].
Interested Persons
Each Fund considers Mr. Zeikel and Mr. Glenn to be "interested persons" of
the Fund within the meaning of Section 2(a)(19) of the Investment Company Act
because of the positions each holds or has held with FAM and its affiliates. Mr.
Glenn is the President of each Fund.
Compensation of Directors
FAM, the investment adviser of each Fund, pays all compensation to all
officers of each Fund and all Directors of each Fund who are affiliated with ML
& Co. or its subsidiaries. Each Fund pays each Director not affiliated with FAM
(each a "non-affiliated Director") an annual fee plus a fee for each meeting
attended, and each Fund also pays each member of its Audit Committee, which
consists of all of the non-affiliated Directors, an annual fee plus a fee for
each meeting attended, together with such Director's out-of-pocket expenses
relating to attendance at such meetings. Information with respect to fees and
expenses paid to the non-affiliated Directors for each Fund's most recently
completed fiscal year is set forth in Exhibit I.
Officers of the Funds
Information regarding the officers of each Fund is set forth in Exhibit I.
Officers of the Funds are elected and appointed by the Board and hold office
until they resign, are removed or are otherwise disqualified to serve.
59
<PAGE>
ITEM 3. SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of each Fund, including a majority of the Directors
who are not interested persons of the Fund, has selected independent auditors to
examine the financial statements of the Fund for the Fund's current fiscal year.
Deloitte & Touche LLP ("D&T") acts as independent auditors for California
Insured, California Insured II and California Insured IV and is expected to act
as independent auditors for the combined fund. Ernst & Young LLP ("E&Y") acts as
independent auditors for California Insured III. The current fiscal year for
California Insured II is the fiscal year ending June 30, 2000; for California
Insured, the fiscal year ending August 31, 2000; for California Insured III, the
fiscal year ending May 31, 2000; and for California Insured IV, the fiscal year
ending September 30, 2000.
No Fund knows of any direct or indirect financial interest of such
auditors in any Fund. Such appointment is subject to ratification or rejection
by the stockholders of each respective Fund. If the stockholders of each of the
Funds approve the Reorganization, then the independent auditors selected at the
Meeting for California Insured II will serve as the independent auditors of the
combined fund until its next Annual Meeting of Stockholders. If the stockholders
of any of the Funds vote against the Reorganization, then the independent
auditors of each Fund selected at the Meetings will continue to serve as
independent auditors of that Fund until the next Annual Meeting of Stockholders
of that Fund. Unless a contrary specification is made, the accompanying proxy of
each Fund will be voted in favor of ratifying the selection of such Fund's
auditors.
D&T also acts as independent auditors for ML & Co. and most of its
subsidiaries, including FAM and MLAM, and for most other investment companies
for which FAM or MLAM acts as investment adviser. Additionally, E&Y also act as
independent auditors for several other investment companies for which FAM or
MLAM acts as investment adviser. The fees received by the independent auditors
from these other entities are substantially greater, in the aggregate, than the
total fees received by the independent auditors from each applicable Fund. The
Board of Directors of each of California Insured, California Insured II and
California Insured IV considered the fact that D&T have been retained as the
independent auditors for ML & Co. and the other entities described above in its
evaluation of the independence of D&T with respect to each applicable Fund. The
Board of Directors of California Insured III considered the fact that E&Y have
been retained as independent auditors for the other entities described above in
its evaluation of the independence of E&Y with respect to each applicable Fund.
Representatives of the independent auditors are expected to be present at
the Meetings and will have the opportunity to make a statement if they so desire
and to respond to questions from stockholders.
INFORMATION CONCERNING THE ANNUAL MEETINGS
Date, Time and Place of Meetings
The Meetings will be held on December 15, 1999 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at the times listed on Exhibit I.
Solicitation, Revocation and Use of Proxies
A stockholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy, by giving
written notice of the revocation to the Secretary of the appropriate Fund or by
voting in person at the Meeting. Although mere attendance at the Meetings will
not revoke a proxy, a stockholder present at the Meetings may withdraw his or
her proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meetings in accordance with
the directions on the proxies; if no direction is indicated, the shares will be
voted "FOR" (i) the approval of the Agreement and Plan of Reorganization, (ii)
the election of the applicable nominees to the Board of Directors and (iii) the
ratification of the selection of D&T or E&Y, as applicable, as independent
accountants. It is not anticipated that any other matters will be brought before
the Meetings. If, however, any other business properly is brought before the
Meetings, proxies will be voted in accordance with the judgment of the persons
designated on such proxies.
Record Date and Outstanding Shares
Only holders of record of shares of Common Stock or AMPS of any of the
Funds at the close of business on the Record Date are entitled to vote at the
Meetings or any adjournment thereof. At the close of business on the Record
Date, the Funds had the number of shares outstanding indicated in Exhibit I.
60
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the Funds, at the date hereof, no person or entity
owns beneficially 5% or more of the shares of the Common Stock or AMPS of any
Fund.
As of the Record Date, none of the nominees held shares of the Funds
except as set forth in the table below:
Nominee Fund and Class of Shares No. of Shares Held*
-------- ---------------------- -----------------
- ----------
* These holdings represent less than [ ]% of the shares of Common
Stock outstanding.
As of the Record Date, the Directors and officers of California Insured II
as a group (__ persons) owned an aggregate of less than 1% of the outstanding
shares of California Insured II Common Stock and [owned no] California Insured
II AMPS.
As of the Record Date, the Directors and officers of California Insured as
a group (__ persons) owned an aggregate of less than 1% of the outstanding
shares of California Insured Common Stock and [owned no] California Insured
AMPS.
As of the Record Date, the Directors and officers of California Insured
III as a group (__ persons) owned an aggregate of less than 1% of the
outstanding shares of California Insured III Common Stock and [owned no]
California Insured III AMPS.
As of the Record Date, the Directors and officers of California Insured IV
as a group (__ persons) owned an aggregate of less than 1% of the outstanding
shares of California Insured IV Common Stock and [owned no] California Insured
IV AMPS.
On the Record Date, Mr. Glenn, a Trustee and an officer of each of the
Funds, Mr. Zeikel, a Trustee of each of the Funds, and the other Trustees and
officers of each Fund owned an aggregate of less than 1% of the outstanding
shares of Common Stock of ML & Co.
Voting Rights and Required Vote
For purposes of this Proxy Statement and Prospectus, each Share of Common
Stock and AMPS of each of the Funds is entitled to one vote. Approval of the
Agreement and Plan of Reorganization requires the approval of each Fund. With
respect to each Fund, approval of the Agreement and Plan of Reorganization
requires the affirmative vote of shareholders representing (i) a majority of the
outstanding shares of the Fund's Common Stock and AMPS, voting together as a
single class, and (ii) a majority of the outstanding shares of the Fund's AMPS,
voting separately as a class.
Under Maryland law, stockholders of a registered investment company whose
shares are traded publicly on a national securities exchange, such as each of
the Acquired Funds, are not entitled to demand the fair value of their shares
upon a transfer of assets; therefore, the common stockholders of each of the
Acquired Funds will be bound by the terms of the Reorganization, if approved at
the Meetings. However, any common stockholder of an Acquired Fund may sell his
or her shares of Common Stock at any time on the NYSE. Conversely, since the
AMPS are not traded publicly on a national securities exchange, holders of AMPS
issued by an Acquired Fund will be entitled to appraisal rights upon the
consummation of the Reorganization. As stockholders of the corporation acquiring
the assets of the Acquired Funds, neither holders of California Insured II
Common Stock nor holders of California Insured II AMPS are entitled to appraisal
rights under Maryland law.
Under Maryland law, a holder of AMPS of any of the Acquired Funds desiring
to receive payment of the fair value of his or her stock (an "objecting
stockholder") (i) must file with the applicable Acquired Fund a written
objection to the Reorganization at or before the Meeting, (ii) must not vote in
favor of the Reorganization, and (iii) must make written demand on California
Insured II for payment of his or her stock, stating the number and class of
shares for which he or she demands payment, within 20 days after the Maryland
Department of Assessments and Taxation accepts for filing the Articles of
Transfer with respect to the Reorganization (California Insured II is required
promptly to give written notice to all objecting stockholders of the date that
the Articles of Transfer are accepted for record). An objecting stockholder who
fails to adhere to this procedure will be bound by the terms of the
Reorganization. An objecting stockholder ceases to have any rights of a
stockholder except the right to receive fair value for his or her shares and has
no right to receive any dividends or distribution payable to such holders on a
record date after the close of business on the date on which fair value is to be
determined,
61
<PAGE>
which, for these purposes, will be the date of the Meeting. A demand for payment
of fair market value may not be withdrawn, except upon the consent of California
Insured II. Within 50 days after the Articles of Transfer have been accepted for
filing, an objecting stockholder who has not received payment for his or her
shares may petition a court located in Baltimore, Maryland for an appraisal to
determine the fair market value of his or her stock.
For purposes of each Meeting, a quorum consists of one-third of the
shares entitled to vote at the Meeting, present in person or by proxy. If, by
the time scheduled for each Meeting, a quorum of the applicable Fund's
shareholders is not present, or if a quorum is present but sufficient votes in
favor of the Agreement and Plan of Reorganization are not received from the
shareholders of the applicable Fund, the persons named as proxies may propose
one or more adjournments of the Meeting to permit further solicitation of
proxies from shareholders. Any such adjournment will require the affirmative
vote of a majority of the shares of the applicable Fund present in person or by
proxy and entitled to vote at the session of the Meeting to be adjourned. The
persons named as proxies will vote in favor of any such adjournment if they
determine that adjournment and additional solicitation are reasonable and in the
interests of the applicable Fund's shareholders.
With respect to the election of Directors, assuming a quorum is present,
holders of shares of a Fund's AMPS, voting separately as a class, are entitled
to elect two Directors of the Fund and holders of shares of a Fund's Common
Stock and AMPS, voting together as a single class, are entitled to elect the
remaining Directors of that Fund. With respect to each Fund, assuming a quorum
is present, (x) election of the two Directors of the Fund to be elected by the
holders of shares of that Fund's AMPS, voting separately as a class, will
require the affirmative vote of a plurality of the votes cast by the holders of
that Fund's AMPS, represented at the Meeting and entitled to vote, voting
together as a single class; and (y) election of the remaining Directors of the
Fund will require the affirmative vote of a plurality of the votes cast by the
holders of that Fund's Common Stock and AMPS, represented at the Meetings and
entitled to vote, voting together as a single class.
Assuming a quorum is present, approval of the ratification of the
selection of the independent auditors of each Fund, will require the affirmative
vote of a majority of the votes cast by the holders of that Fund's Common Stock
and AMPS represented at the Meetings and entitled to vote, voting together as a
single class.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by California Insured II, the surviving fund after the Reorganization, so
as to be borne equally and exclusively on a per share basis by the holders of
Common Stock of each of the Funds. If the Reorganization is not approved, these
expenses will be allocated among the Funds according to the net asset value of
the Common Stock of each Fund on the Meeting date.
The Funds likewise will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the beneficial
owners of shares of each of the Funds and certain persons that the Funds may
employ for their reasonable expenses in assisting in the solicitation of proxies
from such beneficial owners of shares of capital stock of the Funds.
In order to obtain the necessary quorum at the Meetings, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview by
officers of the Funds. Each of the Funds has retained Shareholder Communications
Corporation, 17 State Street, New York, NY 10004, to aid in the solicitation of
proxies, at a cost to be borne by each of the Funds of approximately $7,500,
plus out-of-pocket expenses.
Broker-dealer firms, including Merrill Lynch, holding Fund shares in
"street name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
proposal before the Meetings. The Funds understand that, under the rules of the
NYSE, such broker-dealer firms may, without instructions from their customers
and clients, grant authority to the proxies designated to vote on the election
of the Directors of each Fund (Item 2) and the ratification of the selection of
independent auditors for each Fund (Item 3) if no instructions have been
received prior to the date specified in the broker-dealer firm's request for
voting instructions. With respect to shares of Common Stock of each Fund,
broker-dealer firms, including Merrill Lynch, will not be permitted to grant
voting authority without instructions with respect to the approval of the
Agreement and Plan of Reorganization (Item 1). Shares of AMPS of a Fund held in
"street name," however, may be voted without instructions under certain
conditions by broker-dealer firms with respect to Item 1 and counted for
purposes of establishing a quorum of that Fund if no instructions are received
one business day before the Meeting or, if adjourned, one business day before
the day to which the Meeting is adjourned. With respect to each Fund, these
conditions include, among others, that (i) at least 30% of that Fund's AMPS
outstanding have voted on Item 1, (ii) less than 10% of that Fund's AMPS
outstanding have voted against Item 1 and (iii) holders of that Fund's Common
Stock have voted to approve Item 1. In such instances, the broker-dealer firm
will vote that Fund's shares of AMPS on Item 1 in the same proportion as the
votes cast by all holders of that Fund's AMPS who voted on Item 1. The Funds
will include shares held of record by broker-dealers as to
62
<PAGE>
which such authority has been granted in its tabulation of the total number of
shares present for purposes of determining whether the necessary quorum of
stockholders of each Fund exists. Proxies that are returned to a Fund but that
are marked "abstain" or on which a broker-dealer has declined to vote on any
Item ("broker non-votes") will be counted as present for the purposes of
determining a quorum. Merrill Lynch has advised the Funds that it intends to
vote shares held in its name for which no instructions are received, except as
limited by agreement or applicable law, on Items 2 and 3 (with respect to Common
Stock and AMPS) and on Item 1 (with respect to AMPS only) in the same proportion
as the votes received from beneficial owners of those shares for which
instructions have been received, whether or not held in nominee name.
Abstentions and broker non-votes will not be counted as votes cast. Abstentions
and broker non-votes, therefore, will not have an effect on the vote on Items 2
and 3. Abstentions and broker non-votes will have the same effect as a vote
against Item 1.
This Proxy Statement and Prospectus does not contain all of the
information set forth in the registration statement and the exhibits relating
thereto that California Insured II has filed with the Commission under the
Securities Act and the Investment Company Act, to which reference is hereby
made.
The Funds are subject to the informational requirements of the Exchange
Act and the Investment Company Act and in accordance therewith are required to
file reports, proxy statements and other information with the SEC. Any such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the SEC: Regional Office, at Seven World Trade Center, Suite 1300,
New York, New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The SEC maintains a web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Funds, that file electronically with the
SEC. Reports, proxy statements and other information concerning the Funds can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
Year 2000 Issues
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). The Funds could be adversely
affected if the computer systems used by FAM or other Fund service providers do
not properly address this problem before January 1, 2000. FAM expects to have
addressed this problem before then, and does not anticipate that the services it
provides will be adversely affected. The Fund's other service providers have
told FAM that they also expect to resolve the Year 2000 Problem, and FAM will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Funds could be negatively affected.
The Year 2000 Problem could also have a negative impact on the issuers of
securities in which the Funds invest, and this could hurt the Funds' investment
returns.
CUSTODIAN
The Bank of New York acts as the custodian for cash and securities of
California Insured II and California Insured. The principal business address of
The Bank of New York in such capacity is 90 Washington Street, New York, New
York 10286. State Street Bank and Trust Company acts as the custodian for cash
and securities of California Insured III and California Insured IV. The
principal business address of State Street Bank and Trust Company in such
capacity is One Heritage Drive, P2N, North Quincy, Massachusetts 02171.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Bank of New York serves as the transfer agent, dividend disbursing
agent and registrar with respect to the Common Stock of California Insured II
and California Insured, pursuant to separate registrar, transfer agency and
service agreements with each of the Funds. The principal business address of The
Bank of New York in such capacity is 101 Barclay Street, New York, New York
10286.
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent and registrar with respect to the Common Stock of California
Insured III and California Insured IV, pursuant to a registrar, transfer agency
and service agreement with the Fund. The principal business address of State
Street Bank and Trust Company in such capacity is 225 Franklin Street, Boston,
Massachusetts 02110.
The Bank of New York serves as the transfer agent, dividend disbursing
agent, registrar and auction agent to California Insured II, California Insured,
California Insured III and California Insured IV, in connection with
63
<PAGE>
their respective AMPS, pursuant to separate registrar, transfer agency, dividend
disbursing agency and service agreements with each of the Funds. The principal
business address of The Bank of New York is 101 Barclay Street, New York, New
York 10286.
LEGAL PROCEEDINGS
There are no material legal proceedings to which any Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for the Funds by Brown & Wood LLP, New York, New York.
EXPERTS
The audited financial statements and financial highlights, as applicable,
of California Insured, California Insured II and California Insured IV included
in this Proxy Statement and Prospectus have been so included in reliance on the
reports of D&T, independent auditors for each of these Funds, given on their
authority as experts in auditing and accounting. The principal business address
of D&T is 117 Campus Drive, Princeton, New Jersey 08540. D&T will serve as the
independent auditors for the combined fund after the Reorganization.
Ernst & Young LLP, independent auditors, have audited the financial
statements and financial highlights of California Insured III as of May 31, 1999
as set forth in their report which appears in this Proxy Statement and
Prospectus. The financial statements and financial highlights of California
Insured III are included in reliance upon their report, given on their authority
as experts in accounting and auditing.
The principal business address of Ernst & Young LLP is 99 Wood Avenue
South, Iselin, New Jersey 08830.
STOCKHOLDER PROPOSALS
If a stockholder of any of the Funds intends to present a proposal at the
2000 Annual Meeting of Stockholders of any of the Funds, all of which are
anticipated to be held in December 2000, and desires to have the proposal
included in the Fund's proxy statement and form of proxy for that meeting, the
stockholder must deliver the proposal to the offices of the appropriate Fund by
__________.
By Order of the Boards of Directors
WILLIAM E. ZITELLI, JR..
Secretary of MuniHoldings California Insured
Fund, Inc., MuniHoldings California Insured
Fund III, Inc. and MuniHoldings California
Insured Fund IV, Inc.
ALICE A. PELLEGRINO
Secretary of MuniHoldings California Insured
Fund II, Inc
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Audited Financial Statements for MuniHoldings California Insured
Fund II, Inc. for the Fiscal Year Ended June 30, 1999 ................ F-2
Audited Financial Statements for MuniHoldings California Insured
Fund, Inc. for the Fiscal Year Ended August 31, 1999* ................ F-14
Audited Financial Statements for MuniHoldings California Insured
Fund III, Inc. for the Fiscal Year Ended May 31, 1999 ................ F-15
Unaudited Financial Statements for MuniHoldings California Insured
Fund IV, Inc. for the Period January 29, 1999 to March 31, 1999 ...... F-27
Audited Financial Statements for MuniHoldings California Insured Fund
IV, Inc. for the Period January 29, 1999 to September 30, 1999*....... F-38
Unaudited Financial Statements for the Combined Fund on a Pro Forma
Basis, as of June 30, 1999 ........................................... F-39
* To be filed by amendment.
F-1
<PAGE>
Audited Financial Statements for
MuniHoldings California Insured Fund II, Inc.
for the Fiscal Year Ended June 30, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
MuniHoldings California Insured Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniHoldings California Insured Fund
II, Inc. as of June 30, 1999, the related statements of operations for the year
then ended, changes in net assets and the financial highlights for the year then
ended and for the period February 27, 1998 (commencement of operations) to June
30, 1998. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1999 by correspondence with the custodian and broker. 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniHoldings
California Insured Fund II, Inc. as of June 30, 1999, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 13, 1999
F-3
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
California -- 96.6% AAA Aaa $ 1,000 Anaheim, California, Public Financing Authority, Lease Revenue Bonds
(Public Improvements Project), Series C, 5.38%** due 9/01/2024 (f) $ 246
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,195 Benicia, California, Unified School District, GO, Refunding, Series A,
5.216%** due 8/01/2019 (c) 1,064
---------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Cabrillo, California, Unified School District, GO, Series A, 5.216%** due
8/01/2019 (a) 1,332
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,430 California Educational Facilities Authority, Revenue Refunding Bonds
(Mills College), 5.125% due 9/01/2022 (g) 1,378
---------------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds, AMT:
AAA Aaa 3,000 Series B, 5.25% due 2/01/2028 (a)(d) 2,851
AAA Aaa 7,500 Series J, 5.55% due 8/01/2028 (g) 7,446
AAA Aaa 2,500 Series N, 5.25% due 8/01/2029 (f) 2,373
---------------------------------------------------------------------------------------------------------------
NR* NR* 2,500 California Health Facilities Financing Authority Revenue Bonds, RITR,
Series 26, 7.175% due 6/01/2022 (b)(f) 2,524
---------------------------------------------------------------------------------------------------------------
AAA Aaa 4,180 California State, Department of Water Resources, Water Systems Revenue
Refunding Bonds (Central Valley Project), Series Q, 5.375% due
12/01/2027 (g) 4,190
---------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 100 California State Economic Development Financing Authority Revenue Bonds
(California Independent Systems Project), VRDN, Series A, 3.80% due
4/01/2008 (h) 100
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,950 California State Public Work Board, Lease Revenue Bonds, Department of
Corrections, Series A, 5.25% due 1/01/2021 (a) 2,902
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 California State University and Colleges, Revenue Refunding Bonds (Hayward
Foundation Inc. Auxiliary Organization), 5.25% due 8/01/2025 (g) 980
---------------------------------------------------------------------------------------------------------------
AAA Aaa 10,130 California State Veterans Bonds, GO, Refunding, AMT, Series BH, 5.50% due
12/01/2024 (f)(i) 10,261
---------------------------------------------------------------------------------------------------------------
California Statewide Communities Development Authority, COP:
NR* VMIG1+ 600 (Continuing Care/University Project), VRDN, 3.85% due 11/15/2028 (h) 600
AAA Aaa 2,890 (Huntington East Valley Hospital), 5.40% due 12/01/2027 (a) 2,886
---------------------------------------------------------------------------------------------------------------
Aaa NR* 2,035 California Statewide Communities Development Authority, COP, Refunding
(San Diego State University Foundation), 5.30% due 3/01/2017 (a) 2,032
---------------------------------------------------------------------------------------------------------------
BBB NR* 3,500 Contra Costa County, California, Public Financing Authority, Tax
Allocation Revenue Refunding Bonds (Pleasant Hill Bart Etc.
Redevelopment), 5.25% due 8/01/2028 3,254
---------------------------------------------------------------------------------------------------------------
AAA Aaa 7,500 Delta County, California, Home Mortgage Finance Authority, S/F Mortgage
Revenue Bonds, AMT, Series A, 5.35% due 6/01/2024 (e)(g) 7,298
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,505 Folsom Cordova, California, Unified School District, Refunding, COP (1998
Financing Project), 5.25% due 3/01/2024 (f) 2,467
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Fremont, California, Unified School District, Alameda County, GO,
Refunding, 5.25% due 9/01/2019 (g) 2,974
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,360 Hayward, California, COP (Civic Center Project), 5.25% due 8/01/2026 (g) 1,327
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,850 Irvine, California, Unified School District, Special Tax, Community
Facilities District Number 86-1, 5.375% due 11/01/2020 (a) 3,871
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 La Quinta, California, Redevelopment Agency, Tax Allocation Refunding
Bonds (Redevelopment Project Area Number 1), 5.20% due 9/01/2028 (a) 2,430
---------------------------------------------------------------------------------------------------------------
NR* Aaa 15,875 Los Angeles, California, Convention and Exhibition Center Authority,
Lease Revenue Bonds, RITR, Series 21, 6.87% due 8/15/2018 (b)(g) 15,898
---------------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
AAA Aaa 15,750 Los Angeles, California, Unified School District, GO, Series A, 5% due
7/01/2021 (c) 15,003
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Los Angeles County, California, Metropolitan Transportation Authority, Sales
Tax Revenue Bonds, RITR, Series 30, 6.62% due 7/01/2023 (a)(b) 4,826
---------------------------------------------------------------------------------------------------------------
AAA Aaa 6,250 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Refunding Bonds, Proposition A, First Tier, Senior
Series A, 5.25% due 7/01/2027 (g) 6,124
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,080 Monrovia, California, Unified School District, GO, Series A, 5.375% due
8/01/2022 (g) 1,085
---------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Northern California Power Agency, Public Power Revenue Refunding Bonds
(Hydroelectric Project Number One), Series A, 5.125% due 7/01/2023 (g) 5,780
---------------------------------------------------------------------------------------------------------------
AAA Aaa 13,095 Oakland, California, Alameda County, Unified School District, Refunding,
GO, Series C, 5.50% due 8/01/2019 (c) 13,209
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Olivenhain Municipal Water District, California, Water Revenue Refunding
Bonds, COP, Capital Projects, 5.125% due 6/01/2028 (c) 4,775
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Rancho Cucamonga, California, Redevelopment Agency, Tax Allocation Bonds
(Rancho Redevelopment Project), 5.25% due 9/01/2026 (g) 4,900
---------------------------------------------------------------------------------------------------------------
AAA NR* 6,500 Sacramento, California, Cogeneration Authority, Cogeneration Project,
Revenue Refunding Bonds, 5.20% due 7/01/2021 (g) 6,326
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Sacramento, California, Municipal Utility District, Electric Revenue
Bonds, Series K, 5.25% due 7/01/2024 (a) 4,932
---------------------------------------------------------------------------------------------------------------
AAA Aaa 8,000 Sacramento County, California, COP, Refunding (Public Facilities
Project), 4.75% due 10/01/2027 (a) 7,155
---------------------------------------------------------------------------------------------------------------
AAA Aaa 18,805 San Diego, California, Public Facilities Financing Authority, Sewer
Revenue Bonds, Series A, 5.25% due 5/15/2027 (c) 18,426
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,540 San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Special Facilities Lease (SFO Fuel
Co. LLC), AMT, Series A, 5.25% due 1/01/2022 (a) 5,383
---------------------------------------------------------------------------------------------------------------
AAA Aaa 9,200 San Jose, California, Improvement Bond Act of 1915, Special Assessment
Refunding Bonds, Reassessment District 98-216SJ-24P, 5.25% due
9/02/2015 (a) 9,140
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Jose-Santa Clara, California, Water Financing Authority, Sewer
Revenue Bonds, Series A, 5.375% due 11/15/2020 (c) 4,990
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Santa Ana, California, Financing Authority, Revenue Refunding Bonds
(South Harbor Boulevard), Series A, 5% due 9/01/2019 (g) 4,768
---------------------------------------------------------------------------------------------------------------
AAA Aaa 6,750 Santa Clara County, California, Financing Authority, Lease Revenue
Refunding Bonds, Series A, 5% due 11/15/2022 (a) 6,385
---------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Portfolio Abbreviations
To simplify the listings of MuniHoldings California Insured Fund II, Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
F-5
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
California AAA Aaa $ 9,000 Santa Fe Springs, California, Community Development, Community Tax
(concluded) Allocation Refunding Bonds (Consolidated Redevelopment Project),
Series A, 5% due 9/01/2022 (g) $ 8,515
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Stockton, California, Revenue Refunding Bonds, COP (Wastewater System
Project), Series A, 5.20% due 9/01/2029 (g) 4,830
---------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 University of California, Revenue Refunding Bonds (Multiple Purpose
Projects), Series E, 5.125% due 9/01/2020 (g) 9,704
===================================================================================================================================
Puerto Rico -- 1.6% A Baa1 4,150 Puerto Rico Commonwealth, GO, Public Improvement, 5% due 7/01/2027 3,855
===================================================================================================================================
Total Investments (Cost -- $237,476) -- 98.2% 232,795
Variation Margin on Financial Futures Contracts*** -- (0.1%) (276)
Other Assets Less Liabilities -- 1.9% 4,554
--------
Net Assets -- 100.0% $237,073
========
===================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) The interest rate is subject to change periodically and is inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at June 30, 1999.
(c) FGIC Insured.
(d) FHA Insured.
(e) FNMA/GNMA Collateralized.
(f) FSA Insured.
(g) MBIA Insured.
(h) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at June 30, 1999.
(i) All or a portion of security held as collateral in connection with
open financial futures contracts.
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown
reflects the effective yield at the time of purchase by the Fund.
*** Financial futures contracts sold as of June 30, 1999 were as
follows:
--------------------------------------------------------------------
(in Thousands)
--------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
--------------------------------------------------------------------
315 US Treasury Bonds September 1999 $36,510
--------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price -- $35,954) $36,510
=======
--------------------------------------------------------------------
+ Highest short-term ratings by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
================================================================================
Quality Profile
The quality ratings of securities in the Fund as of June 30, 1999 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ............................................................ 94.9%
A/A ................................................................ 1.6
BBB/Baa ............................................................ 1.4
Other+ ............................................................. 0.3
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
F-6
<PAGE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of June 30, 1999
===================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $237,476,223) (Note 1a) .................... $232,794,724
Cash ................................................................................. 914,385
Interest receivable .................................................................. 4,053,477
Deferred organization expenses (Note 1e) ............................................. 11,898
Prepaid expenses and other assets .................................................... 12,589
------------
Total assets ......................................................................... 237,787,073
------------
===================================================================================================================================
Liabilities: Payables:
Variation margin (Note 1b) ......................................................... $ 275,625
Dividends to shareholders (Note 1f) ................................................ 198,301
Investment adviser (Note 2) ........................................................ 99,484
Offering costs (Note 1e) ........................................................... 60,000 633,410
-----------
Accrued expenses and other liabilities ............................................... 80,741
------------
Total liabilities .................................................................... 714,151
------------
===================================================================================================================================
Net Assets: Net assets ........................................................................... $237,072,922
============
===================================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (3,840 shares of AMPS* issued
and outstanding at $25,000 per share liquidation preference) ....................... $ 96,000,000
Common Stock, par value $.10 per share (9,806,948 shares issued and outstanding) ... $ 980,695
Paid-in capital in excess of par ..................................................... 144,963,983
Undistributed investment income -- net ............................................... 1,004,497
Accumulated realized capital losses on investments -- net ............................ (638,660)
Unrealized depreciation on investments -- net ........................................ (5,237,593)
-----------
Total -- Equivalent to $14.38 net asset value per share of Common Stock (market
price -- $13.00) ..................................................................... 141,072,922
------------
Total capital ........................................................................ $237,072,922
============
===================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
F-7
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended June 30, 1999
===================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned .......................... $ 12,785,332
Income (Note 1d):
===================================================================================================================================
Expenses: Investment advisory fees (Note 2) ................................................. $ 1,354,514
Commission fees (Note 4) .......................................................... 230,228
Accounting services (Note 2) ...................................................... 68,778
Professional fees ................................................................. 57,994
Transfer agent fees ............................................................... 36,140
Printing and shareholder reports .................................................. 25,105
Directors' fees and expenses ...................................................... 21,945
Custodian fees .................................................................... 20,436
Listing fees ...................................................................... 13,457
Pricing fees ...................................................................... 7,704
Amortization of organization expenses (Note 1e) ................................... 3,248
Other ............................................................................. 4,938
------------
Total expenses before reimbursement ............................................... 1,844,487
Reimbursement of expenses (Note 2) ................................................ (206,643)
------------
Total expenses .................................................................... 1,637,844
------------
Investment income -- net .......................................................... 11,147,488
------------
===================================================================================================================================
Realized & Realized gain on investments ...................................................... 867,427
Unrealized Gain Change in unrealized appreciation/depreciation on investments -- net .............. (6,471,307)
(Loss) on ------------
Investments -- Net Net Increase in Net Assets Resulting from Operations .............................. $ 5,543,608
(Notes 1b, 1d & 3): ============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the Period
Year Ended Feb. 27, 1998+
June 30, to June 30,
Increase (Decrease) in Net Assets: 1999 1998
===================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income -- net .......................................................... $ 11,147,488 $ 3,709,606
Realized gain (loss) on investments -- net ........................................ 867,427 (1,110,322)
Change in unrealized appreciation/depreciation on investments -- net .............. (6,471,307) 1,233,714
------------ ------------
Net increase in net assets resulting from operations .............................. 5,543,608 3,832,998
------------ ------------
===================================================================================================================================
Dividends & Investment income -- net:
Distributions to Common Stock .................................................................... (7,892,730) (2,063,732)
Shareholders Preferred Stock ................................................................. (2,898,760) (997,343)
(Note 1f): Realized gain on investments -- net:
Common Stock .................................................................... (276,968) --
Preferred Stock ................................................................. (118,829) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders ...................................................................... (11,187,287) (3,061,075)
------------ ------------
===================================================================================================================================
Capital Stock Proceeds from issuance of Preferred Stock ......................................... -- 96,000,000
Transactions Net proceeds from issuance of Common Stock ........................................ -- 146,750,010
(Notes 1e & 4): Offering and underwriting costs resulting from the issuance of Preferred Stock .... -- (882,865)
Offering costs resulting from the issuance of Common Stock ........................ -- (275,830)
Value of shares issued to Common Stock shareholders in reinvestment of dividends .. -- 253,358
------------ ------------
Net increase in net assets derived from capital stock transactions ................ -- 241,844,673
------------ ------------
===================================================================================================================================
Net Assets: Total increase (decrease) in net assets ........................................... (5,643,679) 242,616,596
Beginning of period ............................................................... 242,716,601 100,005
------------ ------------
End of period* .................................................................... $237,072,922 $242,716,601
============ ============
===================================================================================================================================
* Undistributed investment income -- net (Note 1g) .................................. $ 1,004,497 $ 648,531
============ ============
===================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
F-9
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Ended Feb. 27, 1998+
June 30, to June 30,
Increase (Decrease) in Net Asset Value: 1999 1998
============================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period .................................. $ 14.96 $ 15.00
Operating ----------- -----------
Performance: Investment income -- net .............................................. 1.13 .38
Realized and unrealized gain (loss) on investments -- net ............. (.57) .01
----------- -----------
Total from investment operations ...................................... .56 .39
----------- -----------
Less dividends and distributions to Common Stock shareholders:
Investment income -- net ............................................ (.80) (.21)
Realized gain on investments -- net ................................. (.03) --
----------- -----------
Total dividends and distributions to Common Stock shareholders ........ (.83) (.21)
----------- -----------
Capital charge resulting from issuance of Common Stock ................ -- (.03)
----------- -----------
Effect of Preferred Stock activity:+++
Dividends and distributions to Preferred Stock shareholders:
Investment income -- net .......................................... (.30) (.10)
Realized gain on investments -- net ............................... (.01) --
Capital charge resulting from issuance of Preferred Stock ........... -- (.09)
----------- -----------
Total effect of Preferred Stock activity .............................. (.31) (.19)
----------- -----------
Net asset value, end of period ........................................ $ 14.38 $ 14.96
=========== ===========
Market price per share, end of period ................................. $ 13.00 $ 15.00
=========== ===========
============================================================================================================================
Total Investment Based on market price per share ....................................... (8.34%) 1.42%++++
Return:** =========== ===========
Based on net asset value per share .................................... 1.66% 1.15%++++
=========== ===========
============================================================================================================================
Ratios Based on Total expenses, net of reimbursement*** ............................... 1.09% .38%*
Average Net Assets =========== ===========
Of Common Stock: Total expenses*** ..................................................... 1.23% 1.19%*
=========== ===========
Total investment income -- net*** ..................................... 7.42% 8.00%*
=========== ===========
Amount of dividends to Preferred Stock shareholders ................... 1.93% 2.15%*
=========== ===========
Investment income -- net, to Common Stock shareholders ................ 5.49% 5.85%*
=========== ===========
============================================================================================================================
Ratios Based on Total expenses, net of reimbursement .................................. .67% .24%*
Average =========== ===========
Net Assets:++*** Total expenses ........................................................ .75% .75%*
=========== ===========
Total investment income -- net ........................................ 4.53% 5.05%*
=========== ===========
============================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ............................. 3.02% 3.65%*
Average Net Assets =========== ===========
Of Preferred Stock:
============================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) ...... $ 141,073 $ 146,717
=========== ===========
</TABLE>
F-10
<PAGE>
<TABLE>
<S> <C> <C> <C>
Preferred Stock outstanding, end of period (in thousands) ............. $ 96,000 $ 96,000
=========== ===========
Portfolio turnover .................................................... 82.36% 64.17%
=========== ===========
============================================================================================================================
Leverage: Asset coverage per $1,000 ............................................. $ 2,470 $ 2,528
=========== ===========
============================================================================================================================
Dividends Per Series A -- Investment income -- net .................................. $ 775 $ 262
Share on Preferred =========== ===========
Stock Outstanding: Series B -- Investment income -- net .................................. $ 735 $ 257
=========== ===========
============================================================================================================================
</TABLE>
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock
shareholders.
+ Commencement of operations.
++ Includes Common and Preferred Stock average net assets.
+++ The Fund's Preferred Stock was issued on March 19, 1998.
++++ Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings California Insured Fund II, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles, which may require the use of
management accruals and estimates. The Fund determines and makes available for
publication the net asset value of its Common Stock on a weekly basis. The
Fund's Common Stock is listed on the New York Stock Exchange under the symbol
MUC. The following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
o Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains
F-11
<PAGE>
MuniHoldings California Insured Fund II, Inc., June 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
or losses. When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
o Options -- The Fund is authorized to write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the current
market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization and offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a period not exceeding five
years. In accordance with Statement of Position 98-5, any unamortized
organization expenses will be expensed on July 1, 1999. This charge will not
have any material impact on the operations of the Fund. Direct expenses relating
to the public offering of the Fund's Common and Preferred Stock were charged to
capital at the time of issuance of the shares.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(g) Reclassification -- Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $32 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.55% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred Stock. For the year ended June 30, 1999,
FAM earned fees of $1,354,514, of which $206,643 was voluntarily waived.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 1999 were $214,492,917 and $197,101,574, respectively.
Net realized gains for the year ended June 30, 1999 and net unrealized losses as
of June 30, 1999 were as follows:
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Losses
- --------------------------------------------------------------------------------
Long-term investments .............................. $ 285,377 $(4,681,499)
Financial futures contracts ........................ 582,050 (556,094)
---------- -----------
Total .............................................. $ 867,427 $(5,237,593)
========== ===========
- --------------------------------------------------------------------------------
As of June 30, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $4,691,979, of which $135,955 related to appreciated securities and
$4,827,934 related to depreciated securities. The aggregate cost of investments
at June 30, 1999 for Federal income tax purposes was $237,486,703.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
Common Stock
Shares issued and outstanding during the year ended June 30, 1999 remained
constant and during the period February 27, 1998 to June 30, 1998, increased by
16,947 as a result of dividend reinvestment and by 9,783,334 as a result of
initial offering.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.10 per share and a liquidation preference of $25,000
per share that entitle their holders to receive cash dividends at an annual rate
that may vary for the successive dividend periods. The yields in effect at June
30, 1999 were Series A, 3.95% and Series B, 2.40%.
Shares issued and outstanding during the year ended June 30, 1999 remained
constant and during the period February 27, 1998 to June 30, 1998 increased by
3,840 as a result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of
each auction. For the year ended June 30, 1999, MLPF&S earned $166,836 as
commissions.
5. Subsequent Event:
On July 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.069000 per share,
payable on July 29, 1999 to shareholders of record as of July 23, 1999.
F-13
<PAGE>
Audited Financial Statements for
MuniHoldings California Insured Fund, Inc.
for the Fiscal Year Ended August 31, 1999
[To be filed by amendment]
F-14
<PAGE>
Audited Financial Statements for
MuniHoldings California Insured Fund III, Inc.
for the Fiscal Year Ended May 31, 1999
F-15
<PAGE>
This page intentionally left blank
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniHoldings California Insured Fund III, Inc.
We have audited the accompanying statement of assets, liabilities and capital of
MuniHoldings California Insured Fund III, Inc., including the schedule of
investments, as of May 31, 1999, and the related statements of operations and
changes in net assets, and financial highlights for the period from September
25, 1998 (commencement of operations) to May 31, 1999. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of May 31, 1999, by correspondence with the custodian and brokers. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
MuniHoldings California Insured Fund III, Inc. at May 31, 1999 and the results
of its operations, the changes in its net assets and the financial highlights
for the period from September 25, 1998 to May 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Princeton, New Jersey
June 24, 1999
F-17
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
California -- 93.1% AAA Aaa $ 8,210 California Educational Facilities Authority Revenue Bonds
(Stanford University), Series N, 5.20% due 12/01/2027 $ 8,186
------------------------------------------------------------------------------------------------------------
AAA Aaa 20,000 California HFA, Home Mortgage Revenue Bonds, AMT, Series N, 5.25%
due 8/01/2029 (d) 19,701
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 California Health Facilities Finance Authority, Revenue Refunding
Bonds (Catholic Healthcare West), Series A, 5.125% due
7/01/2024 (b) 2,453
------------------------------------------------------------------------------------------------------------
A1+ NR* 200 California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric), VRDN, Series F, 3.30% due
11/01/2026 (a) 200
------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 3,400 California State Economic Development Financing Authority Revenue
Bonds (California Independent Systems Project), VRDN, Series C,
3.40% due 4/01/2008 (a) 3,400
------------------------------------------------------------------------------------------------------------
California State, GO, Refunding:
AAA Aaa 6,500 5% due 2/01/2023 (c) 6,306
AAA Aaa 2,000 Veterans Bonds, AMT, Series BH, 5.40% due 12/01/2016 (d) 2,034
------------------------------------------------------------------------------------------------------------
AAA Aaa 4,370 California State Public Works Board, Lease Revenue Bonds (Various
University of California Projects), Series C, 5.125% due
9/01/2022 (f) 4,314
------------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 California Statewide Communities Development Authority, COP, RIB,
Series 24, 7.125% due 12/01/2015 (d)(e) 5,217
------------------------------------------------------------------------------------------------------------
AAA Aaa 15,000 Central Coast Water Authority, California, Revenue Refunding Bonds
(State Water Project Regional Facilities), Series A, 5% due
10/01/2022 (f) 14,557
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 Central Valley Financing Authority, California, Cogeneration
Project, Revenue Refunding Bonds (Cason Ice-Generation Project),
5.20% due 7/01/2020 (b) 2,739
------------------------------------------------------------------------------------------------------------
AAA Aaa 4,260 Clovis, California, Sewer Revenue Refunding Bonds, 5.20% due
8/01/2028 (b) 4,253
------------------------------------------------------------------------------------------------------------
BBB NR* 3,500 Contra Costa County, California, Public Financing Authority, Tax
Allocation Revenue Refunding Bonds (Pleasant Hill Bart Etc.
Redevelopment), 5.25% due 8/01/2028 3,354
------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Long Beach, California, Harbor Revenue Bonds, AMT, 5.375% due
5/15/2020 (b) 10,067
------------------------------------------------------------------------------------------------------------
Los Angeles, California, Unified School District, GO (c):
AAA Aaa 2,250 Series A, 5% due 7/01/2021 2,185
AAA Aaa 2,500 Series B, 5% due 7/01/2023 2,425
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 Los Angeles, California, Wastewater System Revenue Bonds, Series
A, 5% due 6/01/2028 (c) 3,370
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Refunding Bonds, Proposition C, 2nd
Senior-Series A, 5% due 7/01/2023 (f) 2,425
------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Los Angeles County, California, Sanitation Districts Financing
Authority Revenue Bonds (Capital Projects), Series A, 5.25% due
10/01/2019 (b) 6,028
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Monterey County, California, COP (Natividad Medical Center
Improvement), Series E, 4.75% due 8/01/2027 (b) 2,780
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,530 Riverside County, California, COP, Refunding Bonds, 5% due
12/01/2021 (b) 3,428
------------------------------------------------------------------------------------------------------------
AAA NR* 7,420 Sacramento, California, Cogeneration Authority, Cogeneration
Project, Revenue Refunding Bonds, 5.20% due 7/01/2021 (b) 7,391
------------------------------------------------------------------------------------------------------------
Sacramento, California, Municipal Utility District, Electric
Revenue Refunding Bonds, Series L (b):
AAA Aaa 2,750 5.20% due 7/01/2017 2,773
AAA Aaa 5,450 5.125% due 7/01/2022 5,381
------------------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
AAA Aaa 10,000 Sacramento County, California, Airport System Revenue Refunding
Bonds, Sub-Series B, 5% due 7/01/2026 (c) 9,640
------------------------------------------------------------------------------------------------------------
AAA Aaa 5,800 Salida, California, Area Public Facilities Financing Agency,
Community Facilities District Special Tax Refunding Bonds (No.
1988-1), 5.25% due 9/01/2028 (d) 5,818
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Diego, California, Convention Center Expansion Financing
Authority, Lease Revenue Bonds, Series A, 4.75% due 4/01/2028 (f) 1,852
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,950 San Diego, California, Public Facilities Financing Authority,
Sewer Revenue Bonds, Series B, 5.25% due 5/15/2027 (c) 2,959
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 San Diego County, California, Water Authority, Water Revenue
Bonds, COP, Series A, 5% due 5/01/2022 (c) 2,427
------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Francisco, California, City and County, GO, Refunding,
Series 1, 5.125% due 6/15/2014 (c) 5,112
------------------------------------------------------------------------------------------------------------
AAA Aaa 7,620 San Joaquin Hills, California, Transportation Corridor Agency,
Toll Road Revenue Refunding Bonds, Series A, 5.25% due
1/15/2030 (b) 7,625
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Santa Clara County, California, East Side Union High School
District, GO, Series E, 5% due 9/01/2022 (c) 2,922
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Turlock, California, Irrigation District Revenue Refunding Bonds,
Series A, 5% due 1/01/2026 (b) 1,929
------------------------------------------------------------------------------------------------------------
AAA Aaa 4,200 University of California, Revenue Refunding Bonds (Multiple
Purpose Projects), Series E, 5.125% due 9/01/2020 (b) 4,165
==================================================================================================================================
Puerto Rico -- 3.8% AAA Aaa 6,760 Puerto Rico Commonwealth Infrastructure Financing Authority,
Special Revenue Bonds, Series A, 5% due 7/01/2013 (f) 6,837
==================================================================================================================================
Total Investments (Cost -- $180,229) -- 96.9% 176,253
Other Assets Less Liabilities -- 3.1% 5,675
--------
Net Assets -- 100.0% $181,928
========
==================================================================================================================================
</TABLE>
(a) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at May 31, 1999.
(b) MBIA Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at May 31, 1999.
(f) AMBAC Insured.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
================================================================================
Portfolio Abbreviations
To simplify the listings of MuniHoldings California Insured Fund III, Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
F-19
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of May 31, 1999
==============================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $180,229,369) (Note 1a) ...... $176,253,489
Cash ................................................................... 179,012
Receivables:
Securities sold ...................................................... $ 5,801,255
Interest ............................................................. 3,068,718 8,869,973
------------
Deferred organization expenses (Note 1f) ............................... 10,796
Prepaid expenses and other assets ...................................... 4,701
------------
Total assets ........................................................... 185,317,971
------------
==============================================================================================================================
Liabilities: Payables:
Securities purchased ................................................. 2,977,077
Dividends to shareholders (Note 1e) .................................. 163,102
Investment adviser (Note 2) .......................................... 56,452
Offering costs (Note 1f) ............................................. 54,000 3,250,631
------------
Accrued expenses and other liabilities ................................. 139,747
------------
Total liabilities ...................................................... 3,390,378
------------
==============================================================================================================================
Net Assets: Net assets ............................................................. $181,927,593
============
==============================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (2,960 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) .. $ 74,000,000
Common Stock, par value $.10 per share (7,521,774 shares issued and
outstanding) ......................................................... $ 752,177
Paid-in capital in excess of par ....................................... 111,148,366
Undistributed investment income -- net ................................. 598,819
Accumulated realized capital losses on investments -- net (Note 5) ..... (595,889)
Unrealized depreciation on investments -- net .......................... (3,975,880)
------------
Total -- Equivalent to $14.35 net asset value per share of Common Stock
(market price -- $13.25) ............................................... 107,927,593
------------
Total capital .......................................................... $181,927,593
============
==============================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
F-20
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period September 25, 1998+ to May 31, 1999
==============================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ............... $ 6,046,430
Income (Note 1d):
==============================================================================================================================
Expenses: Investment advisory fees (Note 2) ...................................... $ 656,536
Commission fees (Note 4) ............................................... 111,918
Accounting services (Note 2) ........................................... 36,101
Professional fees ...................................................... 34,130
Transfer agent fees .................................................... 25,350
Directors' fees and expenses ........................................... 17,332
Listing fees ........................................................... 11,135
Printing and shareholder reports ....................................... 10,926
Custodian fees ......................................................... 7,959
Amortization of organization expenses (Note 1f) ........................ 2,453
Pricing fees ........................................................... 762
Other .................................................................. 3,601
------------
Total expenses before reimbursement .................................... 918,203
Reimbursement of expenses (Note 2) ..................................... (456,988)
------------
Total expenses ......................................................... 461,215
------------
Investment income -- net ............................................... 5,585,215
------------
==============================================================================================================================
Realized & Realized loss on investments -- net .................................... (595,889)
Unrealized Loss Unrealized depreciation on investments -- net .......................... (3,975,880)
On Investments -- Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ................... $ 1,013,446
============
==============================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
F-21
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
Sept. 25, 1998+
Increase (Decrease) in Net Assets: to May 31, 1999
=========================================================================================================================
<S> <C> <C>
Operations: Investment income -- net .......................................................... $ 5,585,215
Realized loss on investments -- net ............................................... (595,889)
Unrealized depreciation on investments -- net ..................................... (3,975,880)
------------
Net increase in net assets resulting from operations .............................. 1,013,446
------------
=========================================================================================================================
Dividends to Investment income -- net:
Shareholders Common Stock .................................................................... (3,600,287)
(Note 1e): Preferred Stock ................................................................. (1,386,109)
------------
Net decrease in net assets resulting from dividends to shareholders ............... (4,986,396)
------------
=========================================================================================================================
Capital Stock Proceeds from issuance of Preferred Stock ......................................... 74,000,000
Transactions Net proceeds from issuance of Common Stock ........................................ 112,125,000
(Notes 1f & 4): Offering and underwriting costs resulting from the issuance of Preferred Stock .... (706,249)
Offering costs resulting from the issuance of Common Stock ........................ (211,402)
Value of shares issued to Common Stock shareholders in reinvestment of dividends .. 593,189
------------
Net increase in net assets derived from capital stock transactions ................ 185,800,538
------------
=========================================================================================================================
Net Assets: Total increase in net assets ...................................................... 181,827,588
Beginning of period ............................................................... 100,005
------------
End of period* .................................................................... $181,927,593
============
=========================================================================================================================
*Undistributed investment income -- net ............................................ $ 598,819
============
=========================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Sept. 25, 1998+
Increase (Decrease) in Net Asset Value: to May 31, 1999
=========================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period .............................................. $ 15.00
Operating ------------
Performance: Investment income -- net .......................................................... .74
Realized and unrealized loss on investments -- net ................................ (.61)
------------
Total from investment operations .................................................. .13
------------
</TABLE>
F-22
<PAGE>
<TABLE>
<S> <C> <C>
Less dividends to Common Stock shareholders:
Investment income -- net ........................................................ (.48)
------------
Capital charge resulting from issuance of Common Stock ............................ (.03)
------------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net ...................................................... (.18)
Capital charge resulting from issuance of Preferred Stock ..................... (.09)
------------
Total effect of Preferred Stock activity .......................................... (.27)
------------
Net asset value, end of period .................................................... $ 14.35
============
Market price per share, end of period ............................................. $ 13.25
============
=========================================================================================================================
Total Investment Based on market price per share ................................................... (8.70%)++++
Return:** ============
Based on net asset value per share ................................................ (1.12%)++++
============
=========================================================================================================================
Ratios Based on Expenses, net of reimbursement*** ................................................. .62%*
Average Net Assets ============
Of Common Stock: Total expenses*** ................................................................. 1.24%*
============
Total investment income -- net*** ................................................. 7.53%*
============
Amount of dividends to Preferred Stock shareholders ............................... 1.87%*
============
Investment income -- net, to Common Stock shareholders ............................ 5.66%*
============
=========================================================================================================================
Ratios Based on Expenses, net of reimbursement .................................................... .39%*
Total Average Net ============
Assets:+++*** Total expenses .................................................................... .77%*
============
Total investment income -- net .................................................... 4.68%*
============
=========================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ......................................... 3.07%*
Average Net Assets ============
Of Preferred Stock:
=========================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) .................. $ 107,928
============
Preferred Stock outstanding, end of period (in thousands) ......................... $ 74,000
============
Portfolio turnover ................................................................ 60.32%
============
=========================================================================================================================
Leverage: Asset coverage per $1,000 ......................................................... $ 2,458
============
=========================================================================================================================
Dividends Per Series A -- Investment income -- net .............................................. $ 460
Share on Preferred ============
Stock Outstanding: Series B -- Investment income -- net .............................................. $ 477
============
=========================================================================================================================
</TABLE>
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock
shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on October 19, 1998.
+++ Includes Common and Preferred Stock average net assets.
++++ Aggregate total investment return.
See Notes to Financial Statements.
F-23
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings California Insured Fund III, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. Prior to commencement of operations on
September 25, 1998, the Fund had no operations other than those relating to
organizational matters and the sale of 6,667 shares of Common Stock on September
17, 1998 to Fund Asset Management, L.P. ("FAM") for $100,005. The Fund's Common
Stock is listed on the New York Stock Exchange under the symbol MCF. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
o Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options -- The Fund is authorized to write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the current
market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to reg-
F-24
<PAGE>
ulated investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision is
required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(f) Deferred organization and offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a period not exceeding five
years. In accordance with Statement of Position 98-5, any unamortized
organization expenses will be expensed on the first day of the next fiscal year
beginning after December 15, 1998. This charge will not have any material impact
on the operations of the Fund. Direct expenses relating to the public offering
of the Fund's Common and Preferred Stock were charged to capital at the time of
issuance of the shares.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.55% of the Fund's average weekly net assets, including
issuance of Preferred Stock. For the period September 25, 1998 to May 31, 1999,
FAM earned fees of $656,536, of which $439,176 was voluntarily waived. FAM also
reimbursed the Fund additional expenses of $17,812.
During the period September 25, 1998 to May 31, 1999, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S") received underwriting fees of $555,000 in
connection with the issuance of the Fund's Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period September 25, 1998 to May 31, 1999 were $270,827,810 and $93,185,580,
respectively.
Net realized gains (losses) for the period September 25, 1998 to May 31, 1999
and net unrealized losses as of May 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments .................... $ (985,630) $(3,975,880)
Financial futures contracts .............. 389,741 --
----------- -----------
Total .................................... $ (595,889) $(3,975,880)
=========== ===========
- --------------------------------------------------------------------------------
As of May 31, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $3,975,880, all of which is related to depreciated securities. The
aggregate cost of investments at May 31, 1999 for Federal income tax purposes
was $180,229,369.
F-25
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
Common Stock
Shares issued and outstanding during the period September 25, 1998 to May 31,
1999 increased by 7,475,000 and 40,107 from shares sold and dividend
reinvestment, respectively.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.10 per share and a liquidation preference of $25,000
per share, that entitle their holders to receive cash dividends at an annual
rate that may vary for the successive dividend periods. The yields in effect at
May 31, 1999 were as follows: Series A, 2.90% and Series B, 3.13%.
Shares issued and outstanding during the period September 25, 1998 to May 31,
1999 increased by 2,960 as a result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of
each auction. For the period September 25, 1998 to May 31, 1999, MLPF&S, an
affiliate of FAM, earned $90,877 as commissions.
5. Capital Loss Carryforward:
At May 31, 1999, the Fund had a net capital loss carryforward of approximately
$395,000, all of which expires in 2007. This amount will be available to offset
like amounts of any future taxable gains.
6. Subsequent Event:
On June 9, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.063000 per share,
payable on June 29, 1999 to shareholders of record as of June 23, 1999.
F-26
<PAGE>
Unaudited Financial Statements for
MuniHoldings California Insured Fund IV, Inc.
for the Period January 29, 1999 to March 31, 1999
F-27
<PAGE>
MuniHoldings California Insured Fund IV, Inc., March 31, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California -- AAA Aaa $ 1,110 Alameda Corridor Transportation Authority, California, Revenue Bonds, Senior
94.4% Lien, Series A, 5% due 10/01/2010 (d) $ 1,172
-----------------------------------------------------------------------------------------------------------------
AAA NR* 1,000 Anaheim, California, Public Financing Authority Revenue Bonds (Electric
System District Facilities), 5% due 10/01/2023 (d) 990
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 5,390 Beverly Hills, California, Public Financing Authority, Lease Revenue
Refunding Bonds, Series A, 5.125% due 6/01/2016 (d) 5,540
-----------------------------------------------------------------------------------------------------------------
California HFA, Revenue Bonds, Home Mortgage, AMT:
AAA Aaa 3,000 Series J-2, 5.30% due 8/01/2016 (d) 3,025
AAA Aaa 5,000 Series R, 5.25% due 8/01/2026 (a) 5,000
-----------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 1,200 California Health Facilities Authority, Revenue Refunding Bonds
(Sutter/CHS), VRDN, Series C, 2.90% due 7/01/2022 (c)(e) 1,200
-----------------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority Revenue Bonds:
AAA Aaa 2,000 (Kaiser Permanente), Series A, 5.50% due 6/01/2022 (c) 2,088
A1+ VMIG1+ 2,500 (Saint Joseph Health System), VRDN, Series B, 3% due 7/01/2009 (e) 2,500
-----------------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority, Revenue Refunding Bonds:
A1+ VMIG1+ 3,300 (Adventist Hospital), VRDN, Series B, 2.80% due 9/01/2028 (e) 3,300
A1+ VMIG1+ 500 (Adventist Hospital), VRDN, Series C, 2.80% due 9/01/2015 (e) 500
AAA NR* 8,500 RIB, Series 90, 7.485% due 8/15/2028 (d)(f) 8,979
AAA Aaa 45 (Sutter Health), Series A, 5.35% due 8/15/2028 (d) 46
-----------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 1,500 California Pollution Control Financing Authority, PCR, Refunding (Pacific
Gas & Electric Corp.), VRDN, Series E, 3% due 11/02/2026 (e) 1,500
-----------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR, Refunding
(Southern California Edison), VRDN (e):
A1 VMIG1+ 3,600 Series A, 3.05% due 2/28/2008 3,600
A1 VMIG1+ 3,200 Series B, 3.05% due 2/28/2008 3,200
A1 P1 2,000 Series C, 3.05% due 2/28/2008 2,000
-----------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 2,200 California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Shell Martinez Refining), VRDN, AMT, Series A, 2.90% due
10/01/2031 (e) 2,200
-----------------------------------------------------------------------------------------------------------------
California State Economic Development Financing Authority Revenue Bonds
(California Independent Systems Project), VRDN (e):
A1+ VMIG1+ 2,300 Series A, 2.75% due 4/01/2008 2,300
A1+ VMIG1+ 4,800 Series C, 3% due 4/01/2008 4,800
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 15,135 California State, GO, Refunding, 5% due 2/01/2023 (b) 14,988
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 California State Public Works Board, Lease Revenue Refunding Bonds,
Department of Corrections, Series B, 5% due 9/01/2021 (d) 1,984
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 8,000 Central Coast Water Authority, California, Revenue Refunding Bonds (State
Water Project Regional Facilities), Series A, 5% due 10/01/2022 (a) 7,913
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 6,140 Contra Costa, California, Water District, Water Revenue Bonds, Series G, 5%
due 10/01/2024 (d) 6,053
-----------------------------------------------------------------------------------------------------------------
East Side Union High School District, California, Santa Clara County, GO,
Series E (b):
AAA Aaa 3,205 5% due 9/01/2022 3,179
AAA Aaa 5,655 5% due 9/01/2023 5,603
-----------------------------------------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
AAA Aaa 3,390 Fresno, California, Sewer Revenue Bonds, Series A, 5% due 9/01/2023 (d) 3,352
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Irvine, California, Public Facilities and Infrastructure Authority,
Assessment Revenue Refunding Bonds, Series A, 5.05% due 9/02/2022 (a) 5,991
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 4,600 La Quinta, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Redevelopment Project Area Number 1), 5.20% due 9/01/2028 (a) 4,681
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 10,650 Los Altos, California, School District, GO, Series A, 5% due 8/01/2023 (c) 10,531
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Los Angeles, California, Convention and Exhibition Center Authority, Lease
Revenue Refunding Bonds, Series A, 5.125% due 8/15/2021 (d) 3,010
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Los Angeles, California, GO, Refunding, Series A, 5.25% due 9/01/2011 (b) 1,074
-----------------------------------------------------------------------------------------------------------------
Los Angeles, California, Unified School District, GO, Series B (b):
AAA Aaa 10,345 5.375% due 7/01/2010 11,231
AAA Aaa 9,415 5% due 7/01/2023 9,323
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Refunding Bonds, Proposition C, Second Senior-Series A,
5.50% due 7/01/2010 (a) 2,190
-----------------------------------------------------------------------------------------------------------------
A+ A2 4,500 Modesto, California, Irrigation District, COP, Refunding and Capital
Improvements, Series B, 5.30% due 7/01/2022 4,501
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Modesto, California, Irrigation District Financing Authority, Revenue
Refunding Bonds (Domestic Water Project), Series D, 5.125% due
9/01/2014 (a) 4,152
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 2,250 Northern California Power Agency, Multiple Capital Facilities Revenue
Refunding Bonds, Series A, 5% due 8/01/2025 (a) 2,221
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Pomona, California, Public Financing Authority, Revenue Refunding Bonds (SW
Pomona Redevelopment Project), Series W, 5% due 2/01/2024 (d) 1,980
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Sacramento, California, Municipal Utility District, Electric Revenue
Refunding Bonds, Series L, 5.10% due 7/01/2014 (a) 3,098
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Diego, California, Certificates of Unified Dividend Interest, Water
Utility Fund, Net System Revenue Bonds, 5% due 8/01/2021 (b) 1,984
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 San Diego, California, Public Facilities Financing Authority, Sewer Revenue
Bonds, 5% due 5/15/2025 (b) 9,856
-----------------------------------------------------------------------------------------------------------------
AAA NR* 5,825 San Diego County, California, COP, Refunding (Central Jail), 5% due
10/01/2025 (a) 5,749
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 2,650 San Dieguito, California, Public Facilities Authority Revenue Bonds, Series
A, 5% due 8/01/2023 (a) 2,624
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 5,400 San Francisco, California, City and County Airport Commission, International
Airport Revenue Bonds, Second Series, Issue 15B, 5% due 5/01/2024 (d) 5,346
-----------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Portfolio Abbreviations
To simplify the listings of MuniHoldings California Insured Fund IV, Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
F-29
<PAGE>
MuniHoldings California Insured Fund IV, Inc., March 31, 1999
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California AAA Aaa $ 3,460 San Francisco, California, City and County Airport Commission, International
(concluded) Airport Revenue Refunding Bonds, AMT, Second Series, Issue 16A, 5.50% due
5/01/2011 (c) $ 3,712
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Francisco, California, City and County, GO, Refunding, Series 1, 5.125%
due 6/15/2014 (b) 5,199
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 San Francisco, California, City and County Redevelopment Agency, Hotel Tax
Revenue Refunding Bonds, 5% due 7/01/2025 (c) 3,454
-----------------------------------------------------------------------------------------------------------------
AAA NR* 3,530 San Francisco, California, City and County Redevelopment Agency, M/F Housing
Revenue Bonds (1045 Mission Apartments), AMT, Series C, 5.25% due 12/20/2027
(g) 3,519
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 14,845 San Jose, California, Redevelopment Agency Tax Allocation (Merged Area
Redevelopment Project), 5% due 8/01/2026 (a) 14,648
-----------------------------------------------------------------------------------------------------------------
AAA Aaa 8,000 Turlock, California, Irrigation District Revenue Refunding Bonds, Series A,
5% due 1/01/2026 (d) 7,895
====================================================================================================================================
Puerto Rico -- AAA Aaa 6,825 Puerto Rico Public Finance Corporation Revenue Bonds, Commonwealth
3.1% Appropriation, Series A, 5.375% due 6/01/2010 (a) 7,407
====================================================================================================================================
Total Investments (Cost -- $233,320) -- 97.5% 232,388
Variation Margin on Financial Futures Contracts** -- 0.0% 53
Other Assets Less Liabilities -- 2.5% 5,951
--------
Net Assets -- 100.0% $238,392
========
====================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at March 31, 1999.
(f) The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at March 31, 1999.
(g) GNMA Collateralized.
* Not Rated.
** Financial futures contracts sold as of March 31, 1999 were as
follows:
---------------------------------------------------------------
(in Thousands)
---------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
---------------------------------------------------------------
100 US Treasury Bonds June 1999 $12,056
---------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price -- $12,141) $12,056
=======
---------------------------------------------------------------
+ Highest short-term ratings by Moody's Investors Service, Inc.
See Notes to Financial Statements.
================================================================================
Quality Profile
The quality ratings of securities in the Fund as of March 31, 1999
were as follows:
---------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
---------------------------------------------------------
AAA/Aaa ..................................... 84.2%
A/A ......................................... 1.9
Other+ ...................................... 11.4
---------------------------------------------------------
+ Temporary investments in short-term municipal securities.
F-30
<PAGE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of March 31, 1999
===================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $233,319,570) (Note 1a) ................... $232,388,321
Cash ................................................................................ 129,778
Receivables:
Securities sold ................................................................... $ 7,636,422
Interest .......................................................................... 2,561,123
Variation margin (Note 1b) ........................................................ 53,125
Investment adviser (Note 2) ....................................................... 19,600 10,270,270
------------
Other assets ........................................................................ 19,000
------------
Total assets ........................................................................ 242,807,369
------------
===================================================================================================================================
Liabilities: Payables:
Securities purchased .............................................................. 3,992,680
Distributor (Note 2) .............................................................. 168,622 4,161,302
------------
Accrued expenses and other liabilities .............................................. 254,076
------------
Total liabilities ................................................................... 4,415,378
------------
===================================================================================================================================
Net Assets: Net assets .......................................................................... $238,391,991
============
===================================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (3,640 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) ............... $ 91,000,000
Common Stock, par value $.10 per share (9,866,667 shares issued and outstanding) .. $ 986,667
Paid-in capital in excess of par .................................................... 145,897,961
Undistributed investment income -- net .............................................. 1,314,086
Undistributed realized capital gains on investments -- net .......................... 40,151
Unrealized depreciation on investments -- net ....................................... (846,874)
------------
Total -- Equivalent to $14.94 net asset value per Share of Common Stock
(market price -- $14.875) ........................................................... 147,391,991
------------
Total capital ....................................................................... $238,391,991
============
===================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
F-31
<PAGE>
MuniHoldings California Insured Fund IV, Inc., March 31, 1999
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period January 29, 1999+ to March 31, 1999
==================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ................. $ 1,603,405
Income (Note 1d):
==================================================================================================================================
Expenses: Investment advisory fees (Note 2) ........................................ $ 165,425
Commission fees (Note 4) ................................................. 27,190
Accounting services (Note 2) ............................................. 8,139
Professional fees ........................................................ 5,234
Transfer agent fees ...................................................... 5,041
Directors' fees and expenses ............................................. 3,585
Custodian fees ........................................................... 2,227
Listing fees ............................................................. 2,129
Printing and shareholder reports ......................................... 1,521
Pricing fees ............................................................. 1,052
Other .................................................................... 1,222
------------
Total expenses before reimbursement ...................................... 222,765
Reimbursement of expenses (Note 2) ....................................... (185,025)
------------
Total expenses ........................................................... 37,740
------------
Investment income -- net ................................................. 1,565,665
------------
==================================================================================================================================
Realized & Unrealized Realized gain on investments -- net ...................................... 40,151
Gain (Loss) on Unrealized depreciation on investments -- net ............................ (846,874)
Investments -- Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ..................... $ 758,942
============
==================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
F-32
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
Jan. 29, 1999+ to
Increase (Decrease) in Net Assets: March 31, 1999
===================================================================================================================================
<S> <C> <C>
Operations: Investment income -- net ................................................................ $ 1,565,665
Realized gain on investments -- net ..................................................... 40,151
Unrealized depreciation on investments -- net ........................................... (846,874)
-------------
Net increase in net assets resulting from operations .................................... 758,942
-------------
===================================================================================================================================
Dividends to Investment income -- net to Preferred Stock shareholders ................................ (251,579)
Shareholders -------------
(Note 1e): Net decrease in net assets resulting from dividends to shareholders ..................... (251,579)
-------------
===================================================================================================================================
Capital Stock Proceeds from issuance of Common Stock .................................................. 147,900,000
Transactions Proceeds from issuance of Preferred Stock ............................................... 91,000,000
(Note 4): Offering costs resulting from the issuance of Common Stock .............................. (262,877)
Offering and underwriting costs resulting from the issuance of Preferred Stock .......... (852,500)
-------------
Net increase in net assets derived from capital stock transactions ...................... 237,784,623
-------------
===================================================================================================================================
Net Assets: Total increase in net assets ............................................................ 238,291,986
Beginning of period ..................................................................... 100,005
-------------
End of period* .......................................................................... $ 238,391,991
=============
===================================================================================================================================
*Undistributed investment income -- net .................................................. $ 1,314,086
=============
===================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
F-33
<PAGE>
MuniHoldings California Insured Fund IV, Inc., March 31, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Jan. 29, 1999+ to
Increase (Decrease) in Net Asset Value: March 31, 1999
===============================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period ................................................ $ 15.00
Operating ------------
Performance: Investment income -- net ............................................................ .16
Realized and unrealized loss on investments -- net .................................. (.07)
------------
Total from investment operations .................................................... .09
------------
Capital charge resulting from issuance of Common Stock .............................. (.03)
------------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net ........................................................ (.03)
Capital charge resulting from issuance of Preferred Stock ......................... (.09)
------------
Total effect of Preferred Stock activity ............................................ (.12)
------------
Net asset value, end of period ...................................................... $ 14.94
============
Market price per share, end of period ............................................... $ 14.875
============
===============================================================================================================================
Total Investment Based on market price per share ..................................................... (.83%)+++
Return:** ============
Based on net asset value per share .................................................. (.40%)+++
============
===============================================================================================================================
Ratios to Average Expenses, net of reimbursement ...................................................... .13%*
Net Assets:*** ============
Expenses ............................................................................ .74%*
============
Investment income -- net ............................................................ 5.21%*
============
===============================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) .................... $ 147,392
============
Preferred Stock outstanding, end of period (in thousands) ........................... $ 91,000
============
Portfolio turnover .................................................................. 34.59%
============
===============================================================================================================================
Leverage: Asset coverage per $1,000 ........................................................... $ 2,620
===============================================================================================================================
Dividends Per Series A -- Investment income -- net ................................................ $ 69
Share on Preferred ============
Stock Outstanding: Series B -- Investment income -- net ................................................ $ 69
============
===============================================================================================================================
</TABLE>
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock
shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on February 22, 1999.
+++ Aggregate total investment return.
See Notes to Financial Statements.
F-34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings California Insured Fund IV, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. Prior to commencement of operations on January
29, 1999, the Fund had no operations other than those relating to organizational
matters and the sale of 6,667 shares of Common Stock on January 13, 1999 to Fund
Asset Management, L.P. ("FAM") for $100,005. The Fund's Common Stock is listed
on the New York Stock Exchange under the symbol CIL. The following is a summary
of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
o Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options -- The Fund is authorized to write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the current
market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added
F-35
<PAGE>
MuniHoldings California Insured Fund IV, Inc., March 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
to (or deducted from) the basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or loss to the
extent the cost of the closing transaction exceeds the premium paid or
received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.55% of the Fund's average weekly net assets, including
issuance of Preferred Stock. For the period January 29, 1999 to March 31, 1999,
FAM earned fees of $165,425, all of which was voluntarily waived. FAM also
reimbursed the Fund additional expenses of $19,600.
During the period January 29, 1999 to March 31, 1999, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, received
underwriting fees of $682,500 in connection with the issuance of the Fund's
Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period January 29, 1999 to March 31, 1999 were $267,048,297 and $60,455,722,
respectively.
Net realized gains (losses) for the period January 29, 1999 to March 31, 1999
and net unrealized gains (losses) as of March 31, 1999 were as follows:
- ------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ------------------------------------------------------------------------------
Long-term investments ....................... $ (352,161) $ (931,249)
Foreign financial futures ................... 392,312 84,375
----------- -----------
Total ....................................... $ 40,151 $ (846,874)
=========== ===========
- ------------------------------------------------------------------------------
As of March 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $931,249, of which $87,900 related to appreciated securities
and $1,019,149 related to depreciated securities. The aggregate cost of
investments at March 31, 1999 for Federal income tax purposes was $233,319,570.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
F-36
<PAGE>
Common Stock
Shares issued and outstanding during the period January 29, 1999 to March 31,
1999 increased by 9,860,000 from shares sold.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.10 per share and a liquidation preference of $25,000
per share that entitle their holders to receive cash dividends at an annual rate
that may vary for the successive dividend periods. The yields in effect at March
31, 1999 were as follows: Series A, 3.20% and Series B, 2.75%.
In connection with the offering of AMPS, the Board of Directors has reclassified
3,640 shares of unissued capital stock as AMPS. Shares issued and outstanding
during the period January 29, 1999 to March 31, 1999 increased by 3,640 as a
result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of
each auction. For the period January 29, 1999 to March 31, 1999, MLPF&S, an
affiliate of FAM, earned $21,626 as commissions.
5. Subsequent Event:
On April 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.132085 per share,
payable on April 29, 1999 to shareholders of record as of April 22, 1999.
F-37
<PAGE>
Audited Financial Statements for
MuniHoldings California Insured Fund IV, Inc.
for the Period January 29, 1999 to September 30, 1999
[To be filed by amendment]
F-38
<PAGE>
Unaudited Financial Statements for
the Combined Fund on a Pro Forma Basis,
as of June 30, 1999
F-39
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- 98.6%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa $3,345 ABC California Unified School District,
GO, Series A, 5.625% due 8/01/2020(f) .. -- $3,413 -- -- $3,413
AAA Aaa 1,000 Anaheim, California, Public Financing
Authority, Lease Revenue Bonds (Public
Improvements Project), Series C, 5.38%
due 9/01/2024(f)** ..................... $246 -- -- -- 246
AAA Aaa 1,000 Anaheim, California, Public Financing
Authority Revenue Bonds, Electric
System District Facilities,
5% due 10/01/2023(g) ................... -- -- -- $945 945
AAA Aaa 3,195 Benicia, California, Unified School
District, GO, Refunding, Series A,
5.216% due 8/01/2019(c)** .............. 1,064 -- -- -- 1,064
AAA Aaa 4,000 Cabrillo, California, Unified School
District, GO, Series A, 5.216% due
8/01/2019(a)** ......................... 1,332 -- -- -- 1,332
AAA Aaa 1,220 California Community College Financing
Authority, Lease Revenue Bonds (West
Valley--Mission Community College),
5.50% due 5/01/2017(g) ................. -- 1,241 -- -- 1,241
California Educational Facilities
Authority Revenue Bonds:
AAA Aaa 8,210 (Stanford University), Series N, 5.20%
due 12/01/2027 ......................... -- -- $ 7,938 -- 7,938
AA Aa2 10,000 (University of Southern California),
5.50% due 10/01/2027 ................... -- -- 5,048 5,048 10,096
AAA Aaa 1,430 California Educational Facilities
Authority, Revenue Refunding Bonds
(Mills College), 5.125% due
9/01/2022(g) ........................... 1,378 -- -- -- 1,378
California HFA, Home Mortgage Revenue
Bonds, AMT:
AAA Aaa 3,000 Series B, 5.25% due 2/01/2028(a)(d) ... 2,851 -- -- -- 2,851
AAA Aaa 4,125 Series E, 6.10% due 8/01/2029(a) ...... -- 4,266 -- -- 4,266
AAA Aaa 7,500 Series J, 5.55% due 8/01/2028(g) ...... 7,446 -- -- -- 7,446
AAA Aaa 4,600 Series M, 5 60% due 8/01/2029(g) ...... -- 4,600 -- -- 4,600
AAA Aaa 22,500 Series N, 5.25% due 8/01/2029(f) ...... 2,373 -- 18,986 -- 21,359
California HFA Revenue Bonds, Home
Mortgage, AMT:
AAA Aaa 1,000 Series I, 5.75% due 2/01/2029(g) ...... -- 1,019 -- -- 1,019
AAA Aaa 3,000 Series J--2, 5.30% due 8/01/2016(g) .... -- -- -- 2,934 2,934
</TABLE>
F-40
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa 5,000 Series R, 5.25% due 8/01/2026(a) ...... -- -- -- 4,757 4,757
AA-- Aa3 3,890 California HFA Revenue Bonds (M/F
Housing III), AMT, Series A, 5.375%
due 8/01/2028 .......................... -- -- -- 3,842 3,842
AAA Aaa 2,000 California Health Facilities Finance
Authority Revenue Bonds (Kaiser
Permanente), Series A, 5.50% due
6/01/2022(f) ........................... -- -- -- 2,010 2,010
California Health Facilities Finance
Authority Revenue Bonds, RITR:
NR* Aaa 10,000 Series 14, 6.87% due 8/15/2030(b) ...... -- 9,746 -- -- 9,746
AAA NR* 2,500 Series 26, 7.175% due 6/01/2022(b)(f) .. 2,524 -- -- -- 2,524
California Health Facilities Finance
Authority Revenue Refunding Bonds:
A--1+ VMIG--1+ 7,500 (Adventist Hospital), VRDN, Series B,
3.85% due 9/01/2028(g)(h) ............ -- -- 2,000 5,500 7,500
AAA Aaa 2,500 (Catholic Healthcare West), Series A,
5.125% due 7/01/2024(g) .............. -- -- 2,387 -- 2,387
AAA Aaa 2,500 (Children's Hospital), 5.375% due
7/01/2016(g) ......................... -- 2,504 -- -- 2,504
AAA Aaa 4,500 (Children's Hospital), 5.375% due
7/01/2020(g) ......................... -- 4,464 -- -- 4,464
AAA Aaa 3,870 (Little Co. of Mary Health Service),
4.50% due 10/01/2028(a) .............. -- 3,285 -- -- 3,285
AAA NR* 8,500 RIB, Series 90, 7.485% due
8/15/2028(b) ......................... -- -- -- 8,228 8,228
AAA Aaa 45 (Sutter Health), Series A, 5.35% due
8/15/2028 ............................ -- -- -- 44 44
California Pollution Control Financing
Authority, PCR, Refunding (Pacific
Gas and Electric), VRDN(h):
A--1+ VMIG--1+ 8,300 Series E, 3.60% due 11/02/2026 ........ -- -- 5,000 3,300 8,300
A1+ NR* 1,200 Series F, 3.85% due 11/01/2026 ........ -- -- 1,200 -- 1,200
AAA Aaa 4,180 California State, Department of Water
Resources, Water Systems Revenue
Refunding Bonds (Central Valley
Project), Series Q, 5.375% due
12/01/2027(g) .......................... 4,190 -- -- -- 4,190
</TABLE>
F-41
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California State Economic Development
Financing Authority Revenue Bonds
(California Independent Systems
Project), VRDN(h):
A1+ VMIG1+ 200 Series A, 3.80% due 4/01/2008 ......... 100 100 -- -- 200
A--1+ VMIG--1+ 6,300 Series B, 3.80% due 4/01/2008 ......... -- -- -- 6,300 6,300
A--1+ VMIG--1+ 100 Series D, 3.80% due 4/01/2008 ......... -- -- -- 100 100
California State, GO, Refunding:
AAA Aaa 2,000 Veterans Bonds, AMT, Series BH,
5.40% due 12/01/2016(f) ................ -- -- 2,014 -- 2,014
AAA Aaa 17,635 5% due 2/01/2023(c) .................... -- -- 2,364 14,313 16,677
California State Public Work Board,
Lease Revenue Bonds, Department of
Corrections, Series A(a):
AAA Aaa 2,000 5.50% due 1/01/2017 .................... -- 2,031 -- -- 2,031
AAA Aaa 2,950 5.25% due 1/01/2021 .................... 2,902 -- -- -- 2,902
AAA Aaa 4,370 California State Public Works Board,
Lease Revenue Bonds (Various
University of California Projects),
Series C, 5.125% due 9/01/2022(a) ..... -- -- 4,212 -- 4,212
California State Public Works Board,
Lease Revenue Refunding Bonds (a):
AAA Aaa 4,500 Department of Corrections, Series B,
5% due 9/01/2021(g) .................. -- 2,375 -- 1,900 4,275
AAA Aaa 2,625 (Various Community College Projects),
Series B, 5.625% due 3/01/2019 ....... -- 2,682 -- -- 2,682
AAA Aaa 3,000 (Various University of California
Projects), Series A, 5.40% due
12/01/2016 ........................... -- 3,025 -- -- 3,025
AAA Aaa 1,000 California State University and
Colleges Revenue Refunding Bonds
(Hayward Foundation Inc. Auxilary
Organization), 5.25% due
8/01/2025(g) ........................... 980 -- -- -- 980
AAA Aaa 19,750 California State Veterans Bonds, GO,
Refunding, AMT, Series BH,
5.50% due 12/01/2024(f)(i) ............. 10,261 9,744 -- -- 20,005
</TABLE>
F-42
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California Statewide Communities
Development Authority, COP:
NR* VMIG1+ 5,400 (Continuing Care/Univiersity
Project), VRDN, 3.85% due
11/15/2028(h) ........................ 600 2,300 -- 2,500 5,400
AAA Aaa 2,890 (Huntington East Valley Hospital),
5.40% due 12/01/2027(a) .............. 2,886 -- -- -- 2,886
NR* Aaa 5,000 RIB, Series 24, 6.775% due
12/01/2015(b)(f) ..................... -- -- 5,028 -- 5,028
NR* Aaa 2,035 California Statewide Communities
Development Authority, COP, Refunding
(San Diego State University
Foundation), 5.30% due 3/01/2017(a) .... 2,032 -- -- -- 2,032
AAA Aaa 30,480 Central Coast Water Authority,
California Revenue Refunding Bonds
(State Water Project Regional
Facilities), Series A, 5% due
10/01/2022(a) .......................... -- 7,076 14,190 7,568 28,834
AAA Aaa 2,750 Central Valley Financing Authority,
California Cogeneration Project
Revenue Refunding Bonds (Cason
Ice--Generation Project), 5.20% due
7/01/2020(g) ........................... -- -- 2,685 -- 2,685
AAA Aaa 4,260 Clovis, California, Sewer Revenue
Refunding Bonds, 5.20% due
8/01/2028(g) ........................... -- -- 4,142 -- 4,142
AAA Aaa 6,140 Contra Costa, California, Water
District, Water Revenue Bonds, Series
G, 5% due 10/01/2024(g) ................ -- -- -- 5,795 5,795
AAA Aaa 3,690 Contra Costa County, California, COP,
Refunding (Merrithew Memorial
Hospital Project), 5.50% due
11/01/2022(g) .......................... -- 3,722 -- -- 3,722
AAA Aaa 4,000 Contra Costa County, California,
Pubic Financing Authority, Lease
Revenue Refunding Bonds (Various
Capital Facilities), Series 1999A,
5% due 6/01/2028(g) .................... -- -- 3,761 -- 3,761
BBB NR* 7,000 Contra Costa County, California,
Public Financing Authority, Tax
Allocation Revenue Refunding Bonds
(Pleasant Hill Bart Etc.
Redevelopment), 5.25% due 8/01/2028 .... 3,254 -- 3,254 -- 6,508
</TABLE>
F-43
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa 7,500 Delta County, California, Home Mortgage
Finance Authoriy, S/F Mortgage
Revenue Bonds, AMT, Series A,
5.35% due 6/01/2024(e)(g) .............. 7,298 -- -- -- 7,298
East Side Union High School District,
California, Santa Clara County GO,
Series E(c):
AAA Aaa 6,205 5% due 9/01/2022 ....................... -- -- 2,843 3,038 5,881
AAA Aaa 5,655 5% due 9/01/2023 ....................... -- -- -- 5,346 5,346
AAA Aaa 7,000 El Dorado County, California, Public
Agency Financing Authority Revenue
Refunding Bonds, 5.50% due
2/15/2021(c) ........................... -- 7,067 -- -- 7,067
AAA Aaa 2,505 Folsom Cordova, California, Unified
School District, Refunding, COP
(1998 Financing Project), 5.25% due
3/01/2024(f) ........................... 2,467 -- -- -- 2,467
AAA Aaa 3,000 Fremont, California, Unified School
District, Alameda County, GO,
Refunding, 5.25% due 9/01/2019(g) ...... 2,974 -- -- -- 2,974
AAA Aaa 3,390 Fresno, California, Sewer Revenue
Bonds, Series A, 5% due 9/01/2023(g) ... -- -- -- 3,203 3,203
AAA Aaa 1,360 Hayward, California, COP (Civic Center
Project), 5.25% due 8/01/2026(g) ....... 1,327 -- -- -- 1,327
AAA Aaa 3,850 Irvine, California, Unified School
District, Special Tax, Community
Facilities District Number 86-1,
5.375% due 11/01/2020(a) ............... 3,871 -- -- -- 3,871
AAA Aaa 7,100 La Quinta, California, Redevelopment
Agency, Tax Allocation Refunding
Bonds (Redevelopment Project Area
Number 1), 5.20% due 9/01/2028(a) ..... 2,430 -- -- 4,472 6,902
AAA Aaa 10,000 Long Beach, California, Harbor Revenue
Bonds, AMT, 5.375% due 5/15/2020(g) .... -- -- 9,894 -- 9,894
AAA Aaa 3,590 Long Beach California, Water Revenue
Refunding Bonds, Series A, 5% due
5/01/2024 .............................. -- -- -- 3,390 3,390
AAA Aaa 10,650 Los Altos, California, School District
GO, Series A, 5% due 8/01/2023(f) ...... -- -- -- 10,065 10,065
</TABLE>
F-44
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NR* Aaa 15,875 Los Angeles, California, Convention and
Exhibition Center Authority, Lease
Revenue Bonds, RITR, Series 21,
6.87% due 8/15/2018(b)(g) .............. 15,898 -- -- -- 15,898
AAA Aaa 3,000 Los Angeles, California, Convention and
Exhibition Center Authority, Lease
Revenue Refunding Bonds, Series A,
5.125% due 8/15/2021(g) ................ -- -- -- 2,898 2,898
Los Angeles, California, Department of
Water and Power, Electric Plant
Revenue Bonds:
AAA Aaa 5,250 5.25% due 6/15/2013(f) ................. -- -- -- 5,271 5,271
NR* Aaa 6,200 RITR, Series 18, 6.92% due
11/15/2031(b)(c) ..................... -- 6,161 -- -- 6,161
AAA Aaa 4,230 Los Angeles, California, M/F Housing
Revenue Refunding Bonds, Senior
Series G, 5.65% due 1/01/2014(f) ...... -- 4,315 -- -- 4,315
Los Angeles, California, Unified School
District, GO(c):
AAA Aaa 22,200 Series A, 5% due 7/01/2021 ............ 15,003 -- 2,143 4,001 21,147
AAA Aaa 11,915 Series B, 5% due 7/01/2023 ............ -- -- 2,363 8,900 11,263
AAA Aaa 5,000 Los Angeles County, California,
Metropolitan Transportation
Authority, Sales Tax Revenue Bonds,
RITR, Series 30, 6.62% due
7/01/2023(a)(b) ........................ 4,826 -- -- -- 4,826
Los Angeles County, California,
Metropolitan Transportation
Authority, Sales Tax Revenue
Refunding Bonds:
AAA Aaa 16,250 Proposition A, First Tier, Senior
Series A, 5.25% due 7/01/2027(g) ..... 6,124 9,799 -- -- 15,923
AAA Aaa 2,500 Proposition A, First Tier, Senior
Series C, 5% due 7/01/2026(a) ........ -- -- 2,355 -- 2,355
AAA Aaa 2,500 Proposition C, 2nd Senior--Series A,
5% due 7/01/2023(a) .................. -- -- 2,363 -- 2,363
AAA Aaa 6,000 Los Angeles County, California,
Sanitation Districts Financing
Authority Revenue Bonds (Capital
Projects), Series A, 5.25% due
10/01/2019(g) .......................... -- -- 5,911 -- 5,911
AAA Aaa 1,750 Metropolitan Water District, Southern
California, Waterworks Revenue Bonds,
Series A, 5.50% due 7/01/2025(g) ....... -- 1,762 -- -- 1,762
</TABLE>
F-45
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa 1,080 Monrovia, California, Unified School
District, GO, Series A, 5.375% due
8/01/2022(g) ........................... 1,085 -- -- -- 1,085
AAA Aaa 2,000 Montebello, California, Community
Redevelopment Agency, Housing Tax
Allocation Bonds, Series A, 5.45% due
9/01/2019(f) ........................... -- 2,006 -- -- 2,006
AAA Aaa 6,065 Monterey County, California, COP
(Natividad Medical Center
Improvement), Series E, 4.75% due
8/01/2027(g) ........................... -- -- 2,684 2,742 5,426
AAA Aaa 16,000 Norco, California, Redevelopment
Agency, Tax Allocation Bonds,
Refunding (Norco Redevelopment
Project-- Area Number 1), 5.75% due
3/01/2026(g) ........................... -- 16,448 -- -- 16,448
AAA Aaa 2,250 Northern California Power Agency,
Multiple Capital Facilities Revenue
Refunding Bonds, Series A, 5% due
8/01/2025(a) ........................... -- -- -- 2,122 2,122
AAA Aaa 12,700 Northern California Power Agency,
Public Power Revenue Refunding Bonds
(Hydroelectric Project Number One),
Series A, 5.125% due 7/01/2023(g) ..... 5,780 -- 5,250 1,200 12,230
NR* VMIG1+ 3,600 Northern California Transmission
Revenue Bonds, RITR, Series 16,
6.62% due 5/01/2020(b) ................. -- 3,483 -- -- 3,483
AAA Aaa 1,300 Oakland, California, GO, Measure K,
Series C, 5.80% due 12/15/2018(g) ...... -- 1,342 -- -- 1,342
AAA Aaa 5,000 Oakland, California, State Building
Authority Lease Revenue Bonds (Elihu
M. Harris), Series A, 5% due
4/01/2023(a) ........................... -- -- -- 4,727 4,727
AAA Aaa 13,095 Oakland, California, Unified School
District, Alameda County, Refunding,
GO, Series C, 5.50% due 8/01/2019(c) ... 13,209 -- -- -- 13,209
AAA Aaa 5,000 Olivenhain Municipal Water District,
California Water Revenue Refunding
Bonds, COP, Capital Projects, 5.125%
due 6/01/2028(c) ....................... 4,775 -- -- -- 4,775
</TABLE>
F-46
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa 5,750 Palm Desert, California, Financing
Authority, Tax Allocation Refunding
Bonds (Project Area Number 1),
5.45% due 4/01/2018(g) ................. -- 5,807 -- -- 5,807
AAA Aaa 5,000 Pittsburg, California, Public Financing
Authority, Water Revenue Bonds,
5.50% due 6/01/2027(g) ................. -- 5,045 -- -- 5,045
AAA Aaa 7,500 Pittsburg, California, Redevelopment
Agency, Tax Allocation Bonds (Los
Medanos Project Area), Series B,
5.70% due 8/01/2032(f) ................. -- 7,723 -- -- 7,723
AAA Aaa 2,000 Pomona, California, Public Financing
Authority Revenue Refunding Bonds
(SW Pomona Redevelopment Project),
Series W, 5% due 2/01/2024(g) ......... -- -- -- 1,889 1,889
Port Oakland, California, Port Revenue
Bonds (g):
AAA Aaa 2,000 AMT, Series G, 5.375% due 11/01/2025 .. -- 1,963 -- -- 1,963
AAA Aaa 7,000 Series J, 5.50% due 11/01/2026 ........ -- 7,065 -- -- 7,065
AAA Aaa 5,000 Rancho Cucamonga, California,
Redevelopment Agency, Tax Allocation
Bonds (Rancho Redevelopment Project),
5.25% due 9/01/2026(g) ................. 4,900 -- -- -- 4,900
AAA Aaa 3,530 Riverside County, California, COP,
Refunding, 5% due 12/01/2021(g) ........ -- -- 3,343 -- 3,343
AAA Aaa 13,920 Sacramento, California, Cogeneration
Authority, Cogeneration Project
Revenue Refunding Bonds, 5.20% due
7/01/2021(g) ........................... 6,326 -- -- -- 6,326
AAA Aaa 15,000 Sacramento, California, Municipal
Utility District, Electric Revenue
Bonds, Series K, 5.25% due
7/01/2024(a) ........................... 4,932 9,863 -- -- 14,795
AAA Aaa 2,750 Sacramento, California, Municipal
Utility District, Electric Revenue
Refunding Bonds, Series L, 5.20% due
7/01/2017(g) ........................... -- -- 2,723 -- 2,723
AAA Aaa 8,000 Sacramento County, California, COP,
Refunding (Public Facilities
Project), 4.75% due 10/01/2027(a) ..... 7,155 -- -- -- 7,155
</TABLE>
F-47
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa 5,800 Salida, California, Area Public
Facilities Financing Agency,
Community Facilities District Special
Tax Refunding Bonds (No. 1998--1),
5.25% due 9/01/2028(f) ................. -- -- 5,681 -- 5,681
AAA Aaa 2,000 San Diego, California, Certificates of
Unified Dividend Interest, Water
Utility Fund, Net System Revenue
Bonds, 5% due 8/01/2021(c) ............. -- -- -- 1,895 1,895
AAA Aaa 2,000 San Diego, California, Convention
Center Expansion Financing Authority,
Lease Revenue Bonds, Series A, 4.75%
due 4/01/2028(a) ....................... -- -- 1,787 -- 1,787
San Diego, California, Public
Facilities Financing Authority, Sewer
Revenue Bonds(c):
AAA Aaa 9,000 5% due 5/15/2025 ....................... -- -- -- 8,477 8,477
AAA Aaa 22,555 Series A, 5.25% due 5/15/2027 ......... 18,426 -- -- 3,523 21,949
AAA Aaa 2,950 Series B, 5.25% due 5/15/2027 ......... -- -- 2,891 -- 2,891
AAA NR* 5,825 San Diego County, California, COP,
Refunding (Central Jail), 5% due
10/01/2025(a) .......................... -- -- -- 5,492 5,492
AAA Aaa 2,500 San Diego County, California, Water
Authority, Water Revenue Bonds, COP,
Series A, 5% due 5/01/2022(c) .......... -- -- 2,366 -- 2,366
AAA Aaa 2,650 San Diego, California, Public
Facilities Authority Revenue Bonds,
Series A, 5% due 8/01/2023(a) .......... -- -- -- 2,504 2,504
San Fransisco, California, City and
County Airport Commission,
International Airport Revenue Bonds,
Second Series:
AAA Aaa 2,000 AMT, Issue 10--A, 5.70% due
5/01/2026 (g) .......................... -- 2,025 -- -- 2,025
AAA Aaa 6,000 AMT, Issue 12--A, 5.80% due
5/01/2021 (c) .......................... -- 6,132 -- -- 6,132
AAA Aaa 5,400 Issue 15B, 5% due 5/01/2024(g) .......... -- -- -- 5,099 5,099
</TABLE>
F-48
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa 5,540 San Francisco, California, City and
County Airport Commission,
International Airport Revenue Bonds,
Special Facilities Lease (SFO Fuel
Co. LLC), AMT, Series A, 5.25% due
1/01/2022(a) ........................... 5,383 -- -- -- 5,383
San Francisco, California, City and
County, GO, Refunding, Series 1(c):
AAA Aaa 6,015 5.125% due 6/15/2013 ................... -- -- 3,013 3,028 6,041
AAA Aaa 10,000 5.125% due 6/15/2014 ................... -- -- 5,006 5,006 10,012
AAA Aaa 3,500 San Francisco, California, City and
County Redevelopment Agency, Hotel
Tax Revenue Refunding Bonds, 5% due
7/01/2025(f) ........................... -- -- -- 3,301 3,301
AAA NR* 3,530 San Francisco, California, City and
County Redevelopment Agency, M/F
Housing Revenue Bonds (1045 Mission
Apartments), AMT, Series C, 5.25% due
12/20/2027(i) .......................... -- -- -- 3,394 3,394
AAA Aaa 4,000 San Francisco, California, City and
County Redevelopment Financing
Authority, Tax Allocation Bonds,
Refunding (Redevelopment Project),
Series D, 0% due 8/01/2022(g) .......... -- 1,119 -- -- 1,119
AAA Aaa 10,000 San Francisco, California, State
Building Authority, Lease Revenue
Bonds (San Francisco Civic Center
Complex), Series A, 5.25% due
12/01/2021(a) .......................... -- 9,831 -- -- 9,831
AAA Aaa 1,045 San Francisco, California, Unified
School District, COP, 4.75% due
8/01/2024 .............................. -- -- 940 -- 940
AAA Aaa 22,120 San Joaquin Hills, California,
Transportation Corridor Agency, Toll
Road Revenue Refunding Bonds, Series
A, 5.25% due 1/15/2030(g) .............. -- -- 9,850 11,679 21,529
AAA Aaa 9,200 San Jose, California, Improvement Bond
Act of 1915, Special Assessment
Refunding Bonds, Reassessemt District
98--216SJ--24P, 5.25% due
9/02/2015(a) ........................... 9,140 -- -- -- 9,140
</TABLE>
F-49
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa 4,845 San Jose, California, Redevelopment
Agency Tax Allocation (Merged Area
Redevelopment Project), 5% due
8/01/2026(a) ........................... -- -- -- 4,564 4,564
AAA Aaa 5,000 San Jose--Santa Clara, California,
Water Financing Authority, Sewer
Revenue Bonds, Series A, 5.375% due
11/15/2020(c) .......................... 4,990 -- -- -- 4,990
AAA Aaa 5,000 San Mateo County, California, Joint
Powers Authority, Lease Revenue
Refunding Bonds (Capital Projects),
Series A, 4.75% due 7/15/2023(f) ...... -- -- -- 4,491 4,491
AAA Aaa 5,000 Santa Ana, California, Financing
Authority, Revenue Refunding Bonds
(South Harbor Boulevard), Series A,
5% due 9/01/2019(g) .................... 4,768 -- -- -- 4,768
AAA Aaa 26,750 Santa Clara County, California,
Financing Authority, Lease Revenue
Refunding Bonds, Series A, 5% due
11/15/2022(a) .......................... 6,385 -- 9,459 9,459 25,303
AAA Aaa 9,000 Santa Fe Springs, California, Community
Development, Community Tax Allocation
Refunding Bonds (Consolidated
Redevelopment Project), Series A,
5% due 9/01/2022(g) .................... 8,515 -- -- -- 8,515
AAA VMIG--1+ 2,700 Southern California Public Power
Authority, Power Project Revenue
Refunding Bonds (Palo Verde Project),
VRDN, Series C, 3.60% due
7/01/2017(a)(h) ........................ -- -- -- 2,700 2,700
AAA Aaa 7,750 Southern California Public Power
Authority Revenue Refunding Bonds
(SouthernTransmission Project),
5.75% due 7/01/2021(g) ................. -- 7,912 -- -- 7,912
AAA Aaa 8,000 Stockton, California, Revenue Refunding
Bonds, COP (Wastewater System
Project), Series A, 5.20% due
9/01/2029(g) ........................... 4,830 -- -- 2,835 7,665
AAA Aaa 9,750 Turlock, California, Irrigation
District Revenue Refunding Bonds,
Series A, 5% due 1/01/2026(g) ......... -- -- 1,650 7,541 9,191
AAA Aaa 2,000 University of California, COP, Series
A, 5.125% due 11/01/2020 (a) ........... -- -- -- 1,936 1,936
</TABLE>
F-50
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
California California California California for
S&P Moody's Face Insured Insured Insured Insured Combined
Ratings Ratings Amount Issue Fund++ Fund II++ Fund III++ Fund IV++ Funds++
- ------------------------------------------------------------------------------------------------------------------------------------
California -- (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa 3,000 University of California, Research
Facilities Revenue Bonds, Series D,
5% due 9/01/2024 (f) ................. -- -- -- 2,832 2,832
AAA Aaa 4,000 University of California Revenue Bonds
(University of California Medical
Center), 5.75% due 7/01/2024(a) ...... -- 4,082 -- -- 4,082
AAA Aaa 15,200 University of California Revenue
Refunding Bonds (Multiple Purpose
Projects), Series E, 5.125% due
9/01/2020(g) ......................... 9,704 -- 4,076 970 14,750
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Puerto Rico -- 1.1%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A Baa1 4,150 Puerto Rico Commonwealth, GO, Public
Improvement, 5% due 7/01/2027 ........ 3,855 -- -- -- 3,855
A Baa1 5,000 Puerto Rico Commonwealth, Highway and
Transportation Authority, Highway
Revenue Bonds, Series Y, 5.50% due
7/01/2026 ............................ -- 5,000 -- -- 5,000
Total Investments (Cost - $863,998)
- 99.7% .............................. 232,795 193,543 172,800 229,074 828,212
Variation Margin on Financial Futures
Contracts *** (0.2%) ................. (276) (346) (536) (384) (1,542)
Other Assets Less Liabilities - 0.5% ... 4,554 3,362 (2,505) (1,719) 3,692
-------- -------- -------- -------- -------
Net Assets - 100.0% .................... $237,073 $196,559 $169,759 $226,971 830,362
======== ======== ======== ======== =======
866,475
</TABLE>
- --------------------------------------------------------------------------------
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at March 31,
1999.
(b) MBIA Insured.
(c) AMBAC Insured.
(d) FSA Insured.
(e) GNMA Collateralized.
(f) Prerefunded.
(g) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at March 31, 1999.
(h) FNMA Collateralized.
F-51
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.,
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
AND MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
California (continued)
- --------------------------------------------------------------------------------
(i) FGIC Insured.
(j) FHLMC Collateralized.
(k) All or a portion of security held as collateral in connection with open
financial futures contract.
* Not Rated
** Represents a zero coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
+ Highest short-term rating by Moody's Investors Service, Inc.
++ Financial futures contracts sold as of March 31, 1999 were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in Thousands)
Value
Number of Contracts Issue Expiration Date (Notes 1a & 1b)
- ------------------- ----- --------------- ---------------
<S> <C> <C> <C>
1,120 US Treasury Bonds September 1999 $129,815
--------
Total Financial Futures Contracts Sold
(Total Contract Price - $127,835) $129,815
========
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniHoldings California Insured Fund II's
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list below.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-52
<PAGE>
The following unaudited pro forma Combined Statement of Assets,
Liabilities and Capital for the Combined Fund has been derived from the
Statements of Assets, Liabilities and Capital of the respective Funds at June
30, 1999 and such information has been adjusted to give effect to the
Reorganization as if the Reorganization had occurred at June 30, 1999. The pro
forma Combined Statement of Assets, Liabilities and Capital is presented for
informational purposes only and does not purport to be indicative of the
financial condition that actually would have resulted if the Reorganization had
been consummated at June 30, 1999. The pro forma Combined Statement of Assets,
Liabilities and Capital should be read in conjunction with the Funds' financial
statements and related notes thereto which are included in the Joint Proxy
Statement and Prospectus.
COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL FOR
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC., MUNIHOLDINGS CALIFORNIA INSURED
FUND, INC., MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC. AND MUNIHOLDINGS
CALIFORNIA INSURED FUND IV, INC.
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
California California California California
Insured II Insured Insured III Insured IV
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets:
Investments, at value* (Note 1a) ............. $ 232,794,724 $ 199,948,746 $ 180,021,093 $ 229,074,352
Cash ......................................... 914,385 -- -- --
Receivables:
Interest ................................... 4,053,477 3,543,694 2,625,218 3,616,858
Securities sold ............................ -- 210,524 4,246,226 2,707,072
Deferred organization expenses (Note 1e) ..... 11,898 -- -- --
Prepaid expenses and other assets ............ 12,589 4,912 13,727 19,000
------------- ------------- ------------- -------------
Total assets ................................. 237,787,073 203,707,876 186,906,264 235,417,282
------------- ------------- ------------- -------------
Liabilities:
Payables:
Securities purchased ....................... -- -- 8,845,711 5,106,800
Custodian bank (Note 1g) ................... -- 34,219 124,135 2,389,207
Variation margin (Note 1b) ................. 275,625 345,938 536,094 384,375
Dividends to shareholders (Note 1f) ........ 198,301 83,565 185,434 236,076
Offering costs (Note 1e) ................... 60,000 100,948 120,117 248,662
Investment adviser (Note 2) ................ 99,484 86,115 61,271 37,783
Accrued expenses and other liabilities ....... 80,741 91,926 53,291 43,272
------------- ------------- ------------- -------------
Total liabilities ............................ 714,151 742,711 9,926,053 8,446,175
------------- ------------- ------------- -------------
Net Assets ................................... $ 237,072,922 $ 202,965,165 $ 176,980,211 $ 226,971,107
============= ============= ============= =============
Capital
Capital Stock (200,000,000 shares authorized)
Preferred Stock, par value $.10 per share of
AMPS** issued and outstanding+ at
$25,000 per share liquidation preference . $ 96,000,000 $ 80,000,000 $ 74,000,000 $ 91,000,000
Common Stock par value $.10 per share issued
and outstanding++ ........................ 980,695 832,719 752,177 986,667
Paid-in capital in excess of par ............. 144,963,983 123,014,809 111,148,366 145,897,961
Undistributed investment income-- net ........ 1,004,497 887,429 608,450 709,494
Undistributed (accumulated) realized capital
gains (losses) on investments--net ......... (638,660) 258,113 (2,125,066) (2,153,154)
Unrealized appreciation (depreciation) on
investments--net ........................... (5,237,593) (2,027,905) (7,403,716) (9,469,861)
------------- ------------- ------------- -------------
Total capital ................................ $ 237,072,922 $ 202,965,165 $ 176,980,211 $ 226,971,107
============= ============= ============= =============
Net asset value per share of Common Stock .... $ 14.38 $ 14.77 $ 13.69 $ 13.78
============= ============= ============= =============
*Identified Cost ............................. $ 237,476,223 $ 201,499,932 $ 187,005,434 $ 238,016,713
============= ============= ============= =============
+Shares issued and outstanding ............... 3,840 3,200 2,960 3,640
============= ============= ============= =============
++ Shares issued and outstanding ............. 9,806,948 8,327,187 7,521,774 9,866,667
============= ============= ============= =============
<CAPTION>
Pro Forma
for
Adjustments Combined Fund
------------- -------------
<S> <C> <C>
Assets:
Investments, at value* (Note 1a) ............. $ 841,838,915
Cash ......................................... 914,385
Receivables:
Interest ................................... 13,839,247
Securities sold ............................ 7,163,822
Deferred organization expenses (Note 1e) ..... 11,898
Prepaid expenses and other assets ............ 50,228
------------- -------------
Total assets ................................. 863,818,495
------------- -------------
Liabilities:
Payables:
Securities purchased ....................... 13,952,511
Custodian bank (Note 1g) ................... 2,547,561
Variation margin (Note 1b) ................ 1,542,032
Dividends to shareholders (Note 1f) ....... 3,467,983(1) 4,171,359
Offering costs (Note 1e) .................. 529,727
Investment adviser (Note 2) ............... 284,653
Accrued expenses and other liabilities ....... 269,230
------------- -------------
Total liabilities ............................ 3,467,983 23,297,073
------------- -------------
Net Assets ................................... $ (3,467,983) $ 840,521,422
============= =============
Capital
Capital Stock (200,000,000 shares authorized)
Preferred Stock, par value $.10 per share of
AMPS** issued and outstanding+ at
$25,000 per share liquidation preference . $ 341,000,000
Common Stock par value $.10 per share issued
and outstanding++ ........................ (54,846) 3,497,412
Paid-in capital in excess of par ............. (54,846) 525,079,965
Undistributed investment income-- net ........ (3,209,870) 0
Undistributed (accumulated) realized capital
gains (losses) on investments--net ......... (258,113) (4,916,880)
Unrealized appreciation (depreciation) on
investments--net ........................... (24,139,075)
------------- -------------
Total capital ................................ $ (3,467,983) $ 840,521,422
============= =============
Net asset value per share of Common Stock .... -- $ 14.28
============= =============
*Identified Cost ............................. -- $ 626,522,079
============= =============
+Shares issued and outstanding ............... -- 9,800
============= =============
++ Shares issued and outstanding ............. (548,452) 34,974,124
============= =============
</TABLE>
- ----------
(1) Assumes the distribution of undistributed investment income and
undistributed realized capital gains.
** Auction Market Preferred Stock.
See Notes to Financial Statements.
F-53
<PAGE>
The following unaudited pro forma Combined Statement of Operations for the
Combined Fund has been derived from the statement of operations of the
respective Funds for the periods indicated through June 30, 1999 and such
information has been adjusted to give effect to the Reorganization as if the
Reorganization had occurred on July 1, 1998. The pro forma Combined Statement
of Operations is presented for informational purposes only and does not purport
to be indicative of the results of operations that actually would have resulted
if the Reorganization had been consummated on July 1, 1998 nor which may result
from future operations. The pro forma Combined Statement of Operations should be
read in conjunction with the Funds' financial statements and related notes
thereto which are included in the Joint Proxy Statement and Prospectus.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC., MUNIHOLDINGS CALIFORNIA
INSURED FUND, INC., MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC. AND
MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
(Unaudited)
<TABLE>
<CAPTION>
California California California California
Insured II Insured Insured III Insured IV
---------------- ---------------- ---------------- ----------------
For the period For the period For the period For the period
July 1, 1998 July 1, 1998 September 25,1998+ January 29, 1999+
to June 30, 1999 to June 30, 1999 to June 30, 1999 to June 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Investment Income (Note 1d):
Interest and amortization of premium and
discount earned ............................. $ 12,785,332 $ 11,193,531 $ 6,805,994 $ 4,524,709
------------ ------------ ------------ ------------
Expenses:
Investment advisory fees (Note 2) ............. 1,354,514 1,151,683 731,423 449,204
Commission fees ............................... 230,228 205,429 127,659 81,469
Accounting services (Note 2) .................. 68,778 73,168 39,305 24,661
Professional fees ............................. 57,994 49,889 39,587 17,162
Transfer agent fees ........................... 36,140 32,972 28,890 15,104
Printing and shareholder reports .............. 25,105 42,770 12,310 4,882
Directors' fees and expenses .................. 21,945 19,973 18,953 10,841
Custodian fees ................................ 20,436 16,477 9,069 6,326
Listing fees .................................. 13,457 12,958 12,764 6,133
Pricing fees .................................. 7,704 6,906 1,188 3,199
Amortization of organization expenses (Note 1e) 3,248 -- 2,453 --
Organization expense .......................... -- 2,749 905 --
Other ......................................... 4,938 3,241 5,034 3,754
------------ ------------ ------------ ------------
Total expenses before reimbursement ........... 1,844,487 1,618,215 1,029,540 622,735
Reimbursement of expenses (Note 2) ............ (206,643) (88,944) (470,604) (371,861)
------------ ------------ ------------ ------------
Total expenses after reimbursement ............ 1,637,844 1,529,271 558,936 250,874
------------ ------------ ------------ ------------
Investment income - net ....................... 11,147,488 9,664,260 6,247,058 4,273,835
------------ ------------ ------------ ------------
Realized & Unrealized Gains(Loss) on
Investments - Net (Notes 1b & 1d)
Realized gain (loss) on investments-net ....... 867,427 912,488 (2,125,067) (2,153,155)
Change in unrealized appreciation/depreciation
on investments - net ........................ (6,471,307) (6,362,097) (7,403,716) (9,469,861)
------------ ------------ ------------ ------------
Net Increase in Net Assets Resulting from
Operations .................................. $ 5,543,608 $ 4,214,651 $ (3,281,725) $ (7,349,181)
============ ============ ============ ============
<CAPTION>
Pro Forma
for
Adjustments Combined Fund
----------- -------------
<S> <C> <C>
Investment Income (Note 1d):
Interest and amortization of premium and
discount earned ............................. $ 35,309,566
------------
Expenses:
Investment advisory fees (Note 2) ............. 3,686,824
Commission fees ............................... 644,785
Accounting services (Note 2) .................. (100,912)(1) 105,000
Professional fees ............................. (103,632(1) 61,000
Transfer agent fees ........................... 113,106
Printing and shareholder reports .............. (14,067)(1) 71,000
Directors' fees and expenses .................. (49,767)(1) 21,945
Custodian fees ................................ 52,308
Listing fees .................................. 45,312
Pricing fees .................................. 18,997
Amortization of organization expenses (Note 1e) 5,701
Organization expense .......................... 3,654
Other ......................................... 16,967
------------ ------------
Total expenses before reimbursement ........... 268,378 4,846,599
Reimbursement of expenses (Note 2) ............ 0 (1,138,052)
------------ ------------
Total expenses after reimbursement ............ 268,378 3,708,547
------------ ------------
Investment income - net ....................... (268,378) 31,601,019
------------ ------------
Realized & Unrealized Gains(Loss) on
Investments - Net (Notes 1b & 1d)
Realized gain (loss) on investments-net ....... (2,498,307)
Change in unrealized appreciation/depreciation
on investments - net ........................ (29,706,981)
------------ ------------
Net Increase in Net Assets Resulting from
Operations .................................. $ 268,378 (604,269)
============ ============
</TABLE>
- ----------
(1) Reflects the anticipated savings of the Reorganization.
(2) These Pro Forma Combined Statements of Operations exclude non-recurring
estimated Reorganization expenses of $488,000 which will be paid by
Californis Insured II subsequent to the Reorganization.
+ Commencement of operations
See Notes to Financial Statements.
F-54
<PAGE>
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings California Insured Fund II, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. These unaudited financial statements reflect all
adjustments which are, in the opinion of management necessary to a fair
statement of the results for the interim period presented. The Fund's financial
statements are prepared in accordance with generally accepted accounting
principles, which may require the use of management accruals and estimates. The
Fund determines and makes available for publication the net asset value of its
Common Stock on a weekly basis. The Fund's Common Stock is listed on the New
York Stock Exchange under the symbol MUC. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in
the over-the-counter markets and are valued at the most recent bid price or
yield equivalent as obtained by the Fund's pricing service from dealers that
make markets in such securities. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their closing prices as of
the close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
o Financial futures contracts -- The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
o Options -- The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization and offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a period not exceeding five
years. In accordance with Statement of Position 98-5, any unamortized
organization expenses will be expensed July 1, 1999. This charge will not have
any material impact on the operations of the Fund. Direct expenses relating to
the public offering of the Fund's Common and Preferred Stock were charged to
capital at the time of issuance of the shares.
F-55
<PAGE>
(f) Dividends and distributions -- Dividends from net investment income
are declared and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
(g) Custodian bank -- The MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund III, Inc. and MuniHoldings California
Insured Fund IV, Inc. recorded an amount payable to the Custodian bank
reflecting an overnight overdraft, which resulted from timing differences of
security transaction settlements.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net assets,
including proceeds from the issuance of Preferred Stock.
For the Fund, FAM earned fees of $1,354,514 for the period July 1, 1998 to
June 30, 1999, of which $206,643 was voluntarily waived. For MuniHoldings
California Insured Fund, Inc., FAM earned fees of $1,151,683 for the period July
1, 1998 to June 30, 1999, of which $88,944 was voluntarily waived. For
MuniHoldings California Insured Fund III, Inc., FAM earned fees of $731,423 for
the period September 25, 1998 (commencement of operations) to June 30, 1999, of
which $470,604 was voluntarily waived. For MuniHoldings California Insured Fund
IV, Inc., FAM earned fees of $449,204 for the period January 29, 1999
(commencement of operations) to June 30, 1999, of which $352,261 was voluntarily
waived. In addition, FAM also reimbursed the Fund $19,600 in additional
expenses.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
F-56
<PAGE>
EXHIBIT I
INFORMATION PERTAINING TO EACH FUND
o General Information Pertaining to the Funds
<TABLE>
<CAPTION>
State of
Defined Term Fiscal Organiza- Meeting
Fund Used in Exhibit I Year End tion Time
- ---- ----------------- -------- --------- -------
<S> <C> <C> <C> <C>
MuniHoldings California Insured Fund II, Inc. ..... California Insured II 6/30 MD 9:00 a.m.
MuniHoldings California Insured Fund, Inc. ........ California Insured 8/31 MD 8:45 a.m.
MuniHoldings California Insured Fund III, Inc. .... California Insured III 5/31 MD 9:15 a.m.
MuniHoldings California Insured Fund IV, Inc. ..... California Insured IV 9/30 MD 9:30 a.m.
</TABLE>
Shares of Capital Stock
Outstanding as of
the Record Date
-------------------------------
Common
Fund Stock AMPS
- ---- ---------- ----
California Insured II ................ 9,820,001 3,840
California Insured ................... 13,086,667 3,200
California Insured III ............... 6,506,667 2,960
California Insured IV ................ 8,606,667 3,640
o Information Pertaining to Officers and Directors
<TABLE>
<CAPTION>
Year in Which Each Nominee of California Insured II
Became a Member of the Board
-----------------------------------------------------------
Fund Bodurtha Glenn London Martin May Perold Zeikel
- --------- -------- ----- ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
California Insured II ...... 1998 1999 1998 1998 1998 1998 1998
</TABLE>
<TABLE>
<CAPTION>
Year in Which Each Nominee of California Insured,
California Insured III
and California Insured IV Became a Member of the Board
-----------------------------------------------------------
Fund Forbes Glenn Montgomery Reilly Ryan West Zeikel
- --------- ------ ----- ---------- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
California Insured ......... 1997 1999 1997 1997 1997 1997 1997
California Insured III ..... 1998 1999 1998 1998 1998 1998 1998
California Insured IV ...... 1998 1999 1998 1998 1998 1998 1998
</TABLE>
Set forth in the table below, with respect to each Fund, are the names of
the nominees to be elected by holders of AMPS, voting separately as a class, and
the names of the nominees to be elected by holders of shares of Common Stock and
AMPS, voting together as a single class.
<TABLE>
<CAPTION>
Nominees to be Elected by
Nominees to be Holders of Shares of Common
Fund Elected by Holders of AMPS Stock and AMPS
- ---- -------------------------- ---------------------------
<S> <C> <C> <C> <C>
California Insured II ... James H. Bodurtha Joseph L. May Herbert I. London Robert R. Martin
Terry K. Glenn Arthur Zeikel
Andre F. Perold
California Insured ...... Charles C. Reilly Richard R. West Ronald W. Forbes Kevin A. Ryan
Terry K. Glenn Arthur Zeikel
Cynthia A. Montgomery
California Insured III .. Charles C. Reilly Richard R. West Ronald W. Forbes Kevin A. Ryan
Terry K. Glenn Arthur Zeikel
Cynthia A. Montgomery
California Insured IV ... Charles C. Reilly Richard R. West Ronald W. Forbes Kevin A. Ryan
Terry K. Glenn Arthur Zeikel
Cynthia A. Montgomery
</TABLE>
I-1
<PAGE>
Set forth in the table below is information regarding board and committee
meetings held and the aggregate fees and expenses paid by the Fund to
non-affiliated Board members during each Fund's most recently completed fiscal
year.
<TABLE>
<CAPTION>
Board Audit Committee
--------------------------------- ------------------------------ Aggregate
# # Per Fees and
Meetings Annual Per Meeting Meetings Annual Meeting Expenses
Fund Held* Fee ($) Fee ($)** Held Fee ($) Fee ($)** ($)
- ----- -------- ------- ----------- -------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
California Insured II [4] 2,500 250 4 500 125
California Insured [4] 2,000 200 4 800 0***
California Insured III 4 2,000 200 [3] 800 0***
California Insured IV + 2,000 200 [2] 800 0***
</TABLE>
- ----------
* Includes meetings held via teleconferencing equipment.
** The fee is payable for each meeting attended in person. A fee is not paid
for telephonic meetings.
*** The Chairman of the Audit Committee receives an annual fee of $1,000.
+ Commenced operations January 29, 1999.
Set forth in the table below is information regarding compensation paid by
each Fund to the non-affiliated Board members for the most recently completed
fiscal year.
Compensation From California Insured,
California Insured III and California Insured IV ($)*
-----------------------------------------------------
Fund Forbes Montgomery Reilly Ryan West
- ---- ------ ---------- ------ ---- ----
California Insured ...... 3,400 3,400 4,400 3,400 3,400
California Insured III .. 3,400 3,400 4,400 3,400 3,400
California Insured IV ... 3,600 3,600 4,600 3,600 3,600
Compensation From California Insured II ($)*
------------------------------------------------------
Fund Bodurtha London Martin May Perold
- ---- -------- ------ ------ --- ------
California Insured II ... 4,875 4,875 4,875 4,875 4,875
- ----------
* No pension or retirement benefits are accrued as part of Fund expenses.
Set forth in the tables below is information regarding the aggregate
compensation paid by all registered investment companies advised by FAM and its
affiliate, MLAM ("FAM/MLAM Advised Funds"), including the Funds, to the
non-affiliated Board members for the year ended December 31, 1998.
Aggregate Compensation From FAM/MLAM Advised Funds
Name of Board Member Paid to Board members of California Insured II ($)(1)
- -------------------- -----------------------------------------------------
James H. Bodurtha ....... 163,500
Herbert I. London ....... 163,500
Robert R. Martin ........ 163,500
Joseph L. May ........... 163,500
Andre F. Perold ......... 163,500
- ----------
(1) The Directors serve on the boards of FAM/MLAM Advised Funds as follows:
Mr. Bodurtha (29 registered investment companies consisting of 47
portfolios); Mr. London (29 registered investment companies consisting of
47 portfolios); Mr. Martin (29 registered investment companies consisting
of 47 portfolios); Mr. May (29 registered investment companies consisting
of 47 portfolios); and Mr. Perold (29 registered investment companies
consisting of 47 portfolios).
Aggregate Compensation From FAM/MLAM Advised Funds
Paid to Board members of California Insured,
Name of Board Member California Insured III and California Insured IV($)(*)
- -------------------- ------------------------------------------------------
Ronald W. Forbes ....... 192,567
Cynthia A. Montgomery .. 192,567
Charles C. Reilly ...... 362,858
Kevin A. Ryan .......... 192,567
Richard R. West ........ 346,125
- ----------
(*) The Directors serve on the boards of FAM/MLAM-advised funds as follows:
Mr. Forbes (42 registered investment companies consisting of 55
portfolios); Ms. Montgomery (42 registered investment companies consisting
of 55 portfolios); Mr. Reilly (60 registered investment companies
consisting of 73 portfolios); Mr. Ryan (42 registered investment companies
consisting of 55 portfolios); and Mr. West (62 registered investment
companies consisting of 86 portfolios).
I-2
<PAGE>
Set forth in the table below is information about the officers of each of the
Funds.
<TABLE>
<CAPTION>
Officer Since
--------------------------------------------------
California California California California
Name and Biography Age Office Insured II Insured Insured III Insured IV
------------------- --- ------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Terry K. Glenn ................................ 59 President 1997* 1997* 1998* 1998*
Executive Vice President of MLAM and
FAM since 1983; Executive Vice President
and Director of Princeton Services since
1993; President of Princeton Funds
Distributor, Inc. ("PFD") since 1986 and
Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
Vincent R. Giordano ........................... 55 Senior Vice 1997 1997 1998 1998
Senior Vice President of FAM and MLAM President
since 1984; Portfolio Manager of FAM and
MLAM since 1977; Senior Vice President of
Princeton Services since 1993.
Kenneth A. Jacob .............................. 48 Vice President 1997 1997 1998 1998
First Vice President of MLAM since 1997;
Vice President of MLAM from 1984 to 1997;
Vice President of FAM since 1984.
Donald C. Burke ............................... 39 Vice President 1997 1997 1998 1998
Senior Vice President and Treasurer of and Treasurer 1999 1999 1999 1999
MLAM and FAM since 1999; Senior Vice
President and Treasurer of Princeton Services
since 1999; Vice President of PFD since
1999; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM from
1990 to 1997; Director of Taxation of MLAM
since 1990.
Robert A. DiMella, CFA ........................ 33 Vice President and 1997 1998 1998 1998
Vice President of MLAM since 1997; Portfolio Manager
Assistant Vice President of MLAM from
1995 to 1997; Assistant Portfolio Manager of
MLAM from 1993 to 1995.
Walter C. O'Connor ............................ 37 Vice President and -- -- 1998 1998
Director (Tax Exempt Mgmt.) of MLAM Portfolio Manager
since 1997; Vice President of MLAM from
1993 to 1997
Alice A. Pellegrino ........................... 38 Secretary 1999 -- -- --
Vice President of MLAM since 1999;
Attorney associated with MLAM since 1997;
Associate with Kirkpatrick & Lockhart LLP
from 1992 to 1997.
William E. Zitelli, Jr. ....................... 30 Secretary -- 1999 1999 1999
Attorney with MLAM since 1998; Attorney
associated with Pepper Hamilton LLP from
1997 to 1998; Attorney associated with
Reboul, MacMurray, Hewitt, Maynard &
Kristol from 1994 to 1997.
</TABLE>
- ----------
* Mr. Glenn was elected President of each Fund in 1999. Prior to that he
served as Executive Vice President of each Fund.
I-3
<PAGE>
EXHIBIT II
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the _____ day of ________________, 1999, by and between MuniHoldings California
Insured Fund II, Inc., a Maryland corporation ("California Insured II"),
MuniHoldings California Insured Fund, Inc., a Maryland corporation ("California
Insured"), MuniHoldings California Insured Fund III, Inc., a Maryland
corporation ("California Insured III") and MuniHoldings California Insured Fund
IV, Inc., a Maryland corporation ("California Insured IV") (California Insured
II, California Insured, California Insured III and California Insured IV are
sometimes referred to herein collectively as the "Funds"; California Insured,
California Insured III and California Insured IV are sometimes referred to
herein collectively as the "Acquired Funds").
PLAN OF REORGANIZATION
The reorganization will comprise the following:
(a)(1) the acquisition by California Insured II of substantially all of
the assets, and the assumption by California Insured II of substantially all of
the liabilities of California Insured in exchange solely for an equal aggregate
value of newly issued shares of (A) common stock, with a par value of $0.10 per
share, of California Insured II ("California Insured II Common Stock") and (B)
auction market preferred stock of California Insured II, with a liquidation
preference of $25,000 per share plus an amount equal to accumulated by unpaid
dividends thereon (whether or not earned or declared) to be designated Series C
("California Insured II Series C AMPS"), and (2) the subsequent distribution by
California Insured to California Insured stockholders of (x) all of the
California Insured II Common Stock received by California Insured in exchange
for such stockholders' shares of common stock, with a par value of $0.10 per
share, of California Insured ("California Insured Common Stock") and (y) all of
the California Insured II Series C AMPS received by California Insured in
exchange for such stockholders' shares of auction market preferred stock of
California Insured, with a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) designated Series A ("California Insured Series A AMPS") and such
stockholders' shares of auction market preferred stock of California Insured,
with a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared),
designated Series B ("California Insured Series B AMPS," and together with the
California Insured Series A AMPS the "California Insured AMPS").
(b)(1) the acquisition by California Insured II of substantially all of
the assets, and the assumption by California Insured II of substantially all of
the liabilities of California Insured III in exchange solely for an equal
aggregate value of newly issued shares of (A) California Insured II Common Stock
and (B) auction market preferred stock of California Insured II, with a
liquidation preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to be
designated Series D ("California Insured II Series D AMPS"), and (2) the
subsequent distribution by California Insured III to California Insured III
stockholders of (x) all of the California Insured II Common Stock received by
California Insured III in exchange for such stockholders' shares of common
stock, with a par value of $0.10 per share, of California Insured III
("California Insured III Common Stock") and (y) all of the California Insured II
Series D AMPS received by California Insured III in exchange for such
stockholders' shares of auction market preferred stock of California Insured
III, with a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared)
designated Series A ("California Insured III Series A AMPS") and all of such
stockholders' shares of auction market preferred stock of California Insured
III, with a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared)
designated Series B ("California Insured III Series B AMPS," and together with
California Insured III Series A AMPS the "California Insured III AMPS");
(c)(1) the acquisition by California Insured II of substantially all of
the assets, and the assumption by California Insured II of substantially all of
the liabilities of California Insured IV in exchange solely for an equal
aggregate value of newly issued shares of (A) California Insured II Common Stock
and (B) auction market preferred stock of California Insured II, with a
liquidation preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to be
designated Series E ("California Insured II Series E AMPS"), and (2) the
subsequent distribution by California Insured IV to
II-1
<PAGE>
California Insured IV stockholders of (x) all of the California Insured II
Common Stock received by California Insured IV in exchange for such
stockholders' shares of common stock, with a par value of $0.10 per share, of
California Insured IV ("California Insured IV Common Stock") and (y) all of the
California Insured II Series E AMPS received by California Insured IV in
exchange for such stockholders' shares of auction market preferred stock, of
California Insured IV, with a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) designated Series A ("California Insured IV Series A AMPS")
and all of such stockholders' shares of auction market preferred stock of
California Insured IV, with a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) designated Series B ("California Insured IV Series B AMPS,"
and together with California Insured IV Series A AMPS the "California Insured IV
AMPS") all upon and subject to the terms hereinafter set forth (collectively,
the "Reorganization").
In the course of the Reorganization, California Insured II Common Stock,
California Insured II Series C AMPS, California Insured II Series D AMPS and
California Insured II Series E AMPS will be distributed to the stockholders of
the Acquired Funds as follows:
(a)(1) each holder of California Insured Common Stock will be entitled to
receive a number of shares of California Insured II Common Stock equal to the
aggregate net asset value of the California Insured Common Stock owned by such
stockholder on the Exchange Date (as defined in Section 9(a) of the Agreement);
and (2) each holder of California Insured AMPS will be entitled to receive a
number of shares of California Insured II Series C AMPS equal to the aggregate
liquidation preference (and aggregate value) of the California Insured AMPS
owned by such stockholder on the Exchange Date;
(b)(1) each holder of California Insured III Common Stock will be entitled
to receive a number of shares of California Insured II Common Stock equal to the
aggregate net asset value of the California Insured III Common Stock owned by
such stockholder on the Exchange Date; and (2) each holder of California Insured
III AMPS will be entitled to receive a number of shares of California Insured II
Series D AMPS equal to the aggregate liquidation preference (and aggregate
value) of the California Insured III AMPS owned by such stockholder on the
Exchange Date; and
(c)(1) each holder of California Insured IV Common Stock will be entitled
to receive a number of shares of California Insured II Common Stock equal to the
aggregate net asset value of the California Insured IV Common Stock owned by
such stockholder on the Exchange Date; and (2) each holder of California Insured
IV AMPS will be entitled to receive a number of shares of California Insured II
Series E AMPS equal to the aggregate liquidation preference (and aggregate
value) of the California Insured IV AMPS owned by such stockholder on the
Exchange Date.
It is intended that the Reorganization described in this Plan shall be a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.
Prior to the Exchange Date, each Acquired Fund shall declare a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to their respective stockholders all of their respective
net investment company taxable income to and including the Exchange Date, if any
(computed without regard to any deduction for dividends paid), and all of its
net capital gain, if any, realized to and including the Exchange Date. In this
regard and in connection with the Reorganization, the last dividend period for
the California Insured AMPS, California Insured III AMPS and California Insured
IV AMPS prior to the Exchange Date may be shorter than the dividend period for
such AMPS determined as set forth in the applicable Articles Supplementary.
Articles Supplementary to California Insured II's Articles of
Incorporation establishing the powers, rights and preferences of the California
Insured II Series C AMPS, the California Insured II Series D AMPS and the
California Insured II Series E AMPS will have been filed with the State
Department of Assessments and Taxation of Maryland (the "Maryland Department")
prior to the Exchange Date.
As promptly as practicable after the consummation of the Reorganization,
each Acquired Fund shall be dissolved in accordance with the laws of the State
of Maryland and will terminate its registration under the Investment Company Act
of 1940, as amended (the "1940 Act") and California Insured II will file an
amendment to its Articles of Incorporation with the Maryland Department to
change its name to MuniHoldings California Insured Fund, Inc.
II-2
<PAGE>
AGREEMENT
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, each of the Funds hereby agrees as follows:
1. Representations and Warranties of California Insured II.
California Insured II represents and warrants to, and agrees with, the
Acquired Funds that:
(a) California Insured II is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. California Insured II has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
(b) California Insured II is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No. 811-08573),
and such registration has not been revoked or rescinded and is in full force and
effect. California Insured II has elected and qualified for the special tax
treatment afforded regulated investment companies ("RICs") under Sections
851-855 of the Code at all times since its inception and intends to continue to
so qualify until consummation of the Reorganization and thereafter.
(c) Each of the Acquired Funds has been furnished with California Insured
II's Annual Report to Stockholders for the fiscal year ended June 30, 1999, and
the audited financial statements appearing therein, having been examined by
Deloitte & Touche LLP, independent public accountants, fairly present the
financial position of California Insured II as of the respective dates
indicated, in conformity with generally accepted accounting principles applied
on a consistent basis.
(d) An unaudited statement of assets, liabilities and capital of
California Insured II and an unaudited schedule of investments of California
Insured II, each as of the Valuation Time (as defined in Section 5(d) of this
Agreement), will be furnished to each of the Acquired Funds, at or prior to the
Exchange Date for the purpose of determining the number of shares of California
Insured II Common Stock, California Insured II Series C AMPS, California Insured
II Series D AMPS, and California Insured II Series E AMPS to be issued pursuant
to Section 6 of this Agreement; each will fairly present the financial position
of California Insured II as of the Valuation Time in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) California Insured II has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of California Insured II, threatened against it
which assert liability on the part of California Insured II or which materially
affect its financial condition or its ability to consummate the Reorganization.
California Insured II is not charged with or, to the best of its knowledge,
threatened with any violation or investigation of any possible violation of any
provisions of any Federal, state or local law or regulation or administrative
ruling relating to any aspect of its business.
(g) California Insured II is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a party to
any contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under this
Agreement, except insofar as the Funds have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation as a
condition precedent to the Reorganization.
(h) There are no material contracts outstanding to which California
Insured II is a party that have not been disclosed in the N-14 Registration
Statement (as defined in subsection (l) below) or will not otherwise be
disclosed to the Acquired Funds prior to the Valuation Time.
(i) California Insured II has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets,
liabilities and capital referred to above, those incurred in the ordinary course
of its business as an investment company since June 30, 1999; and those incurred
in connection with the
II-3
<PAGE>
Reorganization. As of the Valuation Time, California Insured II will advise each
Acquired Fund in writing of all known liabilities, contingent or otherwise,
whether or not incurred in the ordinary course of business, existing or accrued
as of such time.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by California Insured II
of the Reorganization, except such as may be required under the Securities Act
of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act") and the 1940 Act or state securities laws (which term
as used herein shall include the laws of the District of Columbia and Puerto
Rico).
(k) The registration statement filed by California Insured II on Form N-14
which includes the joint proxy statement of the Funds with respect to the
transactions contemplated herein and the prospectus of California Insured II
relating to the California Insured II Common Stock, California Insured II Series
C AMPS, California Insured II Series D AMPS and California Insured II Series E
AMPS to be issued pursuant to this Agreement, (the "Joint Proxy Statement and
Prospectus"), and any supplement or amendment thereto or to the documents
therein (as amended or supplemented, the "N-14 Registration Statement"), on its
effective date, at the time of the stockholders' meetings referred to in Section
8(a) of this Agreement and at the Exchange Date, insofar as it relates to
California Insured II (i) complied or will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder and (ii) did not or will 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; and the
Joint Proxy Statement and Prospectus included therein did not or will not
contain any untrue statement 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; provided, however, that the
representations and warranties in this subsection only shall apply to statements
in or omissions from the N-14 Registration Statement made in reliance upon and
in conformity with information furnished by California Insured II for use in the
N-14 Registration Statement as provided in Section 8(e) of this Agreement.
(l) California Insured II is authorized to issue 200,000,000 shares of
capital stock, of which 1,920 shares have been designated as Series A AMPS,
1,920 shares have been designated as Series B AMPS and 199,996,160 shares have
been designated as common stock, par value $.10 per share; each outstanding
share of which is fully paid and nonassessable and has full voting rights.
(m) The shares of California Insured II Common Stock, California Insured
II Series C AMPS, California Insured II Series D AMPS and California Insured II
Series E AMPS to be issued to the Acquired Funds pursuant to this Agreement will
have been duly authorized and, when issued and delivered pursuant to this
Agreement, will be legally and validly issued and will be fully paid and
nonassessable and will have full voting rights, and no stockholder of California
Insured II will have any preemptive right of subscription or purchase in respect
thereof.
(n) At or prior to the Exchange Date, the California Insured II Common
Stock to be transferred to the Acquired Funds for distribution to the
stockholders of the Acquired Funds on the Exchange Date will be duly qualified
for offering to the public in all states of the United States in which the sale
of shares of the Funds presently are qualified, and there will be a sufficient
number of such shares registered under the 1933 Act and, as may be necessary,
with each pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(o) At or prior to the Exchange Date, the shares of California Insured II
Series C AMPS to be transferred to California Insured on the Exchange Date, the
shares of California Insured II Series D AMPS to be transferred to California
Insured III on the Exchange Date and the shares of California Insured II Series
E AMPS to be transferred to California Insured IV on the Exchange Date will be
duly qualified for offering to the public in all states of the United States in
which the sale of AMPS of the Acquired Funds presently are qualified, and there
are a sufficient number of each series of California Insured II AMPS registered
under the 1933 Act and with each pertinent state securities commission to permit
the transfers contemplated by this Agreement to be consummated.
(p) At or prior to the Exchange Date, California Insured II will have
obtained any and all regulatory, Director and stockholder approvals necessary to
issue the California Insured II Common Stock, California Insured II Series C
AMPS, California Insured II Series D AMPS and California Insured II Series E
AMPS to California Insured, California Insured III and California Insured IV, as
applicable.
II-4
<PAGE>
2. Representations and Warranties of California Insured.
California Insured represents and warrants to, and agrees with, California
Insured II, California Insured III and California Insured IV that:
(a) California Insured is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland, and
has the power to own all of its assets and to carry out this Agreement.
California Insured has all necessary Federal, state and local authorizations to
carry on its business as it is now being conducted and to carry out this
Agreement.
(b) California Insured is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No. 811-08213),
and such registration has not been revoked or rescinded and is in full force and
effect. California Insured has elected and qualified for the special tax
treatment afforded RICs under Sections 851-855 of the Code at all times since
its inception, and intends to continue to so qualify through its taxable year
ending upon liquidation.
(c) As used in this Agreement, the term "California Insured Investments"
shall mean (i) the investments of California Insured shown on the schedule of
its investments as of the Valuation Time furnished to each of California Insured
II, California Insured III and California Insured IV; and (ii) all other assets
owned by California Insured or liabilities incurred as of the Valuation Time.
(d) California Insured has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(e) Each of California Insured II, California Insured III and California
Insured IV has been furnished with California Insured's Annual Report to
Stockholders for the fiscal year ended August 31, 1999,* and the audited
financial statements appearing therein, having been examined by Deloitte &
Touche LLP, independent public accountants, fairly present the financial
position of California Insured as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a consistent
basis.
(f) An unaudited statement of assets, liabilities and capital of
California Insured and an unaudited schedule of investments of California
Insured, each as of the Valuation Time, will be furnished to each of California
Insured II, California Insured III and California Insured IV at or prior to the
Exchange Date for the purpose of determining the number of shares of California
Insured II Common Stock and California Insured II Series C AMPS to be issued to
California Insured pursuant to Section 6 of this Agreement; each will fairly
present the financial position of California Insured as of the Valuation Time in
conformity with generally accepted accounting principles applied on a consistent
basis.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of California Insured, threatened against it which
assert liability on the part of California Insured or which materially affect
its financial condition or its ability to consummate the Reorganization.
California Insured is not charged with or, to the best of its knowledge,
threatened with any violation or investigation of any possible violation of any
provisions of any Federal, state or local law or regulation or administrative
ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which California
Insured is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to California Insured II,
California Insured III and California Insured IV prior to the Valuation Time.
(i) California Insured is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a party to
any contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under this
Agreement, except insofar as the Funds have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation as a
condition precedent to the Reorganization.
(j) California Insured has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets,
liabilities and capital referred to above, those incurred in the ordinary course
of its business as an investment company since August 31, 1999 and those
incurred in connection with the
- ----------
* To be filed by amendment.
II-5
<PAGE>
Reorganization. As of the Valuation Time, California Insured will advise
California Insured II, California Insured III and California Insured IV in
writing of all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or accrued as of such
time.
(k) California Insured has filed, or has obtained extensions to file, all
Federal, state and local tax returns which are required to be filed by it, and
has paid or has obtained extensions to pay, all Federal, state and local taxes
shown on said returns to be due and owing and all assessments received by it, up
to and including the taxable year in which the Exchange Date occurs. All tax
liabilities of California Insured have been adequately provided for on its
books, and no tax deficiency or liability of California Insured has been
asserted and no question with respect thereto has been raised by the Internal
Revenue Service or by any state or local tax authority for taxes in excess of
those already paid, up to and including the taxable year in which the Exchange
Date occurs.
(l) At both the Valuation Time and the Exchange Date, California Insured
will have full right, power and authority to sell, assign, transfer and deliver
the California Insured Investments. At the Exchange Date, subject only to the
obligation to deliver the California Insured Investments as contemplated by this
Agreement, California Insured will have good and marketable title to all of the
California Insured Investments, and California Insured II will acquire all of
the California Insured Investments free and clear of any encumbrances, liens or
security interests and without any restrictions upon the transfer thereof
(except those imposed by the Federal or state securities laws and those
imperfections of title or encumbrances as do not materially detract from the
value or use of the California Insured Investments or materially affect title
thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by California Insured of
the Reorganization, except such as may be required under the 1933 Act, the 1934
Act, the 1940 Act or state securities laws.
(n) The N-14 Registration Statement, on its effective date, at the time of
the stockholders' meetings referred to in Section 8(a) of this Agreement and on
the Exchange Date, insofar as it relates to California Insured (i) complied or
will comply in all material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder, and (ii) did
not or will 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; and the Joint Proxy Statement and Prospectus
included therein did not or will not contain any untrue statement 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; provided, however, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with information
furnished by California Insured for use in the N-14 Registration Statement as
provided in Section 8(e) of this Agreement.
(o) California Insured is authorized to issue 200,000,000 shares of
capital stock, of which 1,600 shares have been designated as Series A AMPS,
1,600 shares have been designated as Series B AMPS and 199,996,800 shares have
been designated as common stock, par value $.10 per share; each outstanding
share of which is fully paid and nonassessable and has full voting rights.
(p) All of the issued and outstanding shares of California Insured Common
Stock and California Insured AMPS were offered for sale and sold in conformity
with all applicable Federal and state securities laws.
(q) The books and records of California Insured made available to
California Insured II, California Insured III, California Insured IV and/or
their counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of California Insured.
(r) California Insured will not sell or otherwise dispose of any of the
shares of California Insured II Common Stock or California Insured II Series C
AMPS to be received in the Reorganization, except in distribution to the
stockholders of California Insured, as provided in Section 5 of this Agreement.
3. Representations and Warranties of California Insured III.
California Insured III represents and warrants to, and agrees with,
California Insured II, California Insured and California Insured IV that:
(a) California Insured III is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. California Insured III has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
II-6
<PAGE>
(b) California Insured III is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No. 811-08973),
and such registration has not been revoked or rescinded and is in full force and
effect. California Insured III has elected and qualified for the special tax
treatment afforded RICs under Sections 851-855 of the Code at all times since
its inception and intends to continue to so qualify through its taxable year
ending upon liquidation.
(c) As used in this Agreement, the term "California Insured III
Investments" shall mean (i) the investments of California Insured III shown on
the schedule of its investments as of the Valuation Time furnished to each of
California Insured II, California Insured and California Insured IV; and (ii)
all other assets owned by California Insured III or liabilities incurred as of
the Valuation Time.
(d) California Insured III has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(e) Each of California Insured II, California Insured and California
Insured IV has been furnished with California Insured III's Annual Report to
Stockholders for the fiscal year ended May 31, 1999, and the audited financial
statements appearing therein, having been examined by Ernst & Young LLP,
independent public accountants, fairly present the financial position of
California Insured III as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(f) Each of California Insured II, California Insured and California
Insured IV has been furnished with California Insured III's Semi-Annual Report
to Stockholders for the six months ended November 30, 1999, and the unaudited
financial statements appearing therein fairly present the financial position of
California Insured III as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(g) An unaudited statement of assets, liabilities and capital of
California Insured III and an unaudited schedule of investments of California
Insured III, each as of the Valuation Time, will be furnished to each of
California Insured II, California Insured and California Insured IV at or prior
to the Exchange Date for the purpose of determining the number of shares of
California Insured II Common Stock and California Insured II Series D AMPS to be
issued to California Insured III pursuant to Section 6 of this Agreement; each
will fairly present the financial position of California Insured III as of the
Valuation Time in conformity with generally accepted accounting principles
applied on a consistent basis.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of California Insured III, threatened against it
which assert liability on the part of California Insured III or which materially
affect its financial condition or its ability to consummate the Reorganization.
California Insured III is not charged with or, to the best of its knowledge,
threatened with any violation or investigation of any possible violation of any
provisions of any Federal, state or local law or regulation or administrative
ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which California
Insured III is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to California Insured II,
California Insured and California Insured IV prior to the Valuation Time.
(j) California Insured III is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a party to
any contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under this
Agreement, except insofar as the Funds have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation as a
condition precedent to the Reorganization.
(k) California Insured III has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets,
liabilities and capital referred to above, those incurred in the ordinary course
of its business as an investment company since May 31, 1999 and those incurred
in connection with the Reorganization. As of the Valuation Time, California
Insured III will advise California Insured II, California Insured and California
Insured IV in writing of all known liabilities, contingent or otherwise, whether
or not incurred in the ordinary course of business, existing or accrued as of
such time.
II-7
<PAGE>
(l) California Insured III has filed, or has obtained extensions to file,
all Federal, state and local tax returns which are required to be filed by it,
and has paid or has obtained extensions to pay, all Federal, state and local
taxes shown on said returns to be due and owing and all assessments received by
it, up to and including the taxable year in which the Exchange Date occurs. All
tax liabilities of California Insured III have been adequately provided for on
its books, and no tax deficiency or liability of California Insured III has been
asserted and no question with respect thereto has been raised by the Internal
Revenue Service or by any state or local tax authority for taxes in excess of
those already paid, up to and including the taxable year in which the Exchange
Date occurs.
(m) At both the Valuation Time and the Exchange Date, California Insured
III will have full right, power and authority to sell, assign, transfer and
deliver the California Insured III Investments. At the Exchange Date, subject
only to the obligation to deliver the California Insured III Investments as
contemplated by this Agreement, California Insured III will have good and
marketable title to all of the California Insured III Investments, and
California Insured II will acquire all of the California Insured III Investments
free and clear of any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed by the Federal or
state securities laws and those imperfections of title or encumbrances as do not
materially detract from the value or use of the California Insured III
Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by California Insured
III of the Reorganization, except such as may be required under the 1933 Act,
the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the time of
the stockholders' meetings referred to in Section 8(a) of this Agreement and on
the Exchange Date, insofar as it relates to California Insured III (i) complied
or will comply in all material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder, and (ii) did
not or will 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; and the Joint Proxy Statement and Prospectus
included therein did not or will not contain any untrue statement 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; provided, however, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with information
furnished by California Insured III for use in the N-14 Registration Statement
as provided in Section 8(e) of this Agreement.
(p) California Insured III is authorized to issue 200,000,000 shares of
capital stock, of which 1,480 shares have been designated as Series A AMPS,
1,480 shares have been designated as Series B AMPS and 199,997,040 shares have
been designated as common stock, par value $.10 per share; each outstanding
share of which is fully paid and nonassessable and has full voting rights.
(q) All of the issued and outstanding shares of California Insured III
Common Stock and California Insured III AMPS were offered for sale and sold in
conformity with all applicable Federal and state securities laws.
(r) The books and records of California Insured III made available to
California Insured II, California Insured, and California Insured IV and/or
their counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of California Insured
III.
(s) California Insured III will not sell or otherwise dispose of any of
the shares of California Insured II Common Stock or California Insured II Series
D AMPS to be received in the Reorganization, except in distribution to the
stockholders of California Insured III, as provided in Section 5 of this
Agreement.
4. Representations and Warranties of California Insured IV.
California Insured IV represents and warrants to, and agrees with,
California Insured II, California Insured and California Insured III that:
(a) California Insured IV is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. California Insured IV has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
(b) California Insured IV is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No. 811-09133),
and such registration has not been revoked or rescinded and is in full
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<PAGE>
force and effect. California Insured IV has elected and qualified for the
special tax treatment afforded RICs under Sections 851-855 of the Code at all
times since its inception, and intends to continue to so qualify through its
taxable year ending upon liquidation.
(c) As used in this Agreement, the term "California Insured IV
Investments" shall mean (i) the investments of California Insured IV shown on
the schedule of its investments as of the Valuation Time furnished to each of
California Insured II, California Insured and California Insured III; and (ii)
all other assets owned by California Insured IV or liabilities incurred as of
the Valuation Time. The California Insured IV Investments together with the
California Insured Investments and the California Insured III Investments may
sometimes be referred to herein collectively as the "Acquired Fund Investments".
(d) California Insured IV has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(e) Each of California Insured II, California Insured and California
Insured III has been furnished with California Insured IV's Annual Report to
Stockholders for the fiscal year ended September 30, 1999*, and the audited
financial statements appearing therein, having been examined by Deloitte &
Touche LLP, independent public accountants, fairly present the financial
position of California Insured IV as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a consistent
basis.
(f) Each of California Insured II, California Insured and California
Insured III has been furnished with California Insured IV's Semi-Annual Report
to Stockholders for the period ended March 31, 1999, and the unaudited financial
statements appearing therein fairly present the financial position of California
Insured IV as of the respective dates indicated, in conformity with generally
accepted accounting principles applied on a consistent basis.
(g) An unaudited statement of assets, liabilities and capital of
California Insured IV and an unaudited schedule of investments of California
Insured IV, each as of the Valuation Time, will be furnished to each of
California Insured II, California Insured and California Insured III at or prior
to the Exchange Date for the purpose of determining the number of shares of
California Insured II Common Stock and California Insured II Series E AMPS to be
issued to California Insured IV pursuant to Section 6 of this Agreement; each
will fairly present the financial position of California Insured IV as of the
Valuation Time in conformity with generally accepted accounting principles
applied on a consistent basis.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of California Insured IV, threatened against it
which assert liability on the part of California Insured IV or which materially
affect its financial condition or its ability to consummate the Reorganization.
California Insured IV is not charged with or, to the best of its knowledge,
threatened with any violation or investigation of any possible violation of any
provisions of any Federal, state or local law or regulation or administrative
ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which California
Insured IV is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to California Insured II,
California Insured and California Insured III prior to the Valuation Time.
(j) California Insured IV is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a party to
any contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under this
Agreement, except insofar as the Funds have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation as a
condition precedent to the Reorganization.
(k) California Insured IV has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets,
liabilities and capital referred to above, those incurred in the ordinary course
of its business as an investment company since September 30, 1999 and those
incurred in connection with the Reorganization. As of the Valuation Time,
California Insured IV will advise California Insured II, California Insured and
California Insured III in writing of all known liabilities, contingent or
otherwise, whether or not incurred in the ordinary course of business, existing
or accrued as of such time.
- ----------
* To be filed by amendment.
II-9
<PAGE>
(l) California Insured IV has filed, or has obtained extensions to file,
all Federal, state and local tax returns which are required to be filed by it,
and has paid or has obtained extensions to pay, all Federal, state and local
taxes shown on said returns to be due and owing and all assessments received by
it, up to and including the taxable year in which the Exchange Date occurs. All
tax liabilities of California Insured IV have been adequately provided for on
its books, and no tax deficiency or liability of California Insured IV has been
asserted and no question with respect thereto has been raised by the Internal
Revenue Service or by any state or local tax authority for taxes in excess of
those already paid, up to and including the taxable year in which the Exchange
Date occurs.
(m) At both the Valuation Time and the Exchange Date, California Insured
IV will have full right, power and authority to sell, assign, transfer and
deliver the California Insured IV Investments. At the Exchange Date, subject
only to the obligation to deliver the California Insured IV Investments as
contemplated by this Agreement, California Insured IV will have good and
marketable title to all of the California Insured IV Investments, and California
Insured II will acquire all of the California Insured IV Investments free and
clear of any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed by the Federal or
state securities laws and those imperfections of title or encumbrances as do not
materially detract from the value or use of the California Insured IV
Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by California Insured IV
of the Reorganization, except such as may be required under the 1933 Act, the
1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the time of
the stockholders' meetings referred to in Section 8(a) of this Agreement and on
the Exchange Date, insofar as it relates to California Insured IV (i) complied
or will comply in all material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder, and (ii) did
not or will 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; and the Joint Proxy Statement and Prospectus
included therein did not or will not contain any untrue statement 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; provided, however, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with information
furnished by California Insured IV for use in the N-14 Registration Statement as
provided in Section 8(e) of this Agreement.
(p) California Insured IV is authorized to issue 200,000,000 shares of
capital stock, of which 1,820 shares have been designated as Series A AMPS,
1,820 shares have been designated as Series B AMPS, and 199,996,360 shares have
been designated as common stock, par value $.10 per share; each outstanding
share of which is fully paid and nonassessable and has full voting rights.
(q) All of the issued and outstanding shares of California Insured IV
Common Stock and California Insured IV AMPS were offered for sale and sold in
conformity with all applicable Federal and state securities laws.
(r) The books and records of California Insured IV made available to
California Insured II, California Insured and California Insured III and/or
their counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of California Insured
IV.
(s) California Insured IV will not sell or otherwise dispose of any of the
shares of California Insured II Common Stock or California Insured II Series E
AMPS to be received in the Reorganization, except in distribution to the
stockholders of California Insured IV, as provided in Section 5 of this
Agreement.
5. The Reorganization.
(a) Subject to receiving the requisite approvals of the stockholders of
each of the Funds, and to the other terms and conditions contained herein, (i)
California Insured agrees to convey, transfer and deliver to California Insured
II and California Insured II agrees to acquire from California Insured, on the
Exchange Date, all of the California Insured Investments (including interest
accrued as of the Valuation Time on debt instruments), and assume substantially
all of the liabilities of California Insured, in exchange solely for that number
of shares of California Insured II
II-10
<PAGE>
Common Stock and California Insured II Series C AMPS provided in Section 6 of
this Agreement; (ii) California Insured III agrees to convey, transfer and
deliver to California Insured II and California Insured II agrees to acquire
from California Insured III on the Exchange Date, all of the California Insured
III Investments (including interest accrued as of the Valuation Time on debt
instruments) and assume substantially all of the liabilities of California
Insured III in exchange solely for that number of shares of California Insured
II Common Stock and California Insured II Series D AMPS provided in Section 6 of
this Agreement; and (iii) California Insured IV agrees to convey, transfer and
deliver to California Insured II and California Insured II agrees to acquire
from California Insured IV on the Exchange Date, all of the California Insured
IV Investments (including interest accrued as of the Valuation Time on debt
instruments) and assume substantially all of the liabilities of California
Insured IV in exchange solely for that number of shares of California Insured II
Common Stock and California Insured II Series E AMPS provided in Section 6 of
this Agreement.
Pursuant to this Agreement, as soon as practicable after the Exchange Date
(i) California Insured will distribute all shares of California Insured II
Common Stock and California Insured II Series C AMPS received by it to its
stockholders in exchange for their shares of California Insured Common Stock and
California Insured AMPS; (ii) California Insured III will distribute all shares
of California Insured II Common Stock and California Insured II Series D AMPS
received by it to its stockholders in exchange for their shares of California
Insured III Common Stock and California Insured III AMPS; and (iii) California
Insured IV will distribute all shares of California Insured II Common Stock and
California Insured II Series E AMPS received by it to its stockholders in
exchange for their shares of California Insured IV Common Stock and California
Insured IV AMPS. Such distributions shall be accomplished by the opening of
stockholder accounts on the stock ledger records of California Insured II in the
amounts due the stockholders of each Acquired Fund based on their respective
holdings in such Acquired Fund as of the Valuation Time.
(b) Prior to the Exchange Date, each Acquired Fund shall declare a
dividend or dividends which, together with all such previous dividends, shall
have the effect of distributing to their respective stockholders all of their
respective net investment company taxable income to and including the Exchange
Date, if any (computed without regard to any deduction for dividends paid), and
all of its net capital gain, if any, realized to and including the Exchange
Date. In this regard and in connection with the Reorganization, the last
dividend period for the California Insured AMPS, the California Insured III AMPS
and the California Insured IV AMPS prior to the Exchange Date may be shorter
than the dividend period for such AMPS determined as set forth in the applicable
Articles Supplementary.
(c) Each of the Acquired Funds will pay or cause to be paid to California
Insured II any interest such Acquired Fund receives on or after the Exchange
Date with respect to any of the Acquired Fund Investments transferred to
California Insured II hereunder.
(d) The Valuation Time shall be 4:00 p.m., Eastern time, on February __,
2000, or such earlier or later day and time as may be mutually agreed upon in
writing (the "Valuation Time").
(e) Recourse for liabilities assumed from each Acquired Fund by California
Insured II in the Reorganization will be limited to the net assets of each such
fund acquired by California Insured II. The known liabilities of the Acquired
Funds, as of the Valuation Time, shall be confirmed in writing to California
Insured II pursuant to Sections 2(j), 3(j) and 4(j) of this Agreement.
(f) The Funds will jointly file Articles of Transfer with the Maryland
Department and any other such instrument as may be required by the State of
Maryland to effect the transfer of the Acquired Fund Investments.
(g) The Acquired Funds will each be dissolved following the Exchange Date
by filing separate Articles of Dissolution with the Maryland Department.
(h) California Insured II will file with the Maryland Department Articles
Supplementary to its Articles of Incorporation establishing the powers, rights
and preferences of the California Insured II Series C AMPS, the California
Insured II Series D AMPS and the California Insured II Series E AMPS prior to
the closing of the Reorganization.
(i) California Insured II will file with the Maryland Department an
amendment to its Articles of Incorporation to change its name to MuniHoldings
California Insured Fund, Inc.
(j) As promptly as practicable after the liquidation of each of the
Acquired Fund pursuant to the Reorganization, each Acquired Fund shall terminate
its respective registration under the 1940 Act.
6. Issuance and Valuation of California Insured II Common Stock,
California Insured II Series C AMPS, California Insured II Series D AMPS and
California Insured II Series E AMPS in the Reorganization.
Full shares of California Insured II Common Stock and California Insured
II Series C AMPS of an aggregate net asset value or liquidation preference, as
the case may be, equal (to the nearest one ten thousandth
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<PAGE>
of one cent) to the value of the assets of California Insured acquired in the
Reorganization determined as hereinafter provided, reduced by the amount of
liabilities of California Insured assumed by California Insured II in the
Reorganization, shall be issued by California Insured II to California Insured
in exchange for such assets of California Insured, plus cash in lieu of
fractional shares. California Insured II will issue to California Insured (a) a
number of shares of California Insured II Common Stock, the aggregate net asset
value of which will equal the aggregate net asset value of the shares of
California Insured Common Stock, determined as set forth below, and (b) a number
of shares of California Insured II Series C AMPS, the aggregate liquidation
preference and value of which will equal the aggregate liquidation preference
and value of the California Insured AMPS, determined as set forth below.
Full shares of California Insured II Common Stock and California Insured
II Series D AMPS of an aggregate net asset value or liquidation preference, as
the case may be, equal (to the nearest one then thousandth of one cent) to the
value of the assets of California Insured III acquired in the Reorganization
determined as hereinafter provided, reduced by the amount of liabilities of
California Insured III assumed by California Insured II in the Reorganization,
shall be issued by California Insured II to California Insured III in exchange
for such assets of California Insured III, plus cash in lieu of fractional
shares. California Insured II will issue to California Insured III (a) a number
of shares of California Insured II Common Stock, the aggregate net asset value
of which will equal the aggregate net asset value of the shares of California
Insured III Common Stock, determined as set forth below, and (b) a number of
shares of California Insured II Series D AMPS, the aggregate liquidation
preference and value of which will equal the aggregate liquidation preference
and value of the California Insured II AMPS, determined as set forth below.
Full shares of California Insured II Common Stock and California Insured
II Series E AMPS of an aggregate net asset value or liquidation preference, as
the case may be, equal (to the nearest one ten thousandth of one cent) to the
value of the assets of California Insured IV acquired in the Reorganization
determined as hereinafter provided, reduced by the amount of liabilities of
California Insured IV assumed by California Insured II in the Reorganization,
shall be issued by California Insured II to California Insured IV in exchange
for such assets of California Insured IV, plus cash in lieu of fractional
shares. California Insured II will issue to California Insured IV (a) a number
of shares of California Insured II Common Stock, the aggregate net asset value
of which will equal the aggregate net asset value of the shares of California
Insured IV Common Stock, determined as set forth below, and (b) a number of
shares of California Insured II Series E AMPS, the aggregate liquidation
preference and value of which will equal the aggregate liquidation preference
and value of the California Insured IV AMPS, determined as set forth below.
The net asset value of each of the Funds and the liquidation preference
and value of the AMPS of each of the Funds shall be determined as of the
Valuation Time in accordance with the procedures described in (i) the prospectus
of California Insured II, dated February 24, 1998, relating to the California
Insured II Common Stock and (ii) the final prospectus of California Insured II,
dated March 4, 1998, relating to the California Insured II AMPS, and no formula
will be used to adjust the net asset value so determined of any Fund to take
into account differences in realized and unrealized gains and losses. Values in
all cases shall be determined as of the Valuation Time. The value of the
Acquired Fund Investments to be transferred to California Insured II shall be
determined by California Insured II pursuant to the procedures utilized by
California Insured II in valuing its own assets and determining its own
liabilities for purposes of the Reorganization. Such valuation and determination
shall be made by California Insured II in cooperation with the Acquired Funds
and shall be confirmed in writing by California Insured II to the Acquired
Funds. The net asset value per share of the California Insured II Common Stock
and the liquidation preference and value per share of the California Insured II
Series C AMPS, the California Insured II Series D AMPS and the California
Insured II Series E AMPS shall be determined in accordance with such procedures
and California Insured II shall certify the computations involved. For purposes
of determining the net asset value of a share of Common Stock of each Fund, the
value of the securities held by the Fund plus any cash or other assets
(including interest accrued but not yet received) minus all liabilities
(including accrued expenses) and the aggregate liquidation value of the
outstanding shares of AMPS of that Fund is divided by the total number of shares
of Common Stock of that Fund outstanding at such time.
California Insured II shall issue to California Insured separate
certificates or share deposit receipts for the California Insured II Common
Stock and the California Insured II Series C AMPS, each registered in the name
of California Insured. California Insured then shall distribute the California
Insured II Common Stock and the California Insured II Series C AMPS to the
holders of California Insured Common Stock and California Insured AMPS by
redelivering the certificates or share deposit receipts evidencing ownership of
(i) the California Insured
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<PAGE>
II Common Stock to The Bank of New York, as the transfer agent and registrar for
the California Insured II Common Stock for distribution to the holders of
California Insured Common Stock on the basis of such holder's proportionate
interest in the aggregate net asset value of the Common Stock of California
Insured and (ii) the California Insured II Series C AMPS to The Bank of New
York, as the transfer agent and registrar for the California Insured II Series C
AMPS for distribution to the holders of California Insured AMPS on the basis of
such holder's proportionate interest in the aggregate liquidation preference and
value of the AMPS of California Insured. With respect to any California Insured
stockholder holding certificates evidencing ownership of either California
Insured Common Stock or California Insured AMPS as of the Exchange Date, and
subject to California Insured II being informed thereof in writing by California
Insured, California Insured II will not permit such stockholder to receive new
certificates evidencing ownership of the California Insured II Common Stock or
California Insured II Series C AMPS, exchange California Insured II Common Stock
or California Insured II Series C AMPS credited to such stockholder's account
for shares of other investment companies managed by Merrill Lynch Asset
Management, L.P. ("MLAM") or any of its affiliates, or pledge or redeem such
California Insured II Common Stock or California Insured II Series C AMPS, in
any case, until notified by California Insured or its agent that such
stockholder has surrendered his or her outstanding certificates evidencing
ownership of California Insured Common Stock or California Insured AMPS or, in
the event of lost certificates, posted adequate bond. California Insured, at its
own expense, will request its stockholders to surrender their outstanding
certificates evidencing ownership of California Insured Common Stock or
California Insured AMPS, as the case may be, or post adequate bond therefor.
California Insured II shall issue to California Insured III separate
certificates or share deposit receipts for the California Insured II Common
Stock and the California Insured II Series D AMPS, each registered in the name
of California Insured III. California Insured III then shall distribute the
California Insured II Common Stock and the California Insured II Series D AMPS
to the holders of California Insured III Common Stock and California Insured III
AMPS by redelivering the certificates or share deposit receipts evidencing
ownership of (i) the California Insured II Common Stock to The Bank of New York,
as the transfer agent and registrar for the California Insured II Common Stock
for distribution to the holders of California Insured III Common Stock on the
basis of such holder's proportionate interest in the aggregate net asset value
of the Common Stock of California Insured III and (ii) the California Insured II
Series D AMPS to The Bank of New York, as the transfer agent and registrar for
the California Insured II Series D AMPS for distribution to the holders of
California Insured III AMPS on the basis of such holder's proportionate interest
in the aggregate liquidation preference and value of the AMPS of California
Insured III. With respect to any California Insured III stockholder holding
certificates evidencing ownership of either California Insured III Common Stock
or California Insured III AMPS as of the Exchange Date, and subject to
California Insured II being informed thereof in writing by California Insured
III, California Insured II will not permit such stockholder to receive new
certificates evidencing ownership of the California Insured II Common Stock or
California Insured II Series D AMPS, exchange California Insured II Common Stock
or California Insured II Series D AMPS credited to such stockholder's account
for shares of other investment companies managed by MLAM or any of its
affiliates, or pledge or redeem such California Insured II Common Stock or
California Insured II Series D AMPS, in any case, until notified by California
Insured III or its agent that such stockholder has surrendered his or her
outstanding certificates evidencing ownership of California Insured III Common
Stock or California Insured III AMPS or, in the event of lost certificates,
posted adequate bond. California Insured III, at its own expense, will request
its stockholders to surrender their outstanding certificates evidencing
ownership of California Insured III Common Stock or California Insured III AMPS,
as the case may be, or post adequate bond therefor.
California Insured II shall issue to California Insured IV separate
certificates or share deposit receipts for the California Insured II Common
Stock and the California Insured II Series E AMPS, each registered in the name
of California Insured IV. California Insured IV then shall distribute the
California Insured II Common Stock and the California Insured II Series E AMPS
to the holders of California Insured IV Common Stock and California Insured IV
AMPS by redelivering the certificates or share deposit receipts evidencing
ownership of (i) the California Insured II Common Stock to The Bank of New York,
as the transfer agent and registrar for the California Insured II Common Stock
for distribution to the holders of California Insured IV Common Stock on the
basis of such holder's proportionate interest in the aggregate net asset value
of the Common Stock of California Insured IV and (ii) the California Insured II
Series E AMPS to The Bank of New York, as the transfer agent and registrar for
the California Insured II Series E AMPS for distribution to the holders of
California Insured IV AMPS on the basis of such holder's proportionate interest
in the aggregate liquidation preference and value of the AMPS of California
Insured IV. With respect to any California Insured IV stockholder holding
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<PAGE>
certificates evidencing ownership of either California Insured IV Common Stock
or California Insured IV AMPS as of the Exchange Date, and subject to California
Insured II being informed thereof in writing by California Insured IV,
California Insured II will not permit such stockholder to receive new
certificates evidencing ownership of California Insured II Common Stock or
California Insured II Series E AMPS, exchange California Insured II Common Stock
or California Insured II Series E AMPS credited to such stockholder's account
for shares of other investment companies managed by MLAM or any of its
affiliates, or pledge or redeem such California Insured II Common Stock or
California Insured II Series E AMPS, in any case, until notified by California
Insured IV or its agent that such stockholder has surrendered his or her
outstanding certificates evidencing ownership of California Insured IV Common
Stock or California Insured IV AMPS or, in the event of lost certificates,
posted adequate bond. California Insured IV, at its own expense, will request
its stockholders to surrender their outstanding certificates evidencing
ownership of California Insured IV Common Stock or California Insured IV AMPS,
as the case may be, or post adequate bond therefor.
Dividends payable to holders of record of shares of California Insured II
Common Stock, California Insured II Series C AMPS, California Insured II Series
D AMPS, or California Insured II Series E AMPS, as the case may be, as of any
date after the Exchange Date and prior to the exchange of certificates by any
stockholder of an Acquired Fund shall be payable to such stockholder without
interest; however, such dividends shall not be paid unless and until such
stockholder surrenders the stock certificates representing shares of common
stock or AMPS of the Acquired Funds, as the case may be, for exchange.
No fractional shares of California Insured II Common Stock will be issued
to holders of California Insured Common Stock, California Insured III Common
Stock or California Insured IV Common Stock. In lieu thereof, California Insured
II's transfer agent, The Bank of New York, will aggregate all fractional shares
of California Insured II Common Stock and sell the resulting full shares on the
New York Stock Exchange at the current market price for shares of California
Insured II Common Stock for the account of all holders of fractional interests,
and each such holder will receive such holder's pro rata share of the proceeds
of such sale upon surrender of such holder's certificates representing
California Insured Common Stock, California Insured III Common Stock or
California Insured IV Common Stock.
7. Payment of Expenses.
(a) With respect to expenses incurred in connection with the
Reorganization, (i) each Fund shall pay all expenses incurred that are
attributable solely to such Fund and the conduct of its business, and (ii)
California Insured II shall pay, subsequent to the Exchange Date and pro rata
according to each Fund's net assets on the Exchange Date, all expenses incurred
in connection with the Reorganization, including, but not limited to, all costs
related to the preparation and distribution of the N-14 Registration Statement.
Such fees and expenses shall include the cost of preparing and filing a ruling
request with the Internal Revenue Service, legal and accounting fees, printing
costs, filing fees, stock exchange fees, rating agency fees, portfolio transfer
taxes (if any) and any similar expenses incurred in connection with the
Reorganization.
(b) If for any reason the Reorganization is not consummated, no party
shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.
8. Covenants of the Funds.
(a) Each Fund agrees to call an annual meeting of its stockholders as soon
as is practicable after the effective date of the N-14 Registration Statement
for the purpose of considering the Reorganization as described in this
Agreement.
(b) Each Fund covenants to operate its business as presently conducted
between the date hereof and the Exchange Date.
(c) Each Acquired Fund agrees that following the consummation of the
Reorganization, it will dissolve in accordance with the laws of the State of
Maryland and any other applicable law, it will not make any distributions of any
shares of California Insured II Common Stock, California Insured II Series C
AMPS, California Insured II Series D AMPS or California Insured II Series E
AMPS, as applicable, other than to its respective stockholders and without first
paying or adequately providing for the payment of all of its respective
liabilities not assumed by California Insured II, if any, and on and after the
Exchange Date it shall not conduct any business except in connection with its
dissolution.
II-14
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(d) Each Acquired Fund undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section 8(f) of the 1940
Act for an order declaring that such Acquired Fund has ceased to be a registered
investment company.
(e) California Insured II will file the N-14 Registration Statement with
the Securities and Exchange Commission (the "Commission") and will use its best
efforts to provide that the N-14 Registration Statement becomes effective as
promptly as practicable. Each Fund agrees to cooperate fully with the others,
and each will furnish to the others the information relating to itself to be set
forth in the N-14 Registration Statement as required by the 1933 Act, the 1934
Act, the 1940 Act, and the rules and regulations thereunder and the state
securities laws.
(f) California Insured II has no plan or intention to sell or otherwise
dispose of the Acquired Fund Investments, except for dispositions made in the
ordinary course of business.
(g) Each of the Funds agrees that by the Exchange Date all of its Federal
and other tax returns and reports required to be filed on or before such date
shall have been filed and all taxes shown as due on said returns either have
been paid or adequate liability reserves have been provided for the payment of
such taxes. In connection with this covenant, the Funds agree to cooperate with
each other in filing any tax return, amended return or claim for refund,
determining a liability for taxes or a right to a refund of taxes or
participating in or conducting any audit or other proceeding in respect of
taxes. California Insured II agrees to retain for a period of ten (10) years
following the Exchange Date all returns, schedules and work papers and all
material records or other documents relating to tax matters of the Acquired
Funds for each of such Fund's taxable period first ending after the Exchange
Date and for all prior taxable periods. Any information obtained under this
subsection shall be kept confidential except as otherwise may be necessary in
connection with the filing of returns or claims for refund or in conducting an
audit or other proceeding. After the Exchange Date, each of the Acquired Funds
shall prepare, or cause its agents to prepare, any Federal, state or local tax
returns, including any Forms 1099, required to be filed by such fund with
respect to its final taxable year ending with its complete liquidation and for
any prior periods or taxable years and further shall cause such tax returns and
Forms 1099 to be duly filed with the appropriate taxing authorities.
Notwithstanding the aforementioned provisions of this subsection, any expenses
incurred by the Acquired Funds (other than for payment of taxes) in connection
with the preparation and filing of said tax returns and Forms 1099 after the
Exchange Date shall be borne by each such Fund to the extent such expenses have
been accrued by such Fund in the ordinary course without regard to the
Reorganization; any excess expenses shall be borne by Fund Asset Management,
L.P. ("FAM") at the time such tax returns and Forms 1099 are prepared.
(h) The Funds each agree to mail to its respective stockholders of record
entitled to vote at the annual meeting of stockholders at which action is to be
considered regarding this Agreement, in sufficient time to comply with
requirements as to notice thereof, a combined proxy statement and prospectus
which complies in all material respects with the applicable provisions of
Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules
and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, California Insured
II will stay in existence and continue its business as a non-diversified,
closed-end management investment company registered under the 1940 Act and will
file with the Maryland Department an amendment to its Articles of Incorporation
to change its name to "MuniHoldings California Insured Fund, Inc."
9. Exchange Date.
(a) Delivery of the assets of the Acquired Funds to be transferred,
together with any other Acquired Fund Investments, and the shares of California
Insured II Common Stock, California Insured II Series C AMPS, California Insured
II Series D AMPS and California Insured II Series E AMPS to be issued as
provided in this Agreement, shall be made at the offices of Brown & Wood LLP,
One World Trade Center, New York, New York 10048, at 10:00 a.m. on the next full
business day following the Valuation Time, or at such other place, time and date
agreed to by the Funds, the date and time upon which such delivery is to take
place being referred to herein as the "Exchange Date." To the extent that any
Acquired Fund Investments, for any reason, are not transferable on the Exchange
Date, the applicable Acquired Fund shall cause such Acquired Fund Investments to
be transferred to California Insured II's account with The Bank of New York at
the earliest practicable date thereafter.
(b) Each of the Acquired Funds will deliver to California Insured II on
the Exchange Date confirmations or other adequate evidence as to the tax basis
of each of their respective Acquired Fund Investments delivered to
II-15
<PAGE>
California Insured II hereunder, certified by Deloitte & Touche LLP (for
California Insured and California Insured IV) and by Ernst & Young LLP (for
California Insured III).
(c) As soon as practicable after the close of business on the Exchange
Date, each of the Acquired Funds shall deliver to California Insured II a list
of the names and addresses of all of the stockholders of record of such Acquired
Fund on the Exchange Date and the number of shares of common stock and AMPS of
such Acquired Fund owned by each such stockholder, certified to the best of
their knowledge and belief by the applicable transfer agent for such Acquired
Fund or by its President.
10. Conditions of the Acquired Funds.
The obligations of each Acquired Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of two-thirds of the members
of the Board of Directors of each of the Funds and by the affirmative vote of
(i) the holders of (a) a majority of the California Insured II Common Stock and
California Insured II AMPS, voting together as a single class, and (b) a
majority of the California Insured II AMPS, voting separately as a class, in
each case issued and outstanding and entitled to vote thereon; (ii) the holders
of (a) a majority of the California Insured Common Stock and California Insured
AMPS, voting together as a single class, and (b) a majority of the California
Insured AMPS, voting separately as a class, in each case issued and outstanding
and entitled to vote thereon; (iii) the holders of (a) a majority of the
California Insured III Common Stock and California Insured III AMPS, voting
together as a single class, and (b) a majority of the California Insured III
AMPS, voting separately as a class, in each case issued and outstanding and
entitled to vote thereon; (iv) the holders of (a) a majority of the California
Insured IV Common Stock and California Insured IV AMPS, voting together as a
single class, and (b) a majority of the California Insured IV AMPS, voting
separately as a class, in each case issued and outstanding and entitled to vote
thereon; and further that each Fund shall have delivered to each other Fund a
copy of the resolution approving this Agreement adopted by such Fund's Board of
Directors, and a certificate setting forth the vote of such Fund's stockholders
obtained at its Annual Meeting, each certified by the Secretary of the
appropriate Fund.
(b) That each Acquired Fund shall have received from California Insured II
and from each other Acquired Fund a statement of assets, liabilities and
capital, with values determined as provided in Section 6 of this Agreement,
together with a schedule of such fund's investments, all as of the Valuation
Time, certified on the Fund's behalf by its President (or any Vice President)
and its Treasurer, and a certificate signed by the Fund's President (or any Vice
President) and its Treasurer, dated as of the Exchange Date, certifying that as
of the Valuation Time and as of the Exchange Date there has been no material
adverse change in the financial position of the Fund since the date of such
Fund's most recent Annual or Semi-Annual Report as applicable, other than
changes in its portfolio securities since that date or changes in the market
value of its portfolio securities.
(c) That California Insured II shall have furnished to the Acquired Funds
a certificate signed by California Insured II's President (or any Vice
President) and its Treasurer, dated as of the Exchange Date, certifying that, as
of the Valuation Time and as of the Exchange Date all representations and
warranties of California Insured II made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of such
dates, and that California Insured II has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or satisfied at
or prior to each of such dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That the Acquired Funds shall have received an opinion or opinions of
Brown & Wood LLP, as counsel to the Funds, in form and substance satisfactory to
the Acquired Funds and dated the Exchange Date, to the effect that (i) each of
the Funds is a corporation duly organized, validly existing and in good standing
in conformity with the laws of the State of Maryland; (ii) the shares of
California Insured II Common Stock, California Insured II Series C AMPS,
California Insured II Series D AMPS and California Insured II Series E AMPS to
be issued pursuant to this Agreement are duly authorized and, upon delivery,
will be validly issued and outstanding and fully paid and nonassessable by
California Insured II, and no stockholder of California Insured II has any
preemptive right to subscription or purchase in respect thereof (pursuant to the
Articles of Incorporation or the by-laws of California Insured II or the state
law of Maryland, or to the best of such counsel's knowledge, otherwise); (iii)
this Agreement has been duly authorized, executed and delivered by each of the
Funds, and represents a valid and binding contract, enforceable in accordance
with its terms, except as enforceability may be
II-16
<PAGE>
limited by bankruptcy, insolvency, reorganization or other similar laws
pertaining to the enforcement of creditors' rights generally and court decisions
with respect thereto; provided, such counsel shall express no opinion with
respect to the application of equitable principles in any proceeding, whether at
law or in equity; (iv) the execution and delivery of this Agreement does not,
and the consummation of the Reorganization will not, violate any material
provisions of Maryland law or the Articles of Incorporation, as amended, the
by-laws, as amended, or any agreement (known to such counsel) to which any Fund
is a party or by which any Fund is bound, except insofar as the parties have
agreed to amend such provision as a condition precedent to the Reorganization;
(v) each of the Acquired Funds has the power to sell, assign, transfer and
deliver the assets transferred by it hereunder and, upon consummation of the
Reorganization in accordance with the terms of this Agreement, each of the
Acquired Funds will have duly transferred such assets and liabilities in
accordance with this Agreement; (vi) to the best of such counsel's knowledge, no
consent, approval, authorization or order of any United States federal court,
Maryland state court or governmental authority is required for the consummation
by the Funds of the Reorganization, except such as have been obtained under the
1933 Act, the 1934 Act and the 1940 Act and the published rules and regulations
of the Commission thereunder and under Maryland law and such as may be required
under state securities laws; (vii) the N-14 Registration Statement has become
effective under the 1933 Act, no stop order suspending the effectiveness of the
N-14 Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the 1933 Act, and the
N-14 Registration Statement, and each amendment or supplement thereto, as of
their respective effective dates, appear on their face to be appropriately
responsive in all material respects to the requirements of the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder; (viii) the descriptions in the N-14 Registration
Statement of statutes, legal and governmental proceedings and contracts and
other documents are accurate and fairly present the information required to be
shown; (ix) the information in the Joint Proxy Statement and Prospectus under
"Comparison of the Funds--Tax Rules Applicable to the Funds and their
Stockholders" and "Agreement and Plan of Reorganization--Tax Consequences of the
Reorganization," to the extent that it constitutes matters of law, summaries of
legal matters or legal conclusions, has been reviewed by such counsel and is
correct in all material respects as of the date of the Joint Proxy Statement and
Prospectus; (x) such counsel does not know of any statutes, legal or
governmental proceedings or contracts or other documents related to the
Reorganization of a character required to be described in the N-14 Registration
Statement which are not described therein or, if required to be filed, filed as
required; (xi) no Fund, to the knowledge of such counsel, is required to qualify
to do business as a foreign corporation in any jurisdiction except as may be
required by state securities laws, and except where each has so qualified or the
failure so to qualify would not have a material adverse effect on such Fund or
its respective stockholders; (xii) such counsel does not have actual knowledge
of any material suit, action or legal or administrative proceeding pending or
threatened against any of the Funds, the unfavorable outcome of which would
materially and adversely affect such Fund; (xiii) all corporate actions required
to be taken by the Funds to authorize this Agreement and to effect the
Reorganization have been duly authorized by all necessary corporate actions on
the part of such Fund; and (xiv) such opinion is solely for the benefit of the
Funds and their Directors and officers. Such opinion also shall state that (x)
while such counsel cannot make any representation as to the accuracy or
completeness of statements of fact in the N-14 Registration Statement or any
amendment or supplement thereto, nothing has come to their attention that would
lead them to believe that, on the respective effective dates of the N-14
Registration Statement and any amendment or supplement thereto, (1) the N-14
Registration Statement or any amendment or supplement thereto contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and (2) the prospectus included in the N-14 Registration Statement
contained any untrue statement of a material fact or omitted 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 (y) such counsel
does not express any opinion or belief as to the financial statements or other
financial or statistical data relating to any Fund contained or incorporated by
reference in the N-14 Registration Statement. In giving the opinion set forth
above, Brown & Wood LLP may state that it is relying on certificates of officers
of a Fund with regard to matters of fact and certain certificates and written
statements of governmental officials with respect to the good standing of a
Fund.
(f) That each Acquired Fund shall have received either (a) a private
letter ruling from the Internal Revenue Service or (b) an opinion of Brown &
Wood LLP, to the effect that for Federal income tax purposes (i) the transfer by
such Acquired Fund of substantially all of its assets to California Insured II
in exchange solely for shares of California Insured II Common Stock and
California Insured II Series C AMPS, California Insured II Series D AMPS or
California Insured II Series E AMPS as provided in this Agreement will
constitute a reorganization
II-17
<PAGE>
within the meaning of Section 368(a)(1)(C) of the Code, and the respective Funds
will each be deemed to be a "party" to a reorganization within the meaning of
Section 368(b); (ii) in accordance with Section 361(a) of the Code, no gain or
loss will be recognized to an Acquired Fund as a result of the asset transfer
solely in exchange for shares of California Insured II Common Stock and
California Insured II Series C AMPS, California Insured II Series D AMPS or
California Insured II Series E AMPS, as the case may be, or on the distribution
of the California Insured II stock to stockholders of the respective Acquired
Fund under Section 361(c)(1); (iii) under Section 1032 of the Code, no gain or
loss will be recognized to California Insured II on the receipt of assets of an
Acquired Fund in exchange for its shares; (iv) in accordance with Section
354(a)(1) of the Code, no gain or loss will be recognized to the stockholders of
an Acquired Fund on the receipt of Corresponding Shares of California Insured II
in exchange for their shares of the Acquired Fund (except to the extent that
common stockholders receive cash representing an interest in fractional shares
of California Insured II Common Stock in the Reorganization); (v) in accordance
with Section 362(b) of the Code, the tax basis of an Acquired Fund's assets in
the hands of California Insured II will be the same as the tax basis of such
assets in the hands of the Acquired Fund immediately prior to the consummation
of the Reorganization; (vi) in accordance with Section 358 of the Code,
immediately after the Reorganization, the tax basis of the shares of California
Insured II received by the stockholders of an Acquired Fund in the
Reorganization will be equal, in the aggregate, to the tax basis of the shares
of the Acquired Fund surrendered in exchange; (vii) in accordance with Section
1223 of the Code, a stockholder's holding period for the shares of California
Insured II will be determined by including the period for which such stockholder
held the Acquired Fund shares exchanged therefor, provided, that such shares
were held as a capital asset; (viii) in accordance with Section 1223 of the
Code, California Insured II's holding period with respect to an Acquired Fund's
assets transferred will include the period for which such assets were held by
the Acquired Fund; (ix) the payment of cash to common stockholders of an
Acquired Fund in lieu of fractional shares of California Insured II Common Stock
will be treated as though the fractional shares were distributed as part of the
Reorganization and then redeemed, with the result that such stockholders will
have short- or long-term capital gain or loss to the extent that the cash
distribution differs from the stockholder's basis allocable to the California
Insured II fractional shares; and (x) the taxable year of each Acquired Fund
will end on the effective date of the Reorganization and pursuant to Section
381(a) of the Code and regulations thereunder, California Insured II will
succeed to and take into account certain tax attributes of each Acquired Fund,
such as earnings and profits, capital loss carryovers and method of accounting.
(g) That all proceedings taken by each of the Funds and its counsel in
connection with the Reorganization and all documents incidental thereto shall be
satisfactory in form and substance to the others.
(h) That the N-14 Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of California Insured II, be contemplated by the
Commission.
(i) That Acquired Funds shall have received from Deloitte & Touche LLP a
letter dated as of the effective date of the N-14 Registration Statement and a
similar letter dated within five days prior to the Exchange Date, in form and
substance satisfactory to them, to the effect that (i) they are independent
public accountants with respect to California Insured II within the meaning of
the 1933 Act and the applicable published rules and regulations thereunder; (ii)
in their opinion, the financial statements and supplementary information of
California Insured II included or incorporated by reference in the N-14
Registration Statement and reported on by them comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder; (iii) on the basis of limited
procedures agreed upon by the Funds and described in such letter (but not an
examination in accordance with generally accepted auditing standards) consisting
of a reading of any unaudited interim financial statements and unaudited
supplementary information of California Insured II included in the N-14
Registration Statement, and inquiries of certain officials of California Insured
II responsible for financial and accounting matters, nothing came to their
attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as to
form in all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder, (b) such unaudited
financial statements are not fairly presented in conformity with generally
accepted accounting principles, applied on a basis substantially consistent with
that of the audited financial statements, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to the
unaudited financial statements taken as a whole; and (iv) on the basis of
limited procedures agreed upon by the Funds and described in such letter (but
not an examination in accordance with generally accepted auditing standards),
the information relating to California Insured II appearing in the N-14
Registration
II-18
<PAGE>
Statement, which information is expressed in dollars (or percentages derived
from such dollars) (with the exception of performance comparisons, if any), if
any, has been obtained from the accounting records of California Insured II or
from schedules prepared by officials of California Insured II having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
(j) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the Reorganization
under Section 25(c) of the 1940 Act, and no other legal, administrative or other
proceeding shall be instituted or threatened which would materially affect the
financial condition of California Insured II or would prohibit the
Reorganization.
(k) That the Acquired Funds shall have received from the Commission such
orders or interpretations as Brown & Wood LLP, as their counsel, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall be
in full force and effect.
11. California Insured II Conditions.
The obligations of California Insured II hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Directors and the stockholders of each
of the Funds as set forth in Section 10(a); and that each of the Acquired Funds
shall have delivered to California Insured II a copy of the resolution approving
this Agreement adopted by such Acquired Fund's Board of Directors, and a
certificate setting forth the vote of the stockholders of such Acquired Fund
obtained, each certified by its Secretary.
(b) That each Acquired Fund shall have furnished to California Insured II
a statement of its assets, liabilities and capital, with values determined as
provided in Section 6 of this Agreement, together with a schedule of investments
with their respective dates of acquisition and tax costs, all as of the
Valuation Time, certified on such Fund's behalf by its President (or any Vice
President) and its Treasurer, and a certificate signed by such Fund's President
(or any Vice President) and its Treasurer, dated as of the Exchange Date,
certifying that as of the Valuation Time and as of the Exchange Date there has
been no material adverse change in the financial position of the Acquired Fund
since the date of such Fund's most recent Annual Report or Semi-Annual Report,
as applicable, other than changes in the Acquired Fund Investments since that
date or changes in the market value of the Acquired Fund Investments.
(c) That each Acquired Fund shall have furnished to California Insured II
a certificate signed by such Fund's President (or any Vice President) and its
Treasurer, dated the Exchange Date, certifying that as of the Valuation Time and
as of the Exchange Date all representations and warranties of the Acquired Fund
made in this Agreement are true and correct in all material respects with the
same effect as if made at and as of such dates and the Acquired Fund has
complied with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied at or prior to such dates.
(d) That each Acquired Fund shall have delivered to California Insured II
a letter from Deloitte & Touche LLP (for California Insured and California
Insured IV) or Ernst & Young LLP (for California Insured III), dated the
Exchange Date, stating that such firm has performed a limited review of the
Federal, state and local income tax returns of the Acquired Fund for the period
ended (which returns originally were prepared and filed by the Acquired Fund),
and that based on such limited review, nothing came to their attention which
caused them to believe that such returns did not properly reflect, in all
material respects, the Federal, state and local income taxes of the Acquired
Fund for the period covered thereby; and that for the period from , to and
including the Exchange Date and for any taxable year of the Acquired Fund ending
upon the liquidation of that Acquired Fund, such firm has performed a limited
review to ascertain the amount of applicable Federal, state and local taxes, and
has determined that either such amount has been paid or reserves have been
established for payment of such taxes, this review to be based on unaudited
financial data; and that based on such limited review, nothing has come to their
attention which caused them to believe that the taxes paid or reserves set aside
for payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from , to and
including the Exchange Date and for any taxable year of that Acquired Fund,
ending upon the liquidation of such fund or that such fund would not qualify as
a regulated investment company for Federal income tax purposes for the tax years
in question.
II-19
<PAGE>
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That California Insured II shall have received an opinion of Brown &
Wood LLP, as counsel to the Funds, in form and substance satisfactory to
California Insured II and dated the Exchange Date, with respect to the matters
specified in Section 10(e) of this Agreement and such other matters as
California Insured II reasonably may deem necessary or desirable.
(g) That California Insured II shall have received a private letter ruling
from the Internal Revenue Service or an opinion of Brown & Wood LLP with respect
to the matters specified in Section 10(f) of this Agreement.
(h) That California Insured II shall have received from Deloitte & Touche
LLP (for California Insured and California Insured IV) or Ernst & Young LLP (for
California Insured III) a letter dated as of the effective date of the N-14
Registration Statement and a similar letter dated within five days prior to the
Exchange Date, in form and substance satisfactory to California Insured II, to
the effect that (i) they are independent public accountants with respect to such
fund within the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; (ii) in their opinion, the financial statements and
supplementary information of such fund included or incorporated by reference in
the N-14 Registration Statement and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder; (iii) on the basis of
limited procedures agreed upon by the Funds and described in such letter (but
not an examination in accordance with generally accepted auditing standards)
consisting of a reading of any unaudited interim financial statements and
unaudited supplementary information of the Acquired Fund included in the N-14
Registration Statement, and inquiries of certain officials of the Acquired Fund
responsible for financial and accounting matters, nothing came to their
attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as to
form in all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder, (b) such unaudited
financial statements are not fairly presented in conformity with generally
accepted accounting principles, applied on a basis substantially consistent with
that of the audited financial statements, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to the
unaudited financial statements taken as a whole; and (iv) on the basis of
limited procedures agreed upon by the Funds and described in such letter (but
not an examination in accordance with generally accepted auditing standards),
the information relating to the Acquired Fund appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages derived
from such dollars) (with the exception of performance comparisons, if any), if
any, has been obtained from the accounting records of the Acquired Fund or from
schedules prepared by officials of the Acquired Fund having responsibility for
financial and reporting matters and such information is in agreement with such
records, schedules or computations made therefrom.
(i) That the Acquired Fund Investments to be transferred to California
Insured II shall not include any assets or liabilities which California Insured
II, by reason of charter limitations or otherwise, may not properly acquire or
assume.
(j) That the N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of any Acquired Fund, be contemplated by the
Commission.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the Reorganization
under Section 25(c) of the 1940 Act, and no other legal, administrative or other
proceeding shall be instituted or threatened which would materially affect the
financial condition of any Acquired Fund or would prohibit the Reorganization.
(l) That California Insured II shall have received from the Commission
such orders or interpretations as Brown & Wood LLP, as counsel to California
Insured II, deems reasonably necessary or desirable under the 1933 Act and the
1940 Act in connection with the Reorganization, provided, that such counsel
shall have requested such orders as promptly as practicable, and all such orders
shall be in full force and effect.
(m) That all proceedings taken by each Acquired Fund and its respective
counsel in connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to California Insured II.
II-20
<PAGE>
(n) That prior to the Exchange Date, each of the Acquired Funds shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to its stockholders all of its
net investment company taxable income for the period to and including the
Exchange Date, if any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to and including the
Exchange Date. In this regard, the last dividend period for the California
Insured AMPS, the California Insured III AMPS and the California Insured IV AMPS
may be shorter than the dividend period for such AMPS determined as set forth in
the applicable Articles Supplementary.
12. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the stockholders of the Funds)
prior to the Exchange Date, or the Exchange Date may be postponed, (i) by mutual
consent of the Boards of Directors of the Funds, (ii) by the Board of Directors
of any Acquired Fund if any condition of such Acquired Fund's obligations set
forth in Section 10 of this Agreement has not been fulfilled or waived by such
Board; or (iii) by the Board of Directors of California Insured II if any
condition of California Insured II's obligations set forth in Section 11 of this
Agreement have not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by August __, 2000, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of Directors
of the Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of any Fund or persons who are
their directors, trustees, officers, agents or stockholders in respect of this
Agreement.
(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Directors of any Fund (whichever
is entitled to the benefit thereof), if, in the judgment of such Board after
consultation with its counsel, such action or waiver will not have a material
adverse effect on the benefits intended under this Agreement to the stockholders
of their respective fund, on behalf of which such action is taken. In addition,
the Boards of Directors of the Funds have delegated to FAM the ability to make
non-material changes to the transaction if it deems it to be in the best
interests of the Funds to do so.
(e) The respective representations and warranties contained in Sections 1,
2, 3 and 4 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and no Fund nor any of its officers,
directors, trustees, agents or stockholders shall have any liability with
respect to such representations or warranties after the Exchange Date. This
provision shall not protect any officer, director, trustee, agent or stockholder
of any Fund against any liability to the entity for which that officer,
director, trustee, agent or stockholder so acts or to its stockholders, to which
that officer, director, trustee, agent or stockholder otherwise would be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose any terms
or conditions which are determined by action of the Boards of Directors of the
Funds to be acceptable, such terms and conditions shall be binding as if a part
of this Agreement without further vote or approval of the stockholders of the
Funds unless such terms and conditions shall result in a change in the method of
computing the number of shares of California Insured II Common Stock, California
Insured II Series C AMPS, California Insured II Series D AMPS and California
Insured II Series E AMPS to be issued to the Acquired Funds, as applicable, in
which event, unless such terms and conditions shall have been included in the
proxy solicitation materials furnished to the stockholders of the Funds prior to
the meetings at which the Reorganization shall have been approved, this
Agreement shall not be consummated and shall terminate unless the Funds promptly
shall call a special meeting of stockholders at which such conditions so imposed
shall be submitted for approval.
13. Indemnification.
(a) Each Acquired Fund hereby severally agrees to indemnify and hold
California Insured II harmless from all loss, liability and expenses (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which California Insured II may incur or sustain by reason of the fact
that (i) California Insured II shall be required to pay any corporate obligation
of such Acquired Fund, whether consisting of tax deficiencies
II-21
<PAGE>
or otherwise, based upon a claim or claims against such Acquired Fund which were
omitted or not fairly reflected in the financial statements to be delivered to
California Insured II in connection with the Reorganization; (ii) any
representations or warranties made by such Acquired Fund in this Agreement
should prove to be false or erroneous in any material respect; (iii) any
covenant of such Acquired Fund has been breached in any material respect; or
(iv) any claim is made alleging that (a) the N-14 Registration Statement
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein attributable to such Fund not misleading or (b) the Joint Proxy
Statement and Prospectus delivered to the stockholders of the Funds and forming
a part of the N-14 Registration Statement included any untrue statement of a
material fact or omitted to state any material fact necessary to make the
statements therein attributable to such Fund, in the light of the circumstances
under which they were made, not misleading, except with respect to (iv)(a) and
(b) herein insofar as such claim is based on written information furnished to
the Acquired Funds by California Insured II.
(b) California Insured II hereby agrees to indemnify and hold each
Acquired Fund harmless from all loss, liability and expenses (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which such Acquired Fund may incur or sustain by reason of the fact that
(i) any representations or warranties made by California Insured II in this
Agreement should prove false or erroneous in any material respect, (ii) any
covenant of California Insured II has been breached in any material respect, or
(iii) any claim is made alleging that (a) the N-14 Registration Statement
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, not misleading or (b) the Joint Proxy Statement and Prospectus
delivered to stockholders of the Funds and forming a part of the N-14
Registration Statement included any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except with respect to (iii)(a) and (b) herein insofar as such claim is based on
written information furnished to California Insured II by the Acquired Fund
seeking indemnification.
(c) In the event that any claim is made against California Insured II in
respect of which indemnity may be sought by California Insured II from an
Acquired Fund under Section 13(a) of this Agreement, or in the event that any
claim is made against an Acquired Fund in respect of which indemnity may be
sought by an Acquired Fund from California Insured II under Section 13(b) of
this Agreement, then the party seeking indemnification (the "Indemnified
Party"), with reasonable promptness and before payment of such claim, shall give
written notice of such claim to the other party (the "Indemnifying Party"). If
no objection as to the validity of the claim is made in writing to the
Indemnified Party by the Indemnifying Party within thirty (30) days after the
giving of notice hereunder, then the Indemnified Party may pay such claim and
shall be entitled to reimbursement therefor, pursuant to this Agreement. If,
prior to the termination of such thirty-day period, objection in writing as to
the validity of such claim is made to the Indemnified Party, the Indemnified
Party shall withhold payment thereof until the validity of such claim is
established (i) to the satisfaction of the Indemnifying Party, or (ii) by a
final determination of a court of competent jurisdiction, whereupon the
Indemnified Party may pay such claim and shall be entitled to reimbursement
thereof, pursuant to this Agreement, or (iii) with respect to any tax claims,
within seven (7) calendar days following the earlier of (A) an agreement between
California Insured II and the Acquired Fund seeking indemnification that an
indemnity amount is payable, (B) an assessment of a tax by a taxing authority,
or (C) a "determination" as defined in Section 1313(a) of the Code. For purposes
of this Section 13, the term "assessment" shall have the same meaning as used in
Chapter 63 of the Code and Treasury Regulations thereunder, or any comparable
provision under the laws of the appropriate taxing authority. In the event of
any objection by the Indemnifying Party, the Indemnifying Party promptly shall
investigate the claim, and if it is not satisfied with the validity thereof, the
Indemnifying Party shall conduct the defense against such claim. All costs and
expenses incurred by the Indemnifying Party in connection with such
investigation and defense of such claim shall be borne by it. These
indemnification provisions are in addition to, and not in limitation of, any
other rights the parties may have under applicable law.
14. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization pursuant to Rule
145(c), California Insured II will cause to be affixed upon the certificate(s)
issued to such person (if any) a legend as follows:
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<PAGE>
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC. (OR ITS
STATUTORY SUCCESSOR), OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to California
Insured II's transfer agent with respect to such shares. Each Acquired Fund will
provide California Insured II on the Exchange Date with the name of any
stockholder of an Acquired Fund who is to the knowledge of such Acquired Fund an
affiliate of that Acquired Fund on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be made by hand delivery, prepaid
certified mail or overnight service, addressed to any Fund, at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, Attn: Terry K. Glenn, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes the
only understanding with respect to the Reorganization, may not be changed except
by a letter of agreement signed by each party and 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.
(e) Copies of the Articles of Incorporation, as amended, and Articles
Supplementary of each Fund are on file with the Maryland Department and notice
is hereby given that this instrument is executed on behalf of the Directors of
each Fund.
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<PAGE>
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
By
--------------------------------------------
Attest:
- ----------------------------------
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
By
--------------------------------------------
Attest:
- ----------------------------------
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
By
--------------------------------------------
Attest:
- ----------------------------------
MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
By
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Attest:
- ----------------------------------
II-24
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EXHIBIT III
ECONOMIC AND FINANCIAL CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State of California and does not purport to be a complete
description of such factors. Other factors will affect issuers. The summary is
based primarily upon one or more of the most recent publicly available offering
statements on debt offerings of California issuers, however, it has not been
updated. The California Fund has not independently verified the information.
General Economic Conditions
The economy of the State of California (sometimes referred to herein as the
"State") is the largest among the 50 states and one of the largest in the world.
This diversified economy has major components in high technology, trade,
entertainment, agriculture, manufacturing, tourism, construction and services.
Since 1994, California's economy has been performing strongly after suffering a
deep recession.
California's July 1, 1998 population of over 33.4 million represented over
12% of the total United States population. As of July 1, 1990, the population of
29,944,000 represented an increase of over 6 million persons, or 26%, during the
decade of the 1980s.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 census, 96% of the State's population resided in the 23
Metropolitan Statistical Areas in the State. As of July 1, 1997, the five-county
Los Angeles area accounted for 49% of the State's population, with over 16.0
million residents. The 10-county San Francisco Bay Area represented 21%, with a
population of over 7.0 million.
In the Governor's Budget release on May 14, 1999, the Department of Finance
projected that the California economy will show moderate growth through 2000, at
a slower pace than in 1998. The economic expansion has been marked by strong
growth in high technology business services (including computer software),
construction, computer and electronic components manufacturing, and tourism
related industries. The Asian economic crisis, which began in 1997, has had some
dampening effects on the State's economy, particularly in high technology
manufacturing. However, stabilizing economic conditions in Asia, ongoing
strength in NAFTA partners, and growth in Europe, combined with ongoing strength
in stock markets, have improved the short-term outlook.
1995-96 through 1997-99 Fiscal Years
The economy grew strongly during the 1995-96 to 1998-99 fiscal years, and
as a result, the General Fund (the principal operating fund that holds most
major revenue sources for the State) took in substantially greater tax revenues
(around $2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.2 billion in
1997-98 and $1.0 billion in 1998-99) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid in 1995-96 and 1996-97. The accumulated budget
deficit from the recession years was finally eliminated. The Department of
Finance estimates that the State's budget reserve (the Special Fund for Economic
Uncertainties or SFEU) totaled $639.8 million as of June 30, 1997, $1.782
billion as of June 30, 1998. In the 1999 Budget Act, signed by the Governor on
June 29, 1999, the Department of Finance projects the budget reserve had a
balance of about $1.932 billion at June 30, 1999 and will have a balance of $880
million at June 30, 2000.
On August 18, 1997, the Governor signed the 1997-98 Budget Act, but vetoed
about $314 million of specific spending items, primarily in health and welfare
and education areas from both the General Fund and Special Funds. The Governor
announced that he was prepared to restore about $200 million of education
spending upon satisfactory completion of legislation on an education testing
program.
The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:
1. The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element was a bill that
provided for a phased-in reduction of the Vehicle License Fee ("VLF"). Since
the VLF is transferred to cities and countries under existing law, the bill
provided for the General Fund to replace the lost revenues. Starting on
January 1, 1999, the VLF has been reduced by 25 percent, at a cost to the
General Fund of approximately $500 million in the 1998-99 Fiscal Year and
about $1 billion annually thereafter.
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In addition to the cut in VLF, the 1998-99 budget included both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a nonrefundable
renters' tax credit ($133 million), and various targeted business tax credits
($106 million).
2. On November 8, 1998, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level,
primarily by guaranteeing K-14 schools a minimum share of General Fund
revenues. Proposition 98 funding for K-14 schools was increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, over $300 million
higher than the minimum Proposition 98 guarantee. Of the 1998-99 funds, major
new programs included money for instructional and library materials, deferred
maintenance, support for increasing the school year to 180 days and reduction
of class sizes in Grade 9. The Budget also included $250 million as repayment
of prior years loans to schools, as part of the settlement of the California
Teachers' Association v. Gould lawsuit. That lawsuit, filed in 1992, requires
that the State and K-14 schools share in repayment of prior years' emergency
loans to schools.
3. Funding for higher education increased substantially above the actual
1997-98 level. General Fund support was increased by $340 million (15.6%) for
the University of California and $267 million (14.1%) for the California
State University system. In addition, Community Colleges funding increased by
$300 million (6.6%).
4. The Budget included increased funding for health, welfare and social
services programs. A 4.9% grant increase was included in the basic welfare
grants, the first increase in those grants on 9 years.
5. Funding for the judiciary and criminal justice programs increased by
about 11% over 1997-98, primarily to reflect increased State support for
local trial courts and a rising prison population.
6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the Headwaters
Forest, funding for the Infrastructure and Economic Development Bank ($50
million) and funding for the construction of local jails. The State realized
savings of $433 million from a reduction in the State's contribution to the
State Teacher's Retirement System in 1998-99.
The May Revision to the 1999-2000 Governor's Budget (hereafter shortened to
"1999-00"), released on May 14, 1999 (the "1999 May Revision"), reported that
stronger than expected economic conditions in the State for the latter part of
1998 and into 1999 would produce total 1998-99 General Fund revenues of about
$57.9 billion, almost $1.0 billion above the 1998 Budget Act estimates and $1.6
billion above the initial estimates in the January 1999-00 Governor's Budget.
The 1999 May Revision projects 1998-99 General Fund expenditures of $58.6
billion, about $400 million higher than the January 1999-00 Governor's Budget
estimate. Some of this additional revenue will be directed to K-14 schools under
Proposition 98.
Federal Welfare Reform. Congress passed and the President signed (on August
22, 1996) the Personal Responsibility and Work Opportunity Act of 1996 (the
"Law") making a fundamental reform of the current welfare system. Among many
provisions, the Law includes: (i) a change of Aid to Families with Dependent
Children from an entitlement program to a block grant titled Temporary
Assistance for Needy Families ("TANF"), with lifetime time limits on TANF
recipients, work requirements and other changes; (ii) provisions denying certain
federal welfare and public benefits to legal noncitizens, allowing states to
elect to deny additional benefits (including TANF) to legal noncitizens, and
generally denying almost all benefits to illegal immigrants; and (iii) changes
in the Food Stamp program, including reducing maximum benefits and imposing work
requirements.
As part of the 1997-98 Budget Act legislative package, the State
Legislature and Governor agreed on a comprehensive reform of the State's public
assistance programs to implement the new federal Law. The new basic State
welfare program is called California Work Opportunity and Responsibility to Kids
Act ("CalWORKs"), which replaces the former Aid to Families with Dependent
Children (AFDC) and Greater Avenues to Independence (GAIN) programs effective
January 1, 1998. As required by the federal Law, CalWORKs contains new time
limits on receipt of welfare aid, both lifetime as well as for any current time
on aid. Administration of the new Welfare-to-Work programs will be largely at
the county level, and counties are given financial incentives for success in
this program.
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Although the longer-term impact of the new federal Law and CalWORKs cannot
be determined until there has been more experience and until an independent
evaluation of the CalWORKs program is completed. In the short-term, the CalWORKs
program shows a continued trend of declining welfare caseloads. The CalWORKs
caseload trend is projected to be 646,000 in 1998-99 and 602,000 in 1999-00,
down from a high of 921,000 cases in 1994-95.
The 1999 Budget Act proposes expenditures that will continue to meet, but
not exceed, the federally-required $2.9 billion combined State and county
maintenance-of-effort (MOE) requirement. Total CalWORKs-related expenditures are
estimated to be $7.3 billion for 1998-99 and $7.3 billion for 1999-00, including
child care transfer amounts for the Department of Education.
Tobacco Litigation. In late 1998, the State signed a settlement agreement
with the four major cigarette manufacturers, which was later ratified by a State
court judge having jurisdiction over a pending lawsuit brought by the State
against these companies. Under the settlement, the companies will pay California
governments a total of approximately $25 billion over a period of 25 years.
Under the State's settlement, half of these moneys will be paid to the State,
and half to local governments (cities and counties).
The specific amount to be received by the State and local governments is,
however, subject to adjustment for a number of reasons. First, the federal
government has indicated that it may seek recovery of part of the state's
settlement as reimbursement for federal Medicaid funding in prior years. Second,
various details in the settlement allow reduction of the companies' payments
because of events such as certain federal government actions, reductions in
cigarette sales, or bankruptcy of any settling companies.
1999-00 Fiscal Year Budget. On January 8, 1999, Governor Davis released his
proposed budget for fiscal year 1999-00 (the "January Governor's Budget"). The
January Governor's Budget generally reported that General Fund revenues for
fiscal year 1998-99 and fiscal year 1999-00 would be lower than earlier
projections (primarily due to weaker overseas economic conditions perceived in
the late 1998), while some caseloads would be higher than earlier projections.
The January Governor's Budget proposed $60.5 billion of General Fund
expenditures in fiscal year 1999-00, with a $415 million SFEU reserve or budget
reserve at June 30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues for
combined fiscal years 1998-99 and 1999-00. The Legislature enacted the 1999
Budget Act in a timely fashion, meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the budget
reserve would have a balance at June 30, 2000, of about $881 million. Not
included in this amount was an additional $300 million that (after the
Governor's vetoes) was "set aside" to provide funds for employee salary
increases (to be negotiated in bargaining with employee unions), and for
litigation reserves. There should be normal cash flow borrowing during the
fiscal year.
The principal features of the 1999 Budget Act include the following:
1. Proposition 98 funding for K-12 schools was increased by $1.6 billion
in General Fund moneys over revised 1998-99 levels, $108.6 million higher
than the minimum Proposition 98 guarantee. Of the 1999-00 funds, major new
programs included money for reading improvement, new textbooks, school
safety, improving teacher quality, funding teacher bonuses, providing greater
accountability for school performance, increasing preschool and after school
care programs and funding deferred maintenance of school facilities. The
Budget also includes $310 million as repayment of prior years' loans to
schools, as part of the settlement of the California Teachers' Association v.
Gould lawsuit.
2. Funding for higher education increased substantially above the actual
1998-99 level. General Fund support was increased by $184 million (7.3%) for
the University of California ("UC") and $126 million (5.9%) for the
California State University ("CSU") system. In addition, Community Colleges
funding increased by $324.3 million (6.6%). As a result, undergraduate fees
at UC and CSU will be reduced for the second consecutive year, and the
per-unit charge at Community Colleges will be reduced by $1.
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3. The Budget included increased funding of nearly $600 million for
health and human service.
4. About $800 million from the General Fund will be directed toward
infrastructure costs, including $425 million in additional funding for the
Infrastructure Bank, intitial planning costs for a new prison in the Central
Valley, additional equipment for train and ferry service, and payment of
deferred maintenance for state parks.
5. The Legislature enacted a one-year additional reduction of 10 percent
of the Vehicle License Fee for calendar year 2000, at a General Fund cost of
about $250 million in each of fiscal year 1999-00 and 2000-01 to make up lost
funding to local governments. Conversion of this one-time reduction to a
permanent cut will remain subject to the revenue tests in the legislation
adopted last year. Several other targeted tax cuts, primarily for businesses,
were also approved, at a cost of $54 million in 1999-00.
6. A one-time appropriation of $150 million, to be split between cities
and counties, was made to offset property tax shifts during the early 1990's.
Additionally, an ongoing $50 million will be given to cities for jail booking
or processing fees charged by counties when an individual arrested by city
personnel is taken to a county detention facility.
Local Governments
The primary units of local government in California are the counties,
ranging in population from 1,200 (Alpine) to over 9,600,000 (Los Angeles).
Counties are responsible for providing many basic services, including indigent
healthcare, welfare, courts, jails and public safety in unincorporated areas.
There are also about 470 incorporated cities and thousands of other special
districts formed for education, utility and other services. The fiscal condition
of local governments has been constrained since the enactment of "Proposition
13" in 1978, which reduced and limited the future growth of property taxes and
limited the ability of local governments to impose "special taxes" (those
devoted to a specific purpose) without two-thirds voter approval. Counties, in
particular, have had fewer options to raise revenues than many other local
governmental entities, and have been required to maintain many services.
In the aftermath of Proposition 13, the State provided aid from the general
fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. During the recession, the Legislature eliminated remnants of this
post-Proposition 13 aid to entities other than K-14 education districts,
although it has also provided additional funding sources (such as sales taxes)
and reduced requirements for local services.
Since then the State has also provided additional funding to counties and
cities through such programs as health and welfare realignment, welfare reform,
trial court restructuring, an annual program supporting local public safety
departments, and various other measures. In his 1999-00 Budget Proposal, the
Governor has proposed a review and "accounting" of state - local fiscal
relationships, with the goal of ultimately restoring local government finances
to an equivalent fiscal condition to the period prior to the 1991-93 recession -
induced tax shifts. Litigation has been brought challenging the legality of the
property tax shifts from counties to schools.
The 1999 Budget Act includes a $150 million one-time grant of money from
the General Fund to local agencies for relief from the 1992 and 1993 property
tax shifts. Legislation has been passed, subject to voter approval at the
election in November, 2000, to provide a more permanent payment to local
governments to offset the property tax shift. In addition, legislation was
enacted in 1999 to provide annually up to $50 million relief to cities based on
1997-98 costs of jail booking and processing fees paid to counties.
The entire statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996 (see "Federal Welfare Reform"
above). Under the CalWORKs program, counties are given flexibility to develop
their own plans, consistent with State law, to implement Welfare-to-Work and to
administer many of its elements and their costs for administrative and support
services are capped at 1996-97 levels. Counties are also given financial
incentives if, at the individual county level or statewide, the CalWORKs program
produces savings associated with specified Welfare-to-Work outcomes; counties
may also suffer penalties for failing to meet federal standards. Under CalWORKs,
counties will still be required to provide "general assistance" aid to certain
persons who cannot obtain welfare from other programs.
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Historically, funding for the State's trial court system was divided
between the State and the counties. However, Chapter 850, Statutes of 1997,
restructured the State's trial court funding system. Funding for the courts,
costs for facilities, local judicial benefits, and revenue collection, was
consolidated at the State level. County contribution for both their general fund
and fine and penalty amounts is capped at the 1994-95 level and becomes part of
the Trial Court Trust Fund, which supports all trial court operations. The State
assumed responsibility for future growth in trial court funding. The
consolidation of funding is intended to streamline the operation of the courts,
provide a dedicated revenue source, and relieve fiscal pressure on the counties.
Beginning in 1998-99, county general fund contribution for court operations is
reduced by $300 million, and cities will retain $62 million in fine and penalty
revenue previously remitted to the State; the General Fund reimbursed the $362
million revenue loss to the Trial Court Trust Fund. The 1999 Budget Act includes
funds to further reduce the county general fund contribution by an additional
$96 million by reducing by 100 percent the contributions of the next 18 smallest
counties and by 10 percent the general fund contribution of the remaining 21
counties.
On November 5, 1996, voters approved Proposition 218, called the "Right to
Vote on Taxes Act," which adds new Articles XIIIC and XIIID into the California
Constitution. These new provisions enact limits on the ability of local
government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, and assessments to changes through local initiatives. There are a number
of ambiguities concerning the Proposition and its impact on local governments
and their bonded debt that will require interpretation by the courts or the
State Legislature. The State Legislature Analyst estimated that enactment of
Proposition 218 would reduce local government revenues statewide by over $100
million a year, and that over time revenues to local government would be reduced
by several hundred million dollars. Proposition 218 does not affect the State or
its ability to levy or collect taxes.
On December 23, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to the
Educational Revenue Augmentation Fund, which is a funding source for schools, is
a reimbursable state mandated cost. On August 11, 1998, the State Department of
Justice, on behalf of the State Department of Finance, filed a rebuttal in
opposition to the counties' claim. The test claim was heard on October 29, 1998,
and the Commission on State Mandates found in favor of the State. In March,
1999, Sonoma County filed suit in the Superior Court to overturn the
Commission's decision. The State is contesting this lawsuit. Should the courts
find in favor of the counties, the impact to the State General Fund could be as
high as $10.0 billion with an annual Proposition 98 General Fund cost of at
least $3.6 billion. This cost would grow in accordance with the annual assessed
value growth rate.
Constitutional and Statutory Limitations; Recent and Pending Initiatives;
Pending Legislation
Constitutional and Statutory Limitations. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies, Article XIIIA, provides
that the maximum ad valorem tax on real property cannot exceed 1% of the "full
cash value" of the property and effectively prohibits the levying of any other
ad valorem tax on real property for general purposes. However, on May 3, 1986,
Proposition 46, an amendment to Article XIIIA, was approved by the voters of the
State of California, creating a new exemption under Article XIIIA permitting an
increase in ad valorem taxes on real property in excess of 1% for bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness, "Full cash value" is defined as "the County Assessor's valuation
of real property as shown on the 1975-76 Fiscal Year tax bill under "full cash
value" or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The "full cash value" is subject to annual adjustment to reflect
increases (not to exceed 2%) or decreases in the consumer price index or
comparable local data, or to reflect reductions in property value caused by
damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
III-5
<PAGE>
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
At the November 9, 1988 general election, California voters approved an
initiative known as Proposition 98. Under Proposition 98 (as modified by
Proposition 111, which was enacted on June 5, 1990), K-14 schools are guaranteed
the greater of (a) in general, a fixed percent of General Fund revenues ("Test
1"), (b) the amount appropriated to K-14 schools in the prior year, adjusted for
changes in the cost of living (measured as in Article XIII B by reference to
State per capita personal income) and enrollment ("Test 2"), or (c) a third
test, which would replace Test 2 in any year when the percentage growth in per
capita General Fund revenues from the prior year plus one half of one percent is
less than the percentage growth in State per capita personal income ("Test 3").
Under Test 3, schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth. Legislation adopted
prior to the end of the 1998-89 Fiscal Year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of General Fund tax revenues, based on 1986-87 appropriations. However, that
percent has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession in the early 1990s, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from the 1991-92
fiscal year to the 1993-94 fiscal year.
In 1992, a lawsuit was filed, called California Teachers' Association v
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count either as appropriations that count toward satisfying the
Proposition 98 guarantee, or as appropriations from "below" the current base.
Repayments are spread over the eight-year period of the 1994-95 fiscal year
through the 2001-02 fiscal year to reduce any adverse fiscal impact.
Substantially increased general fund revenues, above initial budget
projections, in the 1994-95 to 1998-99 fiscal years have resulted in retroactive
increases in Proposition 98 appropriations from subsequent fiscal years'
budgets. Because of the State's increasing revenues, per-pupil funding at the
K-12 level has increased by about 44 percent from the level in place from
1991-92 through 1993-94, and is estimated at about $6,025 per the average daily
attendance rate of students in 1999-00. A significant amount of the "extra"
Proposition 98 monies in the last few years has been allocated to special
programs, most particularly an initiative to allow each classroom from grades
K-3 to have no more than 20 pupils by the end of the 1997-98 school year.
Furthermore, since General Fund revenue growth is expected to continue in
1999-00, there are also new initiatives to increase school safety, improve
schools' accountability for pupil performance, provide additional textbooks to
schools, fund deferred maintenance projects, increase beginning teacher's
salaries and provide performance incentives to teachers.
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen or
a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education,
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<PAGE>
the measure requires, commencing January 1, 1995, that every school district in
the State verify the legal status of every child enrolling in the district for
the first time. By January 1, 1996, each school district must also verify the
legal status of children already enrolled in the district and of all parents or
guardians of all students. If the district "reasonably suspects" that a student,
parent or guardian is not legally in the United States, that district must
report the student to the United States Immigration and Naturalization Service
and certain other parties. The measure also prohibits a school district from
providing education to a student it does not verify as either a United States
citizen or a person legally admitted to the United States.
Opponents of Proposition 187 filed at least eight lawsuits (which were
subsequently consolidated) challenging the constitutionality and validity of the
measure. On March 18, 1998, a United States District Court judge entered as
final judgment in the case, holding key portions of the measure unconstitutional
and permanently enjoining the State from implementing those sections which would
have required law enforcement, teachers and social services and health care
workers to verify a person's immigration status and subsequently report illegal
immigrants to authorities and deny them social services, health care and
education benefits. An appeal by the State Attorney General was filed with the
Ninth Circuit Court of Appeals on March 25, 1998. Governor Gray Davis
subsequently asked the United States Ninth Circuit Court of Appeal to serve as
mediator on the issue. On April 26, 1999, the Ninth Circuit Court of Appeal
granted Governor Davis' request for mediation of the controversy. In response,
David E. Lombardi, Chief Mediator for the Ninth Circuit Mediation Office ordered
a stay until June 18, 1999 of all appellate proceedings in connection with the
six cases then pending before the Court of Appeal involving Proposition 187
challenges. On June 1, 1999, the Howard Jarvis Taxpayers' Association sued
Governor Davis in the California Supreme Court challenging Governor Davis' right
to submit Proposition 187 to mediation, which the plaintiff claims undermines
the public's right of initiative. On June 30, 1999, the California Supreme Court
declined to hear the case. Since that time, Governor Davis had the State's
appeal withdrawn, letting stand the District Court rulings.
State Appropriations Limit The State is subject to an annual appropriations
limit imposed by Article XIII B of the State Constitution (the "Appropriations
Limit"). The Appropriations Limit does not restrict appropriations to pay debt
service on voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," for the State, are authorizations to spend "proceeds of taxes,"
which consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such proceeds
exceed "the cost reasonably borne by that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state aid to local
governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g. cigarette and
tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
The State's Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in state per capita personal income
and changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government or any transfer of the financial source for the provisions of
services from tax proceeds to non tax proceeds. The measurement of change in
population is a blended average of statewide overall population growth, and
change in attendance at local school and community college ("K-14") districts.
The Appropriations Limit is tested over consecutive two-year periods. Any excess
of the aggregate "proceeds of taxes" received over such two-year period above
the combined Appropriations Limits for those two years is divided equally
between transfers to K-14 districts and refunds to taxpayers.
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<PAGE>
The Legislature has enacted legislation to implement Article XIIIB which
defines certain terms used in Article XIII B and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
The following table shows the State Appropriations Limit for the past four
fiscal years and the current fiscal year. As of the enactment of the 1999-00
Budget, the Department of Finance projects the State's Appropriations Subject to
Limitations will be $6.1 billion under the State's Appropriations Limit in
Fiscal Year 1999-00.
State Appropriations Limit
(Millions)
<TABLE>
<CAPTION>
Fiscal Years
--------------------------------------------------------
1995-96 1996-97 1997-98 1998-99* 1999-00*
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
State Appropriations Limit $39,309 $42,002 $44,778 $47,573 $50,673
Appropriations Subject to Limit (34,186) (35,103) (40,743) (42,674) (44,528)
------- ------- ------- ------- -------
Amount (Over)/Under Limit $ 5,123 $ 6,899 $ 4,035 $ 4,899 $ 6,145
======= ======= ======= ======= =======
</TABLE>
- ---------------
*Estimated/Projected
SOURCE: State of California, Department of Finance.
At the November 1998 elections voters approved Proposition 2. This
proposition requires the General Fund to repay loans made from certain
transportation special accounts (such as the State Highway Account) at least
once per fiscal year, or up to 30 days after adoption of the annual budget act.
Since the General Fund may reborrow from the transportation accounts soon after
the annual repayment is made, the proposition is not expected to have any
adverse impact on the State's cash flow.
Pending Litigation The State is a party to numerous legal proceedings, many
of which normally occur in governmental operations. Some of the more significant
lawsuits pending against the State are described herein.
The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to the state-mandated costs. The action involves an appeal by
the Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates). The Board of Control decided in
favor of local school districts' claims for reimbursement for special education
programs for handicapped students. The case was then brought to the trial court
by the State and later remanded to the Commission on State Mandates for
redetermination. The Commission on State Mandates expanded the claim to include
supplemental claims filed by seven other educational institutions and determined
that part, but not all, of the claims should have been paid by the State. The
Department of Finance has not yet determined whether to seek judicial review.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J. B. Stringfellow, Jr., et. al., the State is seeking recovery
for past costs of cleanup of the site, a declaration that the defendants are
each fully liable for future costs, and an order that the cleanup be completed.
However, the defendants have filed a counterclaim against the State for alleged
negligent acts, resulting in significant findings of liability against the State
as owner, operator and generator of the wastes taken to the site. The State has
appealed. Present estimates of the cleanup range from $400 million to $600
million.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 300 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion. In 1992, the State and plaintiffs filed appeals. In
August 1999, the court of appeal issued a decision reversing the trial court's
judgment against the State and remanding the case for retrial on the inverse
condemnation cause of action.
In Just Say No To Tobacco Dough Campaign v. State of California, the
petitioners challenge the appropriation of approximately $166 million of
Proposition 99 funds in the Cigarette and Tobacco Products Surtax Fund for years
ended June 30, 1990, through June 30, 1995 for programs which were allegedly not
health education or tobacco-related disease research. The Supreme Court has
granted the State's demurrer and the plaintiffs have asked the court to
reconsider its ruling. In July, 1999, the court again sustained the State's
demurrer to the amended complaint, and issued a judgment dismissing the case.
Plaintiffs appealed. The matter will be briefed and will be scheduled for oral
argument before the court.
III-8
<PAGE>
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et
al.v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the trial
court issued a preliminary injunction prohibiting the State Controller from
paying moneys from the State Treasury for fiscal year 1998-99, with certain
limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation. On July 22 and 27, 1998,
various employee unions which had intervened in the case appealed the trial
court's preliminary injunction and asked the Court of Appeal to stay the
preliminary injunction. On July 28, 1998, the Court of Appeal granted the
unions' requests and stayed the preliminary injunction pending the Court of
Appeal's decision on the merits of the appeal. On August 5, 1998, the Court of
Appeal denied the plaintiffs' request to reconsider the stay. Also on July 22,
1998, the State Controller asked the California Supreme Court to immediately
stay the trial court's preliminary injunction and to overrule the order granting
the preliminary injunction on the merits. On July 29, 1998, the Supreme Court
transferred the State Controller's request to the Court of Appeal. The matters
are now pending before the Court of Appeal. Briefs are being submitted; no date
has been set for oral argument.
A judgment was entered for the plaintiff in August 1998 in the case of
Ceridian Corporation v. Franchise Tax Board, a suit which challenged the
validity of two sections of the California Tax laws. The first related to
deduction from corporate taxes for dividends received from insurance companies
to the extent the insurance companies have California activities. The second
related to corporate deduction of dividends to the extent the earnings of the
dividend-paying corporation have already been included in the measure of their
California tax. If both sections of the California Tax law are ultimately
invalidated, and all dividends become deductible, then the General Fund can
become liable for approximately $200 to $250 million annually. The State has
appealed the decision.
In Professional Engineers in California Government v. Wilson, the Superior
Court has ruled that $30.7 million of the $258.2 million transferred from the
State Highway Account to the General Fund violated the California Constitution.
The court also invalidated $130.9 million transferred from the Motor Vehicle
Account to the General Fund. On April 30, 1999, the court found that the $130
million transfer from the State Highway Account to the Motor Vehicle Account
also violated the California Constitution. The State decided not to appeal this
case and reversed the challenged transfers pursuant to the court's decision.
In Capitola Land v. Anderson and other related state and federal cases,
plaintiffs sought payments from the State under the AFDC-Foster Care program.
Judgment was rendered against the State in Capitola, which the State appealed
and lost. The State then filed a state plan amendment with the federal
Department of Health and Human Services ("DHHS") to enable the State to comply
with the Capitola ruling and receive federal funding. The DHHS denied the state
plan amendment, and the State has filed suit against DHHS. The Legislature also
enacted a statute which required federal funding in order to comply with the
Capitola judgment. The State then refused to implement the Capitola judgment
based on the new statute. Certain plaintiffs moved for an order of contempt
against the State, which was granted by the trial court, but was stayed and
annulled by the Court of Appeal. The plaintiffs are petitioning the California
Supreme Court for review. If, as a result of this litigation, compliance with
the Capitola judgment is required and the judgment is applied retroactively,
liability to the State could exceed $200 million.
In the Northern California 1997 Flood Litigation, a substantial number of
plaintiffs have joined an existing suit against the State, local agencies, and
private companies and contractors seeking compensation for the damages they
suffered as a result of the 1997 flooding. Property damages have been estimated
up to $2 billion.
The State is a defendant in an action, Emily Q., et al. v. Belshe, et al.,
to compel a change in early screening procedures for children with mental health
needs. The lawsuit is limited to Los Angeles County. The State has filed an
answer in this case. An adverse outcome is possible with the potential liability
of $500 million per year.
Plaintiffs in County of San Bernardino v. Barlow Respiratory Hospital and
related actions seek mandamus relief requiring the State to retroactively
increase out-patient Medi-Cal reimbursement rates. Plaintiffs have estimated the
damages to be several hundred million dollars. The State is vigorously defending
these cases, as well as related federal cases addressing the calculation of
Medi-Cal reimbursement rates in the future.
III-9
<PAGE>
EXHIBIT IV
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 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 some time 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 a
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 arc 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: These bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aal, Al, Baal, Bal and Bl.
Short-term Notes: The three ratings of Moody's for short-term notes are
MIG 1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; 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."
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 capacity
will often be evidenced by the following characteristics:
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<PAGE>
leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins, in earning coverage of fixed
financial charges and high internal cash generation; and with established access
to a range of financial markets and assured sources of alternate liquidity.
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, will 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 the requirement for 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, a Division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment 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 issuer 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 other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity of the obligor 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.
CC While 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.
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<PAGE>
D Debt rated "D" is in payment default. The "D" rating category is
used 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 adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired
unless Standard & Poor's believes that such payments will be made
during such grace period.
c The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below
an investment-grade level and/or the issuer's bonds are deemed
taxable.
p The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
financed by the debt being rated and indicates that payment of the
debt service requirements is largely or entirely dependent upon the
successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r The "r" highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks.
Examples of such obligations are securities with principal or
interest return indexed to equities, commodities, or currencies;
certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility
or variability in total return.
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.
IV-3
<PAGE>
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
-- Source of payment--the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest
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.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
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 an 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.
IV-4
<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 "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," indicating a potential upgrade, "Negative,"
for potential downgrade, or "Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short-term, and should be resolved within three to 12
months.
Ratings Outlook
An outlook is used to describe the most likely direction of any rating
change over the intermediate term. It is described as "Positive" or "Negative."
The absence of a designation indicates a stable outlook.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can
be identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
IV-5
<PAGE>
DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the basis of
D their ultimate recovery value in liquidation or reorganization of
the obligor. "DDD" represents the highest potential for recovery on
these bonds, and "D" represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-l+".
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-l" 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.
IV-6
<PAGE>
EXHIBIT V
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured California Municipal Bonds and Municipal Bonds
held by the Fund. The Fund has no obligation to obtain any such Policies, and
the terms of any Policies actually obtained may vary significantly from the
terms discussed below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards such
companies normally use in establishing the insurability of new issues of
California Municipal Bonds and Municipal Bonds and are not necessarily the
criteria that would be used in regard to the purchase of such bonds by the Fund.
The Policies do not insure (i) municipal securities ineligible for insurance and
(ii) municipal securities no longer owned by the Fund.
The Policies do not guarantee the market value of the insured California
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable to
meet its 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 premium, the policies may require that the Fund notify the
insurance company as to all California Municipal Bonds and Municipal Bonds in
the Fund's portfolio and permit the insurance company to audit their records.
The insurance premiums will be payable monthly by the Fund in accordance with a
premium schedule to be furnished by the insurance company at the time the
Policies are issued. Premiums are based upon the amounts covered and the
composition of the portfolio.
The Fund will seek to utilize insurance companies that have insurance
claims-paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch
IBCA, Inc. ("Fitch") or Aaa from Moody's Investors Service ("Moody's"). There
can be no assurance, however, that insurance from insurance carriers meeting
these criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A 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. A Moody's
insurance claims-paying ability rating is an opinion of the ability of an
insurance company to repay punctually senior policyholder obligations and
claims. An insurer with an insurance claims-paying ability rating of Aaa is
considered by Moody's to be of the best quality. In the opinion of Moody's, the
policy obligations of an insurance company with an insurance claims-paying
ability rating of Aaa carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating of S&P, 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.
V-1
<PAGE>
COMMON STOCK
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all of the Common Stock of MuniHoldings California Insured
Fund II, Inc. (the "Fund") held of record by the undersigned on October 20, 1999
at the Annual Meeting of Stockholders of the Fund to be held on December 15,
1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund III, Inc. and MuniHoldings California
Insured Fund IV, Inc.
For |_| Against |_| Abstain |_|
(Continued and to be signed on the reverse side)
<PAGE>
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) |_|
WITHHOLD AUTHORITY
to vote for all nominees listed below |_|
(INSTRUCTION: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Terry K. Glenn, Herbert I. London, Robert R. Martin, Andre F. Perold,
Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
For |_| Against |_| Abstain |_|
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated:___________________________________________
X________________________________________________
Signature
X________________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed
envelope.
<PAGE>
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all the Auction Market Preferred Stock of MuniHoldings
California Insured Fund II, Inc. (the "Fund") held of record by the undersigned
on October 20, 1999 at the Annual Meeting of Stockholders of the Fund to be held
on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings California Insured Fund, Inc,
MuniHoldings California Insured Fund III, Inc. and MuniHoldings California
Insured Fund IV, Inc.
For |_| Against |_| Abstain |_|
(Continued and to be signed on the reverse side)
<PAGE>
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) |_|
WITHHOLD AUTHORITY
to vote for all nominees listed below |_|
(INSTRUCTION: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Terry K. Glenn, Herbert I. London, Robert R. Martin,
Joseph L. May, Andre F. Perold, Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
For |_| Against |_| Abstain |_|
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed shares of Auction Market Preferred Stock, in the same
proportion as votes cast by holders of Auction Market Preferred Stock, who
have responded to this proxy solicitation.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated:___________________________________________
X________________________________________________
Signature
X________________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed
envelope.
<PAGE>
COMMON STOCK
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Patrick Sweeney and
William Zitelli as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the Common Stock of MuniHoldings
California Insured Fund, Inc. (the "Fund") held of record by the undersigned on
October 20, 1999 at the Annual Meeting of Stockholders of the Fund to be held on
December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings California Insured Fund II,
Inc., MuniHoldings California Insured Fund III, Inc. and MuniHoldings
California Insured Fund IV, Inc.
For |_| Against |_| Abstain |_|
(Continued and to be signed on the reverse side)
<PAGE>
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) |_|
WITHHOLD AUTHORITY
to vote for all nominees listed below |_|
(INSTRUCTION: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Kevin A. Ryan,
Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
For |_| Against |_| Abstain |_|
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated:___________________________________________
X________________________________________________
Signature
X________________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed
envelope.
<PAGE>
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Patrick D. Sweeney and
William E. Zitelli, Jr. as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all the Auction Market Preferred Stock of
MuniHoldings California Insured Fund, Inc. (the "Fund") held of record by the
undersigned on October 20, 1999 at the Annual Meeting of Stockholders of the
Fund to be held on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings California Insured Fund II,
Inc, MuniHoldings California Insured Fund III, Inc. and MuniHoldings
California Insured Fund IV, Inc.
For |_| Against |_| Abstain |_|
(Continued and to be signed on the reverse side)
<PAGE>
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) |_|
WITHHOLD AUTHORITY
to vote for all nominees listed below |_|
(INSTRUCTION: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C.
Reilly, Kevin A. Ryan, Richard R. West, Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
For |_| Against |_| Abstain |_|
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed shares of Auction Market Preferred Stock, in the same
proportion as votes cast by holders of Auction Market Preferred Stock, who
have responded to this proxy solicitation.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated:___________________________________________
X________________________________________________
Signature
X________________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed
envelope.
<PAGE>
COMMON STOCK
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Patrick Sweeney and
William E. Zitelli, Jr. as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the Common Stock of MuniHoldings
California Insured Fund III, Inc. (the "Fund") held of record by the undersigned
on October 20, 1999 at the Annual Meeting of Stockholders of the Fund to be held
on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc. and MuniHoldings California
Insured Fund IV, Inc.
For |_| Against |_| Abstain |_|
(Continued and to be signed on the reverse side)
<PAGE>
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) |_|
WITHHOLD AUTHORITY
to vote for all nominees listed below |_|
(INSTRUCTION: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Kevin A. Ryan,
Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
For |_| Against |_| Abstain |_|
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated:___________________________________________
X________________________________________________
Signature
X________________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed
envelope.
<PAGE>
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS CALIFORNIA INSURED FUND III, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Patrick D. Sweeney and
William E. Zitelli, Jr. as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all the Auction Market Preferred Stock of
MuniHoldings California Insured Fund III, Inc. (the "Fund") held of record by
the undersigned on October 20, 1999 at the Annual Meeting of Stockholders of the
Fund to be held on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings California Insured Fund, Inc,
MuniHoldings California Insured Fund II, Inc. and MuniHoldings California
Insured Fund IV, Inc.
For |_| Against |_| Abstain |_|
(Continued and to be signed on the reverse side)
<PAGE>
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) |_|
WITHHOLD AUTHORITY
to vote for all nominees listed below |_|
(INSTRUCTION: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C.
Reilly, Kevin A. Ryan, Richard R. West, Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
For |_| Against |_| Abstain |_|
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed shares of Auction Market Preferred Stock, in the same
proportion as votes cast by holders of Auction Market Preferred Stock, who
have responded to this proxy solicitation.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated:___________________________________________
X________________________________________________
Signature
X________________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed
envelope.
<PAGE>
COMMON STOCK
MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Patrick D. Sweeney and
William E. Zitelli, Jr. as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the Common Stock of MuniHoldings
California Insured Fund IV, Inc. (the "Fund") held of record by the undersigned
on October 20, 1999 at the Annual Meeting of Stockholders of the Fund to be held
on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc. and MuniHoldings California
Insured Fund III, Inc.
For |_| Against |_| Abstain |_|
(Continued and to be signed on the reverse side)
<PAGE>
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) |_|
WITHHOLD AUTHORITY
to vote for all nominees listed below |_|
(INSTRUCTION: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Kevin A. Ryan,
Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
For |_| Against |_| Abstain |_|
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated:___________________________________________
X________________________________________________
Signature
X________________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed
envelope.
<PAGE>
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS CALIFORNIA INSURED FUND IV, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Patrick D. Sweeney and
William E. Zitelli, Jr. as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all the Auction Market Preferred Stock of
MuniHoldings California Insured Fund IV, Inc. (the "Fund") held of record by
the undersigned on October 20, 1999 at the Annual Meeting of Stockholders of the
Fund to be held on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings California Insured Fund, Inc,
MuniHoldings California Insured Fund II, Inc. and MuniHoldings California
Insured Fund III, Inc.
For |_| Against |_| Abstain |_|
(Continued and to be signed on the reverse side)
<PAGE>
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) |_|
WITHHOLD AUTHORITY
to vote for all nominees listed below |_|
(INSTRUCTION: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C.
Reilly, Kevin A. Ryan, Richard R. West, Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
For |_| Against |_| Abstain |_|
4. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed shares of Auction Market Preferred Stock, in the same
proportion as votes cast by holders of Auction Market Preferred Stock, who
have responded to this proxy solicitation.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should
sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by president or other
authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated:___________________________________________
X________________________________________________
Signature
X________________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed
envelope.
<PAGE>
PART C
OTHER INFORMATION
Item 15. Indemnification.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Amended and Restated Articles of Incorporation, a
form of which was previously filed as an exhibit to the Common Stock
Registration Statement (defined below); Article VI of the Registrant's By-Laws,
which was previously filed as an exhibit to the Common Stock Registration
Statement, and the Investment Advisory Agreement, a form of which was previously
filed as an exhibit to the Common Stock Registration Statement, provide for
indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be provided to directors, officers
and controlling persons of the Registrant, pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant 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
Registrant 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 1933 Act and will be governed by the final adjudication of such
issue.
Reference is made to (i) Section 6 of the Purchase Agreement relating to
the Registrant's Common Stock, a form of which was filed as an exhibit to the
Common Stock Registration Statement, and (ii) Section 7 of the Purchase
Agreement relating to the Registrant's AMPS, a form of which was filed as an
exhibit to the AMPS Registration Statement (defined below), for provisions
relating to the indemnification of the underwriter.
Item 16. Exhibits.
1 (a) -- Articles of Incorporation of the Registrant, dated December 4,
1997.(a)
(b) -- Articles of Amendment relating to name change. (a)
(c) -- Articles of Amendment relating to name change. (b)
(d) -- Form of Articles Supplementary creating the Series A AMPS and
the Series B AMPS. (c)
(e) -- Form of Articles Supplementary creating the Series C AMPS, the
Series D AMPS and the Series E AMPS.
2 -- By-Laws of the Registrant.(a)
3 -- Not Applicable.
4 -- Form of Agreement and Plan of Reorganization among the
Registrant and MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund III, Inc. and
MuniHoldings California Insured Fund IV, Inc. (included in
Exhibit II to the Proxy Statement and Prospectus contained in
this Registration Statement)
5 (a) -- Copies of instruments defining the rights of stockholders,
including the relevant portions of the Articles of
Incorporation and the By-Laws of the Registrant. (c)
(b) -- Form of specimen certificate for the Common Stock of the
Registrant. (a)
(c) -- Form of specimen certificate for the AMPS of the Registrant.(c)
6 -- Form of Investment Advisory Agreement between Registrant and
Fund Asset Management, L.P. (a)
7 (a) -- Form of Purchase Agreement for the Common Stock. (a)
(b) -- Form of Purchase Agreement for the AMPS. (c)
(c) -- Form of Merrill Lynch Standard Dealer Agreement. (a)
8 -- Not applicable.
9 -- Custodian Contract between the Registrant and The Bank of New
York. (a)
10 -- Not applicable.
C-1
<PAGE>
11 -- Opinion and Consent of Brown & Wood LLP, counsel for the
Registrant.*
12 -- Private Letter Ruling from the Internal Revenue Service.*
13 (a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and The Bank
of New York. (a)
(b) -- Form of Auction Agent Agreement between the Registrant and IBJ
Whitehall Bank & Trust Company. (c)
(c) -- Form of Broker-Dealer Agreement. (c)
(d) -- Form of Letter of Representations. (c)
14 (a) -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
(b) -- Consent of Ernst & Young LLP, independent auditors for
MuniHoldings California Insured Fund III, Inc.
15 -- Not applicable.
16 -- Power of Attorney (Included on the signature page of this
Registration Statement).
- ----------
* To be filed by amendment.
(a) Incorporated by reference to the Registrant's Registration Statement on
Form N-2 relating to the Registrant's Common Stock (File No. 333-43147)
(the "Common Stock Registration Statement"), filed on December 23, 1997.
(b) Incorporated by reference to Pre-Effective Amendment No. 1 to the Common
Stock Registration Statement, filed on January 23, 1998.
(c) Incorporated by reference to the Registrant's Registration Statement on
Form N-2 relating to the Registrant's Auction Market Preferred Stock (File
No. 333-46439) (the "AMPS Registration Statement"), filed on February 17,
1998.
(d) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, previously filed as
Exhibit (a)(1) to the Common Stock 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
previously filed as Exhibit (b) to the Common Stock Registration
Statement. Reference is also made to the Form of Articles Supplementary
filed as Exhibit (a)(3) to the AMPS Registration Statement and as Exhibit
1(e) hereto.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through use of a prospectus which is part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, as amended, the reoffering prospectus will contain information
called for by the applicable registration form for reofferings by persons
who may be deemed underwriters, in addition to the information called for
by other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment shall be deemed to be a
new registration statement for the securities offered therein, and the
offering of securities at that time shall be deemed to be the initial bona
fide offering of them.
(3) The Registrant undertakes to file, by post-effective amendment, either a
copy of the Internal Revenue Service private letter ruling applied for or
an opinion of counsel as to certain tax matters, within a reasonable time
after receipt of such ruling or opinion.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and State
of New Jersey, on the 4th day of October, 1999.
MUNIHOLDINGS CALIFORNIA INSURED
FUND II, INC.
(Registrant)
By /s/ Terry K. Glenn
--------------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke and Alice A. Pellegrino, or any of them, as
attorney-in-fact, to sign on his behalf, individually and in each capacity
stated below, any amendments to this Registration Statement (including
post-effective amendments) and to file the same, with all exhibits thereto, with
the Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/s/ Terry K. Glenn
- ------------------------ President and Director
(Terry K. Glenn) (Principal Executive Officer) October 4, 1999
/s/ Donald C. Burke
- ------------------------ Treasurer (Principal Financial October 4, 1999
(Donald C. Burke) and Accounting Officer)
/s/ James H. Bodurtha
- ------------------------ Director October 4, 1999
(James H. Bodurtha)
/s/ Herbert I. London
- ------------------------ Director October 4, 1999
(Herbert I. London)
/s/ Robert R. Martin
- ------------------------ Director October 4, 1999
(Robert R. Martin)
/s/ Joseph L. May
- ------------------------ Director October 4, 1999
(Joseph L. May)
/s/ Andre F. Perold
- ------------------------ Director October 4, 1999
(Andre F. Perold)
/s/ Arthur Zeikel
- ------------------------ Director October 1, 1999
(Arthur Zeikel)
C-3
<PAGE>
EXHIBIT INDEX
1 (e) -- Form of Articles Supplementary creating the Series C AMPS, the
Series D AMPS and the Series E AMPS.
14 (a) -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
(b) -- Consent of Deloitte & Touche LLP, independent auditors for
MuniHoldings California Insured Fund, Inc.
(c) -- Consent of Ernst & Young LLP, independent auditors for
MuniHoldings California Insured Fund III, Inc.
C-4
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
Articles Supplementary creating three series of
Auction Market Preferred Stock(R) ("AMPS(R)")
MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC., a Maryland corporation
having its principal Maryland office in the City of Baltimore (the
"Corporation"), certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors
of the Corporation by article fifth of its Charter, the Board of Directors has
reclassified 9,800 authorized and unissued shares of common stock of the
Corporation as preferred stock of the Corporation and has authorized the
issuance of three series of preferred stock, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) thereon, to be designated
respectively: Auction Market Preferred Stock, Series C; Auction Market Preferred
Stock, Series D; and Auction Market Preferred Stock, Series E.
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of each such series of preferred stock are as follows:
- ----------
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
DESIGNATION
Series C: A series of 3,200 shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series C." Each share of
Auction Market Preferred Stock, Series C (sometimes referred to herein as
"Series C AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series C shall constitute a
separate series of preferred stock of the Corporation, and each share of Auction
Market Preferred Stock, Series C shall be identical.
Series D: A series of 2,960 shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series D." Each share of
Auction Market Preferred Stock, Series D (sometimes referred to herein as
"Series D AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms
2
<PAGE>
and conditions of redemption as are set forth in these Articles Supplementary.
The Auction Market Preferred Stock, Series D shall constitute a separate series
of preferred stock of the Corporation, and each share of Auction Market
Preferred Stock, Series D shall be identical.
Series E: A series of 3,640 shares of preferred stock, par value $.10
per share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series E." Each share of
Auction Market Preferred Stock, Series E (sometimes referred to herein as
"Series E AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series E shall constitute a
separate series of preferred stock of the Corporation, and each share of Auction
Market Preferred Stock, Series E shall be identical.
1. Definitions. (a) Unless the context or use indicates another or
different meaning or intent, in these Articles Supplementary the following terms
have the following meanings, whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's
or the equivalent of such rating by
3
<PAGE>
another nationally recognized rating agency, as such rate is made available on a
discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day immediately preceding such date, or (ii) in the event that the
Federal Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
Merrill Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on the
Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Corporation to provide such rate or rates not being supplied by
the Commercial Paper Dealer. If the number of Dividend Period days shall be (i)
7 or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall
be the arithmetic average of the Interest Equivalent on the 60-day and 90-day
rates on such commercial paper; (iv) 85 or more days but fewer than 99 days,
such rate shall be the Interest Equivalent of the 90-day rate on such commercial
paper; (v) 99 or more days but fewer than 120 days, such rate shall be the
arithmetic average of the Interest Equivalent of the 90-day and 120-day rates on
such commercial paper; (vi) 120 or more days but fewer than 141 days, such rate
shall be the Interest Equivalent of the 120-day rate on such commercial paper;
(vii) 141 or more days but fewer than 162 days, such rate shall be the
arithmetic average of the Interest Equivalent of the 120-day and
4
<PAGE>
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c)
of these Articles Supplementary.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of
these Articles Supplementary.
"Adviser" means the Corporation's investment adviser which initially
shall be Fund Asset Management, L.P.
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner
& Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Corporation.
"Agent Member" means a member of the Securities Depository that will
act on behalf of a Beneficial Owner of one or more shares of AMPS or a Potential
Beneficial Owner.
"AMPS" means, as the case may be, the Auction Market Preferred Stock,
Series C; the Auction Market Preferred Stock, Series D; or the Auction Market
Preferred Stock, Series E.
"AMPS Basic Maintenance Amount," as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares of
AMPS of each series and Other AMPS Outstanding on such Valuation Date multiplied
by the sum of (a) $25,000 and (b) any applicable redemption premium attributable
to the designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have
5
<PAGE>
accumulated for each share of AMPS and Other AMPS Outstanding, in each case, to
(but not including) the end of the current Dividend Period for each series of
AMPS that follows such Valuation Date in the event the then current Dividend
Period will end within 49 calendar days of such Valuation Date or through the
49th day after such Valuation Date in the event the then current Dividend Period
for each series of AMPS will not end within 49 calendar days of such Valuation
Date; (C) in the event the then current Dividend Period will end within 49
calendar days of such Valuation Date, the aggregate amount of cash dividends
that would accumulate at the Maximum Applicable Rate applicable to a Dividend
Period of 28 or fewer days on any shares of AMPS and Other AMPS Outstanding from
the end of such Dividend Period through the 49th day after such Valuation Date,
multiplied by the larger of the Moody's Volatility Factor and the S&P Volatility
Factor, determined from time to time by Moody's and S&P, respectively (except
that if such Valuation Date occurs during a Non-Payment Period, the cash
dividend for purposes of calculation would accumulate at the then current
Non-Payment Period Rate); (D) the amount of anticipated expenses of the
Corporation for the 90 days subsequent to such Valuation Date (including any
premiums payable with respect to a Policy); (E) the amount of the Corporation's
Maximum Potential Additional Dividend Liability as of such Valuation Date; and
(F) any current liabilities as of such Valuation Date to the extent not
reflected in any of (i)(A) through (i)(E) (including, without limitation, and
immediately upon determination, any amounts due and payable by the Corporation
pursuant to repurchase agreements and any amounts payable for California
Municipal Bonds or Municipal Bonds purchased as of such Valuation Date) less
(ii) either (A) the Discounted Value of any of the Corporation's assets, or (B)
the face value of any of the Corporation's assets if such assets mature prior to
or on the date of redemption of AMPS or payment of a liability and are either
securities issued or guaranteed by the United States
6
<PAGE>
Government or Deposit Securities, in both cases irrevocably deposited by the
Corporation for the payment of the amount needed to redeem shares of AMPS
subject to redemption or to satisfy any of (i)(B) through (i)(F). For Moody's
and S&P, the Corporation shall include as a liability an amount calculated
semi-annually equal to 150% of the estimated cost of obtaining other insurance
guaranteeing the timely payment of interest on a Moody's Eligible Asset or S&P
Eligible Asset and principal thereof to maturity with respect to Moody's
Eligible Assets and S&P Eligible Assets that (i) are covered by a Policy which
provides the Corporation with the option to obtain such other insurance and (ii)
are discounted by a Moody's Discount Factor or a S&P Discount Factor, as the
case may be, determined by reference to the insurance claims-paying ability
rating of the issuer of such Policy.
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance Amount (as required by
paragraph 7(a) of these Articles Supplementary) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Corporation which sets forth, as of the related Valuation Date, the assets of
the Corporation, the Market Value and the Discounted Value thereof (seriatim and
in aggregate), and the AMPS Basic Maintenance Amount.
7
<PAGE>
"Anticipation Notes" shall mean the following California Municipal
Bonds: revenue anticipation notes, tax anticipation notes, tax and revenue
anticipation notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph
10(a)(vii) of these Articles Supplementary.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Whitehall Bank & Trust Company unless and
until another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Directors of the Corporation or a duly
authorized committee thereof enters into an agreement with the Corporation to
follow the Auction Procedures for the purpose of determining the Applicable Rate
and to act as transfer agent, registrar, dividend disbursing agent and
redemption agent for the AMPS and Other AMPS.
"Auction Procedures" means the procedures for conducting Auctions set
forth in paragraph 10 of these Articles Supplementary.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own account.
8
<PAGE>
"Broker-Dealer" means any broker-dealer, or other entity permitted by
law to perform the functions required of a Broker-Dealer in paragraph 10 of
these Articles Supplementary, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of these Articles Supplementary.
"Business Day" means a day on which the New York Stock Exchange, Inc.
is open for trading and which is not a Saturday, Sunday or other day on which
banks in The City of New York are authorized or obligated by law to close.
"California Municipal Bonds" means Municipal Bonds issued by or on
behalf of the State of California, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and California
income taxes, and includes Inverse Floaters.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including these Articles Supplementary), of the Corporation on
file in the State Department of Assessments and Taxation of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
9
<PAGE>
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the
Corporation may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors.
"Common Stock" means the common stock, par value $.10 per share, of the
Corporation.
"Corporation" means MuniHoldings California Insured Fund II, Inc., a
Maryland corporation.
"Date of Original Issue" means, with respect to any share of AMPS or
Other AMPS, the date on which the Corporation originally issues such share.
"Deposit Securities" means cash and California Municipal Bonds and
Municipal Bonds rated at least A2 (having a remaining maturity of 12 months or
less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12
months or less), A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set
forth in paragraph 2(b)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.
10
<PAGE>
"Existing Holder" means a Broker-Dealer or any such other Person as may
be permitted by the Corporation that is listed as the holder of record of shares
of AMPS in the Stock Books.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of
these Articles Supplementary.
"Holder" means a Person identified as a holder of record of shares of
AMPS in the Stock Register. "Independent Accountant" means a nationally
recognized accountant, or firm of accountants, that is, with respect to the
Corporation, an independent public accountant or firm of independent public
accountants under the Securities Act of 1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date
as determined by the Board of Directors of the Corporation with respect to each
series of AMPS or Other AMPS, as the case may be.
"Initial Dividend Period," with respect to each series of AMPS, has the
meaning set forth in paragraph 2(c)(i) of these Articles Supplementary and, with
respect to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to each series of AMPS, means the
rate per annum applicable to the Initial Dividend Period for such series of AMPS
and, with respect to Other AMPS, has the equivalent meaning.
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<PAGE>
"Initial Margin" means the amount of cash or securities deposited with
a broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
"Inverse Floaters" means trust certificates or other instruments
evidencing interests in one or more California Municipal Bonds that qualify as
S&P Eligible Assets (and are not part of a private placement of California
Municipal Bonds and satisfy the issuer and original issue size requirements of
clause (vi) of the definition of S&P Eligible Assets) the interest rates on
which are adjusted at short term intervals on a basis that is inverse to the
simultaneous readjustment of the interest rates on corresponding floating rate
trust certificates or other instruments issued by the same issuer, provided that
the ratio of the aggregate dollar amount of floating rate instruments to inverse
floating rate instruments issued by the same issuer does not exceed one to one
at their time of original issuance unless the floating rate instruments have
only one reset remaining until maturity.
"Long Term Dividend Period" means a Special Dividend Period consisting
of a specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption and excluding Additional Dividends.
12
<PAGE>
"Marginal Tax Rate" means the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Corporation shall be the market
value thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value portfolio
securities at the quoted bid prices or the mean between the quoted bid and asked
price or the yield equivalent when quotations are not readily available.
Securities for which quotations are not readily available shall be valued at
fair value as determined by the Pricing Service using methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
type of issue, coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The Pricing Service may employ
electronic data processing techniques and/or a matrix system to determine
valuations. In the event the Pricing Service is unable to value a security, the
security shall be valued at the lower of two dealer bids obtained by the
Corporation from dealers who are members of the National Association of
Securities Dealers, Inc. and who make a market in the security, at least one of
which shall be in writing. Futures contracts and options are valued at closing
prices for such instruments established by the exchange or board of trade on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Directors.
"Maximum Applicable Rate," with respect to AMPS, has the meaning set
forth in paragraph 10(a)(vii) of these Articles Supplementary and, with respect
to Other AMPS, has the equivalent meaning.
13
<PAGE>
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Corporation were to make Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Corporation, as of the end of the calendar month immediately preceding such
Valuation Date and assuming such Additional Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the
Discounted Value of any California Municipal Bond or Municipal Bond which
constitutes a Moody's Eligible Asset, the percentage determined by reference to
(a)(i) the rating by Moody's or S&P on such Bond or (ii) in the event the
Moody's Eligible Asset is insured under a Policy and the terms of the Policy
permit the Corporation, at its option, to obtain other insurance guaranteeing
the timely payment of interest on such Moody's Eligible Asset and principal
thereof to maturity, the Moody's insurance claims-paying ability rating of the
issuer of the Policy or (iii) in the event the Moody's Eligible Asset is insured
under an insurance policy which guarantees the timely payment of interest on
such Moody's Eligible Asset and principal thereof to maturity, the Moody's
insurance claims-paying ability rating of the issuer of the insurance policy
(provided that for purposes of clauses (ii) and (iii) if the insurance
claims-paying ability of an issuer of a Policy or insurance policy is not rated
by Moody's but is rated by S&P, such issuer shall be deemed to have a Moody's
insurance claims-paying ability rating which is two full categories lower than
the S&P insurance claims-paying ability rating) and (b) the Moody's Exposure
Period, in accordance with the table set forth below:
14
<PAGE>
<TABLE>
<CAPTION>
Rating Category
---------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
- ----------------------- ---- --- -- ---- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less............... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks...... 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks...... 158 169 179 209 242 138 150
</TABLE>
- ----------
* Moody's rating.
** California Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
*** California Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1
or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature or
have a demand feature at par exercisable within the Moody's Exposure Period and
which do not have a long-term rating. For the purposes of the definition of
Moody's Eligible Assets, these securities will have an assumed rating of "A" by
Moody's.
; provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the applicable
rating category and (b) the percentage set forth in the foregoing table under
the rating category which is one category lower than the applicable rating
category.
Notwithstanding the foregoing, (i) a 102% Moody's Discount Factor will
be applied to short-term California Municipal Bonds and short-term Municipal
Bonds, so long as such California Municipal Bonds and Municipal Bonds are rated
at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at
par exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Bonds will be 125% if such Bonds are not rated by Moody's but
are rated A-1+ or SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for California Municipal Bonds
or Municipal Bonds Sold. "Receivables for California Municipal Bonds or
Municipal Bonds Sold," for purposes of calculating Moody's Eligible Assets as of
any Valuation Date, means no more than
15
<PAGE>
the aggregate of the following: (i) the book value of receivables for California
Municipal Bonds or Municipal Bonds sold as of or prior to such Valuation Date if
such receivables are due within five Business Days of such Valuation Date, and
if the trades which generated such receivables are (x) settled through clearing
house firms with respect to which the Corporation has received prior written
authorization from Moody's or (y) with counterparties having a Moody's long-term
debt rating of at least Baa3; and (ii) the Moody's Discounted Value of
California Municipal Bonds or Municipal Bonds sold as of or prior to such
Valuation Date which generated receivables, if such receivables are due within
five Business Days of such Valuation Date but do not comply with either of
conditions (x) or (y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for California
Municipal Bonds or Municipal Bonds Sold, a California Municipal Bond or a
Municipal Bond that (i) pays interest in cash, (ii) is publicly rated Baa or
higher by Moody's or, if not rated by Moody's but rated by S&P, is rated at
least BBB by S&P (provided that, for purposes of determining the Moody's
Discount Factor applicable to any such S&P-rated California Municipal Bond or
S&P-rated Municipal Bond, such California Municipal Bond or Municipal Bond
(excluding any short-term California Municipal Bond or Municipal Bond) will be
deemed to have a Moody's rating which is one full rating category lower than its
S&P rating), (iii) does not have its Moody's rating suspended by Moody's; and
(iv) is part of an issue of California Municipal Bonds or Municipal Bonds of at
least $10,000,000. In addition, California Municipal Bonds and Municipal Bonds
in the Corporation's portfolio must be within the following diversification
requirements in order to be included within Moody's Eligible Assets:
16
<PAGE>
<TABLE>
<CAPTION>
Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or Territory
Rating ($ Millions) Obligor (%)(1) Concentration(%)(1)(3) Concentration(%)(1)(4) Concentration (1)(5)
- ------ ------------ -------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
Aaa........ 10 100 100 100 100
Aa......... 10 20 60 60 60
A.......... 10 10 40 40 40
Baa........ 10 6 20 20 20
Other(2)... 10 4 12 12 12
</TABLE>
- ----------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) California Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to California Municipal Bonds. Territorial bonds (other than
those issued by Puerto Rico and counted collectively) are each limited to
10% of Moody's Eligible Assets. For diversification purposes, Puerto Rico
will be treated as a state.
17
<PAGE>
For purposes of the maximum underlying obligor requirement described above, any
California Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Bond. For purposes of the issue type concentration
requirement described above, California Municipal Bonds and Municipal Bonds will
be classified within one of the following categories: health care issues
(teaching and non-teaching hospitals, public and private), housing issues
(single- and multi-family), educational facilities issues (public and private
schools), student loan issues, resource recovery issues, transportation issues
(mass transit, airport and highway bonds), industrial revenue/pollution control
bond issues, utility issues (including water, sewer and electricity), general
obligation issues, lease obligations/certificates of participation, escrowed
bonds and other issues ("Other Issues") not falling within one of the
aforementioned categories (includes special obligations to crossover, excise and
sales tax revenue, recreation revenue, special assessment and telephone revenue
bonds). In no event shall (a) more than 10% of Moody's Eligible Assets consist
of student loan issues, (b) more than 10% of Moody's Eligible Assets consist of
resource recovery issues or (c) more than 10% of Moody's Eligible Assets consist
of Other Issues.
When the Corporation sells a California Municipal Bond or Municipal
Bond and agrees to repurchase it at a future date, the Discounted Value of such
Bond will constitute a Moody's Eligible Asset and the amount the Corporation is
required to pay upon repurchase of such Bond will count as a liability for
purposes of calculating the AMPS Basic Maintenance Amount. For so long as the
AMPS are rated by Moody's, the Corporation will not enter into any such reverse
repurchase agreements unless it has received written confirmation from Moody's
that such
18
<PAGE>
transactions would not impair the ratings then assigned the AMPS by Moody's.
When the Corporation purchases a California Municipal Bond or Municipal Bond and
agrees to sell it at a future date to another party, cash receivable by the
Corporation thereby will constitute a Moody's Eligible Asset if the long-term
debt of such other party is rated at least A2 by Moody's and such agreement has
a term of 30 days or less; otherwise the Discounted Value of such Bond will
constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset if it is (i) held in a margin account, (ii) subject to
any material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Corporation for the payment of
dividends or redemption.
"Moody's Exposure Period" means a period that is the same length or
longer than the number of days used in calculating the cash dividend component
of the AMPS Basic Maintenance Amount and shall initially be the period
commencing on and including a given Valuation Date and ending 48 days
thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph
8(b) of these Articles Supplementary.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
19
<PAGE>
% Change in Marginal Moody's Volatility
Tax Rate Factor
-------------------- ------------------
<=5% 292%
>5% but <=10% 313%
>10% but <=15% 338%
>15% but <=20% 364%
>20% but <=25% 396%
>25% but <=30% 432%
>30% but <=35% 472%
>35% but <=40% 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such other
potential dividend rate increase factor as Moody's advises the Corporation in
writing is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the
Corporation's Registration Statement on Form N-14 (File No. ) relating to the
AMPS on file with the Securities and Exchange Commission, as such Registration
Statement may be amended from time to time, as well as short-term municipal
obligations and Inverse Floaters.
"Municipal Index" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"1940 Act" means the Investment Company Act of 1940, as amended from
time to time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in
section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding
senior securities of the Corporation which are stock, including all outstanding
shares of AMPS and Other AMPS (or such other asset coverage as may in the future
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are stock of a closed-end investment company as a condition of
paying dividends on its common stock).
20
<PAGE>
"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of these
Articles Supplementary) as of the last Business Day of each month, means the
last Business Day of the following month.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Non-Payment Period" means, with respect to each series of AMPS, any
period commencing on and including the day on which the Corporation shall fail
to (i) declare, prior to the close of business on the second Business Day
preceding any Dividend Payment Date, for payment on or (to the extent permitted
by paragraph 2(c)(i) of these Articles Supplementary) within three Business Days
after such Dividend Payment Date to the Holders as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date, the full amount
of any dividend on shares of AMPS payable on such Dividend Payment Date or (ii)
deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, New York City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on such shares payable (if declared) on such
Dividend Payment Date or (B) on any redemption date for any shares of AMPS
called for redemption, the Mandatory Redemption Price per share of such AMPS or,
in the case of an optional redemption, the Optional Redemption Price per share,
and ending on and including the Business Day on which, by 12:00 noon, New York
City time, all unpaid cash dividends and unpaid redemption prices shall have
been so deposited or shall have otherwise been made available to Holders in
same-day funds; provided that, a Non-Payment Period shall not end unless the
Corporation shall have given at least five days' but no more than 30 days'
written notice of such deposit or availability to the Auction Agent, all
Existing Holders
21
<PAGE>
(at their addresses appearing in the Stock Books) and the Securities Depository.
Notwithstanding the foregoing, the failure by the Corporation to deposit funds
as provided for by clauses (ii)(A) or (ii)(B) above within three Business Days
after any Dividend Payment Date or redemption date, as the case may be, in each
case to the extent contemplated by paragraph 2(c)(i) of these Articles
Supplementary, shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Corporation has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS), provided that the Board of Directors of the Corporation shall
have the authority to adjust, modify, alter or change from time to time the
initial Non-Payment Period Rate if the Board of Directors of the Corporation
determines and Moody's and S&P (and any Substitute Rating Agency in lieu of
Moody's or S&P in the event either of such parties shall not rate the AMPS)
advise the Corporation in writing that such adjustment, modification, alteration
or change will not adversely affect their then-current ratings on the AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of these Articles Supplementary.
"Notice of Redemption" means any notice with respect to the redemption
of shares of AMPS pursuant to paragraph 4 of these Articles Supplementary.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii)
of these Articles Supplementary.
22
<PAGE>
"Notice of Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Optional Redemption Price" means $25,000 per share plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends plus any
applicable redemption premium attributable to the designation of a Premium Call
Period.
"Other AMPS" means the auction rate preferred stock of the Corporation,
other than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, shares of
AMPS theretofore issued by the Corporation except, without duplication, (A) any
shares of AMPS theretofore cancelled or delivered to the Auction Agent for
cancellation, or redeemed by the Corporation, or as to which a Notice of
Redemption shall have been given and Deposit Securities shall have been
deposited in trust or segregated by the Corporation pursuant to paragraph 4(c)
and (B) any shares of AMPS as to which the Corporation or any Affiliate thereof
shall be a Beneficial Owner, provided that shares of AMPS held by an Affiliate
shall be deemed outstanding for purposes of calculating the AMPS Basic
Maintenance Amount and (ii) with respect to shares of other Preferred Stock, has
the equivalent meaning.
"Parity Stock" means the AMPS and each other outstanding series of
Preferred Stock the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case
23
<PAGE>
may be, in proportion to the full respective preferential amounts to which they
are entitled, without preference or priority one over the other.
"Person" means and includes an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
"Policy" means an insurance policy purchased by the Corporation which
guarantees the payment of principal and interest on specified California
Municipal Bonds or Municipal Bonds during the period in which such California
Municipal Bonds or Municipal Bonds are owned by the Corporation; provided,
however, that, as long as the AMPS are rated by Moody's and S&P, the Corporation
will not obtain any Policy unless Moody's and S&P advise the Corporation in
writing that the purchase of such Policy will not adversely affect their
then-current rating on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other Person as
may be permitted by the Corporation, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
"Preferred Stock" means the preferred stock, par value $.10 per share,
of the Corporation, and includes AMPS and Other AMPS.
24
<PAGE>
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Pricing Service" means J.J. Kenny or any pricing service designated by
the Board of Directors of the Corporation provided the Corporation obtains
written assurance from S&P and Moody's that such designation will not impair the
rating then assigned by S&P and Moody's to the AMPS.
"Quarterly Valuation Date" means the last Business Day of the last
month of each fiscal quarter of the Corporation in each fiscal year of the
Corporation, commencing , 2000.
"Receivables for California Municipal Bonds Sold" has the meaning set
forth under the definition of S&P Discount Factor.
"Receivables for California Municipal Bonds or Municipal Bonds Sold"
has the meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a
Short Term Dividend Period having 28 or fewer days, the higher of the applicable
"AA" Composite Commercial Paper Rate and the Taxable Equivalent of the
Short-Term Municipal Bond Rate, (ii) with respect to any Short Term Dividend
Period having more than 28 but fewer than 183 days, the applicable "AA"
Composite Commercial Paper Rate, (iii) with respect to any Short Term Dividend
Period having 183 or more but fewer than 364 days, the applicable U.S. Treasury
Bill Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
25
<PAGE>
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Response" has the meaning set forth in paragraph 2(c)(iii) of these
Articles Supplementary.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.
"Right," with respect to each series of AMPS, has the meaning set forth
in paragraph 2(e) of these Articles Supplementary and, with respect to Other
AMPS, has the equivalent meaning.
"S&P" means Standard & Poor's, a division of The McGraw Hill Companies,
Inc. or its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any California Municipal Bond which constitutes an S&P Eligible Asset,
the percentage determined by reference to (a)(i) the rating by S&P, Moody's or
Fitch on such Bond or (ii) in the event the California Municipal Bond is insured
under a Policy and the terms of the Policy permit the Corporation, at its
option, to obtain other permanent insurance guaranteeing the timely payment of
interest on such California Municipal Bond and principal thereof to maturity,
the S&P insurance claims-paying ability rating of the issuer of the Policy or
(iii) in the event the California Municipal Bond is insured under an insurance
policy which guarantees the timely payment of interest on such California
Municipal Bond and principal thereof to maturity, the
26
<PAGE>
S&P insurance claims-paying ability rating of the issuer of the insurance policy
and (b) the S&P Exposure Period, in accordance with the tables set forth below:
For California Municipal Bonds:
- -------------------------------
Rating Category
---------------------------------------
S&P Exposure Period AAA* AA* A* BBB*
- ------------------- ---------------------------------------
45 Business Days 200% 205% 220% 260%
25 Business Days 180 185 200 240
10 Business Days 165 170 185 225
7 Business Days 160 165 180 220
3 Business Days 140 145 160 200
- ----------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term California Municipal Bonds will be 115%, so long as such California
Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand
feature exercisable in 30 days or less, or 120% so long as such California
Municipal Bonds are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less, or 125% if such California Municipal Bonds are
not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's or F-1+ by Fitch;
provided, however, such short-term California Municipal Bonds rated by Moody's
or Fitch but not rated by S&P having a demand feature exercisable in 30 days or
less must be backed by a letter of credit, liquidity facility or guarantee from
a bank or other financial institution having a short-term rating of at least
A-1+ from S&P; and further provided that such short-term California Municipal
Bonds rated by Moody's or Fitch but not rated by S&P may comprise no more than
50% of short-term California Municipal Bonds that qualify as S&P Eligible
Assets, (ii) the S&P Discount Factor for Receivables for California Municipal
Bonds Sold that are due in more than five Business Days from such Valuation Date
will be the S&P Discount Factor applicable to the
27
<PAGE>
California Municipal Bonds sold, and (iii) no S&P Discount Factor will be
applied to cash or to Receivables for California Municipal Bonds Sold if such
receivables are due within five Business Days of such Valuation Date.
"Receivables for California Municipal Bonds Sold," for purposes of calculating
S&P Eligible Assets as of any Valuation Date, means the book value of
receivables for California Municipal Bonds sold as of or prior to such Valuation
Date. The Corporation may adopt S&P Discount Factors for Municipal Bonds other
than California Municipal Bonds provided that S&P advises the Corporation in
writing that such action will not adversely affect its then current rating on
the AMPS. For purposes of the foregoing, Anticipation Notes rated SP-1 or, if
not rated by S&P, rated VMIG-1 by Moody's or F-1+ by Fitch, which do not mature
or have a demand feature exercisable in 30 days and which do not have a
long-term rating, shall be considered to be short-term California Municipal
Bonds.
"S&P Eligible Asset" means cash, Receivables for California Municipal
Bonds Sold or a California Municipal Bond that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in United States Dollars; (iii) is publicly rated BBB or higher by S&P
or, except in the case of Anticipation Notes that are grant anticipation notes
or bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's or Fitch, is rated at
least A by Moody's or Fitch (provided that such Moody's-rated or Fitch-rated
California Municipal Bonds will be included in S&P Eligible Assets only to the
extent the Market Value of such California Municipal Bonds does not exceed 50%
of the aggregate Market Value of the S&P Eligible Assets; and further provided
that, for purposes of determining the S&P Discount Factor applicable to any such
Moody's-rated or Fitch-rated California Municipal Bond, such California
28
<PAGE>
Municipal Bond will be deemed to have an S&P rating which is one full rating
category lower than its Moody's rating or Fitch rating); (iv) is not subject to
a covered call or covered put option written by the Corporation; (v) except for
Inverse Floaters, is not part of a private placement of California Municipal
Bonds; and (vi) except for Inverse Floaters, is part of an issue of California
Municipal Bonds with an original issue size of at least $20 million or, if of an
issue with an original issue size below $20 million (but in no event below $10
million), is issued by an issuer with a total of at least $50 million of
securities outstanding. Notwithstanding the foregoing:
(1) California Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to the
extent the Market Value of such California Municipal Bonds does not exceed 10%
of the aggregate Market Value of the S&P Eligible Assets, provided that 2% is
added to the applicable S&P Discount Factor for every 1% by which the Market
Value of such California Municipal Bonds exceeds 5% of the aggregate Market
Value of the S&P Eligible Assets;
(2) California Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent the
Market Value of such Bonds does not exceed 25% of the aggregate Market Value of
S&P Eligible Assets, except that California Municipal Bonds falling within the
utility issue type category will be broken down into three sub-categories (as
described below) and such California Municipal Bonds will be considered S&P
Eligible Assets to the extent the Market Value of such Bonds in each such
sub-category does not exceed 25% of the aggregate Market Value of S&P Eligible
Assets and the Market Value of such Bonds in all three sub-categories combined
does not exceed 60% of the aggregate Market Value of S&P Eligible Assets, except
that California Municipal Bonds falling within the transportation issue type
category will be broken down into two sub-categories (as described below) and
such California Municipal Bonds will be
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considered S&P Eligible Assets to the extent the Market Value of such Bonds in
both sub-categories combined (as described below) does not exceed 40% of the
aggregate Market Value of S&P Eligible Assets and except that California
Municipal Bonds falling within the general obligation issue type category will
be considered S&P Eligible Assets to the extent the Market Value of such Bonds
does not exceed 50% of the aggregate Market Value of S&P Eligible Assets. For
purposes of the issue type category requirement described above, California
Municipal Bonds will be classified within one of the following categories:
health care issues, housing issues, educational facilities issues, student loan
issues, transportation issues, industrial development bond issues, utility
issues, general obligation issues, lease obligations, escrowed bonds and other
issues not falling within one of the aforementioned categories. The general
obligation issue type category includes any issuer that is directly or
indirectly guaranteed by the State of California or its political subdivisions.
Utility issuers are included in the general obligation issue type category if
the issuer is directly or indirectly guaranteed by the State of California or
its political subdivisions. For purposes of the issue type category requirement
described above, California Municipal Bonds in the utility issue type category
will be classified within one of the three following sub-categories: (i)
electric, gas and combination issues (if the combination issue includes an
electric issue), (ii) water and sewer utilities and combination issues (if the
combination issue does not include an electric issue), and (iii) irrigation,
resource recovery, solid waste and other utilities, provided that California
Municipal Bonds included in this sub-category (iii) must be rated by S&P in
order to be included in S&P Eligible Assets. For purposes of the issue type
category requirement described above, California Municipal Bonds in the
transportation issue type category will be classified within one of the two
following
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sub-categories: (i) streets and highways, toll roads, bridges and tunnels,
airports and multi-purpose port authorities (multiple revenue streams generated
by toll roads, airports, real estate, bridges), (ii) mass transit, parking,
seaports and others. Exposure to transportation sub-category (i) is limited to
25% of the aggregate Market Value of S&P Eligible Assets, provided, however,
exposure to transportation sub-category (i) can exceed the 25% limit to the
extent that exposure to transportation sub-category (ii) is reduced, for a total
exposure up to and not exceeding 40% of the aggregate Market Value of S&P
Eligible Assets for the transportation issue type category; and
(3) California Municipal Bonds which are escrow bonds or defeased bonds
may compose up to 100% of the aggregate Market Value of S&P Eligible Assets if
such Bonds initially are assigned a rating by S&P in accordance with S&P's legal
defeasance criteria or rerated by S&P as economic defeased escrow bonds and
assigned an AAA rating. California Municipal Bonds may be rated as escrow bonds
by another nationally recognized rating agency or rerated as an escrow bond and
assigned the equivalent of an S&P AAA rating, provided that such equivalent
rated Bonds are limited to 50% of the aggregate Market Value of S&P Eligible
Assets and are deemed to have an AA S&P rating for purposes of determining the
S&P Discount Factor applicable to such California Municipal Bonds. The
limitations on California Municipal Bonds of any one issuer in clause (1) above
is not applicable to escrow bonds, however, economically defeased bonds that are
either initially rate or rerated by S&P or another nationally recognized rating
agency and assigned the same rating level as the issuer of the Bonds will remain
in its original issue type category set forth in clause (2) above. California
Municipal Bonds that are legally defeased and secured by securities issued or
guaranteed by the United
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States Government are not required to meet the minimum issuance size requirement
set forth above.
The Corporation may include Municipal Bonds other than California
Municipal Bonds as S&P Eligible Assets pursuant to guidelines and restrictions
to be established by S&P provided that S&P advises the Corporation in writing
that such action will not adversely affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Corporation has under these Articles Supplementary to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount (as described in
paragraph 7(a) of these Articles Supplementary).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a)
of these Articles Supplementary.
"S&P Volatility Factor" means 277% or such other potential dividend
rate increase factor as S&P advises the Corporation in writing is applicable.
"Securities Depository" means The Depository Trust Company or any
successor company or other entities elected by the Corporation as securities
depository for the shares of AMPS that agrees to follow the procedures required
to be followed by such securities depository in connection with the shares of
AMPS.
"Service" means the United States Internal Revenue Service.
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"7-Day Dividend Period" means a Dividend Period consisting of seven
days.
"Short Term Dividend Period" means a Special Dividend Period consisting
of a specified number of days (other than seven) evenly divisible by seven and
not fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Corporation, after
consultation with the Auction Agent and the Broker-Dealers, during which the
shares of AMPS subject to such Dividend Period shall not be subject to
redemption at the option of the Corporation and (ii) a period (a "Premium Call
Period"), consisting of a number of whole years and determined by the Board of
Directors of the Corporation, after consultation with the Auction Agent and the
Broker-Dealers, during each year of which the shares of AMPS subject to such
Dividend Period shall be redeemable at the Corporation's option at a price per
share equal to $25,000 plus accumulated but unpaid dividends plus a premium
expressed as a percentage of $25,000, as determined by the Board of Directors of
the Corporation after consultation with the Auction Agent and the
Broker-Dealers.
"Stock Books" means the books maintained by the Auction Agent setting
forth at all times a current list, as determined by the Auction Agent, of
Existing Holders of the AMPS.
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"Stock Register" means the register of Holders maintained on behalf of
the Corporation by the Auction Agent in its capacity as transfer agent and
registrar for the AMPS.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or, in
lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Corporation, to act as the substitute rating agency
or substitute rating agencies, as the case may be, to determine the credit
ratings of the shares of AMPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component
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issuers selected by Kenny Information Systems Inc. or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available by 8:30
A.M., New York City time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall
mean the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal). The Corporation may not utilize a successor index to the Kenny Index
unless Moody's and S&P provide the Corporation with written confirmation that
the use of such successor index will not adversely affect the then-current
respective Moody's and S&P ratings of the AMPS.
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent
of the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on
any date means the
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Interest Equivalent of the yield as calculated by reference to the arithmetic
average of the bid price quotations of the actively traded Treasury Bill with a
maturity most nearly comparable to the length of the related Dividend Period, as
determined by bid price quotations as of any time on the Business Day
immediately preceding such date, obtained from at least three recognized primary
U.S. Government securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated
by reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the
Corporation is maintaining the AMPS Basic Maintenance Amount, each Business Day
commencing with the Date of Original Issue.
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"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Corporation, the amount of cash or securities paid
to or received from a broker (subsequent to the Initial Margin payment) from
time to time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Inverse Floaters, Market Value, Maximum Potential Additional Dividend
Liability, Moody's Discount Factor, Moody's Eligible Asset, Moody's Exposure
Period, Moody's Hedging Transactions, Moody's Volatility Factor, S&P Discount
Factor, S&P Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P
Volatility Factor, Valuation Date and Variation Margin have been determined by
the Board of Directors of the Corporation in order to obtain a "aaa" rating from
Moody's and a AAA rating from S&P on the AMPS on their Date of Original Issue;
and the Board of Directors of the Corporation shall have the authority, without
shareholder approval, to amend, alter or repeal from time to time the foregoing
definitions and the restrictions and guidelines set forth thereunder if Moody's
and S&P or any Substitute Rating Agency advises the Corporation in writing that
such amendment, alteration or repeal will not adversely affect their then
current ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as
and if declared by the Board of Directors of the Corporation, out of funds
legally available therefor, cumulative dividends each consisting of (i) cash at
the Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
below, and (iii) any additional amounts as set forth in paragraph 2(f)
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below, and no more, payable on the respective dates set forth below. Dividends
on the shares of AMPS so declared and payable shall be paid (i) in preference to
and in priority over any dividends declared and payable on the Common Stock, and
(ii) to the extent permitted under the Code and to the extent available, out of
net tax-exempt income earned on the Corporation's investments. To the extent
permitted under the Code, dividends on shares of AMPS will be designated as
exempt-interest dividends. For the purposes of this section, the term "net
tax-exempt income" shall exclude capital gains of the Corporation.
(b) (i) Cash dividends on shares of AMPS shall accumulate from the Date
of Original Issue and shall be payable, when, as and if declared by the Board of
Directors, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date with respect to each series of AMPS. Following the Initial
Dividend Payment Date for each series of AMPS, dividends on each series of AMPS
will be payable, at the option of the Corporation, either (i) with respect to
any 7-Day Dividend Period and any Short Term Dividend Period of 35 or fewer
days, on the day next succeeding the last day thereof or (ii) with respect to
any Short Term Dividend Period of more than 35 days and with respect to any Long
Term Dividend Period, monthly on the first Business Day of each calendar month
during such Short Term Dividend Period or Long Term Dividend Period and on the
day next succeeding the last day thereof (each such date referred to in clause
(i) or (ii) being herein referred to as a "Normal Dividend Payment Date"),
except that if such Normal Dividend Payment Date is not a Business Day, then the
Dividend Payment Date shall be the first Business Day next succeeding such
Normal Dividend Payment Date. Although any particular Dividend Payment Date may
not occur on the originally scheduled date because of the exceptions discussed
above, the next succeeding Dividend
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Payment Date, subject to such exceptions, will occur on the next following
originally scheduled date. If for any reason a Dividend Payment Date cannot be
fixed as described above, then the Board of Directors shall fix the Dividend
Payment Date. The Board of Directors by resolution prior to authorization of a
dividend by the Board of Directors may change a Dividend Payment Date if such
change does not adversely affect the contract rights of the Holders of shares of
AMPS set forth in the Charter. The Initial Dividend Period, 7-Day Dividend
Periods and Special Dividend Periods are hereinafter sometimes referred to as
Dividend Periods. Each dividend payment date determined as provided above is
hereinafter referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the
Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as they appear on the Stock Register on a
date, not exceeding 15 days prior to the payment date therefor, as may be fixed
by the Board of Directors of the Corporation.
(c) (i) During the period from and including the Date of Original Issue
to but excluding the Initial Dividend Payment Date for each series of AMPS (the
"Initial Dividend Period"), the Applicable Rate shall be the Initial Dividend
Rate. Commencing on the Initial Dividend Payment Date for each series of AMPS,
the Applicable Rate for each subsequent dividend period (hereinafter referred to
as a "Subsequent Dividend Period"), which Subsequent Dividend Period shall
commence on and include a Dividend Payment Date and shall end on and include the
calendar day prior to the next Dividend Payment Date (or last Dividend Payment
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Date in a Dividend Period if there is more than one Dividend Payment Date),
shall be equal to the rate per annum that results from implementation of the
Auction Procedures.
The Applicable Rate for each Dividend Period commencing during a
Non-Payment Period shall be equal to the Non-Payment Period Rate; and each
Dividend Period, commencing after the first day of, and during, a Non-Payment
Period shall be a 7-Day Dividend Period in the case of each series of AMPS.
Except in the case of the willful failure of the Corporation to pay a dividend
on a Dividend Payment Date or to redeem any shares of AMPS on the date set for
such redemption, any amount of any dividend due on any Dividend Payment Date
(if, prior to the close of business on the second Business Day preceding such
Dividend Payment Date, the Corporation has declared such dividend payable on
such Dividend Payment Date to the Holders of such shares of AMPS as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date) or redemption price with respect to any shares of AMPS not paid to such
Holders when due may be paid to such Holders in the same form of funds by 12:00
noon, New York City time, on any of the first three Business Days after such
Dividend Payment Date or due date, as the case may be, provided that, such
amount is accompanied by a late charge calculated for such period of non-payment
at the Non-Payment Period Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 365. In the case
of a willful failure of the Corporation to pay a dividend on a Dividend Payment
Date or to redeem any shares of AMPS on the date set for such redemption, the
preceding sentence shall not apply and the Applicable Rate for the Dividend
Period commencing during the Non-Payment Period resulting from such failure
shall be the Non-Payment Period Rate. For the purposes of the foregoing, payment
to a person in same-day funds on any Business
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Day at any time shall be considered equivalent to payment to such person in New
York Clearing House (next-day) funds at the same time on the preceding Business
Day, and any payment made after 12:00 noon, New York City time, on any Business
Day shall be considered to have been made instead in the same form of funds and
to the same person before 12:00 noon, New York City time, on the next Business
Day.
(ii) The amount of cash dividends per share of any series of AMPS
payable (if declared) on the Initial Dividend Payment Date, each 7-Day Dividend
Period and each Dividend Payment Date of each Short Term Dividend Period shall
be computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of AMPS payable (if declared) on
any Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment Date
and the denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Corporation may, at its sole option and to the extent permitted by
law, by telephonic and written notice (a "Request for Special Dividend Period")
to the Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for a series of AMPS be a
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number of days (other than seven), evenly divisible by seven, and not fewer than
seven nor more than 364 in the case of a Short Term Dividend Period or one whole
year or more but not greater than five years in the case of a Long Term Dividend
Period, specified in such notice, provided that the Corporation may not give a
Request for Special Dividend Period of greater than 28 days (and any such
request shall be null and void) unless, for any Auction occurring after the
initial Auction, Sufficient Clearing Bids were made in the last occurring
Auction and unless full cumulative dividends, any amounts due with respect to
redemptions, and any Additional Dividends payable prior to such date have been
paid in full. Such Request for Special Dividend Period, in the case of a Short
Term Dividend Period, shall be given on or prior to the second Business Day but
not more than seven Business Days prior to an Auction Date for a series of AMPS
and, in the case of a Long Term Dividend Period, shall be given on or prior to
the second Business Day but not more than 28 days prior to an Auction Date for
the AMPS. Upon receiving such Request for Special Dividend Period, the
Broker-Dealer(s) shall jointly determine whether, given the factors set forth
below, it is advisable that the Corporation issue a Notice of Special Dividend
Period for the series of AMPS as contemplated by such Request for Special
Dividend Period and the Optional Redemption Price of the AMPS during such
Special Dividend Period and the Specific Redemption Provisions and shall give
the Corporation and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination the Broker-Dealer(s) will consider (1)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the AMPS, (4) industry and financial conditions which
may affect the AMPS, (5) the investment objective of the
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Corporation, and (6) the Dividend Periods and dividend rates at which current
and potential beneficial holders of the AMPS would remain or become beneficial
holders. If the Broker-Dealer(s) shall not give the Corporation and the Auction
Agent a Response by such second Business Day or if the Response states that
given the factors set forth above it is not advisable that the Corporation give
a Notice of Special Dividend Period for the series of AMPS, the Corporation may
not give a Notice of Special Dividend Period in respect of such Request for
Special Dividend Period. In the event the Response indicates that it is
advisable that the Corporation give a Notice of Special Dividend Period for the
series of AMPS, the Corporation may by no later than the second Business Day
prior to such Auction Date give a notice (a "Notice of Special Dividend Period")
to the Auction Agent, the Securities Depository and each Broker-Dealer which
notice will specify (i) the duration of the Special Dividend Period, (ii) the
Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related Response.
The Corporation also shall provide a copy of such Notice of Special Dividend
Period to Moody's and S&P. The Corporation shall not give a Notice of Special
Dividend Period and, if the Corporation has given a Notice of Special Dividend
Period, the Corporation is required to give telephonic and written notice of its
revocation (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer,
and the Securities Depository on or prior to the Business Day prior to the
relevant Auction Date if (x) either the 1940 Act AMPS Asset Coverage is not
satisfied or the Corporation shall fail to maintain S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value at least equal
to the AMPS Basic Maintenance Amount, in each case on each of the two Valuation
Dates immediately preceding the Business Day prior to the relevant Auction Date
on an actual basis and on a pro forma basis giving effect to the proposed
Special Dividend Period
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(using as a pro forma dividend rate with respect to such Special Dividend Period
the dividend rate which the Broker-Dealers shall advise the Corporation is an
approximately equal rate for securities similar to the AMPS with an equal
dividend period), provided that, in calculating the aggregate Discounted Value
of Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall
be deemed to be one week longer, (y) sufficient funds for the payment of
dividends payable on the immediately succeeding Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the close of business on
the third Business Day preceding the related Auction Date or (z) the
Broker-Dealer(s) jointly advise the Corporation that after consideration of the
factors listed above they have concluded that it is advisable to give a Notice
of Revocation. The Corporation also shall provide a copy of such Notice of
Revocation to Moody's and S&P. If the Corporation is prohibited from giving a
Notice of Special Dividend Period as a result of any of the factors enumerated
in clause (x), (y) or (z) above or if the Corporation gives a Notice of
Revocation with respect to a Notice of Special Dividend Period for any series of
AMPS, the next succeeding Dividend Period will be a 7-Day Dividend Period. In
addition, in the event Sufficient Clearing Bids are not made in the applicable
Auction or such Auction is not held for any reason, such next succeeding
Dividend Period will be a 7-Day Dividend Period and the Corporation may not
again give a Notice of Special Dividend Period for the AMPS (and any such
attempted notice shall be null and void) until Sufficient Clearing Bids have
been made in an Auction with respect to a 7-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends and
applicable late charges, as herein provided, on the shares of AMPS (except for
Additional Dividends as provided in paragraph 2(e)
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hereof and additional payments as provided in paragraph 2(f) hereof). Except for
the late charge payable pursuant to paragraph 2(c)(i) hereof, no interest, or
sum of money in lieu of interest, shall be payable in respect of any dividend
payment on the shares of AMPS that may be in arrears.
(ii) For so long as any share of AMPS is Outstanding, the Corporation
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Stock or other
stock, if any, ranking junior to the shares of AMPS as to dividends or upon
liquidation) in respect of the Common Stock or any other stock of the
Corporation ranking junior to or on a parity with the shares of AMPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the Common Stock or any other
such junior stock (except by conversion into or exchange for stock of the
Corporation ranking junior to the shares of AMPS as to dividends and upon
liquidation) or any other such Parity Stock (except by conversion into or
exchange for stock of the Corporation ranking junior to or on a parity with the
shares of AMPS as to dividends and upon liquidation), unless (A) immediately
after such transaction, the Corporation shall have S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount and the Corporation shall
maintain the 1940 Act AMPS Asset Coverage, (B) full cumulative dividends on
shares of AMPS and shares of Other AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid under paragraph 2(e) below on or
before the date of
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such declaration or payment has been paid and (D) the Corporation has redeemed
the full number of shares of AMPS required to be redeemed by any provision for
mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate,
(ii) an uncertificated right (a "Right") to receive an Additional Dividend (as
defined below), and (iii) any additional amounts as set forth in paragraph 2(f)
below. Each Right shall thereafter be independent of the share or shares of AMPS
on which the dividend was paid. The Corporation shall cause to be maintained a
record of each Right received by the respective Holders. A Right may not be
transferred other than by operation of law. If the Corporation retroactively
allocates any net capital gains or other income subject to regular Federal
income taxes to shares of AMPS without having given advance notice thereof to
the Auction Agent as described in paragraph 2(f) hereof solely by reason of the
fact that such allocation is made as a result of the redemption of all or a
portion of the outstanding shares of AMPS or the liquidation of the Corporation
(the amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Corporation will, within 90 days (and generally within 60
days) after the end of the Corporation's fiscal year for which a Retroactive
Taxable Allocation is made, provide notice thereof to the Auction Agent and to
each holder of a Right applicable to such shares of AMPS (initially Cede & Co.
as nominee of The Depository Trust Company) during such fiscal year at such
holder's address as the same appears or last appeared on the Stock Books of the
Corporation. The Corporation will, within 30 days after such notice is given to
the Auction Agent, pay to the Auction Agent (who will then distribute to such
holders of Rights), out of funds legally available therefor, an amount equal to
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the aggregate Additional Dividend with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal and California income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder if
the amount of the aggregate Retroactive Taxable Allocations would have been
excludable from the gross income of such holder. Such Additional Dividend shall
be calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of shares of AMPS is subject to the Federal
alternative minimum tax with respect to dividends received from the Corporation;
and (iii) assuming that each Retroactive Taxable Allocation would be taxable in
the hands of each holder of shares of AMPS at the greater of: (x) the maximum
combined marginal regular Federal and California individual income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (including any surtax); or (y) the maximum
combined marginal regular Federal and California corporate income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (taking into account in both (x) and (y) the
Federal income tax deductibility of state taxes paid or incurred but not any
phase out of, or provision limiting, personal exemptions, itemized deductions,
or the benefit of lower tax brackets and assuming the taxability of Federally
tax-exempt dividends for corporations for California state income tax purposes).
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(f) Except as provided below, whenever the Corporation intends to
include any net capital gains or other income subject to regular Federal income
taxes in any dividend on shares of AMPS, the Corporation will notify the Auction
Agent of the amount to be so included at least five Business Days prior to the
Auction Date on which the Applicable Rate for such dividend is to be
established. The Corporation may also include such income in a dividend on
shares of a series of AMPS without giving advance notice thereof if it increases
the dividend by an additional amount calculated as if such income was a
Retroactive Taxable Allocation and the additional amount was an Additional
Dividend, provided that the Corporation will notify the Auction Agent of the
additional amounts to be included in such dividend at least five Business Days
prior to the applicable Dividend Payment Date.
(g) No fractional shares of AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the Holders shall be
entitled to receive, out of the assets of the Corporation available for
distribution to shareholders, before any distribution or payment is made upon
any Common Stock or any other capital stock ranking junior in right of payment
upon liquidation to the AMPS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Additional Dividends as provided in paragraph 2(e) hereof.
If upon any liquidation, dissolution or winding up of the Corporation, the
amounts payable with respect to the AMPS and any other Outstanding class or
series of Preferred Stock of the Corporation ranking on a parity with the AMPS
as to payment upon liquidation are not paid in full, the Holders and the holders
of such other class or series will
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share ratably in any such distribution of assets in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the Holders
will not be entitled to any further participation in any distribution of assets
by the Corporation except for any Additional Dividends. A consolidation, merger
or statutory share exchange of the Corporation with or into any other
corporation or entity or a sale, whether for cash, shares of stock, securities
or properties, of all or substantially all or any part of the assets of the
Corporation shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Corporation.
4. Redemption. (a) Shares of AMPS shall be redeemable by the
Corporation as provided below:
(i) To the extent permitted under the 1940 Act and Maryland law, upon
giving a Notice of Redemption, the Corporation at its option may redeem shares
of AMPS, in whole or in part, out of funds legally available therefor, at the
Optional Redemption Price per share, on any Dividend Payment Date; provided that
no share of AMPS may be redeemed at the option of the Corporation during (A) the
Initial Dividend Period with respect to a series of shares or (B) a Non-Call
Period to which such share is subject. In addition, holders of AMPS which are
redeemed shall be entitled to receive Additional Dividends to the extent
provided herein. The Corporation may not give a Notice of Redemption relating to
an optional redemption as described in this paragraph 4(a)(i) unless, at the
time of giving such Notice of Redemption, the Corporation has available Deposit
Securities with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount due to
Holders by reason of the redemption of their shares of AMPS on such redemption
date.
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(ii) The Corporation shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per share, shares of AMPS to the
extent permitted under the 1940 Act and Maryland law, on a date fixed by the
Board of Directors, if the Corporation fails to maintain S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount as provided in paragraph 7(a) or
to satisfy the 1940 Act AMPS Asset Coverage as provided in paragraph 6 and such
failure is not cured on or before the AMPS Basic Maintenance Cure Date or the
1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the
case may be. In addition, holders of AMPS so redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The number of shares
of AMPS to be redeemed shall be equal to the lesser of (i) the minimum number of
shares of AMPS the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the Cure Date, together with all shares of
other Preferred Stock subject to redemption or retirement, would result in the
Corporation having S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be,
on such Cure Date (provided that, if there is no such minimum number of shares
of AMPS and shares of other Preferred Stock the redemption of which would have
such result, all shares of AMPS and shares of other Preferred Stock then
Outstanding shall be redeemed), and (ii) the maximum number of shares of AMPS,
together with all shares of other Preferred Stock subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor on such redemption date. In determining the number of shares of AMPS
required to be redeemed in accordance with the foregoing, the Corporation shall
allocate the number required to be redeemed which would result in the
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Corporation having S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be,
pro rata among shares of AMPS of all series, Other AMPS and other Preferred
Stock subject to redemption pursuant to provisions similar to those contained in
this paragraph 4(a)(ii); provided that, shares of AMPS which may not be redeemed
at the option of the Corporation due to the designation of a Non-Call Period
applicable to such shares (A) will be subject to mandatory redemption only to
the extent that other shares are not available to satisfy the number of shares
required to be redeemed and (B) will be selected for redemption in an ascending
order of outstanding number of days in the Non-Call Period (with shares with the
lowest number of days to be redeemed first) and by lot in the event of shares
having an equal number of days in such Non-Call Period. The Corporation shall
effect such redemption on a Business Day which is not later than 35 days after
such Cure Date, except that if the Corporation does not have funds legally
available for the redemption of all of the required number of shares of AMPS and
shares of other Preferred Stock which are subject to mandatory redemption or the
Corporation otherwise is unable to effect such redemption on or prior to 35 days
after such Cure Date, the Corporation shall redeem those shares of AMPS which it
is unable to redeem on the earliest practicable date on which it is able to
effect such redemption out of funds legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares
of AMPS may be redeemed pursuant to paragraph 4(a)(i) of these Articles
Supplementary (i) unless all dividends in arrears on all remaining outstanding
shares of Parity Stock shall have been or are being contemporaneously paid or
declared and set apart for payment and (ii) if redemption
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thereof would result in the Corporation's failure to maintain Moody's Eligible
Assets or S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount. In the event that less than all
the outstanding shares of a series of AMPS are to be redeemed and there is more
than one Holder, the shares of that series of AMPS to be redeemed shall be
selected by lot or such other method as the Corporation shall deem fair and
equitable.
(c) Whenever shares of AMPS are to be redeemed, the Corporation, not
less than 17 nor more than 60 days prior to the date fixed for redemption, shall
mail a notice ("Notice of Redemption") by first-class mail, postage prepaid, to
each Holder of shares of AMPS to be redeemed and to the Auction Agent. The
Corporation shall cause the Notice of Redemption to also be published in the
eastern and national editions of The Wall Street Journal. The Notice of
Redemption shall set forth (i) the redemption date, (ii) the amount of the
redemption price, (iii) the aggregate number of shares of AMPS of such series to
be redeemed, (iv) the place or places where shares of AMPS of such series are to
be surrendered for payment of the redemption price, (v) a statement that
dividends on the shares to be redeemed shall cease to accumulate on such
redemption date (except that holders may be entitled to Additional Dividends)
and (vi) the provision of these Articles Supplementary pursuant to which such
shares are being redeemed. No defect in the Notice of Redemption or in the
mailing or publication thereof shall affect the validity of the redemption
proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Corporation shall have deposited in trust with
the Auction Agent, or segregated in an account at the Corporation's custodian
bank for the benefit of the Auction Agent, Deposit
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Securities (with a right of substitution) having an aggregate Discounted Value
(utilizing in the case of S&P an S&P Exposure Period of 22 Business Days) equal
to the redemption payment for the shares of AMPS as to which such Notice of
Redemption has been given with irrevocable instructions and authority to pay the
redemption price to the Holders of such shares, then upon the date of such
deposit or, if no such deposit is made, then upon such date fixed for redemption
(unless the Corporation shall default in making the redemption payment), all
rights of the Holders of such shares as shareholders of the Corporation by
reason of the ownership of such shares will cease and terminate (except their
right to receive the redemption price in respect thereof and any Additional
Dividends, but without interest), and such shares shall no longer be deemed
outstanding. The Corporation shall be entitled to receive, from time to time,
from the Auction Agent the interest, if any, on such Deposit Securities
deposited with it and the Holders of any shares so redeemed shall have no claim
to any of such interest. In case the Holder of any shares so called for
redemption shall not claim the redemption payment for his shares within one year
after the date of redemption, the Auction Agent shall, upon demand, pay over to
the Corporation such amount remaining on deposit and the Auction Agent shall
thereupon be relieved of all responsibility to the Holder of such shares called
for redemption and such Holder thereafter shall look only to the Corporation for
the redemption payment.
5. Voting Rights. (a) General. Except as otherwise provided in the
Charter or By-Laws, each Holder of shares of AMPS shall be entitled to one vote
for each share held on each matter submitted to a vote of shareholders of the
Corporation, and the holders of outstanding shares of Preferred Stock, including
AMPS, and of shares of Common Stock shall vote together as a single class;
provided that, at any meeting of the shareholders of the
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Corporation held for the election of directors, the holders of outstanding
shares of Preferred Stock, including AMPS, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of capital stock of
the Corporation, to elect two directors of the Corporation. Subject to paragraph
5(b) hereof, the holders of outstanding shares of capital stock of the
Corporation, including the holders of outstanding shares of Preferred Stock,
including AMPS, voting as a single class, shall elect the balance of the
directors.
(b) Right to Elect Majority of Board of Directors. During any period in
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically increased by the
smallest number that, when added to the two directors elected exclusively by the
holders of shares of Preferred Stock, would constitute a majority of the Board
of Directors as so increased by such smallest number; and the holders of shares
of Preferred Stock shall be entitled, voting separately as one class (to the
exclusion of the holders of all other securities and classes of capital stock of
the Corporation), to elect such smallest number of additional directors,
together with the two directors that such holders are in any event entitled to
elect. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of AMPS equal to at least two
full years' dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the payment
of such accumulated dividends; or
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(ii) if at any time holders of any other shares of Preferred Stock are
entitled to elect a majority of the directors of the Corporation under the 1940
Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this paragraph 5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as any
shares of AMPS are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of Preferred Stock
Outstanding at the time, voting separately as one class: (i) authorize, create
or issue any class or series of stock ranking prior to the AMPS or any other
series of Preferred Stock with respect to payment of dividends or the
distribution of assets on liquidation, or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so as
to adversely affect any of the contract rights expressly set forth in the
Charter of holders of shares of AMPS or any other Preferred Stock. To the extent
permitted under the 1940 Act, in the event shares of more than one series of
AMPS are outstanding, the Corporation shall not approve any of the actions set
forth in clause (i) or (ii) which adversely affects the contract rights
expressly set forth in the Charter of a Holder of shares of a series of AMPS
differently than those of a Holder of shares of any other series of AMPS without
the affirmative vote of the holders of at least a majority of the shares of AMPS
of each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The Corporation shall
notify Moody's and S&P ten Business Days prior to any such vote described in
clause (i) or (ii). Unless a higher percentage is provided for under the
Charter, the affirmative vote of the holders of a majority of the outstanding
shares of
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Preferred Stock, including AMPS, voting together as a single class, will be
required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act. The class vote of holders
of shares of Preferred Stock, including AMPS, described above will in each case
be in addition to a separate vote of the requisite percentage of shares of
Common Stock and shares of Preferred Stock, including AMPS, voting together as a
single class necessary to authorize the action in question.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Stock to elect additional directors as described
in paragraph 5(b) above, the Corporation shall call a special meeting of such
holders and instruct the Auction Agent to mail a notice of such special meeting
to such holders, such meeting to be held not less than 10 nor more than 20 days
after the date of mailing of such notice. If the Corporation fails to send such
notice to the Auction Agent or if the Corporation does not call such a special
meeting, it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting held during a Voting Period, such Holders, voting together as a class
(to the exclusion of the holders of all other securities and classes of capital
stock of the Corporation), shall be entitled to elect the number of directors
prescribed in paragraph 5(b) above. At any such meeting or adjournment thereof
in the absence of a quorum, a majority of such holders present in person or
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by proxy shall have the power to adjourn the meeting without notice, other than
by an announcement at the meeting, to a date not more than 120 days after the
original record date.
(ii) For purposes of determining any rights of the Holders to vote on
any matter or the number of shares required to constitute a quorum, whether such
right is created by these Articles Supplementary, by the other provisions of the
Charter, by statute or otherwise, a share of AMPS which is not Outstanding shall
not be counted.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of Holders and holders of other
Preferred Stock to elect directors shall continue, notwithstanding the election
at such meeting by the Holders and such other holders of the number of directors
that they are entitled to elect, and the persons so elected by the Holders and
such other holders, together with the two incumbent directors elected by the
Holders and such other holders of Preferred Stock and the remaining incumbent
directors elected by the holders of the Common Stock and Preferred Stock, shall
constitute the duly elected directors of the Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional directors elected by the Holders and holders of
other Preferred Stock pursuant to paragraph 5(b) above shall terminate, the
remaining directors shall constitute the directors of the Corporation and the
voting rights of the Holders and such other holders to elect additional
directors pursuant to paragraph 5(b) above shall cease, subject to the
provisions of the last sentence of paragraph 5(b).
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(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
remedy of the Holders shall be the right to vote for directors pursuant to the
provisions of this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders of
AMPS is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Corporation shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify S&P and Moody's that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and, not later than ten Business Days after the date on which such vote is
taken, notify S&P and Moody's of the result of such vote.
6. 1940 Act AMPS Asset Coverage. The Corporation shall maintain, as of
the last Business Day of each month in which any share of AMPS is outstanding,
the 1940 Act AMPS Asset Coverage.
7. AMPS Basic Maintenance Amount. (a) The Corporation shall maintain,
on each Valuation Date, and shall verify to its satisfaction that it is
maintaining on such Valuation Date, (i) S&P Eligible Assets having an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount and
(ii) Moody's Eligible Assets having an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount. Upon any failure to maintain the
required Discounted Value, the Corporation will use its best efforts to
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alter the composition of its portfolio to reattain a Discounted Value at least
equal to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic
Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Corporation fails to satisfy the AMPS
Basic Maintenance Amount, the Corporation shall complete and deliver to the
Auction Agent, and Moody's and S&P, as the case may be, a complete AMPS Basic
Maintenance Report as of the date of such failure, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy or
telecopy, telex or other electronic transcription thereof and on the same day
the Corporation mails to the Auction Agent for delivery on the next Business Day
the complete AMPS Basic Maintenance Report. The Corporation will deliver an AMPS
Basic Maintenance Report to the Auction Agent and Moody's and S&P, as the case
may be, on or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Corporation cures its failure to maintain
Moody's Eligible Assets or S&P Eligible Assets, as the case may be, with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount or on which the Corporation fails to maintain Moody's Eligible Assets or
S&P Eligible Assets, as the case may be, with an aggregate Discounted Value
which exceeds the AMPS Basic Maintenance Amount by 5% or more. The Corporation
will also deliver an AMPS Basic Maintenance Report to the Auction Agent, Moody's
and S&P as of each Quarterly Valuation Date on or before the third Business Day
after such date. Additionally, on or before 5:00 p.m., New York City time, on
the third Business Day after the first day of a Special Dividend Period, the
Corporation will deliver an AMPS Basic Maintenance Report to S&P and the Auction
Agent. The Corporation shall also provide Moody's and S&P with an AMPS Basic
Maintenance Report
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when specifically requested by either Moody's or S&P. A failure by the
Corporation to deliver an AMPS Basic Maintenance Report under this paragraph
7(b) shall be deemed to be delivery of an AMPS Basic Maintenance Report
indicating the Discounted Value for S&P Eligible Assets and Moody's Eligible
Assets of the Corporation is less than the AMPS Basic Maintenance Amount, as of
the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an AMPS
Basic Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent, S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other AMPS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Corporation during the quarter ending on such Quarterly Valuation Date),
(ii) that, in such Report (and in such randomly selected Report), the
Corporation correctly determined the assets of the Corporation which constitute
S&P Eligible Assets or Moody's Eligible Assets, as the case may be, at such
Quarterly Valuation Date in accordance with these Articles Supplementary, (iii)
that, in such Report (and in such randomly selected Report), the Corporation
determined whether the Corporation had, at such Quarterly Valuation Date (and at
the Valuation Date addressed in such randomly selected Report) in accordance
with these Articles Supplementary, S&P Eligible Assets of an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount and Moody's
Eligible Assets of an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount, (iv) with respect to the S&P ratings on California
Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon rate
listed in such Report, that the Independent Accountant has requested that S&P
verify
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such information and the Independent Accountant shall provide a listing in its
letter of any differences, (v) with respect to the Moody's ratings on California
Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon rate
listed in such Report, that such information has been verified by Moody's (in
the event such information is not verified by Moody's, the Independent
Accountant will inquire of Moody's what such information is, and provide a
listing in its letter of any differences), (vi) with respect to the bid or mean
price (or such alternative permissible factor used in calculating the Market
Value) provided by the custodian of the Corporation's assets to the Corporation
for purposes of valuing securities in the Corporation's portfolio, the
Independent Accountant has traced the price used in such Report to the bid or
mean price listed in such Report as provided to the Corporation and verified
that such information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
and (vii) with respect to such confirmation to Moody's, that the Corporation has
satisfied the requirements of paragraph 8(b) of these Articles Supplementary
(such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above relating to any Valuation Date on which the Corporation
failed to maintain S&P Eligible Assets with an aggregate Discounted Value and
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount, and relating to the AMPS Basic
Maintenance Cure Date with respect to such failure, the Independent Accountant
will provide to the Auction Agent, S&P and Moody's an Accountant's Confirmation
as to such AMPS Basic Maintenance Report.
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(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Corporation was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Corporation, and the Corporation shall accordingly amend and deliver the AMPS
Basic Maintenance Report to the Auction Agent, S&P and Moody's promptly
following receipt by the Corporation of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of the shares of AMPS, the Corporation will
complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report as of
the close of business on such Date of Original Issue. Within five Business Days
of such Date of Original Issue, the Independent Accountant will confirm in
writing to S&P and Moody's (i) the mathematical accuracy of the calculations
reflected in such Report and (ii) that the aggregate Discounted Value of S&P
Eligible Assets and the aggregate Discounted Value of Moody's Eligible Assets
reflected thereon equals or exceeds the AMPS Basic Maintenance Amount reflected
thereon. Also, on or before 5:00 p.m., New York City time, on the first Business
Day after shares of Common Stock are repurchased by the Corporation, the
Corporation will complete and deliver to S&P and Moody's an AMPS Basic
Maintenance Report as of the close of business on such date that Common Stock is
repurchased.
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(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the effect
of any such alteration would be to cause the Corporation to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of such
Valuation Date; provided, however, that in the event that, as of the immediately
preceding Valuation Date, the aggregate Discounted Value of Moody's Eligible
Assets exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Adviser will not alter the composition of the Corporation's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of Moody's
Eligible Assets unless the Corporation shall have confirmed that, after giving
effect to such alteration, the aggregate Discounted Value of Moody's Eligible
Assets would exceed the AMPS Basic Maintenance Amount.
8. Certain Other Restrictions and Requirements.
(a) For so long as any shares of AMPS are rated by S&P, the Corporation
will not purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not impair
the ratings then assigned to the shares of AMPS by S&P, except that the
Corporation may purchase or sell futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call options on
such contracts (collectively, "S&P Hedging Transactions"), subject to the
following limitations:
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(i) the Corporation will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a futures
contract or option held by the Corporation by the Corporation's taking an
opposite position thereto ("Closing Transactions")), which would cause the
Corporation at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding futures contracts based on the Municipal Index, (B)
outstanding futures contracts based on the Municipal Index exceeding in number
25% of the quotient of the Market Value of the Corporation's total assets
divided by $1,000 or (C) outstanding futures contracts based on the Municipal
Index exceeding in number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(ii) the Corporation will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause the
Corporation at the time of such transaction to own or have sold the lesser of
(A) outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Corporation's total assets
divided by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal;
(iii) the Corporation will engage in Closing Transactions to close out
any outstanding futures contract which the Corporation owns or has sold or any
outstanding option thereon owned by the Corporation in the event (A) the
Corporation does not have S&P Eligible
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Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount on two consecutive Valuation Dates and (B) the
Corporation is required to pay Variation Margin on the second such Valuation
Date;
(iv) the Corporation will engage in a Closing Transaction to close out
any outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon unless
the Corporation holds the securities deliverable under such terms; and
(v) when the Corporation writes a futures contract or option thereon,
it will either maintain an amount of cash, cash equivalents or high grade (rated
A or better by S&P), fixed-income securities in a segregated account with the
Corporation's custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of or on behalf of the
Corporation's broker with respect to such futures contract or option equals the
Market Value of the futures contract or option, or, in the event the Corporation
writes a futures contract or option thereon which requires delivery of an
underlying security, it shall hold such underlying security in its portfolio.
For purposes of determining whether the Corporation has S&P Eligible
Assets with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Corporation plus
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(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on Treasury Bonds which contracts are owned
by the Corporation.
(b) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not buy or sell futures contracts, write, purchase or sell call
options on futures contracts or purchase put options on futures contracts or
write call options (except covered call options) on portfolio securities unless
it receives written confirmation from Moody's that engaging in such transactions
would not impair the ratings then assigned to the shares of AMPS by Moody's,
except that the Corporation may purchase or sell exchange-traded futures
contracts based on the Municipal Index or Treasury Bonds and purchase, write or
sell exchange-traded put options on such futures contracts and purchase, write
or sell exchange-traded call options on such futures contracts (collectively,
"Moody's Hedging Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any Moody's Hedging Transaction
based on the Municipal Index (other than Closing Transactions) which would cause
the Corporation at the time of such transaction to own or have sold (A)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal or (B) outstanding futures contracts
based on the Municipal Index having a Market Value exceeding 50% of the Market
Value of all Municipal Bonds constituting Moody's Eligible Assets owned by the
Corporation (other than Moody's Eligible Assets already subject to a Moody's
Hedging Transaction);
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(ii) the Corporation will not engage in any Moody's Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause the
Corporation at the time of such transaction to own or have sold (A) outstanding
futures contracts based on Treasury Bonds having an aggregate Market Value
exceeding 20% of the aggregate Market Value of Moody's Eligible Assets owned by
the Corporation and rated Aa by Moody's (or, if not rated by Moody's but rated
by S&P, rated AAA by S&P) or (B) outstanding futures contracts based on Treasury
Bonds having an aggregate Market Value exceeding 40% of the aggregate Market
Value of all Municipal Bonds constituting Moody's Eligible Assets owned by the
Corporation (other than Moody's Eligible Assets already subject to a Moody's
Hedging Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's
but rated by S&P, rated A or AA by S&P) (for purposes of the foregoing clauses
(i) and (ii), the Corporation shall be deemed to own the number of futures
contracts that underlie any outstanding options written by the Corporation);
(iii) the Corporation will engage in Closing Transactions to close out
any outstanding futures contract based on the Municipal Index if the amount of
open interest in the Municipal Index as reported by The Wall Street Journal is
less than 5,000;
(iv) the Corporation will engage in a Closing Transaction to close out
any outstanding futures contract by no later than the fifth Business Day of the
month in which such contract expires and will engage in a Closing Transaction to
close out any outstanding option on a futures contract by no later than the
first Business Day of the month in which such option expires;
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(v) the Corporation will engage in Moody's Hedging Transactions only
with respect to futures contracts or options thereon having the next settlement
date or the settlement date immediately thereafter;
(vi) the Corporation will not engage in options and futures
transactions for leveraging or speculative purposes and will not write any call
options or sell any futures contracts for the purpose of hedging the anticipated
purchase of an asset prior to completion of such purchase; and
(vii) the Corporation will not enter into an option or futures
transaction unless, after giving effect thereto, the Corporation would continue
to have Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
AMPS Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Corporation is obligated to deliver or receive pursuant to an
outstanding futures contract or option shall be as follows: (i) assets subject
to call options written by the Corporation which are either exchange-traded and
"readily reversible" or which expire within 49 days after the date as of which
such valuation is made shall be valued at the lesser of (a) Discounted Value and
(b) the exercise price of the call option written by the Corporation; (ii)
assets subject to call options written by the Corporation not meeting the
requirements of clause (i) of this sentence shall have no value; (iii) assets
subject to put options written by the Corporation shall be valued at the lesser
of (A) the exercise price and (B) the Discounted Value of the subject security;
(iv) futures contracts shall be valued at the
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lesser of (A) settlement price and (B) the Discounted Value of the subject
security, provided that, if a contract matures within 49 days after the date as
of which such valuation is made, where the Corporation is the seller the
contract may be valued at the settlement price and where the Corporation is the
buyer the contract may be valued at the Discounted Value of the subject
securities; and (v) where delivery may be made to the Corporation with any
security of a class of securities, the Corporation shall assume that it will
take delivery of the security with the lowest Discounted Value.
For purposes of determining whether the Corporation has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
AMPS Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Moody's Eligible Assets held by the
Corporation: (i) 10% of the exercise price of a written call option; (ii) the
exercise price of any written put option; (iii) where the Corporation is the
seller under a futures contract, 10% of the settlement price of the futures
contract; (iv) where the Corporation is the purchaser under a futures contract,
the settlement price of assets purchased under such futures contract; (v) the
settlement price of the underlying futures contract if the Corporation writes
put options on a futures contract; and (vi) 105% of the Market Value of the
underlying futures contracts if the Corporation writes call options on a futures
contract and does not own the underlying contract.
(c) For so long as any shares of AMPS are rated by Moody's, the
Corporation will not enter into any contract to purchase securities for a fixed
price at a future date beyond customary settlement time (other than such
contracts that constitute Moody's Hedging Transactions that are permitted under
paragraph 8(b) of these Articles Supplementary), except
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that the Corporation may enter into such contracts to purchase newly-issued
securities on the date such securities are issued ("Forward Commitments"),
subject to the following limitations:
(i) the Corporation will maintain in a segregated account with
its custodian cash, cash equivalents or short-term, fixed-income
securities rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior
to the date of the Forward Commitment with a Market Value that equals
or exceeds the amount of the Corporation's obligations under any
Forward Commitments to which it is from time to time a party or
long-term fixed income securities with a Discounted Value that equals
or exceeds the amount of the Corporation's obligations under any
Forward Commitment to which it is from time to time a party; and
(ii) the Corporation will not enter into a Forward Commitment
unless, after giving effect thereto, the Corporation would continue to
have Moody's Eligible Assets with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount.
(d) For purposes of determining whether the Corporation has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
AMPS Basic Maintenance Amount, the Discounted Value of all Forward Commitments
to which the Corporation is a party and of all securities deliverable to the
Corporation pursuant to such Forward Commitments shall be zero.
(d) For so long as AMPS are rated by S&P or Moody's, the Corporation
will not, unless it has received written confirmation from S&P and/or Moody's,
as the case may be, that such action would not impair the ratings then assigned
to AMPS by S&P and/or Moody's, as the case
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may be, (i) borrow money except for the purpose of clearing transactions in
portfolio securities (which borrowings shall under any circumstances be limited
to the lesser of $10 million and an amount equal to 5% of the Market Value of
the Corporation's assets at the time of such borrowings and which borrowings
shall be repaid within 60 days and not be extended or renewed and shall not
cause the aggregate Discounted Value of Moody's Eligible Assets and S&P Eligible
Assets to be less than the AMPS Basic Maintenance Amount), (ii) engage in short
sales of securities, (iii) lend any securities, (iv) issue any class or series
of shares ranking prior to or on a parity with the AMPS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Corporation, (v) reissue any AMPS previously purchased or
redeemed by the Corporation, (vi) merge or consolidate into or with any other
corporation or entity, (vii) change the Pricing Service or (viii) engage in
reverse repurchase agreements.
(e) For so long as AMPS are rated by Moody's, the Corporation agrees to
provide Moody's with the following, unless the Corporation has received written
confirmation from Moody's that the provision of such information is no longer
required and that the current rating then assigned to the AMPS by Moody's would
not be impaired: a notification letter at least 30 days prior to any material
change in the Charter; a copy of the AMPS Basic Maintenance Report prepared by
the Corporation in accordance with this Articles Supplementary; and a notice
upon the occurrence of any of the following events: (i) any failure by the
Corporation to declare or pay any dividends on the AMPS or successfully remarket
the AMPS; (ii) any mandatory or optional redemption of the AMPS effected by the
Corporation; (iii) any assumption of control of the Board of Directors of the
Corporation by the holders of the AMPS; (iv) a general
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unavailability of dealer quotes on the assets of the Corporation; (v) any
material auditor discrepancies on valuations; (vi) the dividend rate on the AMPS
equals or exceeds 95% of the Aaa Composite Commercial Paper Rate; (vii) the
occurrence of any Special Dividend Period; (viii) any change in the Maximum
Applicable Rate or the Reference Rate; (ix) the acquisition by any person of
beneficial ownership of more than 5% of the Corporation's voting stocks
(inclusive of Common Stock and Preferred Stock); (x) the occurrence of any
change in Internal Revenue Service rules with respect to the payment of
Additional Dividends; (xi) any change in the Pricing Service employed by the
Corporation; (xii) any change in the Investment Adviser; (xiii) any increase of
greater than 40% to the maximum marginal Federal income tax rate applicable to
individuals or corporations; and (xiv) the maximum marginal Federal income tax
rate applicable to individuals or corporations is increased to a rate in excess
of 50%.
9. Notice. All notices or communications, unless otherwise specified in
the By-Laws of the Corporation or these Articles Supplementary, shall be
sufficiently given if in writing and delivered in person or mailed by
first-class mail, postage prepaid. Notice shall be deemed given on the earlier
of the date received or the date seven days after which such notice is mailed.
10. Auction Procedures. (a) Certain definitions. As used in this
paragraph 10, the following terms shall have the following meanings, unless the
context otherwise requires:
(i) "AMPS" means the shares of AMPS being auctioned pursuant to
this paragraph 10.
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(ii) "Auction Date" means the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph
10(d)(i) below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such ratings
by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and (ii) whether the
Corporation has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph 2(f)
hereof that net capital gains or other taxable income will be included in such
dividend on shares of AMPS as follows:
<TABLE>
<CAPTION>
Credit Ratings Applicable Percentage Applicable Percentage
-------------- of Reference Rate - of Reference Rate -
Moody's S&P No Notification Notification
- --------------- ------------- --------------- ------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
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The Corporation shall take all reasonable action necessary to enable
S&P and Moody's to provide a rating for each series of the AMPS. If either S&P
or Moody's shall not make such a rating available, or neither S&P nor Moody's
shall make such a rating available, Merrill Lynch, Pierce, Fenner & Smith
Incorporated or its affiliates and successors, after consultation with the
Corporation, shall select a nationally recognized statistical rating
organization or two nationally recognized statistical rating organizations to
act as a Substitute Rating Agency or Substitute Rating Agencies, as the case may
be.
(viii) "Order" has the meaning specified in paragraph 10(b)(i)
below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on
any Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph
10(d)(i) below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
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(xv) "Sufficient Clearing Bids" has the meaning specified in
paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders.
(i) Unless otherwise permitted by the Corporation, Beneficial
Owners and Potential Beneficial Owners may only participate in Auctions through
their Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners and
as Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of AMPS in its
own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. On or prior to the Submission Deadline
on each Auction Date:
(A) each Beneficial Owner may submit to its
Broker-Dealer information as to:
(1) the number of Outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner
desires to continue to hold without regard to the Applicable
Rate for the next succeeding Dividend Period;
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(2) the number of Outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner
desires to continue to hold, provided that the Applicable Rate
for the next succeeding Dividend Period shall not be less than
the rate per annum specified by such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner
offers to sell without regard to the Applicable Rate for the
next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial
Owners that shall be maintained in good faith for the purpose
of conducting a competitive Auction, shall contact Potential
Beneficial Owners, including Persons that are not Beneficial
Owners, on such list to determine the number of Outstanding
shares, if any, of AMPS which each such Potential Beneficial
Owner offers to purchase, provided that the Applicable Rate
for the next succeeding Dividend Period shall not be less than
the rate per annum specified by such Potential Beneficial
Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this paragraph
10(b)(i) is hereinafter referred to as a "Hold Order";
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an Order containing the information referred to in clause (A)(2) or (B) of this
paragraph 10(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this paragraph
10(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding shares of AMPS specified in such Bid
if the Applicable Rate determined on such Auction Date shall be
less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of AMPS to
be determined as set forth in paragraph 10(e)(i)(D) if the
Applicable Rate determined on such Auction Date shall be equal to
the rate per annum specified therein; or
(3) a lesser number of Outstanding shares of AMPS to be determined
as set forth in paragraph 10(e)(ii)(C) if such specified rate per
annum shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Bids do not exist.
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(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding shares of AMPS
specified in such Sell Order; or
(2) such number or a lesser number of Outstanding
shares of AMPS to be determined as set forth in paragraph
10(e)(ii)(C) if Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an
irrevocable offer to purchase:
(1) the number of Outstanding shares of AMPS
specified in such Bid if the Applicable Rate determined on
such Auction Date shall be higher than the rate per annum
specified in such Bid; or
(2) such number or a lesser number of
Outstanding shares of AMPS to be determined as set forth in
paragraph 10(e)(i)(E) if the Applicable Rate determined on
such Auction Date shall be equal to the rate per annum
specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
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shares subject to Orders submitted to it by Potential Beneficial Owners, and
specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Corporation);
(B) the aggregate number of Outstanding shares of AMPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of AMPS
subject to any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of AMPS
subject to any Bid placed by such Existing Holder and the rate
per annum specified in such Bid; and
(3) the number of Outstanding shares, if any, of AMPS
subject to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate
per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more
than three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.
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(iii) If an Order or Orders covering all of the Outstanding
shares of AMPS held by an Existing Holder are not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent shall deem a Hold Order (in
the case of an Auction relating to a Dividend Period which is not a Special
Dividend Period of 28 days or more) and a Sell Order (in the case of an Auction
relating to a Special Dividend Period of 28 days or more) to have been submitted
on behalf of such Existing Holder covering the number of Outstanding shares of
AMPS held by such Existing Holder and not subject to Orders submitted to the
Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder
covering in the aggregate more than the number of Outstanding shares of AMPS
held by such Existing Holder are submitted to the Auction Agent, such Order
shall be considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder
shall be considered valid up to and including the number of
Outstanding shares of AMPS held by such Existing Holder;
provided that if more than one Hold Order is submitted on
behalf of such Existing Holder and the number of shares of
AMPS subject to such Hold Orders exceeds the number of
Outstanding shares of AMPS held by such Existing Holder, the
number of shares of AMPS subject to each of such Hold Orders
shall be reduced pro rata so that such Hold Orders, in the
aggregate, will cover exactly the number of Outstanding shares
of AMPS held by such Existing Holder;
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(B) any Bids submitted on behalf of such Existing Holder shall
be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted
on behalf of such Existing Holder, up to and including the
excess of the number of Outstanding shares of AMPS held by
such Existing Holder over the number of shares of AMPS subject
to any Hold Order referred to in paragraph 10(c)(iv)(A) above
(and if more than one Bid submitted on behalf of such Existing
Holder specifies the same rate per annum and together they
cover more than the remaining number of shares that can be the
subject of valid Bids after application of paragraph
10(c)(iv)(A) above and of the foregoing portion of this
paragraph 10(c)(iv)(B) to any Bid or Bids specifying a lower
rate or rates per annum, the number of shares subject to each
of such Bids shall be reduced pro rata so that such Bids, in
the aggregate, cover exactly such remaining number of shares);
and the number of shares, if any, subject to Bids not valid
under this paragraph 10(c)(iv)(B) shall be treated as the
subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and
including the excess of the number of Outstanding shares of
AMPS held by such Existing Holder over the number of shares of
AMPS subject to Hold Orders referred to in paragraph
10(c)(iv)(A) and Bids referred to in paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on
behalf of any Existing Holder and the number of shares of AMPS
subject to such Sell Orders is greater than such excess, the
number of shares of AMPS subject to each of such Sell Orders
shall be reduced
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pro rata so that such Sell Orders, in the aggregate, cover
exactly the number of shares of AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any
Potential Holder, each Bid submitted shall be a separate Bid with the rate per
annum and number of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction
Date, the Auction Agent shall assemble all Orders submitted or deemed submitted
to it by the Broker-Dealers (each such Order as submitted or deemed submitted by
a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of
AMPS over the number of Outstanding shares of AMPS that are
the subject of Submitted Hold Orders (such excess being
hereinafter referred to as the "Available AMPS");
(B) from the Submitted Orders whether the number of
Outstanding shares of AMPS that are the subject of Submitted
Bids by Potential Holders specifying one
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or more rates per annum equal to or lower than the Maximum
Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of AMPS
that are the subject of Submitted Bids by Existing Holders
specifying one or more rates per annum higher than the Maximum
Applicable Rate, and
(2) the number of Outstanding shares of AMPS
that are subject to Submitted Sell Orders (if such excess or
such equality exists (other than because the number of
Outstanding shares of AMPS in clause (1) above and this clause
(2) are each zero because all of the Outstanding shares of
AMPS are the subject of Submitted Hold Orders), such Submitted
Bids by Potential Holders being hereinafter referred to
collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per
annum specified in the Submitted Bids (the "Winning Bid Rate")
that if:
(1) each Submitted Bid from Existing Holders
specifying the Winning Bid Rate and all other Submitted Bids
from Existing Holders specifying lower rates per annum were
rejected, thus entitling such Existing Holders to continue to
hold the shares of AMPS that are the subject of such Submitted
Bids, and
(2) each Submitted Bid from Potential
Holders specifying the Winning Bid Rate and all other
Submitted Bids from Potential Holders specifying lower rates
per annum were accepted, thus entitling the Potential Holders
to purchase
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the shares of AMPS that are the subject of such Submitted
Bids, would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower rate
per annum being at least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the
determinations pursuant to paragraph 10(d)(i), the Auction Agent shall advise
the Corporation of the Maximum Applicable Rate and, based on such
determinations, the Applicable Rate for the next succeeding Dividend Period as
follows:
(A) if Sufficient Clearing Bids exist, that the Applicable
Rate for the next succeeding Dividend Period shall be equal to the Winning Bid
Rate;
(B) if Sufficient Clearing Bids do not exist (other than
because all of the Outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend Period shall
be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding shares of AMPS are the subject
of Submitted Hold Orders, that the Dividend Period next succeeding the Auction
shall automatically be the same length as the immediately preceding Dividend
Period and the Applicable Rate for the next succeeding Dividend Period shall be
equal to 40% of the Reference Rate (or 60% of such rate if the Corporation has
provided notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or
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other taxable income will be included in such dividend on
shares of AMPS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares. Based on the determinations made pursuant to
paragraph 10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as set
forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order of
priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying
any rate per annum that is higher than the Winning Bid Rate shall
be accepted, thus requiring each such Existing Holder to sell the
Outstanding shares of AMPS that are the subject of such Submitted
Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be
rejected, thus entitling each such Existing Holder to continue to
hold the Outstanding shares of AMPS that are the subject of such
Submitted Bid;
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(C) the Submitted Bid of each of the Potential Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be
accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be
rejected, thus entitling each such Existing Holder to continue to
hold the Outstanding shares of AMPS that are the subject of such
Submitted Bid, unless the number of Outstanding shares of AMPS
subject to all such Submitted Bids shall be greater than the number
of Outstanding shares of AMPS ("Remaining Shares") equal to the
excess of the Available AMPS over the number of Outstanding shares
of AMPS subject to Submitted Bids described in paragraph
10(e)(i)(B) and paragraph 10(e)(i)(C), in which event the Submitted
Bids of each such Existing Holder shall be accepted, and each such
Existing Holder shall be required to sell Outstanding shares of
AMPS, but only in an amount equal to the difference between (1) the
number of Outstanding shares of AMPS then held by such Existing
Holder subject to such Submitted Bid and (2) the number of shares
of AMPS obtained by multiplying (x) the number of Remaining Shares
by (y) a fraction the numerator of which shall be the number of
Outstanding shares of AMPS held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the sum of
the number of Outstanding shares of AMPS subject to such Submitted
Bids made by all such Existing Holders that specified a rate per
annum equal to the Winning Bid Rate; and
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(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be
accepted but only in an amount equal to the number of Outstanding
shares of AMPS obtained by multiplying (x) the difference between
the Available AMPS and the number of Outstanding shares of AMPS
subject to Submitted Bids described in paragraph 10(e)(i)(B),
paragraph 10(e)(i)(C) and paragraph 10(e)(i)(D) by (y) a fraction
the numerator of which shall be the number of Outstanding shares of
AMPS subject to such Submitted Bid and the denominator of which
shall be the sum of the number of Outstanding shares of AMPS
subject to such Submitted Bids made by all such Potential Holders
that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the Outstanding shares of AMPS are subject to Submitted Hold
Orders), subject to the provisions of paragraph 10(e)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable
Rate shall be rejected, thus entitling such Existing Holder to
continue to hold the Outstanding shares of AMPS that are the
subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable
Rate shall be accepted,
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thus requiring such Potential Holder to purchase the Outstanding
shares of AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be
accepted and the Submitted Sell Orders of each Existing Holder
shall be accepted, in both cases only in an amount equal to the
difference between (1) the number of Outstanding shares of AMPS
then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (2) the number of shares of AMPS obtained
by multiplying (x) the difference between the Available AMPS and
the aggregate number of Outstanding shares of AMPS subject to
Submitted Bids described in paragraph 10(e)(ii)(A) and paragraph
10(e)(ii)(B) by (y) a fraction the numerator of which shall be the
number of Outstanding shares of AMPS held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the number of Outstanding shares of
AMPS subject to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph
10(e)(i) or paragraph 10(e)(ii), any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of a share of AMPS on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine, round up or
down the number of shares of AMPS to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date so that each Outstanding share of AMPS
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date shall be a whole share of AMPS.
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(iv) If, as a result of the procedures described in paragraph
10(e)(i), any Potential Holder would be entitled or required to purchase less
than a whole share of AMPS on any Auction Date, the Auction Agent shall, in such
manner as in its sole discretion it shall determine, allocate shares of AMPS for
purchase among Potential Holders so that only whole shares of AMPS are purchased
on such Auction Date by any Potential Holder, even if such allocation results in
one or more of such Potential Holders not purchasing any shares of AMPS on such
Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of
Outstanding shares of AMPS to be purchased and the aggregate number of the
Outstanding shares of AMPS to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of Outstanding shares to
be purchased and such aggregate number of Outstanding shares to be sold differ,
the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers
acting for one or more purchasers such Broker-Dealer shall deliver, or from
which other Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, Outstanding shares of AMPS.
(f) Miscellaneous. The Corporation may interpret the provisions of
this paragraph 10 to resolve any inconsistency or ambiguity, remedy any formal
defect or make any other change or modification that does not substantially
adversely affect the rights of Beneficial Owners of AMPS. A Beneficial Owner or
an Existing Holder (A) may sell, transfer or otherwise dispose of shares of AMPS
only pursuant to a Bid or Sell Order in accordance with the procedures
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described in this paragraph 10 or to or through a Broker-Dealer, provided that
in the case of all transfers other than pursuant to Auctions such Beneficial
Owner or Existing Holder, its Broker-Dealer, if applicable, or its Agent Member
advises the Auction Agent of such transfer and (B) except as otherwise required
by law, shall have the ownership of the shares of AMPS held by it maintained in
book entry form by the Securities Depository in the account of its Agent Member,
which in turn will maintain records of such Beneficial Owner's beneficial
ownership. Neither the Corporation nor any Affiliate shall submit an Order in
any Auction. Any Beneficial Owner that is an Affiliate shall not sell, transfer
or otherwise dispose of shares of AMPS to any Person other than the Corporation.
All of the Outstanding shares of AMPS of a series shall be represented by a
single certificate registered in the name of the nominee of the Securities
Depository unless otherwise required by law or unless there is no Securities
Depository. If there is no Securities Depository, at the Corporation's option
and upon its receipt of such documents as it deems appropriate, any shares of
AMPS may be registered in the Stock Register in the name of the Beneficial Owner
thereof and such Beneficial Owner thereupon will be entitled to receive
certificates therefor and required to deliver certificates therefor upon
transfer or exchange thereof.
11. Securities Depository; Stock Certificates. (a) If there is a
Securities Depository, one certificate for all of the shares of AMPS of each
series shall be issued to the Securities Depository and registered in the name
of the Securities Depository or its nominee. Additional certificates may be
issued as necessary to represent shares of AMPS. All such certificates shall
bear a legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of AMPS contained in these
Articles Supplementary. Unless the Corporation
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shall have elected, during a Non-Payment Period, to waive this requirement, the
Corporation will also issue stop-transfer instructions to the Auction Agent for
the shares of AMPS. Except as provided in paragraph (b) below, the Securities
Depository or its nominee will be the Holder, and no Beneficial Owner shall
receive certificates representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all shares of AMPS of a
series shall be the Non-Payment Period Rate or there is no Securities
Depository, the Corporation may at its option issue one or more new certificates
with respect to such shares (without the legend referred to in paragraph 11(a))
registered in the names of the Beneficial Owners or their nominees and rescind
the stop-transfer instructions referred to in paragraph 11(a) with respect to
such shares.
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IN WITNESS WHEREOF, MUNIHOLDINGS CALIFORNIA INSURED FUND II, INC.
has caused these presents to be signed in its name and on its behalf by a duly
authorized officer, and attested by its Secretary, and the said officers of the
Corporation further acknowledge said instrument to be the corporate act of the
Corporation, and state under penalties of perjury that to the best of their
knowledge, information and belief the matters and facts herein set forth with
respect to approval are true in all material respects, all on , 2000.
MUNIHOLDINGS CALIFORNIA INSURED
FUND II, INC.
By ____________________________
Vice President
Attest:
- ---------------------------
Alice A. Pellegrino
Secretary
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EXHIBIT 14(a)
INDEPENDENT AUDITORS' CONSENT
MuniHoldings California Insured Fund II, Inc.:
We consent to the use in this Registration Statement on Form N-14 of our report
dated August 13, 1999 appearing in the Proxy Statement and Prospectus, which is
part of such Registration Statement, and to the reference to us under the
captions "Comparison of the Funds-Financial Highlights" and "Experts" also
appearing in such Proxy Statement and Prospectus.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1999
EXHIBIT 14(b)
INDEPENDENT AUDITORS' CONSENT
MuniHoldings California Insured Fund, Inc.:
We consent to the reference to us under the captions "Comparison of the
Funds-Financial Highlights" and "Experts" appearing in the Proxy Statement and
Prospectus, which is a part of this Registration Statement on Form N-14.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1999
EXHIBIT 14(c)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "The
Reorganization-Comparison of the Funds-Financial Highlights", "Selection of
Independent Auditors" and "Experts" and to the use of our report dated June 24,
1999 for MuniHoldings California Insured Fund III, Inc. included in the
Registration Statement (Form N-14 No. 333-0000) and related combined Preliminary
Proxy Statement and Prospectus of MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings California Insured Fund
III, Inc. and MuniHoldings California Insured Fund IV, Inc. filed with the
Securities and Exchange Commission.
Ernst & Young LLP
MetroPark, New Jersey
September 27, 1999 /s/ Ernst & Young LLP
