<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1998
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] PRE-EFFECTIVE AMENDMENT NO.
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO.
[_]
(CHECK APPROPRIATE BOX OR BOXES)
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MUNIHOLDINGS INSURED FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
ARTHUR ZEIKEL
MUNIHOLDINGS INSURED FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
PATRICK D. SWEENEY, ESQ. FUND ASSET FRANK P. BRUNO, ESQ. BROWN & WOOD LLP
MANAGEMENT, L.P. P.O. BOX 9011 ONE WORLD TRADE CENTER NEW YORK, NEW
PRINCETON, NEW JERSEY 08543-9011 YORK 10048-0557
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
--------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering.
[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES BEING BEING OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(2)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par
value) 7,705,000 shares $15.00 $115,575,000 $34,095
</TABLE>
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(1) Includes 1,005,000 shares subject to the Underwriter's over-allotment
option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
MUNIHOLDINGS INSURED FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
--------------------- ---------------------
PART A--INFORMATION REQUIRED IN A PROSPECTUS
<C> <S>
1.Outside Front Cover Page..................... Outside Front Cover Page
2.Inside Front and Outside Back Cover Pages.... Inside Front and Outside Back Cover Pages; Underwriting
3.Fee Table and Synopsis....................... Prospectus Summary; Fee Table
4.Financial Highlights......................... Not Applicable
5.Plan of Distribution......................... Prospectus Summary; Net Asset Value; Underwriting
6.Selling Shareholders......................... Not Applicable
7.Use of Proceeds.............................. Use of Proceeds; Investment Objective and Policies
8.General Description of the Registrant........ Prospectus Summary; The Fund; Investment Objective and Policies; Risks and
Special Considerations of Leverage; Investment Restrictions; Dividends and
Distributions; Automatic Dividend Reinvestment Plan; Mutual Fund Investment
Option
9.Management................................... Directors and Officers; Investment Advisory and Management Arrangements;
Custodian; Transfer Agent, Dividend Disbursing Agent and Registrar
10.Capital Stock, Long-Term Debt, and Other Se-
curities....................................... Description of Capital Stock
11.Defaults and Arrears on Senior Securities.... Not Applicable
12.Legal Proceedings............................ Not Applicable
13.Table of Contents of the Statement of Addi-
tional
Information................................ Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14.Cover Page................................... Not Applicable
15.Table of Contents............................ Not Applicable
16.General Information and History.............. Not Applicable
17.Investment Objective and Policies............ Prospectus Summary; Investment Objective and Policies; Investment
Restrictions
18.Management................................... Directors and Officers; Investment Advisory and Management Arrangements
19.Control Persons and Principal Holders of Se-
curities....................................... Investment Advisory and Management Arrangements
20.Investment Advisory and Other Services....... Investment Advisory and Management Arrangements; Custodian; Underwriting;
Transfer Agent, Dividend Disbursing Agent and Registrar; Legal Opinions;
Experts
21.Brokerage Allocation and Other Practices..... Portfolio Transactions
22.Tax Status................................... Taxes; Automatic Dividend Reinvestment Plan
23.Financial Statements......................... Report of Independent Auditors; Statement of Assets, Liabilities and Capital
</TABLE>
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 19, 1998
PROSPECTUS
6,700,000 SHARES
MUNIHOLDINGS INSURED FUND, INC.
COMMON STOCK
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MuniHoldings Insured Fund, Inc. (the "Fund") is a newly organized, non-
diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal income taxes. The Fund
seeks to achieve its investment objective by investing primarily in a portfolio
of long-term, investment grade municipal obligations the interest on which, in
the opinion of bond counsel to the issuer, is exempt from Federal income taxes.
The Fund intends to invest in municipal obligations that are rated investment
grade or, if unrated, are considered by Fund Asset Management, L.P. (the
"Investment Adviser") to be of comparable quality. Under normal circumstances,
at least 80% of the Fund's assets will be invested in municipal obligations
with remaining maturities of one year or more that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest.
Investors are advised to read this Prospectus carefully and retain it for
future reference.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. See "Prospectus Summary--Risk Factors and Special
Considerations."
Within approximately three months after completion of the offering of Common
Stock described herein, the Fund intends to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's capital will
actually be issued. INVESTORS SHOULD NOTE THE SPECIAL RISKS ASSOCIATED WITH THE
LEVERAGING OF THE COMMON STOCK. SEE "RISKS AND SPECIAL CONSIDERATIONS OF
LEVERAGE" AND "DESCRIPTION OF CAPITAL STOCK."
(Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO SALES LOAD PROCEEDS TO
PUBLIC (1)(2) FUND(3)
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<S> <C> <C> <C>
Per Share................................. $15.00 None $15.00
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Total(4).................................. $100,500,000 None $100,500,000
</TABLE>
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(1) The Investment Adviser or an affiliate will pay the Underwriter a
commission in the amount of % of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby. See
"Underwriting."
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deducting organizational and offering expenses payable by the Fund
estimated at $ .
(4) The Fund has granted the Underwriter an option to purchase up to an
additional 1,005,000 shares to cover over-allotments. If all such shares
are purchased, the total Price to Public and Proceeds to Fund will be
$115,575,000. See "Underwriting."
-------------
The shares are offered by the Underwriter, subject to prior sale, when, as
and if issued by the Fund and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares will be made in New York, New York on or about April ,
1998.
-------------
MERRILL LYNCH & CO.
-------------
The date of this Prospectus is April , 1998.
<PAGE>
(Continued from preceding page)
The Fund may invest all or a portion of its assets in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Fund to an alternative minimum tax. At times, the Fund may
seek to hedge its portfolio through the use of options and futures
transactions. There can be no assurance that the investment objective of the
Fund will be realized. The Fund is designed primarily for long-term investors
and should not be considered a vehicle for trading purposes. The address of
the Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2800.
Prior to this offering, there has been no public market for the Common Stock
of the Fund. Application will be made to list the Fund's Common Stock on the
New York Stock Exchange. However, during an initial period, which is not
expected to exceed two weeks from the date of this Prospectus, the Fund's
Common Stock will not be listed on any securities exchange. During such
period, the Underwriter does not intend to make a market in the Fund's Common
Stock. Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period.
The issuance of the preferred stock will result in leveraging of the Common
Stock. Although the terms of the preferred stock offering will be determined
by the Fund's Board of Directors, it is anticipated that the preferred stock
will pay dividends that will be adjusted over either relatively short-term
periods (generally seven to 28 days) or medium-term periods (up to five years)
and that the dividend rate will be based upon prevailing interest rates for
debt obligations of comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in accordance with the
Fund's investment objective. Because under normal market conditions,
obligations with longer maturities produce higher yields than short-term and
medium-term obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term rates paid
by the Fund and the longer-term rates received by the Fund will provide
holders of Common Stock with a potentially higher yield.
The Underwriter may engage in transactions that stabilize, maintain, or
otherwise affect the price of the Fund's Common Stock. Such transactions may
include stabilizing, the purchase of the Fund's Common Stock to cover short
positions and the imposition of penalty bids. For a description of these
activities, see "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE FUND MuniHoldings Insured Fund, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment
company. See "The Fund."
THE The Fund is offering 6,700,000 shares of Common Stock at an
OFFERING initial offering price of $15.00 per share. The Common Stock is
being offered by Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch" or the "Underwriter"). The
Underwriter has been granted an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to 1,005,000
additional shares of Common Stock to cover over-allotments. See
"Underwriting."
INVESTMENT The investment objective of the Fund is to provide shareholders
OBJECTIVE with current income exempt from Federal income taxes. The Fund
AND will seek to achieve its investment objective by investing
POLICIES primarily in a portfolio of long-term, investment grade
municipal obligations the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal income
taxes. The Fund intends to invest in municipal obligations that
are rated investment grade or, if unrated, are considered by
the Investment Adviser to be of comparable quality. Under
normal circumstances, at least 80% of the Fund's assets will be
invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the
timely payment of principal at maturity and interest. See
"Investment Objective and Policies."
LISTING Prior to this offering, there has been no public market for the
Common Stock of the Fund. Application will be made to list the
Fund's Common Stock on the New York Stock Exchange. However,
during an initial period which is not expected to exceed two
weeks from the date of this Prospectus, the Fund's shares of
Common Stock will not be listed on any securities exchange.
During such period, the Underwriter does not intend to make a
market in the Fund's shares of Common Stock. Consequently, it
is anticipated that an investment in the Fund will be illiquid
during such period. See "Underwriting."
LEVERAGE The Fund anticipates that it will be substantially invested in
longer-term municipal obligations within approximately three
months after completion of the offering of Common Stock
described herein. To leverage the Common Stock, the Fund
intends to offer shares of preferred stock within three months
after completion of this offering representing approximately
40% of the Fund's capital immediately after the issuance of
such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's
capital will actually be issued. The issuance of the preferred
stock will result in the leveraging of the Common Stock.
Although the terms of the preferred stock offering will be
determined by the Fund's Board of Directors, it is anticipated
that the preferred stock will pay dividends that will be
adjusted over either relatively short-term periods (generally
seven to 28 days) or medium-
3
<PAGE>
term periods (up to five years) and that the dividend rate will
be based upon prevailing interest rates for debt obligations of
comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in
accordance with the Fund's investment objective. Issuance and
ongoing expenses of the preferred stock will be borne by the
Fund and will reduce the net asset value of the Common Stock.
Additionally, under certain circumstances, when the Fund is
required to allocate taxable income to holders of preferred
stock, it is anticipated that the terms of the preferred stock
will require the Fund to make an additional distribution to
such holders in an amount approximately equal to the tax
liability resulting from such allocation and such additional
distribution (such amount, an "Additional Distribution").
The use of leverage by the Fund creates an opportunity for
increased net income, but, at the same time, creates special
risks. Because, under normal market conditions, obligations
with longer maturities produce higher yields than short-term
and medium-term obligations, the Investment Adviser believes
that the spread inherent in the difference between the short-
term and medium-term rates (and any Additional Distribution)
paid by the Fund and the longer-term rates received by the Fund
will provide holders of Common Stock with a potentially higher
yield. Investors should note, however, that leverage creates
certain risks for holders of Common Stock, including higher
volatility of both the net asset value and market value of the
Common Stock. Since any decline in the value of the Fund's
investments will be borne entirely by holders of Common Stock,
the effect of leverage in a declining market would result in a
greater decrease in net asset value than if the Fund were not
leveraged, which would likely be reflected in a decline in the
market price for shares of Common Stock. Additionally,
fluctuations in the dividend rates on, and the amount of
taxable income allocable to, the preferred stock will affect
the yield to holders of Common Stock. See "Risks and Special
Considerations of Leverage." Upon issuance of the preferred
stock, holders of the Common Stock will receive all net income
of the Fund remaining after payment of dividends (and any
Additional Distribution) on the preferred stock and will
generally be entitled to a pro rata share of net realized
capital gains. Upon any liquidation of the Fund, the holders of
shares of preferred stock will be entitled to receive
liquidating distributions (expected to equal the original
purchase price per share of preferred stock plus any
accumulated and unpaid dividends thereon and any accumulated
and unpaid Additional Distribution) before any distribution is
made to holders of Common Stock. See "Description of Capital
Stock--Preferred Stock."
Holders of preferred stock, voting as a separate class, will be
entitled to elect two of the Fund's Directors, and holders of
common and preferred stock, voting together as a single class,
will be entitled to elect the remaining Directors. If, at any
time, dividends on the Fund's preferred stock were to be in
arrears in an amount equal to two full years of dividend
payments, the holders of all outstanding shares of preferred
stock, voting as a separate class, would be entitled to elect a
majority of the Fund's Directors. The holders of preferred
stock will also vote separately on certain other matters as
required under the Fund's Articles of Incorporation, the
Investment Company Act of 1940, as amended (the "1940 Act") and
Maryland law, but otherwise will have equal voting rights with
holders of Common Stock (one vote per share) and will vote
together with holders of Common Stock as a single class. See
"Description of Capital Stock--Preferred Stock--Voting Rights."
4
<PAGE>
There can be no assurance that the Fund will be able to realize
a higher net return on its investment portfolio than the then
current dividend rate (and any Additional Distribution) on the
preferred stock. Changes in certain factors could cause the
relationship between the short-term and medium-term dividend
rates (and any Additional Distribution) paid by the Fund on the
preferred stock and the long-term rates received by the Fund on
its investment portfolio to change so that such short-term and
medium-term rates (and any Additional Distribution) may
substantially increase relative to rates on the long-term
obligations in which the Fund may be invested. Under such
conditions, the benefit of leverage to holders of Common Stock
will be reduced, and the Fund's leveraged capital structure
could result in a lower rate of return to holders of Common
Stock than if the Fund were not leveraged. The Fund will have
the authority to redeem the preferred stock for any reason and
may redeem all or part of the preferred stock if it anticipates
that the Fund's leveraged capital structure will result in a
lower rate of return to holders of the Common Stock than that
obtainable if the Common Stock were unleveraged for any
significant amount of time.
Prior to the time it offers the preferred stock, the Fund
intends to apply for ratings on such stock from one or more
NRSROs. The Fund believes that obtaining a rating for the
preferred stock will enhance the marketability of the preferred
stock and thereby reduce the dividend rate on the preferred
stock from that which the Fund would be required to pay if the
preferred stock were not rated.
INVESTMENT Fund Asset Management, L.P. is the Fund's investment adviser
ADVISER and is responsible for the management of the Fund's investment
portfolio and for providing administrative services to the
Fund. For its services, the Fund pays the Investment Adviser a
monthly fee at the annual rate of 0.55 of 1% of the Fund's
average weekly net assets, including proceeds from the sale of
preferred stock. The Investment Adviser is an affiliate of
Merrill Lynch Asset Management, L.P. ("MLAM"), which is owned
and controlled by Merrill Lynch & Co., Inc. ("ML & Co."). The
Investment Adviser or MLAM acts as the investment adviser for
over 100 registered management investment companies. The
Investment Adviser also offers portfolio management and
portfolio analysis services to individuals and institutions. As
of February 1998, the Investment Adviser and MLAM had a total
of approximately $479.6 billion in investment company and other
portfolio assets under management (approximately $36.0 billion
of which was invested in municipal securities), including
selected accounts of certain affiliates of the Investment
Adviser. See "Investment Advisory and Management Arrangements."
DIVIDENDS
AND
DISTRIBUTIONS
The Fund intends to pay dividends monthly and to distribute
substantially all of its net investment income to holders of
Common Stock. From and after issuance of the preferred stock,
monthly distributions to holders of Common Stock will consist
of substantially all net investment income remaining after the
payment of dividends (and any Additional Distribution) on the
preferred stock. It is expected that the Fund will commence
paying dividends to holders of Common Stock within
approximately 90 days from the date of this Prospectus. Net
capital gains (including new categories of capital gains,
discussed under "Taxes"), if any, will be distributed at least
annually to holders of Common Stock and, after issuance of the
preferred
5
<PAGE>
stock, on a pro rata basis to holders of Common Stock and
preferred stock. When capital gains or other taxable income is
allocated to holders of preferred stock, under certain
circumstances, it is anticipated that the terms of the
preferred stock will require the Fund to make an Additional
Distribution. The Fund is not permitted to declare any cash
dividend or other distribution on its Common Stock unless asset
coverage (as defined in the 1940 Act) with respect to the
Fund's preferred stock is at least 200%. If the Fund issues
preferred stock representing 40% of its capital after the time
of issuance, its asset coverage with respect to the preferred
stock will be approximately 250%. If the Fund's ability to make
distributions on its Common Stock is limited, this could under
certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated
investment company, which would have adverse tax consequences
for holders of Common Stock. See "Taxes."
AUTOMATIC All dividend and capital gains distributions will be
DIVIDEND automatically reinvested in additional shares of Common Stock
REINVESTMENTof the Fund unless a shareholder elects to receive cash.
PLAN Shareholders whose shares are held in the name of a broker or
nominee should contact such broker or nominee to confirm that
they may participate in the Fund's dividend reinvestment plan.
See "Automatic Dividend Reinvestment Plan."
MUTUAL Purchasers of shares of Common Stock of the Fund through
FUND Merrill Lynch in this offering will have an investment option
INVESTMENT consisting of the right to reinvest the net proceeds from a
OPTION sale of such shares (the "Original Shares") in Class D initial
sales charge shares of certain Merrill Lynch-sponsored open-end
mutual funds ("Eligible Class D Shares") at their net asset
value, without the imposition of the initial sales charge, if
the conditions set forth below are satisfied. First, the sale
of the Original Shares must be made through Merrill Lynch, and
the net proceeds therefrom must be immediately reinvested in
Eligible Class D Shares. Second, the Original Shares must have
been either acquired in this offering or be shares representing
reinvested dividends from shares of Common Stock acquired in
this offering. Third, the Original Shares must have been
continuously maintained in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to be eligible
for the investment option. Class D shares of the mutual funds
are subject to an account maintenance fee at an annual rate of
up to 0.25% of the average daily net asset value of such mutual
fund. See "Mutual Fund Investment Option."
6
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a newly organized, non-diversified, closed-end management
investment company and has no operating history. Shares of closed-end
investment companies frequently trade at a discount from their net asset value.
This risk may be greater for investors expecting to sell their shares in a
relatively short period after completion of the public offering. Accordingly,
the Common Stock of the Fund is designed primarily for long-term investors and
should not be considered a vehicle for trading purposes. The net asset value of
the Fund's shares of Common Stock will fluctuate with interest rate changes as
well as with price changes of the Fund's portfolio securities, and these
fluctuations are likely to be greater in the case of a fund having a leveraged
capital structure, as contemplated for the Fund. See "Risks and Special
Considerations of Leverage."
The Fund has registered as a "non-diversified" investment company so that it
will be able to invest more than 5% of its assets in the obligations of any
single issuer, subject to the diversification requirements of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to the
Fund. Since the Fund may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Fund may be more
susceptible than a more widely-diversified fund to any single economic,
political or regulatory occurrence.
The Fund intends to invest in municipal obligations that are rated in the
investment grade rating categories by Standard & Poor's ("S&P"), Moody's
Investors Service, Inc. ("Moody's") or Fitch IBCA, Inc. ("Fitch") or, if not
rated, are considered to be of comparable quality by the Investment Adviser.
Obligations rated in the lowest investment grade category may have certain
speculative characteristics. See "Investment Objective and Policies." The Fund
may invest in certain tax-exempt securities classified as "private activity
bonds" that may subject certain investors in the Fund to the alternative
minimum tax. See "Taxes--General."
The Fund will be subject to certain restrictions on investments imposed by
guidelines of the insurance companies issuing the portfolio insurance and to
guidelines of one or more NRSROs that may issue ratings for the preferred
stock. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. It is
not anticipated that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments that may be characterized as
derivatives. These investments include various types of options transactions
and futures and options thereon. Such investments also may consist of non-
municipal tax-exempt securities and securities the potential investment return
on which is based on the change in particular measurements of value or interest
rates ("indexed securities"), including securities the potential investment
return on which is inversely related to a change in particular measurements of
value or interest rates ("inverse securities"). Certain of such investments may
be made solely for hedging purposes, not for speculation, and may in some cases
require limitations as to the type of permissible counterparty to the
transaction. Investments in indexed securities, including inverse securities,
subject the Fund to the risks associated with changes in the particular
indices, which may include reduced or eliminated interest payments and losses
of invested principal. Derivative instruments may have certain characteristics
that have a similar effect on the return to Common Stock investors as the
leverage transactions discussed under "Risks and Special Considerations of
Leverage;"
7
<PAGE>
however, certain derivative investments will not be taken into account for
purposes of calculating the percentage of leverage of the Fund's portfolio. For
a further discussion of the risks associated with derivative investments, see
"Investment Objective and Policies," "Investment Objective and Policies--Other
Investment Policies--Indexed and Inverse Floating Obligations," "--Call Rights"
and "Investment Objective and Policies--Options and Futures Transactions."
Subject to its investment restrictions, the Fund is authorized to engage in
options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security that is the subject of the hedge and the inability to close futures
transactions under certain conditions. Because of the anticipated leveraged
nature of the Common Stock, hedging transactions will result in a larger impact
on the net asset value of the Common Stock than would be the case if the Common
Stock were not leveraged. Certain OTC options and assets used to cover OTC
options written by the Fund may be considered to be illiquid. The illiquidity
of such options or assets may prevent a successful sale of such options or
assets, result in a delay of sale, or reduce the amount of proceeds that might
be otherwise realized. See "Investment Objective and Policies--Options and
Futures Transactions." The Fund intends to apply for ratings of the preferred
stock from one or more NRSROs. In order to obtain these ratings, the Fund may
be required to limit its use of hedging techniques in accordance with the
specified guidelines of such NRSRO.
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. See "Description of Capital Stock--
Certain Provisions of the Articles of Incorporation."
8
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment Plan Fees....................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to shares of
Common Stock):
Management Fees(a)(b)................................................. 0.55%
Interest Payments on Borrowed Funds................................... None
Other Expenses(b)..................................................... 0.10%
----
Total Annual Expenses(b)............................................ 0.65%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
EXAMPLE ------ -------
<S> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) total annual expenses of 0.65%
(assuming no leverage) and 1.14% (assuming leverage) and (2) a
5% annual return throughout the periods:
Assuming No Leverage.......................................... $ 7 $21
Assuming Leverage............................................. $12 $36
</TABLE>
- --------
(a) See "Investment Advisory and Management Arrangements"--page 26.
(b) In the event that the Fund utilizes leverage by issuing preferred stock in
an amount of approximately 40% of the Fund's capital, it is estimated that,
as a percentage of net assets attributable to Common Stock, the Management
Fees would be 0.85%, Other Expenses would be 0.29% and Total Annual Expenses
would be 1.14%. See "Risks and Special Considerations of Leverage."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by Securities and Exchange Commission regulations. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
9
<PAGE>
THE FUND
MuniHoldings Insured Fund, Inc. (the "Fund") is a newly organized, non-
diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on March 11, 1998, and
has registered under the 1940 Act. The Fund's principal office is located at
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number
is (609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their
securities at the option of the shareholder, whereas open-end companies issue
securities redeemable at net asset value at any time at the option of the
shareholder and typically engage in a continuous offering of their shares.
Accordingly, open-end investment companies are subject to continuous asset in-
flows and out-flows that can complicate portfolio management. Shares of
closed-end investment companies, however, frequently trade at a discount from
their net asset value. This risk may be greater for investors expecting to
sell their shares in a relatively short period after completion of the public
offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-
allotment option in full) after payment of organizational and offering
expenses.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of Common Stock, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-
term, tax-exempt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with current
income exempt from Federal income taxes. The Fund seeks to achieve its
investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies or instrumentalities, paying interest that, in the
opinion of bond counsel to the issuer, is exempt from Federal income taxes
("Municipal Bonds"). The Fund, at all times, except during interim periods
pending investment of the net proceeds of public offerings of the Fund's
securities and during temporary defensive periods, the Fund will invest at
least 80% of its total assets in Municipal Bonds. Under normal circumstances,
at least 80% of the Fund's assets will be invested in municipal obligations
with remaining maturities of one year or more that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest. The
Fund 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
10
<PAGE>
may subject certain investors in the Fund to an alternative minimum tax. The
Fund will not invest more than 25% of its total assets (taken at market value)
in Municipal Bonds whose issuers are located in the same state. At times the
Fund may seek to hedge its portfolio through the use of futures transactions
and options to reduce volatility in the net asset value of its shares of
Common Stock. The investment objective of the Fund is a fundamental policy
that may not be changed without a vote of a majority of the Fund's outstanding
voting securities, as defined below under "Investment Restrictions." There can
be no assurance that the investment objective of the Fund will be realized.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the 1940 Act. Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term Municipal Bonds. Certain Non-Municipal Tax-
Exempt Securities may be characterized as derivative instruments. Non-
Municipal Tax-Exempt Securities will be considered "Municipal Bonds" for
purposes of the Fund's investment objective and policies.
Investment in shares of Common Stock of the Fund offers several potential
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal income taxes by investing in a professionally managed portfolio
comprised primarily of investment grade insured Municipal Bonds. Investment in
the Fund also relieves the investor of the burdensome administrative details
involved in managing a portfolio of Municipal Bonds. Additionally, the
Investment Adviser will seek to enhance the yield on the Common Stock by
leveraging the Fund's capital structure through the issuance of preferred
stock. The benefits are at least partially offset by the expenses involved in
operating an investment company. Such expenses primarily consist of the
advisory fee and operational costs. Additionally, the use of leverage involves
certain expenses and special risk considerations. See "Risks and Special
Considerations of Leverage."
The investment grade Municipal Bonds in which the Fund will primarily invest
are those Municipal Bonds rated at the date of purchase in the four highest
rating categories of S&P, Moody's or Fitch or, if unrated, are considered to
be of comparable quality by the Investment Adviser. In the case of long-term
debt, the investment grade rating categories are AAA through BBB for S&P, Aaa
through Baa for Moody's and AAA through BBB for Fitch. In the case of short-
term notes, the investment grade rating categories are SP-l+ through SP-3 for
S&P, MIG-1 through MIG-4 for Moody's and F-1+ through F-3 for Fitch. In the
case of tax-exempt commercial paper, the investment grade rating categories
are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-l+
through F-3 for Fitch. Obligations ranked in the fourth highest rating
category (BBB, SP-3 and A-3 for S&P; Baa, MIG-4 and Prime-3 for Moody's; and
BBB and F-3 for Fitch), while considered "investment grade," may have certain
speculative characteristics. There may be sub-categories or gradations
indicating relative standing within the rating categories set forth above. See
Appendix I to this Prospectus for a description of S&P's, Moody's and Fitch's
ratings of Municipal Bonds. In assessing the quality of Municipal Bonds with
respect to the foregoing requirements, the Investment Adviser will take into
account the portfolio insurance as well as the nature of any letters of credit
or similar credit enhancements to which particular Municipal Bonds are
entitled and the creditworthiness of the insurance company or the financial
institution that provided such insurance or credit enhancements. Consequently,
if Municipal Bonds are covered by insurance policies issued by
11
<PAGE>
insurers whose claims-paying ability is rated AAA by S&P or Fitch or Aaa by
Moody's, the Investment Adviser may consider such municipal obligations to be
equivalent to AAA- or Aaa- rated securities, as the case may be, even though
such Municipal Bonds would generally be assigned a lower rating if the rating
were based primarily upon the credit characteristics of the issuers without
regard to the insurance feature. The insured Municipal Bonds must also comply
with the standards applied by the insurance carriers in determining
eligibility for portfolio insurance.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations, in the opinion of counsel to the issuer,
that contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short
notice period not to exceed seven days. Participating VRDOs provide the Fund
with a specified undivided interest (up to 100%) in the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Fund has been advised by
its counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio
can be expected to decline. Prices of longer-term securities generally
fluctuate more in response to interest rate changes than do short-term or
medium-term securities. These changes in net asset value are likely to be
greater in the case of a fund having a leveraged capital structure, as
proposed for the Fund. See "Risks and Special Considerations of Leverage."
The Fund intends to invest primarily in long-term Municipal Bonds with a
maturity of more than ten years. Also, the Fund may invest in intermediate-
term Municipal Bonds with a maturity of between three years and ten years. The
Fund may invest in short-term, tax-exempt securities, short-term U.S.
Government securities, repurchase agreements or cash. Such short-term
securities or cash will not exceed 20% of its total assets except during
interim periods pending investment of the net proceeds of public offerings of
the Fund's securities or in anticipation of the repurchase or redemption of
the Fund's securities and temporary periods when, in the opinion of the
Investment Adviser, prevailing market or economic conditions warrant. The Fund
does not ordinarily intend to realize significant interest income not exempt
from Federal income taxes.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for special tax
treatment afforded regulated investment companies under the Code. See "Taxes."
To qualify, among other requirements, the Fund will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities (other than U.S. Government securities) of a
12
<PAGE>
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities (other than U.S. Government securities) of a single
issuer. A fund that elects to be classified as "diversified" under the 1940
Act must satisfy the foregoing 5% requirement with respect to 75% of its total
assets. To the extent that the Fund assumes large positions in the securities
of a small number of issuers, the Fund's yield may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's assets will be
invested in Municipal Bonds either (i) insured under an insurance policy
purchased by the Fund or (ii) insured under an insurance policy obtained by
the issuer thereof or any other party. The Fund will seek to limit its
investments to municipal bonds insured under insurance policies issued by
insurance carriers that have total admitted assets (unaudited) of at least
$75,000,000 and capital and surplus (unaudited) of at least $50,000,000 and
insurance claims-paying ability ratings of AAA from S&P or Fitch or Aaa from
Moody's. There can be no assurance that insurance from insurance carriers
meeting these criteria will be at all times available. See Appendix II to this
Prospectus for a brief description of S&P's, Fitch's and Moody's insurance
claims-paying ability ratings. Currently, it is anticipated that a majority of
the Municipal Bonds in the Fund's portfolio will be insured by the following
insurance companies that satisfy the foregoing criteria: AMBAC Indemnity
Corporation, Financial Guaranty Insurance Company, Financial Security
Assurance and Municipal Bond Investors Assurance Corporation. The Fund also
may purchase Municipal Bonds covered by insurance issued by any other
insurance company that satisfies the foregoing criteria. It is anticipated
that initially a majority of insured Municipal Bonds held by the Fund will be
insured under policies obtained by parties other than the Fund.
The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible Municipal Bonds purchased by the Fund. A Municipal Bond will be
eligible for coverage if it meets certain requirements of the insurance
company set forth in a Policy. In the event interest or principal on an
insured 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 Municipal Bonds
beneficially owned by the Fund. In the event of a sale of any Municipal Bonds
held by the Fund, the issuer of the relevant Policy will be liable only for
those payments of interest and principal that are then due and owing. The
Policies will not guarantee the market value of the insured Municipal Bonds or
the value of the shares of the Fund.
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities
remain in the Fund's portfolio. In addition, the insurer may not cancel its
Policies for any reason except failure to pay premiums when due. The Board of
Directors of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately .02 of 1% to .15 of 1% of the principal amount of the Municipal
Bonds covered by such Policies.
13
<PAGE>
The estimate is based on the expected composition of the Fund's portfolio of
Municipal Bonds. Additional information regarding the Policies is set forth in
Appendix II to this Prospectus. In instances in which the Fund purchases
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 Municipal
Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place
a value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser's ability to manage
the portfolio may be limited to the extent it holds defaulted securities,
which may limit its ability in certain circumstances to purchase other
Municipal Bonds. See "Net Asset Value" below for a more complete description
of the Fund's method of valuing defaulted securities and securities that have
a significant risk of default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Directors 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 Municipal Bonds held in the Fund's portfolio.
Although the Investment Adviser periodically reviews the financial condition
of each insurer, there can be no assurance that the insurers will be able to
honor their obligations under all circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Municipal Bonds will not receive
timely scheduled payments of principal or interest). However, the insured
Municipal Bonds are subject to market risk (i.e., fluctuations in market value
as a result of changes in prevailing interest rates).
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to finance various privately-operated facilities, including
certain local facilities for water supply, gas, electricity, sewage or solid
waste disposal. For purposes of this Prospectus, such obligations are
Municipal Bonds if the interest paid thereon is exempt from Federal income
tax, even though such bonds may be industrial development bonds ("IDBs") or
"private activity bonds" as discussed below. Also, for purposes of this
Prospectus, Non-Municipal Tax-Exempt securities as discussed above will be
considered Municipal Bonds.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds, which latter category includes IDBs
and, for bonds issued after August 15, 1986, private activity bonds. General
obligation bonds are secured by the issuer's pledge of faith, credit and
taxing power for the 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
14
<PAGE>
or other specific revenue source such as from the user of the facility being
financed. IDBs are in most cases revenue bonds and do not generally constitute
the pledge of the credit or taxing power of the issuer of such bonds. The
repayment of principal and the payment of interest on such industrial
development bonds depends solely on the ability of the user of the facility
financed by the bonds to meet its financial obligations and the pledge, if
any, of real and personal property so financed as security for such payment.
Municipal Bonds may also include "moral obligation" bonds, which are normally
issued by special purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of such bonds becomes a
moral commitment but not a legal obligation of the state or municipality in
question.
The Fund may purchase Municipal Bonds classified as "private activity bonds"
(in general, bonds that benefit non-governmental entities). Interest received
on certain tax-exempt securities that are classified as "private activity
bonds" may subject certain investors in the Fund to an alternative minimum
tax. There is no limitation on the percentage of the Fund's assets that may be
invested in Municipal Bonds that may subject certain investors to an
alternative minimum tax. See "Taxes--General." Also included within the
general category of Municipal Bonds are participation certificates issued by
government authorities or entities to finance the acquisition or construction
of equipment, land and/or facilities. The certificates represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations do
not constitute general obligations of the issuer for which the issuer's
unlimited taxing power is pledged, a lease obligation frequently is backed by
the issuer's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses, which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known,
as 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.
15
<PAGE>
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Municipal Bonds on a delayed delivery basis or on a when-
issued basis at fixed purchase or sale terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment, and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery day may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or liquid securities having a market value at all
times at least equal to the amount of the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in Municipal
Bonds the return on which is based on a particular index of value or interest
rates. For example, the Fund may invest in Municipal Bonds that pay interest
based on an index of Municipal Bond interest rates. The principal amount
payable upon maturity of certain Municipal Bonds also may be based on the
value of an index. To the extent the Fund invests in these types of Municipal
Bonds, the Fund's return on such Municipal Bonds will be subject to risk with
respect to the value of the particular index. Also, the Fund may invest in so-
called "inverse floating obligations" or "residual interest bonds" on which
the interest rates typically vary inversely with a short-term floating rate
(which may be reset periodically by a dutch auction, a remarketing agent, or
by reference to a short-term tax-exempt interest rate index). The Fund may
purchase in the secondary market synthetically-created inverse floating rate
bonds evidenced by custodial or trust receipts. Generally, interest rates on
inverse floating rate bonds will decrease when short-term rates increase, and
will increase when short-term rates decrease. Such securities have the effect
of providing a degree of investment leverage, since they may increase or
decrease in value in response to changes, as an illustration, in market
interest rates at a rate that is a multiple (typically two) of the rate at
which fixed-rate, long-term, tax-exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
generally will be more volatile than the market values of fixed-rate tax-
exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
limitations on the extent to which the interest rate may vary. The Investment
Adviser believes that indexed and inverse floating obligations represent a
flexible portfolio management instrument for the Fund that allows the
Investment Adviser to vary the degree of investment leverage relatively
efficiently under different market conditions.
Call Rights. The Fund may purchase a Municipal Bond issuer's right to call
all or a portion of such Municipal Bond for mandatory tender for purchase (a
"Call Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Municipal Bond will expire without value. The economic effect
of holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
16
<PAGE>
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts and options thereon. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of the Common Stock, the net asset value of the Common Stock will fluctuate.
There can be no assurance that the Fund's hedging transactions will be
effective. In addition, because of the anticipated leveraged nature of the
Common Stock, hedging transactions will result in a larger impact on the net
asset value of the Common Stock than would be the case if the Common Stock
were not leveraged. Furthermore, the Fund will only engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in interest rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the preferred stock from one or more NRSROs, the
Fund may be required to limit its use of hedging techniques in accordance with
the specified guidelines of such organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and
risks associated therewith. The investment policies with respect to the
hedging transactions of the Fund are not fundamental policies and may be
modified by the Board of Directors of the Fund without the approval of the
Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Municipal Bonds it owns, thereby giving the holder of
the option the right to buy the underlying security covered by the option from
the Fund at the stated exercise price until the option expires. The Fund
writes only covered call options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the option. The Fund may not write covered call options
on underlying securities in an amount exceeding 15% of the market value of its
total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing
17
<PAGE>
sale transaction; profit or loss from the sale will depend on whether the
amount received is more or less than the premium paid for the put option plus
the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale
of an identical option prior to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
that it intends to purchase. The Fund will not purchase options on securities
if, as a result of such purchase, the aggregate cost of all outstanding
options on securities held by the Fund would exceed 5% of the market value of
the Fund's total assets.
Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in Municipal Bonds against declines in
value and to hedge against increases in the cost of securities it intends to
purchase. A financial futures contract obligates the seller of a contract to
deliver and the purchaser of a contract to take delivery of the type of
financial instrument covered by the contract or, in the case of index-based
futures contracts, to make and accept a cash settlement, at a specific future
time for a specified price. A sale of financial futures contracts may provide
a hedge against a decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase in the value
of the position in the financial futures contracts. A purchase of financial
futures contracts may provide a hedge against an increase in the cost of
securities intended to be purchased because such appreciation may be offset,
in whole or in part, by an increase in the value of the position in the
futures contracts.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately
5% of the contract amount must be deposited with the broker. This amount is
known as initial margin. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the
financial futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging Municipal Bonds that
the Fund holds or anticipates purchasing against adverse changes in interest
rates. The Fund also may purchase and sell financial futures contracts on U.S.
Government securities and purchase and sell put and call options on such
financial futures contracts for such hedging purposes. With respect to U.S.
Government securities, currently there are financial futures contracts based
on long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the
Municipal Bonds in which the Fund invests to make such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and
18
<PAGE>
terms negotiated by the buyer and seller. See "Restrictions on OTC Options"
below for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and Municipal
Bonds may be adversely affected by economic, political, legislative or other
developments that have a disparate impact on the respective markets for such
securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that
the Fund adheres to certain restrictions. In particular, the Fund may purchase
and sell financial futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes do not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Although certain risks are involved in options and futures transactions, the
Investment Adviser believes that, because the Fund will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to Municipal Bond
options may be limited, and it is impossible to predict the amount of trading
interest that may exist in such options. In addition, there can be no
assurance that viable exchange markets will continue to be available.
19
<PAGE>
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately three months after the completion of the offering of
shares of Common Stock, the Fund intends to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's capital will
actually be issued. The issuance of the preferred stock will result in the
leveraging of the Common Stock. Although the terms of the preferred stock
offering will be determined by the Fund's Board of Directors, it is
anticipated that the preferred stock will pay dividends that will be adjusted
over either relatively short-term periods (generally seven to 28 days) or
medium-term periods (up to five years) and that the dividend rate will be
based upon prevailing interest rates for debt obligations of comparable
maturity. The proceeds of the preferred stock offering will be invested in
longer-term obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne by the Fund
and will reduce the net asset value of the Common Stock. Additionally, under
certain circumstances, when the Fund is required to allocate taxable income to
holders of preferred stock, it is anticipated that the terms of the preferred
stock will require the Fund to make an additional distribution to such holders
in an amount
20
<PAGE>
approximately equal to the tax liability resulting from such allocation and
such additional distribution (such amount, an "Additional Distribution").
Because under normal market conditions, obligations with longer maturities
produce higher yields than short-term and medium-term obligations, the
Investment Adviser believes that the spread inherent in the difference between
the short-term and medium-term rates (and any Additional Distribution) paid by
the Fund as dividends on the preferred stock and the longer-term rates
received by the Fund will provide holders of Common Stock with a potentially
higher yield.
Utilization of leverage, however, involves certain risks to the holders of
Common Stock. For example, issuance of the preferred stock may result in
higher volatility of the net asset value of the Common Stock and potentially
more volatility in the market value of the Common Stock. In addition,
fluctuations in the short-term and medium-term dividend rates on, and the
amount of taxable income allocable to, the preferred stock will affect the
yield to holders of Common Stock. So long as the Fund, taking into account the
costs associated with the preferred stock and the Fund's operating expenses,
is able to realize a higher net return on its investment portfolio than the
then current dividend rate (and any Additional Distribution) of the preferred
stock, the effect of leverage will be to cause holders of Common Stock to
realize a higher current rate of return than if the Fund were not leveraged.
Similarly, since a pro rata portion of the Fund's net realized capital gains
on its investment assets are generally payable to holders of Common Stock if
net capital gains are realized by the Fund, the effect of leverage will be to
increase the amount of such gains distributed to holders of Common Stock.
However, short-term, medium-term and long-term interest rates change from time
to time as does their relationship to each other (i.e., the slope of the yield
curve) depending upon such factors as supply and demand forces, monetary and
tax policies and investor expectations. Changes in any or all of such factors
could cause the relationship between short-term, medium-term and long-term
rates to change (i.e, to flatten or to invert the slope of the yield curve) so
that short-term and medium-term rates may substantially increase relative to
the long-term obligations in which the Fund may be invested. To the extent
that the current dividend rate (and any Additional Distribution) on the
preferred stock approaches the net return on the Fund's investment portfolio,
the benefit of leverage to holders of Common Stock will be reduced, and if the
current dividend rate (and any Additional Distribution) on the preferred stock
were to exceed the net return on the Fund's portfolio, the Fund's leveraged
capital structure would result in a lower rate of return to holders of Common
Stock than if the Fund were not leveraged. Similarly, since both the cost
associated with the issuance of preferred stock and any decline in the value
of the Fund's investments (including investments purchased with the proceeds
from any preferred stock offering) will be borne entirely by holders of Common
Stock, the effect of leverage in a declining market would result in a greater
decrease in net asset value to holders of Common Stock than if the Fund were
not leveraged.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Code. See "Taxes." The Fund intends, however, to
take all measures necessary to continue to make Common Stock dividend
payments. If the Fund's current investment income were not sufficient to meet
dividend requirements on either the Common Stock or the preferred stock, it
could be necessary for the Fund to liquidate certain of its investments. In
addition, the Fund will have the authority to redeem the preferred stock for
any reason and may redeem all or part of the preferred stock if (i) it
anticipates that the Fund's leveraged capital structure will result in a lower
rate of return for any significant amount of time to holders of the Common
Stock than that obtainable if the Common Stock were unleveraged, (ii) the
asset coverage for the preferred stock declines below 200% either as a result
of a decline in the value of the Fund's portfolio investments or as a result
of the repurchase of Common Stock in tender offers, or (iii) in order to
maintain the asset coverage guidelines established by the NRSROs that have
rated the preferred stock.
21
<PAGE>
Redemption of the preferred stock or insufficient investment income to make
dividend payments, may reduce the net asset value of the Common Stock and
require the Fund to liquidate a portion of its investments at a time when it
may be disadvantageous, in the absence of such extraordinary circumstances, to
do so.
Assuming the utilization of leverage by the issuance of preferred stock that
pays dividends at a rate that generally will be adjusted every 28 days in an
amount representing approximately 40% of the Fund's capital at an annual
dividend rate of 3.40% payable on such preferred stock based on market rates
as of the date of this Prospectus, the annual return that the Fund's portfolio
must experience (net of expenses) in order to cover such dividend payments
would be 1.36%.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of the leverage obtained by the issuance of
preferred stock representing approximately 40% of the Fund's capital, assuming
hypothetical annual returns on the Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and decreases the return when the portfolio
return is negative. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses)................................. (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return.................. (19)% (11)% (2)% 6% 14%
</TABLE>
Leveraging of the Common Stock cannot be fully achieved until preferred
stock is issued and the proceeds of the offering of preferred stock have been
invested in long-term Municipal Bonds.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term or medium-term rates or other
change in market conditions to the point where the Fund's leverage could
adversely affect holders of Common Stock as noted above, or in anticipation of
such changes, the Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of Common Stock. The Fund also may attempt to reduce the
degree to which it is leveraged by redeeming preferred stock pursuant to the
provisions of the Fund's Articles Supplementary establishing the rights and
preferences of the preferred stock or otherwise purchasing shares of preferred
stock. Purchases and redemptions of preferred stock, whether on the open
market or in negotiated transactions, are subject to limitations under the
1940 Act. In determining whether or not it is in the best interest of the Fund
and its stockholders to redeem outstanding preferred stock, the Board of
Directors will take into account a variety of factors including market
conditions, the ratio of preferred stock to Common Stock and the expenses
associated with such redemption. If market conditions subsequently change, the
Fund may sell previously unissued shares of preferred stock or shares of
preferred stock that the Fund previously issued but later repurchased or
redeemed.
The Fund intends to apply for ratings of the preferred stock from one or
more NRSROs. In order to obtain these ratings, the Fund may be required to
maintain portfolio holdings meeting specified guidelines of such
organizations. These guidelines may impose asset coverage requirements that
are more stringent than those imposed by the 1940 Act. It is not anticipated
that these guidelines will impede the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies. Ratings on preferred stock issued by the Fund should not be confused
with ratings on obligations held by the Fund.
22
<PAGE>
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding
preferred stock (expected to equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated and unpaid Additional Distribution). In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Stock unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or distribution) is at least 200% of such liquidation value.
Under the Fund's proposed capital structure, assuming the sale of shares of
preferred stock representing approximately 40% of the Fund's capital, the net
asset value of the Fund's portfolio is expected to be approximately 250% of
the liquidation value of the Fund's preferred stock. To the extent possible,
the Fund intends to purchase or redeem shares of preferred stock from time to
time to maintain coverage of preferred stock of at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred stock, may not be changed without the approval of
the holders of a majority of the Fund's outstanding shares of Common Stock
(which for this purpose and under the 1940 Act means the lesser of (i) 67% of
the shares of Common Stock represented at a meeting at which more than 50% of
the outstanding shares of Common Stock are represented or (ii) more than 50%
of the outstanding shares). Subsequent to the issuance of the preferred stock,
the following investment restrictions may not be changed without the approval
of a majority of the outstanding shares of Common Stock and of the outstanding
shares of preferred stock, voting together as a class, and the approval of a
majority of the outstanding shares of preferred stock, voting separately as a
class. The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase
Municipal Bonds and other debt securities and enter into repurchase
agreements in accordance with its investment objective, policies and
limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors without shareholder approval, provide
that the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of
23
<PAGE>
other investment companies except if immediately thereafter not more than
(i) 3% of the total outstanding voting stock of such company is owned by
the Fund, (ii) 5% of the Fund's total assets, taken at market value, would
be invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on Municipal Bonds, U.S. Government
obligations and related indices or otherwise in connection with bona fide
hedging activities and may purchase and sell Call Rights to require
mandatory tender for the purchase of related Municipal Bonds.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. Because of the affiliation of Merrill Lynch with the
Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in
which it acts as principal. An exemptive order has been obtained that permits
the Fund to effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such
order. The Fund may consider in the future requesting an order permitting
other principal transactions with Merrill Lynch, but there can be no assurance
that such application will be made and, if made, that such order would be
granted.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (65)--President and Director (1)(2)--Chairman of the
Investment Adviser and MLAM (which terms, as used herein, include their
corporate predecessors) since 1997; President of the Investment Adviser and
MLAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997, Director since 1993 and President from 1993 to 1997;
Executive Vice President of ML & Co. since 1990.
24
<PAGE>
Ronald W. Forbes (57)--Director (2)--1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989.
Cynthia A. Montgomery (45)--Director (2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate
School of Business Administration, The University of Michigan from 1979 to
1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.
Charles C. Reilly (66)--Director (2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania, from 1989
to 1990; Partner, Small Cities Cable Television since 1986.
Kevin A. Ryan (65)--Director (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.
Richard R. West (60)--Director (2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus
of New York University, Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company) and Alexander's Inc. (real estate company).
Terry K. Glenn (57)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of Merrill
Lynch Funds Distributor, Inc. ("MLFD") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (53)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
Donald C. Burke (37)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Kenneth A. Jacob (47)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997.
William R. Bock, (62)--Vice President and Portfolio Manager (1)(2)--Vice
President of MLAM since 1989.
Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of MLFD since
1981 and Treasurer since 1984.
Patrick D. Sweeney (43)--Secretary (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
25
<PAGE>
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors,
and the remaining Directors will be elected by all holders of capital stock,
voting as a single class. See "Description of Capital Stock."
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser an
annual fee of $2,000 per year plus $400 per meeting attended, together with
such Director's actual out-of-pocket expenses relating to attendance at
meetings. The Fund also pays members of its Audit Committee, which consists of
all of the Directors not affiliated with the Investment Adviser, an annual fee
of $900. The Chairman of the Audit Committee receives an additional fee of
$1,000 per year.
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31, 1997 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
affiliated Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSE TO DIRECTORS
- ---------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Ronald W. Forbes(1)......... $4,500 None $153,500
Cynthia A. Montgomery(1).... $4,500 None $153,500
Charles C. Reilly(1)........ $5,500 None $313,000
Kevin A. Ryan(1)............ $4,500 None $153,500
Richard R. West(1).......... $4,500 None $299,000
</TABLE>
- --------
(1) The Directors serve on the boards of other FAM/MLAM Advised Funds as
follows: Mr. Forbes (26 registered investment companies consisting of 39
portfolios); Ms. Montgomery (26 registered investment companies consisting
of 39 portfolios); Mr. Reilly (44 registered investment companies consisting
of 57 portfolios); Mr. Ryan (26 registered investment companies consisting
of 39 portfolios); and Mr. West (45 registered investment companies
consisting of 67 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM and is owned and controlled
by ML & Co., a financial services holding company. The Investment Adviser will
provide the Fund with investment advisory and management services. The
Investment Adviser or MLAM acts as the investment adviser for over 100 other
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of February 1998, the Investment Adviser and MLAM had a total of approximately
$479.6 billion in investment company and other portfolio assets under
management (approximately $36.0 billion of which were invested in municipal
securities), including selected accounts of certain affiliates of the
Investment Adviser. The principal business address of the Investment Adviser
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
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The Investment Advisory Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the supervision of
the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors. The Fund's portfolio
manager will consider analyses from various sources (including brokerage firms
with which the Fund does business), make the necessary investment decisions,
and place orders for transactions accordingly. The Investment Adviser will
also be responsible for the performance of certain administrative and
management services for the Fund. William R. Bock is the portfolio manager for
the Fund and is primarily responsible for the Fund's day-to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the issuance of
shares of preferred stock, minus the sum of accrued liabilities of the Fund
and accumulated dividends on the shares of preferred stock). For purposes of
this calculation, average weekly net assets are determined at the end of each
month on the basis of the average net assets of the Fund for each week during
the month. The assets for each weekly period are determined by averaging the
net assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, stock certificates and shareholder reports,
charges of the custodian and the transfer and dividend disbursing agent and
registrar, fees and expenses with respect to the issuance of preferred stock,
Securities and Exchange Commission fees, fees and expenses of unaffiliated
Directors, accounting and pricing costs, insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, mailing and
other expenses properly payable by the Fund. Accounting services are provided
to the Fund by the Investment Adviser, and the Fund reimburses the Investment
Adviser for its costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client
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of the Investment Adviser or its affiliates during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provided supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses
of the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information.
The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Under
the 1940 Act, except as permitted by exemptive order, persons affiliated with
the Fund are prohibited from dealing with the Fund as principal in the
purchase and sale of securities. Since transactions in the over-the-counter
market usually involve transactions with dealers acting as principal for their
own account, the Fund will not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions except that,
pursuant to an
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exemptive order obtained by the Investment Adviser, the Fund may engage in
principal transactions with Merrill Lynch in high quality, short-term, tax-
exempt securities. See "Investment Restrictions." An affiliated person of the
Fund may serve as its broker in over-the-counter transactions conducted on an
agency basis.
The Fund may also purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons
appears advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances after
the Fund's portfolio is invested in accordance with its investment objective,
will be less than 100%. The portfolio turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by the monthly average of the value of the portfolio securities
owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared and paid monthly to holders of
Common Stock. It is expected that the Fund will commence paying dividends to
holders of Common Stock within approximately 90 days of the date of this
Prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of Common Stock normally will consist of
substantially all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the preferred stock. All net
realized capital gains (including new categories of capital gains, discussed
below under "Taxes"), if any, will be distributed pro rata at least annually
to holders of Common Stock and any preferred stock. While any shares of
preferred stock are outstanding, the Fund may not declare any cash dividend or
other distribution on its Common Stock, unless at the time of such
declaration, (i) all accumulated preferred stock dividends, including any
Additional Distribution, have been paid, and (ii) the net asset value of the
Fund's portfolio (determined after deducting the amount of such dividend or
other distribution) is at least 200% of the liquidation value of the
outstanding preferred stock (expected to equal the original purchase price of
the outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated but unpaid Additional Distribution). If
the Fund's ability to make distributions on its Common Stock is limited, such
limitation could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company,
which would have adverse tax consequences for holders of Common Stock. See
"Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of Common Stock may be
automatically reinvested in shares of Common Stock of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
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TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Fund intends to distribute substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Fund that are
attributable to interest on tax-exempt obligations and designated by the Fund
as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security and railroad retirement benefits subject to Federal
income taxes. Interest on indebtedness incurred or continued to purchase or
carry Fund shares is not deductible for Federal income tax purposes to the
extent attributable to exempt-interest dividends. Each shareholder is advised
to consult a tax adviser with respect to whether exempt-interest dividends
retain the exclusion under Code Section 103(a) if such shareholder would be
treated as a "substantial user" or "related person" under Code Section 147(a)
with respect to property financed with the proceeds of an issue of "industrial
development bonds" or "private activity bonds," if any, held by the Fund.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions
will be considered taxable ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the shareholder has owned Fund shares. Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any exempt-interest dividends, ordinary income dividends or capital gain
dividends, as well as the amount of capital gain dividends in the different
categories of capital gain referred to above. Distributions by the
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Fund, whether from exempt-income, ordinary income or capital gains, will not
be eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January that was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Internal Revenue Service (the "Service") has taken the position in a
revenue ruling that if a RIC has more than one class shares, it may designate
distributions made to each class in any year as consisting of no more than
such class's proportionate share of particular types of income, including
exempt-interest income and net long-term capital gains (including the
additional categories of capital gains discussed above). A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the RIC during such year that was
paid to such class. Consequently, when both Common Stock and preferred stock
are outstanding, the Fund intends to designate distributions made to the
classes as consisting of particular types of income in accordance with the
classes' proportionate shares of such income. Thus, the Fund will designate
dividends paid as exempt-interest dividends in a manner that allocates such
dividends among the holders of Common Stock and preferred stock in proportion
to the total dividends paid to each class during the taxable year, or
otherwise as required by applicable law. Capital gain dividends (including the
additional categories of capital gains discussed above) will similarly be
allocated among the classes in proportion to the total dividends paid to each
class during the taxable year, or otherwise as required by applicable law.
When capital gain or other taxable income is allocated to holders of preferred
stock pursuant to the allocation rules described above, the terms of the
preferred stock may require the Fund to make an additional distribution to or
otherwise compensate such holders for the tax liability resulting from such
allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and that benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" that could subject certain investors
in such bonds, including shareholders of the Fund, to an increased alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after its taxable year-end the
portion of its dividends declared during the year that constitutes an item of
tax preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be
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included in adjusted current earnings, a corporate shareholder may be required
to pay an alternative minimum tax on exempt-interest dividends paid by the
Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on nontraditional instruments
could be recharacterized as taxable ordinary income.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. Upon any
failure to meet the asset coverage requirements of the 1940 Act, the Fund, in
its sole discretion, may redeem shares of preferred stock in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to qualify as a RIC. There can be no
assurance, however, that any such action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred stock that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such preferred stock
are "preferential" under the Code and, therefore, not eligible for the
dividends paid deduction. The Fund intends to issue preferred stock that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the Service to that effect. If the Fund
ultimately relies solely on a legal opinion when it issues such preferred
stock, there is no assurance that the Service would agree that dividends on
the preferred stock are not preferential. If the Service successfully
disallowed the dividends paid deduction for dividends on the preferred stock,
the Fund could be disqualified as a RIC. In this case, dividends on the Common
Stock would not be exempt from Federal income taxes. Additionally, the Fund
would be subject to the alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the
Fund's shares) could be viewed as a taxable distribution. If the discount is
viewed as a taxable distribution, it is also possible that the taxable
character of this discount would be allocable to all the shareholders,
including shareholders who do not participate in the dividend reinvestment
plan. Thus, shareholders who do not participate in the dividend reinvestment
plan might be required to report as ordinary income a portion of their
distributions equal to their allocable share of the discount.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing
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an account, an investor must certify under penalty of perjury that such number
is correct and that such investor is not otherwise subject to backup
withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to
the Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
STATE AND LOCAL TAXES
The exemption from Federal income tax for exempt-interest dividends does not
necessarily result in an exemption for such dividends under the income or
other tax laws of any state or other tax laws or local taxing authority.
Shareholders are advised to consult their own tax advisers concerning state
and local tax matters.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of Common Stock otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by The Bank of New York,
as agent for shareholders in administering the Plan (the "Plan Agent"), in
additional shares of
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Common Stock of the Fund. Holders of Common Stock who elect not to participate
in the Plan will receive all distributions in cash paid by check mailed
directly to the shareholder of record (or, if the shares are held in street or
other nominee name, then to such nominee) by The Bank of New York, as dividend
paying agent. Such participants may elect not to participate in the Plan and
to receive all distributions of dividends and capital gains in cash by sending
written instructions to The Bank of New York, as dividend paying agent, at the
address set forth below. The Fund is not responsible for any failure of
delivery to the shareholder's address of record and no interest will accrue on
amounts represented by uncashed distribution checks. Participation in the Plan
is completely voluntary and may be terminated or resumed at any time without
penalty by written notice if received by the Plan Agent not less than ten days
prior to any dividend record date; otherwise, such termination or resumption
will be effective with respect to any subsequently declared dividend or
distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively, referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares of Common
Stock. The shares will be acquired by the Plan Agent for the participant's
account, depending upon the circumstances described below, either (i) through
receipt of additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market ("open-market purchases") on the New York
Stock Exchange or elsewhere. If on the payment date for the dividend, the net
asset value per share of the Common Stock is equal to or less than the market
price per share of the Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be credited
to the participant's account will be determined by dividing the dollar amount
of the dividend by the net asset value per share on the date the shares are
issued, provided that the maximum discount from the then current market price
per share on the date of issuance may not exceed 5%. If on the dividend
payment date the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Plan Agent
will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, participants in the
Plan will receive any dividends in newly issued shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase prices paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in
the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period or if the market discount shifts to a
market premium during the purchase period, the Plan Agent will cease making
open-market purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last purchase
date.
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The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 101 Barclay Street, New York, New York 10286.
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of Common Stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares (the "Original Shares")
in Class D initial sales charge shares of certain Merrill Lynch-sponsored
open-end mutual funds ("Eligible Class D Shares") at their net asset value,
without the imposition of the initial sales charge, if the conditions set
forth below are satisfied. First, the sale of the Original Shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class D Shares. Second, the
35
<PAGE>
Original Shares must have been either acquired in this offering or be shares
representing reinvested dividends from shares of Common Stock acquired in this
offering. Third, the Original Shares must have been continuously maintained in
a Merrill Lynch securities account. Fourth, there must be a minimum purchase
of $250 to be eligible for the investment option. Class D shares of the mutual
funds are subject to an account maintenance fee at an annual rate of up to
0.25% of the average daily net asset value of such mutual fund. The Eligible
Class D Shares may be redeemed at any time at the next determined net asset
value, subject in certain cases to a redemption fee. Prior to the time the
shares of Common Stock commence trading on the New York Stock Exchange, the
distributor for the mutual funds will advise Merrill Lynch Financial
Consultants as to those mutual funds that offer the investment option
described above.
NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
p.m., New York time) on the last business day in each week. For purposes of
determining the net asset value of a share of Common Stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The Municipal Bonds in which the Fund invests are traded primarily in the
over-the-counter markets. In determining net asset value, the Fund utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the Board of Directors. The pricing service typically values portfolio
securities at the bid price or the yield equivalent when quotations are
readily available. Municipal Bonds for which quotations are not readily
available are valued at fair market value on a consistent basis as determined
by the pricing service using a matrix system to determine valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Board of Directors.
The Board of Directors has determined in good faith that the use of a pricing
service is a fair method of determining the valuation of portfolio securities.
Positions in futures contracts are valued at closing prices for such contracts
established by the exchange on which they are traded, or if market quotations
are not readily available, are valued at fair value on a consistent basis
using methods determined in good faith by the Board of Directors.
The Fund determines and makes available for publication the net asset value
of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify or
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption. Within approximately three months after completion of the offering
of the Common Stock described herein, the
36
<PAGE>
Fund intends to reclassify an amount of unissued Common Stock as preferred
stock and at that time to offer shares of preferred stock representing
approximately 40% of the Fund's capital immediately after the issuance of such
preferred stock. There is no assurance that such preferred stock will be
issued.
COMMON STOCK
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred stock are outstanding, holders
of Common Stock will not be entitled to receive any net income of or other
distributions from the Fund unless all accumulated dividends on preferred
stock have been paid and unless asset coverage (as defined in the 1940 Act)
with respect to preferred stock would be at least 200% after giving effect to
such distributions. See "Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 shares of Common Stock of the Fund for $100,005. As of the
date of this Prospectus, the Investment Adviser owned 100% of the outstanding
shares of Common Stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
PREFERRED STOCK
It is anticipated that the Fund's shares of preferred stock will be issued
in one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of Common
Stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of Common Stock have no preemptive right to purchase any
shares of preferred stock that might be issued. It is anticipated that the net
asset value per share of the preferred stock will equal its original purchase
price per share plus accumulated dividends per share.
The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of Common Stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
stock is likely to achieve the benefits to the holders of Common Stock
described in the Prospectus. Although the terms of the preferred stock,
including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Directors (subject to
applicable law and the Fund's Articles of Incorporation), the initial series
of preferred stock will be structured to carry either a relatively short-term
dividend rate, in which case periodic redetermination of the dividend rate
will be made at relatively short intervals (generally seven or 28 days), or a
medium-term dividend rate, in which case periodic redetermination of the
dividend rate will be made at intervals of up to five years. In either case,
such redetermination of the dividend rate will be made through an auction or
remarketing procedure. Additionally, under certain circumstances, when the
Fund is required to allocate taxable income to holders of the preferred
37
<PAGE>
stock, it is anticipated that the terms of the preferred stock will require
the Fund to make an Additional Distribution (as defined in "Special Leverage
Considerations and Risks--Effects of Leverage") to such holders. The Board
also has indicated that it is likely that the liquidation preference, voting
rights and redemption provisions of the preferred stock will be as stated
below. The Fund's Articles of Incorporation, as amended, together with any
Articles Supplementary, is referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of Common Stock. After payment of
the full amount of the liquidating distribution to which they are entitled,
the preferred stockholders will not be entitled to any further participation
in any distribution of assets by the Fund. A consolidation or merger of the
Fund with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Fund will not be deemed to be a
liquidation, dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this Prospectus and except
as otherwise required by applicable law, holders of shares of preferred stock
will have equal voting rights with holders of shares of Common Stock (one vote
per share) and will vote together with holders of Common Stock as a single
class.
In connection with the election of the Fund's directors, holders of shares
of preferred stock, voting as a separate class, will be entitled to elect two
of the Fund's directors, and the remaining directors will be elected by all
holders of capital stock, voting as a single class. So long as any preferred
stock is outstanding, the Fund will have not less than five directors. If at
any time dividends on shares of the Fund's preferred stock shall be unpaid in
an amount equal to two full years' dividends thereon, the holders of all
outstanding shares of preferred stock, voting as a separate class, will be
entitled to elect a majority of the Fund's directors until all dividends in
default have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue, or increase the authorized or issued amount of,
any class or series of stock ranking prior to or on a parity with any series
of preferred stock with respect to payment of dividends or the distribution of
assets on liquidation, or increase the authorized amount of preferred stock or
(ii) amend, alter or repeal the provisions of the Charter, whether by merger,
consolidation or otherwise, so as to adversely affect any of the contract
rights expressly set forth in the Charter of holders of preferred stock.
Redemption Provisions. It is anticipated that shares of preferred stock will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal
to their liquidation preference plus accumulated but unpaid dividends to the
date of redemption upon the occurrence of certain specified events, such as
the failure of the Fund to maintain asset coverage requirements for the
preferred stock specified by the rating agencies that issue ratings on the
preferred stock.
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<PAGE>
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A director may be removed
from office with or without cause, but only by vote of the holders of at least
66 2/3% of the votes entitled to be voted on the matter. A director elected by
all the holders of capital stock may be removed only by action of such
holders, and a director elected by the holders of preferred stock may be
removed only by action of such holders.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 66 2/3% of the Fund's shares of capital stock then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations,
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund, unless such action has
been approved, adopted or authorized by the affirmative vote of two-thirds
of the total number of Directors fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's shares of
capital stock is required. Following the proposed issuance of the preferred
stock, it is anticipated that the approval, adoption or authorization of
the foregoing would also require the favorable vote of a majority of the
Fund's shares of preferred stock then entitled to be voted, voting as a
separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by two-thirds of the total number
of Directors fixed in accordance with the by-laws), and, assuming preferred
stock is issued, the affirmative vote of a majority of outstanding shares of
preferred stock of the Fund, voting as a separate class. Such a vote also
would satisfy a separate requirement in the 1940 Act that the change be
approved by the shareholders. Shareholders of an open-end investment company
may require the company to redeem their shares of common stock at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and the
Common Stock would no longer be listed on a stock exchange.
Conversion to an open-end investment company would also require redemption
of all outstanding shares of preferred stock and would require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the issuance of senior securities, the borrowing of money and the
purchase of illiquid securities.
39
<PAGE>
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Securities
and Exchange Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 6,700,000 shares of Common Stock
from the Fund. The Underwriter is committed to purchase all of such shares if
any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of Common Stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of Common Stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $ per share on
sales by such dealers. After the initial public offering, the public offering
price and other selling terms may be changed. Investors must pay for shares of
Common Stock purchased in the offering on or before April , 1998.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 1,005,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
Common Stock.
If the Underwriter creates a short position in the shares of Common Stock in
connection with the offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriter may
reduce that short position by purchasing shares of Common Stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of Common Stock
in the open market to reduce the Underwriter's short position or to stabilize
the price of the shares of Common Stock, it may reclaim the amount of the
selling concession from the selling group members who sold those shares of
Common Stock as part of the offering.
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<PAGE>
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of Common Stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for the shares of
the Common Stock. Application will be made to list the Fund's Common Stock.
However, during an initial period which is not expected to exceed two weeks
from the date of this Prospectus, the Fund's Common Stock will not be listed
on any securities exchange. Additionally, during such period, the Underwriter
does not intend to make a market in the Fund's Common Stock, although a
limited market may develop. Consequently, it is anticipated that an investment
in the Fund will be illiquid during such period. In order to meet the
requirements for listing, the Underwriter has undertaken to sell lots of 100
or more shares to a minimum of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-
term, tax-exempt securities subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of Common Stock of the Fund will be The Bank of New York, 101 Barclay Street,
New York, New York 10266.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New
York, New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of April ,
1998 included in this Prospectus and Registration Statement has been audited
by , independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing. The
selection of independent auditors is subject to ratification by shareholders
of the Fund.
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<PAGE>
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Commission.
Any such reports, proxy statements and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Regional Office, at Seven World
Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office,
at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and
Midwest Regional Office, at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can
be obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Fund, that file electronically with the Commission. Reports, proxy
statements and other information concerning the Fund can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
Additional information regarding the Fund and the shares of Common Stock is
contained in the Registration Statement on Form N-2, including amendments,
exhibits and schedules thereto, relating to such shares filed by the Fund with
the Commission in Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the
Fund and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission.
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"). Like other investment
companies and financial and business organizations, the Fund could be
adversely affected if the computer systems used by the Investment Adviser or
other Fund service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser has established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the Investment Adviser does not
anticipate that the transition to the 21st Century will have any material
impact on its ability to continue to service the Fund at current levels. In
addition, the Investment Adviser has sought assurances from the Fund's other
service providers that they are taking all necessary steps to ensure that
their computer systems will accurately reflect the Year 2000, and the
Investment Adviser will continue to monitor the situation. At this time,
however, no assurance can be given that the Fund's other service providers
have anticipated every step necessary to avoid any adverse effect on the Fund
attributable to the Year 2000 Problem.
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder
MuniHoldings Insured Fund, Inc.
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Insured Fund, Inc. as of April , 1998. This statement of
assets, liabilities and capital is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets, liabilities and capital based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings Insured Fund, Inc. as of April , 1998 in conformity with
generally accepted accounting principles.
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MUNIHOLDINGS INSURED FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
APRIL , 1998
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Deferred organization expenses (Note 1).............................
--------
Total assets......................................................
--------
LIABILITIES
Accrued expenses (Note 1)...........................................
--------
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares autho-
rized; 6,667 shares issued and outstanding (Note 1)................ $ 667
Paid-in Capital in excess of par.................................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per share of com-
mon stock (Note 1)................................................. $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on March
11, 1998 as a closed-end, non-diversified management investment company and
has had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 6,667 shares for $100,005 on April ,
1998. The General Partner of the Investment Adviser is an indirect, wholly-
owned subsidiary of Merrill Lynch & Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a five-year period beginning with the commencement of operations of the Fund.
Direct costs relating to the public offering of the Fund's shares will be
charged to capital at the time of issuance of shares.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.55 of 1% of
the average weekly net assets of the Fund including proceeds from the sale of
preferred stock. The Investment Adviser or an affiliate will pay Merrill
Lynch, Pierce, Fenner & Smith Incorporated a commission in the amount of %
of the price to the public per share in connection with the initial public
offering of the Fund's Common Stock.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
44
<PAGE>
APPENDIX I
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2
denotes "high quality" with ample margins of protection; MIG 3/VMIG3 notes are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk."
I-1
<PAGE>
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 ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it 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 payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, 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. The obligor's capacity to meet its financial commitment
on the obligation is extremely strong.
I-2
<PAGE>
AA Debt rated "AA" differs from the highest rated obligations 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 to the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
B significant speculative characteristics. "BB" indicates the
CCC least degree of speculation and "C" the highest degree of
CC speculation. While such bonds will likely have some quality and
C protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
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 a 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 highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3
Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
I-3
<PAGE>
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUED CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-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. ("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 carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA
Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA
Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-
term debt of these issuers is generally rated "F-1+."
I-4
<PAGE>
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact
on these bonds, and therefore impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional
A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
Suspended
A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn
A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert
Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as "Positive,"
indicating a potential upgrade, "Negative," for potential downgrade,
or "Evolving," where ratings may be raised or lowered. FitchAlert is
relatively short-term, and should be resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB
Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B
Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
I-5
<PAGE>
CCCBonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CCBonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
CBonds are in imminent default in payment of interest or principal.
DDDBonds are in default on interest and/or principal payments. Such bonds
DDare extremely speculative and should be valued on the basis of their
Dultimate 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- Exceptionally Strong Credit Quality. Issues assigned this rating are
1+ regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned "F-1+" and "F-1" ratings.
F-3
Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be
rated below in 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.
I-6
<PAGE>
APPENDIX II
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 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
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 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 premiums,
the Policies may require that the Fund notify the insurance company as to all
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.
II-1
<PAGE>
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can
only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet nonpolicy
obligations (i.e., debt contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings.
The likelihood of a timely flow of funds from the insurer to the trustee for
the bondholders is a key element in the rating determination for such debt
issues.
II-2
<PAGE>
APPENDIX III
TAXABLE EQUIVALENT YIELDS FOR 1998
<TABLE>
<CAPTION>
TAXABLE INCOME* A TAX-EXEMPT YIELD OF
- ---------------------------------- 1998 FEDERAL --------------------------------------
SINGLE RETURN JOINT RETURN TAX BRACKET 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
- ------------- ------------------- ------------ ----- ----- ----- ------ ------ ------
IS EQUAL TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,351-
$61,400 $ 42,351-$102,300 28.00% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42%
$ 61,401-
$128,100 $ 102,301-$155,950 31.00% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87%
$128,101-
$278,450 $ 155,951-$278,450 36.00% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72%
Over
$278,450 Over $278,450 39.60% 8.28% 9.11% 9.93% 10.76% 11.59% 12.42%
</TABLE>
- --------
* An investor's marginal tax rate may exceed the rates shown in the above
table due to the reduction, or possible elimination, of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. Income also may be subject to certain state and local
taxes. For investors who pay alternative minimum tax, tax-exempt yields may
be equivalent to lower taxable yields than those shown above. The tax rates
shown above do not apply to corporate taxpayers. The tax characteristics of
the Fund are described more fully elsewhere in this Prospectus. Consult your
tax adviser for further details. This chart is for illustrative purposes
only and cannot be taken as an indication of anticipated Fund performance.
III-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE
SUCH OFFER WOULD BE UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors and Special Considerations................................... 7
Fee Table................................................................. 9
The Fund.................................................................. 10
Use of Proceeds........................................................... 10
Investment Objective and Policies......................................... 10
Risks and Special Considerations of Leverage.............................. 20
Investment Restrictions................................................... 23
Directors and Officers.................................................... 24
Investment Advisory and Management Arrangements........................... 26
Portfolio Transactions.................................................... 28
Dividends and Distributions............................................... 29
Taxes..................................................................... 30
Automatic Dividend Reinvestment Plan...................................... 33
Mutual Fund Investment Option............................................. 35
Net Asset Value........................................................... 36
Description of Capital Stock.............................................. 36
Custodian................................................................. 40
Underwriting.............................................................. 40
Transfer Agent, Dividend Disbursing Agent and Registrar................... 41
Legal Opinions............................................................ 41
Experts................................................................... 41
Additional Information.................................................... 42
Report of Independent Auditors............................................ 43
Statement of Assets, Liabilities and Capital.............................. 44
Appendix I................................................................ I-1
Appendix II............................................................... II-1
Appendix III.............................................................. III-1
</TABLE>
---------------
UNTIL JULY , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,700,000 SHARES
MUNIHOLDINGS INSUREDFUND, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
APRIL , 1998
CODE--
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets, Liabilities and Capital as of April , 1998
(2) Exhibits:
<TABLE>
<C> <S>
(a) --Articles of Incorporation
(b) --By-Laws
(c) --Not applicable
(d)(1) --Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(a)
(d)(2) --Form of specimen certificate for shares of Common Stock of the
Registrant
(e) --Form of Dividend Reinvestment Plan
(f) --Not applicable
(g) --Form of Investment Advisory Agreement between the Fund and the
Investment Adviser
(h)(1) --Form of Purchase Agreement
(h)(2) --Merrill Lynch Standard Dealer Agreement
(i) --Not applicable
(j) --Form of Custodian Contract between the Fund and The Bank of New
York
(k) --Form of Registrar, Transfer Agency and Service Agreement between
the Fund and The Bank of New York
(l) --Opinion and Consent of Brown & Wood LLP*
(m) --Not applicable
(n) --Consent of , independent auditors for the Fund*
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.*
(q) --Not applicable
(r) --Not applicable
</TABLE>
- --------
(a) Reference is made to Article V, Article VI (sections 2,3,4,5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement; and to Article II, Article III
(sections 1,2,3,5 and 17), Article VI, Article VII, Article XII, Article
XIII and Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to
this Registration Statement.
*To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
C-1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees.................................................... $ *
New York Stock Exchange listing fee.................................. *
Printing (other than stock certificates)............................. *
Engraving and printing stock certificates............................ *
Legal fees and expenses.............................................. *
Accounting fees and expenses......................................... *
NASD fees............................................................ *
Miscellaneous........................................................ *
------
Total.............................................................. $ *
======
</TABLE>
- --------
*To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the caption "Investment Advisory and
Management Arrangements" and in Note 1 to the Statement of Assets, Liabilities
and Capital is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which will be filed as Exhibit (g)(1) to this
Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to directors, officers
and controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Fund of expenses incurred or paid by a director, officer or controlling
person of the Fund in connection with any successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
will be filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
C-2
<PAGE>
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of
MLAM, acts as investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., Financial
Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch
California Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc., and for the
following closed-end registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Debt Strategies Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Florida Fund, MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured
Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured
Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., and
Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Government Bond Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. MLAM also acts as subadviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646.
The address of the Investment Adviser, MLAM, Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), Princeton
C-3
<PAGE>
Services, Inc. ("Princeton Services") and Princeton Administrators, L.P. also
is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch
& Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281-1201.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of all or substantially all of the investment companies
described in the preceding paragraphs and also hold the same positions with
all or substantially all of the investment companies advised by MLAM as they
do with those advised by the Investment Adviser. Messrs. Giordano, Harvey,
Kirstein and Monagle are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITIONS WITH PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------
<C> <C> <S>
ML & Co................Limited.Partner Financial Services Holding
Company; Limited Partner of
MLAM
Princeton Services...... General Partner General Partner of MLAM
Arthur Zeikel........... Chairman Chairman of MLAM; President
of MLAM and the Investment
Adviser (from 1977 to 1997);
Chairman and Director of
Princeton Services;
President of Princeton
Services (from 1993 to
1997); Executive Vice
President of ML & Co.
Jeffrey M. Peek......... President President of MLAM; President
and Director of Princeton
Services; Executive Vice
President of ML & Co.
Terry K. Glenn.......... Executive Vice President Executive Vice President of
MLAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
MLFD; Director of MLFDS;
President of Princeton
Administrators, L.P.
Linda L. Federici....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Norman R. Harvey........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of the MLAM International
Group
Philip L. Kirstein...... Senior Vice President, Senior Vice President,
General Counsel and General Counsel and
Secretary Secretary of MLAM; Senior
Vice President, General
Counsel, Director and
Secretary of Princeton
Services
Ronald M. Kloss......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Debra W. Landsman-Yaros. Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services; Vice
President of MLFD
Stephen M. M. Miller.... Senior Vice President Executive Vice President of
Princeton Administrators,
L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services;
Managing Director and First
Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services;
Director of MLFD
Gerald M. Richard....... Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior
Vice President and Treasurer
of Princeton Services; Vice
President and Treasurer of
MLFD
Gregory D. Upah......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Ronald L. Welburn....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
</TABLE>
C-4
<PAGE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10 percent from its net
asset value per share of Common Stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of Common Stock
increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 18th day of March, 1998.
MUNIHOLDINGS INSURED FUND, INC,
(Registrant)
/s/ Arthur Zeikel
By __________________________________
(ARTHUR ZEIKEL, PRESIDENT)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn, or Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his or her behalf, individually and in each capacity stated below, any
amendments to this Registration Statement (including post-effective
amendments) and to file same, with all exhibits thereto, with the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
SIGNATURES TITLE DATE
/s/ Arthur Zeikel President and March 18, 1998
- ------------------------------------- Director (Principal
(ARTHUR ZEIKEL) Executive Officer)
/s/ Gerald M. Richard Treasurer (Principal March 18, 1998
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
/s/ Ronald W. Forbes Director March 18, 1998
- -------------------------------------
(RONALD W. FORBES)
/s/ Cynthia A. Montgomery Director March 18, 1998
- -------------------------------------
(CYNTHIA A. MONTGOMERY)
/s/ Charles C. Reilly Director March 18, 1998
- -------------------------------------
(CHARLES C. REILLY)
/s/ Kevin A. Ryan Director March 18, 1998
- -------------------------------------
(KEVIN A. RYAN)
/s/ Richard R. West Director March 18, 1998
- -------------------------------------
(RICHARD R. WEST)
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
(a) Articles of Incorporation
(b) By-Laws
(d)(2) Form of specimen certificate for shares of common stock
(e) Form of Dividend Reinvestment Plan
(g) Form of Investment Advisory Agreement between the Fund and the
Investment Adviser
(h)(1) Form of Purchase Agreement
(h)(2) Merrill Lynch Standard Dealer Agreement
(j) Form of Custody Contract between the Fund and The Bank of New York
(k) Form of Registrar, Transfer Agency and Service Agreement between the
Fund and The Bank of New York
</TABLE>
<PAGE>
EXHIBIT A
ARTICLES OF INCORPORATION
OF
MUNIHOLDINGS INSURED FUND, INC.
THE UNDERSIGNED, JENNIFER M. SHEEHY, whose post-office address is c/o Brown
& Wood LLP, One World Trade Center, 56th Floor, New York, New York 10048-0557,
being at least eighteen (18) years of age, does hereby act as incorporator,
under and by virtue of the General Laws of the State of Maryland authorizing the
formation of corporations and with the intention of forming a corporation.
ARTICLE I.
NAME
----
The name of the corporation is MUNIHOLDINGS INSURED FUND, INC. (the
"Corporation").
ARTICLE II.
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed is to act as a
closed-end, management investment company under the federal Investment Company
Act of 1940, as amended, and in effect from time to time (the "Investment
Company Act"), and to exercise and enjoy all of the powers, rights and
privileges granted to, or conferred upon, corporations by the General Laws of
the State of Maryland now or hereafter in force.
<PAGE>
ARTICLE III.
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 300 East
Lombard Street, Baltimore, Maryland 21202. The name of the resident agent of
the Corporation in this State is The Corporation Trust Incorporated, a
corporation of this State, and the post-office address of the resident agent is
The Corporation Trust Incorporated, 300 East Lombard Street, Baltimore, Maryland
21202.
ARTICLE IV.
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is 200,000,000 shares, all initially classified as
one class called Common Stock, of the par value of Ten Cents ($0.10) per share,
and of the aggregate par value of Twenty Million Dollars ($20,000,000).
(2) The Board of Directors may classify and reclassify any unissued
shares of capital stock into one or more additional or other classes or series
as may be established from time to time by setting or changing in any one or
more respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class
2
<PAGE>
or series provided, however, that the total amount of shares of all classes or
series shall not exceed the total number of shares of capital stock authorized
in the Charter.
(3) Unless otherwise expressly provided in the Charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, the holders of each class or series of capital stock shall be
entitled to dividends and distributions in such amounts and at such times as may
be determined by the Board of Directors, and the dividends and distributions
paid with respect to the various classes or series of capital stock may vary
among such classes and series.
(4) Unless otherwise expressly provided in the Charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, on each matter submitted to a vote of stockholders, each
holder of a share of capital stock of the Corporation shall be entitled to one
vote for each share standing in such holder's name on the books of the
Corporation, irrespective of the class or series thereof, and all shares of all
classes and series shall vote together as a single class; provided, however,
that as to any matter with respect to which a separate vote of any class or
series is required by the Investment Company Act, or any rules, regulations or
orders issued thereunder, or by the Maryland General Corporation Law, such
requirement as to a separate vote by that class or series shall apply in lieu of
a general vote of all classes and series as described above.
3
<PAGE>
(5) Notwithstanding any provision of the Maryland General Corporation
Law requiring a greater proportion than a majority of the votes of all classes
or series of capital stock of the Corporation (or of any class or series
entitled to vote thereon as a separate class or series) to take or authorize any
action, the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act, and any rules, regulations and orders issued thereunder)
to take such action upon the concurrence of a majority of the votes entitled to
be cast by holders of capital stock of the Corporation (or a majority of the
votes entitled to be cast by holders of a class or series as a separate class or
series) unless a greater proportion is specified in the Charter.
(6) Unless otherwise expressly provided in the Charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation.
(7) Any fractional shares shall carry proportionately all of the
rights of a whole share, excepting any right to receive a certificate evidencing
such fractional share, but including,
4
<PAGE>
without limitation, the right to vote and the right to receive dividends.
(8) The presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast shall constitute a
quorum at any meeting of stockholders, except with respect to any matter which
requires approval by a separate vote of one or more classes or series of stock,
in which case the presence in person or by proxy of the holders of shares
entitled to cast one-third of the votes entitled to be cast by each class or
series entitled to vote as a separate class shall constitute a quorum.
(9) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of the Charter and the By-Laws of the
Corporation. As used in the Charter of the Corporation, the terms "Charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
5
<PAGE>
ARTICLE V.
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------------------------
(1) The initial number of directors of the Corporation shall be three
(3), which number may be increased or decreased pursuant to the By-Laws of the
Corporation but shall never be less than the minimum number permitted by the
General Laws of the State of Maryland. The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualify are:
Alice A. Pellegrino
Bradley J. Lucido
George Pelose
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock of any class
or series, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable, without any action by the stockholders,
subject to such limitations as may be set forth in these Articles of
Incorporation or in the By-Laws of the Corporation or in the General Laws of the
State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have
any right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by
6
<PAGE>
it after the issue thereof, or otherwise) other than such right, if any, as the
Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be
indemnified and advanced expenses by the Corporation to the full extent
permitted by the General Laws of the State of Maryland now or hereafter in
force, including the advance of expenses under the procedures and to the full
extent permitted by law subject to the requirements of the Investment Company
Act. The foregoing rights of indemnification shall not be exclusive of any
other rights to which those seeking indemnification may be entitled. No
amendment of these Articles of Incorporation or repeal of any provision hereof
shall limit or eliminate the benefits provided to directors and officers under
this provision in connection with any act or omission that occurred prior to
such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State
of Maryland or decisional law, as amended or interpreted, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation or
repeal of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
7
<PAGE>
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act.
(7) A director elected by the holders of capital stock may be removed
(with or without cause), but only by action taken by the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the shares of capital stock then
entitled to vote in an election to fill that directorship.
(8) The enumeration and definition of the particular powers of the
Board of Directors included in the Charter shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the Charter of the Corporation, or construed as or
deemed by inference or otherwise in any manner to exclude or limit any powers
conferred upon the Board of Directors under the General Laws of the State of
Maryland now or hereinafter in force.
ARTICLE VI.
DENIAL OF PREEMPTIVE RIGHTS
---------------------------
No stockholder of the Corporation shall by reason of his holding
shares of capital stock have any preemptive or preferential right to purchase or
subscribe to any shares of capital stock of the Corporation, now or hereafter to
be
8
<PAGE>
authorized, or any notes, debentures, bonds or other securities convertible into
shares of capital stock, now or hereafter to be authorized, whether or not the
issuance of any such shares, or notes, debentures, bonds or other securities
would adversely affect the dividend or voting rights of such stockholder; except
that the Board of Directors, in its discretion, may issue shares of any class of
the Corporation, or any notes, debentures, bonds, other securities convertible
into shares of any class, either in whole or in part, to the existing
stockholders or holders of any class, series or type of stock or other
securities at the time outstanding to the exclusion of any or all of the holders
of any or all of the classes, series or types of stock or other securities at
the time outstanding.
ARTICLE VII.
DETERMINATION BINDING
---------------------
Any determination made in good faith and consistent with applicable
law, so far as accounting matters are involved, in accordance with accepted
accounting practice by or pursuant to the direction of the Board of Directors,
as to the amount of assets, obligations or liabilities of the Corporation, as to
the amount of net income of the Corporation from dividends and interest for any
period or amounts at any time legally available for the payment of dividends, as
to the amount of any reserves or charges set up and the propriety thereof, as to
the time of or purpose for creating reserves or as to the use, alteration or
9
<PAGE>
cancellation of any reserves or charges (whether or not any obligation or
liability for which such reserves or as to the use, alteration or cancellation
of any reserves or charges shall have been created, shall have been paid or
discharged or shall be then or thereafter required to be paid or discharged), as
to the price of any security owned by the Corporation or as to any other matters
relating to the issuance, sale, redemption or other acquisition or disposition
of securities or shares of capital stock of the Corporation, and any reasonable
determination made in good faith by the Board of Directors as to whether any
transaction constitutes a purchase of securities on "margin," a sale of
securities "short," or an underwriting or the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of, any
securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future, and
shares of the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such determinations
shall be binding as aforesaid. No provision in this Charter shall be effective
to (a) require a waiver of compliance with any provision of the Securities Act
of 1933, as amended, or the Investment Company Act, or of any valid rule,
regulation or order of the Securities and Exchange Commission thereunder or (b)
protect or purport to protect any director or officer of the
10
<PAGE>
Corporation against any liability to the Corporation or its security holders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
ARTICLE VIII.
PRIVATE PROPERTY OF STOCKHOLDERS
--------------------------------
The private property of stockholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
ARTICLE IX.
CONVERSION TO OPEN-END COMPANY
------------------------------
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation, a favorable vote of the holders
of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares
of capital stock of the Corporation entitled to be voted on the matter shall be
required to approve, adopt or authorize an amendment to these Articles of
Incorporation of the Corporation that makes the Common Stock a "redeemable
security" (as that term is defined in section 2(a) (32) of the Investment
Company Act) unless such action has previously been approved, adopted or
authorized by the affirmative vote of at least two-thirds of the total number of
directors fixed in accordance with the By-Laws of the Corporation, in which case
the affirmative vote of the holders of
11
<PAGE>
a majority of the outstanding shares of capital stock of the Corporation
entitled to vote thereon shall be required.
ARTICLE X.
MERGER, SALE OF ASSETS, LIQUIDATION
-----------------------------------
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation, a favorable vote of the holders
of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares
of capital stock of the Corporation entitled to be voted on the matter shall be
required to approve, adopt or authorize (i) a merger or consolidation or
statutory share exchange of the Corporation with any other corporation, (ii) a
sale of all or substantially all of the assets of the Corporation (other than in
the regular course of its investment activities), or (iii) a liquidation or
dissolution of the Corporation, unless such action has previously been approved,
adopted or authorized by the affirmative vote of at least two-thirds of the
total number of directors fixed in accordance with the By-Laws of the
Corporation, in which case the affirmative vote of the holders of a majority of
the outstanding shares of capital stock of the Corporation entitled to vote
thereon shall be required.
ARTICLE XI.
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
12
<PAGE>
ARTICLE XII.
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in its Charter, in any manner now or hereafter
prescribed by statute, including any amendment which alters the contract rights,
as expressly set forth in the Charter, of any outstanding stock and
substantially adversely affects the stockholders' rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
Notwithstanding any other provisions of these Articles of Incorporation or the
By-Laws of the Corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, these Articles of Incorporation or the By-
Laws of the Corporation), the amendment or repeal of Section (5) of Article IV,
Section (1), Section (4), Section (5), Section (6) and Section (7) of Article V,
Article VIII, Article IX, Article X, Article XI or this Article XII, of these
Articles of Incorporation shall require the affirmative vote of the holders of
at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
capital stock of the Corporation entitled to be voted on the matter.
13
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator of MuniHoldings
Insured Fund, Inc. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be her act.
Dated this 9th day
of March, 1998
/s/ Jennifer M. Sheehy
_________________________
Jennifer M. Sheehy
14
<PAGE>
EXHIBIT B
BY-LAWS
OF
MUNIHOLDINGS INSURED FUND, INC.
ARTICLE I.
Offices
-------
Section 1. Principal Office. The principal office of the Corporation
----------------
shall be in the City of Baltimore and State of Maryland.
Section 2. Principal Executive Office. The principal executive office of
--------------------------
the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices in
-------------
such places as the Board of Directors from time to time may determine.
ARTICLE II.
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. Except as otherwise required by the rules of
--------------
any stock exchange on which the Corporation's shares of stock may be listed, the
Corporation shall not be required to hold an annual meeting of its stockholders
in any year in which the election of directors is not required to be acted upon
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). In the event that the Corporation shall be required to hold an annual
meeting of stockholders to elect
<PAGE>
directors under the Investment Company Act, such meeting shall be held no later
than 120 days after the occurrence of the event requiring the meeting. Any
stockholders' meeting held in accordance with this Section shall for all
purposes constitute the annual meeting of stockholders for the year in which the
meeting is held.
In the event an annual meeting is required by the rules of a stock exchange
on which the Corporation's shares of stock are listed, the annual meeting of the
stockholders of the Corporation for the election of directors and for the
transaction of such other business as may properly be brought before the meeting
shall be held on such day and month of each year as shall be designated annually
by the Board of Directors.
Section 2. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the written request of
the holders of at least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with Section 2-
502(b) or (c) of the Maryland General Corporation Law.
Section 3. Place of Meetings. The annual meeting and any special meeting
-----------------
of the stockholders shall be held at such place within the United States as the
Board of Directors from time to time may determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the place,
------------------------------------
date and time of the holding of each annual and
2
<PAGE>
special meeting of the stockholders and the purpose or purposes of each special
meeting shall be given personally or by mail, not less than ten nor more than 90
days before the date of such meeting, to each stockholder entitled to vote at
such meeting and to each other stockholder entitled to notice of the meeting.
Notice by mail shall be deemed to be duly given when deposited in the United
States mail addressed to the stockholder at his or her address as it appears on
the records of the Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who, either
before or after the meeting, shall submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or unless the adjournment is for
more than 120 days after the original record date, notice of such adjourned
meeting need not be given if the time and place to which the meeting shall be
adjourned were announced at the meeting at which the adjournment is taken.
Section 5. Quorum. The presence in person or by proxy of the holders of
------
shares of stock entitled to cast one-third of the votes entitled to be cast
shall constitute a quorum at any meeting of stockholders, except with respect to
any matter which requires approval by a separate vote of one or more classes or
series of stock, in which case the presence in person or by proxy
3
<PAGE>
of the holders of shares entitled to cast one-third of the votes entitled to be
cast by each class or series entitled to vote as a separate class or series
shall constitute a quorum. In the absence of a quorum no business may be
transacted, except that the holders of a majority of the shares of stock present
in person or by proxy and entitled to vote may adjourn the meeting from time to
time, without notice other than announcement thereat except as otherwise
required by these By-Laws, until the holders of the requisite amount of shares
of stock shall be so present. At any such adjourned meeting at which a quorum
may be present any business may be transacted which might have been transacted
at the meeting as originally called. The absence from any meeting, in person or
by proxy, of holders of the number of shares of stock of the Corporation in
excess of a majority thereof which may be required by the laws of the State of
Maryland, the Investment Company Act, or other applicable statute, the Charter,
or these By-Laws, for action upon any given matter shall not prevent action at
such meeting upon any other matter or matters which properly may come before the
meeting, if there shall be present thereat, in person or by proxy, holders of
the number of shares of stock of the Corporation required for action in respect
of such other matter or matters.
Section 6. Organization. At each meeting of the stockholders, the
------------
Chairman of the Board (if one has been designated by the Board), or in his or
her absence or inability to act, the President, or in the absence or inability
to act of
4
<PAGE>
the Chairman of the Board and the President, a Vice President, shall act as
chairman of the meeting. The Secretary, or in his or her absence or inability
to act, any person appointed by the chairman of the meeting, shall act as
secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings of
-----------------
the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
------
Charter, each holder of record of shares of stock of the Corporation having
voting power shall be entitled at each meeting of the stockholders to one vote
for every share of such stock standing in his or her name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 9 of this Article or, if such record date shall not have been so fixed,
then at the later of (i) the close of business on the day on which notice of the
meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or her by a proxy signed by
such stockholder or his or her attorney-in-fact. No proxy shall be valid after
the expiration of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable
5
<PAGE>
proxy is permitted by law. Except as otherwise provided by statute, the Charter
or these By-Laws, any corporate action to be taken by vote of the stockholders
(other than the election of directors, which shall be by a plurality of votes
cast) shall be authorized by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or represented by proxy
and entitled to vote on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his or her proxy, if there be such
proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a record
---------------------
date for the purpose of determining stockholders entitled to vote at any meeting
of the stockholders. The record date, which may not be prior to the close of
business on the day the record date is fixed, shall be not more than 90 nor less
than ten days before the date of the meeting of the stockholders. All persons
who were holders of record of shares at such time, and not others, shall be
entitled to vote at such meeting and any adjournment thereof.
Section 10. Inspectors. The Board, in advance of any meeting of
----------
stockholders, may appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the
6
<PAGE>
inspectors shall not be so appointed or if any of them shall fail to appear or
act, the chairman of the meeting may, and on the request of any stockholder
entitled to vote thereat shall, appoint inspectors. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath to
execute faithfully the duties of inspector at such meeting with strict
impartiality and according to the best of his or her ability. The inspectors
shall determine the number of shares outstanding and the voting powers of each,
the number of shares represented at the meeting, the existence of a quorum, and
the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all stockholders. On request of the chairman of the
meeting or any stockholder entitled to vote thereat, the inspectors shall make a
report in writing of any challenge, request or matter determined by them and
shall execute a certificate of any fact found by them. No director or candidate
for the office of director shall act as inspector of an election of directors.
Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting.
------------------------------------------
Except as otherwise provided by statute or the Charter, any action required to
be taken at any annual or special meeting of stockholders, or any action which
may be taken at any annual or
7
<PAGE>
special meeting of such stockholders, may be taken without a meeting, without
prior notice and without a vote, if the following are filed with the records of
stockholders' meetings: (i) a unanimous written consent which sets forth the
action and is signed by each stockholder entitled to vote on the matter and (ii)
a written waiver of any right to dissent signed by each stockholder entitled to
notice of the meeting but not entitled to vote thereat.
ARTICLE III.
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the Charter,
--------------
the business and affairs of the Corporation shall be managed under the direction
of the Board of Directors. All powers of the Corporation may be exercised by or
under authority of the Board of Directors except as conferred on or reserved to
the stockholders by law or by the Charter or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed
-------------------
from time to time by resolution of the Board of Directors adopted by a majority
of the entire Board of Directors then in office; provided, however, that in no
event shall the number of directors be less than the minimum permitted by the
General Law of the State of Maryland nor more than 15. Any vacancy created by
an increase in the number of directors may be filled in accordance with Section
6 of this Article III. No reduction in the number of directors shall have the
effect of
8
<PAGE>
removing any director from office prior to the expiration of his or her term
unless such director specifically is removed pursuant to Section 5 of this
Article III at the time of such decrease. Directors need not be stockholders.
As long as any preferred stock of the Corporation is outstanding, the number of
directors shall be not less than five.
Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article II of these By-Laws,
directors shall be elected at the next meeting held. The term of office of each
director shall be from the time of his election and qualification until the
election of directors next succeeding his election and until his successor shall
have been elected and shall have qualified, or until his death, or until he
shall have resigned or until December 31 of the year in which he shall have
reached seventy-two years of age, or until he shall have been removed as
hereinafter provided in these By-Laws, or as otherwise provided by statute or by
the Charter.
Section 4. Resignation. A director of the Corporation may resign at any
-----------
time by giving written notice of his or her resignation to the Board or the
Chairman of the Board or the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein,
9
<PAGE>
immediately upon its receipt; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may be
--------------------
removed (with or without cause) by the stockholders by a vote of sixty-six and
two-thirds percent
(66 2/3%) of the outstanding shares of capital stock then entitled to vote in
the election of such director.
Section 6. Vacancies. Subject to the provisions of the Investment Company
---------
Act, any vacancies in the Board of Directors, whether arising from death,
resignation, removal, an increase in the number of directors or any other cause,
shall be filled by a vote of a majority of the Board of Directors then in
office, regardless of whether they constitute a quorum.
Section 7. Place of Meetings. Meetings of the Board may be held at such
-----------------
place as the Board from time to time may determine or as shall be specified in
the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board may be held
---------------
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be called
----------------
by two or more directors of the Corporation or by the Chairman of the Board or
the President.
Section 10. Telephone Meetings. Members of the Board of Directors or of
------------------
any committee thereof may participate in a meeting by means of a conference
telephone or similar
10
<PAGE>
communications equipment if all persons participating in the meeting can hear
each other at the same time. Subject to the provisions of the Investment
Company Act, participation in a meeting by these means constitutes presence in
person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting of
--------------------------
the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least 24 hours before the time at
which such meeting is to be held, or by first-class mail, postage prepaid,
addressed to him or her at his or her residence or usual place of business, at
least three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special meeting
----------------------------
need not be given to any director who, either before or after the meeting, shall
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver of notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two (unless
-----------------
there is only one director) of the members of the entire Board shall be present
in person at any meeting of the Board in order to constitute a quorum for the
transaction of
11
<PAGE>
business at such meeting, and except as otherwise expressly required by statute,
the Charter, these By-Laws, the Investment Company Act, or other applicable
statute, the act of a majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board. In the absence of a quorum
at any meeting of the Board, a majority of the directors present thereat may
adjourn such meeting to another time and place until a quorum shall be present
thereat. Notice of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the adjournment and,
unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at
which a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 14. Organization. The Board, by resolution adopted by a majority
------------
of the entire Board, may designate a Chairman of the Board, who shall preside at
each meeting of the Board. In the absence or inability of the Chairman of the
Board to preside at a meeting, the President or, in his or her absence or
inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his or her absence or inability to act, any person appointed
by the Chairman) shall act as secretary of the meeting and keep the minutes
thereof.
12
<PAGE>
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject to
----------------------------------------- -------
the provisions of the Investment Company Act, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board or the committee, as
the case may be, consent thereto in writing, and the writings or writing are
filed with the minutes of the proceedings of the Board or the committee.
Section 16. Compensation. Directors may receive compensation for services
------------
to the Corporation in their capacities as directors or otherwise in such manner
and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation at all times
are consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
Prospectus of the Corporation included in the registration statement of the
Corporation relating to the initial public offering of its capital stock, as
filed with the Securities and Exchange Commission (or as such investment
policies and restrictions may be modified by the Board of Directors, or, if
required, by a majority vote of the stockholders of the Corporation in
accordance with the Investment Company Act) and as required by the Investment
Company Act. The
13
<PAGE>
Board, however, may delegate the duty of management of the assets and the
administration of its day to day operations to an individual or corporate
management company and/or investment adviser pursuant to a written contract or
contracts which have obtained the requisite approvals, including the requisite
approvals of renewals thereof, of the Board of Directors and/or the stockholders
of the Corporation in accordance with the provisions of the Investment Company
Act.
ARTICLE IV.
Committees
----------
Section 1. Executive Committee. The Board, by resolution adopted by a
-------------------
majority of the entire board, may designate an Executive Committee consisting of
two or more of the directors of the Corporation, which committee shall have and
may exercise all of the powers and authority of the Board with respect to all
matters other than:
(i) the submission to stockholders of any action requiring authorization
of stockholders pursuant to statute or the Charter;
(ii) the filling of vacancies on the Board of Directors;
(iii) the fixing of compensation of the directors for serving on the Board
or on any committee of the Board, including the Executive Committee;
(iv) the approval or termination of any contract with an investment adviser
or principal underwriter, as such terms
14
<PAGE>
are defined in the Investment Company Act, or the taking of any other
action required to be taken by the Board of Directors by the Investment
Company Act;
(v) the amendment or repeal of these By-Laws or the adoption of new By-
Laws;
(vi) the amendment or repeal of any resolution of the Board which by its
terms may be amended or repealed only by the Board;
(vii) the declaration of dividends and, except to the extent permitted by
law, the issuance of capital stock of the Corporation; and
(viii) the approval of any merger or share exchange which does not require
stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject
to revision or alteration by the Board; provided, however, that third parties
shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors from
-----------------------------
time to time, by resolution adopted by a majority of the whole Board, may
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the Board
of Directors, by resolution, may prescribe.
Section 3. General. One-third, but not less than two, of the members of
-------
any committee shall be present in person at any
15
<PAGE>
meeting of such committee in order to constitute a quorum for the transaction of
business at such meeting, and the act of a majority present shall be the act of
such committee. The Board may designate a chairman of any committee and such
chairman or any two members of any committee may fix the time and place of its
meetings unless the Board shall otherwise provide. In the absence or
disqualification of any member of any committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
she or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member. The Board shall have the power at any time to change the
membership of any committee, to fill all vacancies, to designate alternate
members to replace any absent or disqualified member, or to dissolve any such
committee. Nothing herein shall be deemed to prevent the Board from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the Corporation; provided, however, that no such committee shall
have or may exercise any authority or power of the Board in the management of
the business or affairs of the Corporation except as may be prescribed by the
Board.
16
<PAGE>
ARTICLE V.
Officers, Agents and Employees
------------------------------
Section 1. Number of Qualifications. The officers of the Corporation
------------------------
shall be a President, who shall be a director of the Corporation, a Secretary
and a Treasurer, each of whom shall be elected by the Board of Directors. The
Board of Directors may elect or appoint one or more Vice Presidents and also may
appoint such other officers, agents and employees as it may deem necessary or
proper. Any two or more offices may be held by the same person, except the
offices of President and Vice President, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity. Such officers
shall be elected by the Board of Directors each year at its first meeting held
after the annual meeting of stockholders, each to hold office until the next
meeting of the stockholders and until his or her successor shall have been duly
elected and shall have qualified, or until his or her death, or until he or she
shall have resigned, or have been removed, as hereinafter provided in these By-
Laws. The Board from time to time may elect such officers (including one or
more Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents, as may be necessary or desirable for the
business of the Corporation. The President also shall have the power to appoint
such assistant officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) as may be
necessary or
17
<PAGE>
appropriate to facilitate the management of the Corporation's affairs. Such
officers and agents shall have such duties and shall hold their offices for such
terms as may be prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of resignation to the Board, the Chairman of the
Board, the President or the Secretary. Any such resignation shall take effect
at the time specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt; and, unless
otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
-------------------------------------
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract rights, if
any, but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
---------
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
18
<PAGE>
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her control.
Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his or her duties, in such amount and
with such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive officer
---------
of the Corporation. In the absence of the Chairman of the Board (or if there be
none), the President shall preside at all meetings of the stockholders and of
the Board of Directors. He or she shall have, subject to the control of the
Board of Directors, general charge of the business and affairs of the
Corporation. He or she may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he or she may
delegate these powers.
Section 8. Vice President. Each Vice President shall have such powers and
--------------
perform such duties as the Board of Directors or the President from time to time
may prescribe.
Section 9. Treasurer. The Treasurer shall:
---------
(i) have charge and custody of, and be responsible for, all of the funds
and securities of the Corporation, except those which the Corporation has
placed in the custody of a bank or trust company or member of a national
securities exchange
19
<PAGE>
(as that term is defined in the Securities Exchange Act of 1934, as
amended) pursuant to a written agreement designating such bank or trust
company or member of a national securities exchange as custodian of the
property of the Corporation;
(ii) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(iii) cause all moneys and other valuables to be deposited to the credit
of the Corporation;
(iv) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(v) disburse the funds of the Corporation and supervise the investment of
its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(vi) in general, perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him
or her by the Board or the President.
Section 10. Secretary. The Secretary shall:
---------
(i) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;
(ii) see that all notices are duly given in accordance with the provisions
of these By-Laws and as required by law;
20
<PAGE>
(iii) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;
(iv) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly
kept and filed; and
(v) in general, perform all of the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him
or her by the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any officer
--------------------
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI.
Indemnification
---------------
Section 1. General Indemnification. Each officer and director of the
-----------------------
Corporation shall be indemnified by the Corporation to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not
21
<PAGE>
protect any such person against any liability to the Corporation or any
stockholder thereof to which such person otherwise would be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office. Absent a court
determination that an officer or director seeking indemnification was not liable
on the merits or guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office,
the decision by the Corporation to indemnify such person must be based upon the
reasonable determination of independent legal counsel or the vote of a majority
of a quorum of the directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to the proceeding
("non-party independent directors"), after review of the facts, that such
officer or director is not guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and to
the full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Corporation a written
22
<PAGE>
affirmation of his or her good faith belief that the standard of conduct
necessary for indemnification by the Corporation has been met and a written
undertaking to repay any such advance, if it ultimately should be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met:
(i) the person seeking indemnification shall provide a security in form and
amount acceptable to the Corporation for his or her undertaking;
(ii) the Corporation is insured against losses arising by reason of the
advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based on a
review of facts readily available to the Corporation at the time the
advance is proposed to be made, that there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland, from liability arising from his or her activities as an
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any officer or director of the Corporation that
protects or purports to protect such person from liability to the Corporation or
to its stockholders to which such
23
<PAGE>
officer or director otherwise would be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his or her office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
Section 2. Other Rights. The indemnification provided by this Article VI
------------
shall not be deemed exclusive of any other right, in respect of indemnification
or otherwise, to which those seeking such indemnification may be entitled under
any insurance or other agreement, vote of stockholders or disinterested
directors or otherwise, both as to action by a director or officer of the
Corporation in his or her official capacity and as to action by such person in
another capacity while holding such office or position, and shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such person.
ARTICLE VII.
Capital Stock
-------------
Section 1. Stock Certificates. Each holder of stock of the Corporation
------------------
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation
24
<PAGE>
owned by him or her, provided, however, that certificates for fractional shares
will not be delivered in any case. The certificates representing shares of
stock shall be signed by or in the name of the Corporation by the President or a
Vice President and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer and sealed with the seal of the Corporation. Any or
all of the signatures or the seal on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate shall be issued, it
may be issued by the Corporation with the same effect as if such officer,
transfer agent or registrar were still in office at the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall be
-------------------------------------------
kept at the principal executive office of the Corporation correct and complete
books and records of account of all the business and transactions of the
Corporation.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the
25
<PAGE>
payment of all taxes thereon. Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of stockholders as the owner
of such share or shares for all purposes, including, without limitation, the
rights to receive dividends or other distributions, and to vote as such owner,
and the Corporation shall not be bound to recognize any equitable or legal claim
to or interest in any such share or shares on the part of any other person.
Section 4. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
-----------------------------------------
certificates representing shares of stock of the Corporation immediately shall
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board, in its discretion, may require
26
<PAGE>
such owner or his or her legal representatives to give to the Corporation a bond
in such sum, limited or unlimited, and in such form and with such surety or
sureties, as the Board in its absolute discretion shall determine, to indemnify
the Corporation against any claim that may be made against it on account of the
alleged loss or destruction of any such certificate, or issuance of a new
certificate. Anything herein to the contrary notwithstanding, the Board, in its
absolute discretion, may refuse to issue any such new certificate, except
pursuant to legal proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions. The
----------------------------------------- -------------
Board may fix, in advance, a date not more than 90 days preceding the date fixed
for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of the
--------------------------------------
Corporation or his or her agent may inspect and copy during usual business hours
the Corporation's By-Laws,
27
<PAGE>
minutes of the proceedings of its stockholders, annual statements of its
affairs, and voting trust agreements on file at its principal office.
ARTICLE VIII.
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors, the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX.
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the 30th day of September.
ARTICLE X.
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be deposited
------------
with such banks or other depositories as the Board of Directors of the
Corporation from time to time may determine.
Section 2. Custodians. All securities and other investments shall be
----------
deposited in the safekeeping of such banks
28
<PAGE>
or other companies as the Board of Directors of the Corporation from time to
time may determine. Every arrangement entered into with any bank or other
company for the safekeeping of the securities and investments of the Corporation
shall contain provisions complying with the Investment Company Act, and the
general rules and regulations thereunder.
ARTICLE XI.
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
--------------------------
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution from time to time shall designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds or
------------------------------
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer or pursuant
to any procedure approved by the Board of Directors, subject to applicable law.
29
<PAGE>
ARTICLE XII.
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange Commission shall be selected annually by the Board of Directors and
ratified by the stockholders in accordance with the provisions of the Investment
Company Act.
ARTICLE XIII.
Annual Statement
----------------
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of the
Corporation and at such other times as may be directed by the Board. A report
to the stockholders based upon each such examination shall be mailed to each
stockholder of record of the Corporation on such date with respect to each
report as may be determined by the Board, at his or her address as the same
appears on the books of the Corporation. Such annual statement also shall be
available at the annual meeting of stockholders and shall be placed on file at
the Corporation's principal office in the State of Maryland, and if no annual
meeting is held pursuant to Article II, Section 1, such annual statement of
affairs shall be placed on file as the Corporation's principal office within 120
days after the end of the Corporation's fiscal year. Each such report shall
show the
30
<PAGE>
assets and liabilities of the Corporation as of the close of the period covered
by the report and the securities in which the funds of the Corporation then were
invested. Such report also shall show the Corporation's income and expenses for
the period from the end of the Corporation's preceding fiscal year to the close
of the period covered by the report and any other information required by the
Investment Company Act, and shall set forth such other matters as the Board or
such firm of independent public accountants shall determine.
ARTICLE XIV.
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by
the affirmative vote of a majority of the Board of Directors. The stockholders
shall have no power to make, amend, alter or repeal By-Laws.
31
<PAGE>
EXHIBIT (D)(2)
COMMON STOCK COMMON STOCK
PAR VALUE $.10 PAR VALUE $.10
CUSIP
See Reverse For Certain
Definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
MUNIHOLDINGS INSURED FUND, INC.
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF MuniHoldings
Insured Fund, Inc. transferable on the books of the Corporation by the holder in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate and the shares represented hereby are issued
and shall be subject to all of the provisions of the Articles of Incorporation
and of the By-Laws of the Corporation, and of all the amendments from time to
time made thereto. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
THE BANK OF NEW YORK President Secretary
Transfer Agent and Registrar
Authorized Signature
<PAGE>
MUNIHOLDINGS INSURED FUND, INC.
The Corporation has the authority to issue stock of more than one class. A
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class of stock
which the Corporation is authorized to issue and the differences in the relative
rights and preferences between the shares of each class to the extent that they
have been set, and the authority of the Board of Directors to set the relative
rights and preferences of subsequent classes and series, will be furnished by
the Corporation to any stockholder, without charge, upon request to the
Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--
TEN ENT--as tenants by the entireties _______Custodian_______
JT TEN --as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts to
tenants in common Minors Act _________
(State)
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- ----------------------------------------- ______________________________
_________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
_________________________________________________________________________
Shares represented by the within Certificate, and do hereby irrevocably
constitute and appoint ___________________ Attorney to transfer the said shares
on the books of the within-named Corporation with full power of substitution in
the premises.
Dated:__________________
Signature:___________________________________
<PAGE>
NOTICE: The signature to this assignment must correspond with the
name as written upon the face of the certificate, in every
particular, without alteration or enlargement, or any change
whatever.
Signature Guaranteed:_______________________________________
-------------------------------------------------------
Signatures must be guaranteed by an "eligible guarantor
institution" as such term is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934.
-------------------------------------------------------
<PAGE>
EXHIBIT E
MUNIHOLDINGS INSURED FUND, INC.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, __________, will act as Agent for me, and
--------------------
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present shares of common stock, par value $.10 per share
("Common Stock"), of MUNIHOLDINGS INSURED FUND, INC. (the "Fund") are
registered, and will automatically put into effect for me the dividend
reinvestment option of the Plan as of the first record date for a dividend or
capital gains distribution (collectively referred to herein as a "dividend"),
payable at the election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan
---------------------------------
constitutes an election by me to receive dividends in shares of Common Stock
whenever the Fund declares a dividend. In such event, the dividend amount shall
automatically be made payable to me entirely in shares of Common Stock which
shall be acquired by the Agent for my account, depending upon the circumstances
described in paragraph 3, either (i) through receipt of additional shares of
unissued but authorized shares of Common Stock from the Fund ("newly-issued
shares") as described in paragraph 6 or (ii) by purchase of outstanding shares
of Common Stock on the open market ("open-market purchases") as described in
paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open-Market Purchases.
---------------------------------------------------------------------
If on the payment date for the dividend (the "valuation date"), the net asset
value per share of the Common Stock, as defined in paragraph 8, is equal to or
less than the market price per share of the Common Stock, as defined in
paragraph 8, plus estimated brokerage commissions (such condition being referred
to herein as "market premium"), the Agent shall invest the dividend amount in
newly-issued shares on my behalf as described in paragraph 6. If on the
valuation date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Agent shall
invest the dividend amount in shares acquired on my behalf in open-market
purchases as described in paragraph 7.
4. Purchase Period for Open-Market Purchases. In the event of a market
-----------------------------------------
discount on the valuation date, the Agent shall have until the last business day
before the next ex-dividend date with respect to the shares of Common Stock or
in no event more than 30 days after the valuation date (the "last purchase
date") to invest the dividend amount in shares acquired in open-market purchases
except where temporary curtailment or suspension of purchases is necessary to
comply with applicable provisions of federal securities laws.
<PAGE>
5. Failure to Complete Open-Market Purchases During Purchase Period.
------------------------------------------------- ----------------
If the Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period because the market discount has shifted
to a market premium or otherwise, the Agent will invest the uninvested
portion of the dividend amount in newly-issued shares at the close of
business on the last purchase date as described in paragraph 4; except that the
Agent may not acquire newly-issued shares after the valuation date under the
foregoing circumstances unless it has received a legal opinion that registration
of such shares is not required under the Securities Act of 1933, as amended, or
unless the shares to be issued are registered under such Act.
6. Acquisition of Newly-Issued Shares. In the event that all or part
----------------------------------
of the dividend amount is to be invested in newly-issued shares, you shall
automatically receive such newly-issued shares of Common Stock, including
fractions, for my account, and the number of additional newly-issued shares of
Common Stock to be credited to my account shall be determined by dividing the
dollar amount of the dividend on my shares to be invested in newly-issued shares
by the net asset value per share of Common Stock on the date the shares are
issued (the valuation date in the case of an initial market premium or the last
purchase date in case the Agent is unable to complete open-market purchases
during the purchase period); provided, that the maximum discount from the then
current market price per share on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the
--------------------------------------
dividend amount is to be invested in shares of Common Stock acquired in open-
market purchases, you shall apply the amount of such dividend on my shares
(less my pro rata share of brokerage commissions incurred with respect to
your open-market purchases) to the purchase on the open-market of shares of
the Common Stock for my account. Open-market purchases may be made on any
securities exchange where the Common Stock is traded, in the over-the-counter
market or in negotiated transactions and may be on such terms as to price,
delivery and otherwise as you shall determine. My funds held by you uninvested
will not bear interest, and it is understood that, in any event, you shall have
no liability in connection with any inability to purchase shares within 30 days
after the initial date of such purchase as herein provided, or with the timing
of any purchases affected. You shall have no responsibility as to the value of
the Common Stock acquired for my account. For the purposes of cash investments
you may commingle my funds with those of other shareholders of the Fund for whom
you similarly act as Agent, and the average price (including brokerage
commissions) of all shares purchased by you as Agent in the open market shall be
the price per share allocable to me in connection with open-market purchases.
2
<PAGE>
8. Meaning of Market Price and Net Asset Value. For all purposes of the
-------------------------------------------
Plan: (a) the market price of the Common Stock on a particular date shall be the
last sales price on the New York Stock Exchange (the "Exchange") on that date,
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such stock on the Exchange on such date and
(b) net asset value per share of the Common Stock on a particular date shall be
as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold my
----------------------------------------------------
shares of Common Stock acquired pursuant to the Plan, together with the shares
of other shareholders of the Fund acquired pursuant to the Plan, in
noncertificated form in your name or that of your nominee. You will forward to
me any proxy solicitation material and will vote any shares so held for me only
in accordance with the proxy returned by me to the Fund. Upon my written
request, you will deliver to me, without charge, a certificate or certificates
for the full shares held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my
-------------
account as soon as practicable but not later than 60 days after the date
thereof.
11. Fractional Interests. Although I may from time to time have an
--------------------
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
12. Stock Dividends or Share Purchase Rights. Any stock dividends or
----------------------------------------
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains
-----------
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan by
----------------------
notifying you in writing. Such termination will be effective immediately if my
notice is received by you not less than ten days prior to any dividend or
distribution record
3
<PAGE>
date; otherwise such termination will be effective on the first trading day
after the payment date for such dividend or distribution with respect to any
subsequent dividend or distribution. The Plan may be terminated by you or the
Fund upon notice in writing mailed to me at least 90 days prior to any record
date for the payment of any dividend or distribution by the Fund. Upon any
termination you will cause a certificate or certificates for the full shares
held for me under the Plan and cash adjustment for any fraction to be delivered
to me without charge. If I elect by notice to you in writing in advance of such
termination to have you sell part or all of my shares and remit the proceeds to
me, you are authorized to deduct brokerage commissions for this transaction from
the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or
-----------------
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date, thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
my account, all dividends and distributions payable on Common Stock of the Fund
held in my name or under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
16. Extent of Responsibility of Agent. You shall at all times act in good
---------------------------------
faith and agree to use your best efforts within reasonable limits to insure the
accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall not be liable for loss or
damage due to errors unless such error is caused by your negligence, bad faith,
or willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the
-------------
laws of the State of New York without regard to its conflicts of laws
provisions.
4
<PAGE>
EXHIBIT 99G
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the ____ day of ________, 1998, by and between
MUNIHOLDINGS INSURED FUND, INC., a Maryland corporation (the "Fund"), and FUND
ASSET MANAGEMENT, L.P., a Delaware limited partnership (the "Investment
Adviser").
W I T N E S S E T H:
----------------------------
WHEREAS, the Fund is engaged in business as a closed-end, non-diversified,
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE>
ARTICLE I
---------
Duties of the Investment Adviser
--------------------------------
The Fund hereby employs the Investment Adviser to act as investment adviser
of the Fund and to furnish, or arrange for its affiliates to furnish, the
investment advisory services described below, subject to the policies of, review
by and overall control of the Board of Directors of the Fund, for the period and
on the terms and conditions set forth in this Agreement. The Investment Adviser
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. The
Investment Adviser and its affiliates for all purposes herein shall be deemed to
be independent contractors and, unless otherwise expressly provided or
authorized, shall have no authority to act for or represent the Fund in any way
or otherwise be deemed agents of the Fund.
(a) Administrative Services. The Investment Adviser shall perform, or
-----------------------
arrange for its affiliates to perform, the management and administrative
services necessary for the operation of the Fund, including administering
shareholder accounts and handling shareholder relations pursuant to an
Administration Agreement of even date herewith.
(b) Investment Advisory Services. The Investment Adviser shall provide,
----------------------------
or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the
2
<PAGE>
latter from time to time may consider necessary for the proper supervision of
the assets of the Fund, shall furnish continuously an investment program for the
Fund and shall determine from time to time which securities shall be purchased,
sold or exchanged and what portion of the assets of the Fund shall be held in
the various securities in which the Fund invests, options, futures, options on
futures or cash, subject always to the restrictions of the Articles of
Incorporation and the By-Laws of the Fund, as amended from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in filings made by the Fund under the Federal securities
laws. The Investment Adviser shall make decisions for the Fund as to the manner
in which voting rights, rights to consent to corporate action and any other
rights pertaining to the Fund's portfolio securities shall be exercised. Should
the Board of Directors at any time, however, make any definite determination as
to investment policy and notify the Investment Adviser thereof in writing, the
Investment Adviser shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such determination has
been revoked. The Investment Adviser shall take, on behalf of the Fund, all
actions which it deems necessary to implement the investment policies determined
as provided above, and in particular to place all orders for the purchase or
sale of portfolio securities for the Fund's account with brokers or
3
<PAGE>
dealers selected by it, and to that end, the Investment Adviser is authorized as
the agent of the Fund to give instructions to the custodian of the Fund as to
deliveries of securities and payments of cash for the account of the Fund. In
connection with the selection of such brokers or dealers and the placing of such
orders with respect to assets of the Fund, the Investment Adviser is directed at
all times to seek to obtain execution and prices within the policy guidelines
determined by the Board of Directors and set forth in filings made by the Fund
under the Federal securities laws. Subject to this requirement and the
provisions of the Investment Company Act, the Securities Exchange Act of 1934,
as amended, and other applicable provisions of law, the Investment Adviser may
select brokers or dealers with which it or the Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
--------------------------------------------------------
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Investment Adviser. The Investment Adviser shall provide the
----------------------
staff and personnel necessary to perform its obligations under this Agreement,
shall assume and pay or cause
4
<PAGE>
to be paid all expenses incurred in connection with the maintenance of such
staff and personnel, and, at its own expense, shall provide the office space,
facilities, equipment and necessary personnel which it is obligated to provide
under Article I hereof, and shall pay all compensation of officers of the Fund
and all Directors of the Fund who are affiliated persons of the Investment
Adviser.
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
--------
other expenses of the Fund including, without limitation: taxes, expenses for
legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses, charges of the custodian, any sub-
custodian and transfer agent, charges of any auction agent and broker dealers in
connection with preferred stock of the Fund, expenses of portfolio transactions,
Securities and Exchange Commission fees, expenses of registering the shares of
common stock and preferred stock under Federal, state and foreign laws, fees and
actual out-of-pocket expenses of Directors who are not affiliated persons of the
Investment Adviser, accounting and pricing costs (including the daily
calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or nonrecurring expenses, and other expenses
properly payable by the Fund. It also is understood that the Fund will
reimburse the Investment Adviser for its costs incurred in providing accounting
services to the Fund.
5
<PAGE>
ARTICLE III
-----------
Compensation of the Investment Adviser
--------------------------------------
(a) Investment Advisory Fee. For the services rendered, the
-----------------------
facilities furnished and the expenses assumed by the Investment Adviser, the
Fund shall pay to the Investment Adviser at the end of each calendar month a fee
based upon the average weekly value of the net assets of the Fund at the annual
rate of 0.55 of 1.0% (0.55%) of the average weekly net assets of the Fund (i.e.,
the average weekly value of the total assets of the Fund, minus the sum of
accrued liabilities of the Fund and accumulated dividends on shares of
outstanding preferred stock), commencing on the day following effectiveness
hereof. For purposes of this calculation, average weekly net assets are
determined at the end of each month on the basis of the average net assets of
the Fund for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the last business day of a week with
the net assets at the last business day of the prior week. It is understood
that the liquidation preference of any outstanding preferred stock (other than
accumulated dividends) is not considered a liability in determining the Fund's
average weekly net assets. If this Agreement becomes effective subsequent to
the first day of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fee as set forth
above. Subject to the
6
<PAGE>
provisions of subsection (b) hereof, payment of the Investment Adviser's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated by subsection (b) hereof. During
any period when the determination of net asset value is suspended by the Board
of Directors, the average net asset value of a share for the last week prior to
such suspension shall for this purpose shall be deemed to be the net asset value
at the close of each succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the
-------------------
Fund, including amounts payable to the Investment Adviser pursuant to subsection
(a) hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its investment advisory fee by the extent of such excess and, if required
pursuant to any such laws or regulations, will reimburse the Fund in the amount
of such excess; provided, however, to the extent permitted by law, there shall
-------- -------
be excluded from such expenses the amount of any interest, taxes, distribution
fees, brokerage fees and commissions and extraordinary expenses (including but
not limited to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Fund. Whenever the
expenses of the Fund exceed a pro rata portion of
7
<PAGE>
the applicable annual expense limitations, the estimated amount of reimbursement
under such limitations shall be applicable as an offset against the monthly
payment of the fee due to the Investment Adviser. Should two or more such
expense limitations be applicable as at the end of the last business day of the
month, that expense limitation which results in the largest reduction in the
Investment Adviser's fee shall be applicable.
ARTICLE IV
----------
Limitation of Liability of the Investment Adviser
-------------------------------------------------
The Investment Adviser shall not be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
---------
Activities of the Investment Adviser
------------------------------------
The services of the Investment Adviser to the Fund are not to be
deemed to be exclusive; the Investment Adviser and any person controlled by or
under common control with the Investment
8
<PAGE>
Adviser (for purposes of this Article V referred to as "affiliates") are free to
render services to others. It is understood that Directors, officers, employees
and shareholders of the Fund are or may become interested in the Investment
Adviser and its affiliates, as directors, officers, employees, partners and
shareholders or otherwise, and that directors, officers, employees, partners and
shareholders of the Investment Adviser and of its affiliates are or may become
similarly interested in the Fund, and that the Investment Adviser and directors,
officers, employees, partners and shareholders of its affiliates may become
interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above
written and shall remain in force until ___________, 2000 and thereafter, but
only so long as such continuance specifically is approved at least annually by
(i) the Board of Directors of the Fund, or by the vote of a majority of the
outstanding voting securities of the Fund, and (ii) by the vote of a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Board of Directors or by vote of a
9
<PAGE>
majority of the outstanding voting securities of the Fund, or by the Investment
Adviser, on sixty (60) days' written notice to the other party. This Agreement
shall terminate automatically in the event of its assignment.
ARTICLE VII
-----------
Amendment of this Agreement
---------------------------
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
----------
Governing Law
-------------
10
<PAGE>
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York and the applicable provisions of the
Investment Company Act. To the extent that the applicable laws of the State of
New York, or any of the provisions herein, conflict with the applicable
provisions of the Investment Company Act, the latter shall control.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have
executed and delivered this Agreement as of the date first above written.
MUNIHOLDINGS INSURED FUND, INC.
By: ______________________________
Authorized Signatory
ATTEST:
____________________
Secretary
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
ATTEST:
_____________________
Secretary
12
<PAGE>
EXHIBIT (H)(1)
________ Shares
MUNIHOLDINGS INSURED FUND, INC.
(a Maryland corporation)
Common Stock
(Par Value $0.10 Per Share)
PURCHASE AGREEMENT
------------------
, 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1201
Dear Sirs and Mesdames:
MuniHoldings Insured Fund, Inc., a Maryland corporation (the "Fund"), and
Fund Asset Management, L.P., a Delaware limited partnership (the "Adviser"),
each confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the "Underwriter"), with respect to the sale by the
Fund and the purchase by the Underwriter of ___________ shares of common stock,
par value $.10 per share, of the Fund (the "Common Stock"), and, with respect to
the grant by the Fund to the Underwriter of the option described in Section 2
hereof to purchase all or any part of __________ additional shares of Common
Stock to cover over-allotments. The aforesaid __________ shares (the "Initial
Shares"), together with all or any part of the ____________ additional shares of
Common Stock subject to the option described in Section 2 hereof (the "Option
Shares"), hereinafter are referred to collectively as the "Shares".
Prior to the purchase and public offering of the Shares by the Underwriter,
the Fund and the Underwriter shall enter into an agreement substantially in the
form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may
take the form of an exchange of any standard form of written telecommunication
between the Fund and the Underwriter and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Shares
will be governed by this Agreement, as supplemented by the Pricing Agreement.
From and after the date
<PAGE>
of the execution and delivery of the Pricing Agreement, this Agreement shall be
deemed to incorporate the Pricing Agreement.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No.
__________) and a related preliminary prospectus for the registration of the
Shares under the Securities Act of 1933, as amended (the "1933 Act"), the
Investment Company Act, and the rules and regulations of the Commission under
the 1933 Act and the Investment Company Act (together, the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such amended preliminary prospectuses as may have been
required to the date hereof. The Fund will prepare and file such additional
amendments thereto and such amended prospectuses as hereafter may be required.
Such registration statement (as amended at the time it becomes effective, if
applicable) and the prospectus constituting a part thereof (including in each
case the information, if any, deemed to be a part thereof pursuant to Rule
430A(b) or Rule 434 of the Rules and Regulations), as from time to time amended
or supplemented pursuant to the 1933 Act, are referred to hereinafter as the
"Registration Statement" and the "Prospectus", respectively; except that if any
revised prospectus shall be provided to the Underwriter by the Fund for use in
connection with the offering of the Shares which differs from the Prospectus on
file at the Commission at the time the Registration Statement becomes effective
(whether such revised prospectus is required to be filed by the Fund pursuant to
Rule 497(c) or Rule 497(h) of the Rules and Regulations), the term "Prospectus"
shall refer to each such revised prospectus from and after the time it is first
provided to the Underwriter for such use. If the Fund elects to rely on Rule
434 under the Rules and Regulations, all references to the Prospectus shall be
deemed to include, without limitation, the form of prospectus and the term
sheet, taken together, provided to the Underwriter by the Fund in reliance on
Rule 434 under the 1933 Act (the "Rule 434 Prospectus"). If the Fund files a
registration statement to register a portion of the Shares and relies on Rule
462(b) for such registration statement to become effective upon filing with the
Commission (the "Rule 462 Registration Statement"), then any reference to
"Registration Statement" herein shall be deemed to include both the registration
statement referred to above (No. _________) and the Rule 462 Registration
Statement, as each such registration statement may be amended pursuant to the
1933 Act.
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after the
Registration Statement becomes effective and the Pricing Agreement has been
executed and delivered.
2
<PAGE>
SECTION 1. Representations and Warranties. (a) The Fund and the Adviser
each severally represents and warrants to the Underwriter as of the date hereof
and as of the date of the Pricing Agreement (such later date hereinafter being
referred to as the "Representation Date") as follows:
(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act, the Investment
Company Act and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective, at
the Representation Date and at Closing Time referred to in Section 2, the
Prospectus (unless the term "Prospectus" refers to a prospectus which has
been provided to the Underwriter by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file with the
Commission at the time the Registration State ment becomes effective, in
which case at the time such prospectus first is provided to the Underwriter
for such use) will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Fund in writing by the
Underwriter expressly for use in the Registration Statement or in the
Prospectus.
(ii) The accountants who certified the statement of assets,
liabilities and capital included in the Registration Statement are
independent public accountants as required by the 1933 Act and the Rules
and Regulations.
(iii) The statement of assets, liabilities and capital included in the
Registration Statement presents fairly the financial position of the Fund
as at the date indicated and said statement has been prepared in conformity
with generally accepted accounting principles.
(iv) Since the respective dates as of which information is given in
the Registration Statement and in the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the
condition, financial or otherwise, of the Fund, or in the earnings,
business affairs or business prospects of the Fund, whether or not arising
in the ordinary course of business, (B) there
3
<PAGE>
have been no transactions entered into by the Fund which are material to
the Fund other than those in the ordinary course of business and (C) there
has been no dividend or distribution of any kind declared, paid or made by
the Fund on any class of its capital stock.
(v) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland with
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement; the Fund
is duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is required;
and the Fund has no subsidiaries.
(vi) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified, management investment
company, and no order of suspension or revocation of such registration has
been issued or proceedings therefor initiated or threatened by the
Commission.
(vii) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Stock"; the Shares have been duly authorized for issuance and sale to the
Underwriter pursuant to this Agreement and, when issued and delivered by
the Fund pursuant to this Agreement against payment of the consideration
set forth in the Pricing Agreement, will be validly issued and fully paid
and nonassessable; the Shares conform in all material respects to all
statements relating thereto contained in the Registration Statement; and
the issuance of the Shares to be purchased by the Underwriter is not
subject to preemptive rights.
(viii) The Fund is not in violation of its articles of incorporation, as
amended (the "Charter"), or its by-laws, as amended (the "By-Laws"), or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which it is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement, the Pricing Agreement and the
Investment Advisory Agreement and the Custody Agreement referred to in the
Registration Statement (as used herein, the "Advisory Agreement" and the
"Custody Agreement", respectively) and the consummation of the transactions
contemplated herein and therein have been duly authorized by all necessary
corporate action and will not conflict with or constitute a breach of,
4
<PAGE>
or a default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Fund pursuant to
any material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Fund is a party or by which it may be bound
or to which any of the property or assets of the Fund is subject, nor will
such action result in any violation of the provisions of the Charter or the
By-Laws of the Fund, or, to the best knowledge of the Fund and the Adviser,
any law, administrative regulation or administrative or court decree; and
no consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Fund of the
transactions contemplated by this Agreement, the Pricing Agreement, the
Advisory Agreement and the Custody Agreement, except such as has been
obtained under the Investment Company Act or as may be required under the
1933 Act or state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriter.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in
the Prospectus and the Fund has not received any notice of proceedings
relating to the revocation or modification of any such licenses, permits,
covenants, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Fund, threatened against or affecting, the Fund, which
might result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Fund, or might
materially and adversely affect the properties or assets of the Fund; and
there are no material contracts or documents of the Fund which are required
to be filed as exhibits to the Registration Statement by the 1933 Act, the
Investment Company Act or the Rules and Regulations which have not been so
filed.
(xi) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required.
(xii) The Fund owns or possesses, or can acquire on reasonable terms,
adequate trademarks, service marks and trade names necessary to conduct its
business as described
5
<PAGE>
in the Registration Statement, and the Fund has not received any notice of
infringement of or conflict with asserted rights of others with respect to
any trademarks, service marks or trade names which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would materially adversely affect the conduct of the business, operations,
financial condition or income of the Fund.
(b) The Adviser represents and warrants to the Underwriter as of the date
hereof and as of the Representation Date as follows:
(i) The Adviser has been duly organized as a limited partnership
under the laws of the State of Delaware, with power and authority to
conduct its business as described in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Investment Advisers
Act"), and is not prohibited by the Investment Advisers Act or the
Investment Company Act, or the rules and regulations under such acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement has been duly authorized, executed and delivered
by the Adviser; the Advisory Agreement has been duly authorized, executed
and delivered by the Adviser and constitutes a valid and binding obligation
of the Adviser, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization or other laws
relating to or affecting creditors' rights and to general equitable
principles; and neither the execution and delivery of this Agreement or the
Advisory Agreement, nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of any of
the terms and provisions of, or constitute, with or without the giving of
notice or the lapse of time or both, a default under, any agreement or
instrument to which the Adviser is a party or by which it is bound, or any
law, order, rule or regulation applicable to it of any jurisdiction, court,
Federal or state regulatory body, administrative agency or other
governmental body, stock exchange or securities association having
jurisdiction over the Adviser or its respective properties or operations.
(iv) The Adviser has the financial resources available to it necessary
for the performance of its services and obligations as contemplated in the
Prospectus.
6
<PAGE>
(v) Any advertisement approved by the Adviser for use in the public
offering of the Shares pursuant to Rule 482 under the Rules and Regulations
(an "Omitting Prospectus") complies with the requirements of such Rule 482.
(c) Any certificate signed by any officer of the Fund or the Adviser and
delivered to the Underwriter or to counsel to the Fund and the Underwriter shall
be deemed a representation and warranty by the Fund or the Adviser, as the case
may be, to the Underwriter, as to the matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, the Fund agrees to
sell the Initial Shares to the Underwriter and the Underwriter agrees to
purchase the Initial Shares from the Fund, at the price per share set forth in
the Pricing Agreement.
(i) If the Fund has elected not to rely upon Rule 430A under the
Rules and Regulations, the initial public offering prices and the purchase
price per share to be paid by the Underwriter for the Shares have been
determined and set forth in the Pricing Agreement, dated the date hereof,
and an amendment to the Registration Statement and the Prospectus will be
filed before the Registration Statement becomes effective.
(ii) If the Fund has elected to rely upon Rule 430A under the Rules and
Regulations, the purchase price per share to be paid by the Underwriter for
the Shares shall be an amount equal to the applicable initial public
offering price, less an amount per share to be determined by agreement
between the Underwriter and the Fund. The initial public offering price
per share shall be a fixed price based upon the number of Shares purchased
in a single transaction to be determined by agreement between the
Underwriter and the Fund. The initial public offering price and the
purchase price, when so determined, shall be set forth in the Pricing
Agreement. In the event that such prices have not been agreed upon and the
Pricing Agreement has not been executed and delivered by all parties
thereto by the close of business on the fourth business day following the
date of this Agreement, this Agreement shall terminate forthwith, without
liability of any party to any other party, except as provided in Section 4,
unless otherwise agreed to by the Fund, the Adviser and the Underwriter.
In addition, on the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the Fund
hereby grants an option to
7
<PAGE>
the Underwriter to purchase all or any part of the Option Shares at the price
per share set forth above. The option hereby granted will expire 45 days after
the date hereof (or, if the Fund has elected to rely upon Rule 430A under the
Rules and Regulations, 45 days after the execution of the Pricing Agreement) and
may be exercised only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Initial Shares upon
notice by the Underwriter to the Fund setting forth the number of Option Shares
as to which the Underwriter is then exercising the option and the time, date and
place of payment and delivery for such Option Shares. Any such time and date of
delivery (a "Date of Delivery") shall be determined by the Underwriter but shall
not be later than seven full business days after the exercise of said option,
nor in any event prior to Closing Time, as hereinafter defined, unless otherwise
agreed upon by the Underwriter and the Fund.
(b) Payment of the purchase price for, and delivery of certificates for,
the Initial Shares shall be made at the office of Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557, or at such other place as shall be
agreed upon by the Underwriter and the Fund, at 9:00 A.M. on the third business
day following the date the Registration Statement becomes effective or, if the
Fund has elected to rely upon Rule 430A under the Rules and Regulations, the
third business day after execution of the Pricing Agreement (or, if pricing
takes place after 4:30 P.M. on either the date the Registration Statement
becomes effective or the date of execution of the Pricing Agreement, as
applicable, the fourth business day after such applicable date), or such other
time not later than ten business days after such date as shall be agreed upon by
the Underwriter and the Fund (such time and date of payment and delivery herein
being referred to as "Closing Time"). In addition, in the event that any or all
of the Option Shares are purchased by the Underwriter, payment of the purchase
price for, and delivery of certificates for, such Option Shares shall be made at
the above-mentioned office of Brown & Wood LLP, or at such other place as shall
be agreed upon mutually by the Fund and the Underwriter, on each Date of
Delivery as specified in the notice from the Underwriter to the Fund. Payment
shall be made to the Fund by a Federal Funds check or checks or similar same-day
funds payable to the order of the Fund, against delivery to the Underwriter of
certificates for the Shares to be purchased by it. Certificates for the Initial
Shares and Option Shares shall be in such denominations and registered in such
names as the Underwriter may request in writing at least two business days
before Closing Time or the Date of Delivery, as the case may be. The
certificates for the Initial Shares and the Option Shares will be made available
by the Fund for examination by the Underwriter not later than 10:00 A.M. on the
last business day prior to Closing Time or the Date of Delivery, as the case may
be.
8
<PAGE>
SECTION 3. Covenants of the Fund. The Fund covenants with the Underwriter
as follows:
(a) The Fund will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and will advise the
Underwriter promptly as to the time at which the Registration Statement and
any amendments thereto (including any post-effective amendment) becomes so
effective and (ii) if required, to cause the issuance of any orders
exempting the Fund from any provisions of the Investment Company Act, and
the Fund will advise the Underwriter promptly as to the time at which any
such orders are granted.
(b) The Fund will notify the Underwriter immediately, and will
confirm the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendments thereto (including any post-effective
amendment), (ii) of the receipt of any comments from the Commission, (iii)
of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (v) of the issuance by
the Commission of an order of suspension or revocation of the notification
on Form N-8A of registration of the Fund as an investment company under the
Investment Company Act or the initiation of any proceeding for that
purpose. The Fund will make every reasonable effort to prevent the
issuance of any stop order described in subsec tion (vi) hereunder or any
order of suspension or revocation described in subsection (vii) hereunder
and, if any such stop order or order of suspension or revocation is issued,
to obtain the lifting thereof at the earliest possible moment. If the Fund
elects to rely on Rule 434 under the Rules and Regulations, the Fund will
prepare a term sheet that complies with the requirements of Rule 434 under
the Rules and Regulations and the Fund will provide the Underwriter with
copies of the form of Rule 434 Prospectus, in such number as the
Underwriter may reasonably request by the close of business in New York on
the business day immediately succeeding the date of the Pricing Agreement.
(c) The Fund will give the Underwriter notice of its intention to
file any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Fund proposes for use by the
Underwriter in connection with the offering of the Shares, which differs
from the prospectus on file at the Commission at the time the Registration
Statement becomes effective,
9
<PAGE>
whether such revised prospectus is required to be filed pursuant to Rule
497(c) or Rule 497(h) of the Rules and Regulations or any term sheet
prepared in reliance on Rule 434 of the Rules and Regulations), whether
pursuant to the Investment Company Act, the 1933 Act, or otherwise, and
will furnish the Underwriter with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such amendment or supplement
to which the Underwriter reasonably shall object.
(d) The Fund will deliver to the Underwriter, as soon as practicable,
two signed copies of the notification of registration and registration
statement as originally filed and of each amendment thereto, in each case
with two sets of the exhibits filed therewith, and also will deliver to the
Underwriter a conformed copy of the registration statement as originally
filed and of each amendment thereto (but without exhibits to the
registration statement or any such amendment) for the Underwriter.
(e) The Fund will furnish to the Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the
1933 Act, such number of copies of the Prospectus (as amended or
supplemented) as the Underwriter reasonably may request for the purposes
contemplated by the 1933 Act, or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in
the opinion of counsel to the Fund and the Underwriter, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, the Fund forthwith will amend or supplement the Prospectus by
preparing and furnishing to the Underwriter a reasonable number of copies
of an amendment or amendments of or a supplement or supplements to, the
Prospectus (in form and substance satisfactory to counsel to the Fund and
the Underwriter), so that, as so amended or supplemented, the Prospectus
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading.
(g) The Fund will endeavor, in cooperation with the Underwriter, to
qualify the Shares for offering and sale under the applicable securities
laws of such states and other jurisdictions of the United States as the
Underwriter may designate, and will maintain such qualifications in effect
for a period of not less than one year after the date hereof. The Fund
will file such statements and reports as
10
<PAGE>
may be required by the laws of each jurisdiction in which the Shares have
been qualified as above provided.
(h) The Fund will make generally available to its security holders as
soon as practicable, but no later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the Rules and Regulations) covering a twelve-
month period beginning not later than the first day of the Fund's fiscal
quarter next following the "effective" date (as defined in said Rule 158)
of the Registration Statement.
(i) Between the date of this Agreement and the termination of any
trading restrictions or Closing Time, whichever is later, the Fund will
not, without your prior consent, offer or sell, or enter into any agreement
to sell, any equity or equity related securities of the Fund other than the
Shares and shares of Common Stock issued in reinvestment of dividends or
distributions.
(j) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance
upon Rule 430A of the Rules and Regulations, then immediately following the
execution of the Pricing Agreement, the Fund will prepare, and file or
transmit for filing with the Commission in accordance with such Rule 430A
and Rule 497(h) of the Rules and Regulations, copies of the amended
Prospectus, or, if required by such Rule 430A, a post-effective amendment
to the Registration Statement (including an amended Prospectus), containing
all information so omitted.
(k) The Fund will use its best efforts to effect the listing of the
Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than four weeks from the date of the Prospectus.
SECTION 4. Payment of Expenses. The Fund will pay all expenses incident
to the performance of its obligations under this Agreement, including, but not
limited to, expenses relating to (i) the printing and filing of the registration
statement as originally filed and of each amendment thereto, (ii) the printing
of this Agreement and the Pricing Agreement, (iii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriter, (iv) the fees
and disbursements of the Fund's counsel and accountants, (v) the qualification
of the Shares under securities laws in accordance with the provisions of Section
3(g) of this Agreement, including filing fees and any reasonable fees or
disbursements of counsel in connection therewith and in connection with the
preparation of the Blue Sky Survey, (vi) the printing and delivery to the
Underwriter of copies of the registration statement as originally filed and of
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<PAGE>
each amendment thereto, of the preliminary prospectus, and of the Prospectus and
any amendments or supplements thereto, (vii) the printing and delivery to the
Underwriter of copies of the Blue Sky Survey, (viii) the fees and expenses
incurred with respect to the filing with the National Association of Securities
Dealers, Inc. and (ix) the fees and expenses incurred with respect to the
listing of the Shares on the New York Stock Exchange.
If this Agreement is terminated by the Underwriter in accordance with the
provisions of Section 5 or Section 9(a)(i), the Fund or the Adviser shall
reimburse the Underwriter for all of its reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of counsel to the Fund and the
Underwriter. In the event the transactions contemplated hereunder are not
consummated, the Adviser agrees to pay all of the costs and expenses set forth
in the first paragraph of this Section 4 which the Fund would have paid if such
transactions had been consummated.
SECTION 5. Conditions of Underwriter's Obligations. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser herein contained, to the performance by
the Fund and the Adviser of their respective obligations hereunder, and to the
following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., on the date of this Agreement, or at a later time and date
not later, however, than 5:30 P.M. on the first business day following the
date hereof, or at such later time and date as may be approved by the
Underwriter, and at Closing Time no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission. If the
Fund has elected to rely upon Rule 430A of the Rules and Regulations, the
price of the Shares and any price-related information previously omitted
from the effective Registration Statement pursuant to such Rule 430A shall
have been transmitted to the Commission for filing pursuant to Rule 497(h)
of the Rules and Regulations within the prescribed time period, and prior
to Closing Time the Fund shall have provided evidence satisfactory to the
Underwriter of such timely filing, or a post-effective amendment providing
such information shall have been filed promptly and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) At Closing Time, the Underwriter shall have received:
12
<PAGE>
(1) The favorable opinion, dated as of Closing Time, of Brown &
Wood LLP, counsel to the Fund and the Underwriter, to the effect that:
(i) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland.
(ii) The Fund has corporate power and authority to own,
lease and operate its properties and conduct its business as
described in the Registration Statement and in the Prospectus.
(iii) The Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which such qualification is required.
(iv) The Shares have been duly authorized for issuance and
sale to the Underwriter pursuant to this Agreement and, when
issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in the Pricing
Agreement, will be validly issued and fully paid and
nonassessable; the issuance of the Shares is not subject to
preemptive rights; and the authorized capital stock conforms as
to legal matters in all material respects to the description
thereof in the Registration Statement under the caption
"Description of Capital Stock".
(v) This Agreement and the Pricing Agreement each has been
duly authorized, executed and delivered by the Fund and each
complies with all applicable provisions of the Investment Company
Act.
(vi) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop
order suspending the effectiveness of the Registration Statement
has been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission.
(vii) At the time the Registration Statement became effective
and at the Representation Date, the Registration Statement (other
than the financial statements included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the Investment
Company Act and
13
<PAGE>
the Rules and Regulations. The Rule 434 Prospectus conforms to
the requirements of Rule 434 in all material respects.
(viii) To the best of their knowledge and information, there
are no legal or governmental proceedings pending or threatened
against the Fund which are required to be disclosed in the
Registration Statement, other than those disclosed therein.
(ix) To the best of their knowledge and information, there
are no contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments of the Fund required to be described
or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to
therein or filed as exhibits thereto, the descriptions thereof
are correct in all material respects, references thereto are
correct, and no default exists in the due performance or
observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument so described, referred
to or filed.
(x) No consent, approval, authorization or order of any
court or governmental authority or agency is required in
connection with the sale of the Shares to the Underwriter, except
such as has been obtained under the 1933 Act, the Investment
Company Act or the Rules and Regulations or such as may be
required under state securities laws; and to the best of their
knowledge and information, the execution and delivery of this
Agreement, the Pricing Agreement, the Advisory Agreement and the
Custody Agreement and the consummation of the transactions
contemplated herein and therein will not conflict with or
constitute a breach of, or a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Fund pursuant to, any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which the Fund is a party or by which it may be
bound or to which any of the property or assets of the Fund is
subject, nor will such action result in any violation of the
provisions of the Charter or the By-Laws of the Fund, or any law
or administrative regulation, or,
14
<PAGE>
to the best of their knowledge and information, administrative or
court decree.
(xi) The Advisory Agreement and the Custody Agreement have
each been duly authorized and approved by the Fund and comply as
to form in all material respects with all applicable provisions
of the Investment Company Act, and each has been duly executed by
the Fund.
(xii) The Fund is registered with the Commission under the
Investment Company Act as a closed-end, non-diversified
management investment company, and all required action has been
taken by the Fund under the 1933 Act, the Investment Company Act
and the Rules and Regulations to make the public offering and
consummate the sale of the Shares pursuant to this Agreement; the
provisions of the Charter and the By-Laws of the Fund comply as
to form in all material respects with the requirements of the
Investment Company Act; and, to the best of their knowledge and
information, no order of suspension or revocation of such
registration under the Investment Company Act, pursuant to
Section 8(e) of the Investment Company Act, has been issued or
proceedings therefor initiated or threatened by the Commission.
(xiii) The information in the Prospectus under the caption
"Taxes", to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by them and is correct in
all material respects.
(2) The favorable opinion, dated as of Closing Time, of Philip
L. Kirstein, Esq., General Counsel to the Adviser, in form and
substance satisfactory to counsel to the Underwriter, to the effect
that:
(i) The Adviser has been duly organized as a limited
partnership under the laws of the State of Delaware, with power
and authority to conduct its business as described in the
Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser
under the Investment Advisers Act and is not prohibited by the
Investment Advisers Act or the Investment Company Act, or the
rules and regulations under such Acts, from acting
15
<PAGE>
under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been
duly authorized, executed and delivered by the Adviser, and the
Advisory Agreement constitutes a valid and binding obligation of
the Adviser, enforceable in accordance with its terms, subject,
as to enforcement, to bankruptcy, insolvency, reorganization or
other laws relating to or affecting creditors' rights and to
general equity principles; and, to the best of his knowledge and
information, neither the execution and delivery of this Agreement
or the Advisory Agreement nor the performance by the Adviser of
its obligations hereunder or thereunder will conflict with, or
result in a breach of, any of the terms and provisions of, or
constitute, with or without the giving of notice or the lapse of
time or both, a default under, any agreement or instrument to
which the Adviser is a party or by which the Adviser is bound, or
any law, order, rule or regulation applicable to the Adviser of
any jurisdiction, court, Federal or state regulatory body,
administrative agency or other governmental body, stock exchange
or securities association having jurisdiction over the Adviser or
its properties or operations.
(iv) To the best of his knowledge and information, the
description of the Adviser in the Registration Statement and in
the Prospectus does not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(3) In giving their opinion required by subsection (b)(1) of this
Section, Brown & Wood LLP additionally shall state that nothing has come to
their attention that would lead them to believe that the Registration
Statement (other than the financial statements included therein, as to
which no opinion need be rendered), at the time it became effective or at
the Representation Date, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (other than the financial statements included therein, as to
which no opinion need be rendered), at the Representation Date (unless the
term "Prospectus" refers to a prospectus which has been provided to the
Underwriter by the Fund for
16
<PAGE>
use in connection with the offering of the Shares which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective, in which case at the time it first is provided to the
Underwriter for such use) or at Closing Time, included an untrue statement
of a material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. In giving their opinion, Brown &
Wood LLP may rely as to matters of fact, upon certificates and written
statements of officers and employees of and accountants for the Fund and
the Adviser and of public officials.
(c) At Closing Time, (i) the Registration Statement and the
Prospectus shall contain all statements which are required to be stated
therein in accordance with the 1933 Act, the Investment Company Act and the
Rules and Regulations and in all material respects shall conform to the
requirements of the 1933 Act, the Investment Company Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus
shall contain any untrue state ment of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and no action,
suit or proceeding at law or in equity shall be pending or, to the
knowledge of the Fund or the Adviser, threatened against the Fund or the
Adviser which would be required to be set forth in the Prospectus other
than as set forth therein, (ii) there shall not have been, since the date
as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, of the Fund or in its
earnings, business affairs or business prospects, whether or not arising in
the ordinary course of business, from that set forth in the Prospectus,
(iii) the Adviser shall have the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Prospectus, and (iv) no proceedings shall be pending
or, to the knowledge of the Fund or the Adviser, threatened against the
Fund or the Adviser before or by any Federal, state or other commission,
board or administrative agency wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property,
financial condition or income of either the Fund or the Adviser other than
as set forth in the Prospectus, and the Underwriter shall have received, at
Closing Time, a certificate of the President or the Treasurer of the Fund
and of the President or a Vice President of the Adviser dated as of Closing
Time, evidencing compliance with the appropriate provisions of this
subsection (c).
17
<PAGE>
(d) At Closing Time, the Underwriter shall have received
certificates, dated as of Closing Time, (i) of the President or the
Treasurer of the Fund to the effect that the representations and warranties
of the Fund contained in Section 1(a) are true and correct with the same
force and effect as though expressly made at and as of Closing Time and,
(ii) of the President or a Vice President of the Adviser to the effect that
the representations and warranties of the Adviser contained in Sections
1(a) and (b) are true and correct with the same force and effect as though
expressly made at and as of Closing Time.
(e) At the time of execution of this Agreement, the Underwriter shall
have received from Ernst & Young LLP a letter, dated such date in form and
substance satisfactory to the Underwriter, to the effect that:
(i) they are independent accountants with respect to the Fund
within the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the statement of assets, liabilities and
capital examined by them and included in the Registration Statement
complies as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the Investment Company Act
and the Rules and Regulations; and
(iii) they have performed specified procedures, not constituting
an audit, including a reading of the latest available interim
financial statements of the Fund, a reading of the minute books of the
Fund, inquiries of officials of the Fund responsible for financial
accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and
procedures nothing came to their attention that caused them to believe
that at the date of the latest available statement of assets,
liabilities and capital read by such accountants, or at a subsequent
specified date not more than three days prior to the date of this
Agreement, there was any change in the capital stock or net assets of
the Fund as compared with amounts shown on the statement of assets,
liabilities and capital included in the Prospectus.
(f) At Closing Time, the Underwriter shall have received from Ernst &
Young LLP a letter, dated as of Closing Time, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection
(e) of this Section, except that the "specified
18
<PAGE>
date" referred to shall be a date not more than three days prior to Closing
Time.
(g) At Closing Time, counsel to the Underwriter shall have been
furnished with such documents and opinions as they may reasonably require
for the purpose of enabling them to pass upon the issuance and sale of the
Shares as herein contemplated and to pass upon related proceedings, or in
order to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Fund and the Adviser in connection with the
organization and registration of the Fund under the Investment Company Act
and the issuance and sale of the Shares as herein and therein contemplated
shall be satisfactory in form and sub stance to the Underwriter.
(h) In the event the Underwriter exercises its option provided in
Section 2 hereof to purchase all or any portion of the Option Shares, the
representations and warranties of the Fund and the Adviser contained herein
and the statements in any certificate furnished by the Fund and the Adviser
hereunder shall be true and correct as of each Date of Delivery, and the
Underwriter shall have received:
(i) Certificates, dated the Date of Delivery, of the President
or the Treasurer of the Fund and of the President or a Vice President
of the Adviser confirming that the information contained in the
certificate delivered by each of them at Closing Time pursuant to
Section 5(c) or 5(d), as the case may be, remains true as of such Date
of Delivery.
(ii) The favorable opinions of Brown & Wood LLP, counsel to the
Fund and the Underwriter and Philip L. Kirstein, Esq., General Counsel
of the Adviser, each in form and substance satisfactory to the
Underwriter, dated such Date of Delivery, relating to the Option
Shares and otherwise to the same effect as the opinions required by
Sections 5(b)(1) and (2), respectively.
(iii) A letter from Ernst & Young LLP, in form and substance
satisfactory to the Underwriter and dated such Date of Delivery,
substantially the same in scope and substance as the letter furnished
to the Underwriter pursuant to Section 5(e), except that the
"specified date" in the letter furnished pursuant to this Section 5(h)
shall be a date not more than three days prior to such Date of
Delivery.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this
19
<PAGE>
Agreement may be terminated by the Underwriter by notice to the Fund at any time
at or prior to Closing Time, and such termination shall be without liability of
any party to any other party except as provided in Section 4.
SECTION 6. Indemnification. (a) The Fund and the Adviser jointly and
severally agree to indemnify and hold harmless the Underwriter and each person,
if any, who controls the Underwriter within the meaning of Section 15 of the
1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the information deemed to be part of
the Registration Statement pursuant to Rule 430A or Rule 434 of the Rules
and Regulations, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever (including the fees and
disbursements of counsel chosen by the Underwriter) reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity
20
<PAGE>
with written information furnished to the Fund by the Underwriter expressly for
use in the Registration Statement (or any amendment thereto), including the
information deemed to be part of the Registration Statement pursuant to Rule
430A or Rule 434 of the Rules and Regulations, or any preliminary prospectus or
in the Prospectus (or any amendment or supplement thereto).
Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director, officer or controlling
person of the Fund, such indemnity agreement is subject to the undertaking of
the Fund in the Registration Statement.
(b) The Underwriter agrees to indemnify and hold harmless the Fund and the
Adviser, their respective directors, each of the Fund's officers who signed the
Registration Statement, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act, against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or in any preliminary
prospectus or in the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), including the information deemed to be part of the
Registration Statement pursuant to Rule 430A or Rule 434 of the Rules and
Regulations, or any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto) in reliance upon and in conformity with written
information furnished to the Fund by the Underwriter expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudicial as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be
21
<PAGE>
liable for the fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6 (a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses incurred by such indemnified party, as incurred, (i) in such proportion
as is appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the offering
of the Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in
22
<PAGE>
connection with the offering of the Shares pursuant to this Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Shares pursuant to this Agreement (before deducting
expenses) received by the Fund, less the total underwriting commission received
by the Underwriter, and the total underwriting commission received by the
Underwriter, in each case as set forth on the cover of the Prospectus, or, if
Rule 434 is used, the corresponding location on the term sheet, bear to the
aggregate initial public offering price of the Shares as set forth on such
cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriter were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
23
<PAGE>
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each officer or director of the
Fund and the Adviser, respectively, each director of the Fund who signed the
Registration Statement, and each person, if any, who controls the Fund and the
Adviser within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Fund.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
the Pricing Agreement, or contained in certificates of officers of the Fund or
of the Adviser submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriter or controlling person, or by or on behalf of the Fund or the Adviser
and shall survive delivery of the Shares to the Underwriter.
SECTION 9. Termination of Agreement. (a) The Underwriter, may terminate
this Agreement by written notice to the Fund, at any time at or prior to Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Fund or the Adviser,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States, any outbreak of hostilities or escalation thereof or other calamity or
crisis or any change or development involving a prospective change in national
or international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Underwriter
impracticable to market the Shares or enforce contracts for the sale of the
Shares, or (iii) if trading in the Common Stock has been suspended or materially
limited by the Commission or if trading generally on either the New York Stock
Exchange or the American Stock Exchange or in the NASDAQ National Market has
been suspended or materially limited, or minimum or maximum prices for trading
have been fixed, or maximum ranges for prices for securi ties have been
required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
Federal or New York authorities. As used in this subsection (a), the term
"Prospectus" means the Prospectus in the form first used to confirm sales of the
Shares.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and
24
<PAGE>
provided further that Sections 1, 6, 7 and 8 shall survive such termination and
remain in full force and effect.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of written telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated at Merrill Lynch World Headquarters, World Financial
Center, North Tower, New York, New York 10281-1201, Attention: Richard Bruce,
Vice President; notices to the Fund or to the Adviser shall be directed to each
of them at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attention:
Arthur Zeikel, President.
SECTION 11. Parties. This Agreement and the Pricing Agreement shall inure
to the benefit of and be binding upon the Underwriter, the Fund, the Adviser and
their respective successors. Nothing expressed or mentioned in this Agreement
or in the Pricing Agreement is intended or shall be construed to give any
person, firm or corporation, other than the parties hereto and their respective
successors and the controlling persons and officers and directors referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and the Pricing Agreement and all
conditions and provisions hereof are intended to be for the sole and exclusive
benefit of the parties hereto and thereto and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Shares from the Underwriter shall be deemed to be a successor
merely by reason of such purchase.
SECTION 12. Governing Law and Time. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the laws of the
State of New York applicable to agreements made and to be performed in said
State. Specified times of day refer to New York City time.
25
<PAGE>
If the foregoing is in accordance with your understanding of our Agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a single binding agreement between the
Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
MUNIHOLDINGS INSURED FUND, INC.
By: ___________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: ___________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: __________________________
Authorized Officer
26
<PAGE>
Exhibit A
________ Shares
MuniHoldings Insured Fund, Inc.
(a Maryland corporation)
Common Stock
(Par Value $.10 Per Share)
PRICING AGREEMENT
-----------------
, 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Dear Sirs and Mesdames:
Reference is made to the Purchase Agreement, dated , 1998 (the
"Purchase Agreement"), relating to the purchase by Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") of the above
shares of common stock, par value $.10 per share (the "Initial Shares"), of
MuniHoldings Insured Fund, Inc. (the "Fund") and relating to the option granted
to the Underwriter to purchase up to an additional __________ shares of common
stock, par value $.10 per share, of the Fund to cover over-allotments in
connection with the sale of the Initial Shares (the "Option Shares"). The
Initial Shares and all or any part of the Option Shares collectively are
referred to herein as the "Shares".
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with the
Underwriter as follows:
1. The initial public offering price per share for the Shares,
determined as provided in said Section 2, and the purchase price per share
for the Shares to be paid by the Underwriter, shall be $15.00.
2. Fund Asset Management, L.P. will pay, or arrange for an affiliate
to pay, a commission to the Underwriter in the amount of $ per share
for the Shares purchased by the Underwriter.
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If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund in accordance with its terms.
Very truly yours,
MUNIHOLDINGS INSURED FUND, INC.
By:___________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: __________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ___________________________
Authorized Officer
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EXHIBIT (H)(2)
Revised October 29, 1990
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
-------------------------
Dear Sirs:
In connection with public offerings of securities underwritten by us, or by
a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute your
reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD"). Upon our request, you
will advise us of the identity of any dealer to whom you allow such a discount
and any Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
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2. You represent that you are a dealer actually engaged in the investment
banking or securities business and that you are either (i) a member in good
standing of the NASD or (ii) a dealer with its principal place of business
located outside the United States, its territories or possessions and not
registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its territories or its possessions or to persons who are
nationals thereof or residents therein. Non-member foreign dealers and banks
agree, in making any sales, to comply with the NASD's interpretation with
respect to free-riding and withholding. In accepting a selling concession where
we are acting as Representative of the Underwriters, in accepting a reallowance
from us whether or not we are acting as such Representative, and in allowing a
discount to any other person, you agree to comply with the provisions of Section
24 of Article III of the Rules of Fair Practice of the NASD, and, in addition,
if you are a non-member foreign dealer or bank, you agree to comply, as though
you were a member of the NASD, with the provisions of Sections 8 and 36 of
Article III of such Rules of Fair Practice and to comply with Section 25 of
Article III thereof as that Section applies to a non-member foreign dealer or
bank. You represent that you are fully familiar with the above provisions of
the Rules of Fair Practice of the NASD.
3. If the securities have been registered under the Securities Act of 1933
(the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities of
an issuer that is not required to file reports under the Securities Exchange Act
of 1934 (the "1934 Act"), you agree that you will not sell any of the securities
to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such other place
as we may advise), at the offering price less the concession allowed to you, on
such date as we may
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advise, by certified or official bank check in New York Clearing House funds (or
such other funds as we may advise), payable to our order, against delivery of
the securities to be purchased by you. We shall have authority to make
appropriate arrangements for payment for and/or delivery through the facility of
The Depository Trust Company or any such other depository or similar facility
for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of securities
covered by this Agreement you will, upon our request as Representative of the
Underwriters, report to us the amount of securities purchased by you which then
remains unsold and will, upon our request, sell to us for the account of one or
more of the Underwriters such amount of such unsold securities as we may
designate, at the offering price less an amount to be determined by us not in
excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered by
this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
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11. Any notice from us shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunications to you at the
above address or at such other address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this Agreement,
the price restrictions contained in Paragraph 1 hereof and the provisions of
Paragraphs 6 and 7 hereof shall terminate as to such offering at the close of
business on the 45th day after the securities are released for sale or, as to
any or all such provisions, at such earlier time as we may advise. All other
provisions of this Agreement shall remain operative and in full force and effect
with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New York.
Please confirm your agreement hereto by signing the enclosed duplicate copy
hereof in the place provided below and returning such signed duplicate copy to
us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Fred F. Hessinger
---------------------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
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Name of Dealer
- --------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
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EXHIBIT (J)
CUSTODY AGREEMENT
-----------------
Agreement made as of this day of , 1998, between
MUNIHOLDINGS INSURED FUND, INC., a Maryland corporation organized and existing
under the laws of the State of Maryland, having its principal office and place
of business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536
(hereinafter called the "Fund"), and THE BANK OF NEW YORK, a New York
corporation authorized to do a banking business, having its principal office
and place of business at 48 Wall Street, New York, New York 10286 (hereinafter
called the "Custodian").
WITNESSETH:
that for and in consideration of the mutual promises hereinafter set forth,
the Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "Book-Entry System" shall mean the Federal Reserve/Treasury book-
entry system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
2. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually received by the Custodian and signed on behalf
of the Fund by any two Officers, and the term Certificate shall also include
Instructions.
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4. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national
securities exchange qualified to act as a custodian for an investment
company, or any broker-dealer reasonably believed by the Custodian to be such
a clearing member.
5. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of
Article V herein, or (b) any receipt described in Article V or VIII herein.
6. "Covered Call Option" shall mean an exchange traded option entitling
the holder, upon timely exercise and payment of the exercise price, as
specified therein, to purchase from the writer thereof the specified
underlying Securities (excluding Futures Contracts) which are owned by the
writer thereof and subject to appropriate restrictions.
7. "Composite Currency Unit" shall mean the European Currency Unit or
any other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
8. "Currency" shall mean money denominated in a lawful currency of any
country or the European Currency Unit.
9. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository"
shall further mean and include any other person authorized to act as a
depository under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, specifically identified in a certified
copy of a resolution of the Fund's Board of Directors specifically approving
deposits therein by the Custodian.
10. "Financial Futures Contract" shall mean the firm commitment to buy
or sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at
an agreed upon price.
11. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
12. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
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13. "FX Transaction" shall mean any transaction for the purchase by
one party of an agreed amount in one Currency against the sale by it to the
other party of an agreed amount in another Currency.
14. "Instructions" shall mean instructions communications transmitted
by electronic or telecommunications media including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission line, facsimile
transmission (which may be signed by an Officer or unsigned) and tested telex.
15. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's
effecting an appropriate entry in its books and records.
16. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentalities thereof, any tax, bond or revenue
anticipation note issued by any state or municipal government or public
authority, commercial paper, certificates of deposit and bankers' acceptances,
repurchase agreements with respect to the same and bank time deposits, where
the purchase and sale of such securities normally requires settlement in
federal funds on the same day as such purchase or sale.
17. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934,
its successor or successors, and its nominee or nominees.
18. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Treasurer, the Controller, any Assistant
Secretary, any Assistant Treasurer, and any other person or persons, whether
or not any such other person is an officer of the Fund, duly authorized by the
Board of Directors of the Fund to execute any Certificate, instruction, notice
or other instrument on behalf of the Fund and listed in the Certificate
annexed hereto as Appendix A or such other Certificate as may be received by
the Custodian from time to time.
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19. "Option" shall mean a Call Option, Covered Call Option, Stock
Index Option and/or a Put Option.
20. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Officer or from a person reasonably believed
by the Custodian to be an Officer.
21. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
23. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or
representing any other rights or interest therein, or any property or assets.
24. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically
allocated to such Series shall be deposited and withdrawn from time to time in
accordance with Certificates received by the Custodian in connection with such
transactions as the Fund may from time to time determine.
25. "Series" shall mean the various portfolios, if any, of the Fund
listed on Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of capital stock of the Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.
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27. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the
value of a particular stock index at the close of the last business day of
the contract and the price at which the futures contract is originally
struck.
28. "Stock Index Option" shall mean an exchange traded option
entitling the holder, upon timely exercise, to receive an amount of cash
determined by reference to the difference between the exercise price and the
value of the index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian
of the Securities and moneys at any time owned by the Fund during the period
of this Agreement.
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all moneys owned by it, at any time during the period of
this Agreement, and shall specify with respect to such Securities and money
the Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all
Securities eligible for deposit therein, regardless of the Series to which the
same are specifically allocated and to utilize the Book-Entry System to the
extent possible in connection with its performance hereunder, including,
without limitation, in connection with settlements of purchases and sales of
Securities, loans of
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Securities and deliveries and returns of Securities collateral. Prior to a
deposit of Securities specifically allocated to a Series in the Depository,
the Fund shall deliver to the Custodian a certified resolution of the Board of
Directors of the Fund, substantially in the form of Exhibit B hereto,
approving, authorizing and instructing the Custodian on a continuous and
ongoing basis until instructed to the contrary by a Certificate actually
received by the Custodian to deposit in the Depository all Securities
specifically allocated to such Series eligible for deposit therein, and to
utilize the Depository to the extent possible with respect to such Securities
in connection with its performance hereunder, including, without limitation,
in connection with settlements of purchases and sales of Securities, loans of
Securities, and deliveries and returns of Securities collateral. Securities
and moneys deposited in either the Book-Entry System or the Depository will be
represented in accounts which include only assets held by the Custodian for
customers, including, but not limited to, accounts in which the Custodian acts
in a fiduciary or representative capacity and will be specifically allocated
on the Custodian's books to the separate account for the applicable Series.
Prior to the Custodian's accepting, utilizing and acting with respect to
Clearing Member confirmations for Options and transactions in Options for a
Series as provided in this Agreement, the Custodian shall have received a
certified resolution of the Fund's Board of Directors, substantially in the
form of Exhibit C hereto, approving, authorizing and instructing the Custodian
on a continuous and on-going basis, until instructed to the contrary by a
Certificate actually received by the Custodian, to accept, utilize and act in
accordance with such confirmations as provided in this Agreement with respect
to such Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all moneys received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed
by the Custodian only:
(a) as hereinafter provided;
(b) pursuant to Certificates setting forth the name and address
of the person to whom the payment is to be made, the Series account from which
payment is to be made and the purpose for which payment is to be made; or
(c) in payment of the fees and in reimbursement of the expenses
and liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmations and a summary, on a per Series
basis, of all transfers to or from
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the account of the Fund for a Series, either hereunder or with any co-
custodian or sub-custodian appointed in accordance with this Agreement during
said day. Where Securities are transferred to the account of the Fund for a
Series, the Custodian shall also by book-entry or otherwise identify as
belonging to such Series a quantity of Securities in a fungible bulk of
Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall
furnish the Fund with a detailed statement, on a per Series basis, of the
Securities and moneys held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the
name of any duly appointed registered nominee of the Custodian as the
Custodian may from time to time determine, or in the name of the Book-Entry
System or the Depository or their successor or successors, or their nominee or
nominees. The Fund agrees to furnish to the Custodian appropriate instruments
to enable the Custodian to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee or in the name of the
Book-Entry System or the Depository any Securities which it may hold hereunder
and which may from time to time be registered in the name of the Fund. The
Custodian shall hold all such Securities specifically allocated to a Series
which are not held in the Book-Entry System or in the Depository in a separate
account in the name of such Series physically segregated at all times from
those of any other person or persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or
through the use of the Book-Entry System or the Depository with respect to
Securities held hereunder and therein deposited, shall with respect to all
Securities held for the Fund hereunder in accordance with preceding paragraph
4:
(a) collect all income, dividends and distributions due or
payable;
(b) give notice to the Fund and present payment and collect the
amount payable upon such Securities which are called, but only if either (i)
the Custodian receives a written notice of such call, or (ii) notice of such
call appears in one or more of the publications listed in Appendix C annexed
hereto, which may be amended at any time by the
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Custodian without the prior notification or consent of the Fund;
(c) present for payment and collect the amount payable upon all
Securities which mature;
(d) surrender Securities in temporary form for definitive
Securities;
(e) execute, as custodian, any necessary declarations or
certificates of ownership under the Federal Income Tax Laws or the laws or
regulations of any other taxing authority now or hereafter in effect;
(f) hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the account of a
Series, all rights and similar securities issued with respect to any
Securities held by the Custodian for such Series hereunder; and
(g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agrement which are actually received by the Custodian, such
proxies and other similar materials to be executed by the registered owner (if
Securities are registered otherwise than in the name of the Fund), but without
indicating the manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) execute and deliver to such persons as may be designated in
such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate in exchange for other Securities or
cash issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation or recapitalization of any corporation, or
the exercise of any conversion privilege and receive and hold hereunder
specifically allocated to such Series any cash or other Securities received in
exchange;
(c) deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate to any protective committee,
reorganization committee or other person
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in connection with the reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any corporation, and receive and hold
hereunder specifically allocated to such Series such certificates of deposit,
interim receipts or other instruments or documents as may be issued to it to
evidence such delivery;
(d) make such transfers or exchanges of the assets of the
Series specified in such Certificate, and take such other steps as shall be
stated in such Certificate to be for the purpose of effectuating any duly
authorized plan of liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
(e) present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article which may
be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates
are available. The Fund shall deliver to the Custodian such a Certificate no
later than the business day preceding the availability of any such instrument
or certificate. Prior to such availability, the Custodian shall comply with
Section 17(f) of the Investment Company Act of 1940, as amended, in connection
with the purchase, sale, settlement, closing out or writing of Futures
Contracts, Options, or Futures Contract Options by making payments or
deliveries specified in Certificates received by the Custodian in connection
with any such purchase, sale, writing, settlement or closing out upon its
receipt from a broker, dealer, or futures commission merchant of a statement
or confirmation reasonably believed by the Custodian to be in the form
customarily used by brokers, dealers, or future commission merchants with
respect to such Futures Contracts, Options, or Futures Contract Options, as
the case may be, confirming that such Security is held by such broker, dealer
or futures commission merchant, in book-entry form or otherwise, in the name
of the Custodian (or any nominee of the Custodian) as custodian for the Fund,
provided, however, that notwithstanding the foregoing, payments to or
deliveries from the Margin Account, and payments with respect to Securities to
which a Margin Account relates, shall be made in accordance with the terms and
conditions of the Margin Account Agreement. Whenever any such instruments or
certificates are available, the Custodian shall, notwithstanding any provision
in this Agreement to the contrary, make payment for any Futures Contract,
Option, or Futures Contract Option for which such instruments or such
certificates are available only against
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the delivery to the Custodian of such instrument or such certificate, and
deliver any Futures Contract, Option or Futures Contract Option for which such
instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if
any; and (h) the name of the broker to whom payment is to be made. The
Custodian shall, upon receipt of Securities purchased by or for the Fund, pay
to the broker specified in the Certificate out of the moneys held for the
account of such Series the total amount payable upon such purchase, provided
that the same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a
Certificate, and (ii) with respect to each sale of Money Market Securities, a
Certificate or Oral Instructions, specifying with respect to each such sale:
(a) the Series to which such Securities were specifically allocated; (b) the
name of the issuer and the title of the Security; (c) the number of shares or
principal amount sold, and accrued interest, if any; (d) the date of sale; (e)
the sale price per unit; (f) the total amount payable to the Fund upon such
sale; (g) the name of the broker through whom or the person to whom the sale
was made, and the name of the clearing broker, if
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any; and (h) the name of the broker to whom the Securities are to be
delivered. The Custodian shall deliver the Securities specifically allocated
to such Series to the broker specified in the Certificate against payment of
the total amount payable to the Fund upon such sale, provided that the same
conforms to the total amount payable as set forth in such Certificate or Oral
Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund
shall deliver to the Custodian a Certificate specifying with respect to each
Option purchased: (a) the Series to which such Option is specifically
allocated; (b) the type of Option (put or call); (c) the name of the issuer
and the title and number of shares subject to such Option or, in the case of a
Stock Index Option, the stock index to which such Option relates and the
number of Stock Index Options purchased; (d) the expiration date; (e) the
exercise price; (f) the dates of purchase and settlement; (g) the total amount
payable by the Fund in connection with such purchase; (h) the name of the
Clearing Member through whom such Option was purchased; and (i) the name of
the broker to whom payment is to be made. The Custodian shall pay, upon
receipt of a Clearing Member's statement confirming the purchase of such
Option held by such Clearing Member for the account of the Custodian (or any
duly appointed and registered nominee of the Custodian) as custodian for the
Fund, out of moneys held for the account of the Series to which such Option is
to be specifically allocated, the total amount payable upon such purchase to
the Clearing Member through whom the purchase was made, provided that the same
conforms to the total amount payable as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant
to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund
upon such sale; and (h) the name of the Clearing Member through whom the
sale was made. The Custodian shall consent to the delivery of the Option sold
by the Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided
that the same
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conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of
the issuer and the title and number of shares subject to the Call Option; (c)
the expiration date; (d) the date of exercise and settlement; (e) the exercise
price per share; (f) the total amount to be paid by the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such Call
Option was exercised. The Custodian shall, upon receipt of the Securities
underlying the Call Option which was exercised, pay out of the moneys held for
the account of the Series to which such Call Option was specifically allocated
the total amount payable to the Clearing Member through whom the Call Option
was exercised, provided that the same conforms to the total amount payable as
set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of
the issuer and the title and number of shares subject to the Put Option; (c)
the expiration date; (d) the date of exercise and settlement; (e) the exercise
price per share; (f) the total amount to be paid to the Fund upon such
exercise; and (g) the name of the Clearing Member through whom such Put Option
was exercised. The Custodian shall, upon receipt of the amount payable upon
the exercise of the Put Option, deliver or direct the Depository to deliver
the Securities specifically allocated to such Series, provided the same
conforms to the amount payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver
to the Custodian a Certificate specifying with respect to such Stock Index
Option: (a) the Series to which such Stock Index Option was specifically
allocated; (b) the type of Stock Index Option (put or call); (c) the number of
Options being exercised; (d) the stock index to which such Option relates; (e)
the expiration date; (f) the exercise price; (g) the total amount to be
received by the Fund in connection with such exercise; and (h) the Clearing
Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
such Covered Call Option: (a) the Series for which such Covered Call Option
was written; (b) the name of the issuer and the title and number of shares for
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which the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of
the Clearing Member through whom the premium is to be received.
The Custodian shall deliver or cause to be delivered, in exchange for receipt
of the premium specified in the Certificate with respect to such Covered Call
Option, such receipts as are required in accordance with the customs
prevailing among Clearing Members dealing in Covered Call Options and shall
impose, or direct the Depository to impose, upon the underlying Securities
specified in the Certificate specifically allocated to such Series such
restrictions as may be required by such receipts. Notwithstanding the
foregoing, the Custodian has the right, upon prior written notification to the
Fund, at any time to refuse to issue any receipts for Securities in the
possession of the Custodian and not deposited with the Depository underlying a
Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver,
or to direct the Depository to deliver, the Securities subject to such Covered
Call Option and specifying: (a) the Series for which such Covered Call Option
was written; (b) the name of the issuer and the title and number of shares
subject to the Covered Call Option; (c) the Clearing Member to whom the
underlying Securities are to be delivered; and (d) the total amount payable to
the Fund upon such delivery. Upon the return and/or cancellation of any
receipts delivered pursuant to paragraph 6 of this Article, the Custodian
shall deliver, or direct the Depository to deliver, the underlying Securities
as specified in the Certificate against payment of the amount to be received
as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (e) the premium to be received by the Fund; (f) the date such Put
Option is written; (g) the name of the Clearing-Member through whom the
premium is to be received and to whom a Put Option guarantee letter is to be
delivered; (h) the amount of cash, and/or the amount and kind of Securities,
if any, specifically allocated to such Series to be deposited in the Senior
Security Account for such Series; and (i) the amount of cash and/or the amount
and kind of Securities specifically allocated to such Series to be deposited
into the Collateral Account for such Series. The Custodian shall, after making
the deposits into the Collateral Account
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specified in the Certificate, issue a Put Option guarantee letter
substantially in the form utilized by the Custodian on the date hereof, and
deliver the same to the Clearing Member specified in the Certificate against
receipt of the premium specified in said Certificate. Notwithstanding the
foregoing, the Custodian shall be under no obligation to issue any Put Option
guarantee letter or similar document if it is unable to make any of the
representations contained therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option
was written; (b) the name of the issuer and title and number of shares subject
to the Put Option; (c) the Clearing Member from whom the underlying Securities
are to be received; (d) the total amount payable by the Fund upon such
delivery; (e) the amount of cash and/or the amount and kind of Securities
specifically allocated to such Series to be withdrawn from the Collateral
Account for such Series; and (f) the amount of cash and/or the amount and kind
of Securities, specifically allocated to such Series, if any, to be withdrawn
from the Senior Security Account. Upon the return and/or cancellation of any
Put Option guarantee letter or similar document issued by the Custodian in
connection with such Put Option, the Custodian shall pay out of the moneys
held for the account of the Series to which such Put Option was specifically
allocated the total amount payable to the Clearing Member specified in the
Certificate as set forth in such Certificate against delivery of such
Securities, and shall make the withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
such Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the
number of options written; (d) the stock index to which such Option relates;
(e) the expiration date; (f) the exercise price; (g) the Clearing Member
through whom such Option was written; (h) the premium to be received by the
Fund; (i) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series; (j) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in
the Collateral Account for such Series; and (k) the amount of cash and/or the
amount and kind of Securities, if any, specifically allocated to such Series
to be deposited in a Margin Account, and the name in which such account is to
be or has been established. The Custodian shall, upon receipt of the premium
specified in the Certificate, make the deposits, if any, into the Senior
Security Account specified in the Certificate, and either (1) deliver such
receipts if any, which the Custodian
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<PAGE>
has specifically agreed to issue, which are in accordance with the customs
prevailing among Clearing Members in Stock Index Options and make the deposits
into the Collateral Account specified in the Certificate, or (2) make the
deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written;
(b) such information as may be necessary to identify the Stock Index Option
being exercised; (c) the Clearing Member through whom such Stock Index Option
is being exercised; (d) the total amount payable upon such exercise, and
whether such amount is to be paid by or to the Fund; (e) the amount of cash
and/or amount and kind of Securities, if any, to be withdrawn from the Margin
Account; and (f) the amount of cash and/or amount and kind of Securities, if
any, to be withdrawn from the Senior Security Account for such Series; and the
amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Collateral Account for such Series. Upon the return and/or
cancellation of the receipt, if any, delivered pursuant to the preceding
paragraph of this Article, the Custodian shall pay out of the moneys held for
the account of the Series to which such Stock Index Option was specifically
allocated to the Clearing Member specified in the Certificate the total amount
payable, if any, as specified therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order
to liquidate its position as a writer of an Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to the Option
being purchased: (a) that the transaction is a Closing Purchase Transaction;
(b) the Series for which the Option was written; (c) the name of the issuer
and the title and number of shares subject to the Option, or, in the case of a
Stock Index Option, the stock index to which such Option relates and the
number of Options held; (d) the exercise price; (e) the premium to be paid by
the Fund; (f) the expiration date; (g) the type of Option (put or call); (h)
the date of such purchase; (i) the name of the Clearing Member to whom the
premium is to be paid; and (j) the amount of cash and/or the amount and kind
of Securities, if any, to be withdrawn from the Collateral Account, a
specified Margin Account, or the Senior Security Account for such Series. Upon
the Custodian's payment of the premium and the return and/or cancellation of
any receipt issued pursuant to paragraphs 6, 8 or 10 of this Article with
respect to the Option being liquidated through the Closing Purchase
Transaction, the Custodian shall remove,
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or direct the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing
Purchase Transaction with respect to any Option purchased or written by the
Fund and described in this Article, the Custodian shall delete such Option
from the statements delivered to the Fund pursuant to paragraph 3 Article III
herein, and upon the return and/or cancellation of any receipts issued by the
Custodian, shall make such withdrawals from the Collateral Account, and the
Margin Account and/or the Senior Security Account as may be specified in a
Certificate received in connection with such expiration, exercise, or
consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect to such
Futures Contract, (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index
or financial instrument); (c) the number of identical Futures Contracts
entered into; (d) the delivery or settlement date of the Futures Contract(s);
(e) the date the Futures Contract(s) was (were) entered into and the maturity
date; (f) whether the Fund is buying (going long) or selling (going short) on
such Futures Contract(s); (g) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series; (h) the name of the broker, dealer, or futures commission merchant
through whom the Futures Contract was entered into; and (i) the amount of fee
or commission, if any, to be paid and the name of the broker, dealer, or
futures commission merchant to whom such amount is to be paid. The Custodian
shall make the deposits, if any, to the Margin Account in accordance with the
terms and conditions of the Margin Account Agreement. The Custodian shall make
payment out of the moneys specifically allocated to such Series of the fee or
commission, if any, specified in the Certificate and deposit in the Senior
Security Account for such Series the amount of cash and/or the amount and kind
of Securities specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
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(b) Any variation margin payment or similar payment from a
broker, dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying:
(a) the Futures Contract and the Series to which the same relates; (b) with
respect to a Stock Index Futures Contract, the total cash settlement amount to
be paid or received, and with respect to a Financial Futures Contract, the
Securities and/or amount of cash to be delivered or received; (c) the broker,
dealer, or futures commission merchant to or from whom payment or delivery is
to be made or received; and (d) the amount of cash and/or Securities to be
withdrawn from the Senior Security Account for such Series. The Custodian
shall make the payment or delivery specified in the Certificate, and delete
such Futures Contract from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to
the Custodian a Certificate specifying: (a) the items of information required
in a Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Futures Contract Option: (a) the Series to
which such Option is specifically allocated; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and such other
information as may be necessary to identify the Futures Contract underlying
the Futures Contract Option purchased; (d) the expiration date; (e) the
exercise price;
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(f) the dates of purchase and settlement; (g) the amount of premium to be paid
by the Fund upon such purchase; (h) the name of the broker or futures
commission merchant through whom such option was purchased; and (i) the name
of the broker, or futures commission merchant, to whom payment is to be made.
The Custodian shall pay out of the moneys specifically allocated to such
Series, the total amount to be paid upon such purchase to the broker or
futures commissions merchant through whom the purchase was made, provided that
the same conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such sale: (a) the
Series to which such Futures Contract Option was specifically allocated; (b)
the type of Future Contract Option (put or call); (c) the type of Futures
Contract and such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d) the date of sale;
(e) the sale price; (f) the date of settlement; (g) the total amount payable
to the Fund upon such sale; and (h) the name of the broker of futures
commission merchant through whom the sale was made. The Custodian shall
consent to the cancellation of the Futures Contract Option being closed
against payment to the Custodian of the total amount payable to the Fund,
provided the same conforms to the total amount payable as set forth in such
Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures
Contract Option (put or call) being exercised; (c) the type of Futures
Contract underlying the Futures Contract Option; (d) the date of exercise;
(e)the name of the broker or futures commission merchant through whom the
Futures Contract Option is exercised; (f) the net total amount, if any,
payable by the Fund; (g) the amount, if any, to be received by the Fund; and
(h) the amount of cash and/or the amount and kind of Securities to be
deposited in the Senior Security Account for such Series. The Custodian shall
make, out of the moneys and Securities specifically allocated to such Series,
the payments, if any, and the deposits, if any, into the Senior Security
Account as specified in the Certificate. The deposits, if any, to be made to
the Margin Account shall be made by the Custodian in accordance with the terms
and conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
such Futures Contract Option: (a) the Series for which such Futures Contract
Option was written;
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(b) the type of Futures Contract Option (put or call); (c) the type of Futures
Contract and such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the Fund; (g)
the name of the broker or futures commission merchant through whom the premium
is to be received; and (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the moneys and Securities specifically allocated to
such Series the deposits into the Senior Security Account, if any, as
specified in the Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option
was specifically allocated; (b) the particular Futures Contract Option
exercised; (c) the type of Futures Contract underlying the Futures Contract
Option; (d) the name of the broker or futures commission merchant through whom
such Futures Contract Option was exercised; (e) the net total amount, if any,
payable to the Fund upon such exercise; (f) the net total amount, if any,
payable by the Fund upon such exercise; and (g) the amount of cash and/or the
amount and kind of Securities to be deposited in the Senior Security Account
for such Series. The Custodian shall, upon its receipt of the net total amount
payable to the Fund, if any, specified in such Certificate make the payments,
if any, and the deposits, if any, into the Senior Security Account as
specified in the Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian
a Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type
of Futures Contract underlying such Futures Contract Option; (d) the name of
the broker or futures commission merchant through whom such Futures Contract
Option is exercised; (e) the net total amount, if any, payable to the Fund
upon such exercise; (f) the net total amount, if any, payable by the Fund upon
such exercise; and (g) the amount and kind of Securities and/or cash to be
withdrawn from or deposited in, the Senior Security Account for such Series,
if any. The Custodian shall, upon its receipt of the net total amount payable
to the Fund, if any, specified in the Certificate, make out of the moneys and
Securities
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specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits to and/or withdrawals from the Margin Account, if
any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to
a previously written Futures Contract Option described in this Article in
order to liquidate its position as a writer of such Futures Contract Option,
the Fund shall promptly deliver to the Custodian a Certificate specifying with
respect to the Futures Contract Option being purchased: (a) the Series to
which such Option is specifically allocated; (b) that the transaction is a
closing transaction; (c) the type of Future Contract and such other
information as may be necessary to identify the Futures Contract underlying
the Futures Option Contract; (d) the exercise price; (e) the premium to be
paid by the Fund; (f) the expiration date; (g) the name of the broker or
futures commission merchant to whom the premium is to be paid; and (h) the
amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account for such Series. The Custodian
shall effect the withdrawals from the Senior Security Account specified in the
Certificate. The withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased
by the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or
in the case of an exercise such deposits into the Senior Security Account as
may be specified in a Certificate. The deposits to and/or withdrawals from the
Margin Account, if any, shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to Article
VI hereof.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund
shall promptly deliver to the Custodian a Certificate specifying: (a) the
Series for which such short
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sale was made; (b) the name of the issuer and the title of the Security; (c)
the number of shares or principal amount sold, and accrued interest or
dividends, if any; (d) the dates of the sale and settlement; (e) the sale
price per unit; (f) the total amount credited to the Fund upon such sale, if
any; (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin Account and the name in which such
Margin Account has been or is to be established; (h) the amount of cash and/or
the amount and kind of Securities, if any, to be deposited in a Senior
Security Account, and (i) the name of the broker through whom such short sale
was made. The Custodian shall upon its receipt of a statement from such broker
confirming such sale and that the total amount credited to the Fund upon such
sale, if any, as specified in the Certificate is held by such broker for the
account of the Custodian (or any nominee of the Custodian) as custodian of the
Fund, issue a receipt or make the deposits into the Margin Account and the
Senior Security Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
each such closing out: (a) the Series for which such transaction is being
made; (b) the name of the issuer and the title of the Security; (c) the number
of shares or the principal amount, and accrued interest or dividends, if any,
required to effect such closing-out to be delivered to the broker; (d) the
dates of closing-out and settlement; (e) the purchase price per unit; (f) the
net total amount payable to the Fund upon such closing-out; (g) the net total
amount payable to the broker upon such closing-out; (h) the amount of cash and
the amount and kind of Securities to be withdrawn, if any, from the Margin
Account; (i) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Senior Security Account; and (j) the name of the
broker through whom the Fund is effecting such closing-out. The Custodian
shall, upon receipt of the net total amount payable to the Fund upon such
closing-out, and the return and/or cancellation of the receipts, if any,
issued by the Custodian with respect to the short sale being closed-out, pay
out of the moneys held for the account of the Fund to the broker the net total
amount payable to the broker, and make the withdrawals from the Margin Account
and the Senior Security Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters into a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the
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Custodian a Certificate, or in the event such Reverse Repurchase Agreement is
a Money Market Security, a Certificate or Oral Instructions specifying: (a)
the Series for which the Reverse Repurchase Agreement is entered; (b) the
total amount payable to the Fund in connection with such Reverse Repurchase
Agreement and specifically allocated to such Series; (c) the broker or dealer
through or with whom the Reverse Repurchase Agreement is entered; (d) the
amount and kind of Securities to be delivered by the Fund to such broker or
dealer; (e) the date of such Reverse Repurchase Agreement; and (f) the amount
of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in a Senior Security Account for such
Series in connection with such Reverse Repurchase Agreement. The Custodian
shall, upon receipt of the total amount payable to the Fund specified in the
Certificate or Oral Instructions make the delivery to the broker or dealer,
and the deposits, if any, to the Senior Security Account, specified in such
Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money
Market Security, a Certificate or Oral Instructions to the Custodian
specifying: (a) the Reverse Repurchase Agreement being terminated and the
Series for which same was entered; (b) the total amount payable by the Fund in
connection with such termination; (c) the amount and kind of Securities to be
received by the Fund and specifically allocated to such Series in connection
with such termination; (d) the date of termination; (e) the name of the broker
or dealer with or through whom the Reverse Repurchase Agreement is to be
terminated; and (f) the amount of cash and/or the amount and kind of
Securities to be withdrawn from the Senior Securities Account for such Series.
The Custodian shall, upon receipt of the amount and kind of Securities to be
received by the Fund specified in the Certificate or Oral Instructions, make
the payment to the broker or dealer, and the withdrawals, if any, from the
Senior Security Account, specified in such Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall deliver
or cause to be delivered to the Custodian a Certificate specifying with
respect to each such loan: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the title of the
Securities, (c) the number of shares or the
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principal amount loaned, (d) the date of loan and delivery, (e) the total
amount to be delivered to the Custodian against the loan of the Securities,
including the amount of cash collateral and the premium, if any, separately
identified, and (f) the name of the broker, dealer, or financial institution
to which the loan was made. The Custodian shall deliver the Securities thus
designated to the broker, dealer or financial institution to which the loan
was made upon receipt of the total amount designated as to be delivered
against the loan of Securities. The Custodian may accept payment in connection
with a delivery otherwise than through the Book-Entry System or Depository
only in the form of a certified or bank cashier's check payable to the order
of the Fund or the Custodian drawn on New York Clearing House funds and may
deliver Securities in accordance with the customs prevailing among dealers in
securities.
2. Promptly after each termination of the loan of Securities by the
Fund, the Fund shall deliver or cause to be delivered to the Custodian a
Certificate specifying with respect to each such loan termination and return
of Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be returned, (d)
the date of termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any offsetting
credits as described in said Certificate); and (f) the name of the broker,
dealer, or financial institution from which the Securities will be returned.
The Custodian shall receive all Securities returned from the broker, dealer,
or financial institution to which such Securities were loaned and upon receipt
thereof shall pay, out of the moneys held for the account of the Fund, the
total amount payable upon such return of Securities as set forth in the
Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the
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Custodian into, or withdrawn from, a Senior Securities Account, the Custodian
shall be under no obligation to make any such deposit or withdrawal and shall
so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member
in whose name, or for whose benefit, the account was established as specified
in the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in
and to any property at any time held by the Custodian in any Collateral
Account described herein. In accordance with applicable law the Custodian may
enforce its lien and realize on any such property whenever the Custodian has
made payment or delivery pursuant to any Put Option guarantee letter or
similar document or any receipt issued hereunder by the Custodian. In the
event the Custodian should realize on any such property net proceeds which are
less than the Custodian's obligations under any Put Option guarantee letter or
similar document or any receipt, such deficiency shall be a debt owed the
Custodian by the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a copy of the statement furnished
the Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which
cash and/or Securities are maintained in a Collateral Account for any Series,
the Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding
the delivery to the Fund of such statement, the Fund shall furnish to the
Custodian a Certificate specifying the then market value of the Securities
described in such statement. In the event such then market value is indicated
to be less than the Custodian's obligation with respect to any outstanding Put
Option guarantee letter or similar document, the Fund shall promptly specify
in a Certificate the additional cash and/or Securities to be
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deposited in such Collateral Account to eliminate such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Directors of the Fund, certified by the Secretary or any
Assistant Secretary, either (i) setting forth with respect to the Series
specified therein the date of the declaration of a dividend or distribution,
the date of payment thereof, the record date as of which shareholders entitled
to payment shall be determined, the amount payable per Share of such Series to
the shareholders of record as of that date and the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund on
the payment date, or (ii) authorizing with respect to the Series specified
therein the declaration of dividends and distributions on a daily basis and
authorizing the Custodian to rely on Oral Instructions or a Certificate
setting forth the date of the declaration of such dividend or distribution,
the date of payment thereof, the record date as of which shareholders entitled
to payment shall be determined, the amount payable per Share of such Series to
the shareholders of record as of that date and the total amount payable to the
Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall pay out
of the moneys held for the account of each Series the total amount payable to
the Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund
with respect to such Series.
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade
date, and price; and
(b) the amount of money to be received by the Custodian for the
sale of such Shares and specifically allocated to the separate account in the
name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian
shall credit such money to the separate account in the name of the Series for
which such money was received.
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3. Upon issuance of any Shares of any Series described in the
foregoing provisions of this Article, the Custodian shall pay, out of the
money held for the account of such Series, all original issue or other taxes
required to be paid by the Fund in connection with such issuance upon the
receipt of a Certificate specifying the amount to be paid.
4. Whenever the Fund desires the Custodian to make payment out of the
money held by the Custodian hereunder in connection with a redemption of any
Shares, it shall furnish to the Custodian:
(a) a resolution by the Board of Directors of the Fund
directing the Transfer Agent to redeem the Shares; and
(b) a Certificate specifying the number and Series of Shares
redeemed; and
(c) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the moneys held in the separate account
in the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on
behalf of any Series which results in an overdraft because the moneys held by
the Custodian in the separate account for such Series shall be insufficient to
pay the total amount payable upon a purchase of Securities specifically
allocated to such Series, as set forth in a Certificate or Oral Instructions,
or which results in an overdraft in the separate account of such Series for
some other reason, or if the Fund is for any other reason indebted to the
Custodian with respect to a Series, including any indebtedness to The Bank of
New York under the Fund's Cash Management and Related Services Agreement,
(except a borrowing for investment or for temporary or emergency purposes
using Securities as collateral pursuant to a separate agreement and subject to
the provisions of paragraph 2 of this Article), such overdraft or indebtedness
shall be deemed to be a loan made by the Custodian to the Fund for such Series
payable on demand and shall bear interest from the date incurred at a
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rate per annum (based on a 360-day year for the actual number of days
involved) equal to 1/2% over Custodian's prime commercial lending rate in
effect from time to time, such rate to be adjusted on the effective date of
any change in such prime commercial lending rate but in no event to be less
than 6% per annum. In addition, the Fund hereby agrees that the Custodian
shall have a continuing lien and security interest in and to any property
specifically allocated to such Series at any time held by it for the benefit
of such Series or in which the Fund may have an interest which is then in the
Custodian's possession or control or in possession or control of any third
party acting in the Custodian's behalf. The Fund authorizes the Custodian, in
its sole discretion, at any time to charge any such overdraft or indebtedness
together with interest due thereon against any balance of account standing to
such Series' credit on the Custodian's books. In addition, the Fund hereby
covenants that on each Business Day on which either it intends to enter a
Reverse Repurchase Agreement and/or otherwise borrow from a third party, or
which next succeeds a Business Day on which at the close of business the Fund
had outstanding a Reverse Repurchase Agreement or such a borrowing, it shall
prior to 9 a.m., New York City time, advise the Custodian, in writing, of each
such borrowing, shall specify the Series to which the same relates, and shall
not incur any indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the
Custodian) from which it borrows money for investment or for temporary or
emergency purposes using Securities held by the Custodian hereunder as
collateral for such borrowings, a notice or undertaking in the form currently
employed by any such bank setting forth the amount which such bank will loan
to the Fund against delivery of a stated amount of collateral. The Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to
each such borrowing: (a) the Series to which such borrowing relates; (b) the
name of the bank, (c) the amount and terms of the borrowing, which may be set
forth by incorporating by reference an attached promissory note, duly endorsed
by the Fund, or other loan agreement, (d) the time and date, if known, on
which the loan is to be entered into, (e) the date on which the loan becomes
due and payable, (f) the total amount payable to the Fund on the borrowing
date, (g) the market value of Securities to be delivered as collateral for
such loan, including the name of the issuer, the title and the number of
shares or the principal amount of any particular Securities, and (h) a
statement specifying whether such loan is for investment purposes or for
temporary or emergency purposes and that such loan is in conformance with the
Investment Company Act of 1940 and the Fund's prospectus. The Custodian shall
deliver on the borrowing date specified in a Certificate the specified
collateral and the executed promissory note, if any, against delivery by the
lending bank of the total amount of
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the loan payable, provided that the same conforms to the total amount payable
as set forth in the Certificate. The Custodian may, at the option of the
lending bank, keep such collateral in its possession, but such collateral
shall be subject to all rights therein given the lending bank by virtue of any
promissory note or loan agreement. The Custodian shall deliver such Securities
as additional collateral as may be specified in a Certificate to collateralize
further any transaction described in this paragraph. The Fund shall cause all
Securities released from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time such return of
collateral as may be tendered to it. In the event that the Fund fails to
specify in a Certificate the Series, the name of the issuer, the title and
number of shares or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall not be under any
obligation to deliver any Securities.
ARTICLE XV.
INSTRUCTIONS
1. with respect to any software provided by the Custodian to a Fund in
order for the Fund to transmit Instructions to the Custodian (the "Software"),
the Custodian grants to such Fund a personal, nontransferable and nonexclusive
license to use the Software solely for the purpose of transmitting
Instructions to, and receiving communications from, the Custodian in
connection with its account(s). The Fund agrees not to sell, reproduce, lease
or otherwise provide, directly or indirectly, the Software or any portion
thereof to any third party without the prior written consent of the Custodian.
2. The Fund shall obtain and maintain at its own cost and expense all
equipment and services, including but not limited to communications services,
necessary for it to utilize the Software and transmit Instructions to the
Custodian. The Custodian shall not be responsible for the reliability,
compatibility with the Software or availability of any such equipment or
services or the performance or nonperformance by any nonparty to this Custody
Agreement.
3. The Fund acknowledges that the Software, all data bases made
available to the Fund by utilizing the Software (other than data bases
relating solely to the assets of the Fund and transactions with respect
thereto), and any proprietary data, processes, information and documentation
(other than which are or become part of the public domain or are legally
required to be made available to the public) (collectively, the
"Information"), are the exclusive and confidential property of the Custodian.
The Fund shall keep
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the Information confidential by using the same care and discretion that the
Fund uses with respect to its own confidential property and trade secrets and
shall neither make nor permit any disclosure without the prior written consent
of the Custodian. Upon termination of this Agreement or the Software license
granted hereunder for any reason, the Fund shall return to the Custodian all
copies of the Information which are in its possession or under its control or
which the Fund distributed to third parties.
4. The Custodian reserves the right to modify the Software from time to
time upon reasonable prior notice and the Fund shall install new releases of
the Software as the Custodian may direct. The Fund agrees not to modify or
attempt to modify the Software without the Custodian's prior written consent.
The Fund acknowledges that any modifications to the Software, whether by the
Fund or the Custodian and whether with or without the Custodian's consent,
shall become the property of the Custodian.
5. The Custodian makes no warranties or representations of any kind
with regard to the Software or the method(s) by which the Fund may transmit
Instructions to the Custodian, express or implied, including but not limited
to any implied warranties or merchantability or fitness for a particular
purpose.
6. Where the method for transmitting Instructions by the Fund involves
an automatic systems acknowledgment by the Custodian of its receipt of such
Instructions, then in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act pursuant to such Instructions, the Fund
may not claim that such Instructions were received by the Custodian, and the
Fund shall deliver a Certificate by some other means.
7. (a) The Fund agrees that where it delivers to the Custodian
Instructions hereunder, it shall be the Fund's sole responsibility to ensure
that only persons duly authorized by the Fund transmit such Instructions to
the Custodian. The Fund will cause all persons transmitting Instructions to
the Custodian to treat applicable user and authorization codes, passwords and
authentication keys with extreme care, and irrevocably authorizes the
Custodian to act in accordance with and rely upon Instructions received by it
pursuant hereto.
(b) The Fund hereby represents, acknowledges and agrees that it
is fully informed of the protections and risks associated with the various
methods of transmitting Instructions to the Custodian and that there may be
more secure methods of transmitting Instructions to the Custodian than the
method(s) selected by the Fund. The Fund hereby agrees that the security
procedures (if any) to be followed in connection with the Fund's transmission
of Instructions
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provide to it a commercially reasonable degree of protection in light of its
particular needs and circumstances.
8. The Fund hereby presents, warrants and covenants to the Custodian
that this Agreement has been duly approved by a resolution of its Board of
Directors, and that its transmission of Instructions pursuant hereto shall at
all times comply with the Investment Company Act of 1940, as amended.
9. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours
after the earliest of (i) discovery thereof, (ii) the Business Day on which
discovery should have occurred through the exercise of reasonable care and
(iii) in the case of any error, the date of actual receipt of the earliest
notice which reflects such error, it being agreed that discovery and receipt
of notice may only occur on a business day. The Custodian shall promptly
advise the Fund whenever the Custodian learns of any errors, omissions or
interruption in, or delay or unavailability of, the Fund's ability to send
Instructions.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as
sub-custodian for each Series' Foreign Securities (as such term is defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as
amended) and other assets, the foreign banking institutions and foreign
securities depositories and clearing agencies designated on Schedule I hereto
("Foreign Sub-Custodians") to carry out their respective responsibilities in
accordance with the terms of the sub-custodian agreement between each such
Foreign Sub-Custodian and the Custodian, copies of which have been previously
delivered to the Fund and receipt of which is hereby acknowledged (each such
agreement, a "Foreign Sub-Custodian Agreement"). Upon receipt of a
Certificate, together with a certified resolution substantially in the form
attached as Exhibit E of the Fund's Board of Directors, the Fund may designate
any additional foreign sub-custodian with which the Custodian has an agreement
for such entity to act as the Custodian's agent, as its sub-custodian and any
such additional foreign sub-custodian shall be deemed added to Schedule I.
Upon receipt of a Certificate from the Fund, the Custodian shall cease the
employment of any one or more Foreign Sub-Custodians for maintaining custody
of the Fund's assets and such Foreign Sub-Custodian shall be deemed deleted
from Schedule I.
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2. Each Foreign Sub-Custodian Agreement shall be substantially in the
form previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written
consent.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the
Fund or any Series against a Foreign Sub-Custodian as a consequence of any
loss, damage, cost, expense, liability or claim sustained or incurred by the
Fund or any Series if and to the extent that the Fund or such Series has not
been made whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the
terms of the applicable Foreign Sub Custodian Agreement, use reasonable
efforts to arrange for the independent accountants of the Fund to be afforded
access to the books and records of any Foreign Sub-Custodian insofar as such
books and records relate to the performance of such Foreign Sub-Custodian
under its agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as
mutually agreed upon, statements in respect of the securities and other assets
of each Series held by Foreign Sub-Custodians, including but not limited to,
an identification of entities having possession of each Series' Foreign
Securities and other assets, and advices or notifications of any transfers of
Foreign Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually
agreed upon, information concerning the Foreign Sub-Custodians employed by the
Custodian. Such information shall be similar in kind and scope to that
furnished to the Fund in connection with the Fund's initial approval of such
Foreign Sub-Custodians and, in any event, shall include information pertaining
to (i) the Foreign Custodians' financial strength, general reputation and
standing in the countries in which they are located and their ability to
provide the custodial services required, and (ii) whether the Foreign Sub-
Custodians would provide a level of safeguards for safekeeping and custody of
securities not materially different from those prevailing in the United
States. The Custodian shall monitor the general operating performance of each
Foreign Sub-Custodian. The Custodian agrees that it will use reasonable care
in monitoring compliance by each Foreign Sub-Custodian with the terms of the
relevant Foreign Sub-Custodian Agreement
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and that if it learns of any breach of such Foreign Sub-Custodian Agreement
believed by the Custodian to have a material adverse effect on the Fund or any
Series it will promptly notify the Fund of such breach. The Custodian also
agrees to use reasonable and diligent efforts to enforce its rights under the
relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series
and delivery of securities maintained for the account of such Series may be
effected in accordance with the customary or established securities trading
or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivery of securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
9. Notwithstanding any other provision in this Agreement to the
contrary, with respect to any losses or damages arising out of or relating to
any actions or omissions of any Foreign Sub-Custodian the sole responsibility
and liability of the Custodian shall be to take appropriate action at the
Fund's expense to recover such loss or damage from the Foreign Sub-Custodian.
It is expressly understood and agreed that the Custodian's sole responsibility
and liability shall be limited to amounts so recovered from the Foreign
Sub-Custodian.
ARTICLE XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions
specifying with respect to such FX Transaction: (a) the Series to which such
FX Transaction is specifically allocated; (b) the type and amount of Currency
to be purchased by the Fund; (c) the type and amount of Currency to be sold by
the Fund; (d) the date on which the Currency to be purchased is to be
delivered; (e) the date on which the Currency to be sold is to be delivered;
and (f) the name of the person from whom or through whom such currencies are
to be purchased and sold. Unless otherwise instructed by a Certificate or Oral
Instructions, the
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Custodian shall deliver, or shall instruct a Foreign Sub-Custodian to deliver,
the Currency to be sold on the date on which such delivery is to be made, as
set forth in the Certificate, and shall receive, or instruct a Foreign
Sub-Custodian to receive, the Currency to be purchased on the date as set
forth in the Certificate.
2. Where the Currency to be sold is to be delivered on the same day as
the Currency to be purchased, as specified in the Certificate or Oral
Instructions, the Custodian or a Foreign Sub-Custodian may arrange for such
deliveries and receipts to be made in accordance with the customs prevailing
from time to time among brokers or dealers in Currencies, and such receipt and
delivery may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
such receipts and deliveries, which responsibility and liability shall
continue until the Currency to be received by the Fund has been received in
full.
3. Any FX Transaction effected by the Custodian in connection with this
Agreement may be entered with the Custodian, any office, branch or subsidiary
of The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as
principal or otherwise through customary banking channels. The Fund may issue
a standing Certificate with respect to FX Transaction but the Custodian may
establish rules or limitations concerning any foreign exchange facility made
available to the Fund. The Fund shall bear all risks of investing in
Securities or holding Currency. Without limiting the foregoing, the Fund shall
bear the risks that rules or procedures imposed by a Foreign Sub-Custodian or
foreign depositories, exchange controls, asset freezes or other laws, rules,
regulations or orders shall prohibit or impose burdens or costs on the
transfer to, by or for the account of the Fund of Securities or any cash held
outside the Fund's jurisdiction or denominated in Currency other than its home
jurisdiction or the conversion of cash from one Currency into another
currency. The Custodian shall not be obligated to substitute another Currency
for a Currency (including a Currency that is a component of a Composite
Currency Unit) whose transferability, convertibility or availability has been
affected by such law, regulation, rule or procedure. Neither the Custodian nor
any Foreign Sub-Custodian shall be liable to the Fund for any loss resulting
from any of the foregoing events.
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI,
neither the Custodian nor its nominee shall be
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<PAGE>
liable for any loss or damage, including counsel fees, resulting from its
action or omission to act or otherwise, either hereunder or under any Margin
Account Agreement, except for any such loss or damage arising out of its own
negligence or willful misconduct. In no event shall the Custodian be liable to
the Fund or any third party for special, indirect or consequential damages or
lost profits or loss of business, arising under or in connection with this
Agreement, even if previously informed of the possibility of such damages and
regardless of the form of action. The Custodian may, with respect to questions
of law arising hereunder or under any Margin Account Agreement, apply for and
obtain the advice and opinion of counsel to the Fund or of its own counsel, at
the expense of the Fund, and shall be fully protected with respect to anything
done or omitted by it in good faith in conformity with such advice or opinion.
The Custodian shall be liable to the Fund for any loss or damage resulting
from the use of the Book-Entry System or any Depository arising by reason of
any negligence or willful misconduct on the part of the Custodian or any of
its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(a) the validity of the issue of any Securities purchased,
sold, or written by or for the Fund, the legality of the purchase, sale or
writing thereof, or the propriety of the amount paid or received therefor;
(b) the legality of the sale or redemption of any Shares, or
the propriety of the amount to be received or paid therefor;
(c) the legality of the declaration or payment of any dividend
by the Fund;
(d) the legality of any borrowing by the Fund using Securities
as collateral;
(e) the legality of any loan of portfolio Securities, nor shall
the Custodian be under any duty or obligation to see to it that any cash
collateral delivered to it by a broker, dealer, or financial institution or
held by it at any time as a result of such loan of portfolio Securities of the
Fund is adequate collateral for the Fund against any loss it might sustain as
a result of such loan. The Custodian specifically, but not by way of
limitation, shall not be under any duty or obligation periodically to check or
notify the Fund that the amount of such cash collateral held by it for the
Fund is sufficient collateral for the Fund, but such duty or obligation shall
be the sole responsibility of the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer or financial
institution
-34-
<PAGE>
to which portfolio Securities of the Fund are lent pursuant to Article X of
this Agreement makes payment to it of any dividends or interest which are
payable to or for the account of the Fund during the period of such loan or at
the termination of such loan, provided, however, that the Custodian shall
promptly notify the Fund in the event that such dividends or interest are not
paid and received when due; or
(f) the sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or Collateral
Account in connection with transactions by the Fund. In addition, the
Custodian shall be under no duty or obligation to see that any broker, dealer,
futures commission merchant or Clearing Member makes payment to the Fund of
any variation margin payment or similar payment which the Fund may be entitled
to receive from such broker, dealer, futures commission merchant or Clearing
Member, to see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount the Fund
is entitled to receive, or to notify the Fund of the Custodian's receipt or
non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the
Fund until the Custodian actually receives and collects such money directly or
by the final crediting of the account representing the Fund's interest at the
Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable
for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held
in the Depository, unless the Custodian shall have actually received timely
notice from the Depository. In no event shall the Custodian have any
responsibility or liability for the failure of the Depository to collect, or
for the late collection or late crediting by the Depository of any amount
payable upon Securities deposited in the Depository which may mature or be
redeemed, retired, called or otherwise become payable. However, upon receipt
of a Certificate from the Fund of an overdue amount on Securities held in the
Depository the Custodian shall make a claim against the Depository on behalf
of the Fund, except that the Custodian shall not be under any obligation to
appear in, prosecute or defend any action suit or proceeding in respect to any
Securities held by the Depository which in its opinion may involve it in
expense or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
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<PAGE>
5. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount due to the Fund from the
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by the Transfer Agent of the Fund of any amount paid by the
Custodian to the Transfer Agent of the Fund in accordance with this
Agreement.
6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount if the Securities upon which such
amount is payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by
a Certificate and (ii) it shall be assured to its satisfaction of
reimbursement of its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XVI appoint one or more banking
institutions as Depository or Depositories, as Sub-Custodian or
Sub-Custodians, or as Co-Custodian or Co-Custodians including, but not limited
to, banking institutions located in foreign countries, of Securities and
moneys at any time owned by the Fund, upon such terms and conditions as may be
approved in a Certificate or contained in an agreement executed by the
Custodian, the Fund and the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to
ascertain whether any Securities at any time delivered to, or held by it or by
any Foreign Sub-Custodian, for the account of the Fund and specifically
allocated to a Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or (b) to
ascertain whether any transactions by the Fund, whether or not involving the
Custodian, are such transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian all out-of-pocket expenses and such compensation as may
be agreed upon from time to time between the Custodian and the Fund. The
Custodian may charge such compensation and any expenses with respect to a
Series incurred by the Custodian in the performance of its duties pursuant to
such agreement against any money specifically allocated to such Series. Unless
and until the Fund instructs the Custodian by a Certificate to apportion any
loss, damage, liability or expense among the Series in a specified manner, the
Custodian shall also be entitled to charge against any money held by it for
the account of a Series such Series' pro rata share (based on such Series net
asset value at the time of the charge to the aggregate net asset value of all
Series at that time) of the amount of any loss, damage, liability or expense,
including counsel fees, for which it shall be
.
-36-
<PAGE>
entitled to reimbursement under the provisions of this Agreement. The
expenses for which the Custodian shall be entitled to reimbursement hereunder
shall include, but are not limited to, the expenses of sub-custodians and
foreign branches of the Custodian incurred in settling outside of New York
City transactions involving the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the Custodian a
Certificate or facsimile thereof confirming such Oral Instructions in such
manner so that such Certificate or facsimile thereof is received by the
Custodian, whether by hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such Oral
Instructions are given to the Custodian. The Fund agrees that the fact that
such confirming instructions are not received, or that contrary instructions
are received, by the Custodian shall in no way affect the validity of the
transactions or enforceability of the transactions hereby authorized by the
Fund. The Fund agrees that the Custodian shall incur no liability to the Fund
in acting upon Oral Instructions given to the Custodian hereunder concerning
such transactions provided such instructions reasonably appear to have been
received from an Officer.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any
Margin Account Agreement. Without limiting the generality of the foregoing,
the Custodian shall be under no duty to inquire into, and shall not be liable
for, the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the
-37-
<PAGE>
Custodian its expenses of providing such copies. Upon reasonable request of
the Fund, the Custodian shall provide in hard copy or on microfilm, whichever
the Custodian elects, any records included in any such delivery which are
maintained by the Custodian on a computer disk, or are similarly maintained,
and the Fund shall reimburse the Custodian for its expenses of providing such
hard copy or microfilm.
13. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or
non-payment of checks pursuant to paragraph 6 of Article XIII as part of any
check redemption privilege program of the Fund, except for any such liability,
claim, loss and demand arising out of the Custodian's own negligence or
willful misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI and XVII the Custodian may
deliver and receive Securities, and receipts with respect to such Securities,
and arrange for payments to be made and received by the Custodian in
accordance with the customs prevailing from time to time among brokers or
dealers in such Securities. When the Custodian is instructed to deliver
Securities against payment, delivery of such Securities and receipt of payment
therefor may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
the Custodian's delivery of Securities pursuant to instructions of the Fund,
which responsibility and liability shall continue until final payment in full
has been received by the Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XIX.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving
to the other party a notice in writing
-38-
<PAGE>
specifying the date of such termination, which shall be not less than ninety
(90) days after the date of giving of such notice. In the event such notice is
given by the Fund, it shall be accompanied by a copy of a resolution of the
Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, electing to terminate this Agreement and designating a successor
custodian or custodians, each of which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus and undivided profits.
In the event such notice is given by the Custodian, the Fund shall, on or
before the termination date, deliver to the Custodian a copy of a resolution
of the Board of Directors of the Fund, certified by the Secretary or any
Assistant Secretary, designating a successor custodian or custodians.
In the absence of such designation by the Fund, the Custodian may designate a
successor custodian which shall be a bank or trust company having not less
than $2,000,000 aggregate capital, surplus and undivided profits. Upon the
date set forth in such notice this Agreement shall terminate, and the
Custodian shall upon receipt of a notice of acceptance by the successor
custodian on that date deliver directly to the successor custodian all
Securities and moneys then owned by the Fund and held by it as Custodian,
after deducting all fees, expenses and other amounts for the payment or
reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund be deemed to be its own custodian and the Custodian shall thereby
be relieved of all duties and responsibilities pursuant to this Agreement,
other than the duty with respect to Securities held in the Book=Entry System
which cannot be delivered to the Fund to hold such Securities hereunder in
accordance with this Agreement.
ARTICLE XX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Officers of the Fund under its seal, setting forth the names and the
signatures of the present Officers of the Fund. The Fund agrees to furnish to
the Custodian a new Certificate in similar form in the event that any such
present Officer ceases to be an Officer of the Fund, or in the event that
other or additional Officers are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully protected in
acting under the
-39-
<PAGE>
provisions of this Agreement or Oral Instructions upon the signatures of the
Officers as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Custodian, shall be sufficiently given
if addressed to the Custodian and mailed or delivered to it at its offices at
90 Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Fund shall be sufficiently given if
addressed to the Fund and mailed or delivered to it at its office at the
address for the Fund first above written, or at such other place as the Fund
may from time to time designate in writing.
4. This Agreement may not be amended or modified in any manner except
by a written agreement executed by both parties with the same formality as
this Agreement and approved by a resolution of the Board of Directors of the
Fund.
5. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Fund without the
written consent of the Custodian, or by the Custodian without the written
consent of the Fund, authorized or approved by a resolution of the Fund's
Board of Directors.
6. This Agreement shall be construed in accordance with the laws of
the State of New York without giving effect to conflict of laws principles
thereof. Each party hereby consents to the jurisdiction of a state or federal
court situated in New York City, New York in connection with any dispute
arising hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
-40-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective Officers, thereunto duly
authorized and their respective seals to be hereunto affixed, as of the
day and year first above written.
MUNIHOLDINGS INSURED FUND, INC.
[SEAL] By:
-----------------------
Attest:
---------------------------
THE BANK OF NEW YORK
[SEAL] By:
-----------------------
Name:
Title:
Attest:
---------------------------
<PAGE>
APPENDIX A
I, , and I,
, of
MUNIHOLDINGS INSURED FUND, INC., a Maryland corporation (the
"Fund"), do hereby certify that:
The following individuals serve in the following positions with the
Fund and each has been duly elected or appointed by the Board of Directors of
the Fund to each such position and qualified therefor in conformity with the
Fund's Articles of Incorporation and By-Laws, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
---------------------- ---------------------- ----------------------
-42-
<PAGE>
APPENDIX B
SERIES
-43-
<PAGE>
APPENDIX C
I, Jorge Ramos, a Vice President with THE BANK OF NEW YORK do
hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
44
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MUNIHOLDINGS INSURED FUND,
INC., a Maryland corporation (the "Fund"), and further certifies that the
following resolution was adopted by the Board of Directors of the Fund at a
meeting duly held on , 1998, at which a quorum was at all times
present and that such resolution has not been modified or rescinded and is in
full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as
of , 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to deposit in the Book
Entry System, as defined in the Custody Agreement, all securities
eligible for deposit therein, regardless of the Series to which the
same are specifically allocated, and to utilize the Book-Entry System
to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of
purchases and sales of securities, loans of securities, and deliveries
and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
MUNIHOLDINGS INSURED FUND, INC., as of the day of
, 1998.
-----------------------
[SEAL]
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting
of MUNIHOLDINGS INSURED FUND, INC., a Maryland corporation (the
"Fund"), and further certifies that the following resolution was adopted by
the Board of Directors of the Fund at a meeting duly held on , 1998,
at which a quorum was at all times present and that such resolution has not
been modified or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of
, 1998, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis until such time as it receives a
Certificate, as defined in the Custody Agreement, to the contrary to
deposit in the Depository, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of the Series to
which the same are specifically allocated, and to utilize the
Depository to the extent possible in connection with its performance
thereunder, including, without limitation, in connection with
settlements of purchases and sales of securities, loans of securities,
and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal
of MUNIHOLDINGS INSURED FUND, INC., as of the day of , 1998.
--------------------------
[SEAL]
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting
of MUNIHOLDINGS INSURED FUND, INC., a Maryland corporation (the
"Fund"), and further certifies that the following resolution was adopted by
the Board of Directors of the Fund at a meeting duly held on , 1998, at
which a quorum was at all times present and that such resolution has not been
modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of
, 1998, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis until such time as it receives a
Certificate, as defined in the Custody Agreement, to the contrary to
deposit in the Participants Trust Company as Depository, as defined in
the Custody Agreement, all securities eligible for deposit therein,
regardless of the Series to which the same are specifically allocated,
and to utilize the Participants Trust Company to the extent possible in
connection with its performance thereunder, including, without
limitation, in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of MUNIHOLDINGS INSURED FUND, INC., as of the day of
, 1998.
------------------------
[SEAL]
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MUNIHOLDINGS INSURED FUND,
INC., a Maryland corporation (the "Fund"), and further certifies that
the following resolution was adopted by the Board of Directors of the Fund at
a meeting duly held on , 1998, at which a quorum was at all times present and
that such resolution has not been modified or rescinded and is in full force
and effect as of the date hereof .
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as
of , 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody Agreement, to the
contrary, to accept, utilize and act with respect to Clearing Member
confirmations for Options and transaction in Options, regardless of the
Series to which the same are specifically allocated, as such terms are
defined in the Custody Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MUNIHOLDINGS
INSURED FUND, INC., as of the day of , 1998.
------------------------
[SEAL]
<PAGE>
EXHIBIT D
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MUNIHOLDINGS INSURED FUND,
INC., a Maryland corporation (the "Fund"), further certifies
that the following resolutions were adopted by the Board of Directors of the
Fund at a meeting duly held on , 1998, at which a quorum was at all
times present and that such resolutions have not been modified or rescinded
and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to
the Custody Agreement between The Bank of New York and the Fund dated
as of , 1998 (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to act in accordance
with, and to rely on Instructions (as defined in the Custody
Agreement).
RESOLVED, that the Fund shall establish access codes and grant
use of such access codes only to Officers of the Fund as defined in the
Custody Agreement, shall establish internal safekeeping procedures to
safeguard and protect the confidentiality and availability of user and
access codes, passwords and authentication keys, and shall use
Instructions only in a manner that does not contravene the Investment
Company Act of 1940, as amended, or the rules and regulations
thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MUNIHOLDINGS
INSURED FUND, INC., as of the day of
, 1998.
------------------------
[SEAL]
<PAGE>
EXHIBIT E
The undersigned, , hereby certifies that he or she is
the duly elected and acting of MUNIHOLDINGS INSURED FUND, INC., a
Maryland corporation (the "Fund"), further certifies that the following
resolutions were adopted by the Board of Directors of the Fund at a meeting
duly held on , 1998, at which a quorum was at all times present and
that such resolutions have not been modified or rescinded and are in full
force and effect as of the date hereof.
RESOLVED, that the maintenance of the Fund's assets in each
country listed in Schedule I hereto be, and hereby is, approved by the
Board of Directors as consistent with the best interests of the Fund
and its shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the
foreign branches of The Bank of New York (the "Bank") listed in
Schedule I located in the countries specified therein, and with the
foreign sub-custodians and depositories listed in Schedule I located in
the countries specified therein be, and hereby is, approved by the
Board of Directors as consistent with the best interest of the Fund and
its shareholders; and further
RESOLVED, that the Sub-Custodian Agreements presented to this
meeting between the Bank and each of the foreign sub-custodians and
depositories listed in Schedule I providing for the maintenance of the
Fund's assets with the applicable entity, be and hereby are, approved
by the Board of Directors as consistent with the best interests of the
Fund and its shareholders; and further
RESOLVED, that the appropriate officers of the Fund are hereby
authorized to place assets of the Fund with the aforementioned foreign
branches and foreign sub-custodians and depositories as hereinabove
provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of
them, are authorized to do any and all other acts, in the name of the
Fund and on its behalf, as they, or any of them, may determine to be
necessary or desirable and proper in connection with or in furtherance
of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
MUNIHOLDINGS INSURED FUND, INC., as of the day of
, 1998.
------------------------
[SEAL]
<PAGE>
EXHIBIT (K)
THE
BANK OF
NEW
YORK
================================================================================
STOCK TRANSFER AGENCY AGREEMENT
between
MuniHoldings Insured Fund, Inc.
- --------------------------------------------------------------------------------
and
THE BANK OF NEW YORK
ACCOUNT NUMBER(S)
-------------------------------------------
================================================================================
<PAGE>
STOCK TRANSFER AGENCY AGREEMENT
AGREEMENT, made as of ___________________, 1998 by and between MuniHoldings
Insured Fund, Inc., a corporation organized and existing under the laws of the
State of Maryland (hereinafter referred to as the "Customer"), and THE BANK OF
NEW YORK, a New York trust company (hereinafter referred to as the "Bank").
WITNESSETH:
That for and in consideration of the mutual promises hereinafter set forth,
the parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
-----------
Whenever used in this Agreement, the following words and phrases shall have
the following meanings:
1. "Business Day" shall be deemed to be each day on which the Bank is
open for business.
2. "Certificate" shall mean any notice, instruction, or other instrument
in writing, authorized or required by this Agreement to be given to the Bank by
the Customer which is signed by any Officer, as hereinafter defined, and
actually received by the Bank.
3. "Officer" shall be deemed to be the Customer's Chief Executive
Officer, President, any Vice President, the Secretary, the Treasurer, the
Controller, any Assistant Treasurer, and any Assistant Secretary duly authorized
by the Board of Directors of the Customer to execute any Certificate,
instruction, notice or other instrument on behalf of the Customer and named in a
Certificate, as such Certificate may be amended from time to time.
4. "Shares" shall mean all or any part of each class of the shares of
capital stock of the Customer which from time to time are authorized and/or
issued by the Customer and identified in a Certificate of the Secretary of the
Customer under corporate seal, as such Certificate may be amended from time to
time, with respect to which the Bank is to act hereunder.
ARTICLE II
APPOINTMENT OF BANK
-------------------
1. The Customer hereby constitutes and appoints the Bank as its agent to
perform the services described herein and as more particularly described in
Schedule I attached hereto (the "Services"), and the Bank hereby accepts
appointment as such agent and agrees to perform the Services in accordance with
the terms hereinafter set forth.
2. In connection with such appointment, the Customer shall deliver the
following documents to the Bank:
(a) A certified copy of the Certificate of Incorporation or other document
evidencing the Customer's form of organization (the "Charter") and all
amendments thereto;
(b) A certified copy of the By-Laws of the Customer;
<PAGE>
-2-
(c) A certified copy of a resolution of the Board of Directors of the
Customer appointing the Bank to perform the Services and authorizing
the execution and delivery of this Agreement;
(d) A Certificate signed by the Secretary of the Customer specifying: the
number of authorized Shares, the number of such authorized Shares
issued and currently outstanding, and the names and specimen
signatures of all persons duly authorized by the Board of Directors of
the Customer to execute any Certificate on behalf of the Customer, as
such Certificate may be amended from time to time;
(e) A Specimen Share certificate for each class of Shares in the form
approved by the Board of Directors of the Customer, together with a
Certificate signed by the Secretary of the Customer as to such
approval and covenanting to supply a new such Certificate and specimen
whenever such form shall change;
(f) A copy of the Customer's Registration Statement, as amended to date,
and the most recently filed Post-Effective Amendment thereto, filed by
the Customer with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, together with any applications
filed in connection therewith; and
(g) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the validity of the authorized and outstanding
Shares, the obtaining of all necessary governmental consents, whether
such Shares are fully paid and non-assessable and the status of such
Shares under the Securities Act of 1933, as amended, and any other
applicable law or regulation (i.e., if subject to registration, that
----
they have been registered and that the Registration Statement has
become effective or, if exempt, the specific grounds therefor);
(h) A list of the name, address, social security or taxpayer
identification number of each Shareholder, number of Shares owned,
certificate numbers, and whether any "stops" have been placed; and
(i) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the due authorization by the Customer and the
validity and effectiveness of the use of facsimile signatures by the
Bank in connection with the countersigning and registering of Share
certificates of the Customer.
3. The Customer shall furnish the Bank with a sufficient supply of blank
Share certificates and from time to time will renew such supply upon request of
the Bank. Such blank Share certificates shall be properly signed, by facsimile
or otherwise, by Officers of the Customer authorized by law or by the By-Laws to
sign Share certificates, and, if required, shall bear the corporate seal or a
facsimile thereof.
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
------------------------------------
1. The Customer shall deliver to the Bank the following documents on or
before the effective date of any increase, decrease or other change in the total
number of Shares authorized to be issued:
(a) A certified copy of the amendment to the Charter giving effect to such
increase, decrease or change;
<PAGE>
-3-
(b) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the validity of the Shares, the obtaining of all
necessary governmental consents, whether such Shares are fully paid
and non-assessable and the status of such Shares under the Securities
Act of 1933, as amended, and any other applicable federal law or
regulations (i.e., if subject to registration, that they have been
-----
registered and that the Registration Statement has become effective
or, if exempt, the specific grounds therefor); and
(c) In the case of an increase, if the appointment of the Bank was
theretofore expressly limited, a certified copy of a resolution of the
Board of Directors of the Customer increasing the authority of the
Bank.
2. Prior to the issuance of any additional Shares pursuant to stock
dividends, stock splits or otherwise, and prior to any reduction in the number
of Shares outstanding, the Customer shall deliver the following documents to the
Bank:
(a) A certified copy of the resolutions adopted by the Board of Directors
and/or the shareholders of the Customer authorizing such issuance of
additional Shares of the Customer or such reduction, as the case may
be;
(b) A certified copy of the order or consent of each governmental or
regulatory authority required by law as a prerequisite to the issuance
or reduction of such Shares, as the case may be, and an opinion of
counsel for the Customer that no other order or consent is required;
and
(c) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the validity of the Shares, the obtaining of all
necessary governmental consents, whether such Shares are fully paid
and non-assessable and the status of such Shares under the Securities
Act of 1933, as amended, and any other applicable law or regulation
(i.e., if subject to registration, that they have been registered and
-----
that the Registration Statement has become effective, or, if exempt,
the specific grounds therefor).
ARTICLE IV
RECAPITALIZATION OR CAPITAL ADJUSTMENT
--------------------------------------
1. In the case of any negative stock split, recapitalization or other
capital adjustment requiring a change in the form of Share certificates, the
Bank will issue Share certificates in the new form in exchange for, or upon
transfer of, outstanding Share certificates in the old form, upon receiving:
(a) A Certificate authorizing the issuance of Share certificates in
the new form;
(b) A certified copy of any amendment to the Charter with respect to
the change;
(c) Specimen Share certificates for each class of Shares in the new form
approved by the Board of Directors of the Customer, with a Certificate
signed by the Secretary of the Customer as to such approval;
<PAGE>
-4-
(d) A certified copy of the order or consent of each governmental or
regulatory authority required by law as a prerequisite to the issuance
of the Shares in the new form, and an opinion of counsel for the
Customer that the order or consent of no other governmental or
regulatory authority is required; and
(e) An opinion of counsel for the Customer, in a form satisfactory to the
Bank, with respect to the validity of the Shares in the new form, the
obtaining of all necessary governmental consents, whether such Shares
are fully paid and non-assessable and the status of such Shares
under the Securities Act of 1933, as amended, and any other applicable
law or regulation (i.e., if subject to registration, that the Shares
-----
have been registered and that the Registration Statement has become
effective or, if exempt, the specific grounds therefore).
2. The Customer shall furnish the Bank with a sufficient supply of blank
Share certificates in the new form, and from time to time will replenish such
supply upon the request of the Bank. Such blank Share certificates shall be
properly signed, by facsimile or otherwise, by Officers of the Customer
authorized by law or by the By-Laws to sign Share certificates and, if required,
shall bear the corporate seal or a facsimile thereof.
ARTICLE V
ISSUANCE AND TRANSFER OF SHARES
-------------------------------
1. The Bank will issue Share certificates upon receipt of a Certificate
from an Officer, but shall not be required to issue Share certificates after it
has received from an appropriate federal or state authority written notification
that the sale of Shares has been suspended or discontinued, and the Bank shall
be entitled to rely upon such written notification. The Bank shall not be
responsible for the payment of any original issue or other taxes required to be
paid by the Customer in connection with the issuance of any Shares.
2. Shares will be transferred upon presentation to the Bank of Share
certificates in form deemed by the Bank properly endorsed for transfer,
accompanied by such documents as the Bank deems necessary to evidence the
authority of the person making such transfer, and bearing satisfactory evidence
of the payment of applicable stock transfer taxes. In the case of small estates
where no administration is contemplated, the Bank may, when furnished with an
appropriate surety bond, and without further approval of the Customer, transfer
Shares registered in the name of the decedents where the current market value of
the Shares being transferred does not exceed such amount as may from time to
time be prescribed by the various states. The Bank reserves the right to refuse
to transfer Shares until it is satisfied that the endorsements on Share
certificates are valid and genuine, and for that purpose it may require, unless
otherwise instructed by an Officer of the Customer, a guaranty of signature by
an "eligible guarantor institution" meeting the requirements of the Bank, which
requirements include membership or participation in STAMP or such other
"signature guarantee program" as may be determined by the Bank in addition to,
or in substitution for, STAMP, all in accordance with the Securities Exchange
Act of 1934, as amended. The Bank also reserves the right to refuse to transfer
Shares until it is satisfied that the requested transfer is legally authorized,
and it shall incur no liability for the refusal in good faith to make transfers
which the Bank, in its judgment, deems improper or unauthorized, or until it is
satisfied that there is no basis to any claims adverse to such transfer. The
Bank may, in effecting transfers of Shares, rely upon those provisions of the
Uniform Act for the Simplification of Fiduciary Security Transfers or the
Uniform Commercial Code, as the same may be amended from time to time,
applicable to the transfer of securities, and the Customer shall indemnify the
Bank for any act done or omitted by it in good faith in reliance upon such laws.
<PAGE>
-5-
3. All certificates representing Shares that are subject to restrictions
on transfer (e.g., securities acquired pursuant to an investment representation,
----
securities held by controlling person, securities subject to stockholders'
agreement, etc.), shall be stamped with a legend describing the extent and
conditions of the restrictions or referring to the source of such restrictions.
The Bank assumes no responsibility with respect to the transfer of restricted
securities where counsel for the Customer advises that such transfer may be
properly effected.
4. Notwithstanding the foregoing or any other provision contained in this
Agreement to the contrary, the Bank shall be fully protected by the Customer in
not requiring any instruments, documents, assurances, endorsements or
guarantees, including, without limitation, any signature guarantees, in
connection with a transfer of Shares whenever the Bank reasonably believes that
requiring the same would be inconsistent with the transfer procedures as
described in the Prospectus.
ARTICLE VI
DIVIDENDS AND DISTRIBUTIONS
---------------------------
1. The Customer shall furnish to the Bank a copy of a resolution of its
Board of Directors, certified by the Secretary or any Assistant Secretary,
either (i) setting forth the date of the declaration of a dividend or
distribution, the date of accrual or payment, as the case may be, the record
date as of which shareholders entitled to payment, or accrual, as the case may
be shall be determined, the amount per Share of such dividend or distribution,
the payment date on which all previously accrued and unpaid dividends are to be
paid, and the total amount, if any, payable to the Bank on such payment date, or
(ii) authorizing the declaration of dividends and distributions on a periodic
basis and authorizing the Bank to rely on a Certificate setting forth the
information described in subsection (i) of this paragraph.
2. Prior to the payment date specified in such Certificate or resolution,
as the case may be, the Customer shall, in the case of a cash dividend or
distribution, pay to the Bank an amount of cash, sufficient for the Bank to make
the payment, specified in such Certificate or resolution, to the shareholders of
record as of such payment date. The Bank will, upon receipt of any such cash,
(i) in the case of shareholders who are participants in a dividend reinvestment
and/or cash purchase plan of the Customer, reinvest such cash dividends or
distributions in accordance with the terms of such plan, and (ii) in the case of
shareholders who are not participants in any such plan, make payment of such
cash dividends or distributions to the shareholders of record as of the record
date by mailing a check, payable to the registered shareholder, to the address
of record or dividend mailing address. The Bank shall not be liable for any
improper payment made in accordance with a Certificate or resolution described
in the preceding paragraph. If the Bank shall not receive sufficient cash prior
to the payment date to make payments of any cash dividend or distribution
pursuant to subsections (i) and (ii) above to all shareholders of the Customer
as of the record date, the Bank shall, upon notifying the Customer, withhold
payment to all shareholders of the Customer as of the record date until
sufficient cash is provided to the Bank.
3. It is understood that the Bank shall in no way be responsible for the
determination of the rate or form of dividends or distributions due to the
shareholders.
4. It is understood that the Bank shall file such appropriate information
returns concerning the payment of dividends and distributions with the proper
federal, state and local authorities as are required by law to be filed by the
Customer but shall in no way be responsible for the collection or withholding of
taxes due on such dividends or distributions due to shareholders, except and
only to the extent required of it by applicable law.
<PAGE>
-6-
ARTICLE VII
CONCERNING THE CUSTOMER
-----------------------
1. The Customer shall promptly deliver to the Bank written notice of any
change in the Officers authorized to sign Share certificates, Certificates,
notifications or requests, together with a specimen signature of each new
Officer. In the event any Officer who shall have signed manually or whose
facsimile signature shall have been affixed to blank Share certificates shall
die, resign or be removed prior to issuance of such Share certificates, the Bank
may issue such Share certificates as the Share certificates of the Customer
notwithstanding such death, resignation or removal, and the Customer shall
promptly deliver to the Bank such approvals, adoptions or ratifications as may
be required by law.
2. Each copy of the Charter of the Customer and copies of all amendments
thereto shall be certified by the Secretary of State (or other appropriate
official) of the state of incorporation, and if such Charter and/or amendments
are required by law also to be filed with a county or other officer or official
body, a certificate of such filing shall be filed with a certified copy
submitted to the Bank. Each copy of the By-Laws and copies of all amendments
thereto, and copies of resolutions of the Board of Directors of the Customer,
shall be certified by the Secretary or an Assistant Secretary of the Customer
under the corporate seal.
3. Customer hereby represents and warrants:
(a) It is a corporation duly organized and validly existing under the laws
of Maryland.
(b) This Agreement has been duly authorized, executed and delivered on its
behalf and constitutes the legal, valid and binding obligation of
Customer. The execution, delivery and performance of this Agreement by
Customer do not and will not violate any applicable law or regulation
and do not require the consent of any governmental or other regulatory
body except for such consents and approvals as have been obtained and
are in full force and effect.
4. It shall be the sole responsibility of the Customer to deliver to the
Bank the Customer's currently effective Prospectus and, for purposes
of this Agreement, the Bank shall not be deemed to have notice of any
information contained in such Prospectus until it is actually received
by the Bank.
ARTICLE VIII
CONCERNING THE BANK
-------------------
1. The Bank shall not be liable and shall be fully protected in acting
upon any oral instruction, writing or document reasonably believed by it to be
genuine and to have been given, signed or made by the proper person or persons
and shall not be held to have any notice of any change of authority of any
person until receipt of written notice thereof from an Officer of the Customer.
It shall also be protected in processing Share certificates which it reasonably
believes to bear the proper manual or facsimile signatures of the duly
authorized Officer or Officers of the Customer and the proper countersignature
of the Bank.
2. The Bank may establish such additional procedures, rules and
regulations governing the transfer or registration of Share certificates as
it may deem advisable and consistent with such rules and regulations generally
adopted by bank transfer agents.
<PAGE>
-7-
3. The Bank may keep such records as it deems advisable but not
inconsistent with resolutions adopted by the Board of Directors of the Customer.
The Bank may deliver to the Customer from time to time at its discretion, for
safekeeping or disposition by the Customer in accordance with law, such records,
papers, Share certificates which have been cancelled in transfer or exchange and
other documents accumulated in the execution of its duties hereunder as the Bank
may deem expedient, other than those which the Bank is itself required to
maintain pursuant to applicable laws and regulations, and the Customer shall
assume all responsibility for any failure thereafter to produce any record,
paper, cancelled Share certificate or other document so returned, if and when
required. The records maintained by the Bank pursuant to this paragraph which
have not been previously delivered to the Customer pursuant to the foregoing
provisions of this paragraph shall be considered to be the property of the
Customer, shall be made available upon request for inspection by the Officers,
employees and auditors of the Customer, and shall be delivered to the Customer
upon request and in any event upon the date of termination of this Agreement, as
specified in Article IX of this Agreement, in the form and manner kept by the
Bank on such date of termination or such earlier date as may be requested by the
Customer.
4. The Bank may employ agents or attorneys-in-fact at the expense of the
Customer, and shall not be liable for any loss or expense arising out of, or in
connection with, the actions or omissions to act of its agents or attorneys-in-
fact, so long as the Bank acts in good faith and without negligence or willful
misconduct in connection with the selection of such agents or attorneys-in-fact.
5. The Bank shall only be liable for any loss or damage arising out of
its own negligence or willful misconduct; provided, however, that the Bank shall
not be liable for any indirect, special, punitive or consequential damages.
6. The Customer shall indemnify and hold harmless the Bank from and against
any and all claims (whether with or without basis in fact or law), costs,
demands, expenses and liabilities, including reasonable attorney's fees, which
the Bank may sustain or incur or which may be asserted against the Bank except
for any liability which the Bank has assumed pursuant to the immediately
preceding section. The Bank shall be deemed not to have acted with negligence
and not to have engaged in willful misconduct by reason of or as a result of any
action taken or omitted to be taken by the Bank without its own negligence or
willful misconduct in reliance upon (i) any provision of this Agreement, (ii)
any instrument, order or Share certificate reasonably believed by it to be
genuine and to be signed, countersigned or executed by any duly authorized
Officer of the Customer, (iii) any Certificate or other instructions of an
Officer, (iv) any opinion of legal counsel for the Customer or the Bank, or (v)
any law, act, regulation or any interpretation of the same even though such law,
act, or regulation may thereafter have been altered, changed, amended or
repealed. Nothing contained herein shall limit or in any way impair the right of
the Bank to indemnification under any other provision of this Agreement.
7. Specifically, but not by way of limitation, the Customer shall
indemnify and hold harmless the Bank from and against any and all claims
(whether with or without basis in fact or law), costs, demands, expenses and
liabilities, including reasonable attorney's fees, of any and every nature which
the Bank may sustain or incur or which may be asserted against the Bank in
connection with the genuineness of a Share certificate, the Bank's due
authorization by the Customer to issue Shares and the form and amount of
authorized Shares.
<PAGE>
-8-
8. At any time the bank may apply to an Officer of the Customer for
written instructions with respect to any matter arising in connection with the
Bank's duties and obligations under this Agreement, and the Bank shall not be
liable for any action taken or omitted to be taken by the Bank in good faith in
accordance with such instructions. Such application by the Bank for instructions
from an Officer of the Customer may, at the option of the Bank, set forth in
writing any action proposed to be taken or omitted to be taken by the Bank with
respect to its duties or obligations under this Agreement and the date on and/or
after which such action shall be taken, and the Bank shall not be liable for any
action taken or omitted to be taken in accordance with a proposal included in
any such application on or after the date specified therein unless, prior to
taking or omitting to take any such action, the Bank has received written
instructions in response to such application specifying the action to be taken
or omitted. The Bank may consult counsel to the Customer or its own counsel, at
the expense of the Customer, and shall be fully protected with respect to
anything done or omitted by it in good faith in accordance with the advice or
opinion of such counsel.
9. When mail is used for delivery of non-negotiable Share certificates,
the value of which does not exceed the limits of the Bank's Blanket Bond, the
Bank shall send such non-negotiable Share certificates by first class mail, and
such deliveries will be covered while in transit by the Bank's Blanket Bond.
Non-negotiable Share certificates, the value of which exceed the limits of the
Bank's Blanket Bond, will be sent by insured registered mail. Negotiable Share
certificates will be sent by insured registered mail. The Bank shall advise the
Customer of any Share certificates returned as undeliverable after being mailed
as herein provided for.
10. The Bank may issue new Share certificates in place of Share
certificates represented to have been lost, stolen or destroyed upon receiving
instructions in writing from an Officer and indemnity satisfactory to the Bank.
Such instructions from the Customer shall be in such form as approved by the
Board of Directors of the Customer in accordance with applicable law or the By-
Laws of the Customer governing such matters. If the Bank receives written
notification from the owner of the lost, stolen or destroyed Share certificate
within a reasonable time after he has notice of it, the Bank shall promptly
notify the Customer and shall act pursuant to written instructions signed by an
Officer. If the Customer receives such written notification from the owner of
the lost, stolen or destroyed Share certificate within a reasonable time after
he has notice of it, the Customer shall promptly notify the Bank and the Bank
shall act pursuant to written instructions signed by an Officer. The Bank shall
not be liable for any act done or omitted by it pursuant to the written
instructions described herein. The Bank may issue new Share certificates in
exchange for, and upon surrender of, mutilated Share certificates .
11. The Bank will issue and mail subscription warrants for Shares, Shares
representing stock dividends, exchanges or splits, or act as conversion agent
upon receiving written instructions from an Officer and such other documents as
the Bank may deem necessary.
12. The Bank will supply shareholder lists to the Customer from time to
time upon receiving a request therefor from an Officer of the Customer.
13. In case of any requests or demands for the inspection of the
shareholder records of the Customer, the Bank will notify the Customer and
endeavor to secure instructions from an Officer as to such inspection. The Bank
reserves the right, however, to exhibit the shareholder record to any person
whenever it is advised by its counsel that there is a reasonable likelihood that
the Bank will be held liable for the failure to exhibit the shareholder records
to such person.
14. At the request of an Officer, the Bank will address and mail such
appropriate notices to shareholders as the Customer may direct.
15. Notwithstanding any provisions of this Agreement to the contrary, the
Bank shall be under no duty or obligation to inquire into, and shall not be
liable for:
<PAGE>
-9-
(a) The legality of the issue, sale or transfer of any Shares, the
sufficiency of the amount to be received in connection therewith, or
the authority of the Customer to request such issuance, sale or
transfer;
(b) The legality of the purchase of any Shares, the sufficiency of the
amount to be paid in connection therewith, or the authority of the
Customer to request such purchase;
(c) The legality of the declaration of any dividend by the Customer, or
the legality of the issue of any Shares in payment of any stock
dividend; or
(d) The legality of any recapitalization or readjustment of the Shares.
16. The Bank shall be entitled to receive and the Customer hereby agrees
to pay to the Bank for its performance hereunder (i) out-of-pocket expenses
(including legal expenses and attorney's fees) incurred in connection with this
Agreement and its performance hereunder, and (ii) the compensation for services
as set forth in Schedule I.
17. The Bank shall not be responsible for any money, whether or not
represented by any check, draft or other instrument for the payment of money,
received by it on behalf of the Customer, until the Bank actually receives and
collects such funds.
18. The Bank shall have no duties or responsibilities whatsoever except
such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied against the Bank in
connection with this Agreement.
ARTICLE IX
TERMINATION
-----------
Either of the parties hereto may terminate this Agreement by giving to the
other party a notice in writing specifying the date of such termination, which
shall be not less than 60 days after the date of receipt of such notice. In the
event such notice is given by the Customer, it shall be accompanied by a copy of
a resolution of the Board of Directors of the Customer, certified by the
Secretary, electing to terminate this Agreement and designating a successor
transfer agent or transfer agents. In the event such notice is given by the
Bank, the Customer shall, on or before the termination date, deliver to the Bank
a copy of a resolution of its Board of Directors certified by the Secretary
designating a successor transfer agent or transfer agents. In the absence of
such designation by the Customer, the Bank may designate a successor transfer
agent. If the Customer fails to designate a successor Transfer agent and if the
Bank is unable to find a successor transfer agent, the Customer shall, upon the
date specified in the notice of termination of this Agreement and delivery of
the records maintained hereunder, be deemed to be its own transfer agent and the
Bank shall thereafter be relieved of all duties and responsibilities hereunder.
Upon termination hereof, the Customer shall pay to the Bank such compensation as
may be due to the Bank for any disbursements and expenses made or incurred by
the Bank and payable or reimbursable hereunder.
ARTICLE X
MISCELLANEOUS
-------------
1. The Customer agrees that prior to effecting any change in the
Prospectus which would increase or alter the duties and obligations of the Bank
hereunder, it shall advise the Bank of such proposed change at least 30 days
prior to the intended date of the same, and shall proceed with such change only
if it shall have received the written consent of the Bank thereto.
<PAGE>
-10-
2. The indemnities contained herein shall be continuing obligations of
the Customer, its successors and assigns, notwithstanding the termination of
this Agreement.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Customer shall be sufficiently given if
addressed to the Customer and mailed or delivered to it at 800 Scudders Mill
Road, Plainsboro, N.J. 08536, or at such other place as the Customer may from
time to time designate in writing.
4. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Bank shall be sufficiently given if addressed
to the Bank and mailed or delivered to it at its office at 101 Barclay Street
(12W), New York, New York 10286 or at such other place as the Bank may from time
to time designate in writing.
5. This Agreement may not be amended or modified in any manner except by a
written agreement duly authorized and executed by both parties. Any duly
authorized Officer may amend any Certificate naming Officers authorized to
execute and deliver Certificates, instructions, notices or other instruments,
and the Secretary or any Assistant Secretary may amend any Certificate listing
the Shares of capital stock of the Customer for which the Bank performs Services
hereunder.
6. This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by either party without the prior written
consent of the other party, and provided, further, that any reorganization,
merger, consolidation, or sale of assets, by the Bank shall not be deemed to
constitute an assignment of this Agreement.
7. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
8. This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original; but such counterparts, together, shall
constitute only one instrument.
9. The provisions of this Agreement are intended to benefit only the Bank
and the Customer, and no rights shall be granted to any other person by virtue
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate officers, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as of the day and year
first above written.
Attest:
--------------------------------------
- ----------------------- By: MuniHoldings Insured Fund, Inc.
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
Attest: THE BANK OF NEW YORK
By:
- ----------------------- ---------------------------------------
Name:
----------------------------------
Title:
--------------------------------
