<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1998
SECURITIES ACT FILE NO. 333-63791
INVESTMENT COMPANY ACT FILE NO. 811-08815
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 3
(CHECK APPROPRIATE BOX OR BOXES)
--------------
MUNIHOLDINGS FLORIDA INSURED FUND III
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
--------------
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
ARTHUR ZEIKEL
MUNIHOLDINGS FLORIDA INSURED FUND III
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
PATRICK D. SWEENEY, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543- NEW YORK, NEW YORK 10048-0557
9011
--------------
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 statement 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. [X]
--------------
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(1) PRICE(1) FEE(2)
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<S> <C> <C> <C> <C>
Auction Market Preferred
Shares................. 40 shares $25,000 $1,000,000 $295
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the filing fee.
(2) $295 was previously 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 FLORIDA INSURED FUND III
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
--------------------- ---------------------
<C> <S> <C>
Part A--INFORMATION REQUIRED IN A
PROSPECTUS
1. Outside Front Cover Page.......... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages...................... Inside Front and Outside Back Cover
Pages; Underwriting
3. Fee Table and Synopsis............ Not Applicable
4. Financial Highlights.............. Not Applicable
5. Plan of Distribution.............. Underwriting
6. Selling Shareholders.............. Not Applicable
7. Use of Proceeds................... Use of Proceeds
8. General Description of the
Registrant....................... Prospectus Summary; The Fund;
Investment Objective and Policies
9. Management........................ Trustees and Officers; Investment
Advisory and Management Arrangements
10. Capital Stock, Long-Term Debt and
Other Securities................. Description of AMPS; Description of
Capital Shares
11. Defaults and Arrears on Senior
Securities....................... Not Applicable
12. Legal Proceedings................. Not Applicable
13. Table of Contents of the Statement
of Additional Information........ Not Applicable
Part B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page........................ Not Applicable
15. Table of Contents................. Not Applicable
16. General Information and History... Not Applicable
17. Investment Objective and
Policies......................... Prospectus Summary; Investment
Objective and Policies; Other
Investment Policies; Investment
Restrictions
18. Management........................ Trustees and Officers; Investment
Advisory and Management Arrangements
19. Control Persons and Principal
Holders of Securities............ 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; Experts
21. Brokerage Allocation and Other
Practices........................ Portfolio Transactions
22. Tax Status........................ Taxes
23. Financial Statements.............. Report of Independent Auditors;
Statement of Assets, Liabilities and
Capital; Financial Statements
Part C--OTHER INFORMATION
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
i
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 22, 1998
PROSPECTUS
$
MUNIHOLDINGS FLORIDA INSURED FUND III
AUCTION MARKET PREFERRED SHARES ["AMPS(R)"]
SHARES, SERIES A
SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------
MuniHoldings Florida Insured Fund III (the "Fund") is a recently organized,
non-diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal income tax. The Fund also
seeks to offer shareholders the opportunity to own shares the value of which is
exempt from Florida intangible personal property tax. The Fund seeks to achieve
its investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal income tax and which enables
shares of the Fund to be exempt from Florida intangible personal property tax.
The Fund intends to invest in municipal obligations that are rated investment
grade, or if unrated, are considered by Fund Asset Management, L.P. (the
"Investment Adviser") to be of comparable quality. Under normal circumstances,
at least 80% of the Fund's assets will be invested in municipal obligations
with remaining maturities of one year or more that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest.
Investors are advised to read this Prospectus carefully and retain it for
future reference.
(Continued on next page)
-----------
The Broker-Dealers (as defined herein) intend to maintain a secondary trading
market in the AMPS outside of Auctions; however, they have no obligation to do
so, and there can be no assurance that a secondary market for the AMPS will
develop or, if it does develop, that it will provide holders with a liquid
trading market (i.e., trading will depend on the presence of willing buyers and
sellers and the trading price is subject to variables to be determined at the
time of the trade by the Broker-Dealers). The AMPS will not be registered on
any stock exchange or on any automated quotation system. An increase in the
level of interest rates, particularly during any Long Term Dividend Period,
likely will have an adverse effect on the secondary market price of the AMPS,
and a selling shareholder may sell AMPS between Auctions at a price per share
of less than $25,000.
-----------
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 PROCEEDS TO
PUBLIC SALES LOAD(1)(2) FUND(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $25,000 $ $
- --------------------------------------------------------------------------------
Total.................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) Offering expenses payable by the Fund, estimated at $ , will be
reimbursed by the Underwriter. See "Underwriting."
-----------
The AMPS 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 one
certificate for each series of the AMPS will be delivered to the nominee of The
Depository Trust Company on or about October , 1998.
- -----
(R)Registered trademark of Merrill Lynch & Co., Inc.
-----------
MERRILL LYNCH & CO.
-----------
The date of this Prospectus is October , 1998.
<PAGE>
(Continued from previous page)
Dividends on the Auction Market Preferred Shares(R) ("AMPS(R)"), Series A
("Series A AMPS(R)") and Series B ("Series B AMPS(R)") of the Fund offered
hereby will be cumulative from the Date of Original Issue and payable
commencing on , 1998 in the case of Series A AMPS and , 1998 in
the case of Series B AMPS (each, as applicable, an "Initial Dividend Payment
Date") and, generally, on each succeeding in the case of Series A AMPS and
each succeeding in the case of Series B AMPS, subject to certain
exceptions.
The cash dividend rate (the "Applicable Rate") on the Series A AMPS for the
Initial Dividend Period ending , 1998 will be % per annum and the cash
dividend rate on the Series B AMPS for the Initial Dividend Period ending
, 1998 will be % per annum. The Applicable Rate on the AMPS of each series
for each Subsequent Dividend Period will be determined pursuant to periodic
auctions conducted in accordance with the procedures described in Appendix D
hereto (an "Auction"). Except as otherwise provided herein, each Subsequent
Dividend Period for each series of AMPS will be a 7-Day Dividend Period;
provided, however, that prior to any Auction, the Fund may elect, subject to
certain limitations described herein, with respect to each series of AMPS,
upon giving notice to holders thereof, a Special Dividend Period. See
"Description of AMPS--Dividends."
The Applicable Rate on the AMPS of each series for each Subsequent Dividend
Period will be reset on the basis of Bids, Hold Orders and Sell Orders placed
by Existing Holders and Potential Holders in the Auction conducted on the
Business Day next preceding the commencement of such Dividend Period. The
Applicable Rate that results from an Auction for any Dividend Period will not
be greater than the Maximum Applicable Rate (as defined herein). See
"Description of AMPS--The Auction--Orders by Beneficial Owners, Potential
Beneficial Owners, Existing Holders and Potential Holders."
The Fund currently is required to allocate net capital gains (including new
categories of capital gains, discussed under "Taxes") and other taxable
income, if any, proportionately among the Common Shares and the two series of
AMPS. The Fund will give notice of the amount of any taxable income to be
included in a dividend on AMPS in the related Auction, as described herein,
or, in limited circumstances, include such income in a dividend on AMPS
without giving advance notice thereof if it increases the dividend by an
additional amount to offset substantially the tax effect thereof. The amount
of taxable income allocable to AMPS will depend upon the amount of such income
realized by the Fund and other factors but generally is not expected to be
significant. See "Taxes."
Each prospective purchaser should review carefully the detailed information
regarding the Auction Procedures which appears in this Prospectus, including
the Appendices, and should note that (i) an Order constitutes an irrevocable
commitment to hold, purchase or sell AMPS based upon the results of the
related Auction, (ii) the Auctions will be conducted through telephone
communications, (iii) settlement for purchases and sales will be on the
Business Day following the Auction and (iv) ownership of AMPS will be
maintained in book-entry form by or through the Securities Depository. Under
certain circumstances, holders of AMPS may be unable to sell their AMPS in an
Auction and thus may lack liquidity of investment. AMPS only may be
transferred pursuant to a Bid or a Sell Order placed in an Auction through a
Broker-Dealer to the Auction Agent or in the secondary market, if any.
The AMPS are redeemable, in whole or in part, at the option of the Fund, on
any Dividend Payment Date (except during the Initial Dividend Period or a Non-
Call Period) at the Optional Redemption Price per share and will be subject to
mandatory redemption on dates fixed by the Board of Trustees, under certain
circumstances, at the Mandatory Redemption Price per share.
If the Fund fails to pay on any Dividend Payment Date (or within the
applicable grace period) the full amount of any dividend or the redemption
price of AMPS called for redemption, the Applicable Rate will not be based on
the results of an Auction but instead will be equal to the Non-Payment Period
Rate until such failure to pay is cured. See "Description of AMPS--Dividends--
Non-Payment Period; Late Charge."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus. Certain of the
capitalized terms used herein are defined in the Glossary that appears at the
end of this Prospectus.
THE FUND MuniHoldings Florida Insured Fund III (the "Fund") is a recently
organized, non-diversified, closed-end management investment
company. See "The Fund."
INVESTMENT The investment objective of the Fund is to provide shareholders
OBJECTIVE with current income exempt from Federal income taxes. The Fund
AND also seeks to provide shareholders with the opportunity to own
POLICIES shares the value of which is exempt from Florida intangible
personal property tax. The Fund seeks to achieve its investment
objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations the interest on which, in
the opinion of bond counsel to the issuer, is exempt from Federal
income tax and which enables shares of the Fund to be exempt from
Florida intangible personal property tax ("Florida Municipal
Bonds"). The Fund intends to invest in municipal obligations that
are rated investment grade or, if unrated, are considered by the
Investment Adviser to be of comparable quality. The Fund will
seek to achieve its investment objective by seeking to invest
substantially all (a minimum of 80%) of its assets in Florida
Municipal Bonds, except at times when, in the judgment of the
Investment Adviser, Florida Municipal Bonds of sufficient quality
and quantity are unavailable for investment at suitable prices by
the Fund. At all times, except during interim periods pending
investment of the net proceeds of public offerings of the Fund's
securities and during temporary defensive periods, the Fund will
maintain at least 65% of its assets in Florida Municipal Bonds
and at least 80% of its assets in Florida Municipal Bonds and
other long-term municipal obligations paying interest exempt from
Federal income tax, but which are not exempt from Florida
intangible personal property tax ("Municipal Bonds"). Under
normal circumstances, at least 80% of the Fund's assets will be
invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the
timely payment of principal at maturity and interest. The Fund
does not ordinarily intend to realize significant investment
income not exempt from Federal income tax or have significant
assets subject to Florida intangible personal property tax. See
"Investment Objective and Policies."
INVESTMENT Fund Asset Management, L.P. is the Fund's investment adviser (the
ADVISER "Investment Adviser") and is responsible for the management of
the Fund's investment portfolio and for providing administrative
services to the Fund. For its services, the Fund pays the
Investment Adviser a monthly fee at the annual rate of 0.55 of 1%
of the Fund's average weekly net assets, including proceeds from
the sale of Preferred Shares. 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 Asset Management Group of ML & Co. (which includes the
Investment Adviser) acts as the investment adviser for over 100
other registered management investment companies and offers
portfolio management and portfolio analysis services to
individuals and institutional accounts. As of August 1998, the
Asset Management Group had a total of approximately $473 billion
in investment company and other portfolio assets under management
(approximately $38 billion of which was invested in municipal
securities). This amount includes assets managed for certain
affiliates of the Investment Adviser. See "Investment Advisory
and Management Arrangements."
THE The Fund is offering an aggregate of Series A AMPS and
OFFERING Series B AMPS, each at a purchase price of $25,000 per share plus
accumulated dividends, if any, from the Date
3
<PAGE>
of Original Issue. The AMPS are being offered by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch" or the
"Underwriter"). See "Underwriting."
The AMPS of each series will be Preferred Shares of the Fund that
entitle their holders to receive cash dividends at a rate per
annum that may vary for the successive Dividend Periods for each
such series. In general, except as described below, each Dividend
Period for each series of AMPS subsequent to the Initial Dividend
Period will be seven days in length. The Applicable Rate for a
particular Dividend Period will be determined by an Auction
conducted on the Business Day next preceding the start of such
Dividend Period.
Through their Broker-Dealers, Beneficial Owners and Potential
Beneficial Owners of AMPS of each series may participate in
Auctions therefor, although, except in the case of a Special
Dividend Period, Beneficial Owners desiring to continue to hold
all of their AMPS regardless of the Applicable Rate resulting
from Auctions need not participate. For an explanation of
Auctions and the method of determining the Applicable Rate, see
"Description of AMPS--The Auction."
Except as described herein, investors in AMPS will not receive
certificates representing ownership of their shares. Ownership of
AMPS will be maintained in book-entry form by the Securities
Depository or its nominee for the account of the investor's Agent
Member. The investor's Agent Member, in turn, will maintain
records of such investor's beneficial ownership of AMPS.
Accordingly, references herein to an investor's investment in or
purchase, sale or ownership of AMPS are to purchases, sales or
ownership of those shares by Beneficial Owners.
DIVIDENDS After the Initial Dividend Period, each Subsequent Dividend
AND Period for each series of AMPS will generally consist of seven
DIVIDEND days (a "7-Day Dividend Period"); provided, however, that prior
PERIODS to any Auction, the Fund may elect, subject to certain
limitations described herein, with respect to each series of
AMPS, upon giving notice to holders thereof, a Special Dividend
Period. A Special Dividend Period is a Dividend Period consisting
of a specified number of days (other than seven), evenly
divisible by seven and not fewer than seven nor more than 364 (a
"Short Term Dividend Period") or a Dividend Period consisting of
a specified period of one whole year or more but not greater than
five years (a "Long Term Dividend Period"). Dividends on the AMPS
offered hereby are cumulative from the Date of Original Issue and
are payable when, as and if declared by the Board of Trustees of
the Fund, out of funds legally available therefor, commencing on
the Initial Dividend Payment Date and, in the case of Dividend
Periods that are not Special Dividend Periods, dividends will be
payable generally on each succeeding in the case of Series A
AMPS and each succeeding in the case of the Series B AMPS,
subject to certain exceptions.
Dividends for each series of AMPS will be paid through the
Securities Depository (The Depository Trust Company or a
successor securities depository) on each Dividend Payment Date
for such series. The Securities Depository's normal procedures
provide for it to distribute dividends in same-day funds to Agent
Members, who are in turn expected to distribute such dividends to
the person for whom they are acting as agent in accordance with
the instructions of such person. See "Description of AMPS--
Dividends."
For each Subsequent Dividend Period, the cash dividend rate on
each series of AMPS will be the Applicable Rate for such series
that the Auction Agent (IBJ Schroder Bank & Trust Company or any
successor) advises the Fund has resulted from an Auction relating
to such
4
<PAGE>
series. See "Description of AMPS--Dividends." The first Auction
for each series of AMPS is scheduled to be held on the ending
date for the Initial Dividend Period for such series of AMPS as
set forth above.
The Certificate of Designation provides that until the Fund gives
a Request for Special Dividend Period and the related Notice of
Special Dividend Period with respect to a series of AMPS, only 7-
Day Dividend Periods will be applicable to each series of AMPS.
While the Fund does not currently intend to give a Request for
Special Dividend Period with respect to the AMPS, it may so elect
in the future subject to, and on, the conditions discussed under
"Description of the AMPS--Dividends--Notification of Dividend
Period."
A Special Dividend Period will not be effective for a series of
the AMPS unless Sufficient Clearing Bids exist at the Auction in
respect of such Special Dividend Period. If Sufficient Clearing
Bids do not exist at such Auction for a series of the AMPS, the
Dividend Period commencing on the Business Day succeeding such
Auction will be a 7-Day Dividend Period, and the holders of the
AMPS of such series outstanding prior to such Auction will be
required to continue to hold such shares for such Dividend
Period. In addition, the Fund may not give a Notice of Special
Dividend Period with respect to a series of AMPS, or if the Fund
has given a Notice of Special Dividend Period for a series of
AMPS, the Fund will be required to give a Notice of Revocation in
respect thereof if (i) either the 1940 Act AMPS Asset Coverage is
not satisfied or the Fund fails to maintain S&P Eligible Assets
and Moody's Eligible Assets each with an aggregate Discounted
Value at least equal to the AMPS Basic Maintenance Amount, in
each case on each of the two Valuation Dates immediately
preceding the Business Day prior to the related Auction Date for
the AMPS, (ii) sufficient funds for the payment of dividends
payable on the immediately succeeding Dividend Payment Date have
not been irrevocably deposited with the Auction Agent by the
close of business on the third Business Day preceding the related
Auction Date, or (iii) the Broker-Dealers have given the Fund
notice that it is not advisable to hold an Auction in respect of
a Special Dividend Period. In such event, the next succeeding
Dividend Period will be a 7-Day Dividend Period.
ADVANCE Dividends paid by the Fund, to the extent paid from tax-exempt
NOTICE OF income earned on municipal obligations, will be exempt from
ALLOCATION Federal income taxes, subject to the possible application of the
OF TAXABLE alternative minimum tax. However, the Fund is required to
INCOME; allocate net capital gains (including new categories of capital
INCLUSION gains, as discussed under "Taxes") and other income subject to
OF TAXABLE regular Federal income taxes, if any, proportionately among
INCOME IN Common Shares and the two series of AMPS in accordance with the
DIVIDENDS current position of the Internal Revenue Service described
herein. The Fund will notify the Auction Agent of the amount of
any net capital gains (including new categories of capital gains,
as discussed under "Taxes") or other taxable income to be
included in any dividend on AMPS prior to the Auction
establishing the Applicable Rate for such dividend. The Auction
Agent in turn will notify each Broker-Dealer whenever it receives
any such notice from the Fund, and each Broker-Dealer will notify
its Beneficial Owners and Potential Beneficial Owners, as
provided in its Broker-Dealer Agreement. In limited
circumstances, the Fund also may include such income in a
dividend on AMPS without giving advance notice thereof if it
increases the dividend by an additional amount to offset the tax
effect thereof. The amount of taxable income allocable to AMPS
will depend upon the amount of such income realized by the Fund
and other factors, but generally is not expected to be
significant. See "Taxes" and "Description of AMPS--The Auction--
Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends."
5
<PAGE>
ADDITIONAL If the Fund retroactively allocates any net capital gains
DIVIDENDS (including new categories of capital gains, as discussed under
"Taxes") or other income subject to regular Federal income taxes
to AMPS without having given advance notice thereof as described
above, which may only happen when such allocation is made as a
result of the redemption of all or a portion of the outstanding
AMPS or the liquidation of the Fund, the Fund will make certain
payments to holders of AMPS to which such allocation was made to
offset substantially the tax effect thereof. In no other
instances will the Fund be required to make payments to holders
of AMPS to offset the tax effect of any reallocation of net
capital gains or other taxable income. See "Description of AMPS--
Dividends--Additional Dividends" and "Taxes."
DETERMINATION Except during a Non-Payment Period, the Applicable Rate for any
OF MAXIMUM Dividend Period for AMPS of each series will not be more than the
APPLICABLE Maximum Applicable Rate applicable to such shares. The Maximum
RATES Applicable Rate for AMPS will depend on the credit rating
assigned to such shares and on the duration of the Dividend
Period. The Maximum Applicable Rate will be the Applicable
Percentage of the Reference Rate. The Reference Rate is (i) with
respect to any Dividend Period or any Short Term Dividend Period
having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the
Short-Term Municipal Bond Rate, (ii) with respect to any Short
Term Dividend Period having more than 28 but fewer than 183 days,
the applicable "AA" Composite Commercial Paper Rate, (iii) with
respect to any Short Term Dividend Period having 183 or more but
fewer than 364 days, the applicable U.S. Treasury Bill Rate and
(iv) with respect to any Long Term Dividend Period, the
applicable U.S. Treasury Note Rate. The Applicable Percentage
will be determined based on (i) the lower of the credit rating or
ratings assigned on such date to the AMPS by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's, a division of
The McGraw Hill Companies, Inc. ("S&P") (or, if Moody's or S&P or
both shall not make such rating available, the equivalent of
either or both of such ratings by a Substitute Rating Agency or
two Substitute Rating Agencies or, in the event that only one
such rating shall be available, such rating) and (ii) whether the
Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that
net capital gains or other taxable income will be included in
such dividend on AMPS as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
CREDIT RATINGS PERCENTAGE PERCENTAGE
------------------------------ OF REFERENCE RATE OF REFERENCE RATE
MOODY'S S&P --NO NOTIFICATION --NOTIFICATION
---------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend
Period.
The Applicable Rate for any Dividend Period commencing during any
Non-Payment Period, and the rate used to calculate the late
charge described under "Description of AMPS--Dividends--Non-
Payment Period; Late Charge," initially will be 200% of the
Reference Rate (or 275% of such rate if the Fund has provided
notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net
capital gains or other taxable income will be included in such
dividend on AMPS).
AUCTION Separate Auctions will be conducted for each series of AMPS. As
PROCEDURES used in the following description of the Auction Procedures,
unless the context otherwise requires, "AMPS" means the series of
AMPS subject to the related Auction, and "Beneficial Owners,"
6
<PAGE>
"Potential Beneficial Owners," "Existing Holders" and "Potential
Holders" means Beneficial Owners of such series, Potential
Beneficial Owners of such series, Existing Holders of such series
and Potential Holders of such series, respectively.
Unless otherwise permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners of AMPS may only participate in
Auctions through their Broker-Dealers. Broker-Dealers will submit
the Orders of their respective customers who are Beneficial
Owners and Potential Beneficial Owners to the Auction Agent,
designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of shares
subject to Orders submitted to them by Potential Beneficial
Owners. On or prior to each Auction Date for each series of AMPS
(the Business Day next preceding the first day of each Dividend
Period), each Beneficial Owner may submit Orders to its Broker-
Dealer as follows:
-- Hold Order--indicating its desire to hold AMPS without regard
to the Applicable Rate for the next Dividend Period for such
shares.
-- Bid--indicating its desire to hold AMPS, provided that the
Applicable Rate for the next Dividend Period for such shares
is not less than the rate per annum specified in such Bid.
-- Sell Order--indicating its desire to sell AMPS without regard
to the Applicable Rate for the next Dividend Period for such
shares.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to AMPS then held by such Beneficial
Owner, provided that the total number of AMPS covered by such
Orders does not exceed the number of AMPS held by such Beneficial
Owner. If, however, a Beneficial Owner offers through its Broker-
Dealer to purchase additional AMPS in such Auction, such
Beneficial Owner, for purposes of such offer to purchase
additional shares, will be treated as a Potential Beneficial
Owner as described below. Bids by Beneficial Owners through their
Broker-Dealers with rates per annum higher than the Maximum
Applicable Rate will be treated as Sell Orders. A Hold Order (in
the case of an Auction relating to a Dividend Period which is not
a Special Dividend Period) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period) shall be deemed to
have been submitted on behalf of a Beneficial Owner if an Order
with respect to AMPS then held by such Beneficial Owner is not
submitted on behalf of such Beneficial Owner for any reason,
including the failure of a Broker-Dealer to submit such
Beneficial Owner's Order to the Auction Agent.
Potential Beneficial Owners of AMPS may submit Bids through their
Broker-Dealers in which they offer to purchase AMPS, provided
that the Applicable Rate for the next Dividend Period for such
shares is not less than the rate per annum specified in such Bid.
A Bid by a Potential Beneficial Owner with a rate per annum
higher than the Maximum Applicable Rate will not be considered.
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with any of the foregoing.
A Broker-Dealer also may hold AMPS for its own account as a
Beneficial Owner. A Broker-Dealer thus may submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial
Owner and therefore participate in an Auction as an Existing
Holder or Potential Holder on behalf of both itself and its
customers. An Order placed with the Auction Agent by a Broker-
Dealer as an Existing Holder or a Potential Holder as or on
behalf of a
7
<PAGE>
Beneficial Owner or a Potential Beneficial Owner, as the case may
be, will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial
Owner. Similarly, any failure by a Broker-Dealer to submit to the
Auction Agent an Order in respect of any AMPS held by it or its
customers who are Beneficial Owners will be treated in the same
manner as a Beneficial Owner's failure to submit to its Broker-
Dealer an Order in respect of AMPS held by it, as described
above. Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the
interests of a Beneficial Owner or Potential Beneficial Owner,
whether it be a customer or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders
and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby.
If Sufficient Clearing Bids exist in an Auction (that is, in
general, the number of AMPS subject to Bids by Potential Holders
with rates equal to or lower than the Maximum Applicable Rate is
at least equal to the number of AMPS subject to Sell Orders by
Existing Holders), the Applicable Rate will be the lowest rate
per annum specified in the Submitted Bids which, taking into
account such rate per annum and all lower rates per annum bid by
Existing Holders and Potential Holders, would result in Existing
Holders and Potential Holders owning all of the AMPS available
for purchase in the Auction. If Sufficient Clearing Bids do not
exist, the Dividend Period next following the Auction
automatically will be a 7-Day Dividend Period and the Applicable
Rate will be the Maximum Applicable Rate, and in such event,
Existing Holders that have submitted Sell Orders will not be able
to sell in the Auction all, and may not be able to sell any, AMPS
subject to such Sell Orders. Thus, under certain circumstances,
Existing Holders and, thus, the Beneficial Owners they represent
may not have liquidity of investment. If all Existing Holders
submit (or are deemed to have submitted) Hold Orders in an
Auction, the Dividend Period next following the Auction
automatically shall be the same length as the immediately
preceding Dividend Period, and the Applicable Rate will be 40% of
the Reference Rate (as defined under "Determination of Maximum
Applicable Rates" above) in effect on the date of the Auction (or
60% of such rate if the Fund has provided notification to the
Auction Agent prior to the Auction establishing the Applicable
Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on AMPS).
The Auction Procedures include a pro rata allocation of shares
for purchase and sale, which may result in an Existing Holder
selling or holding, or a Potential Holder purchasing, a number of
AMPS that is less than the number of AMPS specified in its Order.
To the extent the allocation has this result, a Broker-Dealer
will be required to make appropriate pro rata allocations among
its customers and itself.
A Sell Order by an Existing Holder will constitute an irrevocable
offer to sell the AMPS subject thereto, and a Bid placed by an
Existing Holder also will constitute an irrevocable offer to sell
the AMPS subject thereto if the rate per annum specified in the
Bid is higher than the Applicable Rate determined in the Auction,
in each case at a price per share equal to $25,000. A Bid placed
by a Potential Holder will constitute an irrevocable offer to
purchase the AMPS subject thereto if the rate per annum specified
in such Bid is less than or equal to the Applicable Rate
determined in the Auction. Settlement of purchases and sales will
be made on the next Business Day (also a Dividend Payment Date)
after the Auction Date through the Securities Depository.
Purchasers will make payment through their Agent Members in same-
day funds to the Securities Depository against delivery by book-
entry to their Agent Members. The Securities Depository will make
payment to the sellers' Agent
8
<PAGE>
Members in accordance with the Securities Depository's normal
procedures, which now provide for payment in same-day funds. See
"Description of AMPS--The Auction."
ASSET Under the Certificate of Designation, the Fund must maintain (i)
MAINTENANCE S&P Eligible Assets and Moody's Eligible Assets each having in
the aggregate a Discounted Value at least equal to the AMPS Basic
Maintenance Amount and (ii) 1940 Act AMPS Asset Coverage of at
least 200%. See "Description of AMPS--Asset Maintenance."
The Fund estimates that, based on the composition of its
portfolio at September , 1998, 1940 Act AMPS Asset Coverage
with respect to the AMPS would be approximately % immediately
after the issuance of the AMPS offered hereby in an amount
representing approximately % of the Fund's capital.
The Discount Factors and guidelines for calculating the
Discounted Value of the Fund's portfolio for purposes of
determining whether the AMPS Basic Maintenance Amount has been
satisfied have been established by Moody's and S&P in connection
with the Fund's receipt of ratings on the AMPS on their Date of
Original Issue of "aaa" from Moody's and AAA from S&P. See
"Investment Objective and Policies--Rating Agency Guidelines."
MANDATORY If the AMPS Basic Maintenance Amount or the 1940 Act AMPS Asset
REDEMPTION Coverage is not maintained or restored as specified herein, the
AMPS will be subject to mandatory redemption, out of funds
legally available therefor, at the Mandatory Redemption Price of
$25,000 per share plus an amount equal to dividends thereon
(whether or not earned or declared) accumulated but unpaid to the
date fixed for redemption. In addition, holders of AMPS may be
entitled to receive Additional Dividends in the event of
redemption of such AMPS to the extent provided herein. See
"Description of AMPS--Dividends--Additional Dividends." Any such
redemption will be limited to the minimum number of AMPS
necessary to restore the AMPS Basic Maintenance Amount or the
1940 Act AMPS Asset Coverage, as the case may be. The Fund's
ability to make such a mandatory redemption may be restricted by
the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act"). See "Description of AMPS--Redemption--Mandatory
Redemption."
OPTIONAL The AMPS of each series are redeemable at the option of the Fund,
REDEMPTION as a whole or in part, on any Dividend Payment Date (except
during the Initial Dividend Period or a Non-Call Period) at the
Optional Redemption Price of $25,000 per share, plus an amount
equal to dividends thereon (whether or not earned or declared)
accumulated but unpaid to the date fixed for redemption plus the
premium, if any, resulting from the designation of a Premium Call
Period. See "Description of AMPS--Redemption--Optional
Redemption." In addition, holders of AMPS may be entitled to
receive Additional Dividends in the event of redemption of such
AMPS to the extent provided herein. See "Description of AMPS--
Dividends--Additional Dividends."
LIQUIDATION The liquidation preference of each share of AMPS will be $25,000,
PREFERENCE plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared). See "Description of AMPS--Liquidation
Rights." In addition, holders of AMPS may be entitled to receive
Additional Dividends in the event of the liquidation of the Fund
as provided herein. See "Description of AMPS--Dividends--
Additional Dividends."
9
<PAGE>
RATINGS It is a condition to their issuance that the AMPS be issued with
a rating of "aaa" from Moody's and AAA from S&P. See "Investment
Objective and Policies--Rating Agency Guidelines."
VOTING The 1940 Act requires that the holders of AMPS and any other
RIGHTS Preferred Shares, voting as a separate class, have the right to
elect at least two trustees at all times and to elect a majority
of the trustees at any time when two years' dividends on the AMPS
or any other Preferred Shares are unpaid. The holders of AMPS and
any other Preferred Shares will vote as a separate class on
certain other matters as required under the Fund's Declaration of
Trust and the 1940 Act. See "Description of AMPS--Voting Rights"
and "Description of Capital Shares--Certain Provisions of the
Declaration of Trust."
10
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund intends to invest a substantial portion of its assets in Florida
Municipal Bonds and, therefore, it is more susceptible to factors adversely
affecting issuers of Florida Municipal Bonds than is a municipal bond fund that
is not concentrated in issuers of Florida Municipal Bonds to this degree. See
"Investment Objective and Policies--Special Considerations Relating to Florida
Municipal Bonds" and Appendix A, "Economic and Other Conditions in Florida."
The Fund has registered as a "non-diversified" investment company so that it
will be able to invest more than 5% of its total 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 S&P, 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
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. 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.
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 Shares investors as the
leveraging of the Fund's portfolio; however, certain derivative investments
will not be taken into account as senior securities (as defined in the 1940
Act) for purposes of calculating the percentage of leverage of the Fund's
portfolio. For a further discussion of the risks associated with derivative
investments, see "Investment Objective and Policies," "Investment Objective and
Policies--Other Investment Policies--Indexed and Inverse Floating Obligations,"
"--Call Rights" and "Investment Objective and Policies--Options and Futures
Transactions."
Subject to its investment restrictions, the Fund is authorized to engage in
options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security that is the subject of the hedge and the inability to close futures
transactions under certain conditions. Because of the anticipated leveraged
nature of the Common Shares, hedging transactions will result
11
<PAGE>
in a larger impact on the net asset value of the Common Shares than would be
the case if the Common Shares were not leveraged. Certain OTC options and
assets used to cover OTC options written by the Fund may be considered to be
illiquid. The illiquidity of such options or assets may prevent a successful
sale of such options or assets, result in a delay of sale, or reduce the amount
of proceeds that might be otherwise realized. See "Investment Objective and
Policies--Options and Futures Transactions."
For so long as any AMPS are rated by Moody's, the Fund will not buy or sell
financial futures contracts, write, purchase or sell call options on financial
futures contracts or purchase put options on financial futures contracts or
write call options (except covered call options) on portfolio securities unless
it receives written confirmation from Moody's that engaging in such
transactions would not impair the ratings then assigned to the AMPS by Moody's,
except that the Fund may engage in Moody's Hedging Transactions subject to the
limitations described herein. For so long as any AMPS are rated by S&P, the
Fund will not purchase or sell financial futures contracts, write, purchase or
sell options on financial futures contracts or write put options (except
covered put options) or call options (except covered call options) on portfolio
securities unless it receives written confirmation from S&P that engaging in
such transactions will not impair the ratings then assigned to the AMPS by S&P,
except that the Fund may engage in S&P Hedging Transactions subject to the
limitations described herein. See "Investment Objective and Policies--Rating
Agency Guidelines" and "--Options and Futures Transactions."
There are a number of specific factors investors in AMPS should consider.
-- The credit ratings of the AMPS could be reduced while an investor holds
the AMPS.
-- Neither Broker-Dealers nor the Fund are obligated to purchase AMPS in an
Auction or otherwise nor is the Fund required to redeem AMPS in the
event of a failed Auction.
-- If in an Auction for the AMPS Sufficient Clearing Bids do not exist, the
Applicable Rate will be the Maximum Applicable Rate, and in such event,
Beneficial Owners that have submitted Sell Orders will not be able to
sell in the Auction all, and may not be able to sell any, AMPS subject
to such Sell Orders. Thus, under certain circumstances, Beneficial
Owners may not have liquidity of investment.
The Broker-Dealers intend to maintain a secondary trading market in the AMPS
outside of Auctions; however, they have no obligation to do so and there can be
no assurance that a secondary market for the AMPS will develop or, if it does
develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The AMPS will not be registered on any stock exchange
or on any automated quotation system. An increase in the level of interest
rates, particularly during any Long Term Dividend Period, likely will have an
adverse effect on the secondary market price of the AMPS, and a selling
shareholder may sell AMPS between Auctions at a price per share of less than
$25,000.
The Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees and could
have the effect of depriving Common Shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. See "Description of Capital
Shares--Certain Provisions of the Declaration of Trust."
It is possible that the Fund may not be able to fully dispose of all of its
assets subject to Florida intangible personal property tax by the last business
day of the calendar year. This would subject shares of the Fund to Florida
intangible personal property tax. See "Taxes."
12
<PAGE>
THE FUND
MuniHoldings Florida Insured Fund III (the "Fund") is a recently organized,
non-diversified, closed-end management investment company. The Fund was
organized under the laws of the Commonwealth of Massachusetts on June 10,
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 commenced operations on September , 1998 upon the closing of an
initial public offering of of its Common Shares. The proceeds of such
offering were approximately $ after the payment of organizational and
offering expenses. In connection with the initial public offering of the
Fund's Common Shares, the underwriter was granted an option to purchase up to
an additional shares to cover over-allotments.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $ after the payment
of offering expenses (estimated to be $ ) and the sales load and the
payment to the Fund by the Underwriter to cover certain expenses. See
"Underwriting."
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies during a period estimated not to
exceed three months from the offer and sale of such AMPS 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."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of September , 1998 and as adjusted to give effect to the issuance of the
AMPS offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' equity:
Shares of Beneficial Interest (unlimited shares au-
thorized)
Preferred Shares, par value $.10 per share (no
shares issued; shares of AMPS issued and
outstanding, as adjusted, at $25,000 per share
liquidation preference)........................... -- $
Common Shares, par value $.10 per share (
shares issued and outstanding).................... $
Capital in excess of par value attributable to Com-
mon Shares........................................
Undistributed investment income--net...............
Unrealized depreciation on investments--net........
------------ ------------
Net assets......................................... $ $
============ ============
</TABLE>
13
<PAGE>
PORTFOLIO COMPOSITION
As of September , 1998, approximately % of the market value of the
Fund's portfolio was invested in long-term municipal obligations and
approximately % of the market value of the Fund's portfolio was invested
in short-term municipal obligations. The following table sets forth certain
information with respect to the composition of the Fund's investment portfolio
as of September , 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<C> <S> <C> <C> <C>
$ %
--- -------- ----
Total................................ $ 100%
=== ======== ====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's ratings on the Fund's
municipal obligations. See "Schedule of Investments." S&P rating categories
may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and
C ratings. Moody's rating categories may be modified further by a 1, 2 or 3
in Aa, A, Baa, Ba and B ratings.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with current
income exempt from Federal income tax. The Fund also seeks to provide
shareholders with the opportunity to own shares the value of which is exempt
from Florida intangible personal property tax. The Fund seeks to achieve its
investment objective by investing primarily in a portfolio of Florida
Municipal Bonds. The Fund will seek to achieve its investment objective by
seeking to invest substantially all (a minimum of 80%) of its assets in
Florida Municipal Bonds, except at times when, in the judgment of the
Investment Adviser, Florida Municipal Bonds of sufficient quality and quantity
are unavailable for investment by the Fund. At all times, except during
interim periods pending investment of the net proceeds of public offerings of
the Fund's securities and during temporary defensive periods, the Fund will
maintain at least 65% of its assets in Florida Municipal Bonds. Under normal
circumstances, at least 80% of the Fund's assets will be invested in municipal
obligations with remaining maturities of one year or more that are covered by
insurance guaranteeing the timely payment of principal at maturity and
interest. The investment objective of the Fund is a fundamental policy that
may not be changed without a vote of a majority of the Fund's outstanding
voting securities, as defined below under "Investment Restrictions." There can
be no assurance that the investment objective of the Fund will be realized. At
times the Fund may seek to hedge its portfolio through the use of futures
transactions and options to reduce volatility in the net asset value of its
Common Shares.
The Fund ordinarily does not intend to realize significant investment income
not exempt from Federal income tax or have significant assets subject to
Florida intangible personal property tax. To the extent that suitable Florida
Municipal Bonds are not available for investment by the Fund, as determined by
the Investment Adviser, the Fund may purchase Municipal Bonds. At all times,
except during interim periods pending investment of the net proceeds of public
offerings of the Fund's securities and during temporary defensive periods, the
Fund will have at least 80% of its assets invested in Florida Municipal Bonds
and Municipal Bonds. The Fund may invest all or a portion of its assets in
certain tax-exempt securities classified as "private activity bonds" (in
general, bonds that benefit non-governmental entities) that may subject
certain investors in the Fund to an alternative minimum tax.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Florida Municipal Bonds
14
<PAGE>
and Municipal Bonds, to the extent such investments are permitted by the 1940
Act. Other Non-Municipal Tax-Exempt Securities could include trust
certificates or other instruments evidencing interests in one or more long-
term Florida Municipal Bonds or Municipal Bonds. Certain Non-Municipal Tax-
Exempt Securities may be characterized as derivative instruments. Non-
Municipal Tax-Exempt Securities will be considered "Florida Municipal Bonds"
or "Municipal Bonds" for purposes of the Fund's investment objective and
policies.
The investment grade Florida Municipal Bonds and Municipal Bonds in which
the Fund will primarily invest are those Florida Municipal Bonds and Municipal
Bonds that are rated at the date of purchase in the four highest rating
categories of S&P, Fitch or Moody's 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 and Fitch,
and Aaa through Baa for Moody's. In the case of short-term notes, the
investment grade rating categories are SP-l+ through SP-3 for S&P, F-1+
through F-3 for Fitch and MIG-1 through MIG-4 for Moody's. In the case of tax-
exempt commercial paper, the investment grade rating categories are A-1+
through A-3 for S&P, F-l+ through F-3 for Fitch and Prime-1 through Prime-3
for Moody's. Obligations ranked in the fourth highest rating category (BBB,
SP-3 and A-3 for S&P; BBB and F-3 for Fitch and Baa, MIG-4 and Prime-3 for
Moody's), 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 B to this
Prospectus for a description of S&P's, Fitch's and Moody's ratings of Florida
Municipal Bonds and Municipal Bonds. In assessing the quality of Florida
Municipal Bonds and Municipal Bonds with respect to the foregoing
requirements, the Investment Adviser will take into account the portfolio
insurance as well as the nature of any letters of credit or similar credit
enhancement to which particular Municipal Bonds are entitled and the
creditworthiness of the insurance company or financial institution that
provided such insurance or credit enhancement. Consequently, if Florida
Municipal Bonds or Municipal Bonds are covered by insurance policies issued by
insurers whose claims-paying ability is rated AAA by S&P or Fitch, or Aaa by
Moody's, the Investment Adviser may consider such municipal obligations to be
equivalent to AAA- or Aaa- rated securities, as the case may be, even though
such Florida Municipal Bonds or Municipal Bonds would generally be assigned a
lower rating if the rating were based primarily upon the credit
characteristics of the issuers without regard to the insurance feature. The
insured Florida Municipal Bonds and Municipal Bonds must also comply with the
standards applied by the insurance carriers in determining eligibility for
portfolio insurance.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations in the opinion of counsel to the issuer that
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short
notice period not to exceed seven days. Participating VRDOs provide the Fund
with a specified undivided interest (up to 100%) in the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Fund has been advised by
its counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the 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."
15
<PAGE>
The Fund intends to invest primarily in long-term Florida Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term Florida Municipal Bonds and Municipal Bonds with a
maturity of between three years and ten years. The Fund may invest in short-
term, tax-exempt securities, short-term U.S. Government securities, repurchase
agreements or cash. Such short-term securities or cash will not exceed 20% of
its total assets except during interim periods pending investment of the net
proceeds of public offerings of the Fund's securities or in anticipation of
the repurchase or redemption of the Fund's securities and temporary periods
when, in the opinion of the Investment Adviser, prevailing market or economic
conditions warrant. The Fund does not ordinarily intend to realize significant
interest income not exempt from Federal income tax or have significant assets
subject to Florida intangible personal property tax.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for special tax
treatment afforded regulated investment companies under the Code. See "Taxes."
To qualify, among other requirements, the Fund will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer. A fund
that elects to be classified as "diversified" under the 1940 Act must satisfy
the foregoing 5% requirement with respect to 75% of its total assets. To the
extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's yield may fluctuate to a greater extent than
that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's assets will be
invested in Florida Municipal Bonds and Municipal Bonds either (i) insured
under an insurance policy purchased by the Fund or (ii) insured under an
insurance policy obtained by the issuer thereof or any other party. The Fund
will seek to limit its investments to municipal obligations insured under
insurance policies issued by insurance carriers that have total admitted
assets (unaudited) of at least $75,000,000 and capital and surplus (unaudited)
of at least $50,000,000 and insurance claims-paying ability ratings of AAA
from S&P or Fitch, or Aaa from Moody's. There can be no assurance that
insurance from insurance carriers meeting these criteria will be available.
Currently, it is anticipated that a majority of the insured Florida Municipal
Bonds and Municipal Bonds in the Fund's portfolio will be insured by the
following insurance companies that satisfy the foregoing criteria: AMBAC
Indemnity Corporation, Financial Guaranty Insurance Company, Financial
Security Assurance and Municipal Bond Investors Assurance Corporation. The
Fund also may purchase Florida Municipal Bonds and Municipal Bonds covered by
insurance issued by any other insurance company that satisfies the foregoing
criteria. It is anticipated that initially a majority of insured Florida
Municipal Bonds and Municipal Bonds held by the Fund will be insured under
policies obtained by parties other than the Fund.
The Fund may purchase, but has no obligation to purchase separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible Florida Municipal Bonds and Municipal Bonds purchased by the Fund. A
Florida Municipal Bond or a Municipal Bond will be eligible for coverage if it
meets certain requirements of the insurance company set forth in a Policy. In
the event interest or principal on an insured Florida Municipal Bond or
Municipal Bond is not paid when due, the insurer will be obligated under its
Policy to make such payment not later than 30 days after it has been notified
by, and provided with documentation from, the Fund that such nonpayment has
occurred.
The Policies will be effective only as to insured Florida Municipal Bonds
and Municipal Bonds beneficially owned by the Fund. In the event of a sale of
any Florida Municipal Bonds and Municipal Bonds held by the Fund, the issuer
of the relevant Policy will be liable only for those payments of interest and
principal that are
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<PAGE>
then due and owing. The Policies will not guarantee the market value of the
insured Florida Municipal Bonds and Municipal Bonds or the value of the shares
of the Fund.
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities
remain in the Fund's portfolio. In addition, the insurer may not cancel its
Policies for any reason except failure to pay premiums when due. The Board of
Trustees of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately .02 of 1% to .15 of 1% of the principal amount of the Florida
Municipal Bonds and Municipal Bonds covered by such Policies. The estimate is
based on the expected composition of the Fund's portfolio of Florida Municipal
Bonds and Municipal Bonds. In instances in which the Fund purchases Florida
Municipal Bonds and Municipal Bonds insured under policies obtained by parties
other than the Fund, the Fund does not pay the premiums for such policies;
rather, the cost of such policies may be reflected in the purchase price of
the Florida Municipal Bonds and Municipal Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place
a value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities which are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternative value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser will be unable to
manage the portfolio to the extent it holds defaulted securities, which may
limit its ability in certain circumstances to purchase other Florida Municipal
Bonds and Municipal Bonds. See "Net Asset Value" below for a more complete
description of the Fund's method of valuing defaulted securities and
securities that have a significant risk of default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Trustees determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance or may discontinue its policy of maintaining
insurance for all or any of the Florida Municipal Bonds and Municipal Bonds
held in the Fund's portfolio. Although the Investment Adviser periodically
reviews the financial condition of each insurer, there can be no assurance
that the insurers will be able to honor their obligations under all
circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Florida Municipal Bonds and
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured Florida Municipal Bonds and Municipal Bonds
are subject to market risk (i.e., fluctuations in market value as a result of
changes in prevailing interest rates).
DESCRIPTION OF FLORIDA MUNICIPAL BONDS AND MUNICIPAL BONDS
Florida Municipal Bonds and Municipal Bonds include debt obligations issued
to obtain funds for various public purposes, including construction of a wide
range of public facilities, refunding of outstanding obligations and obtaining
funds for general operating expenses and loans to other public institutions
and facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to finance various privately
operated facilities, including certain local facilities for water supply, gas,
electricity, sewage or solid waste disposal. For purposes of this Prospectus,
such obligations are Municipal Bonds if the interest paid thereon is exempt
from Federal income tax and are Florida Municipal Bonds if the interest
thereon is exempt
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<PAGE>
from Federal income tax and the obligation is exempt from Florida intangible
personal property 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 Florida Municipal Bonds or Municipal Bonds.
The two principal classifications of Florida Municipal Bonds and Municipal
Bonds are "general obligation" bonds and "revenue" bonds, which latter
category includes IDBs and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
faith, credit and taxing power for the repayment of principal and the payment
of interest. Revenue or special obligation bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as from the user of the facility being financed. IDBs are in most
cases revenue bonds and do not generally constitute the pledge of the credit
or taxing power of the issuer of such bonds. The repayment of principal and
the payment of interest on such industrial development bonds depends solely on
the ability of the user of the facility financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment. Florida Municipal Bonds and Municipal
Bonds may also include "moral obligation" bonds, which are normally issued by
special purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of such bonds becomes a moral
commitment but not a legal obligation of the state or municipality in
question.
The Fund may purchase Florida Municipal Bonds and Municipal Bonds classified
as "private activity bonds" (in general, bonds that benefit non-governmental
entities). Interest received on certain tax-exempt securities that are
classified as "private activity bonds" may subject certain investors in the
Fund to an alternative minimum tax. There is no limitation on the percentage
of the Fund's assets that may be invested in Florida Municipal Bonds and
Municipal Bonds that may subject certain investors to an alternative minimum
tax. See "Taxes--General." Also included within the general category of
Florida Municipal Bonds and Municipal Bonds are participation certificates
issued by government authorities or entities to finance the acquisition or
construction of equipment, land and/or facilities. The certificates represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively 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 Florida Municipal Bonds and Municipal Bonds for investment
by the Fund.
SPECIAL CONSIDERATIONS RELATING TO FLORIDA MUNICIPAL BONDS
The Fund ordinarily will invest at least 80% of its total assets in Florida
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of Florida Municipal Bonds than is a municipal bond fund
that is not concentrated in issuers of Florida Municipal Bonds to this degree.
Many different social, environmental and economic factors may affect the
financial condition of Florida and its political subdivisions. From time to
time Florida and its political subdivisions have encountered financial
difficulties. Florida is highly dependent upon sales and uses taxes, which
account for the majority of its General Fund revenues. The Florida
Constitution does not permit a state or local personal income tax. The
structure of personal income in Florida is also different from the rest of the
nation in that the State has a proportionally greater retirement age
population
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<PAGE>
that is dependent upon transfer payments (social security, pension benefits,
etc.). Such transfer payments can be affected by Federal legislation.
Florida's economic growth is also highly dependent upon other factors such as
changes in population growth, tourism, interest rates and hurricane activity.
In combination, two amendments to the Florida Constitution may limit the
State's ability to raise revenues and may have an adverse effect on the
finances of Florida and its political subdivisions. The Investment Adviser
does not believe that the current economic conditions in Florida will have a
significant adverse effect on the Fund's ability to invest in investment grade
Florida Municipal Bonds. For a discussion of economic and other conditions in
the State of Florida, see Appendix A, "Economic and Other Conditions in
Florida."
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Shares pursuant to tender offers or
otherwise to redeem or repurchase preferred shares or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known,
as with the issuance of preferred shares, as "leveraging") create an
opportunity for greater total return since the Fund will not be required to
sell portfolio securities to repurchase or redeem shares but, at the same
time, increase exposure to capital risk. In addition, borrowed funds are
subject to interest costs that may offset or exceed the return earned on the
borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Florida Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms.
These transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future. The purchase will be
recorded on the date the Fund enters into the commitment, and the value of the
obligation will thereafter be reflected in the calculation of the Fund's net
asset value. The value of the obligation on the delivery day may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or liquid
securities having a market value at all times at least equal to the amount of
the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in Florida
Municipal Bonds and Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest
in Florida Municipal Bonds and Municipal Bonds that pay interest based on an
index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain Florida Municipal Bonds and Municipal Bonds also may be
based on the value of an index. To the extent the Fund invests in these types
of Municipal Bonds, the Fund's return on such Florida Municipal Bonds and
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Also, the Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates
typically vary inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by reference to a
short-term tax-exempt interest rate index). The Fund may purchase in the
secondary market synthetically-created inverse floating rate bonds evidenced
by custodial or trust receipts. Generally, interest rates on inverse floating
rate bonds will decrease when short-term rates increase, and will increase
when short-term rates decrease. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
that is a multiple (typically two) of the rate at which fixed-rate, long-term,
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities generally will be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit
the volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or limitations on the extent to which
the interest rate may vary. The Investment Adviser believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund that allows the Investment Adviser to vary the degree
of investment leverage relatively efficiently under different market
conditions.
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Call Rights. The Fund may purchase a Florida Municipal Bond or Municipal
Bond issuer's right to call all or a portion of such Florida Municipal Bond or
Municipal Bond for mandatory tender for purchase (a "Call Right"). A holder of
a Call Right may exercise such right to require a mandatory tender for the
purchase of related Florida Municipal Bonds or Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Florida Municipal Bond or Municipal Bond will expire without
value. The economic effect of holding both the Call Right and the related
Florida Municipal Bond or Municipal Bond is identical to holding a Florida
Municipal Bond or Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this Prospectus.
The Fund intends that, so long as AMPS are outstanding, the composition of
its portfolio will reflect guidelines established by Moody's and S&P in
connection with the Fund's receipt of a rating for such shares on or prior to
their Date of Original Issue of at least "aaa" from Moody's and AAA from S&P.
Moody's and S&P, which are nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines described below have been
developed by Moody's and S&P in connection with issuances of asset-backed and
similar securities, including debt obligations and variable rate preferred
stock, generally on a case-by-case basis through discussions with the issuers
of these securities. The guidelines are designed to ensure that assets
underlying outstanding debt or preferred shares will be varied sufficiently
and will be of sufficient quality and amount to justify investment-grade
ratings. The guidelines do not have the force of law but have been adopted by
the Fund in order to satisfy current requirements necessary for Moody's and
S&P to issue the above-described ratings for AMPS, which ratings generally are
relied upon by institutional investors in purchasing such securities. The
guidelines provide a set of tests for portfolio composition and asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act. See "Description of AMPS--Asset Maintenance."
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has
established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and S&P guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value
at least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date, thereby incurring additional transaction costs
and possible losses and/or gains on dispositions of portfolio securities. To
the extent any such failure is not cured in a timely manner,
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AMPS will be subject to redemption. See "Description of AMPS--Asset
Maintenance" and "Description of AMPS--Redemption." The AMPS Basic Maintenance
Amount includes the sum of (i) the aggregate liquidation value of AMPS then
outstanding and (ii) certain accrued and projected payment obligations of the
Fund. See "Description of AMPS--Asset Maintenance."
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the AMPS, at any time, may change or withdraw
any such rating. As set forth in the Certificate of Designation, the Board of
Trustees, without shareholder approval, may modify certain definitions or
restrictions that have been adopted by the Fund pursuant to the rating agency
guidelines, provided the Board of Trustees has obtained written confirmation
from Moody's and S&P that any such change would not impair the ratings then
assigned by Moody's and S&P to the AMPS.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the AMPS are not recommendations to purchase, hold
or sell AMPS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
described above address the likelihood that a holder of AMPS will be able to
sell such shares in an Auction. The ratings are based on current information
furnished to Moody's and S&P by the Fund and the Investment Adviser and
information obtained from other sources. The ratings may be changed, suspended
or withdrawn as a result of changes in, or the unavailability of, such
information. The Common Shares have not been rated by a nationally recognized
statistical rating organization.
S&P AAA Rating Guidelines. The Discounted Value of the Fund's S&P Eligible
Assets is calculated on each Valuation Date. See "Description of AMPS--Asset
Maintenance--AMPS Basic Maintenance Amount." S&P Eligible Assets include cash,
Receivables for Florida Municipal Bonds Sold (as defined below) and Florida
Municipal Bonds or Municipal Bonds eligible for consideration under S&P's
current guidelines. For purposes of calculating the Discounted Value of the
Fund's portfolio under current S&P guidelines, the fair market value of
Florida Municipal Bonds or Municipal Bonds eligible for consideration under
such guidelines must be discounted by the applicable S&P Discount Factor set
forth in the table below. The Discounted Value of a Florida Municipal Bond or
Municipal Bond eligible for consideration under S&P guidelines is the fair
market value thereof divided by the S&P Discount Factor. The S&P Discount
Factor used to discount a particular Florida Municipal Bond or Municipal Bond
will be determined by reference to (a)(i) the rating by S&P, Moody's or Fitch
on such Bond or (ii) in the event the Florida Municipal Bond is insured under
a Policy and the terms of the Policy permit the Fund, at its option, to obtain
other permanent insurance guaranteeing the timely payment of interest on such
Florida Municipal Bond and principal thereof to maturity, the S&P insurance
claims-paying ability rating of the issuer of the Policy or (iii) in the event
the Florida Municipal Bond is insured under an insurance policy which
guarantees the timely payment of interest on such Florida Municipal Bond and
principal thereof to maturity, the S&P insurance claims-paying ability rating
of the issuer of the insurance policy and (b) the S&P Exposure Period. The S&P
Exposure Period is the maximum period of time following a Valuation Date,
including the Valuation Date and the AMPS Basic Maintenance Cure Date, that
the Fund has to cure any failure to maintain, as of such Valuation Date, a
Discounted Value for its portfolio at least equal to the AMPS Basic
Maintenance Amount.
S&P Discount Factors applicable to Florida Municipal Bonds for a range of
S&P Exposure Periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS RATING CATEGORY
------------------------------------------
EXPOSURE PERIOD AAA AA A BBB
--------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
40 Business Days................. 205% 210% 225% 265%
22 Business Days................. 185 190 205 245
10 Business Days................. 170 175 190 230
7 Business Days................. 165 170 185 225
3 Business Days................. 145 150 165 205
</TABLE>
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Since the S&P Exposure Period currently applicable to the Fund is seven
Business Days, the S&P Discount Factors currently applicable to Municipal
Bonds eligible for consideration under S&P guidelines will be determined by
reference to the factors set forth opposite the exposure period line entitled
"7 Business Days." Notwithstanding the foregoing, (i) the S&P Discount Factor
for short-term Florida Municipal Bonds will be 115%, so long as such Florida
Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand
feature exercisable in 30 days or less, or 120% so long as such Florida
Municipal Bonds are rated A-1 or SP-1 by S&P and mature or have a demand
feature exercisable in 30 days or less, or 125% if such Florida Municipal
Bonds are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's or F-
1+ by Fitch; provided, however, such short-term Florida Municipal Bonds rated
by Moody's or Fitch but not rated by S&P having a demand feature exercisable
in 30 days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution having a short-term
rating of at least A-1+ from S&P; and further provided that such short-term
Florida Municipal Bonds rated by Moody's or Fitch but not rated by S&P may
comprise no more than 50% of short-term Florida Municipal Bonds that qualify
as S&P Eligible Assets, (ii) the S&P Discount Factor for Receivables for
Florida Municipal Bonds Sold that are due in more than five Business Days from
such Valuation Date will be the S&P Discount Factor applicable to the Florida
Municipal Bonds sold, and (iii) no S&P Discount Factor will be applied to cash
or to Receivables for Florida Municipal Bonds Sold if such receivables are due
within five Business Days of such Valuation Date. "Receivables for Florida
Municipal Bonds Sold," for purposes of calculating S&P Eligible Assets as of
any Valuation Date, means the book value of receivables for Florida Municipal
Bonds sold as of or prior to such Valuation Date. The Fund may adopt S&P
Discount Factors for Municipal Bonds other than Florida Municipal Bonds
provided that S&P advises the Fund in writing that such action will not
adversely affect its then current rating on the AMPS. For purposes of the
foregoing, Anticipation Notes rated SP-1 or, if not rated by S&P, rated VMIG-1
by Moody's or F-1+ by Fitch, which do not mature or have a demand feature
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term Florida Municipal Bonds.
The S&P guidelines require certain minimum issue size and geographical
diversification and impose other requirements for purposes of determining S&P
Eligible Assets. In order to be considered S&P Eligible Assets, Municipal
Bonds must:
(i) be interest bearing and pay interest at least semi-annually;
(ii) be payable with respect to principal and interest in U.S. dollars;
(iii) be publicly rated BBB or higher by S&P or, except in the case of
Anticipation Notes that are grant anticipation notes or bond anticipation
notes, which must be rated by S&P to be included in S&P Eligible Assets, if
not rated by S&P but rated by Moody's or Fitch, be rated at least A by
Moody's or Fitch (provided that such Moody's-rated or Fitch-rated Florida
Municipal Bonds will be included in S&P Eligible Assets only to the extent
the fair market value of such Florida Municipal Bonds does not exceed 50%
of the aggregate fair market value of the S&P Eligible Assets. For purposes
of determining the S&P Discount Factors applicable to any such Moody's-
rated or Fitch-rated Municipal Bonds, such Florida Municipal Bonds will be
deemed to have an S&P rating that is one full rating category lower than
its Moody's rating or Fitch rating);
(iv) not be subject to a covered call or covered put option written by
the Fund;
(v) except for inverse floaters, not be part of a private placement of
Municipal Bonds; and
(vi) except for inverse floaters, be part of an issue with an original
issue size of at least $10 million or, if of an issue with an original
issue size below $10 million (but in no event below $5 million), be either
(a) issued by an issuer with a total of at least $25 million of securities
outstanding or (b) rated at least A by S&P with all such Florida Municipal
Bonds not constituting more than 20% of the aggregate market value of S&P
Eligible Assets.
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Notwithstanding the foregoing:
(i) Florida Municipal Bonds of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the fair market value of such Bonds does not exceed 10% of the aggregate
fair market value of the S&P Eligible Assets, provided that 2% is added to
the applicable S&P Discount Factor for every 1% by which the fair market
value of such Florida Municipal Bonds exceeds 5% of the aggregate fair
market value of the S&P Eligible Assets;
(ii) Florida Municipal Bonds of any one issue type category (as described
below) will be considered S&P Eligible Assets only to the extent the market
value of such Florida Municipal Bonds does not exceed 25% of the aggregate
market value of S&P Eligible Assets, except that Florida Municipal Bonds
falling within the utility issue type category will be broken down into
three sub-categories (as described below) and such Florida Municipal Bonds
will be considered S&P Eligible Assets to the extent the market value of
such Florida Municipal Bonds in each such sub-category does not exceed 25%
of the aggregate market value of S&P Eligible Assets and except that
Florida Municipal Bonds falling within the general obligation issue type
category will be considered S&P Eligible Assets to the extent the market
value of such Florida Municipal Bonds does not exceed 50% of the aggregate
market value of S&P Eligible Assets. For purposes of the issue type
category requirement described above, Florida Municipal Bonds will be
classified within one of the following categories: health care issues,
housing issues, educational facilities issues, student loan issues,
transportation issues, industrial development bond issues, utility issues,
general obligation issues, lease obligations, escrowed bonds and other
issues not falling within one of the aforementioned categories. The general
obligation issue type category includes any issuer that is directly or
indirectly guaranteed by the State of Florida or its political
subdivisions. Utility issuers are included in the general obligation issue
type category if the issuer is directly or indirectly guaranteed by the
State of Florida or its political subdivisions. For purposes of the issue
type category requirement described above, Florida Municipal Bonds in the
utility issue type category will be classified within one of the three
following sub-categories: (1) electric, gas and combination issues (if the
combination issue includes an electric issue), (2) water and sewer
utilities and combination issues (if the combination issue does not include
an electric issue), and (3) irrigation, resource recovery, solid waste and
other utilities, provided that Florida Municipal Bonds included in this
sub-category (3) must be rated by S&P in order to be included in S&P
Eligible Assets; and
(iii) Florida Municipal Bonds which are escrow bonds or defeased bonds
may compose up to 100% of the aggregate market value of S&P Eligible Assets
if such Florida Municipal Bonds initially are assigned a rating by S&P in
accordance with S&P's legal defeasance criteria or rerated by S&P as
economic defeased escrow bonds and assigned an AAA rating. Florida
Municipal Bonds may be rated as escrow bonds by another nationally
recognized rating agency or rerated as an escrow bond and assigned the
equivalent of an S&P AAA rating, provided that such equivalent rated
Florida Municipal Bonds are limited to 50% of the aggregate market value of
S&P Eligible Assets and are deemed to have an AA S&P rating for purposes of
determining the S&P Discount Factor applicable to such Florida Municipal
Bonds. The limitations on Florida Municipal Bonds of any one issuer in
clause (i) above is not applicable to escrow bonds, however, economically
defeased bonds that are either initially rated or rerated by S&P or another
nationally recognized rating agency and assigned the same rating level as
the issuer of the Florida Municipal Bonds will remain in its original issue
type cateogry set forth in clause (ii) above. Florida Municipal Bonds that
are legally defeased and secured by securities issued or guaranteed by the
United States Government are not required to meet the minimum issuance size
requirement set forth above.
The Fund may include Municipal Bonds other than Florida Municipal Bonds as
S&P Eligible Assets pursuant to guidelines and restrictions to be established
by S&P, provided that S&P advises the Fund in writing that such action will
not adversely affect its then-current rating on the AMPS.
As discussed herein, the Fund may engage in options or futures transactions.
For so long as any AMPS are rated by S&P, the Fund will not purchase or sell
financial futures contracts, write, purchase or sell options on
23
<PAGE>
financial futures contracts or write put options (except covered put options)
or call options (except covered call options) on portfolio securities unless
it receives written confirmation from S&P that engaging in such transactions
will not impair the ratings then assigned to the AMPS by S&P, except that the
Fund may purchase or sell financial futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds
or Notes ("Treasury Bonds") and write, purchase or sell put and call options
on such contracts (collectively "S&P Hedging Transactions"), subject to the
following limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions that terminate a financial futures
contract or option held by the Fund by the Fund's taking an opposite
position thereto ("Closing Transactions")), that would cause the Fund at
the time of such transaction to own or have sold the least of (A) more than
1,000 outstanding financial futures contracts based on the Municipal Index,
(B) outstanding financial futures contracts based on the Municipal Index
exceeding in number 25% of the quotient of the fair market value of the
Fund's total assets divided by $1,000 or (C) outstanding financial futures
contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded financial futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold the lesser of (A)
outstanding financial futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the fair market
value of the Fund's total assets divided by $100,000 ($200,000 in the case
of the two-year United States Treasury Note) or (B) outstanding financial
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded financial futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract that the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (A) the Fund
does not have S&P Eligible Assets with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Fund is required to pay Variation Margin on the
second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract or option thereon in the month prior
to the delivery month under the terms of such financial futures contract or
option thereon unless the Fund holds the securities deliverable under such
terms; and
(v) when the Fund writes a financial futures contract or an option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P) fixed-income securities in a
segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in
the account of or on behalf of the Fund's broker with respect to such
financial futures contract or option equals the fair market value of the
financial futures contract or option, or, in the event the Fund writes a
financial futures contract or option thereon that requires delivery of an
underlying security, it shall hold such underlying security in its
portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin
or Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the
aggregate settlement value, as marked to market, of any outstanding financial
futures contracts based on the Municipal Index that are owned by the Fund plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding financial futures contracts based on Treasury Bonds which
contracts are owned by the Fund.
Moody's "aaa" Rating Guidelines. The Discounted Value of the Fund's Moody's
Eligible Assets is calculated on each Valuation Date. See "Description of
AMPS--Asset Maintenance--AMPS Basic Maintenance Amount." Moody's Eligible
Assets include cash, Receivables for Florida Municipal Bonds or Municipal
24
<PAGE>
Bonds (as defined below), and Florida Municipal Bonds or Municipal Bonds
eligible for consideration under Moody's guidelines. For purposes of
calculating the Discounted Value of the Fund's portfolio under current Moody's
guidelines, the fair market value of Municipal Bonds eligible for
consideration under such guidelines must be discounted by the applicable
Moody's Discount Factor set forth in the table below. The Discounted Value of
a Municipal Bond eligible for consideration under Moody's guidelines is the
lower of par and the quotient of the fair market value thereof divided by the
Moody's Discount Factor. The Moody's Discount Factor used to discount a
particular Florida Municipal Bond or Municipal Bond will be determined by
reference to (a) (i) the rating by Moody's or S&P on such Bond or (ii) in the
event the Moody's Eligible Asset is insured under a Policy and the terms of
the Policy permit the Fund, at its option, to obtain other insurance
guaranteeing the timely payment of interest on such Moody's Eligible Asset and
principal thereof to maturity, the Moody's insurance claims-paying ability
rating of the issuer of the Policy or (iii) in the event the Moody's Eligible
Asset is insured under an insurance policy which guarantees the timely payment
of interest on such Moody's Eligible Asset and principal thereof to maturity,
the Moody's insurance claims-paying ability rating of the issuer of the
insurance policy (provided that for purposes of clauses (ii) and (iii) if the
insurance claims-paying ability of an issuer of a Policy or insurance policy
is not rated by Moody's but is rated by S&P, such issuer shall be deemed to
have a Moody's insurance claims-paying ability rating which is two full
categories lower than the S&P insurance claims-paying ability rating) and (b)
the Moody's Exposure Period. Moody's Discount Factors for a range of Moody's
Exposure Periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
-----------------------------------------------------
MOODY'S EXPOSURE PERIOD AAA(1) AA(1) A(1) BAA(1) OTHER(2) VMIG-1(3) SP-1+(3)
----------------------- ------ ----- ---- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less......... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven
weeks.................. 154 164 173 205 235 137 149
9 weeks or less but
greater than eight
weeks.................. 158 169 179 209 242 138 150
</TABLE>
- --------
(1) Moody's rating.
(2) Florida Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
(3) Florida Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1 or,
if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature or
have a demand feature at par exercisable within the Moody's Exposure
Period and which do not have a long-term rating. For the purposes of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of A by Moody's.
provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-
paying ability rating in accordance with clause (a)(ii) or (a)(iii), such
Moody's Discount Factor shall be increased by an amount equal to 50% of the
difference between (a) the percentage set forth in the foregoing table under
the applicable rating category and (b) the percentage set forth in the
foregoing table under the rating category which is one category lower than the
applicable rating category.
Since the Moody's Exposure Period currently is 49 days, the Moody's Discount
Factors currently applicable to Municipal Bonds eligible for consideration
under Moody's guidelines will be determined by reference to the factors set
forth opposite the exposure period line entitled "7 weeks or less."
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be applied
to short-term Florida Municipal Bonds and short-term Municipal Bonds, so long
as such Florida Municipal Bonds and Municipal Bonds are rated at least MIG-1,
VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Bonds will be 125% if such Bonds are not rated by Moody's but
are rated A-1+, SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for Florida Municipal Bonds
or Municipal Bonds Sold. "Receivables for Florida Municipal Bonds or Municipal
Bonds Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than the aggregate of the following: (i) the
book value of receivables for Florida Municipal Bonds or Municipal Bonds sold
as of or prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date, and if the trades which generated such
receivables are (A) settled through clearing house firms with respect
25
<PAGE>
to which the Fund has received prior written authorization from Moody's or (B)
with counterparties having a Moody's long-term debt rating of at least Baa3;
and (ii) the Moody's Discounted Value of Florida Municipal Bonds or Municipal
Bonds sold as of or prior to such Valuation Date that generated receivables,
if such receivables are due within five Business Days of such Valuation Date
but do not comply with either of conditions (A) or (B) of the preceding clause
(i).
The Moody's guidelines impose certain requirements as to minimum issue size,
issuer diversification and geographical concentration, as well as other
requirements for purposes of determining whether Florida Municipal Bonds or
Municipal Bonds constitute Moody's Eligible Assets, as set forth in the table
below:
<TABLE>
<CAPTION>
MAXIMUM MAXIMUM STATE
MINIMUM MAXIMUM ISSUE TYPE MAXIMUM COUNTY OR TERRITORY
ISSUE SIZE UNDERLYING CONCENTRATION CONCENTRATION CONCENTRATION
RATING ($ MILLIONS) OBLIGOR (%)(1) (%)(1)(3) (%)(1)(4) (%)(1)(5)
------ ------------ -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Aaa..................... 10 100 100 100 100
Aa...................... 10 20 60 60 60
A....................... 10 10 40 40 40
Baa..................... 10 6 20 20 20
Other (2)............... 10 4 12 12 12
</TABLE>
- --------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Florida Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to Florida Municipal Bonds. Territorial bonds (other than
those issued by Puerto Rico and counted collectively) are each limited to
10% of Moody's Eligible Assets. For diversification purposes, Puerto Rico
will be treated as a state.
For purposes of the maximum underlying obligor requirement described above,
any Florida Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by
such third party if the issuance of such third party credit is the sole
determinant of the rating on such Bond. For purposes of the issue type
concentration requirement described above, Florida Municipal Bonds and
Municipal Bonds will be classified within one of the following categories:
health care issues (teaching and non-teaching hospitals, public and private),
housing issues (single- and multi-family), educational facilities issues
(public and private schools), student loan issues, resource recovery issues,
transportation issues (mass transit, airport and highway bonds), industrial
revenue/pollution control bond issues, utility issues (including water, sewer
and electricity), general obligation issues, lease obligations/certificates of
participation, escrowed bonds and other issues ("Other Issues") not falling
within one of the aforementioned categories (includes special obligations to
crossover, excise and sales tax revenue, recreation revenue, special
assessment and telephone revenue bonds). In no event shall (a) more than 10%
of Moody's Eligible Assets consist of student loan issues, (b) more than 10%
of Moody's Eligible Assets consist of recovery issues or (c) more than 10% of
Moody's Eligible Assets consist of Other Issues.
Current Moody's guidelines also require that Florida Municipal Bonds or
Municipal Bonds constituting Moody's Eligible Assets pay interest in cash, be
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated
by S&P, that they be rated at least BBB by S&P, not have suspended ratings by
Moody's and be part of an issue of Florida Municipal Bonds or Municipal Bonds
of at least $10,000,000. For purposes of determining the Moody's Discount
Factors applicable to any such S&P-rated Florida Municipal Bonds or S&P-rated
Municipal Bonds, such Florida Municipal Bonds or Municipal Bonds (excluding
any short-term Municipal Bonds) will be deemed to have a Moody's rating that
is one full rating category lower than its S&P rating. When the Fund sells a
Florida Municipal Bond or Municipal Bond and agrees to repurchase it at a
future date, the Discounted Value of such Municipal Bond will constitute a
Moody's Eligible Asset and the amount the Fund is required to pay upon
repurchase of such bond will count as a liability for purposes of calculating
the AMPS
26
<PAGE>
Basic Maintenance Amount. When the Fund purchases a Florida Municipal Bond or
Municipal Bond and agrees to sell it at a future date to another party, cash
receivable by the Fund thereby will constitute a Moody's Eligible Asset if the
long-term debt of such other party is rated at least A2 by Moody's and such
agreement has a term of 30 days or less; otherwise the Discounted Value of
such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Fund for the payment of
dividends or redemption.
For so long as AMPS are rated by Moody's, in managing the Fund's portfolio,
the Investment Adviser will not alter the composition of the Fund's portfolio
if, in the reasonable belief of the Investment Adviser, the effect of any such
alteration would be to cause the Fund to have Moody's Eligible Assets with an
aggregate Discounted Value, as of the immediately preceding Valuation Date,
less than the AMPS Basic Maintenance Amount as of such Valuation Date;
provided, however, that in the event that, as of the immediately preceding
Valuation Date, the aggregate Discounted Value of Moody's Eligible Assets
exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Investment Adviser will not alter the composition of the Fund's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of Moody's
Eligible Assets unless the Fund shall have confirmed that, after giving effect
to such alteration, the aggregate Discounted Value of Moody's Eligible Assets
would exceed the AMPS Basic Maintenance Amount.
For so long as any AMPS are rated by Moody's, the Fund will not buy or sell
financial futures contracts, write, purchase or sell call options on financial
futures contracts or purchase put options on financial futures contracts or
write call options (except covered call options) on portfolio securities
unless it receives written confirmation from Moody's that engaging in such
transactions would not impair the ratings then assigned to the AMPS by
Moody's, except that the Fund may purchase or sell exchange-traded financial
futures contracts based on the Municipal Index or Treasury Bonds, and
purchase, write or sell exchange-traded put options on such financial futures
contracts, and purchase, write or sell exchange-traded call options on such
financial futures contracts (collectively "Moody's Hedging Transactions"),
subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction based on
the Municipal Index (other than Closing Transactions) that would cause the
Fund at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded financial futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal or (B)
outstanding financial futures contracts based on the Municipal Index having
a Market Value exceeding 50% of the Market Value of all Municipal Bonds
constituting Moody's Eligible Assets owned by the Fund (other than Moody's
Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated
by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding financial
futures contracts based on Treasury Bonds having an aggregate fair market
value exceeding 40% of the aggregate fair market value of all Municipal
Bonds constituting Moody's Eligible Assets owned by the Fund (other than
Moody's Eligible Assets already subject to a Moody's Hedging Transaction)
and rated Baa or A by Moody's (or, if not rated by Moody's but rated by
S&P, rated A or AA by S&P) (for purposes of the foregoing clauses (i) and
(ii), the Fund shall be deemed to own the number of financial futures
contracts that underlie any outstanding options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
Street Journal is less than 5,000;
27
<PAGE>
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a financial
futures contract by no later than the first Business Day of the month in
which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only with
respect to financial futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Fund will not engage in options and futures transactions for
leveraging or speculative purposes and will not write any call options or
sell any financial futures contracts for the purpose of hedging the
anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the
Fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Fund that are either exchange-traded and "readily reversible"
or that expire within 49 days after the date as of which such valuation is
made shall be valued at the lesser of (A) Discounted Value and (B) the
exercise price of the call option written by the Fund; (ii) assets subject to
call options written by the Fund not meeting the requirements of clause (i) of
this sentence shall have no value; (iii) assets subject to put options written
by the Fund shall be valued at the lesser of (A) the exercise price and (B)
the Discounted Value of the subject security; (iv) futures contracts shall be
valued at the lesser of (A) settlement price and (B) the Discounted Value of
the subject security, provided that, if a contract matures within 49 days
after the date as of which such valuation is made, where the Fund is the
seller the contract may be valued at the settlement price and where the Fund
is the buyer the contract may be valued at the Discounted Value of the subject
securities; and (v) where delivery may be made to the Fund with any security
of a class of securities, the Fund shall assume that it will take delivery of
the security with the lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(i) 10% of the exercise price of a written call option; (ii) the exercise
price of any written put option; (iii) where the Fund is the seller under a
financial futures contract, 10% of the settlement price of the financial
futures contract; (iv) where the Fund is the purchaser under a financial
futures contract, the settlement price of assets purchased under such
financial futures contract; (v) the settlement price of the underlying
financial futures contract if the Fund writes put options on a financial
futures contract; and (vi) 105% of the fair market value of the underlying
financial futures contracts if the Fund writes call options on a financial
futures contract and does not own the underlying contract.
For so long as any AMPS are rated by Moody's, the Fund will not enter into
any contract to purchase securities for a fixed price at a future date beyond
customary settlement time (other than such contracts that constitute Moody's
Hedging Transactions), except that the Fund may enter into such contracts to
purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short term, fixed-income securities rated P-1,
MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a fair market value that equals or exceeds the amount of
the Fund's obligations under any Forward Commitments to which it is from
time to time a party or long-term, fixed
28
<PAGE>
income securities with a Discounted Value that equals or exceeds the amount
of the Fund's obligations under any Forward Commitment to which it is from
time to time a party, and
(ii) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which
the Fund is a party and of all securities deliverable to the Fund pursuant to
such Forward Commitments shall be zero.
For so long as AMPS are rated by S&P or Moody's, the Fund, unless it has
received written confirmation from S&P and/or Moody's, as the case may be,
that such action would not impair the ratings then assigned to the AMPS by S&P
and/or Moody's, as the case may be, will not (i) borrow money except for the
purpose of clearing transactions in portfolio securities (which borrowings
under any circumstances shall be limited to the lesser of $10 million and an
amount equal to 5% of the fair market value of the Fund's assets at the time
of such borrowings and which borrowings shall be repaid within 60 days and not
be extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of stock ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Fund, (v) reissue any AMPS previously purchased or redeemed by the Fund, (vi)
merge or consolidate into or with any other corporation or entity, (vii)
change the Fund's pricing service or (viii) engage in reverse repurchase
agreements.
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 Common Shares, the net asset value of the Common Shares will fluctuate.
There can be no assurance that the Fund's hedging transactions will be
effective. For so long as the AMPS are rated by Moody's and S&P, the Fund's
use of options and financial futures contracts will be subject to the
limitations described under "Investment Objective and Policies--Rating Agency
Guidelines." Furthermore, the Fund will only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the Preferred Shares from one or more nationally
recognized statistical rating organizations, the Fund may be required to limit
its use of hedging techniques in accordance with the specified guidelines of
such rating organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and
risks associated therewith. The investment policies with respect to the
hedging transactions of the Fund are not fundamental policies and may be
modified by the Board of Trustees of the Fund without the approval of the
Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Florida Municipal Bonds and Municipal Bonds it owns,
thereby giving the holder of the option the right to buy the underlying
security covered by the option from the Fund at the stated exercise price
until the option expires. The Fund writes only covered call options, which
means that so long as the Fund is obligated as the writer of a call option, it
will own the underlying securities subject to the option. The Fund may not
write covered call options on underlying securities in an amount exceeding 15%
of the market value of its total assets.
29
<PAGE>
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the sale
will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities that it intends to purchase. The Fund will not
purchase options on securities if, as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in Florida Municipal Bonds and
Municipal Bonds against declines in value and hedging against increases in the
cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract
or, in the case of index-based financial futures contracts, to make and accept
a cash settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or
in part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be purchased because
such appreciation may be offset, in whole or in part, by an increase in the
value of the position in the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or
received. Instead, an amount of cash or securities acceptable to the broker
equal to approximately 5% of the contract amount must be deposited with the
broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the
price of the financial futures contract fluctuates making the long and short
positions in the financial futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging Florida Municipal Bonds
and Municipal Bonds which 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 Trustees, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become
30
<PAGE>
available, if the Investment Adviser should determine that there is normally
sufficient correlation between the prices of such financial futures contracts
and the Florida Municipal Bonds and Municipal Bonds in which the Fund invests
to make such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss which will not
be completely offset by movements in the price of such security. There is a
risk of imperfect correlation where the securities underlying financial
futures contracts have different maturities, ratings, geographic compositions
or other characteristics than the security being hedged. In addition, the
correlation may be affected by additions to or deletions from the index that
serves as a basis for a financial futures contract. Finally, in the case of
financial futures contracts on U.S. Government securities and options on such
financial futures contracts, the anticipated correlation of price movements
between the U.S. Government securities underlying the futures or options and
Florida Municipal Bonds and Municipal Bonds may be adversely affected by
economic, political, legislative or other developments which have a disparate
impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission (the "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.
See "Taxes--Tax Treatment of Options and Futures Transactions."
31
<PAGE>
The volume of trading in the exchange markets with respect to Florida
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC 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 reached or exceeded the daily limit on a number of
consecutive trading days.
If it is not possible to close a financial futures position entered into by
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 engaging in hedging transactions
when movements in interest rates occur.
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of this Prospectus.
The AMPS of each series will be Preferred Shares that entitle their holders
to receive dividends when, as and if declared by the Board of Trustees, out of
funds legally available therefor, at a rate per annum that may vary for the
successive Dividend Periods for each such series. After the Initial Dividend
Period, each Subsequent Dividend Period for each series of AMPS generally will
be a 7-Day Dividend Period; provided, however, that prior to any Auction, the
Fund may elect, subject to certain limitations described herein, upon giving
notice to holders thereof, a Special Dividend Period. The Applicable Rate for
a particular Dividend Period will be determined by an Auction conducted on the
Business Day before the start of such Dividend Period. Beneficial Owners and
Potential Beneficial Owners of AMPS may participate in Auctions therefor,
although, except in the case of a Special Dividend Period, Beneficial Owners
desiring to continue to hold all of their AMPS regardless of the Applicable
Rate resulting from Auctions need not participate. For an explanation of
Auctions and the method of determining the Applicable Rate, see "Description
of AMPS--The Auction."
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<PAGE>
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding AMPS of each series will be represented by one or
more certificates registered in the name of the nominee of the Securities
Depository (initially expected to be Cede), and no person acquiring AMPS will
be entitled to receive a certificate representing such shares. See Appendix D
(Auction Procedures). As a result, the nominee of the Securities Depository is
expected to be the sole holder of record of the AMPS. Accordingly, each
purchaser of AMPS must rely on (i) the procedures of the Securities Depository
and, if such purchaser is not a member of the Securities Depository, such
purchaser's Agent Member, to receive dividends, distributions and notices and
to exercise voting rights (if and when applicable) and (ii) the records of the
Securities Depository and, if such purchaser is not a member of the Securities
Depository, such purchaser's Agent Member, to evidence its beneficial
ownership of AMPS.
When issued and sold, the AMPS will have a liquidation preference of $25,000
per share plus an amount equal to accumulated but unpaid dividends (whether or
not earned or declared) and will be fully paid and non-assessable. See
"Description of AMPS--Liquidation Rights." The AMPS will not be convertible
into shares of beneficial interest or other capital shares of the Fund, and
the holders thereof will have no preemptive rights. The AMPS of each series
will not be subject to any sinking fund but will be subject to redemption at
the option of the Fund at the Optional Redemption Price on any Dividend
Payment Date for such series (except during the Initial Dividend Period and
during a Non-Call Period) and, under certain circumstances, will be subject to
mandatory redemption by the Fund at the Mandatory Redemption Price stated
herein. See "Description of AMPS--Redemption."
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, IBJ Schroder Bank & Trust Company will be the
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS. The Auction Agent, however, will serve merely as the agent of the
Fund, acting in accordance with the Fund's instructions, and will not be
responsible for any evaluation or verification of any matters certified to it.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any AMPS so long as the
Fund is current in the payment of dividends on AMPS and on any other capital
shares of the Fund ranking on a parity with the AMPS with respect to the
payment of dividends or upon liquidation.
The following is a brief description of the terms of the AMPS. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the Fund's Declaration of Trust and Certificate
of Designation, including the provisions thereof establishing the AMPS. The
Fund's Declaration of Trust and the form of Certificate of Designation
establishing the terms of the AMPS have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
THE AUCTION
General. Holders of the AMPS of each series will be entitled to receive
cumulative cash dividends on their shares when, as and if declared by the
Board of Trustees of the Fund, out of funds legally available therefor, on the
Initial Dividend Payment Date with respect to the Initial Dividend Period and,
thereafter, on each Dividend Payment Date with respect to a Subsequent
Dividend Period (generally a period of seven days subject to certain
exceptions set forth under "Description of AMPS--Dividends--General") at the
rate per annum equal to the Applicable Rate for each such Dividend Period.
The provisions of the Certificate of Designation establishing the terms of
the AMPS offered hereby will provide that the Applicable Rate for each series
of AMPS for each Dividend Period after the Initial Dividend Period therefor
will be equal to the rate per annum that the Auction Agent advises has
resulted on the Business Day preceding the first day of such Dividend Period
due to implementation of the auction procedures set forth in the Certificate
of Designation (the "Auction Procedures") in which persons determine to hold
or offer to purchase or sell AMPS of such series. The Auction Procedures are
attached as Appendix D to this Prospectus.
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<PAGE>
Each periodic operation of such procedures with respect to the AMPS is
referred to hereinafter as an "Auction." If, however, the Fund should fail to
pay or duly provide for the full amount of any dividend on AMPS of any series
or the redemption price of AMPS of such series called for redemption, the
Applicable Rate for AMPS will be determined as set forth under "Description of
AMPS--Dividends--Determination of Dividend Rate."
Auction Agent Agreement. The Fund will enter into an agreement (the "Auction
Agent Agreement") with IBJ Schroder Bank & Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with this Fund, the "Auction Agent"), which provides, among other
things, that the Auction Agent will follow the Auction Procedures for the
purpose of determining the Applicable Rate for the AMPS. The Fund will pay the
Auction Agent compensation for its services under the Auction Agent Agreement.
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the
Auction Agent Agreement, and will not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in
ascertaining the pertinent facts. Pursuant to the Auction Agent Agreement, the
Fund is required to indemnify the Auction Agent for certain losses and
liabilities incurred by the Auction Agent without negligence or bad faith on
its part in connection with the performance of its duties under such
agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to
the Fund, which termination may be no earlier than 60 days following delivery
of such notice. If the Auction Agent resigns, the Fund will use its best
efforts to enter into an agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction Agent Agreement.
The Fund may terminate the Auction Agent Agreement, provided that prior to
such termination the Fund shall have entered into such an agreement with
respect thereto with a successor Auction Agent.
Broker-Dealer Agreements. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into agreements with Merrill
Lynch, Goldman, Sachs & Co., Lehman Government Securities Incorporated and
Salomon Smith Barney Inc. and may enter into similar agreements (collectively,
the "Broker-Dealer Agreements") with one or more other broker-dealers
(collectively, the "Broker-Dealers") selected by the Fund, which provide for
the participation of such Broker-Dealers in Auctions. Merrill Lynch is an
affiliate of the Investment Adviser in that they share a common parent, ML &
Co. A Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with Merrill Lynch may not be terminated without the
prior written consent of the Fund, which consent may not be unreasonably
withheld.
Securities Depository. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the AMPS of
each series. One or more registered certificates for all of each series of
AMPS initially will be registered in the name of Cede, as nominee of the
Securities Depository. The certificate will bear a legend to the effect that
such certificate is issued subject to the provisions restricting transfers of
AMPS of the series to which it relates contained in the Certificate of
Designation. Cede initially will be the holder of record of all AMPS, and
Beneficial Owners will not be entitled to receive certificates representing
their ownership interest in such shares. See Appendix D (Auction Procedures).
The Securities Depository will maintain lists of its participants and will
maintain the positions (ownership interests) of AMPS held by each Agent
Member, whether as the Beneficial Owner thereof for its own account or as
nominee for the Beneficial Owner thereof. Payments made by the Fund to holders
of AMPS will be duly made by making payments to the nominee of the Securities
Depository.
Auction Procedures. The following is a brief summary of the procedures to be
used in conducting Auctions. Separate auctions will be conducted for each
series of AMPS. Accordingly, as used in the following brief summary, unless
the context otherwise requires, "AMPS" means the series of AMPS subject to the
related Auction and "Beneficial Owners," "Potential Beneficial Owners,"
"Existing Holders" and "Potential
34
<PAGE>
Holders" mean Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders of such series, respectively. This summary is qualified
by reference to the Auction procedures set forth in Appendix D hereto. The
Settlement Procedures to be used with respect to Auctions are set forth in
Appendix C hereto.
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends. An Auction to determine the Applicable Rate for
each series of AMPS offered hereby for each Dividend Period for such series
(other than the Initial Dividend Period therefor) will be held on the first
Business Day (as hereinafter defined) preceding the first day of such Dividend
Period, which first day is also the Dividend Payment Date for the preceding
Dividend Period (the date of each Auction being referred to herein as an
"Auction Date"). "Business Day" means a day on which the New York Stock
Exchange is open for trading and which is not a Saturday, Sunday or other day
on which banks in The City of New York are authorized or obligated by law to
close. Auctions for shares of Series A AMPS for Dividend Periods after the
Initial Dividend Period normally will be held every after the preceding
Dividend Payment Date, and each subsequent Dividend Period normally will begin
on the following (also a Dividend Payment Date). Auctions for shares of
Series B AMPS for Dividend Periods after the Initial Dividend Period normally
will be held every after the preceding Dividend Payment Date, and each
subsequent Dividend Period normally will begin on the following (also a
Dividend Payment Date). The Auction Date and the first day of the related
Dividend Period (both of which must be Business Days) need not be consecutive
calendar days. For example, in most cases, if the that normally would
be an Auction Date for Series A AMPS is not a Business Day, then such Auction
Date will be the preceding and the first day of the related Dividend
Period will continue to be the following . See "Description of AMPS--
Dividends" for information concerning the circumstances under which a Dividend
Payment Date may fall on a date other than the days specified above, which may
affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net capital
gains or other income subject to regular Federal income taxes in any dividend
on AMPS, the Fund will notify the Auction Agent of the amount to be so
included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, in turn it will notify each Broker-
Dealer, who, on or prior to such Auction Date, in accordance with its Broker-
Dealer Agreement, will notify its customers who are Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order
in the Auction to be held on such Auction Date. The Fund also may include such
income in a dividend on AMPS without giving advance notice thereof if it
increases the dividend by an additional amount calculated as if such income
were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend; provided that the Fund will notify the Auction Agent of
the additional amounts to be included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. See "Description of AMPS--
Dividends--Additional Dividends."
Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) Hold Order--indicating the number of outstanding AMPS, if any,
that such Beneficial Owner desires to continue to hold without regard
to the Applicable Rate for the next Dividend Period for such shares;
(ii) Bid--indicating the number of outstanding AMPS, if any, that
such Beneficial Owner desires to continue to hold, provided that the
Applicable Rate for the next Dividend Period for such shares is not
less than the rate per annum then specified by such Beneficial Owner;
and/or
(iii) Sell Order--indicating the number of outstanding AMPS, if any,
that such Beneficial Owner offers to sell without regard to the
Applicable Rate for the next Dividend Period for such shares; and
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<PAGE>
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of AMPS to determine whether such Potential Beneficial Owners desire
to submit Bids indicating the number of AMPS which they offer to purchase
provided that the Applicable Rate for the next Dividend Period for such
shares is not less than the rates per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted
by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or
by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on
any Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to AMPS then held by such Beneficial Owner, as well as Bids for
additional AMPS. For information concerning the priority given to different
types of Orders placed by Beneficial Owners, see "Submission of Orders by
Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for AMPS will be the Applicable Percentage of
the Reference Rate. The Auction Agent will round each applicable Maximum
Applicable Rate to the nearest one-thousandth (0.001) of one percent per
annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent.
The Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for AMPS will depend on the credit rating or
ratings assigned to such shares. The Applicable Percentage will be determined
based on (i) the lower of the credit rating or ratings assigned on such date
to such shares by Moody's and S&P (or if Moody's or S&P or both shall not make
such rating available, the equivalent of either or both of such ratings by a
Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and (ii) whether
the Fund has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on AMPS as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
CREDIT RATINGS PERCENTAGE OF PERCENTAGE OF
----------------------------------- REFERENCE RATE-- REFERENCE RATE--
MOODY'S S&P NO NOTIFICATION NOTIFICATION
---------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend Period.
The Fund will take all reasonable action necessary to enable S&P and Moody's
to provide a rating for the AMPS. If either S&P or Moody's shall not make such
a rating available, or neither S&P nor Moody's shall make such a rating
available, the Underwriter or its affiliates and successors, after
consultation with the Fund, will select another nationally recognized
statistical rating organization (a "Substitute Rating Agency") or two other
nationally recognized statistical rating organizations ("Substitute Rating
Agencies") to act as a Substitute Rating Agency or Substitute Rating Agencies,
as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
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<PAGE>
Neither the Fund nor the Auction Agent will be responsible for a Broker-
Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a Beneficial Owner.
A Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial
Owner or a Potential Beneficial Owner and therefore participate in an Auction
as an Existing Holder or Potential Holder on behalf of both itself and its
customers. Any Order placed with the Auction Agent by a Broker-Dealer as or on
behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated
in the same manner as an Order placed with a Broker-Dealer by a Beneficial
Owner or a Potential Beneficial Owner. Similarly, any failure by a Broker-
Dealer to submit to the Auction Agent an Order in respect of any AMPS held by
it or its customers who are Beneficial Owners will be treated in the same
manner as a Beneficial Owner's failure to submit to its Broker-Dealer an Order
in respect of AMPS held by it, as described in the next paragraph. Inasmuch as
a Broker-Dealer participates in an Auction as an Existing Holder or a
Potential Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the
priority given to different types of Orders placed by Existing Holders, see
"Submission of Orders by Broker-Dealers to Auction Agent." Each purchase or
sale in an Auction will be settled on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding AMPS
held by a Beneficial Owner are not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Beneficial Owner or otherwise, the Auction Agent shall deem a Hold Order (in
the case of an Auction relating to a Dividend Period which is not Special
Dividend Period) and a Sell Order (in the case of an Auction relating to a
Special Dividend Period) to have been submitted on behalf of such Beneficial
Owner covering the number of outstanding AMPS held by such Beneficial Owner
and not subject to Orders submitted to the Auction Agent.
If all of the outstanding AMPS are subject to Submitted Hold Orders, the
Dividend Period next succeeding the Auction automatically shall be the same
length as the immediately preceding Dividend Period, and the Applicable Rate
for the next Dividend Period for all AMPS will be 40% of the Reference Rate on
the date of the applicable Auction (or 60% of such rate if the Fund has
provided notification to the Auction Agent prior to the Auction establishing
the Applicable Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on AMPS).
For the purposes of an Auction, AMPS for which the Fund shall have given
notice of redemption and deposited moneys therefor with the Auction Agent in
trust or segregated in an account at the Fund's custodian bank for the benefit
of the Auction Agent, as set forth under "Description of AMPS--Redemption,"
will not be considered as outstanding and will not be included in such
Auction. Pursuant to the Certificate of Designation of the Fund, the Fund will
be prohibited from reissuing and its affiliates (other than the Underwriter)
will be prohibited from transferring (other than to the Fund) any AMPS they
may acquire. Neither the Fund nor any affiliate of the Fund (other than the
Underwriter) may submit an Order in any Auction, except that an affiliate of
the Fund that is a Broker-Dealer may submit an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00 p.m.,
New York City time, on each Auction Date, or such other time on the Auction
Date as may be specified by the Auction Agent (the "Submission Deadline"),
each Broker-Dealer will submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Fund) as the Existing
Holder or Potential Holder in respect of the AMPS subject to such Orders. Any
Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date, shall be irrevocable.
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If the rate per annum specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of
outstanding AMPS held by such Existing Holder, such Orders will be considered
valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the
number of outstanding AMPS held by such Existing Holder, provided that if
more than one Hold Order is submitted by such Existing Holder and the
number of AMPS subject to such Hold Orders exceeds the number of
outstanding AMPS held by such Existing Holder, the number of AMPS subject
to each of such Hold Orders will be reduced pro rata so that such Hold
Orders, in the aggregate, will cover exactly the number of outstanding AMPS
held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding AMPS held by such Existing Holder over the number of
outstanding AMPS subject to any Hold Order referred to in clause (i) above
(and if more than one Bid submitted by such Existing Holder specifies the
same rate per annum and together they cover more than the remaining number
of shares that can be the subject of valid Bids after application of clause
(i) above and of the foregoing portion of this clause (ii) to any Bid or
Bids specifying a lower rate or rates per annum, the number of shares
subject to each of such Bids will be reduced pro rata so that such Bids, in
the aggregate, cover exactly such remaining number of outstanding shares);
and the number of outstanding shares, if any, subject to Bids not valid
under this clause (ii) shall be treated as the subject of a Bid by a
Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding AMPS held by such Existing Holder over
the sum of the number of AMPS subject to Hold Orders referred to in clause
(i) above and the number of AMPS subject to valid Bids by such Existing
Holder referred to in clause (ii) above; provided that, if more than one
Sell Order is submitted by any Existing Holder and the number of AMPS
subject to such Sell Orders is greater than such excess, the number of AMPS
subject to each of such Sell Orders will be reduced pro rata so that such
Sell Orders, in the aggregate, will cover exactly the number of AMPS equal
to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of AMPS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding AMPS over the number of outstanding AMPS subject to
Submitted Hold Orders (such excess being referred to as the "Available AMPS")
and whether Sufficient Clearing Bids have been made in such Auction.
Sufficient Clearing Bids will have been made if the number of outstanding AMPS
that are the subject of Submitted Bids of Potential Holders with rates per
annum not higher than the Maximum Applicable Rate equals or exceeds the number
of outstanding shares that are the subject of Submitted Sell Orders (including
the number of shares subject to Bids of Existing Holders specifying rates per
annum higher than the Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will determine
the lowest rate per annum specified in the Submitted Bids (the "Winning Bid
Rate") which would result in the number of shares subject to Submitted Bids
specifying such rate per annum or a lower rate per annum being at least equal
to the Available
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AMPS. If Sufficient Clearing Bids have been made, the Winning Bid Rate will be
the Applicable Rate for the next Dividend Period for all AMPS then
outstanding.
If Sufficient Clearing Bids have not been made (other than because all
outstanding AMPS are the subject of Submitted Hold Orders), the Dividend
Period next following the Auction automatically will be a 7-Day Dividend
Period, and the Applicable Rate for such Dividend Period will be equal to the
Maximum Applicable Rate. If Sufficient Clearing Bids have not been made,
Beneficial Owners that have Submitted Sell Orders will not be able to sell in
the Auction all, and may not be able to sell any, AMPS subject to such
Submitted Sell Orders. See "Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares." Thus, under some
circumstances, Beneficial Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected
in the order of priority set forth in the Auction Procedures with the result
that Existing Holders and Potential Holders of AMPS will sell, continue to
hold and/or purchase AMPS as set forth below. Existing Holders that submit or
are deemed to have submitted Hold Orders will continue to hold the AMPS
subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Winning Bid Rate or a Submitted Sell Order will
sell the outstanding AMPS subject to such Submitted Bid or Submitted Sell
Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will continue to hold the
outstanding AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will purchase the number of
shares of AMPS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will continue to hold the
outstanding AMPS subject to such Submitted Bids, unless the number of
outstanding AMPS subject to all such Submitted Bids of Existing Holders is
greater than the excess of the Available AMPS over the number of AMPS
accounted for in clauses (b) and (c) above, in which event each Existing
Holder with such a Submitted Bid will sell a number of outstanding AMPS
determined on a pro rata basis based on the number of outstanding AMPS
subject to all such Submitted Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will purchase any Available AMPS
not accounted for in clause (b), (c) or (d) above on a pro rata basis based
on the AMPS subject to all such Submitted Bids of Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding AMPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will continue
to hold the outstanding AMPS subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will purchase
the number of AMPS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Maximum Applicable Rate or a Submitted Sell Order
will sell a number of outstanding AMPS determined on a pro rata basis based
on the outstanding AMPS subject to all such Submitted Bids and Submitted
Sell Orders.
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If as a result of the Auction Procedures described above any Existing Holder
would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will
round up or down the number of AMPS being sold or purchased on such Auction
Date so that each share sold or purchased by each Existing Holder or Potential
Holder will be a whole share of AMPS. If any Potential Holder would be
entitled or required to purchase less than a whole share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will
allocate AMPS for purchase among Potential Holders so that only whole AMPS are
purchased by any such Potential Holder, even if such allocation results in one
or more of such Potential Holders not purchasing any AMPS.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related AMPS by telephone
at approximately 3:00 p.m., New York City time, on the Auction Date for such
Auction. Each such Broker-Dealer that submitted an Order for the account of a
customer then will advise such customer whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling AMPS as a result of the Auction and will advise each
customer purchasing or selling AMPS to give instructions to its Agent Member
of the Securities Depository to pay the purchase price against delivery of
such shares or to deliver such shares against payment therefor as appropriate.
If a customer selling AMPS as a result of an Auction shall fail to instruct
its Agent Member to deliver such shares, the Broker-Dealer that submitted such
customer's Bid or Sell Order will instruct such Agent Member to deliver such
shares against payment therefor. Each Broker-Dealer that submitted a Hold
Order in an Auction on behalf of a customer also will advise such customer of
the Applicable Rate for the next Dividend Period for the AMPS. The Auction
Agent will record each transfer of AMPS on the record book of Existing Holders
to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the day
after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of AMPS as determined in such Auction.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery through their Agent Members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment in same-day funds. If the procedures
of the Securities Depository applicable to AMPS shall be changed to provide
for payment in next-day funds, then purchasers may be required to make payment
in next-day funds. If the certificates for AMPS are not held by the Securities
Depository or its nominee, payment will be made in same-day funds to the
Auction Agent against delivery of such certificates.
If any Existing Holder selling AMPS in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased AMPS in
such Auction may deliver to such person a number of whole AMPS that is less
than the number of shares that otherwise was to be purchased by such person.
In such event, the number of AMPS to be so delivered will be determined by
such Broker-Dealer. Delivery of such lesser number of shares will constitute
good delivery. Each Broker-Dealer Agreement also will provide that neither the
Fund nor the Auction Agent will have responsibility or liability with respect
to the failure of a Potential Beneficial Owner, Beneficial Owner or their
respective Agent Members to deliver AMPS or to pay for AMPS purchased or sold
pursuant to an Auction or otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Fund to each Broker-Dealer on the basis of the purchase price
of AMPS placed by such Broker-Dealer at such Auction. The service charge (i)
for any 7-Day Dividend Period shall be payable at the annual rate of 0.25% of
the purchase price of the AMPS placed by such Broker-Dealer in any such
Auction and (ii) for any Special Dividend Period shall be determined by mutual
consent of the Fund and any such Broker-Dealer or Broker-Dealers and shall be
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based upon a selling concession that would be applicable to an underwriting of
fixed or variable rate preferred shares with a similar final maturity or
variable rate dividend period, respectively, at the commencement of the
Dividend Period with respect to such Auction. For the purposes of the
preceding sentence, AMPS will be placed by a Broker-Dealer if such shares were
(i) the subject of Hold Orders deemed to have been made by Beneficial Owners
that were acquired by such Beneficial Owners through such Broker-Dealer or
(ii) the subject of the following Orders submitted by such Broker-Dealer: (A)
a Submitted Bid of a Beneficial Owner that resulted in such Beneficial Owner
continuing to hold such shares as a result of the Auction, (B) a Submitted Bid
of a Potential Beneficial Owner that resulted in such Potential Beneficial
Owner purchasing such shares as a result of the Auction or (C) a Submitted
Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders
in Auctions for its own account, unless the Fund notifies all Broker-Dealers
that they no longer may do so; provided that Broker-Dealers may continue to
submit Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for
its own account in any Auction of any series of AMPS, it may have knowledge of
Orders placed through it in that Auction and therefore have an advantage over
other Bidders, but such Broker-Dealer would not have knowledge of Orders
submitted by other Broker-Dealers in that Auction.
The Broker-Dealers intend to maintain a secondary trading market in the AMPS
outside of Auctions; however, they have no obligation to do so and there can
be no assurance that a secondary market for the AMPS will develop or, if it
does develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the
trade by the Broker-Dealers). The AMPS will not be registered on any stock
exchange or on any automated quotation system. An increase in the level of
interest rates, particularly during any Long-Term Dividend Period, likely will
have an adverse effect on the secondary market price of the AMPS, and a
selling shareholder may sell AMPS between Auctions at a price per share of
less than $25,000.
DIVIDENDS
General. The holders of each series of AMPS will be entitled to receive,
when, as and if declared by the Board of Trustees of the Fund, out of funds
legally available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the AMPS
so declared and payable shall be paid (i) in preference to and in priority
over any dividends so declared and payable on the Common Shares, and (ii) to
the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Fund's investments. Generally, dividends on
AMPS, to the extent that they are derived from interest paid on Municipal
Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax. See "Taxes."
Dividends on the AMPS will accumulate from the date on which the Fund
originally issues the AMPS (the "Date of Original Issue") and will be payable
on each series of AMPS on the dates described below. Dividends on shares of
each series of AMPS with respect to the Initial Dividend Period shall be
payable on the Initial Dividend Payment Date with respect to each series of
AMPS. Following the Initial Dividend Payment Date for each series of AMPS,
dividends on each series of AMPS will be payable, at the option of the Fund,
either (i) with respect to any 7-Day Dividend Period and any Short Term
Dividend Period of 35 or fewer days, on the day next succeeding the last day
thereof or (ii) with respect to any Short Term Dividend Period of more than 35
days and with respect to any Long Term Dividend Period, monthly on the first
Business Day of each calendar month during such Short Term Dividend Period or
Long Term Dividend Period and on the day next succeeding the last day thereof
(each such date referred to in clause (i) or (ii) being referred to herein as
a "Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, (i) the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date if such Normal
Dividend Payment Date is a Monday, Tuesday, Wednesday or Thursday, or (ii) the
Dividend Payment Date shall be the first Business Day next preceding such
Normal Dividend Payment Date if such Normal Dividend Payment Date is a Friday.
Thus, following the Initial Dividend Payment Date for each series of AMPS,
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dividends generally will be payable (in the case of Dividend Periods which are
not Special Dividend Periods) on each succeeding in the case of Series A
AMPS and on each succeeding in the case of Series B AMPS. Although any
particular Dividend Payment Date may not occur on the originally scheduled
date because of the exceptions discussed above, the next succeeding Dividend
Payment Date, subject to such exceptions, will occur on the next following
originally scheduled date. If for any reason a Dividend Payment Date cannot be
fixed as described above, then the Board of Trustees shall fix the Dividend
Payment Date. The Board of Trustees by resolution prior to authorization of a
dividend by the Board of Trustees may change a Dividend Payment Date if such
change does not adversely affect the contract rights of the holders of AMPS
set forth in the Declaration of Trust. The Initial Dividend Period, 7-Day
Dividend Periods and Special Dividend Periods are hereinafter sometimes
referred to as "Dividend Periods." Each dividend payment date determined as
provided above is hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which holder is
expected to be the nominee of the Securities Depository. See "Description of
AMPS--The Auction--Securities Depository." The Securities Depository will
credit the accounts of the Agent Members of the Existing Holders in accordance
with the Securities Depository's normal procedures which provide for payment
in same-day funds. The Agent Member of an Existing Holder will be responsible
for holding or disbursing such payments on the applicable Dividend Payment
Date to such Existing Holder in accordance with the instructions of such
Existing Holder. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend
Payment Date, to the nominee of the Securities Depository. Any dividend
payment made on AMPS first shall be credited against the earliest declared but
unpaid dividends accumulated with respect to such series.
Holders of AMPS will not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full cumulative dividends except as
described under "Additional Dividends" and "Non-Payment Period; Late Charge"
below. No interest will be payable in respect of any dividend payment or
payments on the AMPS which may be in arrears.
The amount of cash dividends per share of any series of AMPS payable (if
declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period and
each Dividend Payment Date of each Short Term Dividend Period shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and for which dividends
are payable on such Dividend Payment Date and the denominator of which will be
365, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of cash dividends per share of AMPS payable (if declared) on any Dividend
Payment Date shall be computed by multiplying the Applicable Rate for such
Dividend Period by a fraction, the numerator of which will be such number of
days in such part of such Dividend Period that such share was outstanding and
for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
Notification of Dividend Period. With respect to each Dividend Period that
is a Special Dividend Period, the Fund, at its sole option and to the extent
permitted by law, by telephonic and written notice (a "Request for Special
Dividend Period") to the Auction Agent and to each Broker-Dealer, may request
that the next succeeding Dividend Period for a series of AMPS will be a number
of days (other than seven), evenly divisible by seven, and not fewer than
seven nor more than 364 in the case of a Short Term Dividend Period or one
whole year or more but not greater than five years in the case of a Long Term
Dividend Period, specified in such notice, provided that the Fund may not give
a Request for Special Dividend Period (and any such request shall be null and
void) unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the
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last occurring Auction and unless full cumulative dividends, any amounts due
with respect to redemptions, and any Additional Dividends payable prior to
such date have been paid in full. Such Request for Special Dividend Period, in
the case of a Short Term Dividend Period, shall be given on or prior to the
second Business Day but not more than seven Business Days prior to an Auction
Date for the AMPS and, in the case of a Long Term Dividend Period, shall be
given on or prior to the second Business Day but not more than 28 days prior
to an Auction Date for the AMPS. Upon receiving such Request for Special
Dividend Period, the Broker-Dealers jointly shall determine whether, given the
factors set forth below, it is advisable that the Fund issue a Notice of
Special Dividend Period for a series of AMPS as contemplated by such Request
for Special Dividend Period and the Optional Redemption Price of the AMPS
during such Special Dividend Period and the Specific Redemption Provisions and
shall give the Fund and the Auction Agent written notice (a "Response") of
such determination by no later than the second Business Day prior to such
Auction Date. In making such determination, the Broker-Dealers will consider
(i) existing short-term and long-term market rates and indices of such short-
term and long-term rates, (ii) existing market supply and demand for short-
term and long-term securities, (iii) existing yield curves for short-term and
long-term securities comparable to the AMPS, (iv) industry and financial
conditions which may affect the AMPS, (v) the investment objective of the Fund
and (vi) the Dividend Periods and dividend rates at which current and
potential beneficial holders of the AMPS would remain or become beneficial
holders. If the Broker-Dealers shall not give the Fund and the Auction Agent a
Response by such second Business Day or if the Response states that given the
factors set forth above it is not advisable that the Fund give a Notice of
Special Dividend Period for the AMPS, the Fund may not give a Notice of
Special Dividend Period in respect of such Request for Special Dividend
Period. In the event the Response indicates that it is advisable that the Fund
give a Notice of Special Dividend Period for the AMPS, the Fund, by no later
than the second Business Day prior to such Auction Date, may give a notice (a
"Notice of Special Dividend Period") to the Auction Agent, the Securities
Depository and each Broker-Dealer, which notice will specify (i) the duration
of the Special Dividend Period, (ii) the Optional Redemption Price as
specified in the related Response and (iii) the Specific Redemption
Provisions, if any, as specified in the related Response. The Fund also shall
provide a copy of such Notice of Special Dividend Period to Moody's and S&P.
The Fund shall not give a Notice of Special Dividend Period, and, if such
Notice of Special Dividend Period shall have been given already, shall give
telephonic and written notice of its revocation (a "Notice of Revocation") to
the Auction Agent, each Broker-Dealer, and the Securities Depository on or
prior to the Business Day prior to the relevant Auction Date if (x) either the
1940 Act AMPS Asset Coverage is not satisfied or the Fund shall fail to
maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value at least equal to the AMPS Basic Maintenance
Amount, in each case on each of the two Valuation Dates immediately preceding
the Business Day prior to the relevant Auction Date on an actual basis and on
a pro forma basis giving effect to the proposed Special Dividend Period (using
as a pro forma dividend rate with respect to such Special Dividend Period the
dividend rate which the Broker-Dealers shall advise the Fund is an
approximately equal rate for securities similar to the AMPS with an equal
dividend period), provided that, in calculating the aggregate Discounted Value
of Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall
be deemed to be one week longer, (y) sufficient funds for the payment of
dividends payable on the immediately succeeding Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the close of business on
the third Business Day preceding the related Auction Date or (z) the Broker-
Dealers jointly advise the Fund that, after consideration of the factors
listed above, they have concluded that it is advisable to give a Notice of
Revocation. The Fund also shall provide a copy of such Notice of Revocation to
Moody's and S&P. If the Fund is prohibited from giving a Notice of Special
Dividend Period as a result of the factors enumerated in clause (x), (y) or
(z) above or if the Fund gives a Notice of Revocation with respect to a Notice
of Special Dividend Period, the next succeeding Dividend Period for that
series will be a 7-Day Dividend Period. In addition, in the event Sufficient
Clearing Bids are not made in any Auction or an Auction is not held for any
reason, the next succeeding Dividend Period will be a 7-Day Dividend Period,
and the Fund may not again give a Notice of Special Dividend Period (and any
such attempted notice shall be null and void) until Sufficient Clearing Bids
have been made in an Auction with respect to a 7-Day Dividend Period.
Determination of Dividend Rate. The dividend rate on each series of AMPS
during the period from and including the Date of Original Issue for each
series of AMPS to but excluding the Initial Dividend Payment Date
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for each series of AMPS (the "Initial Dividend Period") will be the rate per
annum set forth on the inside cover page hereof. Commencing on the Initial
Dividend Payment Date for each series of AMPS, the Applicable Rate on such
series of AMPS for each Subsequent Dividend Period, which Subsequent Dividend
Period shall be a period commencing on and including a Dividend Payment Date
and ending on and including the calendar day prior to the next Dividend
Payment Date (or last Dividend Payment Date in a Dividend Period if there is
more than one Dividend Payment Date), shall be equal to the rate per annum
that results from the Auction with respect to such Subsequent Dividend Period.
The Initial Dividend Period and Subsequent Dividend Period for each series of
AMPS is referred to herein as a "Dividend Period." Cash dividends shall be
calculated as set forth above under "Dividends--General."
Non-Payment Period; Late Charge. A Non-Payment Period will commence if the
Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
New York City time, on the Business Day preceding such Dividend Payment Date,
the full amount of any dividend on AMPS payable on such Dividend Payment Date
or (ii) deposit, irrevocably in trust, in same-day funds, with the Auction
Agent by 12:00 noon, New York City time, (A) on such Dividend Payment Date the
full amount of any cash dividend on such shares (if declared) payable on such
Dividend Payment Date or (B) on any redemption date for AMPS called for
redemption, the Mandatory Redemption Price per share of such AMPS or, in the
case of an optional redemption, the Optional Redemption Price per share. Such
Non-Payment Period will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be,
and ending on and including the Business Day on which, by 12:00 noon, New York
City time, all unpaid cash dividends and unpaid redemption prices shall have
been so deposited or otherwise shall have been made available to the
applicable holders in same-day funds, provided that a Non-Payment Period for
any series of AMPS will not end unless the Fund shall have given at least five
days' but no more than 30 days' written notice of such deposit or availability
to the Auction Agent, the Securities Depository and all holders of AMPS of
such series. Notwithstanding the foregoing, the failure by the Fund to deposit
funds as provided for by clauses (ii) (A) or (ii) (B) above within three
Business Days after any Dividend Payment Date or redemption date, as the case
may be, in each case to the extent contemplated below, shall not constitute a
"Non-Payment Period." The Applicable Rate for each Dividend Period for AMPS of
any series, commencing during a Non-Payment Period, will be equal to the Non-
Payment Period Rate; and each Dividend Period commencing after the first day
of, and during, a Non-Payment Period shall be a 7-Day Dividend Period. Any
dividend on AMPS due on any Dividend Payment Date for such shares (if, prior
to the close of business on the second Business Day preceding such Dividend
Payment Date, the Fund has declared such dividend payable on such Dividend
Payment Date to the persons who held such shares as of 12:00 noon, New York
City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to such shares not paid to such persons when due
may be paid to such persons in the same form of funds by 12:00 noon, New York
City time, on any of the first three Business Days after such Dividend Payment
Date or due date, as the case may be, provided that such amount is accompanied
by a late charge calculated for such period of non-payment at the Non-Payment
Period Rate applied to the amount of such non-payment based on the actual
number of days comprising such period divided by 365. In the case of a willful
failure of the Fund to pay a dividend on a Dividend Payment Date or to redeem
any AMPS on the date set for such redemption, the preceding sentence shall not
apply and the Applicable Rate for the Dividend Period commencing during the
Non-Payment Period resulting from such failure shall be the Non-Payment Period
Rate. For the purposes of the foregoing, payment to a person in same-day funds
on any Business Day at any time will be considered equivalent to payment to
that person in New York Clearing House (next-day) funds at the same time on
the preceding Business Day, and any payment made after 12:00 noon, New York
City time, on any Business Day shall be considered to have been made instead
in the same form of funds and to the same person before 12:00 noon, New York
City time, on the next Business Day. The Non-Payment Period Rate initially
will be 200% of the applicable Reference Rate (or 275% of such rate if the
Fund has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on AMPS), provided that
the Board of Trustees of the Fund shall have the authority to adjust, modify,
alter or change from time to time the initial Non-Payment Period
44
<PAGE>
Rate if the Board of Trustees of the Fund determines and Moody's and S&P (and
any Substitute Rating Agency in lieu of Moody's or S&P in the event either of
such parties shall not rate the AMPS) advise the Fund in writing that such
adjustment, modification, alteration or change will not adversely affect their
then-current ratings on the AMPS.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on Common Shares or
purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the outstanding AMPS would be less
than 200% (or such other percentage as in the future may be required by law).
The Fund estimates that, based on the composition of its portfolio at
September , 1998, asset coverage with respect to AMPS would be approximately
% immediately after the issuance of the AMPS offered hereby. Under the Code,
the Fund, among other things, must distribute at least 90% of its investment
company taxable income and its tax-exempt interest income each year in order
to maintain its qualification for tax treatment as a regulated investment
company. The foregoing limitations on dividends, distributions and share
purchases under certain circumstances may impair the Fund's ability to
maintain such qualification. See "Taxes."
Upon any failure to pay dividends on AMPS for two years or more, the holders
of the AMPS will acquire certain additional voting rights. See "Voting Rights"
below. Such rights shall be the exclusive remedy of the holders of AMPS upon
any failure to pay dividends on the Fund.
For so long as any AMPS are outstanding, the Fund will not declare, pay or
set apart for payment any dividend or other distribution (other than a
dividend or distribution paid in shares of, or options, warrants or rights to
subscribe for or purchase, Common Shares or other shares of beneficial
interest, if any, ranking junior to AMPS as to dividends or upon liquidation)
in respect of Common Shares or any other shares of beneficial interest of the
Fund ranking junior to or on a parity with AMPS as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of beneficial interest of the Fund
ranking junior to AMPS as to dividends and upon liquidation) or any such
parity shares (except by conversion into or exchange for shares of beneficial
interest of the Fund ranking junior to or on a parity with AMPS as to
dividends and upon liquidation), unless (A) immediately after such
transaction, the Fund would have S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount, and the 1940 Act AMPS Asset Coverage (see
"Asset Maintenance" and "Redemption" below) would be satisfied, (B) full
cumulative dividends on AMPS due on or prior to the date of the transaction
have been declared and paid or shall have been declared and sufficient funds
for the payment thereof deposited with the Auction Agent, (C) any Additional
Dividend required to be paid on or before the date of such declaration or
payment has been paid and (D) the Fund has redeemed the full number of AMPS
required to be redeemed by any provision for mandatory redemption contained in
the Certificate of Designation.
Additional Dividends. If the Fund retroactively allocates any capital gains,
including new categories of capital gains discussed under "Taxes," or other
income subject to regular Federal income taxes to AMPS without having given
advance notice thereof to the Auction Agent as described above under "The
Auction--Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends," which may only happen when such
allocation is made as a result of the redemption of all or a portion of the
outstanding AMPS or the liquidation of the Fund (the amount of such allocation
referred to herein as a "Retroactive Taxable Allocation"), the Fund, within 90
days (and generally within 60 days) after the end of the Fund's fiscal year
for which a Retroactive Taxable Allocation is made, will provide notice
thereof to the Auction Agent and to each holder of shares (initially Cede as
nominee of the Securities Depository) during such fiscal year at such holder's
address as the same appears or last appeared on the stock books of the Fund.
The Fund, within 30 days after such notice is given to the Auction Agent, will
pay to the Auction Agent (who then will distribute to such holders of AMPS),
out of funds legally available therefor, an amount equal to the aggregate
Additional Dividend (as defined below) with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question. See
"Taxes."
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<PAGE>
An "Additional Dividend" means payment to a present or former holder of AMPS
of an amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such holder with respect to the fiscal
year in question, would cause such holder's dividends in dollars (after
Federal income tax consequences) from the aggregate of both the Retroactive
Taxable Allocations and the Additional Dividend to be equal to the dollar
amount of the dividends which would have been received by such holder if the
amount of the aggregate Retroactive Taxable Allocations had been excludable
from the gross income of such holder. Such Additional Dividend shall be
calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of AMPS is subject to the Federal alternative
minimum tax with respect to dividends received from the Fund; and (iii)
assuming that each Retroactive Taxable Allocation would be taxable in the
hands of each holder of AMPS at the greater of: (a) the maximum combined
marginal regular Federal individual income tax rate applicable to ordinary
income or capital gains depending on the taxable character of the distribution
(including any surtax); or (b) the maximum marginal regular Federal and
Florida corporate income tax rate applicable to ordinary income or capital
gains depending on the taxable character of the distribution (taking into
account in both (a) and (b) the Federal income tax deductibility of state
taxes paid or incurred but not any phase out of, or provision limiting,
personal exemptions, itemized deductions, or the benefit of lower tax brackets
and assuming the taxability of Federally tax-exempt dividends for corporations
for Florida state income tax purposes). Although the Fund generally intends to
designate any Additional Dividend as an exempt-interest dividend to the extent
permitted by applicable law, it is possible that all or a portion of any
Additional Dividend will be taxable to the recipient thereof. See "Taxes--Tax
Treatment of Additional Dividends." The Fund will not pay a further Additional
Dividend with respect to any taxable portion of an Additional Dividend.
If the Fund does not give advance notice of the amount of taxable income to
be included in a dividend on AMPS in the related Auction, as described above
under "The Auction--Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends," the Fund may include such
taxable income in a dividend on AMPS if it increases the dividend by an
additional amount calculated as if such income were a Retroactive Taxable
Allocation and the additional amount were an Additional Dividend and notifies
the Auction Agent of such inclusion at least five days prior to the applicable
Dividend Payment Date.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Certificate of Designation. These
requirements are summarized below.
1940 Act AMPS Asset Coverage. The Fund will be required under the
Certificate of Designation to maintain, with respect to AMPS, as of the last
Business Day of each month in which any AMPS are outstanding, asset coverage
of at least 200% with respect to senior securities which are stock, including
the AMPS (or such other asset coverage as in the future may be specified in or
under the 1940 Act as the minimum asset coverage for senior securities which
are stock of a closed-end investment company as a condition of paying
dividends on its common stock) ("1940 Act AMPS Asset Coverage"). If the Fund
fails to maintain 1940 Act AMPS Asset Coverage and such failure is not cured
as of the last Business Day of the following month (the "1940 Act Cure Date"),
the Fund will be required under certain circumstances to redeem certain of the
AMPS. See "Redemption" below.
The 1940 Act AMPS Asset Coverage immediately following the issuance of AMPS
offered hereby (after giving effect to the deduction of the sales load and
offering expenses for the AMPS) will be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less
liabilities not constituting
senior securities $
= = %
---------------------------- -----
Senior securities $
representing indebtedness
plus liquidation value
of the AMPS
</TABLE>
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<PAGE>
AMPS Basic Maintenance Amount. So long as AMPS are outstanding, the Fund
will be required under the Certificate of Designation to maintain as of each
Business Day (a "Valuation Date") S&P Eligible Assets and Moody's Eligible
Assets each having in the aggregate a Discounted Value at least equal to the
AMPS Basic Maintenance Amount. If the Fund fails to meet such requirement as
of any Valuation Date and such failure is not cured on or before the sixth
Business Day after such Valuation Date (the "AMPS Basic Maintenance Cure
Date"), the Fund will be required under certain circumstances to redeem
certain of the AMPS. Upon any failure to maintain the required Discounted
Value, the Fund will use its best efforts to alter the composition of its
portfolio to reattain a Discounted Value at least equal to the AMPS Basic
Maintenance Amount on or prior to the AMPS Basic Maintenance Cure Date. See
"Redemption."
The AMPS Basic Maintenance Amount as of any Valuation Date is defined as the
dollar amount equal to (i) the sum of (A) the product of the number of AMPS
outstanding on such Valuation Date multiplied by the sum of $25,000 and any
applicable redemption premium attributable to the designation of a Premium
Call Period; (B) the aggregate amount of cash dividends (whether or not earned
or declared) that will have accumulated for each share of AMPS outstanding to
(but not including) the end of the current Dividend Period that follows such
Valuation Date in the event the then-current Dividend Period will end within
49 calendar days of such Valuation Date or through the 49th day after such
Valuation Date in the event the then-current Dividend Period for each series
of AMPS will not end within 49 calendar days of such Valuation Date; (C) in
the event the then-current Dividend Period will end within 49 calendar days of
such Valuation Date, the aggregate amount of cash dividends that would
accumulate at the Maximum Applicable Rate applicable to a Dividend Period of
28 or fewer days on any AMPS outstanding from the end of such Dividend Period
through the 49th day after such Valuation Date, multiplied by the larger of
the Moody's Volatility Factor and the S&P Volatility Factor determined from
time to time by Moody's and S&P, respectively (except that if such Valuation
Date occurs during a Non-Payment Period, the cash dividend for purposes of
calculation would accumulate at the then-current Non-Payment Period Rate); (D)
the amount of anticipated Fund expenses for the 90 days subsequent to such
Valuation Date (including any premiums payable with respect to a Policy); (E)
the amount of the Fund's Maximum Potential Additional Dividend Liability as of
such Valuation Date; and (F) any current liabilities as of such Valuation Date
to the extent not reflected in any of (i) (A) through (i) (E) (including,
without limitation, and immediately upon determination, any amounts due and
payable by the Fund pursuant to repurchase agreements, any amounts payable for
Florida Municipal Bonds or Municipal Bonds purchased as of such Valuation
Date) less (ii) either (A) the Discounted Value of any Fund assets, or (B) the
face value of any of the Fund's assets if such assets mature prior to or on
the date of redemption of AMPS or payment of a liability and are either
securities issued or guaranteed by the United States Government or Deposit
Securities, in both cases irrevocably deposited by the Fund for the payment of
the amount needed to redeem AMPS subject to redemption or to satisfy any of
(i) (B) through (i) (F). For Moody's and S&P, the Fund shall include as a
liability an amount calculated semi-annually equal to 150% of the estimated
cost of obtaining other insurance guaranteeing the timely payment of interest
on a Moody's Eligible Asset or S&P Eligible Asset and principal thereof to
maturity with respect to Moody's Eligible Assets and S&P Eligible Assets that
(i) are covered by a Policy which provides the Fund with the option to obtain
such other insurance and (ii) are discounted by a Moody's Discount Factor or a
S&P Discount Factor, as the case may be, determined by reference to the
insurance claims-paying ability rating of the issuer of such Policy. For
purposes of the foregoing, "Maximum Potential Additional Dividend Liability,"
as of any Valuation Date, means the aggregate amount of Additional Dividends
that would be due if the Fund were to make Retroactive Taxable Allocations,
with respect to any fiscal year, estimated based upon dividends paid and the
amount of undistributed realized net capital gains and other taxable income
earned by the Fund, as of the end of the calendar month immediately preceding
such Valuation Date and assuming such Additional Dividends are fully taxable.
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings have been based on criteria established in
connection with rating the AMPS. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of
a debt obligation, the higher the related discount factor) and the frequency
with which the relevant asset is marked to market. In no event shall the
Discounted Value of any asset of the Fund exceed its unpaid principal balance
or
47
<PAGE>
face amount as of the date of calculation. The Discount Factor relating to any
asset of the Fund and the AMPS Basic Maintenance Amount, the assets eligible
for inclusion in the calculation of the Discounted Value of the Fund's
portfolio and certain definitions and methods of calculation relating thereto
may be changed from time to time by the Fund, without shareholder approval,
but only in the event the Fund receives written confirmation from S&P, Moody's
and any Substitute Rating Agency that any such changes would not impair the
ratings then assigned to the AMPS by S&P or Moody's or any Substitute Rating
Agency.
On or before the third Business Day after a Valuation Date on which the Fund
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount, the Fund is required to deliver to the Auction Agent, Moody's and S&P
a report with respect to the calculation of the AMPS Basic Maintenance Amount
and the value of its portfolio holdings as of the date of such failure (an
"AMPS Basic Maintenance Report"). Additionally, on or before the third
Business Day after the first day of a Special Dividend Period, the Fund will
deliver an AMPS Basic Maintenance Report to S&P and the Auction Agent. The
Fund also will deliver an AMPS Basic Maintenance Report as of the twenty-first
day (or, if such day is not a Business Day, the next succeeding Business Day)
of the last month of each fiscal quarter of the Fund on or before the third
Business Day after such day. Within ten Business Days after delivery of such
report relating to the twenty-first day of the last month of each fiscal
quarter of the Fund, the Fund will deliver a letter prepared by the Fund's
independent accountants regarding the accuracy of the calculations made by the
Fund in its most recent AMPS Basic Maintenance Report. Also, on or before 5:00
p.m., New York City time, on the first Business Day after Common Shares are
repurchased by the Fund, the Fund will complete and deliver to S&P and Moody's
an AMPS Basic Maintenance Report as of the close of business on such date that
Common Shares are repurchased. If any such letter prepared by the Fund's
independent accountants shows that an error was made in the most recent AMPS
Basic Maintenance Report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and under
the laws of the Commonwealth of Massachusetts, upon giving a Notice of
Redemption, as provided below, the Fund, at its option, may redeem AMPS of any
series, in whole or in part, out of funds legally available therefor, at the
Optional Redemption Price per share on any Dividend Payment Date; provided
that no share of AMPS may be redeemed at the option of the Fund during (a) the
Initial Dividend Period with respect to a series of shares or (b) a Non-Call
Period to which such share is subject. "Optional Redemption Price" means
$25,000 per share of AMPS plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption
plus any applicable redemption premium, if any, attributable to the
designation of a Premium Call Period. In addition, holders of AMPS may be
entitled to receive Additional Dividends in the event of redemption of such
AMPS to the extent provided herein. See "Description of AMPS--Dividends--
Additional Dividends." The Fund has the authority to redeem the AMPS for any
reason and may redeem all or part of the outstanding shares of AMPS if it
anticipates that the Fund's leveraged capital structure will result in a lower
rate of return to holders of Common Shares for any significant period of time
than that obtainable if the Common Shares were unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share,
shares of AMPS to the extent permitted under the 1940 Act and the laws of the
Commonwealth of Massachusetts, on a date fixed by the Board of Trustees, if
the Fund fails to maintain S&P Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount or to satisfy the 1940 Act AMPS Asset Coverage and
such failure is not cured on or before the AMPS Basic Maintenance Cure Date or
the 1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as
the case may be. "Mandatory Redemption Price" means $25,000 per share of AMPS
plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) to the date fixed for redemption. In addition, holders of
AMPS may be entitled to receive Additional Dividends in the event of
redemption of such AMPS to the extent provided herein. See "Description of
AMPS--Dividends--Additional Dividends." The number of AMPS to be redeemed will
be equal to the lesser of (a) the
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<PAGE>
minimum number of AMPS the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, together with
all other Preferred Shares subject to redemption or retirement, would result
in the Fund having S&P Eligible Assets and Moody's Eligible Assets each with
an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as the
case may be, on such Cure Date (provided that, if there is no such minimum
number of shares the redemption of which would have such result, all AMPS then
outstanding will be redeemed), and (b) the maximum number of AMPS, together
with all other Preferred Shares subject to redemption or retirement, that can
be redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of AMPS required to be redeemed in
accordance with the foregoing, the Fund shall allocate the number required to
be redeemed which would result in the Fund having S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount or satisfaction of the 1940 Act
AMPS Asset Coverage, as the case may be, pro rata among AMPS and other
Preferred Shares subject to redemption pursuant to provisions similar to those
set forth below; provided that, AMPS which may not be redeemed at the option
of the Fund due to the designation of a Non-Call Period applicable to such
shares (A) will be subject to mandatory redemption only to the extent that
other shares are not available to satisfy the number of shares required to be
redeemed and (B) will be selected for redemption in an ascending order of
outstanding number of days in the Non-Call Period (with shares with the lowest
number of days to be redeemed first) and by lot in the event of shares having
an equal number of days in such Non-Call Period. The Fund is required to
effect such a mandatory redemption not later than 35 days after such Cure
Date, except that if the Fund does not have funds legally available for the
redemption of all of the required number of AMPS which are subject to
mandatory redemption or the Fund otherwise is unable to effect such redemption
on or prior to 35 days after such Cure Date, the Fund will redeem those AMPS
which it was unable to redeem on the earliest practicable date on which it is
able to effect such redemption.
General. If AMPS of any series are to be redeemed, a notice of redemption
will be mailed to each record holder of such AMPS (initially Cede as nominee
of the Securities Depository) and to the Auction Agent not less than 17 nor
more than 30 days prior to the date fixed for the redemption thereof. Each
notice of redemption will include a statement setting forth: (i) the
redemption date, (ii) the aggregate number of AMPS of such series to be
redeemed, (iii) the redemption price, (iv) the place or places where AMPS of
such series are to be surrendered for payment of the redemption price, (v) a
statement that dividends on the shares to be redeemed will cease to accumulate
on such redemption date (except that holders may be entitled to Additional
Dividends) and (vi) the provision of the Certificate of Designation pursuant
to which such shares are being redeemed. The notice also will be published in
The Wall Street Journal. No defect in the notice of redemption or in the
mailing or publication thereof will affect the validity of the redemption
proceedings, except as required by applicable law.
In the event that less than all of the outstanding AMPS of any series are to
be redeemed, the shares to be redeemed will be selected by lot or such other
method as the Fund shall deem fair and equitable, and the results thereof will
be communicated to the Auction Agent. The Auction Agent will give notice to
the Securities Depository, whose nominee will be the record holder of all
AMPS, and the Securities Depository will determine the number of shares to be
redeemed from the account of the Agent Member of each Existing Holder. Each
Agent Member will determine the number of shares to be redeemed from the
account of each Existing Holder for which it acts as agent. An Agent Member
may select for redemption shares from the accounts of some Existing Holders
without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares of such
series, the particular shares to be redeemed shall be selected by the Fund by
lot or by such other method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Fund's custodian bank for the benefit of the Auction Agent, Deposit Securities
(with a right of substitution) having an aggregate Discounted Value (utilizing
in the case of S&P and S&P Exposure Period of 22 Business Days) equal to the
redemption payment for the AMPS as to which notice of redemption has been
given, with irrevocable instructions and authority to pay the redemption price
to the
49
<PAGE>
record holders thereof, then upon the date of such deposit or, if no such
deposit is made, upon such date fixed for redemption (unless the Fund shall
default in making payment of the redemption price), all rights of the holders
of such shares called for redemption will cease and terminate, except the
right of such holders to receive the redemption price thereof and any
Additional Dividends, but without interest, and such shares no longer will be
deemed to be outstanding. The Fund will be entitled to receive, from time to
time, the interest, if any, earned on such Deposit Securities deposited with
the Auction Agent, and the holders of any shares so redeemed will have no
claim to any such interest. Any funds so deposited which are unclaimed at the
end of one year from such redemption date will be repaid, upon demand, to the
Fund, after which the holders of the AMPS of such series so called for
redemption may look only to the Fund for payment thereof.
So long as any AMPS are held of record by the nominee of the Securities
Depository (initially Cede), the redemption price for such shares will be paid
on the redemption date to the nominee of the Securities Depository. The
Securities Depository's normal procedures now provide for it to distribute the
amount of the redemption price to Agent Members who, in turn, are expected to
distribute such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no AMPS shall
be subject to optional redemption (i) unless all dividends in arrears on the
outstanding AMPS, and all shares of beneficial interest of the Fund ranking on
a parity with the AMPS with respect to the payment of dividends or upon
liquidation, have been or are being contemporaneously paid or declared and set
aside for payment and (ii) if redemption thereof would result in the Fund's
failure to maintain Moody's Eligible Assets or S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of all series of AMPS will be entitled
to receive, out of the assets of the Fund available for distribution to
shareholders, before any distribution or payment is made upon any Common
Shares or any other shares of beneficial interest of the Fund ranking junior
in right of payment upon liquidation of AMPS, $25,000 per share together with
the amount of any dividends accumulated but unpaid (whether or not earned or
declared) thereon to the date of distribution, and after such payment the
holders of AMPS will be entitled to no other payments except for any
Additional Dividends. If such assets of the Fund shall be insufficient to make
the full liquidation payment on each outstanding series of AMPS and
liquidation payments on any other outstanding class or series of Preferred
Shares of the Fund ranking on a parity with the AMPS as to payment upon
liquidation, then such assets will be distributed among the holders of each
such series of AMPS and the holders of shares of such other class or series
ratably in proportion to the respective preferential amounts to which they are
entitled. After payment of the full amount of liquidation distribution to
which they are entitled, the holders of AMPS will not be entitled to any
further participation in any distribution of assets by the Fund except for any
Additional Dividends. A consolidation, merger or share exchange of the Fund
with or into any other entity or entities or a sale, whether for cash, shares
of stock, securities or properties, of all or substantially all or any part of
the assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of AMPS will be entitled to one vote per
share on each matter submitted to a vote of shareholders and will vote
together with holders of Common Shares as a single class.
In connection with the election of the Fund's trustees, holders of AMPS and
any other Preferred Shares, voting as a separate class, shall be entitled at
all times to elect two of the Fund's trustees, and the remaining trustees will
be elected by holders of Common Shares and AMPS and any other Preferred
Shares, voting together as a single class. In addition, if at any time
dividends on outstanding AMPS shall be unpaid in an amount equal
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<PAGE>
to at least two full years' dividends thereon or if at any time holders of any
Preferred Shares are entitled, together with the holders of AMPS, to elect a
majority of the trustees of the Fund under the 1940 Act, then the number of
trustees constituting the Board of Trustees automatically shall be increased
by the smallest number that, when added to the two trustees elected
exclusively by the holders of AMPS and any other Preferred Shares as described
above, would constitute a majority of the Board of Trustees as so increased by
such smallest number, and at a special meeting of shareholders which will be
called and held as soon as practicable, and at all subsequent meetings at
which trustees are to be elected, the holders of AMPS and any other Preferred
Shares, voting as a separate class, will be entitled to elect the smallest
number of additional trustees that, together with the two trustees which such
holders in any event will be entitled to elect, constitutes a majority of the
total number of trustees of the Fund as so increased. The terms of office of
the persons who are trustees at the time of that election will continue. If
the Fund thereafter shall pay, or declare and set apart for payment in full,
all dividends payable on all outstanding AMPS and any other Preferred Shares
for all past Dividend Periods, the additional voting rights of the holders of
AMPS and any other Preferred Shares as described above shall cease, and the
terms of office of all of the additional trustees elected by the holders of
AMPS and any other Preferred Shares (but not of the trustees with respect to
whose election the holders of Common Shares were entitled to vote or the two
trustees the holders of AMPS and any other Preferred Shares have the right to
elect in any event) will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding AMPS and any other Preferred Shares, voting as a
separate class, will be required to (i) authorize, create or issue any class
or series of shares ranking prior to the AMPS or any other series of Preferred
Shares with respect to the payment of dividends or the distribution of assets
on liquidation, or (ii) amend, alter or repeal the provisions of the
Declaration of Trust, whether by merger, consolidation or otherwise, so as to
adversely affect any of the contract rights expressly set forth in the
Declaration of Trust of holders of AMPS or any other Preferred Shares. To the
extent permitted under the 1940 Act, in the event more than one series of AMPS
is outstanding, the Fund shall not approve any of the actions set forth in
clause (i) or (ii) which adversely affects the contract rights expressly set
forth in the Declaration of Trust of a holder of a series of AMPS differently
than those of a holder of any other series of AMPS without the affirmative
vote of at least a majority of votes entitled to be cast by holders of the
AMPS of each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The Board of
Trustees, however, without shareholder approval, may amend, alter or repeal
any or all of the various rating agency guidelines described herein in the
event the Fund receives confirmation from the rating agencies that any such
amendment, alteration or repeal would not impair the ratings then assigned to
AMPS. Unless a higher percentage is provided for under "Description of Capital
Shares--Certain Provisions in the Declaration of Trust," the affirmative vote
of a majority of the votes entitled to be cast by holders of outstanding AMPS
and any other Preferred Shares, voting as a separate class, will be required
to approve any plan of reorganization (including bankruptcy proceedings)
adversely affecting such shares or any action requiring a vote of security
holders under Section 13(a) of the 1940 Act including, among other things,
changes in the Fund's investment objective or changes in the investment
restrictions described as fundamental policies under "Investment Objective and
Policies." The class vote of holders of AMPS and any other Preferred Shares
described above in each case will be in addition to a separate vote of the
requisite percentage of Common Shares and AMPS and any other Preferred Shares,
voting together as a single class, necessary to authorize the action in
question.
The foregoing voting provisions will not apply to any series of AMPS if, at
or prior to the time when the act with respect to which such vote otherwise
would be required shall be effected, such shares shall have been (i) redeemed
or (ii) called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
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<PAGE>
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding Common Shares and outstanding AMPS and any other Preferred Shares,
voting as a single class, and the majority of the outstanding AMPS and any
other Preferred Shares, voting as a separate class (which for this purpose and
under the 1940 Act means the lesser of (i) 67% of the shares of each class of
capital shares represented at a meeting at which more than 50% of the
outstanding shares of each class of capital shares are represented or (ii)
more than 50% of the outstanding shares of each class of capital shares). 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
interests therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 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 Florida
Municipal Bonds, Municipal Bonds and other debt securities and enter into
repurchase agreements in accordance with its investment objective, policies
and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Trustees without shareholder approval, provide that the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting shares of such company is owned by the
Fund, (ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding shares of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on Florida Municipal Bonds, Municipal
Bonds, U.S. Government obligations and related indices or otherwise in
connection with bona fide hedging activities and may purchase and sell Call
Rights to require mandatory tender for the purchase of related Florida
Municipal Bonds and Municipal Bonds.
52
<PAGE>
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.
For so long as AMPS are rated by Moody's, the Fund will not change these
additional investment restrictions unless it receives written confirmation
from Moody's that engaging in such transactions would not impair the rating
then assigned to the AMPS by Moody's.
The Fund has no intention to file a voluntary application for relief under
Federal bankruptcy law or any similar application under state law for so long
as the Fund is solvent and does not foresee becoming insolvent.
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.
TRUSTEES AND OFFICERS
Information about the Trustees, 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 Trustee, executive officer and the portfolio manager is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (66)--President and Trustee (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 and Director thereof since 1993; President of Princeton Services
from 1993 to 1997; Executive Vice President of ML & Co. since 1990.
James H. Bodurtha (54)--Trustee (2)--Director and Executive Vice President,
The China Business Group, Inc. since 1996; Chairman and Chief Executive
Officer, China Enterprise Management Corporation from 1993 to 1996; Chairman,
Berkshire Corporation since 1980; Partner, Squire, Sanders & Dempsey from 1980
to 1993.
Herbert I. London (59)--Trustee (2)--John M. Olin Professor of Humanities,
New York University since 1994 and Professor thereof since 1980; Dean,
Gallatin Division of New York University from 1972 to 1994; Distinguished
Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Trustee, Hudson
Institute since 1980 and President since 1997; Director, Damon Corp. from 1991
to 1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited
Partner, Hypertech LP in 1996.
Robert R. Martin (71)--Trustee (2)--Chairman and Chief Executive Officer,
Kinnard Investments, Inc. from 1990 to 1993; Executive Vice President, Dain
Bosworth from 1974 to 1989; Director, Carnegie Capital Management from 1977 to
1985 and Chairman thereof in 1979; Director, Securities Industry Association
from 1981 to 1982 and Public Securities Association from 1979 to 1980;
Chairman of the Board, WTC Industries, Inc. in 1994; Trustee, Northland
College since 1992.
Joseph L. May (69)--Trustee (2)--Attorney in private practice since 1984;
President, May and Athens Hosiery Mills Division, Wayne-Gossard Corporation
from 1954 to 1983; Vice President, Wayne-Gossard Corporation from 1972 to
1983; Chairman, The May Corporation (personal holding company) from 1972 to
1983; Director, Signal Apparel Co. from 1972 to 1989.
Andre F. Perold (46)--Trustee (2)--Professor, Harvard Business School since
1989 and Associate Professor from 1983 to 1989; Trustee, The Common Fund since
1989; Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
53
<PAGE>
Terry K. Glenn (58)--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
Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (54)--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 (38)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997 and Director of Taxation
of MLAM since 1990.
Kenneth A. Jacob (47)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Investment Adviser since 1984.
Robert A. DiMella, CFA (32)--Vice President and Portfolio Manager (1)(2)--
Vice President of MLAM since 1997; Assistant Vice President of MLAM from 1995
to 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995; Assistant
Portfolio Manager with Prudential Investment Advisors from 1992 to 1993.
Gerald M. Richard (49)--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 PFD since 1981
and Treasurer since 1984.
Patrick D. Sweeney (44)--Secretary(1)(2)--First Vice President of MLAM since
1997; Vice President of MLAM from 1990 to 1997.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Trustee or officer is a director, trustee, officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
In connection with the election of the Fund's Trustees, holders of AMPS and
other Preferred Shares, voting as a separate class, are entitled to elect two
of the Fund's Trustees, and the remaining Trustees will be elected by holders
of Common Shares and Preferred Shares voting together as a single class.
Messrs. Forbes and West have been designated as the Trustees to be elected by
holders of the Preferred Shares. See "Description of Capital Shares."
COMPENSATION OF TRUSTEES
The Fund pays each Trustee not affiliated with the Investment Adviser an
annual fee of $2,000 per year plus $200 per meeting attended, together with
such Trustee's actual out-of-pocket expenses relating to attendance at
meetings. The Fund also pays members of its Audit Committee, which consists of
all of the Trustees not affiliated with the Investment Adviser, an annual fee
of $2,000. The Chairman of the Audit Committee receives an additional annual
fee of $1,000.
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<PAGE>
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Trustees projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31, 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 Trustees.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF TRUSTEE FROM FUND FUND EXPENSE TRUSTEES
--------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
James H. Bodurtha(1)..... $4,500 None $148,500
Herbert I. London(1)..... $4,500 None $148,500
Robert R. Martin(1)...... $4,500 None $148,500
Joseph L. May(1)......... $4,500 None $148,500
Andre F. Perold(1)....... $4,500 None $148,500
</TABLE>
- --------
(1) In addition to the Fund, the Trustees serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Bodurtha (23 registered investment
companies consisting of 41 portfolios); Mr. London (23 registered
investment companies consisting of 41 portfolios); Mr. Martin (23
registered investment companies consisting of 41 portfolios); Mr. May (23
registered investment companies consisting of 41 portfolios); and Mr.
Perold (23 registered investment companies consisting of 41 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 Asset
Management Group of ML & Co. (which includes the Investment Adviser) acts as
the investment adviser for over 100 other registered investment companies and
offers portfolio management and portfolio analysis services to individuals and
institutional clients. As of August 1998, the Asset Management Group had a
total of approximately $473 billion in investment company and other portfolio
assets under management (approximately $38 billion of which were invested in
municipal securities). This amount includes assets managed for certain
affiliates of the Investment Adviser. The principal business address of the
Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the supervision of
the Board of Trustees of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees. The 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. Robert A. DiMella is the portfolio manager
for the Fund and is primarily responsible for the Fund's day-to-day
management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 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
Preferred Shares, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the Preferred Shares). For purposes of this
calculation, average weekly net assets are determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the last business day of a week with the net assets at the last
business day of the prior week.
55
<PAGE>
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Trustees of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, share certificates and shareholder reports,
charges of the custodian and the transfer and dividend disbursing agent and
registrar, fees and expenses with respect to the issuance of Preferred Shares,
Securities and Exchange Commission (the "Commission") fees, fees and expenses
of unaffiliated Trustees, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Accounting services
are provided to the Fund by the Investment Adviser, and the Fund reimburses
the Investment Adviser for its costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Trustees of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Trustees who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
its affiliate during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading of securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the
56
<PAGE>
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 provide supplemental
investment research to the Investment Adviser, including the Underwriter, 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 OTC
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 OTC market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including the Underwriter and its affiliates, in
connection with such transactions except that, pursuant to an exemptive order
obtained by the Investment Adviser, the Fund may engage in principal
transactions with the Underwriter in high quality, short-term, tax-exempt
securities. See "Investment Restrictions." An affiliated person of the Fund
may serve as its broker in OTC transactions conducted on an agency basis.
The Fund may also purchase tax-exempt debt instruments in individually
negotiated transactions with the issuer. 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.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (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
57
<PAGE>
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 Internal Revenue Service (the "IRS"), in a revenue ruling, held that
certain auction rate preferred stock would be treated as stock for Federal
income tax purposes. The terms of the AMPS are substantially similar, but not
identical, to the auction rate preferred stock discussed in the revenue
ruling, and in the opinion of Brown & Wood llp, counsel to the Fund, the AMPS
will constitute stock of the Fund and distributions with respect to AMPS
(other than distributions in redemption of AMPS subject to Section 302(b) of
the Code) will constitute dividends to the extent of the Fund's current and
accumulated earnings and profits as calculated for Federal income tax
purposes. Nevertheless, it is possible that the IRS might take a contrary
position, asserting, for example, that the AMPS constitute debt of the Fund.
If this position were upheld, the discussion of the treatment of distributions
below would not apply. Instead, distributions by the Fund to holders of AMPS
would constitute interest, whether or not they exceeded the earnings and
profits of the Fund, would be included in full in the income of the recipient
and would be taxed as ordinary income. Counsel believes that such a position,
if asserted by the IRS, would be unlikely to prevail.
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 which
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 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
shares of a RIC paying exempt-interest dividends, such as the Fund, is not
deductible for Federal income tax purposes to the extent attributable to
exempt-interest dividends. Each shareholder is advised to consult a tax
adviser with respect to whether exempt-interest dividends retain the exclusion
under Code Section 103(a) if such shareholder would be treated as a
"substantial user" or "related person" under Code Section 147(a) with respect
to property financed with the proceeds of an issue of "industrial development
bonds" or "private activity bonds," if any, held by the Fund.
The Fund has applied for a ruling from the Florida Department of Revenue
that shares of the Fund will be exempt from Florida intangible personal
property tax in the following year, if, on the last business day of any
calendar year, the Fund's assets consist solely of assets exempt from Florida
intangible personal property tax ("asset requirement"). Although there is no
assurance that the Florida Department of Revenue will issue a favorable ruling
on this issue, the Florida Department of Revenue has previously issued similar
rulings. The Florida Department of Revenue has the authority to revoke or
modify a previously issued ruling; however, if a ruling is revoked or
modified, the revocation or modification is prospective only. Prior to receipt
of the ruling from the Florida Department of Revenue, the Fund will rely on an
opinion of Florida counsel for the Fund, Holland & Knight LLP, stating that
Fund shares will be exempt from Florida intangible personal property tax if
the asset requirement is met. This opinion is based on existing Florida law
and interpretive authority which could be changed at any time retroactively.
While the opinion represents the best judgment of Holland & Knight LLP, the
legal conclusions reached therein are not binding on the Florida Department of
Revenue, and there is no assurance that the legal conclusions will not be
challenged by the Department of Revenue or in judicial or administrative
proceedings. Thus, under Florida counsel's opinion or if a favorable ruling is
issued, and if the asset requirement is met, shares of the Fund owned by
Florida residents will be exempt from Florida intangible personal property
tax. Assets exempt from Florida intangible personal property tax include
Florida Municipal Bonds, obligations of the United States Government or its
agencies, and cash.
58
<PAGE>
The Fund may from time to time hold assets that are not exempt from Florida
intangible personal property tax. The Fund may not be able to fully dispose of
all of its assets subject to Florida intangible personal property tax by the
last business day of the calendar year, thus subjecting shares of the Fund to
Florida intangible personal property tax. If shares of the Fund are subject to
Florida intangible personal property tax because the asset requirement is not
met, only that portion of the value of Fund shares equal to the portion of the
net asset value of the Fund that is attributable to obligations of the United
States Government will be exempt from taxation. The Fund will attempt to
monitor its portfolio so that on the last business day of each calendar year
the Fund's assets consist solely of assets exempt from Florida intangible
personal property tax.
Dividends paid by the Fund to individuals who are Florida residents are not
subject to personal income taxation by Florida, because Florida does not
impose a personal income tax. Distributions of investment income and capital
gains by the Fund will be subject to Florida corporate income taxes, state
taxes in states other than Florida and local taxes in cities other than those
in Florida. Shareholders not subject to taxation by Florida do not benefit
from the fact that shares of the Fund will be exempt from the Florida
intangible personal property tax.
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 are
considered 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 created additional
categories of capital gains taxable at different rates. Additional legislation
eliminates the highest 28% category for most sales of capital assets occurring
after December 31, 1997. 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 Fund, whether from exempt-interest 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 which 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 IRS has taken the position in a revenue ruling that if a RIC has two or
more classes of shares, it may designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including exempt interest and net long-term
capital gains (including the additional categories of capital gains). A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC during such
year that was paid to such class. Thus, the Fund is required to allocate a
portion of its net capital gains (including the additional categories of
capital gains) and other taxable income to the AMPS of each series. The Fund
generally will notify the Auction Agent of the amount of any net capital gains
and other taxable income to be included in any dividend on AMPS prior to the
Auction establishing the Applicable Rate for such dividend. Except for the
portion of any dividend that it informs the Auction Agent will be treated as
capital gains or other taxable income, the Fund anticipates
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<PAGE>
that the dividends paid on the AMPS will constitute exempt-interest dividends.
The amount of net capital gains and ordinary income allocable to AMPS (the
"taxable distribution") will depend upon the amount of such gains and income
realized by the Fund and the total dividends paid by the Fund on Common Shares
and shares of the two series of AMPS during a taxable year, but the taxable
distribution generally is not expected to be significant.
In the opinion of Brown & Wood llp, counsel to the Fund, under current law
the manner in which the Fund intends to allocate items of tax-exempt income,
net capital gains (including additional categories of capital gains), and
other taxable income, if any, among Common Shares and shares of the two series
of AMPS will be respected for Federal income tax purposes. However, the tax
treatment of Additional Dividends may affect the Fund's calculation of each
class' allocable share of capital gains and other taxable income. See "Tax
Treatment of Additional Dividends." In addition, there is currently no direct
guidance from the IRS or other sources specifically addressing whether the
Fund's method for allocating tax-exempt income, net capital gains (including
additional categories of capital gain), and other taxable income among Common
Shares and shares of the two series of AMPS will be respected for Federal
income tax purposes, and it is possible that the IRS could disagree with
counsel's opinion and attempt to reallocate the Fund's net capital gains or
other taxable income. In the event of a reallocation, some of the dividends
identified by the Fund as exempt-interest dividends to holders of AMPS may be
recharacterized as additional capital gains or other taxable income. In the
event of such recharacterization, the Fund would not be required to make
payments to such shareholders to offset the tax effect of such reallocation.
In addition, a reallocation may cause the Fund to be liable for income tax and
excise tax on any reallocated taxable income. Brown & Wood llp has advised the
Fund that, in its opinion, if the IRS were to challenge in court the Fund's
allocations of income and gain, the IRS would be unlikely to prevail. A holder
should be aware, however, that the opinion of Brown & Wood llp represents only
its best legal judgment and is not binding on the IRS or the courts.
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 "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference" which could subject certain investors in such
bonds, including shareholders of the Fund, to an 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 which constitutes an item of tax preference
for alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings", which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay an alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
If at any time when AMPS are outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of Common Shares until the asset coverage is
restored. See "Description of AMPS--Restrictions on Dividends and Other
Payments." This may prevent the Fund from distributing at least 90% of its net
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, and under certain circumstances
will be required to, redeem AMPS in order to maintain or restore the requisite
asset coverage and avoid the adverse consequences to the Fund and its
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<PAGE>
shareholders of failing to qualify as a RIC. See "Description of AMPS--
Redemption." There can be no assurance, however, that any such action would
achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of Preferred Shares that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such Preferred
Shares are "preferential" under the Code and therefore not eligible for the
dividends paid deduction. The Fund intends to issue Preferred Shares that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the IRS to that effect. If the Fund
ultimately relies solely on a legal opinion when it issues such Preferred
Shares, there is no assurance that the IRS would agree that dividends on the
Preferred Shares are not preferential. If the IRS successfully disallowed the
dividends paid deduction for dividends on the Preferred Shares, the Fund could
lose the benefit of the special treatment afforded RICs under the Code. In
this case, dividends paid by the Fund would not be exempt from Federal income
taxes. Additionally, the Fund would be subject to the alternative minimum tax.
Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
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 ADDITIONAL DIVIDENDS
If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of AMPS who are subject to the Retroactive Taxable
Allocation. See "Description of AMPS--Dividends--Additional Dividends." The
Federal income tax consequences of Additional Dividends under existing law are
uncertain. The Fund intends to treat a holder as receiving a dividend
distribution in the amount of any Additional Dividend only as and when such
Additional Dividend is paid. An Additional Dividend generally will be
designated by the Fund as an exempt-interest dividend except as otherwise
required by applicable law. However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year for which
the Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.
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.
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Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
FLORIDA TAXATION OF THE FUND
If the Fund does not have a taxable nexus to Florida, such as through the
location within the state of the Fund's activities or those of the Investment
Adviser, under present Florida law, the Fund is not subject to Florida
corporate income taxation. Additionally, if the Fund's assets do not have a
taxable situs in Florida on January 1 of each calendar year, the Fund will not
be subject to Florida intangible personal property tax. If the Fund has a
taxable nexus to Florida or the Fund's assets have a taxable situs in Florida,
the Fund will be subject to Florida taxation.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and Florida tax laws presently
in effect. For the complete provisions, reference should be made to the
pertinent Code sections, the Treasury Regulations promulgated thereunder and
Florida tax laws. The Code and the Treasury Regulations, as well as the
Florida tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
NET ASSET VALUE
Net asset value per Common Share is determined as of 15 minutes after the
close of business on the New York Stock Exchange (the "NYSE") (generally, 4:00
p.m. New York time) on the last Business Day of each week. For purposes of
determining the net asset value of a Common Share, the value of the securities
held by the Fund plus any cash or other assets (including interest accrued but
not yet received) minus all liabilities (including accrued expenses) and the
aggregate liquidation value of the outstanding AMPS is divided by the total
number of Common Shares outstanding at such time. Expenses, including the fees
payable to the Investment Adviser, are accrued daily.
The Florida Municipal Bonds and Municipal Bonds in which the Fund invests
are traded primarily in the OTC markets. In determining net asset value, the
Fund utilizes the valuations of portfolio securities furnished by a pricing
service approved by the Board of Trustees. The pricing service typically
values portfolio securities at the bid price or the yield equivalent when
quotations are readily available. Florida Municipal Bonds and Municipal Bonds
for which quotations are not readily available are valued at fair market value
on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Trustees. The Board of Trustees has determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Positions in futures contracts are
valued at closing prices for such contracts established by the exchange on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Trustees.
The Fund determines and makes available for publication the net asset value
of its Common Shares weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
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<PAGE>
DESCRIPTION OF CAPITAL SHARES
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, par value $.10 per share. The Board of Trustees may authorize
separate classes of shares together with such designations and powers,
preferences and rights, qualifications, limitations and restrictions as may be
determined from time to time by the Trustees. Pursuant to such authority, the
Trustees have authorized the issuance of an unlimited number of Common Shares
together with 1,000,000 Preferred Shares. In connection with the offering
described herein, the Trustees of the Fund have authorized the issuance of
AMPS. For a description of the AMPS, see "Description of AMPS."
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust of the Fund contains an express
disclaimer of shareholder liability for acts or obligations of the Fund and
provides for indemnification and reimbursement of expenses out of the Fund's
property for any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations. Given the nature of the Fund's assets
and operations, the possibility of the Fund being unable to meet its
obligations is remote and, in the opinion of Massachusetts counsel to the
Fund, the risk to Fund shareholders is remote.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to any shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or
her own bad faith, willful misfeasance, gross negligence, or reckless
disregard of their duties. It also provides that all third persons shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The following table shows the amount of (i) capital shares authorized, (ii)
capital shares held by the Fund for its own account and (iii) capital shares
outstanding for each class of authorized securities of the Fund as of October
, 1998.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
AMOUNT HELD (EXCLUSIVE OF
BY FUND AMOUNT HELD
AMOUNT FOR ITS OWN BY FUND FOR ITS
TITLE OF CLASS AUTHORIZED ACCOUNT OWN ACCOUNT)
- -------------- ---------- ----------- ---------------
<S> <C> <C> <C>
Common Shares............................ Unlimited -0-
Preferred Shares......................... -0- -0-
</TABLE>
COMMON SHARES
Holders of Common Shares are entitled to share equally in dividends declared
by the Board of Trustees payable to holders of Common Shares and in the net
assets of the Fund available for distribution to holders of Common Shares
after payment of the preferential amounts payable to holders of any
outstanding Preferred Shares. Neither holders of Common Shares nor holders of
Preferred Shares have pre-emptive or conversion rights and Common Shares are
not redeemable. The outstanding Common Shares are fully paid and non-
assessable.
Holders of Common Shares are entitled to one vote for each share held and
will vote with the holders of any outstanding AMPS or other Preferred Shares
on each matter submitted to a vote of holders of Common Shares, except as
described under "Description of AMPS--Voting Rights."
Shareholders are entitled to one vote for each share held. The Common
Shares, AMPS and any other Preferred Shares do not have cumulative voting
rights, which means that the holders of more than 50% of the
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<PAGE>
Common Shares, AMPS and any other Preferred Shares voting for the election of
Trustees can elect all of the Trustees standing for election by such holders,
and, in such event, the holders of the remaining shares of Common Shares, AMPS
and any other Preferred Shares will not be able to elect any of such Trustees.
So long as any AMPS or any other Preferred Shares are outstanding, holders
of Common Shares will not be entitled to receive any dividends of or other
distributions from the Fund unless all accumulated dividends on outstanding
AMPS and any other Preferred Shares have been paid, and unless asset coverage
(as defined in the 1940 Act) with respect to such AMPS and any other Preferred
Shares would be at least 200% after giving effect to such distributions. See
"Description of AMPS--Restrictions on Dividends and Other Payments."
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The Common Shares commenced trading on the NYSE on September , 1998. At
, 1998, the net asset value per Common Share was $ , and the closing
price per Common Share on the NYSE was $ .
PREFERRED SHARES
Pursuant to the Fund's Declaration of Trust, the Fund is authorized to issue
up to 1,000,000 Preferred Shares. Under the Certificate of Designation, the
Fund is authorized to issue an aggregate of Preferred Shares designated
AMPS. See "Description of AMPS." Under the 1940 Act, the Fund is permitted to
have outstanding more than one series of Preferred Shares as long as no single
series has priority over another series as to the distribution of assets of
the Fund or the payment of dividends. Neither holders of Common Shares nor
holders of Preferred Shares have pre-emptive rights to purchase any AMPS or
any other Preferred Shares that might be issued. It is anticipated that the
net asset value per share of the AMPS will equal its original purchase price
per share plus accumulated dividends per share.
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
The Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A trustee may be removed
from office with or without cause but only by vote of the holders of at least
66 2/3% of the votes entitled to be voted on the matter. A trustee elected by
all of the holders of shares of beneficial interest may be removed only by
action of such holders, and a trustee elected by the holders of AMPS and any
other Preferred Shares may be removed only by action of holders of AMPS and
any other Preferred Shares.
In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding shares, then entitled to
be voted, voting as a single class, to approve, adopt or authorize the
following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other entities,
(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 at least
two-thirds of the entire Board of Trustees, in which case the affirmative
vote of the holders of a majority of the Fund's outstanding shares entitled
to be voted on the matter, voting as a single class, is required. Such
approval, adoption or authorization of the foregoing would also require the
favorable vote of the holders of at least a majority of the Preferred
Shares then entitled to be voted, including the AMPS, voting as a separate
class where such action would adversely affect the rights of the holders of
Preferred Shares.
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<PAGE>
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Declaration of Trust. The amendment would
have to be declared advisable by the Board of Trustees prior to its submission
to shareholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding capital shares
(including the AMPS and any other Preferred Shares) entitled to be voted on
the matter, voting as a single class (or a majority of such shares if the
amendment was previously approved, adopted or authorized by at least two-
thirds of the total number of Trustees fixed in accordance with the by-laws),
and, the affirmative vote of at least a majority of outstanding Preferred
Shares of the Fund (including the AMPS), voting as a separate class. Such a
vote also would satisfy a separate requirement in the 1940 Act that the change
be approved by the shareholders. Shareholders of an open-end investment
company may require the company to redeem their common shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption.
Conversion to an open-end investment company would also require redemption
of all outstanding Preferred Shares (including the AMPS) and would require
changes in certain of the Fund's investment policies and restrictions, such as
those relating to the issuance of senior securities, the borrowing of money
and the purchase of illiquid securities.
The Board of Trustees has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under the
laws of the Commonwealth of Massachusetts or the 1940 Act, are in the best
interests of shareholders generally. Reference should be made to the
Declaration of Trust on file with the Commission for the full text of these
provisions.
CUSTODIAN
The Fund's securities and cash are held under a custody agreement with State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of a
Purchase Agreement with the Fund and the Investment Adviser, to purchase from
the Fund all of the AMPS of each series offered hereby. 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
AMPS to the public at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriter may allow, and such dealers may
reallow, a discount not in excess of $ per share to other dealers. After
the initial public offering, the public offering price, concession and
discount may be changed. The sales load of $ per share is equal to % of
the initial public offering price. Investors must pay for any AMPS purchased
in the initial public offering on or before October , 1998.
The Underwriter has agreed to pay the Fund an amount to cover expenses
incurred in connection with the issuance and sale of the AMPS offered hereby
(estimated to be $ ) and other expenses.
The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"Description of AMPS--The Auction--General--Broker-Dealer Agreements" and will
be entitled to fees for services as a Broker-Dealer as set forth under
"Description of AMPS--Broker-Dealers." The Underwriter also may provide
information to be used in ascertaining the Reference Rate.
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<PAGE>
The Fund anticipates that the Underwriter from time to time may act as a
broker in connection with the execution of the Fund's 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.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities including liabilities under the Securities Act of
1933, as amended.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the AMPS
will be IBJ Schroder Bank & Trust Company, One State Street, New York, New
York 10004. The transfer agent, dividend disbursing agent and shareholder
servicing agent for the Common Shares is State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110.
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby will be
passed upon for the Fund and the Underwriter by Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557. Brown & Wood LLP will rely as to
matters of Massachusetts law on the opinion of Bingham Dana LLP, Boston,
Massachusetts. Certain information under the caption "Taxes" relating to
matters of Florida law will be passed upon for the Fund and the Underwriter by
Holland & Knight LLP, Tampa, Florida.
EXPERTS
The statement of assets, liabilities and capital of the Fund included in
this Prospectus has been so included in reliance on the report of
independent auditors, and on their authority as experts in auditing and
accounting. The selection of independent auditors is subject to ratification
by shareholders of the Fund.
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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 AMPS 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 Year 2000 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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<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholder of
MuniHoldings Florida Insured Fund III:
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Florida Insured Fund III as of , 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 required that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and 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, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniHoldings
Florida Insured Fund III as of , 1998 in conformity with generally
accepted accounting principles.
Princeton, New Jersey
, 1998
68
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND III
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 1998
<TABLE>
<S> <C>
ASSETS
Cash............................................................. $100,005
Deferred organization expenses and offering expenses (Note 1)....
--------
Total assets...................................................
--------
LIABILITIES
Liabilities and accrued expenses (Note 1)........................
--------
NET ASSETS......................................................... $100,005
========
CAPITAL
Common Shares, par value $.10 per share; unlimited shares
authorized; 6,667 shares issued and outstanding (Note 1)........ $ 667
Paid-in Capital in excess of par................................. 99,338
--------
Total Capital--Equivalent to $15.00 net asset value
per common share (Note 1)..................................... $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was organized under the laws of the Commonwealth of Massachusetts
on June 10, 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 Common
Shares for $100,005 on , 1998. The general partner of the Investment
Adviser is an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a five-year period beginning with the commencement of operations of the Fund.
Direct costs relating to the public offering of the Fund's shares will be
charged to capital at the time of issuance of shares. In accordance with
Statement of Position 98-S, unamortized organization costs existing at June 1,
1999 (start of the Fund's new fiscal year) will be charged to expense at that
date. At the present time, management believes this change will not have any
material impact to the operations of the Fund.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.55 of 1% of
the average weekly net assets, including proceeds from the sale of preferred
shares. 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 shares.
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.
69
<PAGE>
GLOSSARY
" "AA' (AA) Composite Commercial Paper Rate," on any Valuation Date, means
(i) the Interest Equivalent of the rate on commercial paper placed on behalf
of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or
the equivalent of such rating by another nationally recognized statistical
rating organization, as such rate is made available on a discount basis or
otherwise by the Federal Reserve Bank of New York for the Business Day
immediately preceding such date, or (ii) in the event that the Federal Reserve
Bank of New York does not make available such a rate, then the arithmetic
average of the Interest Equivalent of the rate on commercial paper placed on
behalf of such issuers, as quoted on a discount basis or otherwise by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on
the Business Day immediately preceding such date. If one of the Commercial
Paper Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7
or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 60-day and
90-day rates on such commercial paper; (iv) 85 or more days but fewer than 99
days, such rate shall be the Interest Equivalent of the 90-day rate on such
commercial paper; (v) 99 or more days but fewer than 120 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 90-day and 120-day
rates on such commercial paper; (vi) 120 or more days but fewer than 141 days,
such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate
on such commercial paper.
"Additional Dividend" has the meaning set forth on page of this
Prospectus.
"Agent Member" means the member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of AMPS or on behalf of
a Potential Beneficial Owner.
"AMPS" means the Auction Market Preferred Shares, Series A and the Auction
Market Preferred Shares, Series B, each with a par value of $.10 per share and
a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared),
of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page of this
Prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page of
this Prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page of this
Prospectus.
"Anticipation Notes" means the following Florida Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page of this
Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Trustees of the Fund or a
70
<PAGE>
duly authorized committee thereof enters into an agreement with the Fund to
follow the Auction Procedures for the purpose of determining the Applicable
Rate and to act as transfer agent, registrar, dividend disbursing agent and
redemption agent for the AMPS.
"Auction Agent Agreement" means the agreement entered into between the Fund
and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for the purpose of determining the
Applicable Rate.
"Auction Date" has the meaning set forth on page of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Appendix D to this Prospectus.
"Available AMPS" has the meaning specified in Paragraph 10(d)(i) of the
Auction Procedures.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Bid" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Bidder" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Board of Trustees" or "Board" means the Board of Trustees of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker-Dealer, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares of
AMPS initially will be registered.
"Certificate of Designation" means the Certificate of Designation of the
Fund specifying the powers, preferences and rights of the AMPS.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Fund
from time to time may appoint or, in lieu thereof, their respective affiliates
and successors.
"Common Shares" means the Common Shares, par value $.10 per share, of the
Fund.
"Date of Original Issue" means, with respect to each share of AMPS, the date
on which such share first is issued by the Fund.
"Declaration" means the Declaration of Trust, as amended and supplemented
(including the Certificate of Designation) of the Fund.
71
<PAGE>
"Deposit Securities" means cash and Florida Municipal Bonds and Municipal
Bonds rated at least A2 (having a remaining maturity of 12 months or less), P-
1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months
or less), A-1+ or SP-1+ by S&P.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount Factor,
as the case may be.
"Discounted Value" of any asset of the Fund means (i) with respect to an S&P
Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the lower of par and the quotient of the market value thereof divided
by the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page of this
Prospectus.
"Dividend Period" has the meaning set forth on page of this Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of AMPS in the
records of the Auction Agent.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Florida Municipal Bonds" has the meaning set forth on page of this
Prospectus.
"Forward Commitment" has the meaning set forth on page of this
Prospectus.
"Fund" means MuniHoldings Florida Insured Fund III, a Massachusetts business
trust that is the issuer of the AMPS.
"Hold Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Initial Dividend Payment Date" has the meaning, with respect to each series
of AMPS, set forth on page of this Prospectus.
"Initial Dividend Period" means, with respect to the AMPS, the period from
and including the Date of Original Issue to but excluding the Initial Dividend
Payment Date for each series of AMPS.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing
security.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page of this
Prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning specified under "Description of
AMPS--The Auction--Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders" in the Prospectus.
72
<PAGE>
"Maximum Potential Additional Dividend Liability" has the meaning set forth
on page of this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page of this
Prospectus.
"Moody's Eligible Assets" has the meaning set forth on page of this
Prospectus.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and initially shall be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth on page of this
Prospectus.
"Moody's Volatility Factor" means 272% as long as there has been no increase
enacted to the Marginal Tax Rate. If such an increase is enacted but not yet
implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION>
% CHANGE IN MOODY'S
MARGINAL TAX RATE VOLATILITY FACTOR
- ---------------------------------------------- -----------------
<S> <C>
less than or equal to 5%.............. 292%
greater than 5% but less than or equal to 10%.............. 313%
greater than 10% but less than or equal to 15%.............. 338%
greater than 15% but less than or equal to 20%.............. 364%
greater than 20% but less than or equal to 25%.............. 396%
greater than 25% but less than or equal to 30%.............. 432%
greater than 30% but less than or equal to 35%.............. 472%
greater than 35% but less than or equal to 40%.............. 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.
"Municipal Bonds" has the meaning set forth on page of this Prospectus.
"Municipal Index" has the meaning set forth on page of this Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page of this
Prospectus.
"1940 Act Cure Date" has the meaning set forth on page of this
Prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page of this
Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page of this
Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page of
this Prospectus.
"Optional Redemption Price" has the meaning set forth on page of this
Prospectus.
"Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Policy" means an insurance policy purchased by the Fund which guarantees
the payment of principal and interest on specified Florida Municipal Bonds or
Municipal Bonds during the period in which such Florida Municipal Bonds or
Municipal Bonds are owned by the Fund; provided, however, that, as long as the
AMPS are rated by Moody's and S&P, the Fund will not obtain any Policy unless
Moody's and S&P advise the Fund in writing that the purchase of such Policy
will not adversely affect their then-current rating on the AMPS.
73
<PAGE>
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of AMPS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional AMPS.
"Potential Holder" means any Broker-Dealer or any such other person as may
be permitted by the Fund, including any Existing Holder, who may be interested
in acquiring AMPS (or, in the case of an Existing Holder, additional AMPS).
"Preferred Shares" means Preferred Shares, par value $.10 per share, of the
Fund.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Receivables for Florida Municipal Bonds Sold." for purposes of determining
S&P Eligible Assets, has the meaning set forth on page of this Prospectus.
"Receivables for Florida Municipal Bonds or Municipal Bonds Sold," for
purposes of determining Moody's Eligible Assets, has the meaning set forth on
page of this Prospectus.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable
"AA" Composite Commercial Paper Rate and the Taxable Equivalent of the Short
Term Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period,
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on page
of this Prospectus.
"Response" has the meaning set forth on page of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page of
this Prospectus.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.
"S&P Discount Factor" has the meaning set forth on page of this
Prospectus.
"S&P Eligible Assets" has the meaning set forth on page of this
Prospectus.
"S&P Exposure Period" means the maximum period of time following a Valuation
Date, including the Valuation Date and the AMPS Basic Maintenance Cure Date,
that the Fund has under the Certificate of Designation to cure any failure to
maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount.
"S&P Hedging Transactions" has the meaning set forth on page of this
Prospectus.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" has the meaning set forth on page of this
Prospectus.
"Special Dividend Period" has the meaning set forth on page of this
Prospectus.
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<PAGE>
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of the Fund, after consultation with the
Auction Agent and the Broker-Dealers, during which the AMPS subject to such
Dividend Period shall not be subject to redemption at the option of the Fund
and (ii) a period (a "Premium Call Period"), consisting of a number of whole
years and determined by the Board of Trustees of the Fund, after consultation
with the Auction Agent and the Broker-Dealers, during each year of which the
AMPS subject to such Dividend Period shall be redeemable at the Fund's option
at a price per share equal to $25,000 plus accumulated but unpaid dividends
plus a premium expressed as a percentage of $25,000, as determined by the
Board of Trustees of the Fund after consultation with the Auction Agent and
the Broker-Dealers.
"Submission Deadline" has the meaning specified in Subsection 10(a)(x) of
the Auction Procedures.
"Submitted Bid" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Hold Order" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Submitted Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Sell Order" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, or its respective affiliates and
successors, after consultation with the Fund, to act as a substitute rating
agency or substitute rating agencies, as the case may be, to determine the
credit ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning specified in Subsection 10(d)(i)
of the Auction Procedures.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date means
90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index"), or any successor index made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M., New
York City time, on such date by Kenny Information Systems Inc. or any
successor thereto, based upon 30-day yield evaluations at par of bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information
Systems Inc. or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57(a) (5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the Marginal Tax Rate (expressed as a decimal); provided, however, that
if the Kenny Index is not made so available by 8:30 A.M., New York City time,
on such date by Kenny Information Systems Inc. or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of
(A) the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal). The
Fund may not utilize a successor index to the Kenny Index unless Moody's and
S&P provide the Fund with written confirmation that the use of such successor
index will not adversely affect the then-current respective Moody's and S&P
ratings of the AMPS.
"Treasury Bonds" has the meaning set forth on page of this Prospectus.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so
75
<PAGE>
calculated is not available, the Alternate Treasury Bill Rate on such date.
"Alternate Treasury Bill Rate" on any date means the Interest Equivalent of
the yield as calculated by reference to the arithmetic average of the bid
price quotations of the actively traded Treasury Bill with a maturity most
nearly comparable to the length of the related Dividend Period, as determined
by bid price quotations as of any time on the Business Day immediately
preceding such date, obtained from at least three recognized primary U.S.
Government securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of
New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government securities dealers selected by
the Auction Agent.
"Valuation Date" has the meaning set forth on page of this Prospectus.
"Variation Margin" means, in connection with an outstanding financial
futures contract owned or sold by the Fund, the amount of cash or securities
paid to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such financial futures contract fluctuates.
"Winning Bid Rate" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
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<PAGE>
APPENDIX A
ECONOMIC AND OTHER CONDITIONS IN FLORIDA
The following information is a brief summary of factors affecting the
economy of the State of Florida (the "State") and does not purport to be a
complete description of such factors. Other factors will affect issuers. The
summary is based upon one or more publicly available offering statements
relating to debt offerings of the State. The Fund has not independently
verified the information.
Throughout the 1980s, the State's unemployment rate has, generally, tracked
below that of the nation. In the nineties, the trend was reversed, until 1995
and 1996, when the State's unemployment rate again tracked below the national
average. The State's unemployment rate is projected to be 5.3% in 1996-97 and
1997-98. The average rate of unemployment for both the State and the nation,
coincidentally, since 1987 is 6.2%. (The projections set forth in this
Appendix were obtained from a report, prepared by the Revenue and Economic
Analysis Unit of the Executive Office of the Governor for the State of
Florida, contained within a recent official statement, dated August 4, 1997,
for a State of Florida debt offering.)
Personal income in the State has grown at a strong pace and has generally
outperformed both the nation as a whole and the Southeast in particular. From
1985 through 1995, the State's per capita income rose an average 5.0% per
year, while the national per capita income increased an average of 4.9%. Real
personal income in Florida is estimated to increase 4.7% in both 1996-97 and
1997-98 while real personal income per capita is projected to grow at 2.3% in
1996-97 and 2.4% in 1997-98.
The structure of Florida's income differs from that of the nation and the
southeast. Because Florida has a proportionally greater retirement age
population, property income (dividends, interest, and rent) and transfer
payments (social security and pension benefits, among other sources of income)
are a relatively more important source of income. For example, Florida's
employment income in 1995 represented 60.6% of total personal income, while
the nation's share of total personal income in the form of wages and salaries
and other labor benefits was 70.8%. Florida's income is dependent upon
transfer payments controlled by the federal government.
The State's strong population growth is one fundamental reason why its
economy has typically performed better than the nation as a whole. In 1980,
the State was ranked seventh among the 50 states with a population of 9.7
million people. The State has grown dramatically since then and as of April 1,
1996 ranked fourth with an estimated population of 14.4 million. For the years
1987 through 1996, the State's average annual rate of population increase has
been approximately 2.3% as compared to an approximately 1.0% for the nation as
a whole. While annual growth in the State's population is expected to decline
somewhat, it is still expected to grow close to 230,000 new residents per year
throughout the 1990s.
Tourism is one of the State's most important industries. 42.9 million people
visited the State in 1995, according to the Florida Department of Commerce.
Tourism arrivals are expected to increase by 3.1% this fiscal year and 4.7%
next year. By the end of the fiscal year, 42.7 million domestic and
international tourists are expected to have visited the State. In 1997-98,
tourist arrivals should approximate 44.7 million. Florida tourism appears to
be recovering from the effects of negative publicity regarding crime against
tourists in the state. Factors such as "product maturity" of a Florida
vacation package, higher prices, and more aggressive marketing by competing
vacation destinations, could contribute to a tourism slowdown.
Florida's dependency on the highly cyclical construction and construction-
related manufacturing sectors has declined. For example, total contract
construction employment as a share of total non-farm employment was a little
over 5% in 1996. Florida, nevertheless, has had a dynamic construction
industry, with single and multi-family housing starts accounting for
approximately 8.1% of total U.S. housing starts, while the State's population
was 5.5% of the nation's population in 1996. Total housing starts were 118,400
in 1996. A driving force behind Florida's construction industry is its rapid
growth in population. In Florida, single and multi-family housing starts in
1996-97 are projected to reach a combined level of 116,100, while increasing
115,500 next year. Multi-family
A-1
<PAGE>
starts have been slow to recover, but are showing stronger growth now and
should maintain a level of nearly 30,300 in 1996-97 and 30,900 in 1997-98.
Total construction expenditures are forecasted to increase 7.6% in this year
and increase 3.1% next year. This represents a slower pace of growth than what
was originally projected.
Financial operations of the State covering all receipts and expenditures are
maintained through the use of four funds--the General Revenue Fund, Trust
Funds, the Working Capital Fund, and beginning in fiscal year 1994-95, the
Budget Stabilization Fund. In fiscal year 1995-96, the State derived
approximately 66% of its total direct revenues to these funds from State taxes
and fees. Federal funds and other special revenues accounted for the remaining
revenues. Major sources of tax revenues to the General Revenue Fund are the
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax, which amounted to 69%, 7%, 4% and 4%, respectively, of total
General Revenue Funds available. State expenditures are categorized for budget
and appropriation purposes by type of fund and spending unit, which are
further subdivided by line item. In fiscal year 1995-96, expenditures from the
General Revenue Fund for education, health and welfare, and public safety
amounted to approximately 51%, 31% and 14%, respectively, of total General
Revenues.
The Sales and Use Tax is the greatest single source of tax receipts in the
State. For the State fiscal year ended June 30, 1996, receipts from this
source were $11,461 million, an increase of 7.4% from fiscal year 1994-95. The
second largest source of State tax receipts is the Motor Fuel Tax. The
estimated collections from this source during the fiscal year ending June 30,
1996, were $1,923.0 million. Alcoholic beverage tax revenues totalled $441.5
million for the State fiscal year ending June 30, 1996, an increase of $4.2
million from the previous year. The receipts of corporate income tax for the
fiscal year ended June 30, 1996 were $1,162.7 million, an increase of 9.3%
from fiscal year 1994-95. Gross Receipt tax collections for fiscal year 1995-
96 totalled $543.3 million, an increase of 6.9% over the previous fiscal year.
Documentary stamp tax collections totalled $775.2 million during fiscal year
1995-96, posting an 11.5% increase from the previous fiscal year. The
intangible personal property tax is a tax on stocks, bonds, notes,
governmental leaseholds, certain limited partnership interests, mortgages and
other obligations secured by liens on Florida realty, and other intangible
personal property. Total collections from intangible personal property taxes
were $895.9 million during the fiscal year ending June 30, 1996, a 9.5%
increase from the previous fiscal year. Severance taxes totalled $77.2 million
during fiscal year 1995-96, up 26.1% from the previous fiscal year. In
November 1986, the voters of the State approved a constitutional amendment to
allow the State to operate a lottery. Fiscal year 1995-96 produced ticket
sales of $2.07 billion of which education received approximately $788.1
million.
For fiscal year 1997-98 the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $17,553.9 million, a 5.6%
increase over 1996-97. The $16,321.6 million in estimated revenues represent a
4.8% increase over the analogous figure in 1996. With combined General
Revenue, Working Capital Fund and Budget Stabilization Fund appropriations at
$16,716.5 million, unencumbered reserves at the end of 1997-98 are estimated
at $837.4 million.
The State Constitution does not permit a state or local personal income tax.
An amendment to the State Constitution by the electors of the State would be
required in order to impose a personal income tax in the State.
Property valuations for homestead property are subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption is limited to 3% or the change in the Consumer Price Index,
whichever is less. If the property changes ownership or homestead status, it
is to be re-valued at full just value on the next tax roll. Although the
impact of the growth cap cannot be determined, it may have the effect of
causing local government units in the State to rely more on non-ad valorem tax
revenues to meet operating expenses and other requirements normally funded
with ad valorem tax revenues.
An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the
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average annual rate of growth in State personal income over the most recent
twenty quarters times the State revenues allowed under the amendment for the
prior fiscal year. State revenues collected for any fiscal year in excess of
this limitation are required to be transferred to the Budget Stabilization
Fund until the fund reaches the maximum balance specified in Section 19(g) of
Article III of the State Constitution, and thereafter is required to be
refunded to taxpayers as provided by general law. The limitation on State
revenues imposed by the amendment may be increased by the Legislature, by a
two-thirds vote of each house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of Bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception
of State matching funds used to fund elective expansions made after July 1,
1994; (iii) proceeds from the State lottery returned as prizes; (iv) receipts
of the Florida Hurricane Catastrophe Fund; (v) balances carried forward from
prior fiscal years; (vi) taxes, licenses, fees and charges for services
imposed by local, regional, or school district governing bodies; or (vii)
revenue from taxes, licenses, fees and charges for services required to be
imposed by any amendment or revision to the State Constitution after July 1,
1994. The amendment took effect on January 1, 1995 and is applicable to State
fiscal year 1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation will
itself be the subject of court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State
which are subject to, and limited by, the amendment, the future distribution
of such State revenues may be adversely affected by the amendment.
Hurricanes continue to endanger the coastal and interior portions of
Florida. Substantial damage resulted from Hurricane Andrew in 1992. The 1995
hurricane season also experienced a record number of tropical storms and
hurricanes which caused substantial damage. During 1996 hurricane season and
thus far during 1997 hurricane season the State has suffered considerably less
damage than in 1995.
According to the Florida General Purposes Financial Statements for fiscal
year ended June 30, 1996 as of June 30, 1996, the State had a high bond rating
from Moody's Investors Service, Inc. (Aa), Standard & Poor's (AA) and Fitch
IBCA, Inc. (AA) on all of its general obligation bonds. Outstanding general
obligation bonds at June 30, 1996 totalled almost $7.4 billion and were issued
to finance capital outlay for educational projects of both local school
districts, community colleges and state universities, environmental protection
and highway construction. The State has issued over $805 billion of general
obligation bonds since July 1, 1996.
Due to investments in certain derivatives, Escambia County, Florida in 1994
sustained notable losses which may in the future affect their operations. As
reported in the local press, several lawsuits have resulted regarding such
investments.
In late October, 1996, the Florida Auditor General notified the Governor's
office that seventeen municipalities or special districts are in a state of
financial emergency (including the Orlando-Orange County Expressway Authority
and the Pinellas Suncoast Transit Authority) and that another twenty-five
municipalities or special districts might be in a state of financial emergency
(including the City of Miami). For these purposes, a state of emergency is
considered two consecutive years of budget deficits. Municipalities or special
districts that may be in a state of financial emergency are those that the
Auditor General was unable to conclude had sufficient revenues to cover their
deficits. The operations of all these entities mentioned in the Auditor
General's communication may be adversely affected by their financial
condition.
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APPENDIX B
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
Al, Baal, Bal and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, MIG 3/VMIG 3, and MIG 4/VMIG 4; MIG 1/VMIG 1 denotes
"best quality, enjoying strong protection from established cash flows"; MIG
2/VMIG 2 denotes "high quality" with "ample margins of protection"; MIG 3/VMIG
3 instruments are of "favorable quality . . . but . . . lacking the undeniable
strength of the preceding grades"; MIG 4/VMIG 4 instruments are of "adequate
quality . . . [p]rotection commonly regarded as required of an investment
security is present . . . there is specific risk."
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DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-l repayment capacity
will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and with established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity of the obligor to meet its financial commitment on the
obligation is extremely strong.
AA Debt rated "AA" differs from the highest-rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
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A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation. While
CC such debt will likely have some quality and protective characteristics,
C these may be outweighed by large uncertainties or major risk 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 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-l"
for the highest quality obligations to "D" for the lowest. These categories
are as follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
--Amortization schedule--the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
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--Source of payment--the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have
adverse impact on
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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 three to 12 months.
Ratings Outlook
An outlook is used to describe the most likely direction of any
rating change over thentermediate term. It is described as
"Positive" or "Negative." The absence of a designation indicates a
stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can
be identified which could assist the obligor in satisfying its
debt service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC
Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
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CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD DD D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization
of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential
for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+" and
"F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could
cause these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
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APPENDIX C
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix C constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix D hereto, as the case
may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of a Beneficial Owner, the number of shares, if
any, of AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on
behalf of a Potential Beneficial Owner, the number, if any, of AMPS to be
purchased by such Potential Beneficial Owner;
(v) if the aggregate number of AMPS to be sold by all Beneficial Owners
on whose behalf such Broker-Dealer submitted a Bid or a Sell Order exceeds
the aggregate number of AMPS to be purchased by all Potential Beneficial
Owners on whose behalf such Broker-Dealer submitted a Bid, the name or
names of one or more Buyer's Broker-Dealers (and the name of the Agent
Member, if any, of each such Buyer's Broker-Dealer) acting for one or more
purchasers of such excess number of AMPS and the number of such shares to
be purchased from one or more Beneficial Owners on whose behalf such
Broker-Dealer acted by one or more Potential Beneficial Owners on whose
behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of AMPS to be purchased by all Potential
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid
exceeds the aggregate number of AMPS to be sold by all Beneficial Owners on
whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the name
or names of one or more Seller's Broker-Dealers (and the name of the Agent
Member, if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess number of AMPS and the number of such shares to be
sold to one or more Potential Beneficial Owners on whose behalf such
Broker-Dealer acted by one or more Beneficial Owners on whose behalf each
of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the
AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or
its Agent Member) through the Securities Depository the amount necessary to
purchase the number of AMPS to be purchased pursuant to such Bid against
receipt of such shares and advise such Potential Beneficial Owner of the
Applicable Rate for the next succeeding Dividend Period;
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(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted
a Sell Order that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct such Beneficial Owner's Agent
Member to deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of AMPS to be sold pursuant to such Order
against payment therefor and advise any such Beneficial Owner that will
continue to hold AMPS of the Applicable Rate for the next succeeding
Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b) (i) above and any AMPS received by it
pursuant to (b) (ii) above among the Potential Beneficial Owners, if any, on
whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids that were accepted or Sell
Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a) (v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall instruct
its Agent Member as provided in (b) (i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to the Agent Member of the Beneficial Owner
delivering shares to such Broker-Dealer pursuant to (b)(ii) above the
amount necessary to purchase such shares against receipt of such shares,
and (B) deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's Broker-
Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a) (vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b)(i) above against receipt of such
shares, and (B) deliver such shares through the Securities Depository to
the Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d) (i) above shall
instruct the Securities Depository to execute the transactions described in
(b) (i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d) (iii)
above, and the Securities Depository shall execute such transactions.
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(f) If a Beneficial Owner selling AMPS in an Auction fails to deliver such
shares (by authorized book-entry), a Broker-Dealer may deliver to the
Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole AMPS that is less than the number of shares that
otherwise was to be purchased by such Potential Beneficial Owner. In such
event, the number of AMPS to be so delivered shall be determined solely by
such Broker-Dealer. Delivery of such lesser number of shares shall constitute
good delivery. Notwithstanding the foregoing terms of this paragraph (f), any
delivery or non-delivery of shares which shall represent any departure from
the results of an Auction, as determined by the Auction Agent, shall be of no
effect unless and until the Auction Agent shall have been notified of such
delivery or non-delivery in accordance with the provisions of the Auction
Agent Agreement and the Broker-Dealer Agreements.
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APPENDIX D
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Certificate
of Designation relating to the AMPS, and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. The terms not
defined below are defined in the forepart of this Prospectus. Nothing
contained in this Appendix D constitutes a representation by the Fund that in
each Auction each party referred to herein actually will perform the
procedures described herein to be performed by such party.
PARAGRAPH 10(A) CERTAIN DEFINITIONS.
As used in this Paragraph 10, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the AMPS being auctioned pursuant to this Paragraph
10.
(ii) "Auction Date" shall mean the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i) below.
(vi) "Hold Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) and (ii)
whether the Fund has provided modification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on AMPS as
follows:
<TABLE>
<CAPTION>
APPLICABLE
PERCENTAGE OF APPLICABLE
CREDIT RATINGS REFERENCE RATE-- PERCENTAGE OF
------------------------------ NO REFERENCE RATE--
MOODY'S S&P NOTIFICATION NOTIFICATION
---------------- ------------- ---------------- ---------------- --- ---
<S> <C> <C> <C> <C> <C>
"aa3" or higher AA- or Higher 110% 150%
"a3" or "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Fund shall take all reasonable action necessary to enable S&P and
Moody's to provide a rating for the AMPS. If either S&P or Moody's shall not
make such a rating available, or if neither S&P nor Moody's shall make such a
rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after consultation with the Fund, shall select a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating
Agency or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph 10(b)(i) below.
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<PAGE>
(ix) "Sell Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(x) "Submission Deadline" shall mean 1:00 p.m., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by the
Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the
Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in Paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in Paragraph
10(d)(i) below.
PARAGRAPH 10(B) ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS,
EXISTING HOLDERS AND POTENTIAL HOLDERS.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and Potential
Beneficial Owners may only participate in Auctions through their Broker-
Dealers. Broker-Dealers will submit the Orders of their respective customers
who are Beneficial Owners and Potential Beneficial Owners to the Auction
Agent, designating themselves as Existing Holders in respect of shares subject
to Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold AMPS in its own
account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder
on behalf of both itself and its customers. On or prior to the Submission
Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as
to:
(1) the number of outstanding AMPS, if any, held by such Beneficial
Owner which such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for the next succeeding Dividend Period;
(2) the number of outstanding AMPS, if any, held by such Beneficial
Owner which such Beneficial Owner desires to continue to hold, provided
that the Applicable Rate for the next succeeding Dividend Period shall
not be less than the rate per annum specified by such Beneficial Owner,
and/or
(3) the number of outstanding AMPS, if any, held by such Beneficial
Owner which such Beneficial Owner offers to sell without regard to the
Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that
shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of outstanding AMPS, if any, which each such Potential Beneficial
Owner offers to purchase, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order"
D-2
<PAGE>
and each Beneficial Owner and each Potential Beneficial Owner placing an
Order, including a Broker-Dealer acting in such capacity for its own account,
is hereinafter referred to as a "Bidder"; an Order containing the information
referred to in clause (A)(1) of this Paragraph 10(b)(i) is hereinafter
referred to as a "Hold Order"; an Order containing the information referred to
in clause (A)(2) or (B) of this Paragraph 10(b)(i) is hereinafter referred to
as a "Bid"; and an Order containing the information referred to in clause
(A)(3) of this Paragraph 10(b)(i) is hereinafter referred to as a "Sell
Order." Inasmuch as a Broker-Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent the interests of a Beneficial
Owner or Potential Beneficial Owner, whether it be its customers or itself,
all discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of outstanding AMPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be less than the rate
per annum specified in such Bid; or
(2) such number or a lesser number of outstanding AMPS to be determined
as set forth in Paragraph 10(e)(i)(D) if the Applicable Rate determined on
such Auction Date shall be equal to the rate per annum specified therein;
or
(3) a lesser number of outstanding AMPS to be determined as set forth in
Paragraph 10(e)(ii)(C) if such specified rate per annum shall be higher
than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding AMPS specified in such Sell Order, or
(2) such number or a lesser number of outstanding AMPS to be determined
as set forth in Paragraph 10(e)(ii)(C) if Sufficient Clearing Bids do not
exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of outstanding AMPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be higher than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding AMPS to be determined
as set forth in Paragraph 10(e)(i)(E) if the Applicable Rate determined on
such Auction Date shall be equal to the rate per annum specified therein.
PARAGRAPH 10(C) SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the Broker-
Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding AMPS that are the subject of such
Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding AMPS, if any, subject to any Hold Order
placed by such Existing Holder;
(2) the number of outstanding AMPS, if any, subject to any Bid placed
by such Existing Holder and the rate per annum specified in such Bid;
and
D-3
<PAGE>
(3) the number of outstanding AMPS, if any, subject to any Sell Order
placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding AMPS held by an
Existing Holder are not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent shall deem a Hold Order (in the case of an Auction
relating to a Dividend Period which is not a Special Dividend Period) and a
Sell Order (in the case of an Auction relating to a Special Dividend Period)
to have been submitted on behalf of such Existing Holder covering the number
of outstanding AMPS held by such Existing Holder and not subject to Orders
submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of outstanding AMPS held by such Existing
Holder are submitted to the Auction Agent, such Orders shall be considered
valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of outstanding AMPS held by
such Existing Holder; provided that if more than one Hold Order is
submitted on behalf of such Existing Holder and the number of AMPS subject
to such Hold Orders exceeds the number of outstanding AMPS held by such
Existing Holder, the number of AMPS subject to each of such Hold Orders
shall be reduced pro rata so that such Hold Orders, in the aggregate, cover
exactly the number of outstanding AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of outstanding AMPS held by
such Existing Holder over the number of AMPS subject to any Hold Order
referred to in Paragraph 10(c)(iv)(A) above (and if more than one Bid
submitted on behalf of such Existing Holder specifies the same rate per
annum and together they cover more than the remaining number of shares that
can be the subject of valid Bids after application of Paragraph
10(c)(iv)(A) above and of the foregoing portion of this Paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this Paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding AMPS held by such Existing Holder over
the number of AMPS subject to Hold Orders referred to in Paragraph
10(c)(iv)(A) and Bids referred to in Paragraph 10(c)(iv)(B); provided that
if more than one Sell Order is submitted on behalf of any Existing Holder
and the number of AMPS subject to such Sell Orders is greater than such
excess, the number of AMPS subject to each of such Sell Orders shall be
reduced pro rata so that such Sell Orders, in the aggregate, cover exactly
the number of AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number
of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.
PARAGRAPH 10(D) DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE
AND APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed
D-4
<PAGE>
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding AMPS over the number of
outstanding AMPS that are the subject of Submitted Hold Orders (such excess
being hereinafter referred to as the "Available AMPS");
(B) from the Submitted Orders whether the number of outstanding AMPS that
are the subject of Submitted Bids by Potential Holders specifying one or
more rates per annum equal to or lower than the Maximum Applicable Rate
exceeds or is equal to the sum of:
(1) the number of outstanding AMPS that are the subject of Submitted
Bids by Existing Holders specifying one or more rates per annum higher
than the Maximum Applicable Rate, and
(2) the number of outstanding AMPS that are subject to Submitted Sell
Orders (if such excess or such equality exists (other than because the
number of outstanding AMPS in clauses (1) and (2) above are each zero
because all of the outstanding AMPS are the subject of Submitted Hold
Orders), such Submitted Bids by Potential Holders hereinafter being
referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning
Bid Rate and all other submitted Bids from Existing Holders specifying
lower rates per annum were rejected, thus entitling such Existing
Holders to continue to hold the AMPS that are the subject of such
Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning
Bid Rate and all other Submitted Bids from Potential Holders specifying
lower rates per annum were accepted, thus entitling the Potential
Holders to purchase the AMPS that are the subject of such Submitted
Bids, would result in the number of shares subject to all Submitted
Bids specifying the Winning Bid Rate or a lower rate per annum being at
least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the outstanding shares of AMPS are the subject of Submitted Hold Orders),
that the Applicable Rate for the next succeeding Dividend Period shall be
equal to the Maximum Applicable Rate; or
(C) if all of the outstanding AMPS are the subject of Submitted Hold
Orders, that the Dividend Period next succeeding the Auction automatically
shall be the same length as the immediately preceding Dividend Period and
the Applicable Rate for the next succeeding Dividend Period shall be equal
to 59% of the Reference Rate (or 90% of such rate if the Fund has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on AMPS) on the date of the
Auction.
PARAGRAPH 10(E) ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF SHARES.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
D-5
<PAGE>
(i) If Sufficient Clearing Bids have been made, subject to the provisions of
Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority
and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and
the Submitted Bid of each of the Existing Holders specifying any rate per
annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the outstanding AMPS that are
the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holder specifying any rate
per annum that is lower than the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the outstanding
AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the outstanding
AMPS that are the subject of such Submitted Bid, unless the number of
outstanding shares of AMPS subject to all such Submitted Bids shall be
greater than the number of outstanding AMPS ("Remaining Shares") equal to
the excess of the Available AMPS over the number of outstanding AMPS
subject to Submitted Bids described in Paragraph 10(e)(i)(B) and Paragraph
10(e)(i)(C), in which event the Submitted Bids of each such Existing Holder
shall be accepted, and each such Existing Holder shall be required to sell
outstanding AMPS, but only in an amount equal to the difference between (1)
the number of outstanding AMPS then held by such Existing Holder subject to
such Submitted Bid and (2) the number of AMPS obtained by multiplying (x)
the number of Remaining Shares by (y) a fraction the numerator of which
shall be the number of outstanding AMPS held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall be the sum
of the numbers of outstanding AMPS subject to such Submitted Bids made by
all such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be accepted but only
in an amount equal to the number of outstanding AMPS obtained by
multiplying (x) the difference between the Available AMPS and the number of
outstanding AMPS subject to Submitted Bids described in Paragraph
10(e)(i)(B), Paragraph 10(e)(i)(C) and Paragraph 10(e)(i)(D) by (y) a
fraction the numerator of which shall be the number of outstanding AMPS
subject to such Submitted Bid and the denominator of which shall be the sum
of the number of outstanding AMPS subject to such Submitted Bids made by
all such Potential Holders that specified rates per annum equal to the
Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the outstanding shares of AMPS are subject to Submitted Hold Orders),
subject to the provisions of Paragraph 10(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
outstanding AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the outstanding
AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and
the Submitted Sell Orders of each Existing Holder shall be accepted, in
both cases only in an amount equal to the difference between (1) the number
of outstanding AMPS then held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and (2)
D-6
<PAGE>
the number of AMPS obtained by multiplying (x) the difference between the
Available AMPS and the aggregate number of outstanding AMPS subject to
Submitted Bids described in Paragraph 10(e)(ii)(A) and Paragraph
10(e)(ii)(B) by (y) a fraction the numerator of which shall be the number
of outstanding AMPS held by such Existing Holder subject to such Submitted
Bid or Submitted Sell Order and the denominator of which shall be the
number of outstanding AMPS subject to all such Submitted Bids and Submitted
Sell Orders.
(iii) If, as a result of the procedures described in Paragraph 10(e)(i) or
Paragraph 10(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of AMPS on any Auction Date, the Auction Agent shall, in
such manner as in its sole discretion it shall determine, round up or down the
number of AMPS to be purchased or sold by any Existing Holder or Potential
Holder on such Auction Date so that each outstanding share of AMPS purchased
or sold by each Existing Holder or Potential Holder on such Auction Date shall
be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph 10(e)(i), any
Potential Holder would be entitled or required to purchase less than a whole
share of AMPS on any Auction Date, the Auction Agent, in such manner as in its
sole discretion it shall determine, shall allocate AMPS for purchase among
Potential Holders so that only whole shares of AMPS are purchased on such
Auction Date by any Potential Holder, even if such allocation results in one
or more of such Potential Holders not purchasing any AMPS on such Auction
Date.
(v) Based on the results of each Auction, the Auction Agent shall determine,
with respect to each Broker-Dealer that submitted Bids or Sell Orders on
behalf of Existing Holders or Potential Holders, the aggregate number of the
outstanding AMPS to be purchased and the aggregate number of outstanding AMPS
to be sold by such Potential Holders and Existing Holders and, to the extent
that such aggregate number of outstanding shares to be purchased and such
aggregate number of outstanding shares to be sold differ, the Auction Agent
shall determine to which other Broker-Dealer or Broker-Dealers acting for one
or more purchasers such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-
Dealer shall receive, as the case may be, outstanding AMPS.
PARAGRAPH 10(F) MISCELLANEOUS.
The Fund may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change
or modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of AMPS only pursuant to a Bid or Sell
Order in accordance with the procedures described in this Paragraph 10 or to
or through a Broker-Dealer, provided that in the case of all transfers other
than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the AMPS held by it maintained in book entry form by the
Securities Depository in the account of its Agent Member, which in turn will
maintain records of such Beneficial Owner's beneficial ownership. Neither the
Fund nor any Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall submit an Order in any Auction. Any Beneficial Owner that
is an Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall not sell, transfer or otherwise dispose of AMPS to any
Person other than the Fund. All of the outstanding AMPS of a Series shall be
represented by a single certificate registered in the name of the nominee of
the Securities Depository unless otherwise required by law or unless there is
no Securities Depository. If there is no Securities Depository, at the Fund's
option and upon its receipt of such documents as it deems appropriate, any
AMPS may be registered in the Share Register in the name of the Beneficial
Owner thereof and such Beneficial Owner thereupon will be entitled to receive
certificates therefor and required to deliver certificates thereof or upon
transfer or exchange thereof.
D-7
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATION 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.................................... 11
The Fund................................................................... 13
Use of Proceeds............................................................ 13
Capitalization............................................................. 13
Portfolio Composition...................................................... 14
Investment Objective and Policies.......................................... 14
Description of AMPS........................................................ 32
Investment Restrictions.................................................... 52
Trustees and Officers...................................................... 53
Investment Advisory and Management Arrangements............................ 55
Portfolio Transactions..................................................... 56
Taxes...................................................................... 57
Net Asset Value............................................................ 62
Description of Capital Shares.............................................. 63
Custodian.................................................................. 65
Underwriting............................................................... 65
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 66
Legal Opinions............................................................. 66
Experts.................................................................... 66
Additional Information..................................................... 67
Independent Auditors' Report .............................................. 68
Statement of Assets, Liabilities and Capital............................... 69
Financial Statements (Unaudited)........................................... 69
Glossary................................................................... 70
Appendix A--Economic and Other Conditions in Florida....................... A-1
Appendix B--Ratings of Municipal Bonds and Commercial Paper................ B-1
Appendix C--Settlement Procedures.......................................... C-1
Appendix D--Auction Procedures............................................. D-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$
MUNIHOLDINGS FLORIDA INSURED FUND III
AUCTION MARKET PREFERRED SHARES
["AMPS(R)"]
SHARES, SERIES A
SHARES, SERIES B
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
OCTOBER , 1998
(R)Registered trademark of Merrill Lynch & Co., Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 September , 1998
Schedule of Investments as of September , 1998 (unaudited)
Statement of Assets, Liabilities and Capital as of September , 1998
(unaudited)
(2) Exhibits:
<TABLE>
<C> <C> <S>
(a) (1) -- Declaration of Trust of the Registrant.(a)
(2) -- Form of Certificate of Designation creating the Series A AMPS
and Series B AMPS.
(b) -- By-Laws of the Registrant.(a)
(c) -- Not applicable.
(d) (1) -- Portions of the Declaration of Trust, By-Laws and the
Certificate of Designation of the Registrant defining the rights
of holders of shares of the Registrant.(b)
(2) -- Form of specimen certificate for the AMPS of the Registrant.
(e) -- Form of Automatic Dividend Reinvestment Plan.(a)
(f) -- Not applicable.
(g) -- Form of Investment Advisory Agreement between the Registrant
and Fund Asset Management, L.P.(a)
(h) (1) -- Form of Purchase Agreement for the AMPS.
(2) -- Merrill Lynch Standard Dealer Agreement.(a)
(i) -- Not applicable.
(j) -- Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company.(a)
(k) (1) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the Registrant
and State Street Bank and Trust Company.(a)
(2) -- Form of Auction Agent Agreement between the Registrant and IBJ
Schroder Bank & Trust Company.
(3) -- Form of Broker-Dealer Agreement.
(4) -- Form of Letter of Representations.
(l) -- Opinion and Consent of Brown & Wood llp, counsel to the
Registrant.*
(m) -- Not applicable.
(n) (1) -- Opinion and Consent of Holland & Knight LLP.
(2) -- Consent of , independent auditors for the
Registrant.*
(o) -- Not applicable.
(p) -- Certificate of Fund Asset Management, L.P.(a)
(q) -- Not applicable.
(r) -- Financial Data Schedule.*
</TABLE>
- --------
(a) Incorporated by reference to the Registrant's registration statement on
Form N-2, File No. 333-56721 (the "Common Shares Registration Statement").
(b) Reference is made to Section 3.4, 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 Declaration of Trust, previously
filed as Exhibit (a)(1) to the Common Shares Registration Statement; and
to Article II, Article III (sections 1, 2, 3, 5 and 17), Article VI,
Article VII, Article XII, Article XIII and Article XIV of the Registrant's
By-Laws, previously filed as Exhibit (b) to the Common Shares Registration
Statement. Reference is also made to the Form of Certificate of
Designation filed hereto as Exhibit (a)(2).
* To be filed by amendment.
C-1
<PAGE>
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees................................................... $ *
Printing............................................................ *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Rating Agency 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 captions "Investment Advisory
and Management Arrangements" and "Description of Capital Shares--Common
Shares" and in Note 1 to the Statement of Assets, Liabilities and Capital is
incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AT SEPTEMBER 25, 1998
-------------- ---------------------
<S> <C>
Common Shares, $.10 par value....................... 2
Preferred Shares, $.10 par value.................... 0
</TABLE>
ITEM 29. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of good faith and reasonable
belief as to the best interest of the Trust, had been adjudicated, it would
have been adjudicated in favor of such person. The rights accruing to any
person under these provisions shall not exclude any other right to which he
may be lawfully entitled; provided that no person may satisfy any right of
indemnity or reimbursement granted herein or in Section 5.1 or to which he
may be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any person with respect to any
claim for indemnity or reimbursement or otherwise. The Trustees may make
advance payments in connection with indemnification under this Section 5.3,
provided that the indemnified person shall have given a written undertaking
to reimburse the Trust in the event it is subsequently determined that he
is not entitled to such indemnification."
C-2
<PAGE>
The Registrant's By-Laws provide that insofar as the conditional
advancing of indemnification moneys pursuant to Section 5.3 of the
Declaration of Trust for actions based upon the Investment Company Act of
1940 may be concerned, such payments will be made only on the following
conditions: (i) the advances must be limited to amounts used, or to be
used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii)
advances may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds
the amount to which it is ultimately determined he is entitled to receive
from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be
obtained by the Registrant without delay or litigation, which bond,
insurance, or other form of security must be provided by the recipient of
the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Trustees, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily available
facts, that the recipient of the advance ultimately will be found entitled
to indemnification.
In Section 8 of the Distribution Agreement relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor
and each person, if any, who controls the Distributor within the meaning of
the Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act") may be provided to trustees,
officers and controlling persons of the Fund, pursuant to the foregoing
provisions or otherwise, the Fund has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Fund of expenses incurred or paid by a trustee,
officer or controlling person of the Fund in connection with any successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Reference is made to Section Six of the Purchase Agreement, a form of
which will be filed as Exhibit (h)(1) hereto, for provisions relating to
the indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
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., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest
C-3
<PAGE>
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc. 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 Growth Fund, Inc., Merrill Lynch
Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Index
Funds, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch 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., Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and
Wiley, a division of MLAM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisors Trust.
The address of each of these registered 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, Princeton Funds
Distributor, Inc. ("PFD"), Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. also is P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is 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.
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
ML & Co. ............. Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton Services.... General Partner General Partner of MLAM
Arthur Zeikel......... Chairman 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.; Managing Director and Co-Head
of the Investment Banking Division of
Merrill Lynch (in 1997); Senior Vice
President and Director of the Global
Securities and Economics Division of Merrill
Lynch (from 1995 to 1997)
Terry K. Glenn........ Executive Vice President Executive Vice President of MLAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of MLFDS; President of Princeton
Administrators, L.P.
Linda L. Federici..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin.. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Norman R. Harvey...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Senior Vice President Senior Vice President of MLAM; Senior Vice
Hennewinkel.......... President of Princeton Services
Philip L. Kirstein.... Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of MLAM; Senior Vice President,
Secretary General Counsel, Secretary and Director of
Princeton Services
Ronald M. Kloss....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra W. Senior Vice President Senior Vice President of MLAM; Senior Vice
Landsman-Yaros....... President of Princeton Services; Vice
President of PFD
Stephen M. M. Miller.. Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Senior Vice President Senior Vice President of MLAM; Senior Vice
Jr................... President of Princeton Services
Michael L. Quinn...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of Merrill
Lynch from 1989 to 1995
Richard L. Reller..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director of
PFD
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
Gerald M. Richard..... Senior Vice President Senior Vice President and Treasurer of MLAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of PFD
Gregory D. Upah....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Welburn..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 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.
Registrant undertakes that:
(1) For the purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a
part of a registration statement in reliance upon Rule 430A under the
Securities Act of 1933 and contained in the form of prospectus filed by the
Registrant pursuant to Rule 497(h) under the Securities Act of 1933 shall
be deemed to be part of the registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro and State of New
Jersey, on the 21st day of September, 1998.
MuniHoldings Florida Insured Fund III
(Registrant)
/s/ Arthur Zeikel
By
-----------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Arthur Zeikel President and September 21,
- ------------------------------------- Trustee (Principal 1998
(ARTHUR ZEIKEL) Executive Officer)
/s/ Gerald M. Richard Treasurer (Principal September 21,
- ------------------------------------- Financial and 1998
(GERALD M. RICHARD) Accounting Officer)
/s/ James H. Bodurtha Trustee September 21,
- ------------------------------------- 1998
(JAMES H. BODURTHA)
/s/ Herbert I. London Trustee September 21,
- ------------------------------------- 1998
(HERBERT I. LONDON)
/s/ Robert R. Martin Trustee September 21,
- ------------------------------------- 1998
(ROBERT R. MARTIN)
/s/ Joseph L. May Trustee September 21,
- ------------------------------------- 1998
(JOSEPH L. MAY)
/s/ Andre F. Perold Trustee September 21,
- ------------------------------------- 1998
(ANDRE F. PEROLD)
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S> <C>
(a)(3) --Form of Certificate of Designation creating the Series A AMPS
and Series B AMPS
(d)(2) --Form of Specimen Certificate for the AMPS of the Registrant
(h)(1) --Form of Purchase Agreement for the AMPS
(k)(2) --Form of Auction Agent Agreement between the Registrant and
IBJ Schroder Bank & Trust Company
(k)(3) --Form of Broker-Dealer Agreement
(k)(4) --Form of Letter of Representations
</TABLE>
<PAGE>
EXHIBIT (a)(2)
MUNIHOLDINGS FLORIDA INSURED FUND III
CERTIFICATE OF DESIGNATION DATED ____ __, 1998
ESTABLISHING POWERS, QUALIFICATIONS, RIGHTS
AND PREFERENCES OF TWO SERIES OF AUCTION MARKET
PREFERRED SHARES ("AMPS(R)")
WHEREAS the Board of Trustees of MuniHoldings Florida Insured Fund III (the
"Trust") is expressly empowered pursuant to Section 6.1 of the Trust's
Declaration of Trust to authorize the issuance of preferred shares of the Trust
in one or more series, with such preferences, powers, restrictions, limitations
or qualifications as determined by the Board of Trustees and as set forth in the
resolution or resolutions providing for the issuance of such preferred shares.
AND WHEREAS the Board of Trustees has determined that it is in the best
interests of the Trust to issue two series of such preferred shares.
NOW THEREFORE, the Board of Trustees does hereby authorize the issuance of
two series of preferred shares, par value $0.10 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared), to be designated
respectively: Auction Market Preferred Shares, Series A; and Auction Market
Preferred Shares, Series B.
The preferences, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption, of the preferred shares
are as follows:
DESIGNATION
Series A: A series of ____ preferred shares, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) thereon, is hereby
designated "Auction Market Preferred Shares, Series A." Each Auction Market
Preferred Share, Series A (sometimes referred to herein as "Series A AMPS")
shall be issued on a date to be determined by the Board of Trustees of the Trust
or pursuant to their delegated authority; have an Initial Dividend Rate and an
Initial Dividend Payment Date as shall be determined in advance of the issuance
thereof by the Board of Trustees of the Trust or pursuant to their delegated
authority; and have such other preferences,
___________________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
voting powers, limitations as to dividends, qualifications and terms and
conditions of redemption as are set forth in this Certificate of Designation.
The Auction Market Preferred Shares, Series A shall constitute a separate series
of preferred shares of the Trust, and each Auction Market Preferred Share,
Series A shall be identical.
Series B: A series of ____ preferred shares, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) thereon, is hereby
designated "Auction Market Preferred Shares, Series B." Each Auction Market
Preferred Share, Series B (sometimes referred to herein as "Series B AMPS")
shall be issued on a date to be determined by the Board of Trustees of the Trust
or pursuant to their delegated authority; have an Initial Dividend Rate and an
Initial Dividend Payment Date as shall be determined in advance of the issuance
thereof by the Board of Trustees of the Trust or pursuant to their delegated
authority; and have such other preferences, voting powers, limitations as to
dividends, qualifications and terms and conditions of redemption as are set
forth in this Certificate of Designation. The Auction Market Preferred Shares,
Series B shall constitute a separate series of preferred shares of the Trust,
and each Auction Market Preferred Share, Series B shall be identical.
1. Definitions. (a) Unless the context or use indicates another or
-----------
different meaning or intent, in this Certificate of Designation the following
terms have the following meanings, whether used in the singular or plural:
"`AA" Composite Commercial Paper Rate," on any date of determination, means
(i) the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another nationally recognized rating agency, as
such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York for the Business Day immediately preceding such date,
or (ii) in the event that the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the Interest Equivalent of
the rate on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by Merrill Lynch, Pierce, Fenner & Smith
Incorporated or its successors that are Commercial Paper Dealers, to the Auction
Agent for the close of business on the Business Day immediately preceding such
date. If one of the Commercial Paper Dealers does not quote a rate required to
2
<PAGE>
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Trust to provide such rate or rates not
being supplied by the Commercial Paper Dealer. If the number of Dividend Period
days shall be (i) 7 or more but fewer than 49 days, such rate shall be the
Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more
but fewer than 70 days, such rate shall be the Interest Equivalent of the 60-day
rate on such commercial paper; (iii) 70 or more days but fewer than 85 days,
such rate shall be the arithmetic average of the Interest Equivalent on the 60-
day and 90-day rates on such commercial paper; (iv) 85 or more days but fewer
than 99 days, such rate shall be the Interest Equivalent of the 90-day rate on
such commercial paper; (v) 99 or more days but fewer than 120 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 90-day and
120-day rates on such commercial paper; (vi) 120 or more days but fewer than 141
days, such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c) of
this Certificate of Designation.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of this
Certificate of Designation.
"Adviser" means the Trust's investment adviser which initially shall be
Fund Asset Management, L.P.
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Trust.
"Agent Member" means a member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more AMPS or a Potential Beneficial
Owner.
3
<PAGE>
"AMPS" means, as the case may be, the Auction Market Preferred Shares,
Series A; or the Auction Market Preferred Shares, Series B.
"AMPS Basic Maintenance Amount," as of any Valuation Date, means the dollar
amount equal to (i) the sum of (A) the product of the number of AMPS of each
series and Other AMPS Outstanding on such Valuation Date multiplied by the sum
of (a) $25,000 and (b) any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each share of
AMPS and Other AMPS Outstanding, in each case, to (but not including) the end of
the current Dividend Period for each series of AMPS that follows such Valuation
Date in the event the then current Dividend Period will end within 49 calendar
days of such Valuation Date or through the 49th day after such Valuation Date in
the event the then current Dividend Period for each series of AMPS will not end
within 49 calendar days of such Valuation Date; (C) in the event the then
current Dividend Period will end within 49 calendar days of such Valuation Date,
the aggregate amount of cash dividends that would accumulate at the Maximum
Applicable Rate applicable to a Dividend Period of 28 or fewer days on any AMPS
and Other AMPS Outstanding from the end of such Dividend Period through the 49th
day after such Valuation Date, multiplied by the larger of the Moody's
Volatility Factor and the S&P Volatility Factor, determined from time to time by
Moody's and S&P, respectively (except that if such Valuation Date occurs during
a Non-Payment Period, the cash dividend for purposes of calculation would
accumulate at the then current Non-Payment Period Rate); (D) the amount of
anticipated expenses of the Trust for the 90 days subsequent to such Valuation
Date (including any premiums payable with respect to a Policy); (E) the amount
of the Trust's Maximum Potential Additional Dividend Liability as of such
Valuation Date; and (F) any current liabilities as of such Valuation Date to the
extent not reflected in any of (i)(A) through (i)(E) (including, without
limitation, and immediately upon determination, any amounts due and payable by
the Trust pursuant to repurchase agreements and any amounts payable for Florida
Municipal Bonds or Municipal Bonds purchased as of such Valuation Date) less
(ii) either (A) the Discounted Value of any of the Trust's assets, or (B) the
face value of any of the Trust's assets if such assets mature prior to or on the
date of redemption of AMPS or payment of a liability and are either securities
issued or guaranteed by the United States Government or Deposit Securities, in
both cases irrevocably deposited by the Trust for the payment of the amount
needed to redeem AMPS subject to redemption or to satisfy any of (i)(B)
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<PAGE>
through (i)(F). For Moody's and S&P, the Trust shall include as a liability an
amount calculated semi-annually equal to 150% of the estimated cost of obtaining
other insurance guaranteeing the timely payment of interest on a Moody's
Eligible Asset or S&P Eligible Asset and principal thereof to maturity with
respect to Moody's Eligible Assets and S&P Eligible Assets that (i) are covered
by a Policy which provides the Trust with the option to obtain such other
insurance and (ii) are discounted by a Moody's Discount Factor or an S&P
Discount Factor determined, as the case may be, by reference to the insurance
claims-paying ability rating of the issuer of such Policy.
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Trust to satisfy the AMPS Basic Maintenance Amount (as required by paragraph
7(a) of this Certificate of Designation) as of a given Valuation Date, means the
sixth Business Day following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Trust which sets forth, as of the related Valuation Date, the assets of the
Trust, the Market Value and the Discounted Value thereof (seriatim and in
aggregate), and the AMPS Basic Maintenance Amount.
"Anticipation Notes" shall mean the following Florida Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph 10(a)(vii)
of this Certificate of Designation.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Trust or a duly authorized
committee thereof enters into an agreement with the Trust to follow the Auction
Procedures for the purpose of determining the Applicable
5
<PAGE>
Rate and to act as transfer agent, registrar, dividend disbursing agent and
redemption agent for the AMPS and Other AMPS.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 10 of this Certificate of Designation.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of AMPS or a Broker-Dealer that holds AMPS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 10 of this
Certificate of Designation, that has been selected by the Trust and has entered
into a Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of this Certificate of Designation.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Trust may
from time to time appoint, or, in lieu of any thereof, their respective
affiliates or successors.
"Common Shares" means the common shares of beneficial interest, par value
$.10 per share, of the Trust.
"Date of Original Issue" means, with respect to any share of AMPS or Other
AMPS, the date on which the Trust originally issues such share.
"Declaration" means the Declaration of Trust, as amended and supplemented
(including this Certificate of Designation), of the Trust on file with the
office of the Secretary of State of the Commonwealth of Massachusetts.
6
<PAGE>
"Deposit Securities" means cash and Florida Municipal Bonds and Municipal
Bonds rated at least A2 (having a remaining maturity of 12 months or less), P-1,
VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or
less), A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set forth in
paragraph 2(b)(i) of this Certificate of Designation and, with respect to Other
AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Trust that is listed as the holder of record of AMPS in the
Share Books.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Florida Municipal Bonds" means Municipal Bonds issued by or on behalf of
the State of Florida, its political subdivisions, agencies and instrumentalities
and by other qualifying issuers that pay interest which, in the opinion of bond
counsel to the issuer, is exempt from Federal income taxes and Florida
intangible personal property taxes, and includes Inverse Floaters.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of this
Certificate of Designation.
"Holder" means a Person identified as a holder of record of AMPS in the
Share Register.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Trust, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Trustees of the Trust with respect to each series of
AMPS or other AMPS, as the case may be.
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<PAGE>
"Initial Dividend Period," with respect to each series of AMPS, has the
meaning set forth in paragraph 2(c)(i) of this Certificate of Designation and,
with respect to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to each series of AMPS, means the
rate per annum applicable to the Initial Dividend Period for such series of AMPS
and, with respect to Other AMPS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Inverse Floaters" means trust certificates or other instruments evidencing
interests in one or more Florida Municipal Bonds that are S&P Eligible Assets
the interest rates on which are adjusted at short term intervals on a basis that
is inverse to the simultaneous readjustment of the interest rates on
corresponding floating rate trust certificates or other instruments issued by
the same issuer, provided that the ratio of the aggregate dollar amount of
floating rate instruments to inverse floating rate instruments issued by the
same issuer does not exceed one to one at their time of original issuance.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Trust shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available.
8
<PAGE>
Securities for which quotations are not readily available shall be valued at
fair value as determined by the Pricing Service using methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
type of issue, coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The Pricing Service may employ
electronic data processing techniques and/or a matrix system to determine
valuations. In the event the Pricing Service is unable to value a security, the
security shall be valued at the lower of two dealer bids obtained by the Trust
from dealers who are members of the National Association of Securities Dealers,
Inc. and who make a market in the security, at least one of which shall be in
writing. Futures contracts and options are valued at closing prices for such
instruments established by the exchange or board of trade on which they are
traded, or if market quotations are not readily available, are valued at fair
value on a consistent basis using methods determined in good faith by the Board
of Trustees.
"Maximum Applicable Rate," with respect to AMPS, has the meaning set forth
in paragraph 10(a)(vii) of this Certificate of Designation and, with respect to
Other AMPS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Trust were to make Retroactive Taxable Allocations, with respect to any
fiscal year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Trust, as of
the end of the calendar month immediately preceding such Valuation Date and
assuming such Additional Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Florida Municipal Bond or Municipal Bond which constitutes a
Moody's Eligible Asset, the percentage determined by reference to (a)(i) the
rating by Moody's or S&P on such Bond or (ii) in the event the Moody's Eligible
Asset is insured under a Policy and the terms of the Policy permit the Trust, at
its option, to obtain other insurance guaranteeing the timely payment of
interest on
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<PAGE>
such Moody's Eligible Asset and principal thereof to maturity, the Moody's
insurance claims-paying ability rating of the issuer of the Policy or (iii) in
the event the Moody's Eligible Asset is insured under an insurance policy which
guarantees the timely payment of interest on such Moody's Eligible Asset and
principal thereof to maturity, the Moody's insurance claims-paying ability
rating of the issuer of the insurance policy (provided that for purposes of
clauses (ii) and (iii) if the insurance claims-paying ability of an issuer of a
Policy or insurance policy is not rated by Moody's but is rated by S&P, such
issuer shall be deemed to have a Moody's insurance claims-paying ability rating
which is two full categories lower than the S&P insurance claims-paying ability
rating) and (b) the Moody's Exposure Period, in accordance with the table set
forth below:
<TABLE>
<CAPTION>
Rating Category
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
----------------------- ---- --- -- --- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less.............................. 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks..................... 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks..................... 158 169 179 209 242 138 150
</TABLE>
- ---------------
* Moody's rating.
** Florida Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
*** Florida Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1 or,
if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature or
have a demand feature at par exercisable within the Moody's Exposure Period
and which do not have a long-term rating. For the purposes of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of "A" by Moody's.
; provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the applicable
rating category and (b) the percentage set forth in the foregoing table under
the rating category which is one category lower than the applicable rating
category.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term Florida Municipal Bonds and short-term Municipal Bonds, so
long as such Florida Municipal Bonds and Municipal Bonds are rated at least MIG-
1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount Factor
for such Bonds will be 125% if such Bonds are not rated by Moody's but are rated
A-1+ or SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for Florida Municipal Bonds or
Municipal Bonds Sold. "Receivables for Florida Municipal Bonds or Municipal
Bonds Sold," for purposes of calculating
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<PAGE>
Moody's Eligible Assets as of any Valuation Date, means no more than the
aggregate of the following: (i) the book value of receivables for Florida
Municipal Bonds or Municipal Bonds sold as of or prior to such Valuation Date if
such receivables are due within five Business Days of such Valuation Date, and
if the trades which generated such receivables are (x) settled through clearing
house firms with respect to which the Trust has received prior written
authorization from Moody's or (y) with counterparties having a Moody's long-term
debt rating of at least Baa3; and (ii) the Moody's Discounted Value of Florida
Municipal Bonds or Municipal Bonds sold as of or prior to such Valuation Date
which generated receivables, if such receivables are due within five Business
Days of such Valuation Date but do not comply with either of conditions (x) or
(y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for Florida Municipal
Bonds or Municipal Bonds Sold, a Florida Municipal Bond or a Municipal Bond that
(i) pays interest in cash, (ii) is publicly rated Baa or higher by Moody's or,
if not rated by Moody's but rated by S&P, is rated at least BBB by S&P (provided
that, for purposes of determining the Moody's Discount Factor applicable to any
such S&P-rated Florida Municipal Bond or S&P-rated Municipal Bond, such Florida
Municipal Bond or Municipal Bond (excluding any short-term Florida Municipal
Bond or Municipal Bond) will be deemed to have a Moody's rating which is one
full rating category lower than its S&P rating), (iii) does not have its Moody's
rating suspended by Moody's; and (iv) is part of an issue of Florida Municipal
Bonds or Municipal Bonds of at least $10,000,000. In addition, Florida
Municipal Bonds and Municipal Bonds in the Trust's portfolio must be within the
following diversification requirements in order to be included within Moody's
Eligible Assets:
<TABLE>
<CAPTION>
Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or Territory
Rating ($ Millions) Obligor (%) (1) Concentration (%) (1) (3) Concentration (%) (1) (4) Concentration (1) (5)
- ------------------ ------------ --------------- ------------------------- ------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Aaa............... 10 100 100 100 100
Aa................ 10 20 60 60 60
A................. 10 10 40 40 40
Baa............... 10 6 20 20 20
Other(2).......... 10 4 12 12 12
</TABLE>
_________________________
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Florida Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to Florida Municipal Bonds. Territorial bonds (other than
those issued by Puerto Rico and counted collectively) are each limited to
10% of Moody's Eligible Assets. For diversification purposes, Puerto Rico
will be treated as a state.
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<PAGE>
For purposes of the maximum underlying obligor requirement described above, any
Florida Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Bond. For purposes of the issue type concentration
requirement described above, Florida Municipal Bonds and Municipal Bonds will be
classified within one of the following categories: health care issues (teaching
and non-teaching hospitals, public and private), housing issues (single- and
multi-family), educational facilities issues (public and private schools),
student loan issues, resource recovery issues, transportation issues (mass
transit, airport and highway bonds), industrial revenue/pollution control bond
issues, utility issues (including water, sewer and electricity), general
obligation issues, lease obligations/certificates of participation, escrowed
bonds and other issues ("Other Issues") not falling within one of the
aforementioned categories (includes special obligations to crossover, excise and
sales tax revenue, recreation revenue, special assessment and telephone revenue
bonds). In no event shall (a) more than 10% of Moody's Eligible Assets consist
of student loan issues, (b) more than 10% of Moody's Eligible Assets consist of
resource recovery issues or (c) more than 10% of Moody's Eligible Assets consist
of Other Issues.
When the Trust sells a Florida Municipal Bond or Municipal Bond and agrees
to repurchase it at a future date, the Discounted Value of such Bond will
constitute a Moody's Eligible Asset and the amount the Trust is required to pay
upon repurchase of such Bond will count as a liability for purposes of
calculating the AMPS Basic Maintenance Amount. When the Trust purchases a
Florida Municipal Bond or Municipal Bond and agrees to sell it at a future date
to another party, cash receivable by the Trust thereby will constitute a Moody's
Eligible Asset if the long-term debt of such other party is rated at least A2 by
Moody's and such agreement has a term of 30 days or less; otherwise the
Discounted Value of such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Trust for the payment of dividends or
redemption.
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<PAGE>
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and shall initially be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b)
of this Certificate of Designation.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION>
% Change in
Marginal Tax Moody's Volatility
Rate Factor
----------- ------------------
<S> <C>
less than but equal to 5% 292%
greater than 5% but equal to 10% 313%
greater than 10% but equal to 15% 338%
greater than 15% but equal to 20% 364%
greater than 20% but equal to 25% 396%
greater than 25% but equal to 30% 432%
greater than 30% but equal to 35% 472%
greater than 35% but equal to 40% 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such other
potential dividend rate increase factor as Moody's advises the Trust in writing
is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the Trust's
Registration Statement on Form N-2 (File No. 333-_______) relating to the AMPS
on file with the Securities and Exchange Commission, as such Registration
Statement may be amended from time to time, as well as short-term municipal
obligations.
"Municipal Index" has the meaning set forth in paragraph 8(a) of this
Certificate of Designation.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Trust which are shares of beneficial interest, including all
outstanding AMPS and Other AMPS (or such other
13
<PAGE>
asset coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of paying dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Trust to maintain
the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of this Certificate
of Designation) as of the last Business Day of each month, means the last
Business Day of the following month.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Non-Payment Period" means, with respect to each series of AMPS, any period
commencing on and including the day on which the Trust shall fail to (i)
declare, prior to the close of business on the second Business Day preceding any
Dividend Payment Date, for payment on or (to the extent permitted by paragraph
2(c)(i) of this Certificate of Designation) within three Business Days after
such Dividend Payment Date to the Holders as of 12:00 noon, New York City time,
on the Business Day preceding such Dividend Payment Date, the full amount of any
dividend on AMPS payable on such Dividend Payment Date or (ii) deposit,
irrevocably in trust, in same-day funds, with the Auction Agent by 12:00 noon,
New York City time, (A) on such Dividend Payment Date the full amount of any
cash dividend on such shares payable (if declared) on such Dividend Payment Date
or (B) on any redemption date for any AMPS called for redemption, the Mandatory
Redemption Price per share of such AMPS or, in the case of an optional
redemption, the Optional Redemption Price per share, and ending on and including
the Business Day on which, by 12:00 noon, New York City time, all unpaid cash
dividends and unpaid redemption prices shall have been so deposited or shall
have otherwise been made available to Holders in same-day funds; provided that,
a Non-Payment Period shall not end unless the Trust shall have given at least
five days' but no more than 30 days' written notice of such deposit or
availability to the Auction Agent, all Existing Holders (at their addresses
appearing in the Share Books) and the Securities Depository. Notwithstanding
the foregoing, the failure by the Trust to deposit funds as provided for by
clauses (ii)(A) or (ii)(B) above within three Business Days after any Dividend
Payment Date or redemption date, as the case may be, in each case to the extent
contemplated by paragraph 2(c)(i) of this Certificate of Designation, shall not
constitute a "Non-Payment Period."
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<PAGE>
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Trust has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend pursuant to paragraph 2(f) hereof that net capital gains or other
taxable income will be included in such dividend on AMPS), provided that the
Board of Trustees of the Trust shall have the authority to adjust, modify, alter
or change from time to time the initial Non-Payment Period Rate if the Board of
Trustees of the Trust determines and Moody's and S&P (and any Substitute Rating
Agency in lieu of Moody's or S&P in the event either of such parties shall not
rate the AMPS) advise the Trust in writing that such adjustment, modification,
alteration or change will not adversely affect their then-current ratings on the
AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of this Certificate of Designation.
"Notice of Redemption" means any notice with respect to the redemption of
AMPS pursuant to paragraph 4 of this Certificate of Designation.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
this Certificate of Designation.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of this Certificate of Designation.
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Other AMPS" means the auction rate preferred shares of the Trust, other
than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, AMPS
theretofore issued by the Trust except, without duplication, (A) any AMPS
theretofore cancelled or delivered to the Auction Agent for cancellation, or
redeemed by the Trust, or as to which a Notice of Redemption shall have been
given and Deposit Securities shall have been deposited in trust or segregated by
the Trust pursuant to paragraph 4(c) and (B) any AMPS as to which the Trust or
any Affiliate
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<PAGE>
thereof shall be a Beneficial Owner, provided that AMPS held by an Affiliate
shall be deemed outstanding for purposes of calculating the AMPS Basic
Maintenance Amount and (ii) with respect to other Preferred Shares, has the
equivalent meaning.
"Parity Shares" means the AMPS and each other outstanding series of
Preferred Shares the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Policy" means an insurance policy purchased by the Trust which guarantees
the payment of principal and interest on specified Florida Municipal Bonds or
Municipal Bonds during the period in which such Florida Municipal Bonds or
Municipal Bonds are owned by the Trust; provided, however, that, as long as the
AMPS are rated by Moody's and S&P, the Trust will not obtain any Policy unless
Moody's and S&P advise the Trust in writing that the purchase of such Policy
will not adversely affect their then-current rating on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of AMPS but that wishes to purchase
such shares, or that is a Beneficial Owner that wishes to purchase additional
AMPS.
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Trust, including any Existing Holder, who may be interested
in acquiring AMPS (or, in the case of an Existing Holder, additional AMPS).
"Preferred Shares" means the preferred shares of beneficial interest, par
value $.10 per share, of the Trust, and includes AMPS and Other AMPS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
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<PAGE>
"Pricing Service" means J.J. Kenny or any pricing service designated by the
Board of Trustees of the Trust provided the Trust obtains written assurance from
S&P and Moody's that such designation will not impair the rating then assigned
by S&P and Moody's to the AMPS.
"Quarterly Valuation Date" means the twenty-first day of the last month of
each fiscal quarter of the Trust (or, if such day is not a Business Day, the
next succeeding Business Day) in each fiscal year of the Trust, commencing
______ __, 1998.
"Receivables for Florida Municipal Bonds Sold" has the meaning set forth
under the definition of S&P Discount Factor.
"Receivables for Florida Municipal Bonds or Municipal Bonds Sold" has the
meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of this Certificate of Designation.
"Response" has the meaning set forth in paragraph 2(c)(iii) of this
Certificate of Designation.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of this Certificate of Designation.
"Right," with respect to each series of AMPS, has the meaning set forth in
paragraph 2(e) of this Certificate of Designation and, with respect to Other
AMPS, has the equivalent meaning.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.
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<PAGE>
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Florida Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a)(i) the rating by S&P, Moody's or Fitch
on such Bond or (ii) in the event the Florida Municipal Bond is insured under a
Policy and the terms of the Policy permit the Trust, at its option, to obtain
other permanent insurance guaranteeing the timely payment of interest on such
Florida Municipal Bond and principal thereof to maturity, the S&P insurance
claims-paying ability rating of the issuer of the Policy or (iii) in the event
the Florida Municipal Bond is insured under an insurance policy which guarantees
the timely payment of interest on such Florida Municipal Bond and principal
thereof to maturity, the S&P insurance claims-paying ability rating of the
issuer of the insurance policy and (b) the S&P Exposure Period, in accordance
with the tables set forth below:
<TABLE>
<CAPTION>
For Florida Municipal Bonds:
- ---------------------------
Rating Category
----------------------------------------------------------------------
S&P Exposure Period AAA* AA* A* BBB*
- ------------------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
40 Business Days............................... 205% 210% 225% 265%
22 Business Days............................... 185 190 205 245
10 Business Days............................... 170 175 190 230
7 Business Days............................... 165 170 185 225
3 Business Days............................... 145 150 165 205
</TABLE>
______________
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Florida Municipal Bonds will be 115%, so long as such Florida Municipal Bonds
are rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
in 30 days or less, or 120% so long as such Florida Municipal Bonds are rated A-
1 or SP-1 by S&P and mature or have a demand feature exercisable in 30 days or
less, or 125% if such Florida Municipal Bonds are not rated by S&P but are rated
VMIG-1, P-1 or MIG-1 by Moody's or F-1 + by Fitch; provided, however, such
short-term Florida Municipal Bonds rated by Moody's or Fitch but not rated by
S&P having a demand feature exercisable in 30 days or less must be backed by a
letter of credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-1+ from S&P; and further
provided that such short-term Florida Municipal Bonds rated by Moody's or Fitch
but not rated by S&P may comprise no more than 50% of short-term Florida
Municipal Bonds that qualify as S&P Eligible Assets, (ii) the S&P Discount
Factor for
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<PAGE>
Receivables for Florida Municipal Bonds Sold that are due in more than five
Business Days from such Valuation Date will be the S&P Discount Factor
applicable to the Florida Municipal Bonds Sold, and (iii) no S&P Discount Factor
will be applied to cash or to Receivables for Florida Municipal Bonds Sold if
such receivables are due within five Business Days of such Valuation Date.
"Receivables for Florida Municipal Bonds Sold," for purposes of calculating S&P
Eligible Assets as of any Valuation Date, means the book value of receivables
for Florida Municipal Bonds sold as of or prior to such Valuation Date if such
receivables are due within five Business Days of such Valuation Date. The Trust
may adopt S&P Discount Factors for Municipal Bonds other than Florida Municipal
Bonds provided that S&P advises the Trust in writing that such action will not
adversely affect its then current rating on the AMPS. For purposes of the
foregoing, Anticipation Notes rated SP-1 or, if not rated by S&P, rated VMIG-1
by Moody's or F-1 + by Fitch, which do not mature or have a demand feature
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term Florida Municipal Bonds.
"S&P Eligible Asset" means cash, Receivables for Florida Municipal Bonds
Sold or a Florida Municipal Bond that (i) is interest bearing and pays interest
at least semi-annually; (ii) is payable with respect to principal and interest
in United States Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are grant anticipation notes or
bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's or Fitch, is rated at
least A by Moody's or Fitch (provided that such Moody's-rated or Fitch-rated
Florida Municipal Bonds will be included in S&P Eligible Assets only to the
extent the Market Value of such Florida Municipal Bonds does not exceed 50% of
the aggregate Market Value of the S&P Eligible Assets; and further provided
that, for purposes of determining the S&P Discount Factor applicable to any such
Moody's-rated or Fitch-rated Florida Municipal Bond, such Florida Municipal Bond
will be deemed to have an S&P rating which is one full rating category lower
than its Moody's rating); (iv) is not subject to a covered call or covered put
option written by the Trust; (v) except for Inverse Floaters, is not part of a
private placement of Florida Municipal Bonds; and (vi) except for Inverse
Floaters, is part of an issue of Florida Municipal Bonds with an original issue
size of at least $10 million or, if of an issue with an original issue size
below $10 million (but in no event below $5 million), is either (a) issued by an
issuer with a total of at least $25 million of securities outstanding or (b)
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<PAGE>
rated at least A by S&P with all such Florida Municipal Bonds not constituting
more than 20% of the aggregate Market Value of S&P Eligible Assets.
Notwithstanding the foregoing:
(1) Florida Municipal Bonds of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the Market Value of such Florida Municipal Bonds does not exceed 10% of the
aggregate Market Value of the S&P Eligible Assets, provided that 2% is
added to the applicable S&P Discount Factor for every 1% by which the
Market Value of such Florida Municipal Bonds exceeds 5% of the aggregate
Market Value of the S&P Eligible Assets; and
(2) Florida Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent
the Market Value of such Bonds does not exceed 25% of the aggregate Market
Value of S&P Eligible Assets, except that Florida Municipal Bonds falling
within the utility issue type category will be broken down into three sub-
categories (as described below) and such Florida Municipal Bonds will be
considered S&P Eligible Assets to the extent the Market Value of such Bonds
in each such sub-category does not exceed 25% of the aggregate Market Value
of S&P Eligible Assets and except that Florida Municipal Bonds falling
within the general obligation issue type category will be considered S&P
Eligible Assets to the extent the Market Value of such Bonds does not
exceed 50% of the aggregate Market Value of S&P Eligible Assets. For
purposes of the issue type category requirement described above, Florida
Municipal Bonds will be classified within one of the following categories:
health care issues, housing issues, educational facilities issues, student
loan issues, transportation issues, industrial development bond issues,
utility issues, general obligation issues, lease obligations, escrowed
bonds and other issues not falling within one of the aforementioned
categories. The general obligation issue type category includes any issuer
that is directly or indirectly guaranteed by the State of Florida or its
political subdivisions. Utility issuers are included in the general
obligation issue type category if the issuer is directly or indirectly
guaranteed by the State of Florida or its political subdivisions. For
purposes of the issue type category requirement described above, Florida
Municipal Bonds in the utility issue type category will be classified
within one of the three following sub-categories: (i) electric, gas and
combination issues (if the combination issue includes an electric issue),
(ii) water and sewer utilities and
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<PAGE>
combination issues (if the combination issue does not include
an electric issue), and (iii) irrigation, resource recovery, solid waste
and other utilities, provided that Florida Municipal Bonds included in this
sub-category (iii) must be rated by S&P in order to be included in S&P
Eligible Assets; and
(3) Florida Municipal Bonds which are escrow bonds or defeased bonds
may compose up to 100% of the aggregate Market Value of S&P Eligible Assets
if such Bonds initially are assigned a rating by S&P in accordance with
S&P's legal defeasance criteria or rerated by S&P as economic defeased
escrow bonds and assigned an AAA rating. Florida Municipal Bonds may be
rated as escrow bonds by another nationally recognized rating agency or
rerated as an escrow bond and assigned the equivalent of an S&P AAA rating,
provided that such equivalent rated Bonds are limited to 50% of the
aggregate Market Value of S&P Eligible Assets and are deemed to have an AA
S&P rating for purposes of determining the S&P Discount Factor applicable
to such Florida Municipal Bonds. The limitations on Florida Municipal Bonds
of any one issuer in clause (1) above are not applicable to escrow bonds,
however, economically defeased bonds that are either initially rated or
rerated by S&P or another nationally recognized rating agency and assigned
the same rating level as the issuer of the Bonds will remain in its
original issue type category set forth in clause (2) above. Florida
Municipal Bonds that are legally defeased and secured by securities issued
or guaranteed by the United States Government are not required to meet the
minimum issuance size requirement set forth above.
The Trust may include Municipal Bonds other than Florida Municipal Bonds as
S&P Eligible Assets pursuant to guidelines and restrictions to be established by
S&P provided that S&P advises the Trust in writing that such action will not
adversely affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Trust has under this Certificate of Designation to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount (as described in
paragraph 7(a) of this Certificate of Designation).
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<PAGE>
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
this Certificate of Designation.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Trust in writing is applicable.
"Securities Depository" means The Depository Trust Company or any successor
company or other entities elected by the Trust as securities depository for the
AMPS that agrees to follow the procedures required to be followed by such
securities depository in connection with the AMPS.
"Service" means the United States Internal Revenue Service.
"7-Day Dividend Period" means, with respect to each series of AMPS, a
Dividend Period consisting of seven days.
"Share Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the AMPS.
"Share Register" means the register of Holders maintained on behalf of the
Trust by the Auction Agent in its capacity as transfer agent and registrar for
the AMPS.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Trustees of the Trust, after consultation with the
Auction Agent and the Broker-Dealers, during which the AMPS subject to such
Dividend Period shall not be subject to redemption at the option of the Trust
and (ii) a period (a "Premium Call Period"), consisting of a number of whole
years and determined by the Board of Trustees of the Trust, after consultation
with the Auction Agent and the Broker-Dealers, during each year of which the
AMPS subject to such Dividend Period
22
<PAGE>
shall be redeemable at the Trust's option at a price per share equal to $25,000
plus accumulated but unpaid dividends plus a premium expressed as a percentage
of $25,000, as determined by the Board of Trustees of the Trust after
consultation with the Auction Agent and the Broker-Dealers.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of this Certificate of Designation and, with respect
to Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Trust may from time to time appoint or, in lieu
of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Trust, to act as the substitute rating agency or
substitute rating agencies, as the case may be, to determine the credit ratings
of the AMPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not made
so available by 8:30 A.M., New York City time, on such date by Kenny Information
Systems Inc. or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the
23
<PAGE>
per annum rate expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business Day, divided by
(B) 1.00 minus the Marginal Tax Rate (expressed as a decimal). The Trust may not
utilize a successor index to the Kenny Index unless Moody's and S&P provide the
Trust with written confirmation that the use of such successor index will not
adversely affect the then-current respective Moody's and S&P ratings of the
AMPS.
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of this
Certificate of Designation.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate"
on any date means the Interest Equivalent of the yield as calculated by
reference to the arithmetic average of the bid price quotations of the actively
traded Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate"
on any date means the yield as calculated by reference to the arithmetic average
of the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day
24
<PAGE>
immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the Trust is
maintaining the AMPS Basic Maintenance Amount, each Business Day commencing with
the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Market Value, Maximum Potential Additional Dividend Liability, Moody's
Discount Factor, Moody's Eligible Asset, Moody's Exposure Period, Moody's
Hedging Transactions, Moody's Volatility Factor, S&P Discount Factor, S&P
Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P Volatility
Factor, Valuation Date and Variation Margin have been determined by the Board of
Trustees of the Trust in order to obtain a "aaa" rating from Moody's and a AAA
rating from S&P on the AMPS on their Date of Original Issue; and the Board of
Trustees of the Trust shall have the authority, without shareholder approval, to
amend, alter or repeal from time to time the foregoing definitions and the
restrictions and guidelines set forth thereunder if Moody's and S&P or any
Substitute Rating Agency advises the Trust in writing that such amendment,
alteration or repeal will not adversely affect their then current ratings on the
AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as and
---------
if declared by the Board of Trustees of the Trust, out of funds legally
available therefor, cumulative dividends each consisting of (i) cash at the
Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
below, and (iii) any additional amounts as set forth in paragraph 2(f) below,
and no more, payable on the respective dates set forth below. Dividends on the
AMPS so declared and payable shall be paid (i) in preference to and in priority
over any dividends declared and payable on the Common Shares, and (ii) to the
extent permitted under the Code and to the extent available, out of net tax-
exempt income earned on the Trust's investments. To the extent permitted under
the Code, dividends on AMPS will be designated as exempt-interest dividends.
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<PAGE>
For the purposes of this section, the term "net tax-exempt income" shall exclude
capital gains of the Trust.
(b) (i) Cash dividends on AMPS shall accumulate from the Date of
Original Issue and shall be payable, when, as and if declared by the Board of
Trustees, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date with respect to each series of AMPS. Following the Initial
Dividend Payment Date for each series of AMPS, dividends on each series of AMPS
will be payable, at the option of the Trust, either (i) with respect to any 7-
Day Dividend Period and any Short Term Dividend Period of 35 or fewer days, on
the day next succeeding the last day thereof or (ii) with respect to any Short
Term Dividend Period of more than 35 days and with respect to any Long Term
Dividend Period, monthly on the first Business Day of each calendar month during
such Short Term Dividend Period or Long Term Dividend Period and on the day next
succeeding the last day thereof (each such date referred to in clause (i) or
(ii) being herein referred to as a "Normal Dividend Payment Date"), except that
if such Normal Dividend Payment Date is not a Business Day, then the Dividend
Payment Date shall be the first Business Day next succeeding such Normal
Dividend Payment Date. Although any particular Dividend Payment Date may not
occur on the originally scheduled date because of the exceptions discussed
above, the next succeeding Dividend Payment Date, subject to such exceptions,
will occur on the next following originally scheduled date. If for any reason a
Dividend Payment Date cannot be fixed as described above, then the Board of
Trustees shall fix the Dividend Payment Date. The Board of Trustees by
resolution prior to authorization of a dividend by the Board of Trustees may
change a Dividend Payment Date if such change does not adversely affect the
contract rights of the Holders of AMPS set forth in the Declaration. The Initial
Dividend Period, 7-Day Dividend Periods and Special Dividend Periods are
hereinafter sometimes referred to as Dividend Periods. Each dividend payment
date determined as provided above is hereinafter referred to as a "Dividend
Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the
Share Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as they appear on the Share Register on a
date, not exceeding 15 days prior to the payment date therefor, as may be fixed
by the Board of Trustees of the Trust.
26
<PAGE>
(c) (i) During the period from and including the Date of Original Issue
to but excluding the Initial Dividend Payment Date for each series of AMPS (the
"Initial Dividend Period"), the Applicable Rate shall be the Initial Dividend
Rate. Commencing on the Initial Dividend Payment Date for each series of AMPS,
the Applicable Rate for each subsequent dividend period (hereinafter referred to
as a "Subsequent Dividend Period"), which Subsequent Dividend Period shall
commence on and include a Dividend Payment Date and shall end on and include the
calendar day prior to the next Dividend Payment Date (or last Dividend Payment
Date in a Dividend Period if there is more than one Dividend Payment Date),
shall be equal to the rate per annum that results from implementation of the
Auction Procedures.
The Applicable Rate for each Dividend Period commencing during a Non-
Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend
Period, commencing after the first day of, and during, a Non-Payment Period
shall be a 7-Day Dividend Period in the case of each series of AMPS. Except in
the case of the willful failure of the Trust to pay a dividend on a Dividend
Payment Date or to redeem any AMPS on the date set for such redemption, any
amount of any dividend due on any Dividend Payment Date (if, prior to the close
of business on the second Business Day preceding such Dividend Payment Date, the
Trust has declared such dividend payable on such Dividend Payment Date to the
Holders of such AMPS as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date) or redemption price with respect to any
AMPS not paid to such Holders when due may be paid to such Holders in the same
form of funds by 12:00 noon, New York City time, on any of the first three
Business Days after such Dividend Payment Date or due date, as the case may be,
provided that, such amount is accompanied by a late charge calculated for such
period of non-payment at the Non-Payment Period Rate applied to the amount of
such non-payment based on the actual number of days comprising such period
divided by 365. In the case of a willful failure of the Trust to pay a dividend
on a Dividend Payment Date or to redeem any AMPS on the date set for such
redemption, the preceding sentence shall not apply and the Applicable Rate for
the Dividend Period commencing during the Non-Payment Period resulting from such
failure shall be the Non-Payment Period Rate. For the purposes of the
foregoing, payment to a person in same-day funds on any Business Day at any time
shall be considered equivalent to payment to such person in New York Clearing
House (next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business
27
<PAGE>
Day shall be considered to have been made instead in the same form of funds and
to the same person before 12:00 noon, New York City time, on the next Business
Day.
(ii) The amount of cash dividends per share of any series of AMPS payable
(if declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period
and each Dividend Payment Date of each Short Term Dividend Period shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of AMPS payable (if declared) on
any Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment Date
and the denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Trust may, at its sole option and to the extent permitted by law, by
telephonic and written notice (a "Request for Special Dividend Period") to the
Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for a series of AMPS be a number of days (other than seven),
evenly divisible by seven, and not fewer than seven nor more than 364 in the
case of a Short Term Dividend Period or one whole year or more but not greater
than five years in the case of a Long Term Dividend Period, specified in such
notice, provided that the Trust may not give a Request for Special Dividend
Period of greater than 28 days (and any such request shall be null and void)
unless, for any Auction occurring after the initial Auction, Sufficient Clearing
Bids were made in the last occurring Auction and unless full cumulative
dividends, any amounts due with respect to redemptions, and any Additional
Dividends payable prior to such date have been paid in full. Such Request for
Special Dividend
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Period, in the case of a Short Term Dividend Period, shall be given on or prior
to the second Business Day but not more than seven Business Days prior to an
Auction Date for a series of AMPS and, in the case of a Long Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
28 days prior to an Auction Date for the AMPS. Upon receiving such Request for
Special Dividend Period, the Broker-Dealer(s) shall jointly determine whether,
given the factors set forth below, it is advisable that the Trust issue a Notice
of Special Dividend Period for the series of AMPS as contemplated by such
Request for Special Dividend Period and the Optional Redemption Price of the
AMPS during such Special Dividend Period and the Specific Redemption Provisions
and shall give the Trust and the Auction Agent written notice (a "Response") of
such determination by no later than the second Business Day prior to such
Auction Date. In making such determination the Broker-Dealer(s) will consider
(1) existing short-term and long-term market rates and indices of such short-
term and long-term rates, (2) existing market supply and demand for short-term
and long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the AMPS, (4) industry and financial conditions which
may affect the AMPS, (5) the investment objective of the Trust, and (6) the
Dividend Periods and dividend rates at which current and potential beneficial
holders of the AMPS would remain or become beneficial holders. If the Broker-
Dealer(s) shall not give the Trust and the Auction Agent a Response by such
second Business Day or if the Response states that given the factors set forth
above it is not advisable that the Trust give a Notice of Special Dividend
Period for the series of AMPS, the Trust may not give a Notice of Special
Dividend Period in respect of such Request for Special Dividend Period. In the
event the Response indicates that it is advisable that the Trust give a Notice
of Special Dividend Period for the series of AMPS, the Trust may by no later
than the second Business Day prior to such Auction Date
give a notice (a "Notice of Special Dividend Period") to the Auction Agent, the
Securities Depository and each Broker-Dealer which notice will specify (i) the
duration of the Special Dividend Period, (ii) the Optional Redemption Price as
specified in the related Response and (iii) the Specific Redemption Provisions,
if any, as specified in the related Response. The Trust also shall provide a
copy of such Notice of Special Dividend Period to Moody's and S&P. The Trust
shall not give a Notice of Special Dividend Period and, if the Trust has given a
Notice of Special Dividend Period, the Trust is required to give telephonic and
written notice of its revocation (a "Notice of Revocation") to the Auction
Agent, each Broker-Dealer, and the Securities Depository on or prior to the
Business Day prior to the relevant Auction Date if (x) either the 1940 Act AMPS
Asset Coverage is not satisfied or the Trust shall fail to maintain S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value at
least equal to the AMPS Basic Maintenance Amount, in each case on each of the
two Valuation Dates immediately
29
<PAGE>
preceding the Business Day prior to the relevant Auction Date on an actual basis
and on a pro forma basis giving effect to the proposed Special Dividend Period
(using as a pro forma dividend rate with respect to such Special Dividend Period
the dividend rate which the Broker-Dealers shall advise the Trust is an
approximately equal rate for securities similar to the AMPS with an equal
dividend period), provided that, in calculating the aggregate Discounted Value
of Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall
be deemed to be one week longer, (y) sufficient funds for the payment of
dividends payable on the immediately succeeding Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the close of business on
the third Business Day preceding the related Auction Date or (z) the Broker-
Dealer(s) jointly advise the Trust that after consideration of the factors
listed above they have concluded that it is advisable to give a Notice of
Revocation. The Trust also shall provide a copy of such Notice of Revocation to
Moody's and S&P. If the Trust is prohibited from giving a Notice of Special
Dividend Period as a result of any of the factors enumerated in clause (x), (y)
or (z) above or if the Trust gives a Notice of Revocation with respect to a
Notice of Special Dividend Period for any series of AMPS, the next succeeding
Dividend Period will be a 7-Day Dividend Period in the case of Series A AMPS and
Series B AMPS. In addition, in the event Sufficient Clearing Bids are not made
in the applicable Auction or such Auction is not held for any reason, such next
succeeding Dividend Period will be a 7-Day Dividend Period (in the case of
Series A AMPS and Series B AMPS) and the Trust may not again give a Notice of
Special Dividend Period for the AMPS (and any such attempted notice shall be
null and void) until Sufficient Clearing Bids have been made in an Auction with
respect to a 7-Day Dividend Period (in the case of Series A AMPS and Series B
AMPS).
(d) (i) Holders shall not be entitled to any dividends, whether payable
in cash, property or shares, in excess of full cumulative dividends and
applicable late charges, as herein provided, on the AMPS (except for Additional
Dividends as provided in paragraph 2(e) hereof and additional payments as
provided in paragraph 2(f) hereof). Except for the late charge payable pursuant
to paragraph 2(c)(i) hereof, no interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment on the AMPS that may be in
arrears.
(ii) For so long as any share of AMPS is Outstanding, the Trust shall not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or
30
<PAGE>
other shares of beneficial interest, if any, ranking junior to the AMPS as to
dividends or upon liquidation) in respect of the Common Shares or any other
shares of the Trust ranking junior to or on a parity with the AMPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the Common Shares or any other
such junior shares of beneficial interest (except by conversion into or exchange
for shares of the Trust ranking junior to the AMPS as to dividends and upon
liquidation) or any other such Parity Shares (except by conversion into or
exchange for shares of the Trust ranking junior to or on a parity with the AMPS
as to dividends and upon liquidation), unless (A) immediately after such
transaction, the Trust shall have S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount and the Trust shall maintain the 1940 Act AMPS Asset
Coverage, (B) full cumulative dividends on AMPS and shares of Other AMPS due on
or prior to the date of the transaction have been declared and paid or shall
have been declared and sufficient funds for the payment thereof deposited with
the Auction Agent, (C) any Additional Dividend required to be paid under
paragraph 2(e) below on or before the date of such declaration or payment has
been paid and (D) the Trust has redeemed the full number of AMPS required to be
redeemed by any provision for mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii)
an uncertificated right (a "Right") to receive an Additional Dividend (as
defined below), and (iii) any additional amounts as set forth in paragraph 2(f)
below. Each Right shall thereafter be independent of the AMPS on which the
dividend was paid. The Trust shall cause to be maintained a record of each Right
received by the respective Holders. A Right may not be transferred other than by
operation of law. If the Trust retroactively allocates any net capital gains or
other income subject to regular Federal income taxes to AMPS without having
given advance notice thereof to the Auction Agent as described in paragraph 2(f)
hereof solely by reason of the fact that such allocation is made as a result of
the redemption of all or a portion of the outstanding AMPS or the liquidation of
the Trust (the amount of such allocation referred to herein as a "Retroactive
Taxable Allocation"), the Trust will, within 90 days (and generally within 60
days) after the end of the Trust's fiscal year for which a Retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and to each
holder of a Right applicable to such AMPS (initially Cede & Co. as nominee of
The Depository Trust Company) during such fiscal year at such
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<PAGE>
holder's address as the same appears or last appeared on the Share Books of the
Trust. The Trust will, within 30 days after such notice is given to the Auction
Agent, pay to the Auction Agent (who will then distribute to such holders of
Rights), out of funds legally available therefor, an amount equal to the
aggregate Additional Dividend with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
AMPS of an amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such holder with respect to the fiscal
year in question, would cause such holder's dividends in dollars (after Federal
and Florida income tax consequences) from the aggregate of both the Retroactive
Taxable Allocations and the Additional Dividend to be equal to the dollar amount
of the dividends which would have been received by such holder if the amount of
the aggregate Retroactive Taxable Allocations would have been excludable from
the gross income of such holder. Such Additional Dividend shall be calculated
(i) without consideration being given to the time value of money; (ii) assuming
that no holder of AMPS is subject to the Federal alternative minimum tax with
respect to dividends received from the Trust; and (iii) assuming that each
Retroactive Taxable Allocation would be taxable in the hands of each holder of
AMPS at the greater of: (x) the maximum combined marginal regular Federal
individual income tax rate applicable to ordinary income or capital gains
depending on the taxable character of the distribution (including any surtax);
or (y) the maximum combined marginal regular Federal and Florida corporate
income tax rate applicable to ordinary income or capital gains depending on the
taxable character of the distribution (taking into account in both (x) and (y)
the Federal income tax deductibility of state taxes paid or incurred but not any
phase out of, or provision limiting, personal exemptions, itemized deductions,
or the benefit of lower tax brackets and assuming the taxability of Federally
tax-exempt dividends for corporations for Florida income tax purposes).
(f) Except as provided below, whenever the Trust intends to include any
net capital gains or other income subject to regular Federal income taxes in any
dividend on AMPS, the Trust will notify the Auction Agent of the amount to be so
included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. The Trust may also
include such income in a dividend on shares of a series of AMPS without giving
advance notice thereof if it increases the dividend by an additional amount
calculated as if such
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<PAGE>
income was a Retroactive Taxable Allocation and the additional amount was an
Additional Dividend, provided that the Trust will notify the Auction Agent of
the additional amounts to be included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date.
(g) No fractional AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or winding up of
------------------
the Trust, whether voluntary or involuntary, the Holders shall be entitled to
receive, out of the assets of the Trust available for distribution to
shareholders, before any distribution or payment is made upon any Common Shares
or any other shares of beneficial interest ranking junior in right of payment
upon liquidation to the AMPS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Additional Dividends as provided in paragraph 2(e) hereof.
If upon any liquidation, dissolution or winding up of the Trust, the amounts
payable with respect to the AMPS and any other Outstanding class or series of
Preferred Shares of the Trust ranking on a parity with the AMPS as to payment
upon liquidation are not paid in full, the Holders and the holders of such other
class or series will share ratably in any such distribution of assets in
proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of the liquidating distribution to which they
are entitled, the Holders will not be entitled to any further participation in
any distribution of assets by the Trust except for any Additional Dividends. A
consolidation, merger or statutory share exchange of the Trust with or into any
other corporation or entity or a sale, whether for cash, shares of stock,
securities or properties, of all or substantially all or any part of the assets
of the Trust shall not be deemed or construed to be a liquidation, dissolution
or winding up of the Trust.
4. Redemption. (a) Shares of AMPS shall be redeemable by the Trust as
----------
provided below:
(i) To the extent permitted under the 1940 Act and Massachusetts law,
upon giving a Notice of Redemption, the Trust at its option may redeem AMPS, in
whole or in part, out of funds legally available therefor, at the Optional
Redemption Price per share, on any Dividend Payment Date; provided that no share
of AMPS may be redeemed at the
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option of the Trust during (A) the Initial Dividend Period with respect to a
series of shares or (B) a Non-Call Period to which such share is subject. In
addition, holders of AMPS which are redeemed shall be entitled to receive
Additional Dividends to the extent provided herein. The Trust may not give a
Notice of Redemption relating to an optional redemption as described in this
paragraph 4(a)(i) unless, at the time of giving such Notice of Redemption, the
Trust has available Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount due to Holders by reason of the redemption of their AMPS on
such redemption date.
(ii) The Trust shall redeem, out of funds legally available therefor, at
the Mandatory Redemption Price per share, AMPS to the extent permitted under the
1940 Act, on a date fixed by the Board of Trustees, if the Trust fails to
maintain S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount as
provided in paragraph 7(a) or to satisfy the 1940 Act AMPS Asset Coverage as
provided in paragraph 6 and such failure is not cured on or before the AMPS
Basic Maintenance Cure Date or the 1940 Act Cure Date (herein collectively
referred to as a "Cure Date"), as the case may be. In addition, holders of AMPS
so redeemed shall be entitled to receive Additional Dividends to the extent
provided herein. The number of AMPS to be redeemed shall be equal to the lesser
of (i) the minimum number of AMPS the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the Cure Date, together
with all shares of other Preferred Shares subject to redemption or retirement,
would result in the Trust having S&P Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or satisfaction of the 1940 Act AMPS Asset Coverage, as the
case may be, on such Cure Date (provided that, if there is no such minimum
number of AMPS and of other Preferred Shares the redemption of which would have
such result, all AMPS and other Preferred Shares then Outstanding shall be
redeemed), and (ii) the maximum number of AMPS, together with all other
Preferred Shares subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor on such redemption date. In
determining the number of AMPS required to be redeemed in accordance with the
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<PAGE>
foregoing, the Trust shall allocate the number required to be redeemed
which would result in the Trust having S&P Eligible Assets and Moody's
Eligible Assets each with an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount or satisfaction of the 1940 Act AMPS
Asset Coverage, as the case may be, pro rata among AMPS of all series,
Other AMPS and other Preferred Shares subject to redemption pursuant to
provisions similar to those contained in this paragraph 4(a)(ii); provided
that, AMPS which may not be redeemed at the option of the Trust due to the
designation of a Non-Call Period applicable to such shares (A) will be
subject to mandatory redemption only to the extent that other shares are
not available to satisfy the number of shares required to be redeemed and
(B) will be selected for redemption in an ascending order of outstanding
number of days in the Non-Call Period (with shares with the lowest number
of days to be redeemed first) and by lot in the event of shares having an
equal number of days in such Non-Call Period. The Trust shall effect such
redemption on a Business Day which is not later than 35 days after such
Cure Date, except that if the Trust does not have funds legally available
for the redemption of all of the required number of AMPS and other
Preferred Shares which are subject to mandatory redemption or the Trust
otherwise is unable to effect such redemption on or prior to 35 days after
such Cure Date, the Trust shall redeem those AMPS which it is unable to
redeem on the earliest practicable date on which it is able to effect such
redemption out of funds legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no AMPS may
be redeemed pursuant to paragraph 4(a)(i) of this Certificate of Designation (i)
unless all dividends in arrears on all remaining outstanding Parity Shares shall
have been or are being contemporaneously paid or declared and set apart for
payment and (ii) if redemption thereof would result in the Trust's failure to
maintain Moody's Eligible Assets or S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount. In
the event that less than all the outstanding shares of a series of AMPS are to
be redeemed and there is more than one Holder, the shares of that series of AMPS
to be redeemed shall be selected by lot or such other method as the Trust shall
deem fair and equitable.
(c) Whenever AMPS are to be redeemed, the Trust, not less than 17 nor more
than 30 days prior to the date fixed for redemption, shall mail a notice
("Notice of Redemption") by first-
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- -class mail, postage prepaid, to each Holder of AMPS to be redeemed and to the
Auction Agent. The Trust shall cause the Notice of Redemption to also be
published in the eastern and national editions of The Wall Street Journal. The
-----------------------
Notice of Redemption shall set forth (i) the redemption date, (ii) the amount of
the redemption price, (iii) the aggregate number of AMPS of such series to be
redeemed, (iv) the place or places where AMPS of such series are to be
surrendered for payment of the redemption price, (v) a statement that dividends
on the shares to be redeemed shall cease to accumulate on such redemption date
(except that holders may be entitled to Additional Dividends) and (vi) the
provision of this Certificate of Designation pursuant to which such shares are
being redeemed. No defect in the Notice of Redemption or in the mailing or
publication thereof shall affect the validity of the redemption proceedings,
except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Trust shall have deposited in trust with the
Auction Agent, or segregated in an account at the Trust's custodian bank for the
benefit of the Auction Agent, Deposit Securities (with a right of substitution)
having an aggregate Discounted Value (utilizing in the case of S&P an S&P
Exposure Period of 22 Business Days) equal to the redemption payment for the
AMPS as to which such Notice of Redemption has been given with irrevocable
instructions and authority to pay the redemption price to the Holders of such
shares, then upon the date of such deposit or, if no such deposit is made, then
upon such date fixed for redemption (unless the Trust shall default in making
the redemption payment), all rights of the Holders of such shares as
shareholders of the Trust by reason of the ownership of such shares will cease
and terminate (except their right to receive the redemption price in respect
thereof and any Additional Dividends, but without interest), and such shares
shall no longer be deemed outstanding. The Trust shall be entitled to receive,
from time to time, from the Auction Agent the interest, if any, on such Deposit
Securities deposited with it and the Holders of any shares so redeemed shall
have no claim to any of such interest. In case the Holder of any shares so
called for redemption shall not claim the redemption payment for his shares
within one year after the date of redemption, the Auction Agent shall, upon
demand, pay over to the Trust such amount remaining on deposit and the Auction
Agent shall thereupon be relieved of all responsibility to the Holder of such
shares called for redemption and such Holder thereafter shall look only to the
Trust for the redemption payment.
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5. Voting Rights. (a) General. Except as otherwise provided in the
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Declaration or By-Laws, each Holder of AMPS shall be entitled to one vote for
each share held on each matter submitted to a vote of shareholders of the Trust,
and the holders of outstanding Preferred Shares, including AMPS, and of Common
Shares vote together as a single class; provided that, at any meeting of the
shareholders of the Trust held for the election of trustees, the holders of
outstanding Preferred Shares, including AMPS, shall be entitled, as a class, to
the exclusion of the holders of all other securities and classes of shares of
beneficial interest of the Trust, to elect two trustees of the Trust. Subject
to paragraph 5(b) hereof, the holders of outstanding shares of beneficial
interest of the Trust, including the holders of outstanding Preferred Shares,
including AMPS, voting as a single class, shall elect the balance of the
trustees.
(b) Right to Elect Majority of Board of Trustees. During any period in
--------------------------------------------
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of trustees
constituting the Board of Trustees shall be automatically increased by the
smallest number that, when added to the two trustees elected exclusively by the
holders of Preferred Shares, would constitute a majority of the Board of
Trustees as so increased by such smallest number; and the holders of Preferred
Shares shall be entitled, voting separately as one class (to the exclusion of
the holders of all other securities and classes of shares of beneficial interest
of the Trust), to elect such smallest number of additional trustees, together
with the two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding AMPS equal to at least two full
years' dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the
payment of such accumulated dividends; or
(ii) if at any time holders of any other Preferred Shares are entitled
to elect a majority of the trustees of the Trust under the 1940 Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this paragraph 5(b).
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(c) Right to Vote with Respect to Certain Other Matters. So long as any
---------------------------------------------------
AMPS are outstanding, the Trust shall not, without the affirmative vote of the
holders of a majority of the Preferred Shares Outstanding at the time, voting
separately as one class: (i) authorize, create or issue any class or series of
shares ranking prior to the AMPS or any other series of Preferred Shares with
respect to payment of dividends or the distribution of assets on liquidation, or
(ii) amend, alter or repeal the provisions of the Declaration, whether by
merger, consolidation or otherwise, so as to adversely affect any of the
contract rights expressly set forth in the Declaration of holders of AMPS or any
other Preferred Shares. To the extent permitted under the 1940 Act, in the event
shares of more than one series of AMPS are outstanding, the Trust shall not
approve any of the actions set forth in clause (i) or (ii) which adversely
affects the contract rights expressly set forth in the Declaration of a Holder
of shares of a series of AMPS differently than those of a Holder of shares of
any other series of AMPS without the affirmative vote of the holders of at least
a majority of the AMPS of each series adversely affected and outstanding at such
time (each such adversely affected series voting separately as a class). The
Trust shall notify Moody's and S&P ten Business Days prior to any such vote
described in clause (i) or (ii). Unless a higher percentage is provided for
under the Declaration, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares, including AMPS, voting together as a single class,
will be required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act. The class vote of holders
of Preferred Shares, including AMPS, described above will in each case be in
addition to a separate vote of the requisite percentage of shares of beneficial
interest and Preferred Shares, including AMPS, voting together as a single class
necessary to authorize the action in question.
(d) Voting Procedures.
------------------
(i) As soon as practicable after the accrual of any right of the
holders of Preferred Shares to elect additional trustees as described in
paragraph 5(b) above, the Trust shall call a special meeting of such holders and
instruct the Auction Agent to mail a notice of such special meeting to such
holders, such meeting to be held not less than 10 nor more than 20 days after
the date of mailing of such notice. If the Trust fails to send such notice to
the Auction Agent or if the Trust does not call such a special meeting, it may
be called by any such holder on like notice. The record date for determining the
holders entitled to notice of and to vote at such special
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<PAGE>
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting held during a Voting Period, such Holders, voting together as a class
(to the exclusion of the holders of all other securities and classes of shares
of beneficial interest of the Trust), shall be entitled to elect the number of
trustees prescribed in paragraph 5(b) above. At any such meeting or adjournment
thereof in the absence of a quorum, a majority of such holders present in person
or by proxy shall have the power to adjourn the meeting without notice, other
than by an announcement at the meeting, to a date not more than 120 days after
the original record date.
(ii) For purposes of determining any rights of the Holders to vote on any
matter or the number of shares required to constitute a quorum, whether such
right is created by this Certificate of Designation, by the other provisions of
the Declaration, by statute or otherwise, a share of AMPS which is not
Outstanding shall not be counted.
(iii) The terms of office of all persons who are trustees of the Trust at
the time of a special meeting of Holders and holders of other Preferred Shares
to elect trustees shall continue, notwithstanding the election at such meeting
by the Holders and such other holders of the number of trustees that they are
entitled to elect, and the persons so elected by the Holders and such other
holders, together with the two incumbent trustees elected by the Holders and
such other holders of Preferred Shares and the remaining incumbent trustees
elected by the holders of the Common Shares and Preferred Shares, shall
constitute the duly elected trustees of the Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms of
office of the additional trustees elected by the Holders and holders of other
Preferred Shares pursuant to paragraph 5(b) above shall terminate, the remaining
trustees shall constitute the trustees of the Trust and the voting rights of the
Holders and such other holders to elect additional trustees pursuant to
paragraph 5(b) above shall cease, subject to the provisions of the last sentence
of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
----------------
AMPS shall not have any rights or preferences other than those specifically set
forth herein. The Holders of AMPS shall have no preemptive rights or rights to
cumulative voting. In the event that the Trust fails to pay any dividends on the
AMPS, the exclusive remedy of the Holders shall be the right to vote for
trustees pursuant to the provisions of this paragraph 5.
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(f) Notification to S&P and Moody's. In the event a vote of Holders of
-------------------------------
AMPS is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Trust shall, not later than ten Business Days prior to the date on which
such vote is to be taken, notify S&P and Moody's that such vote is to be taken
and the nature of the action with respect to which such vote is to be taken and,
not later than ten Business Days after the date on which such vote is taken,
notify S&P and Moody's of the result of such vote.
6. 1940 Act AMPS Asset Coverage. The Trust shall maintain, as of the last
----------------------------
Business Day of each month in which any share of AMPS is outstanding, the 1940
Act AMPS Asset Coverage.
7. AMPS Basic Maintenance Amount. (a) The Trust shall maintain, on each
-----------------------------
Valuation Date, and shall verify to its satisfaction that it is maintaining on
such Valuation Date, (i) S&P Eligible Assets having an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount and (ii)
Moody's Eligible Assets having an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount. Upon any failure to maintain the
required Discounted Value, the Trust will use its best efforts to alter the
composition of its portfolio to reattain a Discounted Value at least equal to
the AMPS Basic Maintenance Amount on or prior to the AMPS Basic Maintenance Cure
Date.
(b) On or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the AMPS Basic
Maintenance Amount, the Trust shall complete and deliver to the Auction Agent,
and Moody's and S&P, as the case may be, a complete AMPS Basic Maintenance
Report as of the date of such failure, which will be deemed to have been
delivered to the Auction Agent if the Auction Agent receives a copy or telecopy,
telex or other electronic transcription thereof and on the same day the Trust
mails to the Auction Agent for delivery on the next Business Day the complete
AMPS Basic Maintenance Report. The Trust will deliver an AMPS Basic Maintenance
Report to the Auction Agent and Moody's and S&P, as the case may be, on or
before 5:00 p.m., New York City time, on the third Business Day after a
Valuation Date on which the Trust cures its failure to maintain Moody's Eligible
Assets or S&P Eligible Assets, as the case may be, with an aggregate
40
<PAGE>
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount or
on which the Trust fails to maintain Moody's Eligible Assets or S&P Eligible
Assets, as the case may be, with an aggregate Discounted Value which exceeds the
AMPS Basic Maintenance Amount by 5% or more. The Trust will also deliver an AMPS
Basic Maintenance Report to the Auction Agent, Moody's and S&P as of each
Quarterly Valuation Date on or before the third Business Day after such date.
Additionally, on or before 5:00 p.m., New York City time, on the third Business
Day after the first day of a Special Dividend Period, the Trust will deliver an
AMPS Basic Maintenance Report to S&P and the Auction Agent. The Trust shall also
provide Moody's and S&P with an AMPS Basic Maintenance Report when specifically
requested by either Moody's or S&P. A failure by the Trust to deliver an AMPS
Basic Maintenance Report under this paragraph 7(b) shall be deemed to be
delivery of an AMPS Basic Maintenance Report indicating the Discounted Value for
S&P Eligible Assets and Moody's Eligible Assets of the Trust is less than the
AMPS Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an AMPS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent, S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other AMPS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Trust during the quarter ending on such Quarterly Valuation Date), (ii)
that, in such Report (and in such randomly selected Report), the Trust correctly
determined the assets of the Trust which constitute S&P Eligible Assets or
Moody's Eligible Assets, as the case may be, at such Quarterly Valuation Date in
accordance with this Certificate of Designation, (iii) that, in such Report (and
in such randomly selected Report), the Trust determined whether the Trust had,
at such Quarterly Valuation Date (and at the Valuation Date addressed in such
randomly selected Report) in accordance with this Certificate of Designation,
S&P Eligible Assets of an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount and Moody's Eligible Assets of an aggregate Discounted
Value at least equal to the AMPS Basic Maintenance Amount, (iv) with respect to
the S&P ratings on Florida Municipal Bonds or Municipal Bonds, the issuer name,
issue size and coupon rate listed in such Report, that the Independent
Accountant has requested that S&P verify such information and the Independent
Accountant shall provide a listing in its letter of any differences, (v) with
respect to the Moody's ratings on Florida Municipal Bonds or Municipal Bonds,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by Moody's (in the event such
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<PAGE>
information is not verified by Moody's, the Independent Accountant will inquire
of Moody's what such information is, and provide a listing in its letter of any
differences), (vi) with respect to the bid or mean price (or such alternative
permissible factor used in calculating the Market Value) provided by the
custodian of the Trust's assets to the Trust for purposes of valuing securities
in the Trust's portfolio, the Independent Accountant has traced the price used
in such Report to the bid or mean price listed in such Report as provided to the
Trust and verified that such information agrees (in the event such information
does not agree, the Independent Accountant will provide a listing in its letter
of such differences) and (vii) with respect to such confirmation to Moody's,
that the Trust has satisfied the requirements of paragraph 8(b) of this
Certificate of Designation (such confirmation is herein called the "Accountant's
Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above relating to any Valuation Date on which the Trust failed to
maintain S&P Eligible Assets with an aggregate Discounted Value and Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount, and relating to the AMPS Basic Maintenance Cure
Date with respect to such failure, the Independent Accountant will provide to
the Auction Agent, S&P and Moody's an Accountant's Confirmation as to such AMPS
Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph (c)
or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Trust was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Trust, and the Trust shall accordingly amend and deliver the AMPS Basic
Maintenance Report to the Auction Agent, S&P and Moody's promptly following
receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the AMPS, the Trust will complete and
deliver to S&P and Moody's an AMPS Basic Maintenance Report as of the close of
business on such Date of Original Issue.
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<PAGE>
Within five Business Days of such Date of Original Issue, the Independent
Accountant will confirm in writing to S&P and Moody's (i) the mathematical
accuracy of the calculations reflected in such Report and (ii) that the
aggregate Discounted Value of S&P Eligible Assets and the aggregate Discounted
Value of Moody's Eligible Assets reflected thereon equals or exceeds the AMPS
Basic Maintenance Amount reflected thereon. Also, on or before 5:00 p.m., New
York City time, on the first Business Day after Common Shares are repurchased by
the Trust, the Trust will complete and deliver to S&P and Moody's an AMPS Basic
Maintenance Report as of the close of business on such date that Common Shares
are repurchased.
(g) For so long as AMPS are rated by Moody's, in managing the Trust's
portfolio, the Adviser will not alter the composition of the Trust's portfolio
if, in the reasonable belief of the Adviser, the effect of any such alteration
would be to cause the Trust to have Moody's Eligible Assets with an aggregate
Discounted Value, as of the immediately preceding Valuation Date, less than the
AMPS Basic Maintenance Amount as of such Valuation Date; provided, however, that
in the event that, as of the immediately preceding Valuation Date, the aggregate
Discounted Value of Moody's Eligible Assets exceeded the AMPS Basic Maintenance
Amount by five percent or less, the Adviser will not alter the composition of
the Trust's portfolio in a manner reasonably expected to reduce the aggregate
Discounted Value of Moody's Eligible Assets unless the Trust shall have
confirmed that, after giving effect to such alteration, the aggregate Discounted
Value of Moody's Eligible Assets would exceed the AMPS Basic Maintenance Amount.
8. Certain Other Restrictions and Requirements. (a) For so long as any
--------------------------------------------
AMPS are rated by S&P, the Trust will not purchase or sell futures contracts,
write, purchase or sell options on futures contracts or write put options
(except covered put options) or call options (except covered call options) on
portfolio securities unless it receives written confirmation from S&P that
engaging in such transactions will not impair the ratings then assigned to the
AMPS by S&P, except that the Trust may purchase or sell futures contracts based
on the Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and
call options on such contracts (collectively, "S&P Hedging Transactions"),
subject to the following limitations:
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<PAGE>
(i) the Trust will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures contract or
option held by the Trust by the Trust's taking an opposite position thereto
("Closing Transactions")), which would cause the Trust at the time of such
transaction to own or have sold the least of (A) more than 1,000 outstanding
futures contracts based on the Municipal Index, (B) outstanding futures
contracts based on the Municipal Index exceeding in number 25% of the quotient
of the Market Value of the Trust's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal;
-----------------------
(ii) the Trust will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the Trust at
the time of such transaction to own or have sold the lesser of (A) outstanding
futures contracts based on Treasury Bonds and on the Municipal Index exceeding
in number 25% of the quotient of the Market Value of the Trust's total assets
divided by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal;
-----------------------
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any outstanding
option thereon owned by the Trust in the event (A) the Trust does not have S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount on two consecutive Valuation Dates and (B) the
Trust is required to pay Variation Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon unless
the Trust holds the securities deliverable under such terms; and
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<PAGE>
(v) when the Trust writes a futures contract or option thereon, it will
either maintain an amount of cash, cash equivalents or high grade (rated A or
better by S&P), fixed-income securities in a segregated account with the
Trust's custodian, so that the amount so segregated plus the amount of Initial
Margin and Variation Margin held in the account of or on behalf of the Trust's
broker with respect to such futures contract or option equals the Market Value
of the futures contract or option, or, in the event the Trust writes a futures
contract or option thereon which requires delivery of an underlying security,
it shall hold such underlying security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets with
a Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin or
Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the aggregate
settlement value, as marked to market, of any outstanding futures contracts
based on the Municipal Index which are owned by the Trust plus (ii) 25% of the
aggregate settlement value, as marked to market, of any outstanding futures
contracts based on Treasury Bonds which contracts are owned by the Trust.
(b) For so long as any AMPS are rated by Moody's, the Trust will not buy or
sell futures contracts, write, purchase or sell call options on futures
contracts or purchase put options on futures contracts or write call options
(except covered call options) on portfolio securities unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the ratings then assigned to the AMPS by Moody's, except that the Trust may
purchase or sell exchange-traded futures contracts based on the Municipal Index
or Treasury Bonds and purchase, write or sell exchange-traded put options on
such futures contracts and purchase, write or sell exchange-traded call options
on such futures contracts (collectively, "Moody's Hedging Transactions"),
subject to the following limitations:
(i) the Trust will not engage in any Moody's Hedging Transaction based on
the Municipal Index (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold (A) outstanding
futures contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded futures contracts based on the Municipal Index
in the 30 days preceding the time of
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effecting such transaction as reported by The Wall Street Journal or (B)
-----------------------
outstanding futures contracts based on the Municipal Index having a Market
Value exceeding 50% of the Market Value of all Municipal Bonds constituting
Moody's Eligible Assets owned by the Trust (other than Moody's Eligible Assets
already subject to a Moody's Hedging Transaction);
(ii) the Trust will not engage in any Moody's Hedging Transaction based
on Treasury Bonds (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold (A) outstanding
futures contracts based on Treasury Bonds having an aggregate Market Value
exceeding 20% of the aggregate Market Value of Moody's Eligible Assets owned
by the Trust and rated Aa by Moody's (or, if not rated by Moody's but rated by
S&P, rated AAA by S&P) or (B) outstanding futures contracts based on Treasury
Bonds having an aggregate Market Value exceeding 40% of the aggregate Market
Value of all Municipal Bonds constituting Moody's Eligible Assets owned by the
Trust (other than Moody's Eligible Assets already subject to a Moody's Hedging
Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's but
rated by S&P, rated A or AA by S&P) (for purposes of the foregoing clauses (i)
and (ii), the Trust shall be deemed to own the number of futures contracts
that underlie any outstanding options written by the Trust);
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the amount of
open interest in the Municipal Index as reported by The Wall Street Journal is
-----------------------
less than 5,000;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth Business Day of the
month in which such contract expires and will engage in a Closing Transaction
to close out any outstanding option on a futures contract by no later than the
first Business Day of the month in which such option expires;
(v) the Trust will engage in Moody's Hedging Transactions only with
respect to futures contracts or options thereon having the next settlement
date or the settlement date immediately thereafter;
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<PAGE>
(vi) the Trust will not engage in options and futures transactions for
leveraging or speculative purposes and will not write any call options or sell
any futures contracts for the purpose of hedging the anticipated purchase of
an asset prior to completion of such purchase; and
(vii) the Trust will not enter into an option or futures transaction
unless, after giving effect thereto, the Trust would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than
the AMPS Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of Moody's Eligible Assets which the Trust is
obligated to deliver or receive pursuant to an outstanding futures contract or
option shall be as follows: (i) assets subject to call options written by the
Trust which are either exchange-traded and "readily reversible" or which expire
within 49 days after the date as of which such valuation is made shall be valued
at the lesser of (a) Discounted Value and (b) the exercise price of the call
option written by the Trust; (ii) assets subject to call options written by the
Trust not meeting the requirements of clause (i) of this sentence shall have no
value; (iii) assets subject to put options written by the Trust shall be valued
at the lesser of (A) the exercise price and (B) the Discounted Value of the
subject security; (iv) futures contracts shall be valued at the lesser of (A)
settlement price and (B) the Discounted Value of the subject security, provided
that, if a contract matures within 49 days after the date as of which such
valuation is made, where the Trust is the seller the contract may be valued at
the settlement price and where the Trust is the buyer the contract may be valued
at the Discounted Value of the subject securities; and (v) where delivery may be
made to the Trust with any security of a class of securities, the Trust shall
assume that it will take delivery of the security with the lowest Discounted
Value.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the Trust: (i) 10% of
the exercise price of a written call option; (ii) the exercise price of any
written put option; (iii) where the Trust is the seller under a futures
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<PAGE>
contract, 10% of the settlement price of the futures contract; (iv) where the
Trust is the purchaser under a futures contract, the settlement price of assets
purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the Trust writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the Trust writes call options on a futures contract and does not own the
underlying contract.
(c) For so long as any AMPS are rated by Moody's, the Trust will not enter
into any contract to purchase securities for a fixed price at a future date
beyond customary settlement time (other than such contracts that constitute
Moody's Hedging Transactions that are permitted under paragraph 8(b) of this
Certificate of Designation), except that the Trust may enter into such contracts
to purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitations:
(i) the Trust will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities
rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the
Forward Commitment with a Market Value that equals or exceeds the amount of
the Trust's obligations under any Forward Commitments to which it is from
time to time a party or long-term fixed income securities with a Discounted
Value that equals or exceeds the amount of the Trust's obligations under
any Forward Commitment to which it is from time to time a party; and
(ii) the Trust will not enter into a Forward Commitment unless, after
giving effect thereto, the Trust would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Trust is a party and of all securities deliverable to the Trust pursuant to such
Forward Commitments shall be zero.
(d) For so long as AMPS are rated by S&P or Moody's, the Trust will not,
unless it has received written confirmation from S&P and/or Moody's, as the case
may be, that such action would not impair the ratings then assigned to AMPS by
S&P and/or Moody's, as the case may be, (i) borrow money except for the purpose
of clearing transactions in portfolio securities
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(which borrowings shall under any circumstances be limited to the lesser of $10
million and an amount equal to 5% of the Market Value of the Trust's assets at
the time of such borrowings and which borrowings shall be repaid within 60 days
and not be extended or renewed and shall not cause the aggregate Discounted
Value of Moody's Eligible Assets and S&P Eligible Assets to be less than the
AMPS Basic Maintenance Amount), (ii) engage in short sales of securities, (iii)
lend any securities, (iv) issue any class or series of shares ranking prior to
or on a parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the Trust,
(v) reissue any AMPS previously purchased or redeemed by the Trust, (vi) merge
or consolidate into or with any other corporation or entity, (vii) change the
Pricing Service or (viii) engage in reverse repurchase agreements.
9. Notice. All notices or communications, unless otherwise specified in
------
the By-Laws of the Trust or this Certificate of Designation, shall be
sufficiently given if in writing and delivered in person or mailed by first-
class mail, postage prepaid. Notice shall be deemed given on the earlier of the
date received or the date seven days after which such notice is mailed.
10. Auction Procedures.
------------------
(a) Certain definitions. As used in this paragraph 10, the following terms
-------------------
shall have the following meanings, unless the context otherwise requires:
(i) "AMPS" means the AMPS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph
10(d)(i) below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i)
below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i)
below.
(vi) "Hold Order" has the meaning specified in paragraph
10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be
the Applicable Percentage of the Reference Rate. The Applicable
Percentage will be determined based on (i) the lower of the credit
rating or ratings assigned on such date to such shares by Moody's and
S&P (or if Moody's or S&P or both shall not make such
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<PAGE>
rating available, the equivalent of either or both of such ratings by a
Substitute Rating Agency or two Substitute Rating Agencies or, in the
event that only one such rating shall be available, such rating) and
(ii) whether the Trust has provided notification to the Auction Agent
prior to the Auction establishing the Applicable Rate for any dividend
pursuant to paragraph 2(f) hereof that net capital gains or other
taxable income will be
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included in such dividend on AMPS as follows:
<TABLE>
<CAPTION>
Applicable Applicable
Percentage of Percentage of
Credit Ratings Reference Reference
- ------------------------------------------------------ Rate Rate -
Moody's S&P No Notification Notification
- ------------------------------------------------------ ------------------------- -----------------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Trust shall take all reasonable action necessary to enable S&P and
Moody's to provide a rating for each series of the AMPS. If either S&P or
Moody's shall not make such a rating available, or neither S&P nor Moody's shall
make such a rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated
or its affiliates and successors, after consultation with the Trust, shall
select a nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating Agency
or Substitute Rating Agencies, as the case may be.
(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on
any Auction Date or such other time on any Auction Date as may be specified
by the Auction Agent from time to time as the time by which each Broker-
Dealer must submit to the Auction Agent in writing all Orders obtained by
it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
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(xv) "Sufficient Clearing Bids" has the meaning specified in
paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
------------------------------------------------------------------
Holders and Potential Holders.
-----------------------------
(i) Unless otherwise permitted by the Trust, Beneficial Owners
and Potential Beneficial Owners may only participate in Auctions through
their Broker-Dealers. Broker-Dealers will submit the Orders of their
respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves as Existing Holders in
respect of shares subject to Orders submitted or deemed submitted to them
by Beneficial Owners and as Potential Holders in respect of shares subject
to Orders submitted to them by Potential Beneficial Owners. A Broker-Dealer
may also hold AMPS in its own account as a Beneficial Owner. A Broker-
Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner or
a Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its
customers. On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold, provided that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by
such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding Dividend
Period; and
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(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of Outstanding shares, if any, of AMPS which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable Rate for
the next succeeding Dividend Period shall not be less than the rate per
annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a Broker-
Dealer acting for its own account to the Auction Agent, of information referred
to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter referred to as
an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order, including a Broker-Dealer acting in such capacity for its own account,
is hereinafter referred to as a "Bidder"; an Order containing the information
referred to in clause (A)(1) of this paragraph 10(b)(i) is hereinafter referred
to as a "Hold Order"; an Order containing the information referred to in clause
(A)(2) or (B) of this paragraph 10(b)(i) is hereinafter referred to as a "Bid";
and an Order containing the information referred to in clause (A)(3) of this
paragraph 10(b)(i) is hereinafter referred to as a "Sell Order." Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of Outstanding AMPS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less
than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding AMPS to be
determined as set forth in paragraph 10(e)(i)(D) if the
Applicable Rate determined on such Auction Date shall be equal to
the rate per annum specified therein; or
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(3) a lesser number of Outstanding AMPS to be determined as
set forth in paragraph 10(e)(ii)(C) if such specified rate per
annum shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of Outstanding AMPS specified in such Sell
Order; or
(2) such number or a lesser number of Outstanding AMPS to be
determined as set forth in paragraph 10(e)(ii)(C) if Sufficient
Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable
offer to purchase:
(1) the number of Outstanding AMPS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding AMPS to be
determined as set forth in paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to
the rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
-------------------------------------------------------
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Trust) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
54
<PAGE>
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding AMPS that are the subject of
such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of AMPS subject to
any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of AMPS subject to
any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of Outstanding shares, if any, of AMPS subject to
any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding AMPS held
by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend Period)
and a Sell Order (in the case of an Auction relating to a Special Dividend
Period) to have been submitted on behalf of such Existing Holder covering the
number of Outstanding AMPS held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering
in the aggregate more than the number of Outstanding AMPS held by such Existing
Holder are submitted to the Auction Agent, such Order shall be considered valid
as follows and in the following order of priority:
55
<PAGE>
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of Outstanding AMPS held by
such Existing Holder; provided that if more than one Hold Order is submitted on
behalf of such Existing Holder and the number of AMPS subject to such Hold
Orders exceeds the number of Outstanding AMPS held by such Existing Holder, the
number of AMPS subject to each of such Hold Orders shall be reduced pro rata so
that such Hold Orders, in the aggregate, will cover exactly the number of
Outstanding AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per annum if
more than one Bid is submitted on behalf of such Existing Holder, up to and
including the excess of the number of Outstanding AMPS held by such Existing
Holder over the number of AMPS subject to any Hold Order referred to in
paragraph 10(c)(iv)(A) above (and if more than one Bid submitted on behalf of
such Existing Holder specifies the same rate per annum and together they cover
more than the remaining number of shares that can be the subject of valid Bids
after application of paragraph 10(c)(iv)(A) above and of the foregoing portion
of this paragraph 10(c)(iv)(B) to any Bid or Bids specifying a lower rate or
rates per annum, the number of shares subject to each of such Bids shall be
reduced pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of shares); and the number of shares, if any, subject to Bids
not valid under this paragraph 10(c)(iv)(B) shall be treated as the subject of a
Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding AMPS held by such Existing Holder over the
number of AMPS subject to Hold Orders referred to in paragraph 10(c)(iv)(A) and
Bids referred to in paragraph 10(c)(iv)(B); provided that if more than one Sell
Order is submitted on behalf of any Existing Holder and the number of AMPS
subject to such Sell Orders is greater than such excess, the number of AMPS
subject to each of such Sell Orders shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of AMPS equal to such excess.
56
<PAGE>
(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum and
number of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
--------------------------------------------------------------------------
Rate.
----
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding AMPS over the number
of Outstanding AMPS that are the subject of Submitted Hold Orders (such excess
being hereinafter referred to as the "Available AMPS");
(B) from the Submitted Orders whether the number of Outstanding AMPS
that are the subject of Submitted Bids by Potential Holders specifying one or
more rates per annum equal to or lower than the Maximum Applicable Rate exceeds
or is equal to the sum of:
(1) the number of Outstanding AMPS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding AMPS that are subject to Submitted
Sell Orders (if such excess or such equality exists (other than
because the number of Outstanding AMPS in clause (1) above and this
clause (2) are each zero because all of the Outstanding AMPS are the
subject of Submitted Hold Orders), such Submitted Bids by Potential
Holders being hereinafter referred to collectively as "Sufficient
Clearing Bids"); and
57
<PAGE>
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other Submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such
Existing Holders to continue to hold the AMPS that are the subject of
such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the AMPS that are the subject of such
Submitted Bids,
would result in the number of shares subject to all Submitted Bids specifying
the Winning Bid Rate or a lower rate per annum being at least equal to the
Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to paragraph 10(d)(i), the Auction Agent shall advise the Trust of
the Maximum Applicable Rate and, based on such determinations, the
Applicable Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the Outstanding AMPS are the subject of Submitted Hold Orders), that the
Applicable Rate for the next succeeding Dividend Period shall be equal to
the Maximum Applicable Rate; or
(C) if all of the Outstanding AMPS are the subject of Submitted Hold
Orders, that the Dividend Period next succeeding the Auction shall
automatically be the same length as the immediately preceding Dividend
Period and the Applicable Rate for the next succeeding Dividend Period
shall be equal to 40% of the Reference Rate (or 60% of such rate if the
Trust has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph
2(f) hereof that
58
<PAGE>
net capital gains or other taxable income will be included in such dividend
on AMPS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
--------------------------------------------------------------------
and Allocation of Shares. Based on the determinations made pursuant to
- ------------------------
paragraph 10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as set
forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids
and Submitted Sell Orders shall be accepted or rejected in the following
order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the Outstanding AMPS that are
the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding AMPS that are the subject of such Submitted Bid, unless the
number of Outstanding AMPS subject to all such Submitted Bids shall be
greater than the number of Outstanding AMPS ("Remaining Shares") equal to
the excess of the Available AMPS over the number of Outstanding AMPS
subject to Submitted Bids described in paragraph 10(e)(i)(B) and paragraph
10(e)(i)(C), in which event the Submitted Bids of each such
59
<PAGE>
Existing Holder shall be accepted, and each such Existing Holder shall be
required to sell Outstanding AMPS, but only in an amount equal to the
difference between (1) the number of Outstanding AMPS then held by such
Existing Holder subject to such Submitted Bid and (2) the number of AMPS
obtained by multiplying (x) the number of Remaining Shares by (y) a
fraction the numerator of which shall be the number of Outstanding AMPS
held by such Existing Holder subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding AMPS
subject to such Submitted Bids made by all such Existing Holders that
specified a rate per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but
only in an amount equal to the number of Outstanding AMPS obtained by
multiplying (x) the difference between the Available AMPS and the number of
Outstanding AMPS subject to Submitted Bids described in paragraph
10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph 10(e)(i)(D) by (y) a
fraction the numerator of which shall be the number of Outstanding AMPS
subject to such Submitted Bid and the denominator of which shall be the sum
of the number of Outstanding AMPS subject to such Submitted Bids made by
all such Potential Holders that specified rates per annum equal to the
Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the Outstanding AMPS are subject to Submitted Hold Orders),
subject to the provisions of paragraph 10(e)(iii), Submitted Orders shall
be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
Outstanding AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the
Outstanding AMPS that are the subject of such Submitted Bid; and
60
<PAGE>
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and
the Submitted Sell Orders of each Existing Holder shall be accepted, in
both cases only in an amount equal to the difference between (1) the number
of Outstanding AMPS then held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and (2) the number of AMPS obtained
by multiplying (x) the difference between the Available AMPS and the
aggregate number of Outstanding AMPS subject to Submitted Bids described in
paragraph 10(e)(ii)(A) and paragraph 10(e)(ii)(B) by (y) a fraction the
numerator of which shall be the number of Outstanding AMPS held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the number of Outstanding AMPS subject to
all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph 10(e)(i)
or paragraph 10(e)(ii), any Existing Holder would be entitled or required
to sell, or any Potential Holder would be entitled or required to purchase,
a fraction of a share of AMPS on any Auction Date, the Auction Agent shall,
in such manner as in its sole discretion it shall determine, round up or
down the number of AMPS to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that each Outstanding share of
AMPS purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a
whole share of AMPS on any Auction Date, the Auction Agent shall, in such
manner as in its sole discretion it shall determine, allocate AMPS for
purchase among Potential Holders so that only whole AMPS are purchased on
such Auction Date by any Potential Holder, even if such allocation results
in one or more of such Potential Holders not purchasing any AMPS on such
Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of Outstanding AMPS to be
61
<PAGE>
purchased and the aggregate number of the Outstanding AMPS to be sold by
such Potential Holders and Existing Holders and, to the extent that such
aggregate number of Outstanding shares to be purchased and such aggregate
number of Outstanding shares to be sold differ, the Auction Agent shall
determine to which other Broker-Dealer or Broker-Dealers acting for one or
more purchasers such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-
Dealer shall receive, as the case may be, Outstanding AMPS.
(f) Miscellaneous. The Trust may interpret the provisions of this
-------------
paragraph 10 to resolve any inconsistency or ambiguity, remedy any formal
defect or make any other change or modification that does not substantially
adversely affect the rights of Beneficial Owners of AMPS. A Beneficial
Owner or an Existing Holder (A) may sell, transfer or otherwise dispose of
AMPS only pursuant to a Bid or Sell Order in accordance with the procedures
described in this paragraph 10 or to or through a Broker-Dealer, provided
that in the case of all transfers other than pursuant to Auctions such
Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or
its Agent Member advises the Auction Agent of such transfer and (B) except
as otherwise required by law, shall have the ownership of the AMPS held by
it maintained in book entry form by the Securities Depository in the
account of its Agent Member, which in turn will maintain records of such
Beneficial Owner's beneficial ownership. Neither the Trust nor any
Affiliate shall submit an Order in any Auction. Any Beneficial Owner that
is an Affiliate shall not sell, transfer or otherwise dispose of AMPS to
any Person other than the Trust. All of the Outstanding AMPS of a series
shall be represented by a single certificate registered in the name of the
nominee of the Securities Depository unless otherwise required by law or
unless there is no Securities Depository. If there is no Securities
Depository, at the Trust's option and upon its receipt of such documents as
it deems appropriate, any AMPS may be registered in the Share Register in
the name of the Beneficial Owner thereof and such Beneficial Owner
thereupon will be entitled to receive certificates therefor and required to
deliver certificates therefor upon transfer or exchange thereof.
11. Securities Depository; Share Certificates. (a) If there is a
-----------------------------------------
Securities Depository, one certificate for all of the AMPS of each series shall
be issued to the Securities Depository and registered in the name of the
Securities Depository or its nominee. Additional certificates may be issued as
necessary to represent AMPS. All such certificates shall bear a legend to the
effect
62
<PAGE>
that such certificates are issued subject to the provisions restricting
the transfer of AMPS contained in this Certificate of Designation. Unless the
Trust shall have elected, during a Non-Payment Period, to waive this
requirement, the Trust will also issue stop-transfer instructions to the Auction
Agent for the AMPS. Except as provided in paragraph (b) below, the Securities
Depository or its nominee will be the Holder, and no Beneficial Owner shall
receive certificates representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all AMPS of a series shall be
the Non-Payment Period Rate or there is no Securities Depository, the Trust may
at its option issue one or more new certificates with respect to such shares
(without the legend referred to in paragraph 11(a)) registered in the names of
the Beneficial Owners or their nominees and rescind the stop-transfer
instructions referred to in paragraph 11(a) with respect to such shares.
12. Personal Liability. The Declaration of Trust establishing
------------------
MuniHoldings Florida Insured Fund III, dated June 10, 1998, a copy of which,
together with all amendments thereto, is on file in the office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "MuniHoldings
Florida Insured Fund III" refers to the trustees under the Declaration
collectively as trustees, but not as individuals or personally; and no trustee,
shareholder, officer, employee or agent of the Trust shall be held to any
personal liability, nor shall resort be had to their private property for the
satisfaction of any obligation or claim or otherwise in connection with the
affairs of the Trust, but the "Trust Property" only shall be liable.
63
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND III
CERTIFICATE
The undersigned hereby certifies that he is the Secretary of MuniHoldings
Florida Insured Fund III, an unincorporated business trust organized and
existing under the laws of The Commonwealth of Massachusetts (the "Trust"), that
annexed hereto is the Certificate of Designation dated _____ ___, 1998,
establishing the powers, qualifications, rights and preferences of the Auction
Market Preferred Shares, Series A and the Auction Market Preferred Shares,
Series B of the Trust, which Certificate has been adopted by the Board of
Trustees of the Trust in a manner provided in the Trust's Declaration of Trust.
Dated this ____th day of , 1998.
------------------------------------
Patrick D. Sweeney
Secretary
<PAGE>
EXHIBIT (2)
Auction Market Preferred Shares, Series A
NUMBER ______ SHARES
1
MUNIHOLDINGS FLORIDA INSURED FUND III
ORGANIZED AS A BUSINESS TRUST UNDER THE LAWS SEE REVERSE FOR
OF THE COMMONWEALTH OF MASSACHUSETTS CERTAIN DEFINITIONS
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY CUSIP #
THIS CERTIFIES THAT
CEDE & CO.
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE AUCTION MARKET PREFERRED SHARES OF BENEFICIAL
INTEREST, PAR VALUE $.10 PER SHARE, LIQUIDATION PREFERENCE $25,000 PER SHARE
PLUS AN AMOUNT EQUAL TO ACCUMULATED BUT UNPAID DIVIDENDS THEREON (WHETHER OR NOT
EARNED OR DECLARED) OF
MUNIHOLDINGS FLORIDA INSURED FUND III
TRANSFERABLE ON THE BOOKS OF SAID TRUST IN PERSON OR BY DULY AUTHORIZED ATTORNEY
UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTERED BY THE REGISTRAR.
This certificate and the shares represented hereby are issued and shall be held
subject to all provisionsof the Declaration of Trust, dated June 10, 1998 (a
copy of which has been filed with the Secretaryof State of the Commonwealth of
Massachusetts), and of the By-Laws of the Trust and of all the amendmentsfrom
time to timer made thereto. The Declaration of Trust provides that the name
MuniHoldings FloridaInsured Fund III refers to the Trustees under the
Declaration collectively as Trustees and not asindividuals or personally, and no
Trustee, shareholder, officer, employee or agent of the Trust may beheld to any
personal liability, nor may resort be had to their private property for the
satisfaction ofany obligation or claim otherwise in connection with the affairs
of the Trust but the Trust property onlyshall be liable.
IN WITNESS WHEREOF, MUNIHOLDINGS FLORIDA INSURED FUND III HAS CAUSED ITS SEAL TO
BE HERETO AFFIXED AND THIS CERTIFICATE TO BE EXECUTED IN ITS NAME AND BEHALF BY
ITS DULY AUTHORIZED OFFICERS.
Dated: , 1998
Countersigned and Registered:
IBJ SCHRODER BANK & TRUST COMPANY -----------------------------
(New York) Transfer Agent Vice President
By:
--------------------------- -----------------------------
Authorized Signature Secretary
<PAGE>
THE TRANSFER OF THE AUCTION MARKET PREFERRED SHARES REPRESENTED HEREBY IS
SUBJECT TO THE RESTRICTIONS CONTAINED IN THE TRUST'S CERTIFICATE OF DESIGNATION.
THE TRUST WILL FURNISH INFORMATION ABOUT SUCH RESTRICTIONS TO ANY SHAREHOLDER,
WITHOUT CHARGE, UPON REQUEST TO THE SECRETARY OF THE TRUST.
MUNIHOLDINGS FLORIDA INSURED FUND III
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 and series of shares of beneficial interest which the Trust is authorized
to issue and the differences in the relative rights and preferences between the
shares of each class and series to the extent that they have been set, and the
authority of the Board of Trustees to set the relative rights and preferences of
subsequent classes and series, will be furnished by the Trust to any
shareholder, without charge, upon request to the Secretary of the Trust at its
principal office.
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:
<TABLE>
<S> <C>
TEN COM--as tenants in common UNIF GIFT MIN ACT--_______ Custodian ______
TEN ENT-- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to
of survivorship and not as Minors Act _________
tenants in common (State)
</TABLE>
Additional abbreviations also may be used though not in the above list.
For value received, _______________________ hereby sell, assign and transfer
unto
Please insert social securities or other identifying number of assignee
- --------------------------------------------------------------------------------
| |
- --------------------------------------------------------------------------------
________________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________shares
of the shares of beneficial interest 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 Trust with
full power of substitution in the premises.
Dated:________________________
____________________________________________
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
whatsoever.
1
<PAGE>
EXHIBIT 99(g)
Auction Market Preferred Shares, Series B
NUMBER ______ SHARES
1
MUNIHOLDINGS FLORIDA INSURED FUND III
ORGANIZED AS A BUSINESS TRUST UNDER THE LAWS SEE REVERSE FOR
OF THE COMMONWEALTH OF MASSACHUSETTS CERTAIN DEFINITIONS
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY CUSIP #
THIS CERTIFIES THAT
CEDE & CO.
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE AUCTION MARKET PREFERRED SHARES OF BENEFICIAL
INTEREST, PAR VALUE $.10 PER SHARE, LIQUIDATION PREFERENCE $25,000 PER SHARE
PLUS AN AMOUNT EQUAL TO ACCUMULATED BUT UNPAID DIVIDENDS THEREON (WHETHER OR NOT
EARNED OR DECLARED) OF
MUNIHOLDINGS FLORIDA INSURED FUND III
TRANSFERABLE ON THE BOOKS OF SAID TRUST IN PERSON OR BY DULY AUTHORIZED ATTORNEY
UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTERED BY THE REGISTRAR.
This certificate and the shares represented hereby are issued and shall be held
subject to all provisions of the Declaration of Trust, dated June 10, 1998 (a
copy of which has been filed with the Secretary of State of the Commonwealth of
Massachusetts), and of the By-Laws of the Trust and of all the amendments from
time to timer made thereto. The Declaration of Trust provides that the name
MuniHoldings Florida Insured Fund III refers to the Trustees under the
Declaration collectively as Trustees and not as individuals or personally, and
no Trustee, shareholder, officer, employee or agent of the Trust may be held to
any personal liability, nor may resort be had to their private property for the
satisfaction of any obligation or claim otherwise in connection with the affairs
of the Trust but the Trust property only shall be liable.
IN WITNESS WHEREOF, MUNIHOLDINGS FLORIDA INSURED FUND III HAS CAUSED ITS SEAL TO
BE HERETO AFFIXED AND THIS CERTIFICATE TO BE EXECUTED IN ITS NAME AND BEHALF BY
ITS DULY AUTHORIZED OFFICERS.
Dated: _________, 1998
Countersigned and Registered:
IBJ SCHRODER BANK & TRUST COMPANY ------------------------------
(New York) Transfer Agent Vice President
By:
-------------------------------- ------------------------------
Authorized Signature Secretary
<PAGE>
THE TRANSFER OF THE AUCTION MARKET PREFERRED SHARES REPRESENTED HEREBY IS
SUBJECT TO THE RESTRICTIONS CONTAINED IN THE TRUST'S CERTIFICATE OF DESIGNATION.
THE TRUST WILL FURNISH INFORMATION ABOUT SUCH RESTRICTIONS TO ANY SHAREHOLDER,
WITHOUT CHARGE, UPON REQUEST TO THE SECRETARY OF THE TRUST.
MUNIHOLDINGS FLORIDA INSURED FUND III
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 and series of shares of beneficial interest which the Trust is authorized
to issue and the differences in the relative rights and preferences between the
shares of each class and series to the extent that they have been set, and the
authority of the Board of Trustees to set the relative rights and preferences of
subsequent classes and series, will be furnished by the Trust to any
shareholder, without charge, upon request to the Secretary of the Trust at its
principal office.
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:
<TABLE>
<S> <C>
TEN COM--as tenants in common UNIF GIFT MIN ACT--_______ Custodian ______
TEN ENT-- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to
of survivorship and not as Minors Act _________
tenants in common (State)
</TABLE>
Additional abbreviations also may be used though not in the above list.
For value received, _______________________ hereby sell, assign and transfer
unto
Please insert social securities or other identifying number of assignee
- --------------------------------------------------------------------------------
| |
- --------------------------------------------------------------------------------
________________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________shares
of the shares of beneficial interest 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 Trust with
full power of substitution in the premises.
Dated:________________________
____________________________________________
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
whatsoever.
1
<PAGE>
EXHIBIT (h)(1)
$__________
MUNIHOLDINGS FLORIDA INSURED FUND III
(a Massachusetts business trust)
AUCTION MARKET PREFERRED SHARES(R) ["AMPS"(R)]
_____ Series A Shares
_____ Series B Shares
Liquidation Preference $25,000 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 10281-1305
Dear Sirs and Mesdames:
MuniHoldings Florida Insured Fund III, a Massachusetts business trust (the
"Fund"), and Fund Asset Management, L.P., a Delaware limited partnership (the
"Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the
sale by the Fund and the purchase by the Underwriter of _____ Auction Market
Preferred Shares(R), Series A ("Series A AMPS"), and _____ Auction Market
Preferred Shares(R), Series B ("Series B AMPS"), each with a par value of $.10
per share and a liquidation preference of $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared). The
Series A AMPS and Series B AMPS are sometimes herein referred to together 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 of the execution and delivery of the Pricing Agreement,
this Agreement shall be deemed to incorporate the Pricing Agreement.
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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"), a registration statement on Form N-2 (No. 333-_____),
and a related preliminary prospectus for the registration of the Shares under
the Securities Act of 1933, as amended (the "Securities Act"), the Investment
Company Act, and the rules and regulations of the Commission under the
Securities Act and the Investment Company Act (together, the "Rules and
Regulations"), and the Fund 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 Securities 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 Securities Act (the
"Rule 434 Prospectus"). If the Fund files a registration statement to register
a portion of the Shares and relies on Rule 462(b) for such registration
statement to become effective upon filing with the Commission (the "Rule 462
Registration Statement"), then any reference to "Registration Statement" herein
shall be deemed to include both the registration statement referred to above
(No. 333-_____) and the Rule 462 Registration Statement, as each such
registration statement may be amended pursuant to the Securities 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.
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 Securities 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
hereof, the Prospectus
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(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 Statement 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 Securities 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; and the information in the
Prospectus under the headings "Description of Capital Shares" and
"Portfolio Composition" has been fairly presented.
(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 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) except for regular monthly dividends on the outstanding
common shares of beneficial interest, par value $.10 per share (the "Common
Shares") of the Fund, there has been no dividend or distribution of any
kind declared, paid or made by the Fund on any class of its capital shares.
(v) The Fund has been duly organized and is validly existing as a
voluntary association (commonly referred to as a business trust) in good
standing under the laws of the Commonwealth of Massachusetts with power and
authority to own, lease and operate its properties and conduct its business
as described in the Registration Statement; the Fund is duly qualified to
transact business and is in good standing in each jurisdiction in which
such qualification is required; and the Fund has no subsidiaries.
(vi) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified, management investment
company, and no order of suspension or revocation of such registration has
been issued or proceedings therefor initiated or threatened by the
Commission.
(vii) The authorized, issued and outstanding shares of beneficial
interest of the Fund are as set forth in the Prospectus under the caption
"Description of Capital Shares";
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the outstanding Common Shares have been duly authorized and validly issued
and are fully paid and nonassessable; 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 Common Shares and the
Shares conform in all material respects to all statements relating thereto
contained in the Registration Statement; and the issuance of the Shares to
be purchased by the Underwriter is not subject to preemptive rights.
(viii) The Fund is not in violation of its Declaration of Trust, as
amended (the "Declaration of Trust"), or its by-laws, as amended (the "By-
Laws"), or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which it is a party or by which it or its properties may be
bound; and the execution and delivery of this Agreement, the Pricing
Agreement and the Investment Advisory Agreement, the Custody Agreement, the
Auction Agent Agreement and the Letter of Representations referred to in
the Registration Statement (as used herein, the "Advisory Agreement," the
"Auction Agreement," the "Custody Agreement" and the "Letter of
Representations," respectively), and the consummation of the transactions
contemplated herein and therein, have been duly authorized and will not
conflict with or constitute a breach of, or a default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Fund pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which the Fund is a party or by which it may be bound or to which any of
the property or assets of the Fund is subject, nor will such action result
in any violation of the provisions of the Declaration of Trust or the By-
Laws of the Fund, or, to the best knowledge of the Fund and the Adviser,
any law, administrative regulation or administrative or court decree; and
no consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Fund of the
transactions contemplated by this Agreement, the Pricing Agreement, the
Advisory Agreement, the Custody Agreement, the Auction Agreement and the
Letter of Representations, except such as has been obtained under the
Investment Company Act or as may be required under the Securities 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 or the Adviser, 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
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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 Securities 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 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.
(xiii) The Fund intends to, and will, direct the investment of the
proceeds of the offering described in the Registration Statement in such a
manner as to comply with the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended ("Subchapter M of the Code"), and intends
to qualify as a regulated investment company under Subchapter M of the
Code.
(xiv) Each of this Agreement, the Advisory Agreement and the Custody
Agreement has been duly authorized, executed and delivered by the Fund, and
each complies with all applicable provisions of the Investment Company Act.
(xv) Each of the Auction Agreement and the Letter of Representations
has been duly authorized for execution and delivery by the Fund and, when
executed and delivered by the Fund, will constitute a valid and binding
obligation of the Fund, 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.
(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 Registration Statement and 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
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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.
(c) Any certificate signed by any officer of the Fund or the Adviser and
delivered to the Underwriter or to counsel to 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 Shares to the Underwriter, and the Underwriter agrees to
purchase the 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 5
hereof, unless otherwise agreed to by the Fund, the Adviser and the
Underwriter.
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(b) Payment of the purchase price for, and delivery of certificates
for, the 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"). Payment shall be made to the Fund by a
Federal Funds wire transfer or similar same-day funds, against delivery to the
Underwriter of the certificates for the Shares to be purchased by it. The Shares
shall be represented by certificates registered in the name of Cede & Co., as
nominee for The Depository Trust Company. The certificates for the Shares will
be made available for examination by the Underwriter not later than 10:00 A.M.
on the last business day prior to Closing Time.
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 Securities 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 subsection (iv) hereunder or
any order of suspension or revocation described in subsection (v) 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.
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(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,
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 Securities 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 Securities
Act, such number of copies of the Prospectus (as amended or supplemented) as the
Underwriter reasonably may request for the purposes contemplated by the
Securities 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 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.
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(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
the Common Shares issued in reinvestment of dividends or distributions.
(j) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule 430A of
the Rules and Regulations, then immediately following the execution of the
Pricing Agreement, the Fund will prepare, and file or transmit for filing with
the Commission in accordance with such Rule 430A and Rule 497(h) of the Rules
and Regulations, copies of the amended Prospectus, or, if required by such Rule
430A, a post-effective amendment to the Registration Statement (including an
amended Prospectus), containing all information so omitted.
(k) The Fund will use its best efforts to maintain its qualification as
a regulated investment company under Subchapter M of the Code.
SECTION 4. Covenants of the Underwriter. The Underwriter covenants and
agrees with the Fund that no later than the second business day succeeding
Closing Time, it will provide the Fund and the Auction Agent (as defined in the
Prospectus) with a list of Existing Holders (as defined in the Prospectus) of
Shares, the number of Shares held by each such Existing Holder and the number of
Shares it is holding as Underwriter as of the date of such notice.
SECTION 5. 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
preparation 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 fees
or disbursements of counsel for the Underwriter in connection therewith and in
connection with the preparation of the Blue Sky Survey, (vi) the printing and
delivery to the Underwriter of copies of the registration statement as
originally filed and of each amendment thereto, of the preliminary prospectus,
and of the Prospectus and any amendments or supplements thereto, (vii) the
printing and delivery to the Underwriter of copies of the Blue Sky Survey and
(viii) the fees charged by rating agencies for the rating of the Shares.
If this Agreement is terminated by the Underwriter in accordance with the
provisions of Section 6 or Section 10(a)(i) hereof, 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 5 which the Fund would have paid if
such transactions had been consummated.
SECTION 6. Conditions of Underwriter's Obligations. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the
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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., New York City time, 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 Securities 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:
(1) The favorable opinion, dated as of Closing Time, of Brown & Wood
LLP, counsel to the Fund and the Underwriter, to the effect that:
(i) The Fund has been duly organized and is validly existing as a
voluntary association (commonly referred to as a business trust) in good
standing under the laws of the Commonwealth of Massachusetts.
(ii) The Fund has power and authority to own, lease and operate its
properties and conduct its business as described in the Registration
Statement and in the Prospectus.
(iii) The Fund is duly qualified to transact business and is in
good standing in each jurisdiction in which such qualification is required.
(iv) The outstanding Common Shares have been duly authorized and
validly issued and are fully paid and nonassessable (except for certain
possible liability of shareholders described in the Prospectus under
"Description of Capital Shares").
(v) The Shares have been duly authorized for issuance and sale to
the Underwriter pursuant to this Agreement and, when issued and delivered
by the Fund pursuant to this Agreement against payment of the consideration
set forth in the Pricing Agreement, will be validly issued and fully paid
and nonassessable (except for certain possible liability of shareholders
described in the Prospectus under "Description of Capital Shares"); the
issuance of the Shares is not subject to preemptive or other similar
rights; and the authorized shares of beneficial interest conform as to
legal matters in all material respects to the description thereof in the
Registration Statement under the caption "Description of Capital Shares".
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(vi) Each of this Agreement and the Pricing Agreement has been duly
authorized, executed and delivered by the Fund and each complies with all
applicable provisions of the Investment Company Act.
(vii) The Registration Statement is effective under the Securities
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 Securities Act or proceedings therefor initiated or threatened by
the Commission.
(viii) 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 Securities Act and the Investment Company Act and the
Rules and Regulations. The Rule 434 Prospectus conforms to the requirements
of Rule 434 in all material respects.
(ix) 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.
(x) 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.
(xi) 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
Securities 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, the Custody
Agreement, the Auction Agreement and the Letter of Representations 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 Declaration of Trust or the By-Laws of the Fund,
or any law or administrative regulation, or, to the best of their knowledge
and information, administrative or court decree.
11
<PAGE>
(xii) Each of the Advisory Agreement and the Custody Agreement has been
duly authorized and approved by the Fund and complies 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.
(xiii) 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
Securities Act, the Investment Company Act and the Rules and Regulations to
make the public offering and consummate the sale of the Shares pursuant to
this Agreement; the provisions of the Declaration of Trust and the By-Laws
of the Fund comply as to form in all material respects with the
requirements of the Investment Company Act; and, to the best of their
knowledge and information, no order of suspension or revocation of such
registration under the Investment Company Act, pursuant to Section 8(e) of
the Investment Company Act, has been issued or proceedings therefor
initiated or threatened by the Commission.
(xiv) The information in the Prospectus under the caption "Taxes"
(other than information related to Florida law, as to which no opinion need
be rendered), to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by them and is correct in all material
respects.
(xv) The Auction Agreement and the Letter of Representations have been
duly authorized, executed and delivered by the Fund, and each constitutes a
valid and binding obligation of the Fund, 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.
(2) The favorable opinion, dated as of Closing Time of Holland & Knight
LLP, special Florida counsel to the Fund, to the extent that:
(i) The information in the Prospectus under the caption "Taxes", to
the extent that it constitutes matters of Florida law or legal conclusions
or legal opinions involving matters of law, has been reviewed by them and
is correct in all material respects.
(ii) Nothing has come to their attention that would lead them to
believe that the information in the Registration Statement under the
caption "Investment Objective and Policies - Special Considerations
Relating to Florida Municipal Bonds" and in Appendix A entitled "Economic
Conditions in Florida", at the time it became effective or at the
Representation Date, contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the information under
such caption and in such appendix in the Prospectus, at the Representation
Date (unless the term "Prospectus" refers to a prospectus which has been
provided to the Underwriter by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective, in
which case at the time they are first provided to the Underwriter for such
use) or at Closing Time, included an untrue statement of a material fact or
omitted to state a material fact
12
<PAGE>
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(3) The favorable opinion, dated as of Closing Time, of Philip L.
Kirstein, Esq., General Counsel to the Adviser, in form and substance
satisfactory to counsel to the Underwriter, to the effect that:
(i) The Adviser has been duly organized as a limited partnership
under the laws of the State of Delaware, with power and authority to
conduct its business as described in the Registration Statement and in the
Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers
Act or the Investment Company Act, or the rules and regulations under such
Acts, from acting under the Advisory Agreement for the Fund as contemplated
by the Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the Advisory
Agreement constitutes a valid and binding obligation of the Adviser,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization or other laws relating to or
affecting creditors' rights and to general equity principles; and, to the
best of his knowledge and information, neither the execution and delivery
of this Agreement or the Advisory Agreement nor the performance by the
Adviser of its obligations hereunder or thereunder will conflict with, or
result in a breach of, any of the terms and provisions of, or constitute,
with or without the giving of notice or the lapse of time or both, a
default under, any agreement or instrument to which the Adviser is a party
or by which the Adviser is bound, or any law, order, rule or regulation
applicable to the Adviser of any jurisdiction, court, Federal or state
regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Adviser or
its properties or operations.
(iv) To the best of his knowledge and information, the description of
the Adviser in the Registration Statement and in the Prospectus does not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(4) In giving their opinion required by subsection(b) (1) of this Section
6, Brown & Wood LLP additionally shall state that nothing has come to their
attention that would lead them to believe that the Registration Statement (other
than the financial statements included therein, as to which no opinion need be
rendered), at the time it became effective or at the Representation Date,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus (other than the financial statements
included therein, as to which no opinion need be rendered), at the
Representation Date (unless the term "Prospectus" refers to a prospectus which
has been provided to the Underwriter by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective, in which
case at the time it first is provided to the Underwriter for
13
<PAGE>
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 all
matters governed by the law of the Commonwealth of Massachusetts, upon the
opinion of Bingham Dana LLP. Bingham Dana LLP and Brown & Wood llp may rely, as
to matters of fact, upon certificates and written statements of officers and
employees of and accountants for the Fund and the Adviser and of public
officials.
(c) At Closing Time, (i) the Registration Statement and the Prospectus
shall contain all statements which are required to be stated therein in
accordance with the Securities Act, the Investment Company Act and the Rules and
Regulations and in all material respects shall conform to the requirements of
the Securities Act, the Investment Company Act and the Rules and Regulations,
and neither the Registration Statement nor the Prospectus shall contain any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, 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 Registration Statement and the Prospectus, (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, (v) Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Ratings Services ("S&P") shall have confirmed that the Shares have been
rated "aaa" and AAA, respectively, by such agencies; and (vi) the Distributor
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), together with true and correct
copies of letters from Moody's and S&P confirming their rating.
(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) hereof 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) hereof 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 ______________ a letter, dated such date in form and
substance satisfactory to the Underwriter, to the effect that:
14
<PAGE>
(i) they are independent accountants with respect to the Fund within
the meaning of the Securities 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 Securities Act and the Investment Company Act and the
Rules and Regulations;
(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 (A) the unaudited
financial statements as of _______, 1998 included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and of the Rules
and Regulations applicable to unaudited interim financial statements
included in registration statements or are not in conformity with generally
accepted accounting principles applied on a basis substantially consistent
with that of the audited financial statements included in the Registration
Statement, and (B) during the period from ___________, 1998 to a specified
date not more than three days prior to the date of this Agreement, there
was any change in the shares of beneficial interest of the Fund or net
assets of the Fund (other than by reason of the issuance of Common Shares
in connection with the Fund's dividend reinvestment plan, as specified in
such letter) or any increase in the long-term debt of the Fund, as compared
with amounts shown on the unaudited financial statements included in the
Registration Statement, except for changes which the Registration Statement
discloses have occurred or may occur; and
(iv) in addition to the procedures referred to in clause (iii) above,
they have performed other specified procedures, not constituting an audit,
with respect to certain amounts, percentages, numerical data, financial
information and financial statements appearing in the Registration
Statement, which previously have been specified by such accountants and
which shall be specified in such letter, and have compared certain of such
items with, and have found such items to be in agreement with, the
accounting and financial records of the Fund.
(f) At Closing Time, the Underwriter shall have received from
_______________ 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 6, except that the "specified 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 reasonably may 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
15
<PAGE>
Investment Company Act and the issuance and sale of the Shares as herein
contemplated shall be satisfactory in form and substance to counsel to the
Underwriter and counsel to the Underwriter.
If any condition specified in this Section 6 shall not have been fulfilled
when and as required to be fulfilled, this 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 5 hereof and except that Sections 1, 7, 8 and 9
hereof shall survive any such termination and remain in full force and effect.
SECTION 7. 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
Securities 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 7(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expenses whatsoever (including the fees and
disbursements of counsel chosen by the Underwriter) reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the information deemed to be a 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).
16
<PAGE>
(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 Securities Act, against any and
all loss, liability, claim, damage and expense described in the indemnity
contained in subsection (a) of this Section 7, as incurred, but only with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or in any amendment or supplement
thereto) or in any preliminary prospectus or in the Prospectus (or in 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 in any amendment or supplement thereto), including
the information deemed to be a 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 no 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 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 7 or Section
8 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 7 (a)(ii) hereof 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.
17
<PAGE>
SECTION 8. Contribution. If the indemnification provided for in Section 7
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 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 and the total
underwriting discount 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 8 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 8 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 8, 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 Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
18
<PAGE>
For purposes of this Section 8, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Securities Act shall have
the same rights to contribution as the Underwriter, and each officer or trustee
of the Fund and partner of the Adviser, respectively, each trustee of the Fund
who signed the Registration Statement, and each person, if any, who controls the
Fund and the Adviser within the meaning of Section 15 of the Securities Act
shall have the same rights to contribution as the Fund and the Adviser,
respectively.
SECTION 9. 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 any 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 10. 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 or elsewhere, any outbreak of hostilities or
escalation thereof or other calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case the effect of which is such as to make it,
in the judgment of the Underwriter impracticable to market the Shares or enforce
contracts for the sale of the Shares, or (iii) if trading in the Common Shares
has been suspended or materially limited by the Commission or if trading
generally on either the New York Stock Exchange or the American Stock Exchange
or in the NASDAQ National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities 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.
(b) If this Agreement is terminated pursuant to this Section 10, such
termination shall be without liability of any party to any other party except as
provided in Section 5 hereof, and provided further that Sections 1, 7, 8 and 9
hereof shall survive such termination and remain in full force and effect.
SECTION 11. 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: Lee Whitley, 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.
19
<PAGE>
SECTION 12. Parties. This Agreement and the Pricing Agreement shall
inure to the benefit of and be binding upon the Underwriter, the Fund, the
Adviser and their respective successors. Nothing expressed or mentioned in this
Agreement or in the Pricing Agreement is intended or shall be construed to give
any person, firm or corporation, other than the parties hereto and their
respective successors and the controlling persons and officers, directors and
trustees referred to in Sections 7 and 8 hereof and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
the Pricing Agreement and all conditions and provisions hereof are intended to
be for the sole and exclusive benefit of the parties hereto and thereto and
their respective successors, and said controlling persons and officers,
directors and trustees and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Shares from the
Underwriter shall be deemed to be a successor merely by reason of such purchase.
SECTION 13. Liability of Shareholders, Trustees and Officers. This
agreement is executed by or on behalf of the trustees of the Fund solely in
their capacity as such trustees, and shall not constitute their personal
obligation either jointly or severally in their individual capacities. No
trustee, officer or shareholder of the Fund shall be liable for any obligations
of the Fund under this instrument and the Fund shall be solely liable therefor;
all parties hereto shall look solely to the Fund property for the payment of any
claim, or the performance of any obligation, hereunder.
SECTION 14. 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.
20
<PAGE>
If the foregoing is in accordance with your understanding of our Agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a single binding agreement between the
Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
MUNIHOLDINGS FLORIDA INSURED FUND III
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 Signatory
21
<PAGE>
EXHIBIT A
---------
$____________
MUNIHOLDINGS FLORIDA INSURED FUND III
(a Massachusetts business trust)
AUCTION MARKET PREFERRED SHARES(R) ["AMPS"(R)]
_____ Series A Shares
_____ Series B Shares
Liquidation Preference $ 25,000 Per Share
PRICING 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:
Reference is made to the Purchase Agreement, dated June __, 1998 (the
"Purchase Agreement"), relating to the purchase by Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") of _____ Auction
Market Preferred Shares(R), Series A ("Series A AMPS"), and _____ Auction Market
Preferred Shares Series B ("Series B AMPS"), each with a par value of $.10 per
share and a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared)
(collectively, the "Shares") of MuniHoldings Florida Insured Fund III (the
"Fund").
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with
the Underwriter as follows:
- ---------------------------------------
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
1. The initial public offering price per share for the Shares,
determined as provided in said Section 2, shall be $_______ plus
accumulated dividends, if any, from the date of original issue.
2. The purchase price per share for the Shares to be paid by the
Underwriter shall be $________ plus accumulated dividends, if any, from the
date of original issue, being an amount equal to the initial public
offering price set forth above less $___ per share.
3. The dividend rate for the Series A AMPS for the Initial Dividend
Period ending ____ __, 1998 will be ____%, and the dividend rate for the
Series B AMPS for the Initial Dividend Period ending ____ __, 1998 will be
____%.
This agreement is executed by or on behalf of the trustees of the Fund
solely in their capacity as such trustees, and shall not constitute their
personal obligation either jointly or severally in their individual capacities.
No trustee, officer or shareholder of the Fund shall be liable for any
obligations of the Fund under this instrument and the Fund shall be solely
liable therefor; all parties hereto shall look solely to the Fund property for
the payment of any claim, or the performance of any obligation, hereunder.
A-2
<PAGE>
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 single binding
agreement between the Underwriter and the Fund in accordance with its terms.
Very truly yours,
MUNIHOLDINGS FLORIDA INSURED FUND III
By:
------------------------------------
Authorized Officer
Confirmed and Accepted,
as of the date
first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
------------------------------
Authorized Signatory
A-3
<PAGE>
EXHIBIT 99(k)(2)
- --------------------------------------------------------------------------------
AUCTION AGENT AGREEMENT
between
MUNIHOLDINGS FLORIDA INSURED FUND III
and
IBJ SCHRODER BANK & TRUST COMPANY
Dated as of _________, 1998
Relating to
AUCTION MARKET PREFERRED SHARES
("AMPS"(R)),
Series A and B
of
MUNIHOLDINGS FLORIDA INSURED FUND III
- --------------------------------------------------------------------------------
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
THIS AUCTION AGENT AGREEMENT, dated as of __________, 1998, is between
MUNIHOLDINGS FLORIDA INSURED FUND III, a Massachusetts business trust (the
"Fund"), and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation.
The Fund proposes to duly authorize and issue ______ Auction Market
Preferred Shares(R), Series A ("Series A AMPS"), and ______ Auction Market
Preferred Shares(R), Series B ("Series B AMPS"), each with a par value of $.10
per share and a liquidation preference of $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared),
pursuant to the Fund's Certificate of Designation (as defined below). The
Series A AMPS and Series B AMPS are sometimes herein referred to together as the
"AMPS". A separate Auction (as defined below) will be conducted for each series
of AMPS. The Fund desires that IBJ Schroder Bank & Trust Company perform
certain duties as agent in connection with each Auction of AMPS (in such
capacity, the "Auction Agent"), and as the transfer agent, registrar, dividend
disbursing agent and redemption agent with respect to the AMPS (in such
capacity, the "Paying Agent"), upon the terms and conditions of this Agreement,
and the Fund hereby appoints IBJ Schroder Bank & Trust Company as said Auction
Agent and Paying Agent in accordance with those terms and conditions
(hereinafter generally referred to as the "Auction Agent", except in Sections 3
and 4 below).
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Fund and the Auction Agent agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
-------------------------------------
1.1. Terms Defined by Reference to
Certificate of Designation.
---------------------------
Capitalized terms not defined herein shall have the respective meanings
specified in the Certificate of Designation.
1.2. Terms Defined Herein.
--------------------
As used herein and in the Settlement Procedures (as defined below), the
following terms shall have the following meanings, unless the context otherwise
requires:
(a) "Affiliate" shall mean any Person, other than Merrill Lynch,
Pierce, Fenner & Smith Incorporated, made known to the Auction Agent to be
controlled by, in control of, or under common control with, the Fund or its
successors.
(b) "Agent Member" of any Person shall mean such Person's agent member
of the Securities Depository that will act on behalf of a Bidder.
(c) "Auction" shall have the meaning specified in Section 2.1 hereof.
- --------------------
(R) Registered trademark of Merrill Lynch & Co., Inc.
2
<PAGE>
(d) "Auction Procedures" shall mean the Auction Procedures that are set
forth in Paragraph 10 of the Certificate of Designation.
(e) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Fund Officer, and Assistant Secretary
and Assistant Treasurer of the Auction Agent assigned to its Corporate
Trust and Agency Group and every other officer or employee of the Auction
Agent designated as an "Authorized Officer" for purposes hereof in a
communication to the Fund.
(f) "Broker-Dealer Agreement" shall mean each agreement between the
Auction Agent and a Broker-Dealer substantially in the form attached hereto
as Exhibit A.
(g) "Certificate of Designation" shall mean the Certificate of
Designation of the Fund, establishing the powers, preferences and rights of
the AMPS, filed on __________, 1998 in the Office of the Secretary of The
Commonwealth of Massachusetts.
(h) "Fund Officer" shall mean the Chairman and Chief Executive Officer,
the President, each Vice President (whether or not designated by a number
or word or words added before or after the title "Vice President"), the
Secretary, the Treasurer, each Assistant Secretary and each Assistant
Treasurer of the Fund and every other officer or employee of the Fund
designated as a "Fund Officer" for purposes hereof in a notice from the
Fund to the Auction Agent.
(i) "Holder" shall be a holder of record of one or more AMPS, listed as
such in the share register maintained by the Paying Agent pursuant to
Section 4.6 hereof.
(j) "Settlement Procedures" shall mean the Settlement Procedures
attached as Exhibit A to the Broker-Dealer Agreement.
1.3. Rules of Construction.
---------------------
Unless the context or use indicates another or different meaning or intent,
the following rules shall apply to the construction of this Agreement:
(a) Words importing the singular number shall include the plural number
and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to New
York City time.
3
<PAGE>
II. THE AUCTION.
-----------
2.1. Purpose; Incorporation by Reference of Auction
Procedures and Settlement Procedures.
-------------------------------------
(a) The Certificate of Designation provides that the Applicable Rate
on shares of each series of AMPS, as the case may be, for each Dividend
Period therefor after the Initial Dividend Period shall be the rate per
annum that a commercial bank, trust company or other financial institution
appointed by the Fund advises results from implementation of the Auction
Procedures. The Board of Trustees of the Fund has adopted a resolution
appointing IBJ Schroder Bank & Trust Company as Auction Agent for purposes
of the Auction Procedures. The Auction Agent hereby accepts such
appointment and agrees that, on each Auction Date, it shall follow the
procedures set forth in this Section 2 and the Auction Procedures for the
purpose of determining the Applicable Rate for the AMPS for the next
Dividend Period therefor. Each periodic operation of such procedures is
hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and in
the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part hereof to the same extent as if
such provisions were set forth fully herein.
2.2. Preparation for Each Auction; Maintenance
of Registry of Existing Holders.
--------------------------------
(a) Pursuant to Section 2.5 hereof, the Fund shall not designate any
Person to act as a Broker-Dealer without the prior written approval of the
Auction Agent (which approval shall not be withheld unreasonably). As of
the date hereof, the Fund shall provide the Auction Agent with a list of
the Broker-Dealers previously approved by the Auction Agent and shall cause
to be delivered to the Auction Agent for execution by the Auction Agent a
Broker-Dealer Agreement signed by each such Broker-Dealer. The Auction
Agent shall keep such list current and accurate and shall indicate thereon,
or on a separate list, the identity of each Existing Holder, if any, whose
most recent Order was submitted by a Broker-Dealer on such list and
resulted in such Existing Holder continuing to hold or purchasing AMPS. Not
later than five Business Days prior to any Auction Date for which any
change in such list of Broker-Dealers is to be effective, the Fund shall
notify the Auction Agent in writing of such change and, if any such change
is the addition of a Broker-Dealer to such list, the Fund shall cause to be
delivered to the Auction Agent for execution by the Auction Agent a Broker-
Dealer Agreement signed by such Broker-Dealer. The Auction Agent shall have
entered into a Broker-Dealer Agreement with each Broker-Dealer prior to the
participation of any such Broker-Dealer in any Auction.
(b) In the event that the Auction Date for any Auction shall be
changed after the Auction Agent shall have given the notice referred to in
clause (vii) of Paragraph (a) of the Settlement Procedures, the Auction
Agent, by such means as the Auction Agent
4
<PAGE>
deems practicable, shall give notice of such change to the Broker-Dealers
not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15
A.M. on the old Auction Date.
(c) The provisions contained in paragraph 2 of the Certificate of
Designation concerning Special Dividend Periods and the notification of a
Special Dividend Period will be followed by the Fund and, to the extent
applicable, the Auction Agent, and the provisions contained therein are
incorporated herein by reference in their entirety and shall be deemed to
be a part of this Agreement to the same extent as if such provisions were
set forth fully herein.
(d) (i) Except as otherwise provided in paragraph 2(f) of the
Certificate of Designation, whenever the Fund intends to include any net
capital gains or other income subject to regular Federal income tax in any
dividend on AMPS, the Fund will notify the Auction Agent of the amount to
be so included at least five Business Days prior to the Auction Date on
which the Applicable Rate for such dividend is to be established. Whenever
the Auction Agent receives such notice from the Fund, in turn it will
notify each Broker-Dealer, who, on or prior to such Auction Date, in
accordance with its Broker-Dealer Agreement, will notify its Beneficial
Owners and Potential Beneficial Owners believed to be interested in
submitting an Order in the Auction to be held on such Auction Date.
Whenever the Fund includes any additional amounts in a dividend as provided
in paragraph 2(f) of the Certificate of Designation, the Fund will notify
the Auction Agent of such additional amounts to be so included in such
dividend at least five Business Days prior to the applicable Dividend
Payment Date. Whenever the Auction Agent receives such notice from the
Fund, in turn it will notify the Securities Depository and each Broker-
Dealer, who, on or prior to the applicable Dividend Payment Date, in
accordance with its Broker-Dealer Agreement, will notify its Beneficial
Owners.
(ii) If the Fund makes a Retroactive Taxable Allocation, the Fund,
within 90 days (and generally within 60 days) after the end of its fiscal
year for which a Retroactive Taxable Allocation is made, will provide
notice thereof to the Auction Agent and to each Holder (initially the
Securities Depository) during such fiscal year at such Holder's address as
the same appears or last appeared on the share books of the Fund. The Fund,
within 30 days after such notice is given to the Auction Agent, will pay to
the Auction Agent (who then will distribute to such Holders), out of funds
legally available therefor, a cash amount equal to the aggregate Additional
Dividend with respect to all Retroactive Taxable Allocations made to such
Holders during the fiscal year in question.
(e) (i) On each Auction Date, the Auction Agent shall determine the
Reference Rate and the Maximum Applicable Rate. If the Reference Rate is not
quoted on an interest basis but is quoted on a discount basis, the Auction Agent
shall convert the quoted rate to an Interest Equivalent, as set forth in
paragraph 1 of the Certificate of Designation; or, if the rate obtained by the
Auction Agent is not quoted on an interest or discount basis, the Auction Agent
shall convert the quoted rate to an interest rate after consultation with the
Fund as to the method of such conversion. Not later than 9:30 A.M. on each
Auction Date, the Auction Agent shall notify the Fund and the Broker-Dealers of
the Reference Rate so determined and of the Maximum Applicable Rate.
5
<PAGE>
(ii) If the Reference Rate is the applicable "AA" Composite
Commercial Paper Rate and such rate is to be based on rates supplied by
Commercial Paper Dealers and one or more of the Commercial Paper Dealers
shall not provide a quotation for the determination of the applicable "AA"
Composite Commercial Paper Rate, the Auction Agent immediately shall notify
the Fund so that the Fund can determine whether to select a Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers to provide
the quotation or quotations not being supplied by any Commercial Paper
Dealer or Commercial Paper Dealers. The Fund promptly shall advise the
Auction Agent of any such selection. If the Fund does not select any such
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers,
then the rates shall be supplied by the remaining Commercial Paper Dealer
or Commercial Paper Dealers.
(iii) If, after the date of this Agreement, there is any change in the
prevailing rating of AMPS by either of the rating agencies (or substitute
or successor rating agencies) referred to in the definition of the Maximum
Applicable Rate, thereby resulting in any change in the corresponding
applicable percentage for the AMPS, as set forth in said definition (the
"Percentage"), the Fund shall notify the Auction Agent in writing of such
change in the Percentage prior to 9:00 A.M. on the Auction Date for AMPS
next succeeding such change. The Percentage for the AMPS on the date of
this Agreement is as specified in paragraph 10(a)(vii) of the Certificate
of Designation. The Auction Agent shall be entitled to rely on the last
Percentage of which it has received notice from the Fund (or, in the
absence of such notice, the Percentage set forth in the preceding sentence)
in determining the Maximum Applicable Rate as set forth in Section
2.2(e)(i) hereof.
(f) (i) The Auction Agent shall maintain a current registry of the
Existing Holders of the shares of each series of AMPS for purposes of each
Auction. The Fund shall use its best efforts to provide or cause to be
provided to the Auction Agent within ten Business Days following the date
of the Closing a list of the initial Existing Holders of each series of
AMPS, and the Broker-Dealer of each such Existing Holder through which such
Existing Holder purchased such shares. The Auction Agent may rely upon, as
evidence of the identities of the Existing Holders, such list, the results
of each Auction and notices from any Existing Holder, the Agent Member of
any Existing Holder or the Broker-Dealer of any Existing Holder with
respect to such Existing Holder's transfer of any AMPS to another Person.
(ii) In the event of any partial redemption of any series of AMPS,
upon notice by the Fund to the Auction Agent of such partial redemption,
the Auction Agent promptly shall request the Securities Depository to
notify the Auction Agent of the identities of the Agent Members (and the
respective numbers of shares) from the accounts of which shares have been
called for redemption and the person or department at such Agent Member to
contact regarding such redemption, and at least two Business Days prior to
the Auction preceding the date of redemption with respect to shares of the
series being partially redeemed, the Auction Agent shall request each Agent
Member so identified to disclose to the Auction Agent (upon selection by
such Agent Member of the Existing Holders whose shares are to be redeemed)
the number of shares of such series of AMPS of each such Existing Holder,
if any, to be redeemed by the Fund, provided that
6
<PAGE>
the Auction Agent has been furnished with the name and telephone number of
a person or department at such Agent Member from which it is to request
such information. In the absence of receiving any such information with
respect to an Existing Holder, from such Existing Holder's Agent Member or
otherwise, the Auction Agent may continue to treat such Existing Holder as
having ownership of the number of shares of the series of AMPS shown in the
Auction Agent's registry of Existing Holders.
(iii) The Auction Agent shall register a transfer of the ownership of
shares of a series of AMPS from an Existing Holder to another Existing
Holder, or to another Person if permitted by the Fund, only if (A) such
transfer is made pursuant to an Auction or (B) if such transfer is made
other than pursuant to an Auction, the Auction Agent has been notified of
such transfer in writing in a notice substantially in the form of Exhibit C
to the Broker-Dealer Agreements, by such Existing Holder or by the Agent
Member of such Existing Holder. The Auction Agent is not required to accept
any notice of transfer delivered for an Auction unless it is received by
the Auction Agent by 3:00 P.M. on the Business Day next preceding the
applicable Auction Date. The Auction Agent shall rescind a transfer made on
the registry of the Existing Holders of any AMPS if the Auction Agent has
been notified in writing, in a notice substantially in the form of Exhibit
D to the Broker-Dealer Agreement, by the Agent Member or the Broker-Dealer
of any Person that (i) purchased any AMPS and the seller failed to deliver
such shares or (ii) sold any AMPS and the purchaser failed to make payment
to such Person upon delivery to the purchaser of such shares.
(g) The Auction Agent may request that the Broker-Dealers, as set
forth in Section 3.2(c) of the Broker-Dealer Agreements, provide the
Auction Agent with a list of their respective customers that such Broker-
Dealers believe are Beneficial Owners of AMPS. The Auction Agent shall keep
confidential any such information and shall not disclose any such
information so provided to any Person other than the relevant Broker-Dealer
and the Fund, provided that the Auction Agent reserves the right to
disclose any such information if it is advised by its counsel that its
failure to do so would be unlawful.
2.3. Auction Schedule.
----------------
The Auction Agent shall conduct Auctions in accordance with the schedule
set forth below. Such schedule may be changed by the Auction Agent with the
consent of the Fund, which consent shall not be withheld unreasonably. The
Auction Agent shall give notice of any such change to each Broker-Dealer. Such
notice shall be received prior to the first Auction Date on which any such
change shall be effective.
Time Event
---- -----
By 9:30 A.M. Auction Agent advises the Fund and the Broker-
Dealers of the Reference Rate and the Maximum
Applicable Rate as set forth in Section
7
<PAGE>
9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated
to it by Broker-Dealers as provided in Paragraph
10(c)(i) of the Certificate of Designation.
Submission deadline is 1:00 P.M.
Not earlier than Auction Agent makes determinations pursuant to
1:00 P.M. Paragraph 10(d)(i) of the Certificate of
Designation.
By approximately Auction Agent advises the Fund of the results of
3:00 P.M. the Auction as provided in Paragraph 10(d)(ii) of
the Certificate of Designation.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part and AMPS
are allocated as provided in Paragraph 10(e) of
the Certificate of Designation.
Auction Agent gives notice of the Auction results
as set forth in Section 2.4 hereof.
2.4. Notice of Auction Results.
-------------------------
On each Auction Date, the Auction Agent shall notify Broker-Dealers of the
results of the Auction held on such date by telephone or through the Auction
Agent's Auction Processing System as set forth in Paragraph (a) of the
Settlement Procedures.
2.5. Broker-Dealers.
--------------
(a) Not later than 12:00 noon on each Auction Date, the Fund shall
pay to the Auction Agent in Federal Funds or similar same-day funds an
amount in cash equal to (i) in the case of any Auction Date immediately
preceding a 7-Day Dividend Period or 28-Day Dividend Period, the product of
(A) a fraction the numerator of which is the number of days in such
Dividend Period (calculated by counting the first day of such Dividend
Period but excluding the last day thereof) and the denominator of which is
360, times (B) 1/4 of 1%, times (C) $25,000 times (D) the sum of the
aggregate number of Outstanding AMPS for which the Auction is conducted and
(ii) in the case of any Special Dividend Period, the amount determined by
mutual consent of the Fund and the Broker-Dealers pursuant to Section 3.5
of the Broker-Dealer Agreements. The Auction Agent shall apply such moneys
as set forth in Section 3.5 of the Broker-Dealer Agreements and shall
thereafter remit to the Fund any remaining funds paid to the Auction Agent
pursuant to this Section 2.5(a).
(b) The Fund shall not designate any Person to act as a Broker-
Dealer, or permit a Existing Holder or a Potential Beneficial Owner to
participate in Auctions through any Person other than a Broker-Dealer,
without the prior written approval of the Auction Agent, which approval
shall not be withheld unreasonably. The Fund may designate an Affiliate or
Merrill Lynch, Pierce, Fenner & Smith Incorporated to act as a Broker-
Dealer.
8
<PAGE>
(c) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed by the Fund.
(d) Subject to Section 2.5(b) hereof, the Auction Agent from time to
time shall enter into such Broker-Dealer Agreements as the Fund shall
request.
(e) The Auction Agent shall maintain a list of Broker-Dealers.
2.6. Ownership of AMPS and Submission of Bids
by the Fund and its Affiliates.
-------------------------------
Neither the Fund nor any Affiliate of the Fund may submit any Sell Order or
Bid, directly or indirectly, in any Auction, except that an Affiliate of the
Fund that is a Broker-Dealer may submit a Sell Order or Bid on behalf of a
Beneficial Owner or a Potential Beneficial Owner. The Fund shall notify the
Auction Agent if the Fund or, to the best of the Fund's knowledge, any Affiliate
of the Fund becomes a Beneficial Owner of any AMPS. Any AMPS redeemed,
purchased or otherwise acquired (i) by the Fund shall not be reissued, except in
accordance with the requirements of the Securities Act of 1933, as amended, or
(ii) by its Affiliates shall not be transferred (other than to the Fund). The
Auction Agent shall have no duty or liability with respect to enforcement of
this Section 2.6.
2.7. Access to and Maintenance of Auction Records.
--------------------------------------------
The Auction Agent shall afford to the Fund, its agents, independent public
accountants and counsel, access at reasonable times during normal business hours
to review and make extracts or copies (at the Fund's sole cost and expense) of
all books, records, documents and other information concerning the conduct and
results of Auctions, provided that any such agent, accountant or counsel shall
furnish the Auction Agent with a letter from the Fund requesting that the
Auction Agent afford such person access. The Auction Agent shall maintain
records relating to any Auction for a period of two years after such Auction
(unless requested by the Fund to maintain such records for such longer period
not in excess of four years, then for such longer period), and such records, in
reasonable detail, shall accurately and fairly reflect the actions taken by the
Auction Agent hereunder. The Fund agrees to keep confidential any information
regarding the customers of any Broker-Dealer received from the Auction Agent in
connection with this Agreement or any Auction, and shall not disclose such
information or permit the disclosure of such information without the prior
written consent of the applicable Broker-Dealer to anyone except such agent,
accountant or counsel engaged to audit or review the results of Auctions as
permitted by this Section 2.7, provided that the Fund reserves the right to
disclose any such information if it is advised by its counsel that its failure
to do so would (i) be unlawful or (ii) expose it to liability, unless the
Broker-Dealer shall have offered indemnification satisfactory to the Fund. Any
such agent, accountant or counsel, before having access to such information,
shall agree to keep such information confidential and not to disclose such
information or permit disclosure of such information without the prior written
consent of the applicable Broker-Dealer, provided that such agent, accountant or
counsel may reserve the right to disclose any such information if it is advised
by its counsel that its failure to do so would (i) be unlawful or (ii) expose it
to liability, unless the Broker-Dealer shall have offered indemnification
satisfactory to such agent, accountant or counsel.
9
<PAGE>
III. THE AUCTION AGENT AS PAYING AGENT.
---------------------------------
3.1. The Paying Agent.
----------------
The Board of Trustees of the Fund has adopted a resolution appointing IBJ
Schroder Bank & Trust Company as transfer agent, registrar, dividend disbursing
agent and redemption agent for the Fund in connection with any AMPS (in such
capacity, the "Paying Agent"). The Paying Agent hereby accepts such appointment
and agrees to act in accordance with its standard procedures and the provisions
of the Certificate of Designation which are specified herein with respect to the
AMPS and as set forth in this Section 3.
3.2. The Fund's Notices to the Paying Agent.
--------------------------------------
Whenever any AMPS are to be redeemed, the Fund promptly shall deliver to
the Paying Agent a Notice of Redemption, which will be mailed by the Fund to
each Holder at least five Business Days prior to the date such Notice of
Redemption is required to be mailed pursuant to the Certificate of Designation.
The Paying Agent shall have no responsibility to confirm or verify the accuracy
of any such Notice.
3.3. The Fund to Provide Funds for Dividends,
Redemptions and Additional Dividends.
-------------------------------------
(a) Not later than noon on each Dividend Payment Date, the Fund shall
deposit with the Paying Agent an aggregate amount of Federal Funds or
similar same-day funds equal to the declared dividends to be paid to
Holders on such Dividend Payment Date, and shall give the Paying Agent
irrevocable instructions to apply such funds to the payment of such
dividends on such Dividend Payment Date.
(b) If the Fund shall give a Notice of Redemption, then by noon of
the date fixed for redemption, the Fund shall deposit in trust with the
Paying Agent an aggregate amount of Federal Funds or similar same-day funds
sufficient to redeem such AMPS called for redemption and shall give the
Paying Agent irrevocable instructions and authority to pay the redemption
price to the Holders of AMPS called for redemption upon surrender of the
certificate or certificates therefor.
(c) If the Fund provides notice to the Auction Agent of a Retroactive
Taxable Allocation, the Fund, within 30 days after such notice is given and
by noon of the date fixed for payment of an Additional Dividend, shall
deposit in trust with the Paying Agent an aggregate amount of Federal Funds
or similar same-day funds equal to such Additional Dividend and shall give
the Paying Agent irrevocable instructions and authority to pay the
Additional Dividend to Holders (or former Holders) entitled thereto.
3.4. Disbursing Dividends, Redemption Price
and Additional Dividends.
-------------------------
After receipt of the Federal Funds or similar same-day funds and
instructions from the Fund described in Sections 3.3(a), (b) and (c) above, the
Paying Agent shall pay to the Holders (or former Holders) entitled thereto (i)
on each corresponding Dividend Payment Date, dividends
10
<PAGE>
on the AMPS, (ii) on any date fixed for redemption, the redemption price of any
AMPS called for redemption and (iii) on the date fixed for payment of an
Additional Dividend, such Additional Dividend. The amount of dividends for any
Dividend Period to be paid by the Paying Agent to Holders will be determined by
the Fund as set forth in Paragraph 2 of the Certificate of Designation. The
redemption price to be paid by the Paying Agent to the Holders of any AMPS
called for redemption will be determined as set forth in Paragraph 4 of the
Certificate of Designation. The amount of Additional Dividends to be paid by the
Paying Agent in the event of a Retroactive Taxable Allocation to Holders will be
determined by the Fund pursuant to paragraph 2(e) of the Certificate of
Designation. The Fund shall notify the Paying Agent in writing of a decision to
redeem any AMPS on or prior to the date specified in Section 3.2 above, and such
notice by the Fund to the Paying Agent shall contain the information required to
be stated in a Notice of Redemption required to be mailed by the Fund to such
Holders. The Paying Agent shall have no duty to determine the redemption price
and may rely on the amount thereof set forth in a Notice of Redemption.
IV. THE PAYING AGENT AS TRANSFER AGENT AND REGISTRAR.
------------------------------------------------
4.1. Original Issue of Share Certificates.
------------------------------------
On the Date of Original Issue for any AMPS, one certificate for each series
of AMPS shall be issued by the Fund and registered in the name of Cede & Co., as
nominee of the Securities Depository, and countersigned by the Paying Agent.
The Fund will give the Auction Agent prior written notice and instruction as to
the issuance and redemption of AMPS.
4.2. Registration of Transfer or Exchange of Shares.
----------------------------------------------
Except as provided in this Section 4.2, the shares of each series of AMPS
shall be registered solely in the name of the Securities Depository or its
nominee. If the Securities Depository shall give notice of its intention to
resign as such, and if the Fund shall not have selected a substitute Securities
Depository acceptable to the Paying Agent prior to such resignation, then upon
such resignation, the shares of each series of AMPS, at the Fund's request, may
be registered for transfer or exchange, and new certificates thereupon shall be
issued in the name of the designated transferee or transferees, upon surrender
of the old certificate in form deemed by the Paying Agent properly endorsed for
transfer with (a) all necessary endorsers' signatures guaranteed in such manner
and form as the Paying Agent may require by a guarantor reasonably believed by
the Paying Agent to be responsible, (b) such assurances as the Paying Agent
shall deem necessary or appropriate to evidence the genuineness and
effectiveness of each necessary endorsement and (c) satisfactory evidence of
compliance with all applicable laws relating to the collection of taxes in
connection with any registration of transfer or exchange or funds necessary for
the payment of such taxes. If the certificate or certificates for AMPS are not
held by the Securities Depository or its nominee, payments upon transfer of
shares in an Auction shall be made in Federal Funds or similar same-day funds to
the Auction Agent against delivery of certificates therefor.
11
<PAGE>
4.3. Removal of Legend.
-----------------
Any request for removal of a legend indicating a restriction on transfer
from a certificate evidencing AMPS shall be accompanied by an opinion of counsel
stating that such legend may be removed and such shares may be transferred free
of the restriction described in such legend, said opinion to be delivered under
cover of a letter from a Fund Officer authorizing the Paying Agent to remove the
legend on the basis of said opinion.
4.4. Lost, Stolen or Destroyed Share Certificates.
--------------------------------------------
The Paying Agent shall issue and register replacement certificates for
certificates represented to have been lost, stolen or destroyed, upon the
fulfillment of such requirements as shall be deemed appropriate by the Fund and
by the Paying Agent, subject at all times to provisions of law, the By-Laws of
the Fund governing such matters and resolutions adopted by the Fund with respect
to lost, stolen or destroyed securities. The Paying Agent may issue new
certificates in exchange for and upon the cancellation of mutilated
certificates. Any request by the Fund to the Paying Agent to issue a
replacement or new certificate pursuant to this Section 4.4 shall be deemed to
be a representation and warranty by the Fund to the Paying Agent that such
issuance will comply with provisions of applicable law and the By-Laws and
resolutions of the Fund.
4.5. Disposition of Canceled Certificates; Record Retention.
-------------------------------------------------------
The Paying Agent shall retain share certificates which have been canceled
in transfer or in exchange and accompanying documentation in accordance with
applicable rules and regulations of the Securities and Exchange Commission for
two calendar years from the date of such cancellation. The Paying Agent, upon
written request by the Fund, shall afford to the Fund, its agents and counsel
access at reasonable times during normal business hours to review and make
extracts or copies (at the Fund's sole cost and expense) of such certificates
and accompanying documentation. Upon request by the Fund at any time after the
expiration of this two-year period, the Paying Agent shall deliver to the Fund
the canceled certificates and accompanying documentation. The Fund, at its
expense, shall retain such records for a minimum additional period of four
calendar years from the date of delivery of the records to the Fund and shall
make such records available during this period at any time, or from time to
time, for reasonable periodic, special, or other examinations by representatives
of the Securities and Exchange Commission. The Fund also shall undertake to
furnish to the Securities and Exchange Commission, upon demand, either at their
principal office or at any regional office, complete, correct and current hard
copies of any and all such records. Thereafter, such records shall not be
destroyed by the Fund without the approval of the Paying Agent, which approval
shall not be withheld unreasonably, but will be safely stored for possible
future reference.
4.6. Share Register.
--------------
The Paying Agent shall maintain the share register, which shall contain a
list of the Holders, the number of shares held by each Holder and the address of
each Holder. The Paying Agent shall record in the share register any change of
address of a Holder upon notice by such Holder. In case of any written request
or demand for the inspection of the share register or any
12
<PAGE>
other books of the Fund in the possession of the Paying Agent, the Paying Agent
will notify the Fund and secure instructions as to permitting or refusing such
inspection. The Paying Agent reserves the right, however, to exhibit the share
register or other records to any person in case it is advised by its counsel
that its failure to do so would (i) be unlawful or (ii) expose it to liability,
unless the Fund shall have offered indemnification satisfactory to the Paying
Agent.
4.7. Return of Funds.
---------------
Any funds deposited with the Paying Agent by the Fund for any reason under
this Agreement, including for the payment of dividends or the redemption of
shares of any series of AMPS, that remain with the Paying Agent after 12 months
shall be repaid to the Fund upon written request by the Fund.
V. REPRESENTATIONS AND WARRANTIES.
------------------------------
5.1. Representations and Warranties of the Fund.
------------------------------------------
The Fund represents and warrants to the Auction Agent that:
(i) the Fund is duly organized and is validly existing as a
voluntary association (commonly referred to as a business trust) in good
standing under the laws of the Commonwealth of Massachusetts, and has full
power to execute and deliver this Agreement and to authorize, create and
issue the AMPS;
(ii) the Fund is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified, management investment company;
(iii) this Agreement has been duly and validly authorized, executed
and delivered by the Fund and constitutes the legal, valid and binding
obligation of the Fund, enforceable against the Fund in accordance with its
terms, subject as to such enforceability to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equitable principles;
(iv) the forms of the certificates evidencing the shares of each
series of AMPS comply with all applicable laws of the Commonwealth of
Massachusetts;
(v) the shares of each series of AMPS have been duly and validly
authorized by the Fund and, upon completion of the initial sale of the
shares of such series of AMPS and receipt of payment therefor, will be
validly issued, fully paid and nonassessable;
(vi) at the time of the offering of the shares of each series of
AMPS, the shares offered will be registered under the Securities Act of
1933, as amended, and no further action by or before any governmental body
or authority of the United States or of any state thereof is required in
connection with the execution and delivery of this Agreement or will be
required in connection with the issuance of the AMPS, except such action as
required by applicable state securities or insurance laws, all of which
action will have been taken;
13
<PAGE>
(vii) the execution and delivery of this Agreement and the issuance
and delivery of the shares of each series of AMPS do not and will not
conflict with, violate, or result in a breach of, the terms, conditions or
provisions of, or constitute a default under, the Declaration of Trust or
the By-Laws of the Fund, any law or regulation applicable to the Fund, any
order or decree of any court or public authority having jurisdiction over
the Fund, or any mortgage, indenture, contract, agreement or undertaking to
which the Fund is a party or by which it is bound; and
(viii) no taxes are payable upon or in respect of the execution of
this Agreement or will be payable upon or in respect of the issuance of the
shares of each series of AMPS.
5.2. Representations and Warranties of the Auction Agent.
---------------------------------------------------
The Auction Agent represents and warrants to the Fund that the Auction
Agent is duly organized and is validly existing as a banking corporation in good
standing under the laws of the State of New York, and has the corporate power to
enter into and perform its obligations under this Agreement.
VI. THE AUCTION AGENT.
-----------------
6.1. Duties and Responsibilities.
---------------------------
(a) The Auction Agent is acting solely as agent for the Fund
hereunder and owes no fiduciary duties to any Person except as provided by
this Agreement.
(b) The Auction Agent undertakes to perform such duties and only such
duties as are set forth specifically in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the
Auction Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered or omitted
by it or for any error of judgment made by it in the performance of its
duties under this Agreement. The Auction Agent shall not be liable for any
error of judgment made in good faith unless the Auction Agent shall have
been negligent in ascertaining (or failing to ascertain) the pertinent
facts.
6.2. Rights of the Auction Agent.
---------------------------
(a) The Auction Agent may rely upon, and shall be protected in acting
or refraining from acting upon, any communication authorized hereby and any
written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document
reasonably believed by it to be genuine. The Auction Agent shall not be
liable for acting upon any telephone communication authorized hereby which
the Auction Agent believes in good faith to have been given by the Fund or
by a Broker-Dealer. The Auction Agent may record telephone communications
with the Fund or with the Broker-Dealers or with both.
14
<PAGE>
(b) The Auction Agent may consult with counsel of its choice, and the
written advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder. The Auction Agent
shall be under no liability for interest on any money received by it
hereunder except as otherwise agreed in writing with the Fund.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.
6.3. Auction Agent's Disclaimer.
--------------------------
The Auction Agent makes no representation as to the validity or the
adequacy of this Agreement, the Broker-Dealer Agreements or the AMPS.
6.4. Compensation, Expenses and Indemnification.
------------------------------------------
(a) The Fund shall pay to the Auction Agent from time to time
reasonable compensation for all services rendered by it under this
Agreement and under the Broker-Dealer Agreements as shall be set forth in a
separate writing signed by the Fund and the Auction Agent, subject to
adjustments if the AMPS no longer are held of record by the Securities
Depository or its nominee or if there shall be such other change as shall
increase materially the Auction Agent's obligations hereunder or under the
Broker-Dealer Agreements.
(b) The Fund shall reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of this Agreement and of the
Broker-Dealer Agreements (including the reasonable compensation, expenses
and disbursements of its agents and counsel), except any expense,
disbursement or advance attributable to its negligence or bad faith.
(c) The Fund shall indemnify the Auction Agent for, and hold it
harmless against, any loss, liability or expense incurred without
negligence or bad faith on its part arising out of or in connection with
its agency under this Agreement and under the Broker-Dealer Agreements,
including the costs and expenses of defending itself against any claim of
liability in connection with its exercise or performance of any of its
duties hereunder and thereunder, except such as may result from its
negligence or bad faith.
VII. MISCELLANEOUS.
-------------
7.1. Term of Agreement.
-----------------
(a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Fund may terminate this
Agreement at any time by so
15
<PAGE>
notifying the Auction Agent, provided that if any AMPS remain outstanding
the Fund shall have entered into an agreement in substantially the form of
this Agreement with a successor auction agent. The Auction Agent may
terminate this Agreement upon prior notice to the Fund on the date
specified in such notice, which date shall be no earlier than 60 days after
delivery of such notice. If the Auction Agent resigns while any AMPS remain
outstanding, the Fund shall use its best efforts to enter into an agreement
with a successor auction agent containing substantially the same terms and
conditions as this Agreement.
(b) Except as otherwise provided in this Section 7.1(b), the
respective rights and duties of the Fund and the Auction Agent under this
Agreement shall cease upon termination of this Agreement. The Fund's
representations, warranties, covenants and obligations to the Auction Agent
under Sections 5 and 6.4 hereof shall survive the termination hereof. Upon
termination of this Agreement, the Auction Agent shall (i) resign as
Auction Agent under the Broker-Dealer Agreements, (ii) at the Fund's
request, deliver promptly to the Fund copies of all books and records
maintained by it in connection with its duties hereunder, and (iii) at the
request of the Fund, transfer promptly to the Fund or to any successor
auction agent any funds deposited by the Fund with the Auction Agent
(whether in its capacity as Auction Agent or as Paying Agent) pursuant to
this Agreement which have not been distributed previously by the Auction
Agent in accordance with this Agreement.
7.2. Communications.
--------------
Except for (i) communications authorized to be made by telephone pursuant
to this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be given to such
party at its address or telecopier number set forth below:
If to the Fund, MuniHoldings Florida Insured Fund III
addressed to: 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Treasurer
Telephone No.: (609) 282-2800
Telecopier No.: (609) 282-3472
If to the Auction IBJ Schroder Bank & Trust Company
Agent, addressed to: One State Street
New York, New York 10004
Attention: Auction Window
Subcellar 1
Telephone No.: (212) 858-2315
Telecopier No.: (212) 797-1148
16
<PAGE>
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of the Fund by a Fund Officer and on
behalf of the Auction Agent by an Authorized Officer.
7.3. Entire Agreement.
----------------
This Agreement contains the entire agreement between the parties relating
to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or inferred,
between the parties relating to the subject matter hereof, except for agreements
relating to the compensation of the Auction Agent.
7.4. Benefits.
--------
Nothing herein, express or implied, shall give to any Person, other than
the Fund, the Auction Agent and their respective successors and assigns, any
benefit of any legal or equitable right, remedy or claim hereunder.
7.5. Amendment; Waiver.
-----------------
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party
to be charged. The Fund shall notify the Auction Agent of any change in the
Certificate of Designation prior to the effective date of any such change.
If any such change in the Certificate of Designation materially increases
the Auction Agent's obligations hereunder, the Fund shall obtain the
written consent to the Auction Agent prior to the effective date of such
change.
(b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any
subsequent breach.
7.6. Successors and Assigns.
----------------------
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of the
Fund and the Auction Agent. This Agreement may not be assigned by either party
hereto absent the prior written consent of the other party, which consent shall
not be withheld unreasonably.
7.7. Severability.
------------
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
17
<PAGE>
7.8. Liability of Shareholders, Trustees and Officers.
------------------------------------------------
This agreement is executed by and on behalf of the trustees of the Fund
solely in their capacity as such trustees, and shall not constitute their
personal obligation, either jointly or severally, in their individual
capacities. No trustee, officer or shareholder of the Fund shall be liable for
any obligations of the Fund under this instrument and the Fund shall be solely
liable therefor; all parties hereto shall look solely to the fund estate for the
payment of any claim, or the performance of any obligation, hereunder.
7.9. Execution in Counterparts.
-------------------------
This Agreement may be executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument.
7.10. Governing Law.
-------------
This 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.
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
MUNIHOLDINGS FLORIDA INSURED FUND III
By:
-----------------------------------
Title:
IBJ SCHRODER BANK & TRUST COMPANY
By:
-----------------------------------
Title:
19
<PAGE>
EXHIBIT (3)
BROKER-DEALER AGREEMENT
between
IBJ SCHRODER BANK & TRUST COMPANY
and
[NAME OF BROKER-DEALER]
Dated as of ____ __, 1998
Relating to
AUCTION MARKET PREFERRED SHARES(R)
("AMPS"(R)),
Series A and B
of
MUNIHOLDINGS FLORIDA INSURED FUND III
/(R)/ Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
BROKER-DEALER AGREEMENT dated as of ____ __, 1998, between IBJ SCHRODER
BANK & TRUST COMPANY, a New York banking corporation (the "Auction Agent") (not
in its individual capacity, but solely as agent of MuniHoldings Florida Insured
Fund III, a Massachusetts business trust (the "Fund"), pursuant to authority
granted to it in the Auction Agent Agreement dated as of ____ __, 1998, between
the Fund and the Auction Agent (the "Auction Agent Agreement")) and [NAME OF
BROKER-DEALER] (together with its successors and assigns, "BD").
The Fund proposes to duly authorize and issue ____ Auction Market Preferred
Shares(R), Series A ("Series A AMPS"), and ____ Auction Market Preferred
Shares(R), Series B ("Series B AMPS"), each with a par value of $.10 per share
and a liquidation preference of $25,000 per share plus accumulated but unpaid
dividends (whether or not earned or declared), each pursuant to the Fund's
Certificate of Designation (as defined below). The Series A AMPS and Series B
AMPS are sometimes herein referred to together as the "AMPS."
The Fund's Certificate of Designation provides that the dividend rate on
each series of AMPS for each Dividend Period therefor after the Initial Dividend
Period shall be the Applicable Rate therefor, which in each case, in general
shall be the rate per annum that a commercial bank, trust company or other
financial institution appointed by the Fund advises results from implementation
of the Auction Procedures (as defined below). The Board of Trustees of the Fund
has adopted a resolution appointing IBJ Schroder Bank & Trust Company as Auction
Agent for purposes of the Auction Procedures, and pursuant to Section 2.5(d) of
the Auction Agent Agreement, the Fund has requested and directed the Auction
Agent to execute and deliver this Agreement.
The Auction Procedures require the participation of one or more Broker-
Dealers.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Auction Agent and BD agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
-------------------------------------
1.1. Terms Defined by Reference to the Certificate of Designation.
------------------------------------------------------------
Capitalized terms not defined herein shall have the respective meanings
specified in the Certificate of Designation of the Fund.
1.2. Terms Defined Herein. As used herein and in the Settlement
--------------------
Procedures (as defined below), the following terms shall have the following
meanings, unless the context otherwise requires:
(a) "Auction" shall have the meaning specified in Section 3.1 hereof.
<PAGE>
(b) "Auction Procedures" shall mean the Auction Procedures that are set
forth in Paragraph __ of the Certificate of Designation.
(c) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Fund Officer, Assistant Secretary and
Assistant Treasurer of the Auction Agent assigned to its Corporate Trust and
Agency Group and every other officer or employee of the Auction Agent designated
as an "Authorized Officer" for purposes of this Agreement in a communication to
BD.
(d) "BD Officer" shall mean each officer or employee of BD designated
as a "BD Officer" for purposes of this Agreement in a communication to the
Auction Agent.
(e) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.
(f) "Certificate of Designation" shall mean the Certificate of
Designation, as amended, of the Fund, establishing the powers, preferences and
rights of the AMPS filed on _____ __, 1998 in the office of the Secretary of
State of the Commonwealth of Massachusetts.
(g) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit A.
1.3. Rules of Construction. Unless the context or use indicates another or
---------------------
different meaning or intent, the following rules shall apply to the construction
of this Agreement:
(a) Words importing the singular number shall include the plural number
and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement, nor shall they
affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to New
York City time.
- ----------------------
(R) Registered trademark of Merrill Lynch & Co., Inc.
2
<PAGE>
II. NOTIFICATION OF DIVIDEND PERIOD AND ADVANCE NOTICE OF
ALLOCATION OF TAXABLE INCOME.
-----------------------------------------------------
2.1. The provisions contained in paragraph __ of the Certificate of
Designation concerning the notification of a Special Dividend Period will be
followed by the Auction Agent and BD, and the provisions contained therein are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.
2.2. Except as otherwise provided in paragraph ___ of the Certificate of
Designation, whenever the Fund intends to include any net capital gains or other
income subject to regular Federal income tax in any dividend on shares of any
series of AMPS, the Fund will notify the Auction Agent of the amount to be so
included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, in turn it will notify BD, who, on or
prior to such Auction Date, will notify its Beneficial Owners and Potential
Beneficial Owners believed to be interested in submitting an Order in the
Auction to be held on such Auction Date. Whenever the Fund intends to include
any additional amounts in a dividend as provided in paragraph 2(f) of the
Certificate of Designation, the Fund will notify the Auction Agent of such
additional amounts to be so included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. Whenever the Auction Agent
receives such notice from the Fund, in turn it will notify the Securities
Depository and BD, who, on or prior to the applicable Dividend Payment Date,
will notify its Beneficial Owners.
III. THE AUCTION.
-----------
3.1. Purpose; Incorporation by Reference of Auction Procedures and
-------------------------------------------------------------
Settlement Procedures.
---------------------
(a) On each Auction Date, the provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of determining the
Applicable Rate for each series of AMPS, for the next Dividend Period therefor.
Each periodic operation of such procedures is hereinafter referred to as an
"Auction."
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their entirety
and shall be deemed to be a part of this Agreement to the same extent as if such
provisions were set forth fully herein.
(c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement.
BD understands that other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in Paragraph _ of the Certificate of
Designation may execute a Broker-Dealer Agreement and participate as Broker-
Dealers in Auctions.
3
<PAGE>
(d) BD and other Broker-Dealers may participate in Auctions for
their own accounts. However, the Fund, by notice to BD and all other Broker
Dealers, may prohibit all Broker-Dealers from submitting Bids in Auctions for
their own accounts, provided that Broker-Dealers may continue to submit Hold
Orders and Sell Orders.
3.2. Preparation for Each Auction.
----------------------------
(a) Not later than 9:30 A.M. on each Auction Date for the AMPS, the
Auction Agent shall advise BD by telephone of the Reference Rate and the Maximum
Applicable Rate in effect on such Auction Date.
(b) In the event that the Auction Date for any Auction shall be
changed after the Auction Agent has given the notice referred to in clause (vii)
of paragraph (a) of the Settlement Procedures, the Auction Agent, by such means
as the Auction Agent deems practicable, shall give notice of such change to BD
not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on
the old Auction Date. Thereafter, BD promptly shall notify customers of BD that
BD believes are Beneficial Owners of AMPS of such change in the Auction Date.
(c) The Auction Agent from time to time may request BD to provide it
with a list of the respective customers BD believes are Beneficial Owners of
shares of each series of AMPS. BD shall comply with any such request, and the
Auction Agent shall keep confidential any such information, including
information received as to the identity of Bidders in any Auction, and shall not
disclose any such information so provided to any Person other than the Fund; and
such information shall not be used by the Auction Agent or its officers,
employees, agents or representatives for any purpose other than such purposes as
are described herein. The Auction Agent shall transmit any list of customers BD
believes are Beneficial Owners of shares of each series of AMPS and information
related thereto only to its officers, employees, agents or representatives in
the Corporate Trust and Agency Group who need to know such information for the
purposes of acting in accordance with this Agreement, and the Auction Agent
shall prevent the transmission of such information to others and shall cause its
officers, employees, agents and representatives to abide by the foregoing
confidentiality restrictions; provided, however, that the Auction Agent shall
have no responsibility or liability for the actions of any of its officers,
employees, agents or representatives after they have left the employ of the
Auction Agent.
3.3. Auction Schedule; Method of Submission of Orders.
------------------------------------------------
(a) The Fund and the Auction Agent shall conduct Auctions for each
series of AMPS in accordance with the schedule set forth below. Such schedule
may be changed at any time by the Auction Agent with the consent of the Fund,
which consent shall not be withheld unreasonably. The Auction Agent shall give
notice of any such change to BD. Such notice shall be received prior to the
first Auction Date on which any such change shall be effective.
4
<PAGE>
Time Event
---- -----
By 9:30 A.M. Auction Agent advises the Fund and Broker-
Dealers of the Reference Rate and the Maximum
Applicable Rate as set forth in Section 3.2(a)
hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Paragraph _____ of the Certificate
of Designation. Submission Deadline is 1:00
P.M.
Not earlier than Auction Agent makes determinations pursuant
1:00 P.M. to Paragraph _______ of the Certificate of
Designation.
By approximately 3:00P.M. Auction Agent advises the Fund of the results
of the Auction as provided in Paragraph
_______ of the Certificate of Designation.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part and
AMPS are allocated as provided in Paragraph
_____ of the Certificate of Designation.
Auction Agent gives notice of the Auction
results as set forth in Section 3.4(a) hereof.
(b) BD agrees to maintain a list of Potential Beneficial Owners and to
contact the Potential Beneficial Owners on such list on or prior to each Auction
Date for the purposes set forth in Paragraph __ of the Certificate of
Designation.
(c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit B. BD shall submit separate
Orders to the Auction Agent for each Potential Beneficial Owner or Beneficial
Owner on whose behalf BD is submitting an Order and shall not net or aggregate
the Orders of Potential Beneficial Owners or Beneficial Owners on whose behalf
BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit C, of transfers of shares
of any series of AMPS, made through BD by an Existing Holder to another Person
other than pursuant to an Auction, and (ii) a written notice, substantially in
the form attached hereto as Exhibit D, of the failure of shares of any series of
any series of AMPS to be transferred to or by any Person that purchased or sold
shares of any series of AMPS through BD pursuant to an Auction. The Auction
Agent is not required to accept any notice delivered pursuant to the terms of
the foregoing sentence with
5
<PAGE>
respect to an Auction unless it is received by the Auction Agent by 3:00 P.M. on
the Business Day next preceding the applicable Auction Date.
3.4. Notice of Auction Results.
-------------------------
(a) On each Auction Date, the Auction Agent shall notify BD by
telephone as set forth in paragraph (a) of the Settlement Procedures. On the
Business Day next succeeding such Auction Date, the Auction Agent shall notify
BD in writing of the disposition of all Orders submitted by BD in the Auction
held on such Auction Date.
(b) BD shall notify each Beneficial Owner, Potential Beneficial
Owner, Existing Holder or Potential Holder on whose behalf BD has submitted an
Order as set forth in paragraph (b) of the Settlement Procedures, and take such
other action as is required of BD pursuant to the Settlement Procedures.
If any Beneficial Owner or Existing Holder selling AMPS in an Auction fails
to deliver such shares, the BD of any Person that was to have purchased shares
of such series of AMPS in such Auction may deliver to such Person a number of
whole shares of such series of AMPS that is less than the number of shares that
otherwise was to be purchased by such Person. In such event, the number of
shares of such series of AMPS to be so delivered shall be determined by such BD.
Delivery of such lesser number of shares shall constitute good delivery. Upon
the occurrence of any such failure to deliver shares, such BD shall deliver to
the Auction Agent the notice required by Section 3.3(d)(ii) hereof.
Notwithstanding the foregoing terms of this Section 3.4(b), any delivery or non-
delivery of shares of any series of AMPS which represents any departure from the
results of an Auction, as determined by the Auction Agent, shall be of no effect
unless and until the Auction Agent shall have been notified of such delivery or
non-delivery in accordance with the terms of Section 3.3(d) hereof. The Auction
Agent shall have no duty or liability with respect to enforcement of this
Section 3.4(b).
3.5. Service Charge to Be Paid to BD. On the Business Day next
-------------------------------
succeeding each Auction Date, the Auction Agent shall pay to BD from moneys
received from the Fund an amount equal to: (a) in the case of any Auction Date
immediately preceding a 7-Day Dividend Period or 28-Day Dividend Period, the
product of (i) a fraction the numerator of which is the number of days in such
Dividend Period (calculated by counting the first day of such Dividend Period
but excluding the last day thereof) and the denominator of which is 360, times
(ii) 1/4 of 1%, times (iii) $25,000, times (iv) the sum of (A) the aggregate
number of AMPS placed by BD in the applicable Auction that were (x) the subject
of a Submitted Bid of a Beneficial Owner submitted by BD and continued to be
held as a result of such submission and (y) the subject of a Submitted Bid of a
Potential Beneficial Owner submitted by BD and were purchased as a result of
such submission plus (B) the aggregate number of AMPS subject to valid Hold
Orders (determined in accordance with Paragraph __ of the Certificate of
Designation) submitted to the Auction Agent by BD plus (C) the number of AMPS
deemed to be subject to Hold Orders by Beneficial Owners pursuant to Paragraph
__ of the Certificate of Designation that were acquired by such Beneficial
Owners through BD; and (b) in the case of any Auction Date immediately
6
<PAGE>
preceding a Special Dividend Period, that amount as mutually agreed upon by the
Fund and BD, based on the selling concession that would be applicable to an
underwriting of fixed or variable rate preferred shares with a similar final
maturity or variable rate dividend period, at the commencement of such Special
Dividend Period.
For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any
Beneficial Owner who acquired shares of any series of AMPS through BD transfers
those shares to another Person other than pursuant to an Auction, then the
Broker-Dealer for the shares so transferred shall continue to be BD, provided,
however, that if the transfer was effected by, or if the transferee is, a
Broker-Dealer other than BD, then such Broker-Dealer shall be the Broker-Dealer
for such shares.
IV. THE AUCTION AGENT.
-----------------
4.1. Duties and Responsibilities.
---------------------------
(a) The Auction Agent is acting solely as agent for the Fund
hereunder and owes no fiduciary duties to any other Person by reason of this
Agreement.
(b) The Auction Agent undertakes to perform such duties and only such
duties as are set forth specifically in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered or omitted by
it, or for any error of judgment made by it in the performance of its duties
under this Agreement. The Auction Agent shall not be liable for any error of
judgment made in good faith unless the Auction Agent shall have been negligent
in ascertaining (or failing to ascertain) the pertinent facts.
4.2. Rights of the Auction Agent.
---------------------------
(a) The Auction Agent may rely upon, and shall be protected in
acting or refraining from acting upon, any communication authorized by this
Agreement and any written instruction, notice, request, direction, consent,
report, certificate, share certificate or other instrument, paper or document
believed by it to be genuine. The Auction Agent shall not be liable for acting
upon any telephone communication authorized by this Agreement which the Auction
Agent believes in good faith to have been given by the Fund or by BD. The
Auction Agent may record telephone communications with BD.
(b) The Auction Agent may consult with counsel of its own choice, and
the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
7
<PAGE>
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial liability
in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.
4.3. Auction Agent's Disclaimer. The Auction Agent makes no
--------------------------
representation as to the validity or adequacy of this Agreement or the AMPS.
V. MISCELLANEOUS.
--------------
5.1. Termination. Any party may terminate this Agreement at any time
-----------
upon five days' prior written notice to the other party; provided, however, that
if BD is Merrill Lynch, Pierce, Fenner & Smith Incorporated, neither BD nor the
Auction Agent may terminate this Agreement without first obtaining the prior
written consent of the Fund to such termination, which consent shall not be
withheld unreasonably.
5.2. Participant in Securities Depository; Payment of Dividends in
--------------------------------------------------------------
Same-Day Funds.
--------------
(a) BD is, and shall remain for the term of this Agreement, a member
of, or a participant in, the Securities Depository (or an affiliate of such a
member or participant).
(b) BD represents that it (or if BD does not act as Agent Member,
one of its affiliates) shall make all dividend payments on the AMPS available in
same-day funds on each Dividend Payment Date to customers that use BD (or its
affiliate) as Agent Member.
5.3. Agent Member. At the date hereof, BD is a participant of the
------------
Securities Depository.
5.4. Communications. Except for (i) communications authorized to be
--------------
made by telephone pursuant to this Agreement or the Auction Procedures and (ii)
communications in connection with the Auctions (other than those expressly
required to be in writing), all notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given to such party at its address or telecopier number set forth
below:
If to BD, ___________________________
addressed to: ___________________________
___________________________
Attention:_________________
8
<PAGE>
Telecopier No.:___________
Telephone No.:____________
If to the Auction IBJ Schroder Bank & Trust Company
Agent, addressed to: One State Street
New York, New York 10004
Attention: Auction Window
Subcellar 1
Telecopier No.: (212) 797-1148
Telephone No.: (212) 858-2135
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a BD Officer and on behalf of
the Auction Agent by an Authorized Officer. BD may record telephone
communications with the Auction Agent.
5.5. Entire Agreement. This Agreement contains the entire
----------------
agreement between the parties relating to the subject matter hereof, and there
are no other representations, endorsements, promises, agreements or
understandings, oral, written or inferred, between the parties relating to the
subject matter hereof.
5.6. Benefits. Nothing in this Agreement, express or
--------
implied, shall give to any person, other than the Fund, the Auction Agent and BD
and their respective successors and assigns, any benefit of any legal or
equitable right, remedy or claim under this Agreement.
5.7. Amendment; Waiver.
-----------------
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged.
(b) Failure of either party to this Agreement to exercise any right
or remedy hereunder in the event of a breach of this Agreement by the other
party shall not constitute a waiver of any such right or remedy with respect to
any subsequent breach.
5.8. Successors and Assigns. This Agreement shall be
----------------------
binding upon, inure to the benefit of, and be enforceable by, the respective
successors and permitted assigns of each of BD and the Auction Agent. This
Agreement may not be assigned by either party hereto absent the prior written
consent of the other party; provided, however, that this Agreement may be
assigned by the Auction Agent to a successor Auction Agent selected by the Fund
without the consent of BD.
9
<PAGE>
5.9. Severability. If any clause, provision or section of
------------
this Agreement shall be ruled invalid or unenforceable by any court of competent
jurisdiction, the invalidity or unenforceability of such clause, provision or
section shall not affect any remaining clause, provision or section hereof.
5.10. Execution in Counterparts. This Agreement may be
-------------------------
executed in several counterparts, each of which shall be an original and all of
which shall constitute but one and the same instrument.
5.11. Governing Law. This 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.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
IBJ SCHRODER BANK & TRUST COMPANY
By:_________________________________
Title:
[NAME OF BROKER-DEALER]
By:_________________________________
Title:
11
<PAGE>
EXHIBIT A
---------
SETTLEMENT PROCEDURES
---------------------
[From Prospectus]
A-1
<PAGE>
EXHIBIT B
---------
IBJ SCHRODER BANK & TRUST COMPANY
AUCTION BID FORM
---------------------------------
Submit To: IBJ Schroder Bank & Trust Co. Issue: MuniHoldings Florida
Securities Transfer Department Insured Fund III
One State Street Series: ____________________
New York, New York 10004 Auction Date:_______________
Attention: Auction Window Telephone: (212) 858-2272
Facsimile: (212) 797-1148
The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:
Name of Bidder:____________________________
BENEFICIAL OWNER
Shares now held ______________ HOLD ______________________
BID at rate of ______________________
SELL ______________________
POTENTIAL BENEFICIAL OWNER
# of shares bid ______________________
BID at rate of ______________________
Notes:
(1) If submitting more than one Bid for one Bidder, use additional Auction Bid
Forms.
(2) If one or more Bids covering in the aggregate more than the number of
outstanding shares held by any Beneficial Owner are submitted, such bid
shall be considered valid in the order of priority set forth in the
Auction Procedures on the above issue.
(3) A Hold or Sell Order may be placed only by a Beneficial Owner covering a
number of shares not greater than the number of shares currently held.
(4) Potential Beneficial Owners may make only Bids, each of which must specify
a rate. If more than one Bid is submitted on behalf of any Potential
Beneficial Owner, each Bid submitted shall be a separate Bid with the rate
specified.
(5) Bids may contain no more than three figures to the right of the decimal
point (.001 of 1%). Fractions will not be accepted.
NAME OF BROKER-DEALER ______________________
Authorized Signature ______________________
B-1
<PAGE>
EXHIBIT C
---------
(Note: To be used only for transfers made
other than pursuant to an Auction)
TRANSFER FORM
-------------
Re: MuniHoldings Florida Insured Fund III
Auction Market Preferred Shares(R),
Series [A][B] ("AMPS"(R))
We are (check one):
[ ] the Existing Holder named below;
[ ] the Broker-Dealer for such Existing Holder; or
[ ] the Agent Member for such Existing Holder.
We hereby notify you that such Beneficial Owner has
transferred _____ AMPS to ______________.
-----------------------------
(Name of Existing Holder)
-----------------------------
(Name of Broker-Dealer)
-----------------------------
(Name of Agent Member)
By: _____________________________
Printed Name:
Title:
C-1
<PAGE>
EXHIBIT D
---------
(Note: To be used only for failures to deliver
AMPS sold pursuant to an Auction)
NOTICE OF A FAILURE TO DELIVER
------------------------------
Complete either I or II
- -----------------------
I. We are a Broker-Dealer for ____________________ (the "Purchaser"),
which purchased _____ AMPS, Series [A][B], of MuniHoldings Florida
Insured Fund III in the Auction held on ______________________ from
the seller of such shares.
II. We are a Broker-Dealer for _____________________ (the "Seller"), which
sold ____ AMPS, Series [A][B], of MuniHoldings Florida Insured Fund
III in the Auction held on ______________ to the Purchaser of such
shares.
We hereby notify you that (check one):
_______ the Seller failed to deliver such shares to the Purchaser
_______ the Purchaser failed to make payment to the Seller
upon delivery of such shares
Name: ___________________________
(Name of Broker-Dealer)
By:______________________________
Printed Name:
Title:
D-1
<PAGE>
EXHIBIT (4)
- --------------------------------------------------------------------------------
BOOK-ENTRY-ONLY AUCTION-RATE/MONEY MARKET PREFRRED/AND REMARKETED
PREFERRED SECURITIES
- --------------------------------------------------------------------------------
LETTER OF REPRESENTATIONS
[To be Completed by Issuer and Trust Company]
___________________________________
[Name of Issuer]
___________________________________
[Name of Trust Company]
Attention: General Counsel's Office ____________
THE DEPOSITORY TRUST COMPANY [Date]
55 Water Street; 49th Floor
New York, NY 10041-0099
Re: _________________________________________________
_________________________________________________
_________________________________________________
[Issue Description, including CUSIP number]
Ladies and Gentlemen:
This letter sets forth our understanding with respect to certain matters
relating to the above-referenced issue (the "Securities"). Trust Company will
act as transfer agent, registrar, dividend disbursing agent, and redemption
agent with respect to the Securities. The Securities will be issued pursuant to
a prospectus, private placement memorandum, or other such document authorizing
the issuance of a Securities dated _______________________, 199__ (the
"Document"). _______________________ ["Underwriter"] is distributing the
Securities through the Depositary Trust Company ("DTC").
To induce DTC to accept the Securities as eligible for deposit at DTC, and
to act in accordance with respect to the Securities, Issue and Trust Company
make the following representations to DTC:
1. Prior to closing on the Securities on ____________________, 199__,
there shall be deposited with DTC one Security certificate registered in the
name of DTC's nominee, Cede & Co., which represents the total number of
Securities issued. Said certificate shall remain in DTC's custody as provided
in the Document.
<PAGE>
If however, the aggregate principal amount of the Securities exceed $200
million, one certificate will be issued with respect to each $200 million of
principal amount and an additional certificate will be issued with respect to
any remaining principal amount. Each Security certificate shall bear the
following legend:
Unless this certificate is presented by an authorized representative
of The Depository Trust Company, a New York corporation ("DTC"), to issuer
or its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co., or in such
other name as is requested by an authorized representative of DTC (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGRUL inasmuch as
the registered owner hereof, Cede & Co., has an interest therein.
2. Issuer: (a) understands that DTC has no obligation to, and will not,
communicate to its Participants or to any person having an interest in the
Securities any information contained in the Security certificate(s); and (b)
acknowledges that neither DTC's Participants nor any person having an interest
in the Securities shall be deemed to have notice of the provisions of the
Security certificate(s) by virtue of submission of such certificate(s) to DTC.
3. In the event of any solicitation of consents from or voting by holders
of the Securities, Issuer shall establish a record date for such purposes (with
no provision for revocation of consents or votes by subsequent holders) and
shall send notice of such record date to DTC not less than 15 calendar days in
advance of such record date. Notices to DTC pursuant to this Paragraph by
telecopy shall be sent to DTC's Reorganization Department at (212) 709-6896 or
(212) 709-6897, and receipt of such notices shall be confirmed by telephoning
(212) 709-6870. Notices to DTC pursuant to this Paragraph by mail or by any
other means shall be sent to DTC's Reorganization Department as indicated in
Paragraph 5.
4. In the event of a full or partial redemption of the outstanding
Securities, Issuer or Trust Company shall send a notice to DTC specifying: (a)
the number of Securities to be redeemed; and (b) the date such notice is to be
distributed to Security holders or published (the "Publication Date"). Such
notice shall be sent to DTC by a secure means (e.g., legible telecopy,
registered or certified mail, overnight delivery) in a timely manner designed to
assure that such notice is in DTC's possession no later than the close of
business on the business day before or, if possible, two business days before
the Publication Date. Issuer or Trust Company shall forward such notice either
in a separate secure transmission for each CUSIP number or in a secure
transmission for multiple CUSIP numbers (if applicable) which includes a
manifest or list of each CUSIP number submitted in that transmission. (The
party sending such notice shall have a method to verify subsequently the use of
such means and the timeliness of such notice.) The Publication date shall be
not less than 30 days nor more than 60 days prior to the redemption date.
Notices to DTC pursuant to this Paragraph by telecopy shall be sent to DTC's
Call Notification Department at (516) 227-4039 or (516) 227-4190. If the party
sending the notice does not receive a telecopy receipt from DTC confirming that
the notice has been received, such party shall telephone (516) 227-4070.
Notices to DTC pursuant to this Paragraph by mail or by any other means shall be
sent to:
Manager; Call Notification Department
The Depository Trust Company
711 Stewart Avenue
Garden City, NY 11530-4719
5. In the event of an invitation to tender the Securities (including
mandatory tenders, exchanges, and capital changes), notice by Issuer or Trust
Company to Security holder specifying the terms of the tender and the
Publication Date of such notice shall be sent to DTC by a secure means in the
manner set
2
<PAGE>
forth in the preceding Paragraph. Notices to DTC pursuant to this Paragraph and
notices of other corporate action by telecopy shall be sent to DTC's
Reorganization Department at (212) 709-1093 or (212) 709-1094, and receipt of
such notices shall be confirmed by telephoning (212) 709-6884. Notices to DTC
pursuant to the above by mail or by any other means shall be sent to:
Manager; Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square, 23rd Street
New York, NY 10004-2695
6. All notices and payment advices sent to DTC shall contain the CUSIP
number of the Securities (listed on Schedule A hereto) and the accompanying
description of such Security, which as of the date of this letter is
"__________________".
7. The Document indicates that the dividend rate for the Securities may
vary from time to time. Absent other existing arrangements with DTC, Issuer or
Trust Company shall give DTC notice of each such change in the dividend rate, on
the same day that the new rate is determined, by telephoning the Supervisor of
DTC's Dividend Announcement Section at (212) 709-1270, or by telecopy sent to
(212) 709-1723. Such verbal or telecopy notice shall be followed by prompt
written confirmation sent by a secure means in the manner set forth in Paragraph
4 to:
Manager; Announcements
Dividend Department
The Depository Trust Company
7 Hanover Square, 22nd Floor
New York, NY 10004-2695
8. The Document indicates that each purchaser must sign a purchaser's
letter which contains provisions restricting transfer of the Securities
purchased. Issuer and Trust Company acknowledge that as long as Cede & Co. is
the sole record owner of the Securities, Cede & Co. shall be entitled to all
voting rights applicable to the Securities and to receive the full amount of all
dividends, liquidation proceeds, and redemption proceeds payable with respect to
the Securities, even if the credits of Securities to the DTC accounts of any DTC
Participant ("Participant") result from transfers or failures to transfer in
violation of the provisions of the purchaser's letter. Issuer and Trust Company
acknowledge that DTC shall treat any Participant having Securities credited to
its DTC accounts as entitled to the full benefits of ownership of such
Securities. Without limiting the generality of the preceding sentence, Issuer
and Trust Company acknowledge that DTC shall treat any Participant having
securities credited to its DTC accounts as entitled to receive dividends,
distributions, and voting rights, if any, in respect of Securities and, subject
to Paragraphs 12 and 13, to receive certificates evidencing Securities if such
certificates are to be issued in accordance with Issuer's certificate of
incorporation. (The Treatment by DTC of the effects of the crediting by it of
Securities to the accounts of Participants described in the preceding two
sentences shall not affect the rights of Issuer, participants in auctions
relating to the Securities, purchasers, sellers, or holders of Securities
against any Participant.) DTC shall not have any responsibility to ascertain
whether any transfer of Securities is made in accordance with the provisions of
the purchaser's letter.
9. Issuer or Trust Company shall provide a written notice of dividend
payment and distribution information to a standard announcement service
subscribed to by DTC as soon as the information is available. In the unlikely
event that no such service exists, Issuer or Trust Company shall provide this
information directly to DTC electronically, as previously arranged by Issuer or
Trust Company and DTC, as soon as the information is available. If electronic
transmission ahs not been arranged, absent any other
3
<PAGE>
arrangements between Issuer or Trust Company and DTC, such information should be
sent by telecopy to DTC's Dividend Department at (212) 709-1723 or (212) 709-
1686, and receipt of such notices shall be confirmed by telephoning (212) 709-
1270. Notices to DTC pursuant to the above by mail or by any other means shall
be addressed as follows:
Manager; Announcements
Dividend Department
The Depository Trust Company
7 Hanover Square, 22nd Floor
New York, NY 10004-2695
10. Issuer or Trust Company shall provide CUSIP-level detail for dividend
payments and distributions to DTC no later than noon (Eastern Time) on the
payment date.
11. Dividend payments and distributions shall be received by Cede & Co.,
as nominee of DTC, or its registered assignees in same-day funds no later than
2:30 p.m. (Eastern Time) on each payment date. Absent any other arrangements
between Issuer or Trust Company and DTC, such funds shall be wired as follow:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Dividend Deposit Account #066-026776
12. Redemption payments shall be received by Cede & Co., as nominee of
DTC, or its registered assigns in same-day funds no later than 2:30 p.m.
(Eastern Time) on the payment date. Absent any other arrangements between
Issuer or Trust Company and DTC, such funds shall be wired as follows:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Redemption Deposit Account #066-027306
13. Reorganization payments and CUSIP-level detail resulting from
corporate actions (such as tender offers, remarketings, or mergers) hall be
received by Cede & co., as nominee of DTC, or its registered assigns in same-day
funds no later than 2:30 p.m. (Eastern Time) on the first payment date. Absent
any other arrangement between Issuer or Trust Company and DTC, such funds shall
be wired as follows:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Redemption Deposit Account #066-027608
14. DTC may direct Issuer or Trust Company to use any other number or
address as the number or address to which notices, payments of dividends,
distributions, or redemption proceeds may be sent.
4
<PAGE>
15. In the event of a redemption acceleration, or any similar transaction
(e.g., tender made and accepted in response to Issuer's or Trust Company's
invitation) necessitating a reduction in the number of Securities outstanding,
or an advance refunding of part of the Securities outstanding DTC, in its
discretion: (a) may request Issuer or Trust Company to issue and authenticate a
new Security certificate; or (b) may make an appropriate notation on the
Security certificate indicating the date and amount of such reduction in the
number of Securities outstanding, except in the case of final redemption, in
which case the certificate the certificate will be presented to Issuer or Trust
Company prior to payment, if required.
16. In the event that Issuer determines that beneficial owners of
Securities shall be able to obtain certificated Securities, Issuer or Trust
company shall notify DTC of the availability of certificates. In such event,
Issuer or Trust Company shall issue, transfer, and exchange certificates in
appropriate amounts, as required by DTC and others.
17. DTC may discontinue providing its services as securities depository
with respect to the Securities at any time by giving reasonable notice to Issuer
or Trust Company (at which time DTC will confirm with Issuer or Trust Company
the aggregate principal amount of Securities outstanding). Under such
circumstances, at DTC's request Issuer and Trust Company shall cooperate fully
with DTC by taking appropriate action to make available one or more separate
certificates evidencing Securities to any DTC Participant having Securities
credited to its DTC accounts.
18. Issuer hereby authorized DTC to provide to Trust Company security
position listings of Participants with respect to the Securities from time to
time at the request of Trust Company. Issuer also authorizes DTC, in the event
of a partial redemption of Securities, to provide Trust Company, upon request,
with the names of those Participants whose positions in Securities have been
selected for redemption by DTC. DTC will use its best efforts to notify Trust
Company of those Participants whose positions in Securities have been selected
for redemption by DTC. Issuer authorizes and instructs Trust Company to provide
DTC with such signatures, examples of signatures, and authorizations to act as
may be deemed necessary or appropriate by DTC to permit DTC to discharge its
obligations to its Participants and appropriate regulatory authorities. Such
requests for security position listings shall be sent to DTC's Reorganization
Department in the manner set forth in Paragraph 5.
This authorization, unless revoked by Issuer, shall continue with respect
to the Securities while any Securities are on deposit at DTC, until and unless
Trust Company shall no longer be acting. In such event, Issuer shall provide
DTC with similar evidence, satisfactory to DTC, of the authorization of any
successor thereto so to act.
19. Nothing herein shall be deemed to require Trust Company to advance
funds on behalf of Issuer.
20. This Letter of Representations may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all such counterparts together constitute but one and the same instrument.
21. This Letter of Representations is governed by, and shall be construed
in accordance with, the laws of the State of New York.
5
<PAGE>
22. The following riders, attached hereto, are hereby incorporated into
this Letter of Representations:
--------------------------------------------------------
--------------------------------------------------------
6
<PAGE>
NOTES: Very truly yours,
-----
A. If there is a Trust Company (as
defined in this Letter of
Representations), Trust Company as well _______________________________
as Issuer must sign this Letter. If (Issuer)
there is no Trust Company, in signing
this Letter Issuer itself undertakes to
perform all of the obligations set forth
herein. By: ___________________________
B. Schedule B contains statements that
DTC believes accurately describe DTC,
the method of effecting book-entry
transfers of securities distributed
through DTC, and certain related matters.
_______________________________
(Trust Company)
By: _______________________________
(Authorized Officer's Signature)
Received and Accepted:
THE DEPOSITORY TRUST COMPANY
By: ______________________________
cc: Underwriter
Underwriter's Counsel
7
<PAGE>
SCHEDULE A
----------
---------------------------------------------------------
---------------------------------------------------------
(Describe Issue)
CUSIP Number Share Total Value ($ Amount)
- ------------ ----------- ----------------
8
<PAGE>
RIDER TO THE LETTER OF REPRESENTATIONS
OF
MUNIHOLDINGS FLORIDA INSURED FUND III
AND
IBJ SCHRODER BANK & TRUST COMPANY
DATED _________, 1998
1. This Rider supersedes any contradictory language set forth in the Letter of
Representations to which it is appended. Capitalized terms used and not
defined herein have the meaning set forth in the Letter of Representations
to which this Rider is appended.
2. The Prospectus indicates that in the event the Issuer retroactively
allocates any net capital gains or other income subject to regular Federal
income tax to shares of AMPS without having given advance notice thereof to
the Auction Agent as described in the Prospectus solely by reason of the
fact that such allocation is made as a result of the redemption of all or a
portion of the shares of AMPS outstanding or the liquidation of the Issuer
(the amount of such allocation being referred to herein as a "Retroactive
Taxable Allocation"), the Issuer, within 90 days (and generally within 60
days) after the end of the Issuer's fiscal year for which a Retroactive
Taxable Allocation is made, will provide notice thereof to the Auction
Agent and to each holder of shares of AMPS (initially Cede & Co. as nominee
of DTC) during such fiscal year at such holder's address as the same
appears or last appeared on the stock books of the Issuer. The Issuer,
within 30 days after such notice is given to the Auction Agent, will pay to
the Auction Agent (who then will distribute to such holders of AMPS), out
of funds legally available therefor, an amount equal to the aggregate
Additional Dividend with respect to all Retroactive Taxable Allocations
made to such holders during the fiscal year in question.
3. The Issuer will notify DTC, at least 10 Business Days prior to the payment
date for any Additional Dividends, of (i) the record date for holders of
shares of AMPS entitled to receive Additional Dividends, (ii) the amount of
Additional Dividends payable on a per share basis to such holders and (iii)
the CUSIP numbers set forth on the stock certificates representing such
shares of AMPS.
4. The Prospectus indicates that if the Issuer does not give advance notice of
the amount of net capital gains or other income subject to regular Federal
income tax to be included in a dividend on shares of AMPS in the related
Auction, the Issuer may include such taxable income in a dividend on shares
of AMPS if it increases the dividend by an additional amount calculated as
if such income were a Retroactive Taxable Allocation and the additional
amount were an Additional Dividend. The Issuer or the Auction Agent will
notify DTC, at least five Business Days prior to the applicable Dividend
Payment Date, of the amount of such additional amount to be included in the
dividend on a per share basis.
5. The Prospectus indicates that in the event a Response (as defined in the
Prospectus) indicates that it is advisable that the Issuer give a Notice of
Special Dividend Period (as defined in the Prospectus) for the AMPS, the
Issuer, by no later than the second Business
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Day prior to the relevant Auction Date (as defined in the Prospectus), may
give a Notice of Special Dividend Period to the Auction Agent, DTC and each
Broker-Dealer (as defined in the Prospectus), which notice will specify (i)
the duration of the Special Dividend Period (as defined in the Prospectus),
(ii) the Optional Redemption Price as specified in the related Response and
(iii) the Specific Redemption Provisions, if any, as specified in the
related Response. The Issuer is required to give telephonic and written
notice (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer,
and DTC (as described in paragraph 6 hereof) on or prior to the Business
Day prior to the relevant Auction Date under the circumstances specified in
the Prospectus.
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