<PAGE>
As filed with the Securities and Exchange Commission on February 5, 1999
Securities Act File No. 333-70287
Investment Company Act File No. 811-09129
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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. 4
(Check appropriate box or boxes)
--------------
MuniHoldings Florida Insured Fund IV
(Exact Name of Registrant as Specified in Charter)
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800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
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(609) 282-2800
(Registrant's Telephone Number, Including Area Code)
--------------
Arthur Zeikel
MuniHoldings Florida Insured Fund IV
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)
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Copies to:
Michael J. Hennewinkel, Esq. Frank P. Bruno, Esq.
Fund Asset Management, L.P. Brown & Wood LLP
P.O. Box 9011 One World Trade Center
Princeton, New Jersey 08543-9011 New York, New York 10048-0557
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Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [X]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Amount Maximum Aggregate Amount of
Securities Being Being Offering Price Offering Registration
Registered Registered(1) Per Unit(1) Price(1) Fee(2)
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<S> <C> <C> <C> <C>
Auction Market Preferred
Shares................ 3,340 Shares $25,000 $83,500,000 $23,213
</TABLE>
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(1) Estimated solely for the purpose of calculating the filing fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$278 was previously paid. $22,935 was previously transmitted earlier in
connection with this filing.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any State where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 5, 1999
PROSPECTUS
$83,500,000
MuniHoldings Florida Insured Fund IV
Auction Market Preferred Shares ["AMPS(R)"]
1,670 Shares, Series A
1,670 Shares, Series B
Liquidation Preference $25,000 Per Share
-----------
MuniHoldings Florida Insured Fund IV (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 and the
opportunity to own shares whose value is exempt from Florida intangible
personal property tax. The Fund seeks to achieve its objective by investing
primarily in a portfolio of long-term, investment grade municipal obligations
the interest on which, in the opinion of bond counsel to the issuer, is exempt
from Federal income tax and which enable shares of the Fund to be exempt from
Florida intangible personal property tax. The Fund intends to invest in
municipal obligations that are rated investment grade or, if unrated, are
considered by the Fund's 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.
-----------
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference. This Fund's statement of additional information contains
further information about the Fund and is incorporated by reference (legally
considered to be part of this prospectus). You may request a free copy by
writing or calling the Fund at (800) 637-3863.
-----------
Investing in the AMPS involves certain risks, which are described in the
"Risk Factors and Special Considerations" section beginning on page 5 of this
prospectus.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price...................... $25,000 $83,500,000
Sales Load................................. $ $
Proceeds, before expenses, to Fund......... $ $
</TABLE>
The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offence.
We expect that one certificate for each series of the AMPS will be ready for
delivery to the nominee of The Depository Trust Company on or about February ,
1999.
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(R) Registered trademark of Merrill Lynch & Co., Inc.
-----------
Merrill Lynch & Co.
-----------
The date of this prospectus is February , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Offering Summary........................................................... 3
Risk Factors and Special Considerations.................................... 5
The Fund................................................................... 7
Use of Proceeds............................................................ 7
Capitalization............................................................. 7
Portfolio Composition...................................................... 8
Investment Objective and Policies.......................................... 8
Description of AMPS........................................................ 14
The Auction................................................................ 19
Rating Agency Guidelines................................................... 27
Investment Advisory and Management Arrangements............................ 28
Taxes...................................................................... 29
Description of Capital Shares.............................................. 30
Custodian.................................................................. 32
Underwriting............................................................... 32
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 33
Legal Opinions............................................................. 33
Experts.................................................................... 33
Year 2000 Issues........................................................... 33
Table of Contents of Statement of Additional Information................... 34
Glossary................................................................... 35
</TABLE>
----------------
Information about the Fund can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the
operation of the public reference room. This information is also available on
the SEC's Internet site at http://www.sec.gov and copies may be obtained upon
payment of a duplicating fee by writing the Public Reference Section of the
SEC, Washington, D.C. 20549-6009.
----------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriter has not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
2
<PAGE>
OFFERING SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus and the statement of additional
information.
The Offering
The Fund is offering a total of 1,670 Series A AMPS and 1,670
Series B AMPS, each at a purchase price of $25,000 per share
plus accumulated dividends, if any, from the date the shares
are first issued. The AMPS are being offered by Merrill Lynch,
Pierce, Fenner & Smith Incorporated, as underwriter.
The AMPS of each series will be preferred shares of the Fund
that entitle their holders to receive cash dividends at an an-
nual rate that may vary for the successive dividend periods for
each series. In general, except as described below, each divi-
dend period for each series of AMPS following the initial divi-
dend period will be seven days. The applicable dividend for a
particular dividend period will be determined by an auction
conducted on the business day next preceding the start of that
dividend period.
Investors and potential investors in AMPS of each series may
participate in auctions for the AMPS through their broker-deal-
ers.
Generally, AMPS investors will not receive certificates repre-
senting ownership of their shares. Ownership of AMPS will be
maintained in book-entry form by the securities depository (The
Depository Trust Company) or its nominee for the account of the
investor's agent member (generally the investor's broker-deal-
er). The investor's agent member, in turn, will maintain rec-
ords of such investor's beneficial ownership of AMPS.
Dividends and
Dividend Dividends on the Series A AMPS and Series B AMPS will be cumu-
Periods lative from the date the shares are first issued and payable
beginning on , 1999 in the case of Series A AMPS and
, 1999 in the case of Series B AMPS. Thereafter, in the case
of dividend periods that are not special dividend periods, div-
idends generally will be payable on each succeeding Friday in
the case of Series A AMPS and each succeeding Tuesday in the
case of Series B AMPS. After the initial dividend period, each
dividend period for each series of AMPS will generally consist
of seven days; provided, however, that before any auction, the
Fund may decide, subject to certain limitations and only if it
gives notice to holders, to declare a special dividend period
of up to five years.
Dividends for each series of AMPS will be paid through the se-
curities depository (The Depository Trust Company) on each div-
idend payment date for each series.
The cash dividend rate on the Series A AMPS for the initial
dividend period ending , 1999 will be % per year and the
cash dividend rate on the Series B AMPS for the initial divi-
dend period ending , 1999 will be % per year. For each
subsequent dividend period, the auction agent (IBJ Whitehall
Bank & Trust Company) will hold an auction to determine the
cash dividend rate on the shares of each series of AMPS.
Determination Generally, the applicable dividend rate for any dividend period
of Maximum for AMPS of each series will be subject to a maximum applicable
Dividend rate. The maximum applicable rate for AMPS will depend on the
Rates credit rating assigned to the shares and on the length of the
dividend period. There is no minimum applicable dividend rate
for any dividend period.
3
<PAGE>
Asset Under the Fund's Certificate of Designation creating the AMPS,
Maintenance the Fund must maintain
. asset coverage of the AMPS as required by the rating agencies
rating the AMPS, and
. asset coverage of the AMPS of at least 200% as required by
the Investment Company Act of 1940.
The Fund estimates that, based on the composition of its port-
folio at February 1, 1999, asset coverage of the AMPS as re-
quired by the Investment Company Act of 1940 would be approxi-
mately 245% immediately after the Fund issues the AMPS offered
by this prospectus representing approximately 41% of the Fund's
capital.
Mandatory
Redemption If the required asset coverage is not maintained or, when
necessary, restored, the Fund must redeem AMPS at the price of
$25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared). The provisions of the
Investment Company Act of 1940 may restrict the Fund's ability
to make such a mandatory redemption.
Optional The Fund may, at its option, choose to redeem all or a portion
Redemption of the AMPS of each series on any dividend payment date at the
price of $25,000 per share, plus accumulated but unpaid
dividends thereon (whether or not earned or declared) plus any
applicable premium.
Liquidation
Preference The liquidation preference (that is, the amount the Fund must
pay to AMPS shareholders if the Fund is liquidated) of each
share of AMPS will be $25,000, plus an amount equal to accumu-
lated but unpaid dividends (whether or not earned or declared).
Ratings The AMPS will be issued with a rating of "aaa" from Moody's In-
vestors Service, Inc. and AAA from Standard & Poor's.
Voting Rights
The Investment Company Act of 1940 requires that the holders of
AMPS and any other 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
dividends on the AMPS or any other preferred shares are unpaid
for two full years. The Fund's Declaration of Trust and the In-
vestment Company Act of 1940 require holders of AMPS and any
other preferred shares to vote as a separate class on certain
other matters.
4
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Florida Municipal Bonds. The Fund intends to invest the majority of its
portfolio in Florida municipal bonds. As a result, the Fund is more exposed to
risks affecting issuers of Florida municipal bonds than is a municipal bond
fund that invests more widely.
Interest Rate and Credit Risk. The Fund invests in municipal bonds, which are
subject to interest rate and credit risk. Interest rate risk is the risk that
prices of municipal bonds generally increase when interest rates decline and
decrease when interest rates increase. Prices of longer term securities
generally change more in response to interest rate changes than prices of
shorter term securities. Credit risk is the risk that the issuer will be unable
to pay the interest or principal when due. The degree of credit risk depends on
both the financial condition of the issuer and the terms of the obligation.
Non-diversification. The Fund is registered as a "non-diversified" investment
company. This means that the Fund may invest a greater percentage of its assets
in a single issuer than a diversified investment company. Even as a non-
diversified fund, the Fund must still meet the diversification requirements of
applicable Federal income tax laws. Since the Fund may invest a relatively high
percentage of its assets in a limited number of issuers, the Fund may be more
exposed to any single economic, political or regulatory occurrence than a more
widely-diversified fund.
Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc. or
Fitch IBCA, Inc. It may also invest in unrated municipal bonds that the Fund's
investment adviser believes are of comparable quality. Obligations rated in the
lowest investment grade category have certain speculative characteristics.
Private Activity Bonds. The Fund may invest in certain tax-exempt securities
classified as "private activity bonds." These bonds may subject certain
investors in the Fund to the alternative minimum tax.
Portfolio Insurance. The Fund will be subject to certain restrictions on
investments imposed by guidelines of the insurance companies issuing the
portfolio insurance. The Fund does not expect these guidelines to prevent the
Fund's investment adviser from managing the Fund's portfolio in accordance with
the Fund's investment objective and policies.
Indexed and Inverse Floating Rate Securities. The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Both indexed securities and inverse floaters are derivative
securities and can be considered speculative.
Options and Futures Transactions. The Fund may seek to hedge its portfolio
against changes in interest rates using options and financial futures
contracts. The Fund's hedging transactions are designed to reduce volatility,
but come at some cost. For example, the Fund may try to limit its risk of loss
from a decline in the price of a portfolio security by purchasing a put option.
However, the Fund must pay for the option, and the price of the security may
not in fact drop. In large part, the success of the Fund's hedging activities
depends on its ability to forecast movements in securities prices and interest
rates. The Fund does not, however, intend to enter into options and futures
transactions for speculative purposes. The Fund is not required to hedge its
portfolio and may not do so.
Antitakeover Provisions. The Fund's Declaration of Trust includes provisions
that could limit the ability of other entities or persons to acquire control of
the Fund or to change the composition of its Board of Trustees. Such provisions
could discourage a third party from seeking to obtain control of the Fund.
5
<PAGE>
Investment Considerations. Investors in AMPS should consider the following
factors:
. 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 shares of AMPS in
the event of a failed auction.
. If sufficient bids do not exist in an auction, the applicable dividend
rate will be the maximum applicable dividend rate, and in such event,
owners of AMPS wishing to sell will not be able to sell all, and may not
be able to sell any, AMPS in the auction. As a result, investors may not
have liquidity of investment.
Secondary Market. 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. The AMPS will not be registered on any stock exchange or on any
automated quotation system. An increase in the level of interest rates likely
will have an adverse effect on the secondary market price of the AMPS, and a
selling shareholder may have to sell AMPS between auctions at a price per share
of less than $25,000.
6
<PAGE>
THE FUND
MuniHoldings Florida Insured Fund IV (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 November 25,
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 January 29, 1999 upon the closing of an
initial public offering of 8,100,000 of its common shares. The proceeds of such
offering were approximately $121,230,000 after the payment of 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
1,215,000 shares to cover over-allotments.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $82,707,750 after the
payment of offering expenses (estimated to be $166,000) and the sales load.
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 shares of 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
February 1, 1999 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
authorized)
Preferred Shares, par value $.10 per share (no
shares issued; 3,340 AMPS issued and outstanding,
as adjusted, at $25,000 per share liquidation
preference)....................................... -- $83,500,000
Common Shares, par value $.10 per share (8,106,667
shares issued and outstanding).................... $810,667 810,667
Capital in excess of par value attributable to
Common Shares..................................... 120,529,221 119,736,971
Undistributed investment income--net............... 56,106 56,106
Unrealized appreciation on investments--net........ 332,737 332,737
------------ ------------
Net assets......................................... $121,728,731 $204,436,481
============ ============
</TABLE>
7
<PAGE>
PORTFOLIO COMPOSITION
As of February 1, 1999, approximately 72.2% of the market value of the
Fund's portfolio was invested in long-term municipal obligations and
approximately 27.8% 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 February 1, 1999.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 16 $ 94,767 65.7%
A A 2 9,365 6.5
A-1 VMIG-1 4 40,000 27.8
--- -------- -----
Total............. 22 $144,132 100.0%
=== ======== =====
</TABLE>
- --------
* Ratings: Using the higher of Standard & Poor's ("S&P") or Moody's Investors
Service, Inc. ("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 Fund's investment objective is to provide shareholders with current
income exempt from Federal and income tax and the opportunity to own shares
whose value is exempt from Florida intangible personal property tax. The Fund
seeks to achieve its investment objective by investing primarily in a
portfolio of long-term, investment grade municipal obligations issued by or on
behalf of the State of Florida, its political subdivisions, agencies and
instrumentalities, and other qualifying issuers, each of which pays interest
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income tax and which enable shares of the Fund to be exempt from Florida
intangible personal property tax ("Florida Municipal Bonds"). The Fund intends
to invest substantially all (at least 80%) of its assets in Florida Municipal
Bonds, except at times when the Fund's investment adviser, Fund Asset
Management, L.P. (the "Investment Adviser"), considers that Florida Municipal
Bonds of sufficient quality and quantity are unavailable for investment at
suitable prices by the Fund. To the extent the Investment Adviser considers
that suitable Florida Municipal Bonds are not available for investment, the
Fund may purchase other long-term municipal obligations that are exempt from
Federal income taxes but whose value is not exempt from Florida intangible
personal property taxes ("Municipal Bonds"). 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 Municipal Bonds, except during interim periods
pending investment of the net proceeds of public offerings of the Fund's
securities and during temporary defensive periods. 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's investment objective is a fundamental policy that may not be changed
without a vote of a majority of the Fund's outstanding voting securities, as
defined in the statement of additional information 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 options and futures transactions to reduce volatility in
the net asset value of its shares of common shares.
The Fund ordinarily does not intend to realize significant investment income
that is subject to Federal income tax or have significant assets subject to
Florida intangible personal property tax. 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
8
<PAGE>
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 and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (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 are 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, Moody's or Fitch IBCA, Inc. ("Fitch") or, if unrated, are
considered to be of comparable quality by the Investment Adviser. In the case
of long-term debt, the investment grade rating categories are AAA through BBB
for S&P, Aaa through Baa for Moody's and AAA through BBB for Fitch. In the case
of short-term notes, the investment grade rating categories are SP-l+ through
SP-3 for S&P, MIG-1 through MIG-3 for Moody's and F-1+ through F-3 for Fitch.
In the case of tax-exempt commercial paper, the investment grade rating
categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moody's
and F-l+ through F-3 for Fitch. Obligations ranked in the lowest investment
grade rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-3 and Prime-3 for
Moody's; and BBB and F-3 for Fitch), while considered "investment grade," may
have certain speculative characteristics. There may be sub-categories or
gradations indicating relative standing within the rating categories set forth
above. Appendix B to the statement of additional information contains a
description of S&P's, Moody's and Fitch'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 for Federal income
tax purposes.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the common shares of a closed-end investment company, such as
the Fund, which invests primarily in fixed-income securities, changes as the
general levels of interest rates fluctuate. When interest rates decline, the
value of a fixed-income portfolio can
9
<PAGE>
be expected to rise. Conversely, when interest rates rise, the value of a
fixed-income portfolio can be expected to decline. Prices of longer-term
securities generally fluctuate more in response to interest rate changes than
do short-term or medium-term securities. These changes in net asset value are
likely to be greater in the case of a fund having a leveraged capital
structure, such as that used by the Fund.
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 that is subject to Federal income tax or have significant
assets subject to Florida intangible personal property tax. For a more complete
description of Florida Municipal Bonds and Municipal Bonds, see "Investment
Objective and Policies" in the statement of additional information.
The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by the 1940 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 Federal tax laws.
See "Taxes" herein and in the statement of additional information. 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. See Appendix C to
the statement of additional information for a brief description of S&P's,
Fitch's and Moody's insurance claims--paying ability ratings. Currently, it is
anticipated that a majority of the insured Florida Municipal Bonds and
Municipal Bonds in the Fund's portfolio will be insured by the following
insurance companies that satisfy the foregoing criteria: AMBAC Indemnity
Corporation, Financial Guaranty Insurance Company, Financial Security Assurance
and Municipal Bond Investors Assurance Corporation. The Fund also may purchase
Florida Municipal Bonds and Municipal Bonds covered by insurance issued by any
other insurance company that satisfies the foregoing criteria. It is
anticipated that initially a majority of insured Florida Municipal Bonds and
Municipal Bonds held by the Fund will be insured under policies obtained by
parties other than the Fund.
The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible Florida Municipal Bonds and Municipal Bonds purchased by the Fund. A
Florida Municipal Bond or a Municipal Bond will be eligible for coverage if it
meets certain requirements of the
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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 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" in the statement of additional
information 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 the circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Florida Municipal Bonds or Municipal
Bonds will not receive timely scheduled payments of principal or interest).
However, the insured Florida Municipal Bonds or Municipal Bonds are subject to
market risk (i.e., fluctuations in market value as a result of changes in
prevailing interest rates).
Special Considerations Relating to Florida Municipal Bonds
The Fund ordinarily will invest at least 80% of its total assets in Florida
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of Florida Municipal Bonds than is a municipal bond mutual
fund that is not concentrated in issuers of Florida Municipal Bonds to this
degree. Many different
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social, environmental and economic factors may affect the financial condition
of Florida and its political subdivisions. From time to time Florida and its
political subdivisions have encountered financial difficulties. Florida is
highly dependent upon sales and uses taxes, which account for the majority of
its General Fund revenues. The Florida Constitution does not permit a state or
local personal income tax. The structure of personal income in Florida is also
different from the rest of the nation in that the State has a proportionally
greater retirement age population that is dependent upon transfer payments
(social security, pension benefits, etc.). Such transfer payments can be
affected by Federal legislation. Florida's economic growth is also highly
dependent upon other factors such as changes in population growth, tourism,
interest rates and hurricane activity. In combination, 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. As of December
2, 1998, the State had a high bond rating from Moody's Investors Service, Inc.
(Aa2), Standard & Poor's (AA+) and Fitch IBCA, Inc. (AA) on all of its general
obligation bonds. For a discussion of economic and other conditions in the
State of Florida, see Appendix A, "Economic and Other Conditions in Florida" to
the statement of additional information.
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 yielding a return 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, income on inverse floating rate bonds will decrease
when short-term interest rates increase, and will increase when short-term
interest rates decrease. Such securities have the effect of providing a degree
of investment leverage, since they
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may increase or decrease in value in response to changes, as an illustration,
in market interest rates at a rate that is a multiple (typically two) of the
rate at which fixed-rate, long-term, tax-exempt securities increase or decrease
in response to such changes. As a result, the market values of such securities
generally will be more volatile than the market values of fixed-rate tax-exempt
securities. To seek to limit the volatility of these securities, the Fund may
purchase inverse floating obligations with shorter-term maturities or
limitations on the extent to which the interest rate may vary. The Investment
Adviser believes that indexed and inverse floating obligations represent a
flexible portfolio management instrument for the Fund that allows the
Investment Adviser to vary the degree of investment leverage relatively
efficiently under different market conditions.
Call Rights. The Fund may purchase a Florida Municipal Bond or Municipal Bond
issuer's right to call all or a portion of such Florida Municipal Bond or
Municipal Bond for mandatory tender for purchase (a "Call Right"). A holder of
a Call Right may exercise such right to require a mandatory tender for the
purchase of related Florida Municipal Bonds or Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Florida Municipal Bond or Municipal Bond will expire without value.
The economic effect of holding both the Call Right and the related Florida
Municipal Bond or Municipal Bond is identical to holding a Florida Municipal
Bond or Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in Florida Municipal Bonds,
Municipal Bonds and U.S. Government 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
securities.
Options and Futures Transactions
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common 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
"Rating Agency Guidelines" herein and in the statement of additional
information. Furthermore, the Fund may only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur. The Fund has no obligation to enter into
hedging transactions and may not do so.
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 the statement of
additional information. In addition, in order to obtain ratings of the
preferred shares from one or more nationally recognized statistical rating
organizations ("NRSROs"), the Fund may be required to limit its use of hedging
techniques in accordance with the specified guidelines of such rating
organizations.
For a description of the options and futures transactions in which the Fund
may engage, limitations on the Fund's use of such transactions and risks
associated with these transactions, see "Investment Objective and Policies--
Options and Futures Transactions" in the statement of additional information.
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.
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DESCRIPTION OF AMPS
General
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 "The Auction"
herein and in the statement of additional information.
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.
Dividends
General. The holders of shares 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" in the statement of
additional information.
Dividends on the AMPS will accumulate from the date on which the Fund
originally issues the shares of 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, the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date. Thus, following
the Initial Dividend Payment Date for each series of AMPS, dividends generally
will be payable (in the case of Dividend Periods which are not Special Dividend
Periods) on each succeeding Friday in the case of Series A AMPS and on each
succeeding Tuesday in the case of Series B AMPS. Although any
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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 "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."
No interest will be payable in respect of any dividend payment or payments on
the shares of 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 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
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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 the event the
Response indicates that it is advisable that the Fund give a notice of a
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. See "Description of AMPS--Dividends-- Notification of Dividend
Period" in the statement of additional information for a detailed description
of these procedures.
Determination of Dividend Rate. The dividend rate on shares of 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 for each
series of AMPS (the "Initial Dividend Period") will be the rate per annum set
forth above under "Offering Summary." Commencing on the Initial Dividend
Payment Date for each series of AMPS, the Applicable Rate on the shares of 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."
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
February 1, 1999, asset coverage with respect to AMPS would be approximately
245% 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 each year in order to maintain its qualification for tax
treatment as a regulated investment company. The foregoing limitations on
dividends, distributions and purchases under certain circumstances may impair
the Fund's ability to maintain such qualification. See "Taxes" in the statement
of additional information.
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 shares of the Fund.
Additional Dividends. If the Fund retroactively allocates any net capital
gains or other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
under "The Auction--Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends" below, 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
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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" in the statement of additional information.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal 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 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 (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
franchise 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" in the statement of additional information. 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, the Fund 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 and notifies the Auction Agent of such inclusion at least five days
prior to the applicable Dividend Payment Date. See "The Auction--Auction
Procedures--Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends" below.
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.
17
<PAGE>
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 = $204,436,481 = 245%
------------------------ ------------
Senior securities $83,500,000
representing
indebtedness
plus liquidation value
of the
AMPS
</TABLE>
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. 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--AMPS Basic Maintenance Amount" in the statement of
additional information. 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" herein and in
the statement of additional information.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided in the statement
of additional information, 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 "Dividends--Additional Dividends" above. The Fund
has the authority to redeem the AMPS for any reason and may redeem all or part
of the outstanding 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, AMPS
to the extent permitted under the 1940 Act and Maryland law, 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
"Dividends--Additional Dividends" above.
18
<PAGE>
For a discussion of the allocation procedures to be used if fewer than all of
the outstanding AMPS of either series are to be redeemed and for a discussion
of other redemption procedures, see "Description of AMPS--Redemption" in the
statement of additional information.
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 capital shares 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
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 the statement of
additional information 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.
The 1940 Act and the Certificate of Designation require that the holders of
preferred shares, including the AMPS, voting as a separate class, have the
rights to elect two of the Fund's Trustees at all times and to elect a majority
of the Trustees at any time that two full years' dividends on the AMPS are
unpaid. The holders of AMPS will vote as a separate class or classes on certain
other matters as required under the Certificate of Designation, the 1940 Act
and Maryland law. In addition, each series of AMPS may vote as a separate
series under certain circumstances. See "Description of AMPS--Voting Rights" in
the statement of additional information.
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 E to the statement of additional information.
19
<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--Non-Payment Period; Late Charge" in the statement of
additional information.
Auction Agent Agreement. The Fund will enter into an agreement (the "Auction
Agent Agreement") with IBJ Whitehall 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.
Broker-Dealer Agreements. The Auction Agent will enter into agreements with
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("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.
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 the shares 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. 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 discussion of the procedures to be used in
conducting Auctions. Separate auctions will be conducted for each series of
AMPS. This summary is qualified by reference to the Auction Procedures set
forth in Appendix E to the statement of additional information. The Settlement
Procedures to be used with respect to Auctions are set forth in Appendix D to
the statement of additional information.
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 Series A AMPS for Dividend Periods after the Initial
Dividend Period normally will be held every Thursday after the preceding
Dividend Payment Date, and each subsequent Dividend Period normally will begin
on the following Friday (also a Dividend Payment Date). Auctions for Series B
AMPS for Dividend Periods after the Initial Dividend Period normally will be
held every
20
<PAGE>
Monday after the preceding Dividend Payment Date, and each subsequent Dividend
Period normally will begin on the following Tuesday (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 Thursday that normally would be an Auction Date
for Series A AMPS is not a Business Day, then such Auction Date will be the
preceding Wednesday and the first day of the related Dividend Period will
continue to be the following Friday. 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" above.
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
(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.
21
<PAGE>
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 shares of 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" or "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, or both, shall not
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."
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
22
<PAGE>
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" below.
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 a Special
Dividend Period of 28 days or more) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period of 28 days or more) to have been
submitted on behalf of such 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" in
the statement of additional information, 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 shares of 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.,
Eastern 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.
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
23
<PAGE>
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 shares 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 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 shares of 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 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 shares of 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
24
<PAGE>
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 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 shares of 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.
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 shares
of 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., Eastern 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
25
<PAGE>
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
General. 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.
Fees. 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
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.
26
<PAGE>
Secondary Trading Market. 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.
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 NRSROs, 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 stock will be
varied sufficiently and will be of sufficient quality and amount to justify
investment-grade ratings. The guidelines do not have the force of law but have
been adopted by 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" herein and in the statement of additional information.
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, AMPS will be subject
to redemption. See "Description of AMPS--Asset Maintenance" and "Description of
AMPS--Redemption" herein and in the statement of additional information.
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.
27
<PAGE>
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.
For additional information concerning the Moody's and S&P ratings guidelines,
see "Rating Agency Guidelines" in the statement of additional information.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides
the Fund with investment advisory and management services. The Merrill Lynch
Asset Management Group (which includes the Investment Adviser) acts as the
investment adviser to more than 100 other registered investment companies and
offers investment advisory services to individuals and institutional accounts.
As of December 1998, the Merrill Lynch Asset Management Group had a total of
approximately $501 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 Investment Adviser is a limited partnership, the
partners of which are ML & Co. and Princeton Services. The principal business
address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
The Investment Advisory Agreement provides that, subject to the supervision
of the Board of Trustees of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Trustees.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. Robert D. Sneeden, Jr. and
Robert A. DiMella are the portfolio managers of the Fund and are 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.
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
28
<PAGE>
things, expenses for legal and auditing services, taxes, costs of printing
proxies, listing fees, if any, share certificates and shareholder reports,
charges of the custodian and the transfer and dividend disbursing agent and
registrar, fees and expenses with respect to the issuance of preferred shares,
Securities and Exchange Commission fees, fees and expenses of non-interested
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.
TAXES
In general, dividends on the AMPS will be exempt from Federal income tax in
the hands of holders of such AMPS, subject to the possible application of the
Federal alternative minimum tax. However, the Fund is required to allocate net
capital gains and other taxable income, if any, proportionately among the
common shares and each series of AMPS in accordance with the current position
of the Internal Revenue Service ("IRS") described under the heading "Taxes" in
the statement of additional information. The Fund may notify the Auction Agent
of the amount of any net capital gains or other anticipated taxable income to
be included in any dividend on the AMPS prior to the Auction establishing the
Applicable Dividend Rate for such dividend. The Auction Agent will in turn
notify holders of the AMPS and prospective purchasers. The amount of taxable
income allocable to each series of AMPS will depend upon the amount of such
income realized by the Fund and cannot be determined with certainty prior to
the end of the Fund's fiscal year, but it is not generally expected to be
significant.
In general, shares of the Fund will be exempt from Florida intangible
personal property tax for Florida resident shareholders. Dividends paid to
individual Florida residents are not subject to personal income taxation by
Florida, because Florida does not impose a personal income tax. 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.
Generally, within 60 days after the end of the Fund's taxable year, the Fund
will tell you the amount of exempt-interest dividends, ordinary income
dividends or capital gain dividends you received that year. Capital gain
dividends are taxable as long-term capital gains to you regardless of how long
you have held your shares. The tax treatment of distributions from the Fund is
the same whether you choose to receive distributions in cash or to have them
reinvested in shares of the Fund.
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.
Because the Fund may from time to time invest a substantial portion of its
portfolio in municipal securities bearing income that is taxable under the
Federal alternative minimum tax, the Fund would not ordinarily be a suitable
investment for investors who are subject to the alternative minimum tax.
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 meeting certain distribution requirements for
qualification as a regulated investment company ("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
29
<PAGE>
restore the requisite asset coverage and avoid the adverse consequences to the
Fund and its 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.
By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
For more information regarding the tax treatment of an investment in AMPS, see
"Taxes" in the statement of additional information.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
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
3,340 AMPS. For a description of the AMPS, see "Description of AMPS" herein and
in the statement of additional information.
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 February
1, 1999.
<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- 8,106,667
Auction Market Preferred Shares...... 1,000,000 -0- -0-
</TABLE>
30
<PAGE>
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 shares of common shares are
not redeemable. The outstanding shares of 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" herein and in the
statement of additional information.
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 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 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" herein and
in the statement of additional information.
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The common shares will commence trading on the NYSE on February 8, 1999. At
February 1, 1999, the net asset value per common share was $15.02.
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 3,340 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 capital shares 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 AMPS and any other preferred shares.
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<PAGE>
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:
. a merger or consolidation or statutory share exchange of the Fund with
any other corporation,
. 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
. a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Trustees fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by shareholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing would also require the favorable vote of at least a majority of the
Fund's preferred shares then entitled to be voted, including the AMPS, voting
as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Declaration of Trust. The amendment would
have to be declared advisable by the Board of Trustees prior to its submission
to shareholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding capital shares
(including 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
Massachusetts law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the 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
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 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
32
<PAGE>
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 February , 1999.
The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"The Auction--General--Broker-Dealer Agreements" and will be entitled to fees
for services as a Broker-Dealer as set forth under "The Auction--Broker-
Dealers." The Underwriter also may provide information to be used in
ascertaining the Reference Rate.
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 exemptive orders 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" in the statement of additional
information.
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 shares of
AMPS will be IBJ Whitehall 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.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the statement of
assets, liabilities and capital of the Fund as of January 13, 1999 which is
included in the statement of additional information as set forth in their
report which appears in the statement of additional information. The statement
of assets, liabilities and capital is included in reliance upon their report,
given on their authority as experts in accounting and auditing. The selection
of independent auditors is subject to ratification by shareholders of the Fund.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The 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 before January 1, 2000.
The Investment Adviser expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Investment Adviser that they
also expect to resolve the Year 2000 Problem, and the Investment Adviser will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected.
The Year 2000 Problem could also have a negative impact on the issuers of
securities in which the Fund invests, and this could hurt the Fund's investment
returns.
33
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Investment Objective and Policies........................................... 3
Investment Restrictions..................................................... 7
Description of AMPS......................................................... 9
The Auction................................................................. 16
Rating Agency Guidelines.................................................... 17
Trustees and Officers....................................................... 25
Investment Advisory and Management Arrangements............................. 27
Portfolio Transactions...................................................... 28
Taxes....................................................................... 29
Net Asset Value............................................................. 33
Additional Information...................................................... 34
Report of Independent Auditors.............................................. 35
Statement of Assets, Liabilities and Capital................................ 36
Financial Statements (Unaudited)............................................ 37
Appendix A--Economic and Other Conditions in Florida........................ A-1
Appendix B--Ratings of Municipal Bonds...................................... B-1
Appendix C--Portfolio Insurance............................................. C-1
Appendix D--Settlement Procedures........................................... D-1
Appendix E--Auction Procedures.............................................. E-1
</TABLE>
34
<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 17 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 18 of this
prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page 18 of
this prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page 13 of the
statement of additional information.
"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 22 of this
prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
35
<PAGE>
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Whitehall Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Fund or a 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 20 of this prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Appendix E to the statement of additional information.
"Available AMPS" has the meaning set forth on page 24 of this prospectus.
"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 set forth on page 21 of this prospectus.
"Bidder" has the meaning set forth on page 21 of this prospectus.
"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 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.
36
<PAGE>
"Declaration of Trust" means the Declaration of Trust, as amended and
supplemented (including the Certificate of Designation), of the Fund.
"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 15 of this
prospectus.
"Dividend Period" has the meaning set forth on page 15 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 8 of this
prospectus.
"Forward Commitment" has the meaning set forth on page 24 of the statement of
additional information.
"Fund" means MuniHoldings Florida Insured Fund IV, a Massachusetts business
trust that is the issuer of the AMPS.
"Hold Order" has the meaning set forth on page 24 of this prospectus.
"Initial Dividend Payment Date" means with respect to each series of AMPS,
the first Dividend Payment Date for the AMPS as set forth on page 14 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" means a dividend period of one year or more but
not greater than five years.
"Mandatory Redemption Price" has the meaning set forth on page 18 of this
prospectus.
37
<PAGE>
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning set forth on page 22 of this
prospectus.
"Maximum Potential Additional Dividend Liability" has the meaning set forth
on page 13 of the statement of additional information.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page 21 of the
statement of additional information.
"Moody's Eligible Assets" has the meaning set forth on page 22 of the
statement of additional information.
"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 23 of the
statement of additional information.
"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%
less than or equal to 5% but 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 8 of this prospectus.
"Municipal Index" has the meaning set forth on pages 19 and 20 of the
statement of additional information.
"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 17 of this
prospectus.
"1940 Act Cure Date" has the meaning set forth on page 17 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 11 of the statement of
additional information.
38
<PAGE>
"Non-Payment Period Rate" has the meaning set forth on page 11 of the
statement of additional information.
"Notice of Revocation" has the meaning set forth on page 10 of the statement
of additional information.
"Notice of Special Dividend Period" has the meaning set forth on page 16 of
this prospectus.
"Optional Redemption Price" has the meaning set forth on page 18 of this
prospectus.
"Order" has the meaning set forth on page 21 of this prospectus.
"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.
"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 shares of
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 18 of the statement of
additional information.
"Receivables for Florida Municipal Bonds or Municipal Bonds Sold," for
purposes of determining Moody's Eligible Assets, has the meaning set forth on
page 21 of the statement of additional information.
"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 15 of
this prospectus.
"Response" has the meaning set forth on page 16 of this prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page 16 of this
prospectus.
"Series A AMPS" means the Auction Market Preferred Shares, Series A, 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.
"Series B AMPS" means the Auction Market Preferred Shares, Series B, 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.
39
<PAGE>
"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 17 of the statement
of additional information.
"S&P Eligible Assets" has the meaning set forth on page 17 of the statement
of additional information.
"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 20 of the
statement of additional information.
"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" means a dividend period the number of days in
which are evenly divisible by seven, and not fewer than seven days nor more
than 364 days.
"Special Dividend Period" has the meaning set forth on page 15 of this
prospectus.
"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 set forth on page 23 of this
prospectus.
"Submitted Bid" has the meaning set forth on page 24 of this prospectus.
"Submitted Hold Order" has the meaning set forth on page 24 of this
prospectus.
"Submitted Order" has the meaning set forth on page 24 of this prospectus.
"Submitted Sell Order" has the meaning set forth on page 24 of this
prospectus.
"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.
40
<PAGE>
"Sufficient Clearing Bids" has the meaning set forth on page 24 of this
prospectus.
"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., Eastern 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., Eastern 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 20 of the statement of
additional information.
"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 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 18 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 set forth on page 24 of this prospectus.
41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$83,500,000
MuniHoldings Florida Insured Fund IV
Auction Market Preferred Shares(R) ["AMPS(R)"]
1,670 Shares, Series A
1,670 Shares, Series B
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
February , 1999
(R) Registered trademarks of Merrill Lynch & Co. Inc. Code #####
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY 5, 1999.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information contained in this statement of additional information is not +
+complete and may be changed. We may not sell these securities until the +
+registration statement filed with the Securities and Exchange Commission is +
+effective. This statement of additional information is not a prospectus. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
STATEMENT OF ADDITIONAL INFORMATION
$83,500,000
MuniHoldings Florida Insured Fund IV
Auction Market Preferred Shares ["AMPS(R)"]
1,670 Shares, Series A
1,670 Shares, Series B
Liquidation Preference $25,000 Per Share
------------
MuniHoldings Florida Insured Fund IV (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 and the
opportunity to own shares whose value is exempt from Florida intangible
personal property tax. The Fund seeks to achieve its objective by investing
primarily in a portfolio of long-term, investment grade municipal obligations
the interest on which, in the opinion of bond counsel to the issuer, is exempt
from Federal income tax and which enable shares of the Fund to be exempt from
Florida intangible personal property tax. The Fund intends to invest in
municipal obligations that are rated investment grade or, if unrated, are
considered by the Fund's 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. There can be no assurance that the Fund's investment objective
will be realized. For more information on the Fund's investment objective and
policies, see "Investment Objective and Policies."
------------
Certain capitalized terms not otherwise defined in this statement of
additional information have the meaning provided in the Glossary included as
part of the prospectus.
This statement of additional information is not a prospectus, but should be
read in conjunction with the prospectus of the Fund, which has been filed with
the Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling (800) 637-3863. The prospectus is incorporated by
reference into this statement of additional information, and this statement of
additional information is incorporated by reference into the prospectus.
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(R) Registered trademark of Merrill Lynch & Co., Inc.
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Merrill Lynch & Co.
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The date of this statement of additional information is February , 1999.
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Investment Objective and Policies........................................... 3
Investment Restrictions..................................................... 7
Description of AMPS......................................................... 9
The Auction................................................................. 16
Rating Agency Guidelines.................................................... 17
Trustees and Officers....................................................... 25
Investment Advisory and Management Arrangements............................. 27
Portfolio Transactions...................................................... 28
Taxes....................................................................... 29
Net Asset Value............................................................. 33
Additional Information...................................................... 34
Report of Independent Auditors.............................................. 35
Statement of Assets, Liabilities and Capital................................ 36
Financial Statements (Unaudited)............................................ 37
Appendix A--Economic and Other Conditions in Florida........................ A-1
Appendix B--Ratings of Municipal Bonds...................................... B-1
Appendix C--Portfolio Insurance............................................. C-1
Appendix D--Settlement Procedures........................................... D-1
Appendix E--Auction Procedures.............................................. E-1
</TABLE>
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with current
income exempt from Federal income tax and the opportunity to own shares whose
value is exempt from Florida intangible personal property tax. The Fund seeks
to achieve its investment objective by investing primarily in a portfolio of
long-term, investment grade municipal obligations issued by or on behalf of the
State of Florida, its political subdivisions, agencies and instrumentalities,
and other qualifying issuers, each of which pays interest which, in the opinion
of bond counsel to the issuer, is exempt from Federal income tax and which
enable shares of the Fund to be exempt from Florida intangible personal
property tax ("Florida Municipal Bonds"). The Fund intends to invest
substantially all (at least 80%) of its assets in Florida Municipal Bonds,
except at times when the Fund's investment adviser, Fund Asset Management, L.P.
(the "Investment Adviser"), considers that Florida Municipal Bonds of
sufficient quality and quantity are unavailable for investment at suitable
prices by the Fund. To the extent the Investment Adviser considers that
suitable Florida Municipal Bonds are not available for investment, the Fund may
purchase other long-term municipal obligations that are exempt from Federal
income taxes but whose value is not exempt from Florida intangible personal
property taxes ("Municipal Bonds"). 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 Municipal Bonds, except during interim periods pending
investment of the net proceeds of public offerings of the Fund's securities and
during temporary defensive periods. 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's investment
objective 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 options and futures transactions to reduce
volatility in the net asset value of its common shares.
The Fund ordinarily does not intend to realize significant investment income
that is subject to Federal income tax or have significant assets subject to
Florida intangible personal property tax. 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 the 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 and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (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 are considered "Florida
Municipal Bonds" or "Municipal Bonds" for purposes of the Fund's investment
objective and policies.
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 ("IDBs")
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 statement of
additional information, such obligations are considered Municipal Bonds if the
interest paid thereon is exempt from Federal income tax and as Florida
Municipal Bonds if the interest thereon is exempt from Federal income tax and
the obligations are exempt from Florida intangible personal property tax, even
though such bonds may be IDBs or "private
3
<PAGE>
activity bonds" as discussed below. Also, for purposes of this statement of
additional information, 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 (other than those of the State of Florida,
which has limited taxing powers) are typically 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 typically 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/or 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 typically 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.
Options and Futures Transactions
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of 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.
4
<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 may 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 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.
5
<PAGE>
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets. 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. Over-the-counter options
transactions ("OTC options") are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and Florida
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments 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 does 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.
Certain risks are involved in options and futures transactions. The
Investment Adviser believes, however, that, because the Fund will engage in
options and futures transactions only for hedging purposes, the Fund's options
and futures portfolio strategies will not subject the Fund to those risks
associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to Florida
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
6
<PAGE>
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures transaction. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with which the Fund has an open position in an option or
financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges that limit the amount of fluctuation in a financial futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
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. The Fund is not required to enter into
hedging transactions and may not do so.
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
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase Florida
Municipal Bonds, Municipal Bonds and other debt securities and enter into
repurchase agreements in accordance with is 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.
7
<PAGE>
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 stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on Florida Municipal Bonds, Municipal
Bonds, U.S. Government obligations and related indices or otherwise in
connection with bona fide hedging activities and may purchase and sell Call
Rights to require mandatory tender for the purchase of related Florida
Municipal Bonds and Municipal Bonds.
If a percentage restriction on 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 Merrill Lynch & Co. ("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.
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<PAGE>
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the Glossary that
appears at the back of the 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 year 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 Appendix E--
"Auction Procedures."
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 E--
"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" in the prospectus. The AMPS will not
be convertible into common shares 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 in the
prospectus. See "Description of AMPS--Redemption" in the prospectus.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described in the prospectus, IBJ Whitehall 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 supplements the description of the terms of the AMPS set forth
in the prospectus. This description does not purport to be complete and is
subject to and qualified in its entirety by reference to the Fund's Charter and
Certificate of Designation, including the provisions thereof establishing the
AMPS. The
9
<PAGE>
Fund's Charter 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 statement of additional information is a part.
Dividends
General. The holders of shares 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."
Notification of Dividend Period. In determining whether the Fund should issue
a Notice of Special Dividend for a series of AMPS, 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
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(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.
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,
Eastern time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend on shares of AMPS payable on such Dividend Payment
Date or (ii) deposit, irrevocably in trust, in same-day funds, with the Auction
Agent by 12:00 noon, Eastern 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, Eastern
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, Eastern 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, Eastern 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, Eastern 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, Eastern 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 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.
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Restrictions on Dividends and Other Payments. 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, if any, ranking junior to AMPS as to dividends or upon
liquidation) in respect of common shares or any other shares 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 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 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.
Asset Maintenance
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 shares, 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" in the prospectus and below.
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" in the
prospectus and below.
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
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<PAGE>
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
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 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 of the last
month of each fiscal quarter of the Fund (or, if such day is not a Business
Day, the next succeeding Business Day) 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., Eastern 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
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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
Mandatory Redemption. The number of AMPS to be redeemed will be equal to the
lesser of (a) 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 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.
Notice of Redemption. 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 shares of any series of
AMPS 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.
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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 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 capital shares 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.
Voting Rights
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 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.
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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 shares of more than one
series of AMPS are 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 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 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 of the Declaration of Trust"
in the prospectus, 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 shares of common shares and shares
of 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.
THE AUCTION
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. 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.
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Auction Procedures
Separate auctions will be conducted for each series of AMPS. The Auction
Procedures are set forth in Appendix E to this statement of additional
information. The Settlement Procedures to be used with respect to Auctions are
set forth in Appendix D to this statement of additional information.
RATING AGENCY GUIDELINES
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>
45 Business Days....................................... 205% 210% 225% 265%
25 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>
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
17
<PAGE>
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 floating obligations, not be part of a private
placement of Municipal Bonds; and
(vi) except for inverse floating obligations, 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.
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, except that Florida
Municipal Bonds falling within the transportation issue type category will
be broken down into two sub-categories (as described below) and such
Florida
18
<PAGE>
Municipal Bonds will be considered S&P Eligible Assets to the extent the
market value of such Bonds in both sub-categories combined (as described
below) does not exceed 40% of the aggregate market value of S&P Eligible
Assets and except that 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 (iii) must be rated by S&P in order to be included in S&P
Eligible Assets. For purposes of the issue type category requirement
described above, Florida Municipal Bonds in the transportation issue type
category will be classified within one of the two following sub-categories:
(i) streets and highways, toll roads, bridges and tunnels, airports and
multi-purpose port authorities (multiple revenue streams generated by toll
roads, airports, real estate, bridges), (ii) mass transit, parking,
seaports and others. Exposure to transportation sub-category (1) in the
preceding sentence is limited to 25% of the aggregate market value of S&P
Eligible Assets, provided, however, exposure to transportation sub-category
(2) in the preceding sentence can exceed the 25% limit to the extent that
exposure to transportation sub-category (2) is reduced, for a total
exposure up to and not exceeding 40% of the aggregate market value of S&P
Eligible Assets for the transportation issue type category; and
(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 category 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 in the prospectus, 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 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
19
<PAGE>
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" herein. Moody's Eligible Assets include cash, Receivables
for Florida Municipal Bonds or Municipal 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
20
<PAGE>
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 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
21
<PAGE>
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 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
22
<PAGE>
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;
23
<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;
(v) 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
(vi) 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: 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 shares of 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 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
24
<PAGE>
(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 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 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.
TRUSTEES AND OFFICERS
Information about the Trustees, executive officers and the portfolio managers
of the Fund, including their ages and their principal occupations during the
last five years is set forth below. Unless otherwise noted, the address of each
Trustee, executive officer and the portfolio manager is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
Arthur Zeikel (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.
Ronald W. Forbes (58)--Trustee (2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York
at Albany since 1989; Consultant, Urban Institute, Washington, D.C. since 1995.
Cynthia A. Montgomery (46)--Trustee (2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate School
of Business Administration, The University of Michigan from 1979 to 1985;
Director, UNUM Corporation since 1990 and Director of Newell Co. since 1995.
Charles C. Reilly (67)--Trustee (2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990.
25
<PAGE>
Kevin A. Ryan (66)--Trustee (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; Formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.
Richard R. West (60)--Trustee (2)--Box 604, Genoa, Nevada 89411, Professor of
Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus of
New York University, Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc., Vornado Realty Trust, Inc., Vornado Operating
Company and Alexander's Inc.
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. 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.
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.
Robert D. Sneeden, Jr. (45)--Vice President and Portfolio Manager (1)(2)--
Assistant Vice President and Portfolio Manager of MLAM since 1994; Vice
President of Lehman Brothers from 1990 to 1994.
Donald C. Burke (38)--Vice President and Treasurer (1)(2)--Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; First
Vice President of MLAM from 1997 to 1999; Vice President of MLAM from 1990 to
1997; Director of Taxation of MLAM since 1990.
Alice A. Pellegrino (38)--Secretary (1)(2)--Vice President of MLAM since
1999; Attorney with MLAM since 1997; Associate with Kirkpatrick & Lockhart LLP
from 1992 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. Reilly and West have been designated as the Trustees to be elected by
holders of the preferred shares. See "Description of Capital Shares" in the
prospectus.
Compensation of Trustees
Pursuant to an Investment Advisory Agreement with the Fund, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Trustees who are affiliated persons of ML & Co. or its
subsidiaries.
The Fund pays each Trustee not affiliated with the Investment Adviser (each a
"non-affiliated Trustee") a fee of $2,000 per year plus $200 per meeting
attended, and pays all Trustees' out-of-pocket expenses relating to attendance
at meetings. The Fund also pays members of the Board's audit and nominating
committee (the
26
<PAGE>
"Committee"), which consists of all the non-affiliated Trustees, an annual fee
of $800. The Chairman of the Committee receives an additional annual fee of
$1,000.
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, 1998 the aggregate
compensation paid by all investment companies advised by the Investment Adviser
and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-affiliated
Trustees.
<TABLE>
<CAPTION>
Total Compensation
Pension or From Fund and
Aggregate Retirement Benefits FAM/MLAM Advised
Compensation Accrued as part of Funds Paid to
Name of Trustee from Fund Fund Expense Trustees
- --------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Ronald W. Forbes(1)........ $3,600 None $192,567
Cynthia A. Montgomery(1)... $3,600 None $192,567
Charles C. Reilly(1)....... $4,600 None $362,858
Kevin A. Ryan(1)........... $3,600 None $192,567
Richard R. West(1)......... $3,600 None $334,125
</TABLE>
- --------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (35 registered investment companies consisting of 48 portfolios);
Ms. Montgomery (35 registered investment companies consisting of 48
portfolios); Mr. Reilly (54 registered investment companies consisting of
67 portfolios); Mr. Ryan (35 registered investment companies consisting of
46 portfolios); and Mr. West (56 registered investment companies consisting
of 81 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Fund has entered into an Investment Advisory Agreement with the
Investment Adviser. The Fund pays the Investment Adviser 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).
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, if any, share certificates and shareholder reports, charges of the
custodian and the transfer and dividend disbursing agent and registrar, fees
and expenses with respect to the issuance of preferred shares, Securities and
Exchange Commission fees, fees and expenses of non-interested 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 an
advisory client when other clients
27
<PAGE>
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.
Transactions effected by the Investment Adviser (or its affiliates) on behalf
of more than one of its clients during the same period may increase the demand
for securities being purchased or the supply of securities being sold, causing
an adverse effect on price.
Code of Ethics
The Board of Trustees of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of the
Fund within periods of trading by the Fund in the same (or equivalent) security
(15 or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the execution
of transactions in portfolio securities. Subject to providing the best price
and execution, securities firms that provide investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Research information provided to the Investment
Adviser by securities firms is supplemental. It does not replace or reduce the
level of service performed by the Investment Adviser and the expenses of the
Investment Adviser will not necessarily be reduced because it receives
supplemental research information.
The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with 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, including Merrill Lynch, are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principals for their own accounts, the Fund
does not deal with Merrill Lynch and its affiliates in connection with such
transactions except that, pursuant to exemptive orders 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." However, affiliated persons of the Fund, including Merrill
Lynch, may serve as its brokers in certain over-the-counter transactions
conducted on an agency basis.
28
<PAGE>
The Fund also may 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
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, presently it is anticipated that the Fund's annual portfolio
turnover rate, under normal circumstances should 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.)
A high portfolio turnover rate has certain tax consequences and results in
greater transaction costs, which are borne directly by the Fund.
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 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
29
<PAGE>
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. 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.
The Fund may from time to time hold assets that are not exempt from Florida
intangible personal property tax. It is possible that the Fund may not be able
to fully dispose of all of its assets subject to Florida intangible personal
property tax by the last business day of the calendar year. This would subject
shares of the Fund to Florida intangible personal property tax. If shares of
the Fund are subject to Florida intangible personal property tax because the
asset requirement is not met, only that portion of the value of Fund shares
equal to the portion of the net asset value of the Fund that is attributable to
obligations of the United States Government will be exempt from taxation. The
Fund will attempt to monitor its portfolio so that on the last business day of
each calendar year the Fund's assets consist solely of assets exempt from
Florida intangible personal property tax.
Dividends paid by the Fund to individuals who are Florida residents are not
subject to personal income taxation by Florida, because Florida does not impose
a personal income tax. Distributions of investment income and capital gains by
the Fund will be subject to Florida corporate income taxes, state taxes in
states other than Florida and local taxes in cities other than those in
Florida. Shareholders not subject to taxation by Florida do not benefit from
the fact that shares of the Fund will be exempt from the Florida intangible
personal property tax. Interest on indebtedness incurred or continued to
purchase or carry Fund shares is not deductible for Federal income tax purposes
to the extent attributable to exempt-interest dividends.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions 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.
30
<PAGE>
Certain categories of capital gains are taxable at different rates. Generally
not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
exempt-interest dividends, ordinary income dividends or capital gain dividends,
as well as any 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, are not 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 for Federal income
tax purposes 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. 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 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 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 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 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.
31
<PAGE>
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 calendar year-end the portion of its dividends declared during
the year which constitutes an item of tax preference for alternative minimum
tax purposes. The Code further provides that corporations are subject to 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--Dividends--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. If the Fund were to fail to qualify as a RIC, some or all of the
distribution paid by the Fund would be fully taxable by Federal income tax
purposes. 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 shares of AMPS in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to qualify as a RIC. 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
32
<PAGE>
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" in the
prospectus. 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 divided 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.
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.
----------------
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, foreign, state or local 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, the
NYSE closes at 4:00 p.m. Eastern 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.
33
<PAGE>
The Florida Municipal Bonds and Municipal Bonds in which the Fund invests are
traded primarily in the over-the-counter markets. In determining net asset
value, the Fund utilizes the valuations of portfolio securities furnished by a
pricing service approved by the Board of Trustees. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. Florida Municipal Bonds and Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Trustees. The Board of Trustees has determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Positions in futures contracts are
valued at closing prices for such contracts established by the exchange on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Trustees.
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.
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 statement of additional information and the
prospectus do 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
statement of additional information and the 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.
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder of
MuniHoldings Florida Insured Fund IV:
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Florida Insured Fund IV as of January 13, 1999. This statement
of assets, liabilities and capital is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets, liabilities and capital based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets, liabilities and
capital is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings Florida Insured Fund IV at January 13, 1999 in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Princeton, New Jersey
January 21, 1999
35
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND IV
Statement of Assets, Liabilities and Capital
January 13, 1999
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Offering costs (Note 1)............................................. 257,000
--------
Total assets........................................................ 357,005
--------
LIABILITIES
Liabilities and accrued expenses (Note 1)........................... 257,000
--------
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Shares, par value $.10 per share; unlimited shares
authorized;
6,667 shares issued and outstanding (Note 1)....................... $ 667
Paid-in Capital in excess of par.................................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per common share
(Note 1)........................................................... $100,005
========
</TABLE>
Notes to Statement of Assets, Liabilities and Capital
Note 1. Organization
The Fund was organized under the laws of the Commonwealth of Massachusetts on
November 25, 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 January 13, 1999. The General Partner of the Investment Adviser is
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The Investment Adviser, on behalf of the Fund, will incur organizational
costs estimated at $11,000. Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares.
Note 2. Management Arrangements
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.55 of 1% of the
average weekly net assets of the Fund, including any proceeds from the issuance
of Preferred Shares. The Investment Adviser or an affiliate will pay Merrill
Lynch, Pierce, Fenner & Smith Incorporated a commission in the amount of 2.00%
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.
36
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND IV
SCHEDULE OF INVESTMENTS (UNAUDITED)
FEBRUARY 1, 1999
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- --------------------------------------------------------------------------------
ALASKA -- 3.0%
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
A-1+ VMIG1++ $ 3,600 Valdez, Alaska, Marine Terminal Revenue
Refunding Bonds (Exxon Pipeline Company
Project), VRDN, Series B, 3.15% due
12/01/2033(g) $ 3,600
- --------------------------------------------------------------------------------
<CAPTION>
ARIZONA -- 4.1%
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
A-1+ P1 5,000 Maricopa County, Arizona, Pollution
Control Corporation, PCR, Refunding
(Arizona Public Service Company), VRDN,
Series C, 2.55% due 5/01/2029(g) 5,000
- --------------------------------------------------------------------------------
<CAPTION>
FLORIDA -- 85.5%
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
NR* Aaa 6,000 Duval County, Florida, HFA, S/F Mortgage
Revenue Bonds, AMT, 5.30% due 4/01/2029(c) 6,010
Florida HFA, Revenue Bonds, Willow Lake
Apartments, AMT, Series J-1(a):
AAA Aaa 3,750 5.35% due 7/01/2027 3,824
AAA Aaa 6,000 5.45% due 1/01/2038 6,144
Highlands County, Florida, Health
Facilities Authority Revenue Bonds
(Adventist Hospital Health Systems):
A- Baa1 3,500 5.25% due 11/15/2020 3,477
A- Baa1 6,000 5.25% due 11/15/2028 5,888
AAA NR* 12,000 Hillsborough County Port District Revenue
Bonds (Tampa Port Authority Project),
AMT, 5% due 6/01/2023(e) 11,849
AAA Aaa 4,000 Jupiter Island, Florida, Utility System
Revenue Bonds (South Martin Regional
Utility), 5% due 10/01/2028(e) 4,000
AAA Aaa 6,000 Miami Beach, Florida, Parking Revenue
Bonds, 5.125% due 9/01/2022(d) 6,047
AAA Aaa 5,000 Miami-Dade County, Florida, Special
Obligation Revenue Bonds, Sub-Series B,
5% due 10/01/2037(e) 4,991
AAA Aaa 10,750 Orlando & Orange County Expressway
Authority, Florida, Expressway Revenue
Refunding Bonds, Junior Lien, 5% due
7/01/2021(b) 10,750
Pinellas County, Florida, HFA, S/F Housing
Revenue Bonds, Multi-County Program,
AMT Series A-1(c):
NR* Aaa 1,375 5.20% due 9/01/2021 1,375
NR* Aaa 2,750 5.25% due 9/01/2025 2,750
AAA Aaa 6,000 Pinellas County, Florida, Sewer Revenue
Refunding Bonds, 5% due 10/01/2024(b) 6,000
AAA Aaa 4,375 Port Saint Lucie, Florida, Utility Revenue
Refunding and Improvement Bonds, Series
A, 5.125% due 9/01/2027(e) 4,416
</TABLE>
37
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND IV
SCHEDULE OF INVESTMENTS (UNAUDITED)
FEBRUARY 1, 1999
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
RATINGS RATINGS AMOUNT ISSUE (NOTE 1A)
- -------------------------------------------------------------------------------
FLORIDA (CONCLUDED)
- -------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
NR* Aaa $ 9,500 Sarasota County, Florida, Public Hospital
Board, Revenue Refunding Bonds, Residual
Certificates, RIB, Series 99, 5.50% due
7/01/2028(e)(f) $ 11,265
AAA Aaa 4,100 South Miami, Florida, Health Facilities
Authority, Hospital Revenue Bonds
(Baptist Health System Obligation Group),
5% due 11/15/2028(e) 4,087
AAA Aaa 6,000 Sunrise, Florida, Utility System Revenue 6,256
Refunding Bonds, 5.20% due 10/01/2022(a)
AAA Aaa 5,000 Tallahassee, Florida, Energy Systems
Revenue Bonds, Series B, 5% due
10/01/2028(d) 5,003
- -------------------------------------------------------------------------------
<CAPTION>
NEW YORK -- 16.4%
- -------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
A-1+ VMIG1++ 20,000 Long Island Power Authority, New York,
Electric System Revenue Bonds, VRDN, Sub-
Series 7, 3.15% due 4/01/2025(e)(g) 20,000
- -------------------------------------------------------------------------------
<CAPTION>
TEXAS -- 9.4%
- -------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
A-1+ NR* 11,400 Harris County, Texas, Health Facilities
Development Corporation, Hospital Revenue
Refunding Bonds (Methodist Hospital),
VRDN, 3.20% due 12/01/2025(g) 11,400
- -------------------------------------------------------------------------------
Total Investments (Cost--$143,799)--118.4% 144,132
Liabilities in Excess of other Assets--(18.4)% (22,403)
--------
Net Assets--100.0% $121,729
========
- -------------------------------------------------------------------------------
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FNMA/GNMA Collateralized.
(d) FSA Insured.
(e) MBIA Insured.
(f) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in effect
at February 1, 1999.
(g) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at February 1,
1999.
* Not Rated.
++ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
Portfolio Abbreviations
To simplify the listings of MuniHoldings Florida Insured Fund IV's portfolio
holdings in the Schedule of Investments, we have abbreviated the names of many
of the securities according to the list below.
<TABLE>
<C> <S>
AMT Alternative Minimum Tax (subject to)
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
</TABLE>
38
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND IV
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
as of February 1, 1999 (Unaudited)
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$143,798,841)
(Note 1a)............................................ $144,131,578
Cash.................................................. 10,080,677
Receivables:
Interest............................................ $1,240,413
Investment adviser (Note 2)......................... 1,676 1,242,089
----------
Other assets.......................................... 18,250
------------
Total assets.......................................... 155,472,594
------------
Liabilities:
Payable for securities purchased...................... 33,463,820
Accrued expenses and other liabilities................ 280,043
------------
Total liabilities..................................... 33,743,863
------------
Net Assets:
Net assets............................................ $121,728,731
============
Capital:
Capital Shares (unlimited number of shares of
beneficial interest authorized) (Note 4):
Common Shares, par value $.10 per share (8,106,667
shares issued and outstanding)..................... $ 810,667
Paid-in capital in excess of par...................... 120,529,221
Undistributed investment income--net.................. 56,106
Unrealized appreciation on investments--net........... 332,737
------------
Total capital--Equivalent to $15.02 net asset value
per Common Share..................................... $121,728,731
============
</TABLE>
See Notes to Financial Statements.
39
<PAGE>
MUNIHOLDINGS FLORIDA INSURED FUND IV
Notes to Financial Statements (Unaudited)
1. Significant Accounting Policies:
MuniHoldings Florida Insured Fund IV (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. Prior to commencement of operations on
January 29, 1999 the Fund had no operations other than those relating to
organizational matters and the sale of 6,667 shares of Common Shares on January
13, 1999, to Fund Asset Management, L.P. ("FAM") for $100,005. The Fund
determines and makes available for publication the net asset value of its
Common Shares on a weekly basis. The Fund's Common Shares are listed on the New
York Stock Exchange under the symbol MFR. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased). Securities with
remaining maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Board of Trustees of the Fund, including
valuations furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
. Financial futures contracts--The Fund may purchase or sell financial
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or yield.
Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
. Options--The Fund is authorized to write covered call options and
purchase call and put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written. When
a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent
the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
40
<PAGE>
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net assets.
For the period ended February 1, 1999, FAM earned fees of $7,332, all of which
was voluntarily waived. FAM also reimbursed the Fund additional expenses of
$1,676.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases of investments, excluding short-term securities, for the period
ended February 1, 1999 were $103,798,840. There were no long-term sales.
Net unrealized gains as of February 1, 1999 were as follows:
<TABLE>
<CAPTION>
Unrealized
Gains
----------
<S> <C>
Long-term investments......................................... $332,737
--------
Total......................................................... $332,737
========
</TABLE>
As of February 1, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $332,737, of which $360,934 related to appreciated
securities and $28,197 related to depreciated securities. The aggregate cost of
investments at February 1, 1999 for Federal income tax purposes was
$143,798,841.
4. Beneficial Interest Transactions:
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, including Preferred Shares, par value $.10 per share, all of which
were initially classified as Common Shares. The Board of Trustees is
authorized, however, to reclassify any unissued shares of capital without
approval of holders of Common Shares.
Common Shares
Shares issued and outstanding increased by 8,100,000 as a result of the
initial offering during the period ended February 1, 1999.
41
<PAGE>
5. General:
As of February 1, 1999, the Fund had only four days of investment operations
and had not yet declared dividends (whereas it will ordinarily do so on a
monthly basis). As a result, the Fund believes that more extensive interim
financial statements would not be indicative of the Fund's current and ongoing
operations. The Fund believes that such financial statements may be misleading
to potential investors and, accordingly, believes that inclusion of such
financial statements would be inappropriate. For the period ended February 1,
1999, the Fund had net investment income of $56,106. FAM voluntarily waived all
expenses.
42
<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 4.7% in 1997-98 and
5.0% in 1998-99. The average rate of unemployment for the State was 4.8% while
the nation's was 4.9%. (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 18, 1998, 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
1992 through 1997, the State's per capita income expanded approximately 25.9%,
while the national per capita income increased by 24.1%. Real personal income
in Florida is estimated to increase 5.2% in 1997-98 and 3.7% in 1998-99 while
real personal income per capita is projected to grow at 3.2% in 1997-98 and
1.8% in 1998-99.
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 1997 represented 59.8% 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 70.4%. 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, 1997
ranked fourth with an estimated population of 14.7 million. Since 1990, the
State's average annual rate of population increase has been approximately 1.8%
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. 47 million people
visited the State in 1997, according to the Florida Department of Commerce.
Tourism arrivals are expected to increase by 2.1% this fiscal year and 4.7%
next year. By the end of the fiscal year, 43.8 million domestic and
international tourists are expected to have visited the State. In 1998-99,
tourist arrivals should approximate 45.6 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 5.7% in 1997. Florida, nevertheless, has had a dynamic construction
industry, with single and multi-family housing starts accounting for
approximately 9.2% of total U.S. housing starts, while the State's population
was 5.5% of the nation's population. Total housing starts were 132,813 in 1997.
A driving force behind Florida's construction industry is its rapid growth in
population. In Florida, single and multi-family
A-1
<PAGE>
housing starts in 1997-98 are projected to reach a combined level of 129,500,
while increasing 131,300 next year. Multi-family starts have been slow to
recover, but are showing stronger growth now and should maintain a level of
nearly 38,200 in 1997-98 and 37,200 in 1998-99. Total construction expenditures
are forecasted to increase 13.2% in this year and increase 6.5% next year.
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 1996-97, the State derived
approximately 67% 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,
beverage tax, and estate tax which amounted to 68%, 8%, 4% and 3%,
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 1996-97,
expenditures from the General Revenue Fund for education, health and welfare,
and public safety amounted to approximately 53%, 26% 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, 1997, receipts from this source
were $12,089 million, an increase of 5.5% from fiscal year 1995-96. The second
largest source of State tax receipts is the Motor Fuel Tax. The collections
from this source during the fiscal year ending June 30, 1997, were $2,012
million. Alcoholic beverage tax revenues totalled $447.2 million for the State
fiscal year ending June 30, 1997, an increase of $5.7 million from the previous
year. The receipts of corporate income tax for the fiscal year ended June 30,
1997 were $1,362.3 million, an increase of 17.2% from fiscal year 1995-96.
Gross Receipt tax collections for fiscal year 1996-97 totalled $575.7 million,
an increase of 6.0% over the previous fiscal year. Documentary stamp tax
collections totalled $844.2 million during fiscal year 1996-97, posting an 8.9%
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 $952.4 million during the fiscal year
ending June 30, 1997, a 6.3% increase from the previous fiscal year. Severance
taxes totalled $39.2 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
1996-97 produced ticket sales of $2.09 billion of which education received
approximately $792.3 million.
For fiscal year 1998-99 the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $19,113.2 million, a 2.6%
increase over 1997-98. The $16,887.6 million in estimated revenues represent a
7.2% increase over the analogous figure in 1997. With combined General Revenue,
Working Capital Fund and Budget Stabilization Fund appropriations at $17,207.0
million, unencumbered reserves at the end of 1998-99 are estimated at $1,414.8
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
A-2
<PAGE>
under the amendment for the prior fiscal year plus an adjustment for growth.
Growth is defined as an amount equal to the average annual rate of growth in
State personal income over the most recent twenty quarters times the State
revenues allowed under the amendment for the prior fiscal year. State revenues
collected for any fiscal year in excess of this limitation are required to be
transferred to the Budget Stabilization Fund until the fund reaches the maximum
balance specified in Section 19(g) of Article III of the State Constitution,
and thereafter is required to be refunded to taxpayers as provided by general
law. The limitation on State revenues imposed by the amendment may be increased
by the Legislature, by a two-thirds vote of each house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of Bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception
of State matching funds used to fund elective expansions made after July 1,
1994; (iii) proceeds from the State lottery returned as prizes; (iv) receipts
of the Florida Hurricane Catastrophe Fund; (v) balances carried forward from
prior fiscal years; (vi) taxes, licenses, fees and charges for services imposed
by local, regional, or school district governing bodies; or (vii) revenue from
taxes, licenses, fees and charges for services required to be imposed by any
amendment or revision to the State Constitution after July 1, 1994. The
amendment took effect on January 1, 1995 and is applicable to State fiscal year
1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation will itself
be the subject of court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To the
extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.
Hurricanes continue to endanger the coastal and interior portions of Florida.
Substantial damage resulted from Hurricane Andrew in 1992. During the 1995
hurricane season, a record number of tropical storms and hurricanes also caused
substantial damages. The 1996 and 1997 hurricane seasons were uneventful with
considerably less damage than in 1992 and 1995. During the 1998 hurricane
season, which ended November 30, two hurricanes caused significant damage to
several coastal communities in Florida. The Fund cannot predict the economic
impact, if any, of future hurricanes and storms.
As of December 2, 1998, the State had a high bond rating from Moody's
Investors Service, Inc. (Aa2), Standard & Poor's (AA+) and Fitch IBCA, Inc.
(AA) on all of its general obligation bonds. Outstanding general obligation
bonds at June 30, 1997 totalled almost $7.9 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 $1,340 billion of general obligation
bonds since July 1, 1997.
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.
A-3
<PAGE>
APPENDIX B
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: 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 three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades."
B-1
<PAGE>
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment 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.
Debt rated "AA" differs from the highest-rated issues only in small
AA degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
B-2
<PAGE>
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.
--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.
B-3
<PAGE>
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
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.
B-4
<PAGE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within three to 12 months.
Ratings An outlook is used to describe the most likely direction of any
Outlook 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.
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 Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the
basis D 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.
B-5
<PAGE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD," "DD," or "D" categories.
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin
of safety is not as great as for issues assigned "F-1+" and "F-1"
ratings.
F-3
Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
B-6
<PAGE>
APPENDIX C
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance policies
(the "Policies") that the Fund may obtain from several insurance companies with
respect to insured Florida Municipal Bonds and Municipal Bonds held by the
Fund. The Fund has no obligation to obtain any such Policies, and the terms of
any Policies actually obtained may vary significantly from the terms discussed
below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards such
companies normally use in establishing the insurability of new issues of
Florida Municipal Bonds and Municipal Bonds and are not necessarily the
criteria that would be used in regard to the purchase of such bonds by the
Fund. The Policies do not insure (i) municipal securities ineligible for
insurance and (ii) municipal securities no longer owned by the Fund.
The Policies do not guarantee the market value of the insured Florida
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable to
meet its obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the insurance
company will not have any obligation to insure any issue held by the Fund that
is aversely affected by either of the above described events. In addition to
the payment of premium, the policies may require that the Fund notify the
insurance company as to all Florida Municipal Bonds and Municipal Bonds in the
Fund's portfolio and permit the insurance company to audit their records. The
insurance premiums will be payable monthly by the Fund in accordance with a
premium schedule to be furnished by the insurance company at the time the
Policies are issued. Premiums are based upon the amounts covered and the
composition of the portfolio.
The Fund will seek to utilize insurance companies that have insurance claims-
paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch IBCA,
Inc. ("Fitch") or Aaa from Moody's Investors Service ("Moody's"). There can be
no assurance however, that insurance from insurance carriers meeting these
criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance claims-
paying ability rating of AAA has the highest rating assigned by Fitch. The
ability to pay claims is adjudged by Fitch to be extremely strong for insurance
companies with this highest rating. In the opinion of Fitch, foreseeable
business and economic risk factors should not have any material adverse impact
on the ability of these insurers to pay claims. In Fitch's opinion,
profitability, overall balance sheet strength, capitalization and liquidity are
all at very secure levels and are unlikely to be affected by potential adverse
underwriting, investment or cyclical events. A Moody's insurance claims-paying
ability rating is an opinion of the ability of an insurance company to repay
punctually senior policyholder obligations and claims. An insurer with an
insurance claims-paying ability rating of Aaa is considered by Moody's to be of
the best quality. In the opinion of Moody's, the policy obligations of an
insurance company with an insurance claims-paying ability rating of Aaa carry
the smallest degree of credit risk and, while the financial strength of these
companies is likely to change, such changes as can be visualized are most
unlikely to impair the company's fundamentally strong position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
C-1
<PAGE>
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
C-2
<PAGE>
APPENDIX D
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 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. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix E 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, 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;
(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;
D-1
<PAGE>
(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.
(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.
D-2
<PAGE>
APPENDIX E
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 E 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 shares of 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>
"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.
(ix) "Sell Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(x) "Submission Deadline" shall mean 1:00 p.m., Eastern 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.
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(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) (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" 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.
E-2
<PAGE>
(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
(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
E-3
<PAGE>
(in the case of an Auction relating to a Dividend Period which is not a Special
Dividend Period of 28 days or more) and a Sell Order (in the case of an Auction
relating to a Special Dividend Period of 28 days or more) to have been
submitted on behalf of such Existing Holder covering the number of outstanding
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 submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of AMPS over the
number of outstanding AMPS that are the subject of Submitted Hold Orders
(such excess being hereinafter referred to as the "Available AMPS");
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<PAGE>
(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 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 40% of the Reference Rate (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 the 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:
(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;
E-5
<PAGE>
(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 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 shares of 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 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)
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
E-6
<PAGE>
to purchase, a fraction of a share of AMPS on any Auction Date, the Auction
Agent shall, in such manner as in its sole discretion it shall determine,
round up or down the number of shares of AMPS to be purchased or sold by
any Existing Holder or Potential Holder on such Auction Date so that each
outstanding 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 shares of AMPS
for purchase among Potential Holders so that only whole shares of AMPS are
purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
any 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 Stock
Register in the name of the Beneficial Owner thereof and such Beneficial Owner
thereupon will be entitled to receive certificates therefor and required to
deliver certificates thereof or upon transfer or exchange thereof.
E-7
<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 January 13, 1999
Schedule of Investments as of February 1, 1999 (unaudited)
Statement of Assets, Liabilities and Capital as of February 1, 1999
(unaudited)
(2) Exhibits:
<TABLE>
<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.(d)
(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.(d)
(e) --Form of Automatic Dividend Reinvestment Plan.(c)
(f) --Not applicable.
(g) --Form of Investment Advisory Agreement between the Registrant and
Fund Asset Management, L.P.(c)
(h)(1) --Form of Purchase Agreement for the AMPS.(d)
(2) --Merrill Lynch Standard Dealer Agreement.(c)
(i) --Not applicable.
(j) --Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company.(c)
(k)(1) --Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the Registrant and
State Street Bank and Trust Company.(c)
(2) --Form of Auction Agent Agreement between the Registrant and IBJ
Schroder Bank & Trust Company.(d)
(3) --Form of Broker-Dealer Agreement.(d)
(4) --Form of Letter of Representations.(d)
(l) --Opinion and Consent of Brown & Wood LLP, counsel to the
Registrant.
(m) --Not applicable.
(n) --Consent of Ernst & Young LLP, independent auditors for the
Registrant.
(o) --Not applicable.
(p) --Certificate of Fund Asset Management, L.P.(c)
(q) --Not applicable.
(r) --Financial Data Schedule.
</TABLE>
- --------
(a) Reference is made to the Registrant's registration statement on Form N-2,
File Nos. 333-68933 and 811-09129 (the "Common Shares Registration
Statement") filed with the Securities and Exchange Commission on December
4, 1998.
(b) Reference is made to Section 3.4, Article V, Article VI (sections 1, 2, 4,
5 and 7), Article VIII, Article IX and Article X of the Registrant's
Declaration of Trust, 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).
(c) Reference is made to Pre-Effective Amendment No. 1 to Registrant's Common
Shares Registration Statement filed with the Securities and Exchange
Commission on December 15, 1998.
(d) Reference is made to Registrant's Registration Statement on Form N-2 filed
with the Securities and Exchange Commission on January 8, 1999.
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................................................ $ 23,213
Printing......................................................... 54,000
Legal fees and expenses.......................................... 35,000
Accounting fees and expenses..................................... 7,000
Rating Agency fees............................................... 45,925
Miscellaneous.................................................... 862
--------
Total.......................................................... $166,000
========
</TABLE>
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 February 1, 1999
-------------- -------------------
<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 interests of the Trust, had been adjudicated, it
would have been adjudicated in favor of such person. The rights accruing to
any person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no person may satisfy any
right of indemnity or reimbursement granted herein or in Section 5.1 or to
which he may be otherwise entitled except out of the property of the Trust,
and no Shareholder shall be personally liable to any person with respect to
any claim for indemnity or reimbursement or otherwise. The Trustees may
make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."
C-2
<PAGE>
The Registrant's By-Laws provide that insofar as the conditional advancing of
indemnification moneys pursuant to Section 5.3 of the Declaration of Trust for
actions based upon the Investment Company Act of 1940 may be concerned, such
payments will be made only on the following conditions: (i) the advances must
be limited to amounts used, or to be used, for the preparation or presentation
of a defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise
by, or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined he is entitled to
receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested, non-party Trustees, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
In Section 8 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to trustees, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a trustee, officer or controlling person of the
Fund in connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
will be filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
Item 30. Business and Other Connections of The Investment Adviser.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of MLAM
acts as investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch 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
C-3
<PAGE>
Fund II, Inc., MuniHoldings California Insured Fund III, Inc., MuniHoldings
California Insured Fund IV, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Insured Fund, Inc., MuniHoldings Michigan Insured Fund, Inc.
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings New
York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New
York Insured Fund II, Inc., MuniHoldings New York Insured Fund III, Inc.,
MuniInsured Fund, Inc., MuniVest Florida Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch 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
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 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-
2665. The address of the Investment Adviser, MLAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. 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.
C-4
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
for the past two years for his or her or its own account or in the capacity of
director, officer, employee, partner or trustee. In addition, Mr. Zeikel is
President, Mr. Burke is Treasurer and Mr. Glenn is Executive Vice President of
all or substantially all of the investment companies described in the first two
paragraphs of this Item 30 and also hold the same positions with all or
substantially all of the investment companies advised by MLAM as they do with
those advised by the Investment Adviser. Messrs. Giordano, Harvey, Kirstein and
Monagle are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
Position with Other Substantial Business Profession,
Name Investment Adviser Vocation of Employment
---- ------------------ --------------------------------------
<C> <C> <S>
ML & Co. ................ Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services....... General Partner General Partner of MLAM
Arthur Zeikel............ Chairman Chairman of MLAM; President of the
Investment Adviser and MLAM 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 Financial
Data Services, Inc.; President of
Princeton Administrators, L.P.
Mark A. DeSario.......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Linda L. Federici........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano...... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth A. Griffin..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Norman R. Harvey......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel... Senior Vice President,
General Counsel Senior Vice President, General Counsel of
and Secretary MLAM; Senior Vice President of the MLAM
International Group
Philip L. Kirstein....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President, Director and Secretary of
Princeton Services
Ronald M. Kloss.......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Debra Landsman-Yaros..... Senior Vice President Senior Vice President of MLAM; Senior
Vice 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, Jr. .. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Brian A. Murdock......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Director of PFD
Donald C. Burke.......... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; 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, as amended, and the Rules
promulgated thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
C-5
<PAGE>
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
Registrant undertakes:
(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 5th day of
February, 1999.
MuniHoldings Florida Insured Fund IV
(Registrant)
/s/ Arthur Zeikel
By
-----------------------------------
(Arthur Zeikel, President)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn or Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his or her behalf, individually and in each capacity stated below, any
amendment to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following person in the capacities and
on the dates indicated.
<TABLE>
<S> <C>
</TABLE>
Signatures Title Date
/s/ Arthur Zeikel President (Principal
- ------------------------------------- Executive Officer) February 5,
(Arthur Zeikel) and Trustee 1999
Treasurer (Principal
/s/ Donald C. Burke Financial and February 5,
- ------------------------------------- Accounting Officer) 1999
(Donald C. Burke)
/s/ Ronald W. Forbes Trustee
- ------------------------------------- February 5,
(Ronald W. Forbes) 1999
/s/ Cynthia A. Montgomery Trustee
- ------------------------------------- February 5,
(Cynthia A. Montgomery) 1999
/s/ Charles C. Reilly Trustee
- ------------------------------------- February 5,
(Charles C. Reilly) 1999
/s/ Kevin A. Ryan Trustee
- ------------------------------------- February 5,
(Kevin A. Ryan) 1999
/s/ Richard R. West Trustee
- ------------------------------------- February 5,
(Richard R. West) 1999
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<C> <S>
(l) Opinion and Consent of Brown & Wood LLP
(n) Consent of Ernst & Young LLP
(r) Financial Data Schedule
</TABLE>
<PAGE>
Exhibit (l)
BROWN & WOOD LLP
One World Trade Center
New York, New York 10048-0557
Telephone (212) 839-5300
Facsimile (212) 839-5599
February 5, 1999
MuniHoldings Florida Insured Fund IV
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Dear Sirs:
This opinion is being furnished in connection with the registration by
MuniHoldings Florida Insured Fund IV, a Massachusetts business trust (the
"Fund"), of 3,340 shares of Auction Market Preferred Shares, par value
$0.10 per share, (the "Shares"), under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to the Fund's registration statement on Form N-
2, as amended (the "Registration Statement"), under the Securities Act. The
Shares will be issued pursuant to the Certificate of Designation (the
"Certificate of Designation") to be filed with the Secretary of State of the
Commonwealth of Massachusetts (the "Secretary of the Commonwealth").
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Fund, the By-laws of the Fund, and such other documents as we have deemed
relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement, will
be legally issued, fully paid and non-assessable preferred shares of the Fund.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus constituting
a part thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
<PAGE>
EXHIBIT (n)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 21, 1999, in this Registration Statement on
Form N-2 under the Securities Act of 1933 (File No. 333-70287) and under the
Investment Company Act of 1940 (File No. 811-09129) and related Prospectus of
MuniHoldings Florida Insured Fund IV for the registration of its Auction Market
Preferred Shares.
ERNST & YOUNG LLP
Princeton, New Jersey
February 2, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> FEB-01-1999
<INVESTMENTS-AT-COST> 143,798,841
<INVESTMENTS-AT-VALUE> 14,41,31,578
<RECEIVABLES> 12,42,089
<ASSETS-OTHER> 10,098,972
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155,472,594
<PAYABLE-FOR-SECURITIES> 33,463,820
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 280,043
<TOTAL-LIABILITIES> 33,743,863
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 121,339,888
<SHARES-COMMON-STOCK> 8,106,667
<SHARES-COMMON-PRIOR> 6,667
<ACCUMULATED-NII-CURRENT> 56,106
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 332,737
<NET-ASSETS> 121,728,731
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 00
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,100,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 121,628,726
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 121,728,731
<PER-SHARE-NAV-BEGIN> 15.02
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.02
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
