<PAGE>
As filed with the Securities and Exchange Commission on January 26, 1999
Securities Act File No. 333-68389
Investment Company Act File No. 811-09125
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 2
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 3
(Check appropriate box or boxes)
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MuniHoldings Michigan Insured Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
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800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
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(609) 282-2800
(Registrant's Telephone Number, Including Area Code)
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Arthur Zeikel
MuniHoldings Michigan Insured Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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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. [_]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
Proposed Proposed
Title of Amount Maximum Maximum Amount of
Securities Being Being Offering Price Aggregate Registration
Registered Registered(1) Per Unit Offering Price Fee(2)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)............... 4,628,750 shares $15.00 $69,431,250 $19,302
</TABLE>
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(1) Includes 603,750 shares subject to the Underwriter's over-allotment option.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$32,130 was previously paid.
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<PAGE>
PROSPECTUS
4,025,000 Shares
MuniHoldings Michigan Insured Fund, Inc.
Common Stock
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MuniHoldings Michigan Insured Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal and Michigan income taxes.
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 and Michigan
income taxes. 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.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. The Fund's common stock has been approved for listing on
the New York Stock Exchange under the symbol "MCG." Trading of the Fund's
common stock on the exchange is expected to begin within two weeks of the date
of this prospectus. Before it begins trading, the underwriter does not intend
to make a market in the Fund's shares. Thus, investors may not be able to buy
and sell shares of the Fund during that time.
Within approximately three months after completion of this offering of common
stock, the Fund intends to offer shares of preferred stock representing
approximately 40% of the Fund's capital immediately after the issuance of such
preferred stock. There can be no assurance, however, that preferred stock
representing such percentage of the Fund's capital will actually be issued. The
use of preferred stock to leverage the common stock can create special risks.
----------------
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.
----------------
Investing in the common stock involves certain risks, which are described in
the "Risk Factors and Special Considerations" section beginning on page 7 of
this prospectus.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price.............................. $15.00 $60,375,000
Sales Load......................................... None None
Proceeds, before expenses, to Fund................. $15.00 $60,375,000
</TABLE>
The Fund's investment adviser or an affiliate will pay the underwriter a
commission in the amount of 2.00% of the public offering price per share in
connection with the sale of the common stock.
The underwriter may also purchase up to an additional 603,750 shares at the
public offering price within 45 days from the date of this prospectus to cover
over-allotments.
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 offense.
We expect that the shares of common stock will be ready for delivery in New
York, New York on or about January 29, 1999.
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Merrill Lynch & Co.
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The date of this prospectus is January 26, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 7
Fee Table.................................................................. 9
The Fund................................................................... 10
Use of Proceeds............................................................ 10
Investment Objective and Policies.......................................... 10
Risks and Special Considerations Of Leverage............................... 21
Investment Restrictions.................................................... 23
Directors and Officers..................................................... 25
Investment Advisory and Management Arrangements............................ 27
Portfolio Transactions..................................................... 29
Dividends and Distributions................................................ 30
Taxes...................................................................... 30
Automatic Dividend Reinvestment Plan....................................... 35
Mutual Fund Investment Option.............................................. 36
Net Asset Value............................................................ 37
Description of Capital Stock............................................... 37
Custodian.................................................................. 41
Underwriting............................................................... 41
Transfer Agent, Dividend Disbursing Agent And Registrar.................... 42
Legal Opinions............................................................. 42
Experts.................................................................... 42
Additional Information..................................................... 42
Independent Auditors' Report............................................... 44
Statement of Assets, Liabilities and Capital............................... 45
Appendix IiI--Economic and Other Conditions in Michigan.................... 46
Appendix III--Ratings of Municipal Bonds................................... 49
Appendix III--Portfolio Insurance.......................................... 56
Appendix IV--Taxable Equivalent Yields for 1999............................ 58
</TABLE>
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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 on 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>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus.
The Fund MuniHoldings Michigan Insured Fund, Inc. is a newly organized, non-
diversified, closed-end management investment company.
The
Offering The Fund is offering 4,025,000 shares of common stock at an initial
offering price of $15.00 per share. The common stock is being
offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated as
underwriter. The underwriter may also purchase up to an additional
603,750 shares of common stock within 45 days of the date of this
prospectus to cover over-allotments.
Investment The investment objective of the Fund is to provide shareholders
Objective with current income exempt from Federal and Michigan income taxes.
and The Fund seeks to achieve its objective by investing primarily in a
Policies 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 and Michigan income taxes.
Investment Grade Municipal Bonds. The Fund intends to invest in
municipal bonds that are rated investment grade by one or more
nationally recognized statistical rating agencies or, if unrated,
are considered by the Fund's Investment Adviser to be of comparable
quality.
Michigan Municipal Bonds. The Fund will generally invest
substantially all (at least 80%) of its assets in Michigan
municipal bonds. However, when the Fund's investment adviser
believes that investment grade Michigan municipal bonds are not
available in sufficient amounts at an appropriate price, the Fund
may invest a lesser amount of its assets in these securities. At
all times, except during periods when the Fund is in the process of
investing its proceeds from a public offering or during temporary
defensive periods, the Fund intends to invest at least 65% of its
assets in Michigan municipal bonds and at least 80% of its assets
in Michigan municipal bonds and other long-term municipal bonds.
These other long-term municipal bonds that the Fund may buy will be
exempt from Federal income tax but not Michigan income tax.
The Fund will normally invest at least 80% of its assets in insured
municipal obligations with remaining maturities of one year or
more. Insured municipal obligations are covered by insurance that
guarantees timely interest payments and the repayment of principal
on maturity.
In general, the Fund does not intend its investments to earn a
large amount of income that is not exempt from Federal and Michigan
income tax.
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
3
<PAGE>
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. Investment 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 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.
Leverage
Issuance of Preferred Stock. The Fund intends to offer shares of
preferred stock within three months after completion of this
offering. The preferred stock will represent approximately 40% of
the Fund's capital, including the capital raised by issuing the
preferred stock. There can be no assurance, however, that preferred
stock will actually be issued. Issuing preferred stock will result
in the leveraging of the common stock. Although the Board of
Directors has not yet determined the terms of the preferred stock
offering, the Fund expects that the preferred stock will pay
dividends that will be adjusted over either relatively short-term
periods (generally seven to 28 days) or medium-term periods (up to
five years). The preferred stock dividend rate will be based upon
prevailing interest rates for debt obligations of comparable
maturity. The money raised by the preferred stock offering will be
invested in longer-term obligations in accordance with the Fund's
investment objective. The expenses of the preferred stock, which
will be borne by the Fund, will reduce the net asset value of the
common stock. In addition, at times when the Fund is required to
allocate taxable income to preferred stockholders, the terms of the
preferred stock may require the Fund to make an additional
distribution to them. The amount of this additional distribution
approximately equals the tax liability resulting from the
allocation (an "Additional Distribution"). During periods when the
Fund has preferred stock outstanding, the Fund will pay fees to the
investment adviser for its services that are higher than if the
Fund did not issue preferred stock because the fees will be
calculated on the basis of the Fund's average weekly net assets,
including proceeds from the sale of preferred stock.
Potential Benefits of Leverage. Under normal market conditions,
longer term obligations produce higher yields than short and medium
term obligations. The Fund's investment adviser believes that the
interest income the Fund receives from its long term investments
will exceed
4
<PAGE>
the amount of interest the Fund must pay to the preferred
stockholders. Thus, the Fund's use of preferred stock should
provide common stockholders with a higher yield than they would
receive if the Fund were not leveraged.
Risks. This use of leverage creates certain risks for common
stockholders, including higher volatility of both the net asset
value and the market value of the common stock. Since any decline
in the value of the Fund's investments affects only the common
stockholders, in a declining market the use of leverage will cause
the Fund's net asset value to decrease more than it would if the
Fund were not leveraged. This decrease in net asset value will
likely also cause a decline in the market price for shares of
common stock. In addition, fluctuations in the dividend rates on,
and the amount of taxable income allocable to, the preferred stock
will affect the yield to common stockholders. There can be no
assurance that the Fund will earn a higher net return on its
investments than the then current dividend rate (and any Additional
Distribution) it pays on the preferred stock. Under certain
conditions, the benefits of leverage to common stockholders will be
reduced, and the Fund's leveraged capital structure could result in
a lower rate of return to common stockholders than if the Fund were
not leveraged.
Distributions. When the Fund issues preferred stock, common
stockholders will receive all of the Fund's net income that remains
after it pays dividends (and any Additional Distribution) on the
preferred stock and generally will be entitled to a pro rata share
of net realized capital gains. If the Fund is liquidated, preferred
stockholders will be entitled to receive liquidating distributions
before any distribution is made to common stockholders. These
liquidating distributions are expected to equal the original
purchase price per share of the preferred stock plus any
accumulated and unpaid dividends and Additional Distributions.
Redemption of Preferred Stock. The Fund may redeem the preferred
stock for any reason. For example, the Fund may redeem all or part
of the preferred stock if it believes that the Fund's leveraged
capital structure will cause common stockholders to obtain a lower
return than they would if the common stock were unleveraged for any
significant amount of time.
Voting Rights. Preferred stockholders, voting as a separate class,
will be entitled to elect two of the Fund's Directors. Common and
preferred stockholders, voting together as a single class, will be
entitled to elect the remaining Directors. If the Fund fails to pay
dividends to the preferred stockholders for two full years, the
holders of all outstanding shares of preferred stock, voting as a
separate class, would then be entitled to elect a majority of the
Fund's Directors. Preferred stockholders also will vote separately
on certain other matters as required under the Fund's Articles of
Incorporation, the Investment Company Act of 1940, as amended, and
Maryland law. Otherwise, common and preferred stockholders will
have equal voting rights (one vote per share) and will vote
together as a single class.
Ratings. Before it offers the preferred stock, the Fund intends to
apply to one or more nationally recognized statistical ratings
organizations for ratings on the preferred stock. The Fund believes
that a rating for the preferred stock will make it easier to market
the stock, which should reduce the dividend rate.
5
<PAGE>
Listing
Currently, there is no public market for the Fund's common
stock. The Fund's common stock has been approved for listing on
the New York Stock Exchange. Trading of the Fund's common stock
is expected to begin within two weeks of the date of this
prospectus. Before it begins trading, the underwriter does not
intend to make a market in the Fund's shares of common stock.
Thus, investors may not be able to buy and sell shares of the
Fund during that period.
Investment Fund Asset Management, L.P. is the Fund's investment adviser and
Adviser provides investment advisory and management services to the
Fund. For its services, the Fund pays the investment adviser a
fee at the annual rate of 0.55% of the Fund's average weekly net
assets, including assets acquired from the sale of preferred
stock.
Dividends The Fund intends to distribute dividends equal to substantially
and all of its net investment income to common stockholders each
Distributions month. Once the Fund issues preferred stock, the monthly
distributions to common stockholders will consist of
substantially all net investment income that remains after the
Fund pays dividends (and any Additional Distribution) on the
preferred stock. The Fund expects to begin paying dividends to
common stockholders within approximately 90 days from the date
of this prospectus. The Fund will distribute net capital gains,
if any, at least annually to common stockholders and, after it
issues the preferred stock, on a pro rata basis to common
stockholders and preferred stockholders. When the Fund allocates
capital gains or other taxable income to preferred stockholders,
under certain circumstances, the terms of the preferred stock
may require the Fund to make an Additional Distribution. The
Fund may not declare any cash dividend or other distribution on
its common stock unless the preferred stock has asset coverage
of at least 200%. If the Fund issues preferred stock
representing 40% of its total capital, the preferred stock's
asset coverage will be approximately 250%. If the Fund's ability
to make distributions on its common stock is limited, the Fund
may not be able to qualify for taxation as a regulated
investment company. This would have adverse tax consequences for
common stockholders.
Automatic Dividend and capital gains distributions generally are used to
Dividend purchase additional shares of the Fund's common stock. However,
Reinvestment an investor can choose to receive distributions in cash. Since
Plan not all investors can participate in the automatic dividend
reinvestment plan, you should call your broker or nominee to
confirm that you are eligible to participate in the plan.
Mutual Investors who purchase shares in this offering through the
Fund underwriter and later sell their shares have the option,
Investment subject to certain conditions, to purchase Class D shares of
Option certain Merrill Lynch funds with the proceeds from the sale.
6
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity and Market Price of Shares. The Fund is newly organized and has no
operating history or history of public trading. Before the Fund's common stock
is listed on the New York Stock Exchange, an investment in the Fund may be
illiquid.
Shares of closed-end funds that trade in a secondary market frequently trade
at a market price that is below their net asset value. This is commonly
referred to as "trading at a discount." Investors who sell their shares within
a relatively short period after completion of the public offering are more
likely to be exposed to this risk. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.
Michigan Municipal Bonds. The Fund intends to invest the majority of its
portfolio in Michigan municipal bonds. As a result, the Fund is more exposed to
risks affecting issuers of Michigan 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.
and 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 may 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 and Rating Agencies. The Fund will be subject to certain
restrictions imposed by guidelines of the insurance companies that issue
portfolio insurance and to guidelines of one or more nationally recognized
statistical ratings organizations that may issue ratings for the preferred
stock. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the Investment
Company Act of 1940, as amended. The Fund does not expect these requirements or
guidelines to prevent the investment adviser from managing the Fund's portfolio
in accordance with the Fund's investment objective and policies.
7
<PAGE>
Leverage. The Fund plans to offer shares of preferred stock. The preferred
stock will represent approximately 40% of the Fund's capital, including capital
raised by issuing the preferred stock. Leverage creates certain risks for
common stockholders, including higher volatility of both the net asset value
and market value of the common stock. Leverage also creates the risk that the
investment return on shares of the Fund's common stock will be reduced to the
extent the dividends paid on preferred stock and other expenses of the
preferred stock exceed the income earned by the Fund on its investments. If the
Fund is liquidated, preferred stockholders will be entitled to receive
liquidating distributions before any distribution is made to common
stockholders.
Inverse Floating Obligations. The Fund's investments in "inverse floating
obligations" or "residual interest bonds" provide investment leverage because
their market value increases or decreases in response to market changes at a
greater rate than fixed rate, long term tax exempt securities. The market
values of such securities are more volatile than the market values of fixed
rate, tax exempt securities.
Options and Futures Transactions. The Fund may engage in certain options and
futures transactions to reduce its exposure to interest rate movements. If the
Fund incorrectly forecasts market values, interest rates or other factors, the
Fund's performance could suffer. The Fund also may suffer a loss if the other
party to the transaction fails to meet its obligations. The Fund is not
required to use hedging and may not do so.
Antitakeover Provisions. The Fund's Articles of Incorporation include
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 Directors.
Such provisions could limit the ability of shareholders to sell their shares at
a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund.
8
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment Plan Fees....................................... None
Annual Expenses (as a percentage of net assets attributable to Common
Stock):
Investment Advisory Fees(a)(b)........................................ 0.92%
Interest Payments on Borrowed Funds................................... None
Other Expenses(a)(b).................................................. 0.37%
-----
Total Annual Expenses(a)(b)......................................... 1.29%
=====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 Year 3 Years 5 Years 10 Years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) total
annual expenses of 1.29% (assuming leverage
of 40% of the Fund's total assets) and (2) a
5% annual return throughout the periods: .... $13 $41 $71 $156
</TABLE>
- --------
(a) Assumes leverage by issuing preferred stock in an amount of approximately
40% of the Fund's capital at a dividend rate of 3.375%. The Fund intends to
use leverage only if the Investment Adviser believes that it would result
in higher income to shareholders over time. See "Risks and Special
Considerations of Leverage"--page 21. If the Fund does not use leverage, it
is estimated that, as a percentage of net assets attributable to common
stock, the Investment Advisory Fees would be 0.55%, Other Expenses would be
0.16% and Total Annual Expenses would be 0.71%.
(b) See "Investment Advisory and Management Arrangements"--page 27.
The Fee Table is intended to assist investors in understanding the costs and
expenses that a shareholder in the Fund will bear directly or indirectly. The
expenses set forth under "Other Expenses" are based on estimated amounts
through the end of the Fund's first fiscal year. The Example set forth above
assumes reinvestment of all dividends and distributions and uses a 5% annual
rate of return as mandated by the Securities and Exchange Commission
regulations. The Example should not be considered a representation of future
expenses or annual rates of return, and actual expenses or annual rates of
return may be more or less than those assumed for purposes of the Example.
9
<PAGE>
THE FUND
MuniHoldings Michigan Insured Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on November 23, 1998, and
has registered under the 1940 Act. The Fund's principal office is located at
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number
is (609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their securities
at the option of the shareholder, whereas open-end companies issue securities
redeemable at net asset value at any time at the option of the shareholder and
typically engage in a continuous offering of their shares. Accordingly, open-
end investment companies are subject to continuous asset in-flows and out-flows
that can complicate portfolio management. Shares of closed-end investment
companies, however, frequently trade at a discount from their net asset value.
This risk may be greater for investors expecting to sell their shares in a
relatively short period after completion of the public offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $60,150,000 (or
approximately $69,206,250 assuming the Underwriter exercises the over-allotment
option in full) after payment of offering expenses estimated to be
approximately $225,000.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of common stock, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-term,
tax-exempt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with current
income exempt from Federal and Michigan income taxes. The Fund will seek to
achieve its objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations issued by or on behalf of the State of
Michigan, 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 and Michigan income taxes
("Michigan Municipal Bonds"). The Fund intends to invest substantially all (at
least 80%) of its assets in Michigan Municipal Bonds, except at times when the
Fund's investment adviser, Fund Asset Management, L.P. (the "Investment
Adviser"), considers that Michigan 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 Michigan Municipal Bonds
are not available for investment, the Fund may purchase other long-term
municipal obligations exempt from Federal but not Michigan income taxes
("Municipal Bonds"). The Fund will maintain at least 65% of its assets in
Michigan Municipal Bonds and at least 80% of its assets in Michigan 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 shares of common stock.
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The Fund ordinarily does not intend to realize significant investment income
that is subject to Federal and Michigan income taxes. The Fund may invest all
or a portion of its assets in certain tax-exempt securities classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) that may subject certain investors in the Fund to an alternative
minimum tax.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Michigan 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 Michigan Municipal Bonds or Municipal Bonds.
Certain Non-Municipal Tax-Exempt Securities may be characterized as derivative
instruments. Non-Municipal Tax-Exempt Securities are considered "Michigan
Municipal Bonds" or "Municipal Bonds" for purposes of the Fund's investment
objective and policies.
Investment in shares of the Fund's common stock offers several potential
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal and Michigan income taxes by investing in a professionally managed
portfolio comprised primarily of investment grade insured Michigan Municipal
Bonds. Investment in the Fund also relieves the investor of the burdensome
administrative details involved in managing a portfolio of Michigan Municipal
Bonds. Additionally, the Investment Adviser will seek to enhance the yield on
the common stock by leveraging the Fund's capital structure through the
issuance of preferred stock. The benefits are at least partially offset by the
expenses involved in operating an investment company. Such expenses primarily
consist of the advisory fee and operational costs. Additionally, the use of
leverage involves certain expenses and special risk considerations. See "Risks
and Special Considerations of Leverage."
The investment grade Michigan Municipal Bonds and Municipal Bonds in which
the Fund will primarily invest are those Michigan Municipal Bonds and Municipal
Bonds rated at the date of purchase in the four highest rating categories of
Standard & Poor's ("S&P"), Moody's Investors Services, Inc. ("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-1+ through SP-3 for S&P, MIG-1
through MIG-3 for Moody's and F-1+ through F-3 for Fitch. In the case of tax-
exempt commercial paper, the investment grade rating categories are A-1+
through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+ through F-3
for Fitch. Obligations ranked in the lowest investment grade rating category
(BBB, SP-3 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody's; and BBB and F-3
for Fitch), while considered "investment grade," may have certain speculative
characteristics. There may be sub-categories or gradations indicating relative
standing within the rating categories set forth above. See Appendix II to this
Prospectus for a description of S&P's, Moody's and Fitch's ratings of Municipal
Bonds. In assessing the quality of Michigan Municipal Bonds and Municipal Bonds
with respect to the foregoing requirements, the Investment Adviser will take
into account the portfolio insurance as well as the nature of any letters of
credit or similar credit enhancements to which particular Michigan Municipal
Bonds and Municipal Bonds are entitled and the creditworthiness of the
insurance company or the financial institution that provided such insurance or
credit enhancements. Consequently, if Michigan 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
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such municipal obligations to be equivalent to AAA- or Aaa- rated securities,
as the case may be, even though such Michigan 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 Michigan 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 shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates decline,
the value of a fixed-income portfolio can be expected to rise. Conversely, when
interest rates rise, the value of a fixed-income portfolio can be expected to
decline. Prices of longer-term securities generally fluctuate more in response
to interest rate changes than do short-term or medium-term securities. These
changes in net asset value are likely to be greater in the case of a fund
having a leveraged capital structure, as proposed for the Fund. See "Risks and
Special Considerations of Leverage."
The Fund intends to invest primarily in long-term Michigan Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term Michigan 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 and Michigan income taxes.
The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by 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." 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,
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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 Michigan Municipal Bonds and Municipal Bonds either (i) insured
under an insurance policy purchased by the Fund or (ii) insured under an
insurance policy obtained by the issuer thereof or any other party. The Fund
will seek to limit its investments to municipal bonds insured under insurance
policies issued by insurance carriers that have total admitted assets
(unaudited) of at least $75,000,000 and capital and surplus (unaudited) of at
least $50,000,000 and insurance claims-paying ability ratings of AAA from S&P
or Fitch or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be at all times available. See
Appendix III to this Prospectus for a brief description of S&P's, Fitch's and
Moody's insurance claims-paying ability ratings. Currently, it is anticipated
that a majority of the insured Michigan 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 Michigan 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 Michigan 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 Michigan Municipal Bonds and Municipal Bonds purchased by the Fund. A
Michigan Municipal Bond or a Municipal Bond will be eligible for coverage if it
meets certain requirements of the insurance company set forth in a Policy. In
the event interest or principal on an insured Michigan Municipal Bond and
Municipal Bond is not paid when due, the insurer will be obligated under its
Policy to make such payment not later than 30 days after it has been notified
by, and provided with documentation from, the Fund that such nonpayment has
occurred.
The Policies will be effective only as to insured Michigan Municipal Bonds
and Municipal Bonds beneficially owned by the Fund. In the event of a sale of
any Michigan 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 Michigan 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
Directors of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently
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ranges from approximately .02 of 1% to .15 of 1% of the principal amount of the
Michigan Municipal Bonds and Municipal Bonds covered by such Policies. The
estimate is based on the expected composition of the Fund's portfolio of
Michigan Municipal Bonds and Municipal Bonds. Additional information regarding
the Policies is set forth in Appendix III to this Prospectus. In instances in
which the Fund purchases Michigan 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 Michigan Municipal Bonds and Municipal
Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser's ability to manage
the portfolio may be limited to the extent it holds defaulted securities, which
may limit its ability in certain circumstances to purchase other Michigan
Municipal Bonds and Municipal Bonds. See "Net Asset Value" below for a more
complete description of the Fund's method of valuing defaulted securities and
securities that have a significant risk of default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Directors determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or may discontinue its policy of maintaining
insurance for all or any of the Michigan Municipal Bonds and Municipal Bonds
held in the Fund's portfolio. Although the Investment Adviser periodically
reviews the financial condition of each insurer, there can be no assurance that
the insurers will be able to honor their obligations under all circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Michigan Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured Michigan 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).
Description of Michigan Municipal Bonds and Municipal Bonds
Michigan 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 prospectus,
such obligations are Municipal Bonds if the interest paid thereon is exempt
from Federal income tax and as Michigan Municipal Bonds if the interest thereon
is exempt from Federal income tax and exempt from Michigan income tax, even
though such bonds may be IDBs or "private activity bonds" as discussed below.
Also, for purposes of this prospectus, Non-Municipal Tax-Exempt securities as
discussed above will be considered Michigan Municipal Bonds or Municipal Bonds.
The two principal classifications of Michigan 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 Michigan
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<PAGE>
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.
Michigan 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 Michigan 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 Michigan 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
Michigan 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
typically do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses, which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the lease property, disposition
of the property in the event of foreclosure might prove difficult. These
securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional
securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Michigan Municipal Bonds and Municipal Bonds for investment
by the Fund.
Special Considerations Relating to Michigan Municipal Bonds
The Fund ordinarily will invest at least 80% of its total assets in Michigan
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of Michigan Municipal Bonds than is a municipal bond mutual
fund that is not concentrated in issuers of Michigan Municipal Bonds to this
degree. The State of Michigan reports its financial results in accordance with
generally accepted accounting principles. Michigan reported the General Fund in
balance as of September 30, 1997. The Michigan Budget and Economic
Stabilization Fund had an unreserved accrued balance of $579.1 million. The
balance is net of a reserve for future education funding of $572.6 million.
Michigan has reported balanced budgets and year-end General Fund surpluses for
each of the last six fiscal years. Economically, Michigan remains closely tied
to the economic cycles of the automobile industry. Current increased automobile
production and an increasingly
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diversified economy have led to an unemployment rate which, for the last three
years has been below the national average. Currently, Michigan's general
obligation bonds are rated Aa1 by Moody's, AA+ by Standard & Poor's and AA+ by
Fitch. FAM does not believe that the current economic conditions in Michigan
will have a significant adverse effect on the ability of the Fund to invest in
high quality Michigan Municipal Bonds. For a discussion of economic and other
conditions in the State of Michigan, see Appendix I, "Economic and Other
Conditions in Michigan."
Other Investment Policies
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to finance
the repurchase of its own common stock pursuant to tender offers or otherwise
to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known, as
with the issuance of preferred stock, as "leveraging") create an opportunity
for greater total return since the Fund will not be required to sell portfolio
securities to repurchase or redeem shares but, at the same time, increase
exposure to capital risk. In addition, borrowed funds are subject to interest
costs that may offset or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Michigan 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 Michigan
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 Michigan
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 Michigan 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 Michigan 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 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
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<PAGE>
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 Michigan Municipal Bond or Municipal
Bond issuer's right to call all or a portion of such Michigan 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 Michigan Municipal Bonds or Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Michigan Municipal Bond or Municipal Bond will expire without
value. The economic effect of holding both the Call Right and the related
Michigan Municipal Bond or Municipal Bond is identical to holding a Michigan
Municipal Bond or Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at a
mutually agreed-upon time and price, thereby determining the yield during the
term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer time
delays and incur costs or possible losses in connection with the disposition of
the underlying securities.
In general, for Federal and Michigan income tax purposes, repurchase
agreements are treated as collateralized loans secured by the securities
"sold." Therefore, amounts earned under such agreements will not be considered
tax-exempt interest.
Options and Futures Transactions
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common stock, the net asset value of the common stock will fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective. In
addition, because of the anticipated leveraged nature of the common stock,
hedging transactions will result in a larger impact on the net asset value of
the common stock than would be the case if the common stock were not leveraged.
Furthermore, the Fund 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 addition, in order to
obtain ratings of the preferred stock from one or more nationally recognized
statistical ratings organizations ("NRSROs"), the Fund may be required to limit
its use of hedging techniques in accordance with the specified guidelines of
such organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the 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 Directors of the Fund without the approval
of the Fund's shareholders.
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<PAGE>
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Michigan 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.
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 Michigan Municipal Bonds and Municipal
Bonds against declines in value and to hedge against increases in the cost of
securities it intends to purchase. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract or, in the
case of index-based futures contracts, to make and accept a cash settlement, at
a specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts. A
purchase of financial futures contracts may provide a hedge against an increase
in the cost of securities intended to be purchased because such appreciation
may be offset, in whole or in part, by an increase in the value of the position
in the futures contracts.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately 5%
of the contract amount must be deposited with the broker. This amount is known
as initial margin. Subsequent payments to and from the broker, called variation
margin, are made on a daily basis as the price of the financial futures
contract fluctuates making the long and short positions in the financial
futures contract more or less valuable.
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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 Michigan Municipal Bonds
and Municipal Bonds that the Fund holds or anticipates purchasing against
adverse changes in interest rates. The Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and sell
put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available, if
the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the
Michigan Municipal Bonds and Municipal Bonds in which the Fund invests to make
such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated
by the buyer and seller. See "Restrictions on OTC Options" below for
information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million. Certain OTC options and assets used to cover OTC options written by
the Fund may be considered to be illiquid. The illiquidity of such options or
assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the security
that is the subject of the hedge. If the price of the financial futures
contract moves more or less than the price of the security that is the subject
of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and Michigan
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments that have a disparate impact on
the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, the Fund may purchase and
sell financial futures contracts and options thereon (i) for bona fide hedging
purposes, without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) for non-hedging purposes if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures
19
<PAGE>
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 the risks
associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to Michigan
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures transaction. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with which the Fund has an open position in an option or
financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges that limit the amount of fluctuation in a financial futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
moved beyond the daily limit on a number of consecutive trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.
20
<PAGE>
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
Effects of Leverage
Within approximately three months after the completion of this offering, the
Fund intends to offer shares of preferred stock representing approximately 40%
of the Fund's capital immediately after the issuance of such preferred stock.
There can be no assurance, however, that preferred stock representing such
percentage of the Fund's capital will actually be issued. Issuing the
preferred stock will result in the leveraging of the common stock. Although
the Fund's Board of Directors has not yet determined the terms of the
preferred stock offering, the Fund anticipates that the preferred stock will
pay dividends that will be adjusted over either relatively short-term periods
(generally seven to 28 days) or medium-term periods (up to five years). The
dividend rate will be based upon prevailing interest rates for debt
obligations of comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in accordance with the
Fund's investment objective. The expenses of the preferred stock, which will
be borne by the Fund, will reduce the net asset value of the common stock.
Additionally, under certain circumstances, when the Fund is required to
allocate taxable income to holders of preferred stock, the Fund anticipates
that the terms of the preferred stock will require the Fund to make an
additional distribution to such holders in an amount approximately equal to
the tax liability resulting from such allocation (an "Additional
Distribution"). Because under normal market conditions, obligations with
longer maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread inherent in the
difference between the short-term and medium-term rates (and any Additional
Distribution) paid by the Fund as dividends on the preferred stock and the
longer-term rates received by the Fund may provide holders of common stock
with a potentially higher yield.
The use of leverage, however, involves certain risks to the holders of
common stock. For example, issuance of the preferred stock may result in
higher volatility of the net asset value of the common stock and potentially
more volatility in the market value of the common stock. In addition, changes
in the short-term and medium-term dividend rates on, and the amount of taxable
income allocable to, the preferred stock will affect the yield to holders of
common stock. Leverage will allow holders of common stock to realize a higher
current rate of return than if the Fund were not leveraged as long as the
Fund, while accounting for its costs and operating expenses, is able to
realize a higher net return on its investment portfolio than the then current
dividend rate (and any Additional Distribution) of the preferred stock.
Similarly, since a pro rata portion of the Fund's net realized capital gains
are generally payable to holders of common stock, the effect of leverage will
be to increase the amount of such gains distributed to holders of common
stock. However, short-term, medium-term and long-term interest rates change
from time to time as do their relationships to each other (i.e., the slope of
the yield curve) depending upon such factors as supply and demand forces,
monetary and tax policies and investor expectations. Changes in any or all of
such factors could cause the relationship between short-term, medium-term and
long-term rates to change (i.e., to flatten or to invert the slope of the
yield curve) so that short-term and medium-term rates may substantially
increase relative to the long-term obligations in which the Fund may be
invested. To the extent that the current dividend rate (and any Additional
Distribution) on the preferred stock approaches the net return on the Fund's
investment portfolio, the benefit of leverage to holders of common stock will
be decreased. If the current dividend rate (and any Additional Distribution)
on the preferred stock were to exceed the net return on the Fund's portfolio,
holders of common stock would receive a lower rate of return than if the Fund
were not leveraged. Similarly, since both the cost of issuing the preferred
stock and any decline in the value of the Fund's investments (including
investments purchased with the proceeds from any preferred stock offering)
will be borne entirely by holders of common stock, the effect of leverage in a
declining market would result in a greater decrease in net asset value to
holders of common stock
21
<PAGE>
than if the Fund were not leveraged. If the Fund is liquidated, holders of
preferred stock will be entitled to receive liquidating distributions before
any distribution is made to holders of common stock.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the common stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Federal tax laws. See "Taxes." However, the Fund
intends to take all measures necessary to make common stock dividend payments.
If the Fund's current investment income is ever insufficient to meet dividend
payments on either the common stock or the preferred stock, the Fund may have
to liquidate certain of its investments. In addition, the Fund will have the
authority to redeem the preferred stock for any reason and may redeem all or
part of the preferred stock under the following circumstances:
. if the Fund anticipates that the leveraged capital structure will result
in a lower rate of return for any significant amount of time to holders of
common stock than that obtainable if the common stock were not leveraged,
. if the asset coverage for the preferred stock declines below 200% either
as a result of a decline in the value of the Fund's portfolio investments
or as a result of the repurchase of common stock in tender offers, or
. in order to maintain the asset coverage guidelines established by the
nationally recognized statistical rating organizations ("NRSROs") that
have rated the preferred stock.
Redemption of the preferred stock or insufficient investment income to make
dividend payments, may reduce the net asset value of the common stock and
require the Fund to liquidate a portion of its investments at a time when it
may be disadvantageous, in the absence of such extraordinary circumstances, to
do so.
As discussed under "Investment Advisory and Management Arrangements," during
periods when the Fund has preferred stock outstanding, the fees paid the
Investment Adviser for investment advisory and management services will be
higher than if the Fund did not issue preferred stock because the fees paid
will be calculated on the basis of the Fund's average weekly net assets,
including proceeds from the sale of preferred stock.
Assuming the use of leverage by issuing preferred stock (paying dividends at
a rate that generally will be adjusted every 28 days) in an amount representing
approximately 40% of the Fund's capital at an annual dividend rate of 3.375%
payable on such preferred stock based on market rates as of the date of this
prospectus, the annual return that the Fund's portfolio must experience (net of
expenses) in order to cover such dividend payments would be 1.35%.
The following table is designed to illustrate the effect on the return to a
holder of common stock of the leverage obtained by the issuance of preferred
stock representing approximately 40% of the Fund's capital, assuming
hypothetical annual returns on the Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and decreases the return when portfolio
return is negative. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses).................................. (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return................... (19)% (11)% (2)% 6% 14%
</TABLE>
Leveraging the common stock cannot be fully achieved until preferred stock is
issued and the proceeds of such offering have been invested in long-term
Michigan Municipal Bonds and Municipal Bonds.
22
<PAGE>
Portfolio Management and Other Considerations
If short-term or medium-term rates increase or other changes in market
conditions occur to the point where the Fund's leverage could adversely affect
holders of common stock as noted above (or in anticipation of such changes),
the Fund may attempt to shorten the average maturity of its investment
portfolio in order to offset the negative impact of leverage. The Fund also may
attempt to reduce the degree to which it is leveraged by redeeming preferred
stock pursuant to the Fund's Articles Supplementary, which establish the rights
and preferences of the preferred stock, or otherwise by purchasing shares of
preferred stock. Purchases and redemptions of preferred stock, whether on the
open market or in negotiated transactions, are subject to limitations under the
1940 Act. In determining whether or not it is in the best interest of the Fund
and its stockholders to redeem or repurchase outstanding preferred stock, the
Board of Directors will take into account a variety of factors including the
following:
. market conditions,
. the ratio of preferred stock to common stock, and
. the expenses associated with such redemption or repurchase.
If market conditions subsequently change, the Fund may sell previously unissued
shares of preferred stock or shares of preferred stock that the Fund had issued
but later repurchased or redeemed.
The Fund intends to apply for ratings of the preferred stock from one or more
NRSROs. In order to obtain these ratings, the Fund may be required to maintain
portfolio holdings that meet the specified guidelines of such organizations.
These guidelines may impose asset coverage requirements that are more stringent
than those imposed by the 1940 Act. The Fund does not anticipate that these
guidelines will impede the Investment Adviser from managing the Fund's
portfolio in accordance with the Fund's investment objective and policies.
Ratings on preferred stock issued by the Fund should not be confused with
ratings on the obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding
preferred stock (expected to equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid dividends
thereon and any accumulated and unpaid Additional Distribution). In addition,
the Fund is not permitted to declare any cash dividend or other distribution on
its common stock unless, at the time of such declaration, the net asset value
of the Fund's portfolio (determined after deducting the amount of such dividend
or distribution) is at least 200% of the liquidation value of the outstanding
preferred stock. Under the Fund's proposed capital structure, assuming the sale
of shares of preferred stock representing approximately 40% of the Fund's
capital, the net asset value of the Fund's portfolio is expected to be
approximately 250% of the liquidation value of the Fund's preferred stock. To
the extent possible, the Fund intends to purchase or redeem shares of preferred
stock from time to time to maintain coverage of preferred stock of at least
200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred stock, may not be changed without the approval of
the holders of a majority of the Fund's outstanding shares of common stock
(which for this purpose and under the 1940 Act means the lesser of (i) 67% of
the shares of common stock represented at a meeting at which more than 50% of
the outstanding shares of common stock are represented or (ii) more than 50% of
the outstanding shares). Subsequent to the issuance of the preferred stock, the
following investment restrictions may not be changed without the approval of a
majority of the
23
<PAGE>
outstanding shares of common stock and of the outstanding shares of preferred
stock, voting together as a class, and the approval of a majority of the
outstanding shares of preferred stock, voting separately as a class. The Fund
may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase
Michigan Municipal Bonds, Municipal Bonds and other debt securities and
enter into repurchase agreements in accordance with its investment
objective, policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed by
the Board of Directors without shareholder approval, provide that the Fund may
not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of 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 Michigan 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 Michigan 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.
24
<PAGE>
The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("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.
DIRECTORS AND OFFICERS
Information about the Directors, 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 Director, executive officer and the portfolio managers is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (66)--President and Director(1)(2)--Chairman of the Manager and
Merrill Lynch Asset Management, L.P. ("MLAM") (which terms as used herein
include their corporate predecessors) since 1997; President of the Manager 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 Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.
James H. Bodurtha (54)--Director(2)(3)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (59)--Director(2)(3)--113-115 University Place, New York,
New York 10003. John M. Olin Professor of Humanities, New York University since
1993 and Professor thereof since 1980; President, Hudson Institute since 1997
and Trustee thereof since 1980; Dean, Gallatin Division of New York University
from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corporation from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP
since 1996.
Robert R. Martin (71)--Director(2)(3)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof in
1979; Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc. in 1994; Trustee, Northland College since 1992.
Joseph L. May (69)--Director(2)(3)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
25
<PAGE>
Andre F. Perold (46)--Director(2)(3)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
Terry K. Glenn (58)--Executive Vice President(1)(2)--Executive Vice President
of the Manager 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 Manager and MLAM since 1984; Senior Vice President of Princeton Services
since 1984.
Donald C. Burke (38)--Vice President and Treasurer(1)(2)--First Vice
President of MLAM since 1997; Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM since 1990.
Kenneth A. Jacob (47)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Manager since 1993.
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.
Fred K. Stuebe (48)--Vice President and Portfolio Manager of the Fund(1)(2)--
Vice President of MLAM since 1989.
Alice A. Pellegrino (38)--Secretary(1)(2)--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 Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors, and
the remaining Directors will be elected by all holders of capital stock, voting
as a single class. See "Description of Capital Stock."
Compensation of Directors
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 Directors who are affiliated persons of ML & Co. or its
subsidiaries.
The Fund pays each Director not affiliated with the Investment Adviser (each
a "non-affiliated Director") a fee of $2,500 plus $250 per meeting attended,
and pays all Director's out-of-pocket expenses relating to attendance at
meetings. The Fund also pays members of the Board's audit and nominating
committee (the "Committee"), which consists of all the non-affiliated
Directors, an annual fee of $500 per year plus $125 per Committee meeting
attended.
26
<PAGE>
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and, for the calendar year ended December 31, 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
Directors.
<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 Director from Fund Fund Expense Directors
- ---------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
James H. Bodurtha (/1/)..... $4,500 None $163,500
Herbert I. London (/1/)..... $4,500 None $163,500
Robert R. Martin (/1/)...... $4,500 None $163,500
Joseph L. May (/1/)......... $4,500 None $163,500
Andre F. Perold (/1/)....... $4,500 None $163,500
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Bodurtha (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43
portfolios); Mr. Martin (25 registered investment companies consisting of
portfolios); Mr. May (25 registered investment companies consisting of 43
portfolios); and Mr. Perold (25 registered investment companies consisting
of 43 portfolios).
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 registered investment companies and offers
investment advisory services to individuals and institutional accounts. As of
December 1998, the 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 Directors of the Fund, the Investment Adviser is responsible
for the actual management of the Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Investment Adviser, subject to review by the Board of Directors.
The 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. Fred K. Stuebe and Robert
A. DiMella are the portfolio managers of the Fund and are primarily responsible
for the Fund's day-to-day management.
27
<PAGE>
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the issuance of shares
of preferred stock, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the shares of preferred stock). For purposes of this
calculation, average weekly net assets are determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with investment and
economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing
fees, if any, stock certificates and shareholder reports, charges of the
custodian and the transfer and dividend disbursing agent and registrar, fees
and expenses with respect to the issuance of preferred stock, Securities and
Exchange Commission fees, fees and expenses of non-interested Directors,
accounting and pricing costs, insurance, interest, brokerage costs, litigation
and other extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940 Act)
of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an
advisory client when other clients are selling the same security. If purchases
or sales of securities by the Investment Adviser for the Fund or other funds
for which it acts as investment adviser or for 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 Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
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The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of the
Fund within periods of trading by the Fund in the same (or equivalent) security
(15 or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the execution
of transactions in portfolio securities. Subject to 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 services performed by the Investment Adviser and the expenses of the
Investment Adviser will not 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 Merrill
Lynch in high quality, short-term, tax-exempt securities. See "Investment
Restrictions." However, affiliated persons of the Fund, including Merrill
Lynch, serve as its brokers in certain over-the-counter transactions conducted
on an agency basis.
The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
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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.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared and paid monthly to holders of
common stock. It is expected that the Fund will commence paying dividends to
holders of common stock within approximately 90 days of the date of this
prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of common stock normally will consist of substantially
all net investment income remaining after the payment of dividends (and any
Additional Distribution) on the preferred stock. All net realized capital
gains, if any, will be distributed pro rata at least annually to holders of
common stock and any preferred stock. While any shares of preferred stock are
outstanding, the Fund may not declare any cash dividend or other distribution
on its common stock, unless at the time of such declaration, (i) all
accumulated preferred stock dividends, including any Additional Distribution,
have been paid, and (ii) the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or other distribution)
is at least 200% of the liquidation value of the outstanding preferred stock
(expected to equal the original purchase price of the outstanding shares of
preferred stock plus any accumulated and unpaid dividends thereon and any
accumulated but unpaid Additional Distribution). If the Fund's ability to make
distributions on its common stock is limited, such limitation could under
certain circumstances impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company, which would have
adverse tax consequences for holders of common stock. See "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of common stock may be
automatically reinvested in shares of common stock of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
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.
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The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by the Fund that are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-
interest dividends in a written notice mailed to the Fund's shareholders within
60 days after the close of its taxable year. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income exempt
from tax under Code Section 103(a) and are properly designated as exempt-
interest dividends, they will be excludable from a shareholder's gross income
for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Each shareholder
is advised to consult a tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if such shareholder
would be treated as a "substantial user" or "related person" under Code Section
147(a) with respect to property financed with the proceeds of an issue of
"industrial development bonds" or "private activity bonds," if any, held by the
Fund.
The portion of exempt-interest dividends paid from interest received by the
Fund from Michigan Municipal Bonds also will be exempt from the Michigan
personal income tax and the single business tax. To the extent the
distributions from the Fund are attributable to sources other than interest on
Michigan Municipal Bonds, such distributions, including, but not limited to,
long-term or short-term capital gains, but excluding any such capital gains
from the obligations of the United States or of its possessions, will not be
exempt from Michigan income tax or the single business tax. The intangibles tax
was totally repealed effective January 1, 1998. Shareholders subject to income
taxation by states other than Michigan will realize a lower after-tax rate of
return than Michigan shareholders since the dividends distributed by the Fund
generally will not be exempt, to any significant degree, from income taxation
by such other states. The Fund will inform shareholders annually as to the
portion of the Fund's distributions which constitutes exempt-interest dividends
and the portion which is exempt from Michigan income taxes. Interest on
indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal or Michigan income tax purposes to the extent
attributable to exempt-interest dividends.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions will
be considered taxable ordinary income for Federal and Michigan 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 and, for Michigan
income tax purposes, are treated as capital gains which are taxed at ordinary
income tax rates. Certain categories of capital gains are taxable at different
rates for
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Federal income tax purposes. 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-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 gains. This rule may
increase the amount of ordinary income dividends received by shareholders.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Any loss upon the sale or exchange of Fund
shares held for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. In addition, any such
loss that is not disallowed under the rule stated above will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. If the Fund pays a dividend in January that was declared in
the previous October, November or December to shareholders of record on a
specified date in one of such months, then such dividend will be treated for
tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
The Internal Revenue Service ("Service") has taken the position in a revenue
ruling that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than such
class's proportionate share of particular types of income, including exempt-
interest income and net long-term capital gains. A class's proportionate share
of a particular type of income is determined according to the percentage of
total dividends paid by the RIC during such year that was paid to such class.
Consequently, when common stock and one or more series of preferred stock are
outstanding, the Fund intends to designate distributions made to the classes as
consisting of particular types of income in accordance with each class's
proportionate share of such income. Thus, the Fund will designate dividends
paid as exempt-interest dividends in a manner that allocates such dividends
among the holders of common stock and series of preferred stock in proportion
to the total dividends paid to each class during the taxable year, or otherwise
as required by applicable law. Capital gain dividends will similarly be
allocated among the classes in proportion to the total dividends paid to each
class during the taxable year, or otherwise as required by applicable law. When
capital gain or other taxable income is allocated to holders of preferred stock
pursuant to the allocation rules described above, the terms of the preferred
stock may require the Fund to make an additional distribution to or otherwise
compensate such holders for the tax liability resulting from such allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt, are
used for purposes other than those generally performed by governmental units
and that benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference" that could subject certain investors in such
bonds, including shareholders of the Fund, to an increased alternative minimum
tax. The Fund intends to purchase such "private activity bonds" and will report
to shareholders within 60 days after calendar year-end the portion of its
dividends declared during the year that constitutes an item of tax preference
for alternative minimum tax purposes. The Code further provides that
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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 shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of common stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. If the
Fund were to fail to qualify as a RIC, some or all of the distributions paid by
the Fund would be fully taxable for Federal and Michigan income tax purposes.
Upon any failure to meet the asset coverage requirements of the 1940 Act, the
Fund, in its sole discretion, may redeem shares of preferred stock in order to
maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a RIC.
There can be no assurance, however, that any such action would achieve such
objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Fund currently contemplates issuing may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code and, therefore, not eligible for the dividends
paid deduction. The Fund intends to issue preferred stock that counsel advises
will not result in the payment of a preferential dividend and may seek a
private letter ruling from the Service to that effect. If the Fund ultimately
relies solely on a legal opinion when it issues such preferred stock, there is
no assurance that the Service would agree that dividends on the preferred stock
are not preferential. If the Service successfully disallowed the dividends paid
deduction for dividends on the preferred stock, the Fund could be disqualified
as a RIC. In this case, dividends on the common stock would not be exempt from
Federal income taxes. Additionally, the Fund would be subject to the
alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the
Fund's shares) could be viewed as a taxable distribution. If the discount is
viewed as a taxable distribution, it is also possible that the taxable
character of this discount would be allocable to all of the shareholders,
including shareholders who do not participate in the dividend reinvestment
plan. Thus, shareholders who do not participate in the dividend reinvestment
plan, as well as dividend reinvestment plan participants, might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
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Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding are those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
Tax Treatment of Options and Futures Transactions
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to the
Fund or an exception applies, such options and financial futures contracts that
are "Section 1256 contracts" will be "marked to market" for Federal income tax
purposes at the end of each taxable year, i.e., each such option or financial
futures contract will be treated as sold for its fair market value on the last
day of the taxable year, and any gain or loss attributable to Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest
rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in financial futures
contracts or the related options.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and Michigan tax laws presently
in effect. For the complete provisions, reference should be made to the
pertinent Code sections, the Treasury Regulations promulgated thereunder and
the applicable Michigan personal income and corporate tax laws. The Code and
the Treasury Regulations, as well as the Michigan tax laws, are subject to
change by legislative, judicial or administrative action either prospectively
or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
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AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of common stock otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by The Bank of New York,
as agent for shareholders in administering the Plan (the "Plan Agent"), in
additional shares of common stock of the Fund. Holders of common stock who
elect not to participate in the Plan will receive all distributions in cash
paid by check mailed directly to the shareholder of record (or, if the shares
are held in street or other nominee name, then to such nominee) by The Bank of
New York, as dividend paying agent. Such participants may elect not to
participate in the Plan and to receive all distributions of dividends and
capital gains in cash by sending written instructions to The Bank of New York,
as dividend paying agent, at the address set forth below. Participation in the
Plan is completely voluntary and may be terminated or resumed at any time
without penalty by written notice if received by the Plan Agent not less than
ten days prior to any dividend record date; otherwise, such termination or
resumption will be effective with respect to any subsequently declared dividend
or distribution.
Whenever the Fund declares an income dividend or a capital gains distribution
(collectively, referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash, and participants in the Plan
will receive the equivalent in shares of common stock. The shares will be
acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional
unissued but authorized shares of common stock from the Fund ("newly issued
shares") or (ii) by purchase of outstanding shares of common stock on the open
market ("open-market purchases") on the New York Stock Exchange (the "NYSE") or
elsewhere. If on the payment date for the dividend, the net asset value per
share of the common stock is equal to or less than the market price per share
of the common stock plus estimated brokerage commissions (such condition being
referred to herein as "market premium"), the Plan Agent will invest the
dividend amount in newly issued shares on behalf of the participant. The number
of newly issued shares of common stock to be credited to the participant's
account will be determined by dividing the dollar amount of the dividend by the
net asset value per share on the date the shares are issued, provided that the
maximum discount from the then current market price per share on the date of
issuance may not exceed 5%. If on the dividend payment date the net asset value
per share is greater than the market value (such condition being referred to
herein as "market discount"), the Plan Agent will invest the dividend amount in
shares acquired on behalf of the participant in open-market purchases. Prior to
the time the shares of common stock commence trading on the NYSE, participants
in the Plan will receive any dividends in newly issued shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that the
Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of common stock exceeds the
net asset value per share, the average per share purchase prices paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in
the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing difficulty
with respect to open-market purchases, the Plan provides that if the Plan Agent
is unable to invest the full dividend amount in open-market purchases during
the purchase period or if the market discount shifts to a
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market premium during the purchase period, the Plan Agent will cease making
open-market purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last purchase
date.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by
the record shareholders as representing the total amount registered in the
record shareholder's name and held for the account of beneficial owners who are
to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable either
in shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 101 Barclay Street, New York, New York 10268.
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of common stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares (the "Original Shares") in
Class D initial sales charge shares of certain Merrill Lynch-sponsored open-end
mutual funds ("Eligible Class D Shares") at their net asset value, without the
imposition of the initial sales charge, if the
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conditions set forth below are satisfied. First, the sale of the Original
Shares must be made through Merrill Lynch, and the net proceeds therefrom must
be immediately reinvested in Eligible Class D Shares. Second, the Original
Shares must have been either acquired in this offering or be shares
representing reinvested dividends from shares of common stock acquired in this
offering. Third, the Original Shares must have been continuously maintained in
a Merrill Lynch securities account. Fourth, there must be a minimum purchase of
$250 to be eligible for the investment option. Class D shares of the mutual
funds are subject to an account maintenance fee at an annual rate of up to
0.25% of the average daily net asset value of such mutual fund. The Eligible
Class D Shares may be redeemed at any time at the next determined net asset
value, subject in certain cases to a redemption fee. Prior to the time the
shares of common stock commence trading on the NYSE, the distributor for the
mutual funds will advise Merrill Lynch Financial Consultants as to those mutual
funds that offer the investment option described above.
NET ASSET VALUE
Net asset value per share of common stock is determined as of 15 minutes
after the close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on the last business day in each week. For purposes of
determining the net asset value of a share of common stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of common stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The Michigan 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 Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. Michigan 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 Directors. The Board of Directors has determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Positions in futures contracts are
valued at closing prices for such contracts established by the exchange on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Directors.
The Fund determines and makes available for publication the net asset value
of its common stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as common
stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption.
37
<PAGE>
Within approximately three months after completion of the offering of the
common stock described herein, the Fund intends to reclassify an amount of
unissued common stock as preferred stock and at that time to offer shares of
preferred stock representing approximately 40% of the Fund's capital
immediately after the issuance of such preferred stock. There is no assurance
that such preferred stock will be issued.
Common Stock
Shares of common stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred stock are outstanding, holders
of common stock will not be entitled to receive any net income of or other
distributions from the Fund unless all accumulated dividends on preferred stock
have been paid and unless asset coverage (as defined in the 1940 Act) with
respect to preferred stock would be at least 200% after giving effect to such
distributions. See "--Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 shares of common stock of the Fund for $100,005. As of the
date of this prospectus, the Investment Adviser owned 100% of the outstanding
shares of common stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
Preferred Stock
It is anticipated that the Fund's shares of preferred stock will be issued in
one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of common
stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of common stock have no preemptive right to purchase any
shares of preferred stock that might be issued. It is anticipated that the net
asset value per share of the preferred stock will equal its original purchase
price per share plus accumulated dividends per share.
The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of common stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred stock
is likely to achieve the benefits to the holders of common stock described in
the prospectus. Although the terms of the preferred stock, including its
dividend rate, voting rights, liquidation preference and redemption provisions
will be determined by the Board of Directors (subject to applicable law and the
Fund's Articles of Incorporation), the initial series of preferred stock will
be structured to carry either a relatively short-term dividend rate, in which
case periodic redetermination of the dividend rate will be made at relatively
short intervals (generally seven or 28 days), or a medium-term dividend rate,
in which case periodic
38
<PAGE>
redetermination of the dividend rate will be made at intervals of up to five
years. In either case, such redetermination of the dividend rate will be made
through an auction or remarketing procedure. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to holders
of the preferred stock, it is anticipated that the terms of the preferred stock
will require the Fund to make an Additional Distribution (as defined in "Risks
and Special Considerations of Leverage--Effects of Leverage") to such holders.
The Board also has indicated that it is likely that the liquidation preference,
voting rights and redemption provisions of the preferred stock will be as
stated below. The Fund's Articles of Incorporation, as amended, together with
any Articles Supplementary, is referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of common stock. After payment of the
full amount of the liquidating distribution to which they are entitled, the
preferred stockholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any other corporation or corporations or a sale of all or substantially
all of the assets of the Fund will not be deemed to be a liquidation,
dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this prospectus and except as
otherwise required by applicable law, holders of shares of preferred stock will
have equal voting rights with holders of shares of common stock (one vote per
share) and will vote together with holders of common stock as a single class.
In connection with the election of the Fund's directors, holders of shares of
preferred stock, voting as a separate class, will be entitled to elect two of
the Fund's directors, and the remaining directors will be elected by all
holders of capital stock, voting as a single class. So long as any preferred
stock is outstanding, the Fund will have not less than five directors. If at
any time dividends on shares of the Fund's preferred stock shall be unpaid in
an amount equal to two full years' dividends thereon, the holders of all
outstanding shares of preferred stock, voting as a separate class, will be
entitled to elect a majority of the Fund's directors until all dividends in
default have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so as
to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.
Redemption Provisions. It is anticipated that shares of preferred stock will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal
to their liquidation preference plus accumulated but unpaid dividends to the
date of redemption upon the occurrence of certain specified events, such as the
failure of the Fund to maintain asset coverage requirements for the preferred
stock specified by the rating agencies that issue ratings on the preferred
stock.
39
<PAGE>
Certain Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. A director may be removed from
office with or without cause, but only by vote of the holders of at least 66
2/3% of the votes entitled to be voted on the matter. A director elected by all
the holders of capital stock may be removed only by action of such holders, and
a director elected by the holders of preferred stock may be removed only by
action of such holders.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 66 2/3% of the Fund's shares of capital stock then entitled
to be voted, voting as a single class, to approve, adopt or authorize the
following:
.merger or consolidation or statutory share exchange of the Fund with other
corporations,
. 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
. liquidation or dissolution of the Fund, unless such action has been
approved, adopted or authorized by the affirmative vote of two-thirds of
the total number of Directors fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's shares of
capital stock is required. Following the proposed issuance of the
preferred stock, it is anticipated that the approval, adoption or
authorization of the foregoing would also require the favorable vote of a
majority of the Fund's shares of preferred stock then entitled to be
voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by two-thirds of the total number of
Directors fixed in accordance with the by-laws), and, assuming preferred stock
is issued, the affirmative vote of a majority of outstanding shares of
preferred stock of the Fund, voting as a separate class. Such a vote also would
satisfy a separate requirement in the 1940 Act that the change be approved by
the shareholders. Shareholders of an open-end investment company may require
the company to redeem their shares of common stock at any time (except in
certain circumstances as authorized by or under the 1940 Act) at their net
asset value, less such redemption charge, if any, as might be in effect at the
time of a redemption. All redemptions will be made in cash. If the Fund is
converted to an open-end investment company, it could be required to liquidate
portfolio securities to meet requests for redemption, and the common stock
would no longer be listed on a stock exchange.
Conversion to an open-end investment company would also require redemption of
all outstanding shares of preferred stock and would require changes in certain
of the Fund's investment policies and restrictions, such as those relating to
the issuance of senior securities, the borrowing of money and the purchase of
illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of shareholders generally.
Reference should be made to the Charter on file with the Securities and
Exchange Commission for the full text of these provisions.
40
<PAGE>
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with The
Bank of New York, 90 Washington Street, New York, NY 10286.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 4,025,000 shares of common stock
from the Fund. The Underwriter is committed to purchase all of such shares if
any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of common stock to the public at the public offering price set forth on
the cover page of this prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of common stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of common stock in the offering in the amount of $.30 per share. Such
payment is equal to 2.00% of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $.30 per share on
sales by such dealers. After the initial public offering, the public offering
price and other selling terms may be changed. Investors must pay for shares of
common stock purchased in the offering on or before January 29, 1999.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 603,750 additional shares of common
stock to cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
common stock.
If the Underwriter creates a short position in the shares of common stock in
connection with the offering, i.e., if it sells more shares of common stock
than are set forth on the cover page of this prospectus, the Underwriter may
reduce that short position by purchasing shares of common stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of common stock
in the open market to reduce the Underwriter's short position or to stabilize
the price of the shares of common stock, it may reclaim the amount of the
selling concession from the selling group members who sold those shares of
common stock as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of common stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
41
<PAGE>
Prior to this offering, there has been no public market for the shares of the
common stock. The Fund's shares of common stock have been approved for listing
on the NYSE. However, during an initial period which is not expected to exceed
two weeks from the date of this prospectus, the Fund's common stock will not be
listed on any securities exchange. Additionally, before it begins trading, the
Underwriter does not intend to make a market in the Fund's common stock,
although a limited market may develop. Thus, it is anticipated that investors
may not be able to buy and sell shares of the Fund during such period. In order
to meet the requirements for listing, the Underwriter has undertaken to sell
lots of 100 or more shares to a minimum of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The Fund
has obtained an exemptive order permitting it to engage in certain principal
transactions with the Underwriter involving high quality, short-term, tax-
exempt securities subject to certain conditions. See "Investment Restrictions"
and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares of
common stock of the Fund is The Bank of New York, 101 Barclay Street, New York,
NY 10286.
LEGAL OPINIONS
Certain legal matters in connection with the common stock offered hereby will
be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New York,
New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of January
13, 1999 included in this prospectus has been so included in reliance on the
report of Deloitte & Touche LLP, independent auditors, and on their authority
as experts in auditing and accounting. The selection of independent auditors is
subject to ratification by shareholders of the Fund.
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 Securities and
Exchange Commission (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
42
<PAGE>
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 is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Commission
upon the payment of certain fees prescribed by the Commission.
Year 2000 Issues
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). 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.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
MuniHoldings Michigan Insured Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Michigan Insured Fund, Inc. as of January 13, 1999. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniHoldings
Michigan Insured Fund, Inc. as of January 13, 1999 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
January 21, 1999
44
<PAGE>
MuniHoldings Michigan Insured Fund, Inc.
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
--------
</TABLE>
<TABLE>
<S> <C>
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 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 share of
Common Stock (Note 1).............................................. $100,005
========
</TABLE>
Notes to Statement of Assets, Liabilities and Capital
Note 1. Organization
The Fund was incorporated under the laws of the State of Maryland on November
23, 1998 as a closed-end, non-diversified management investment company and has
had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 6,667 shares of Common Stock for
$100,005 on January 13, 1999. The General Partner of the Investment Adviser is
an indirectly wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The Investment Adviser, on behalf of the Fund, will incur organization 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 the annual rate of 0.55 of 1% of the
Fund's average weekly net assets of the Fund, including any proceeds from the
issuance of Preferred Stock. 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 in connection with the initial public
offering of the Fund's Common Stock.
Note 3. Federal Income Taxes
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
45
<PAGE>
APPENDIX I
ECONOMIC AND OTHER CONDITIONS IN MICHIGAN
The following information is a brief summary of factors affecting the economy
of the State of Michigan (the "State") and does not purport to be a complete
description of such factors. Other factors will affect issuers. The summary is
based primarily upon one or more publicly available offering statements
relating to debt offerings of state issuers. The Fund has not independently
verified the information.
Economic activity in the State of Michigan has tended to be more cyclical
than in the nation as a whole. The State's efforts to diversify its economy
have proven successful, as reflected by the fact that the share of employment
in the State in the durable goods sector has fallen from 33.1% in 1960 to 16.3%
in 1997. While durable goods manufacturing still represents a sizable portion
of the State's economy, the service sector now represents 27.41% of the State's
economy. Any substantial national economic downturn is likely to have an
adverse effect on the economy of the State and on the revenues of the State and
some of its local governmental units. Although historically, the average
monthly unemployment rate in the State has been higher than the average figures
for the United States, for the last three years, the unemployment rate in the
State has been at or below the national average. During 1997, the average
monthly unemployment rate in the State was 4.2% compared to a national average
of 4.9%.
The State's economy could continue to be affected by changes in the auto
industry resulting from competitive pressures, overcapacity and labor disputes.
Such actions could adversely affect State revenues and the financial impact on
the local units of government in the areas in which plants are located could be
more severe.
The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year, the State
refunded approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of taxes
so long as expected revenues do not exceed the revenue limit and authorizes
exceeding the limit for emergencies. The State Constitution further provides
that the proportion of State spending paid to all local units to total spending
may not be reduced below the proportion in effect for the 1978-79 fiscal year.
The Constitution requires that if spending does not meet the required level in
a given year an additional appropriation for local units is required for the
following fiscal year. The State Constitution also requires the State to
finance any new or expanded activity of local units mandated by State law. Any
expenditures required by this provision would be counted as State spending for
local units for purposes of determining compliance with the provisions stated
above.
The State Constitution limits the purposes for which State general obligation
debt may be issued. Such debt is limited to short-term debt for State operating
purposes, short- and long-term debt for the purposes of making loans to school
districts and long-term debt for voter approved purposes. In addition to the
foregoing, the State authorizes special purpose agencies and authorities to
issue revenue bonds payable from designated revenues and fees. Revenue bonds
are not obligations of the State and in the event of shortfalls in self-
supporting revenues, the State has no legal obligation to appropriate money to
these debt service payments. The State's Constitution also directs or restricts
the use of certain revenues.
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<PAGE>
The State finances its operations through the State's General Fund and Special
Revenue Funds. The General Fund receives revenues of the State that are not
specifically required to be included in the Special Revenue Fund. General Fund
revenues are obtained approximately 56% from the payment of State taxes and 44%
from federal and non-tax revenue sources. The majority of the revenues from
State taxes are from the State's personal income tax, single business tax, use
tax, sales tax and various other taxes. Approximately two-thirds of total
General Fund expenditures are for State support of public education and for
social services programs. Other significant expenditures from the General Fund
provide funds for law enforcement, general State government, debt service and
capital outlay. The State Constitution requires that any prior year's surplus
or deficit in any fund must be included in the net succeeding year's budget for
that fund.
The State of Michigan reports its financial results in accordance with
generally accepted accounting principles. For each of the last six fiscal years
ending with the fiscal year ended September 30, 1997, the State ended the
fiscal year with its General Fund in balance after transfers from the General
Fund to the Budget Stabilization Fund. Those and certain other transfers into
and out of the Budget Stabilization Fund raised the balance in the Budget
Stabilization Fund to $1.15 billion as of September 30, 1997 of which $572.6
million was received for future education funding as described below. In all
but one of the last six fiscal years the State has borrowed between $500
million and $900 million for cash flow purposes. It borrowed $900 million in
each of the 1996, 1997 and 1998 fiscal years.
In November, 1997, the State Legislature adopted legislation to provide for
the funding of claims of local school districts, some of whom had alleged in a
lawsuit, Durant v. State of Michigan, that the State had, over a period of
years, paid less in school aid than required by the State's Constitution. Under
this legislation, the State paid to school districts which were plaintiffs in
the suit approximately $212 million from the Budget Stabilization Fund on April
15, 1998, and will be required to pay to other school districts from the Budget
Stabilization Fund (i) an additional $32 million per year in the fiscal years
1998-99 through 2007-08, and (ii) up to an additional $40 million per year in
the fiscal years 1998-99 through 2012-13.
Amendments to the Michigan Constitution which placed limitations on increases
in State taxes and local ad valorem taxes (including taxes used to meet debt
service commitments on obligations of taxing units) were approved by the voters
of the State of Michigan in November 1978 and became effective on December 23,
1978. To the extent that obligations in the Fund are tax supported and are for
local units and have not been voted by the taxing unit's electors, the ability
of the local units to levy debt service taxes might be affected.
State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units
unless the impact of the census is changed by State law. No assurance can be
given that any such State law will be enacted. In the 1991 fiscal year, the
State deferred certain scheduled payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at later
dates, similar future deferrals could have an adverse impact on the cash
position of some local units. Additionally, while total State revenue sharing
payments have increased in each of the last five years, the State has reduced
revenue sharing payments to municipalities below the level otherwise provided
under formulas in each of those years.
On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place an
annual cap on property assessment increases for all property taxes.
47
<PAGE>
Companion legislation also cut the State's income tax rate from 4.6% to 4.4%,
reduced some property taxes and shifted the balance of school funding sources
among property taxes and State revenues, some of which are being provided from
new or increased State taxes. The legislation also contains other provisions
that may reduce or alter the revenues of local units of government and tax
increment bonds could be particularly affected. While the ultimate impact of
the constitutional amendment and related legislation cannot yet be accurately
predicted, investors should be alert to the potential effect of such measures
upon the operations and revenues of Michigan local units of government.
In addition, in 1997, the State legislature adopted a package of State tax
cuts, including a phase-out of the intangibles tax, an increase in exemption
amounts for personal income tax, and reductions in single business tax.
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State or local programs or finances. These lawsuits
involve programs generally in the areas of corrections, highway maintenance,
social services, tax collection, commerce and budgetary reductions to school
districts and governmental units and court funding.
Currently, the State's general obligation bonds are rated Aal by Moody's, AA+
by Standard & Poor's and AA+ by Fitch. The State received upgrades in January
1998 from Standard & Poor's, in March 1998 from Moody's and in April 1998 from
Fitch.
48
<PAGE>
APPENDIX II
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
49
<PAGE>
Short-term Notes: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2 and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments
are of "favorable quality . . . but . . . lacking the undeniable strength of
the preceding grades".
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's, a Division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on circumstances.
50
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest rated issues only in small
degree. The Obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation. While
CC such debt will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition
or the taking of similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest-quality obligations to "D" for the lowest. These categories are
as follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
51
<PAGE>
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Fitch IBCA, Inc.'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.
52
<PAGE>
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
53
<PAGE>
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
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.
54
<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.
55
<PAGE>
APPENDIX III
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance policies
(the "Policies") that the Fund may obtain from several insurance companies with
respect to insured Michigan 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
Michigan 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 Michigan
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable to
meet its obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the insurance
company will not have any obligation to insure any issue held by the Fund that
is adversely affected by either of the above described events. In addition to
the payment of premiums, the Policies may require that the Fund notify the
insurance company as to all Michigan 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, Inc. ("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
56
<PAGE>
claims-paying ability rating of Aaa carry the smallest degree of credit risk
and, while the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair the company's
fundamentally strong position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
57
<PAGE>
APPENDIX IV
<TABLE>
<CAPTION>
A Tax-Free Yield of
-----------------------------------
Taxable Income* 1999
- ------------------------------------ 1999 Federal Michigan
Single Return Joint Return Tax Bracket Tax Bracket 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
- ----------------- ----------------- ------------ ----------- ----- ----- ----- ----- ----- -----
is equal to a taxable yield of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 25,750 $ 0-$ 43,050 15.00% 4.4% 6.14 6.76 7.37 7.99 8.60 9.21
$ 25,751-$ 62,450 $ 43,051-$104,050 28.00% 4.4% 7.27 7.99 8.72 9.45 10.17 10.90
$ 62,451-$130,250 $104,051-$158,550 31.00% 4.4% 7.58 8.33 9.09 9.85 10.61 11.36
$130,251-$283,150 $158,551-$283,150 36.00% 4.4% 8.17 8.99 9.80 10.62 11.44 12.25
Over $283,150 Over $283,150 39.60% 4.4% 8.67 9.53 10.40 11.27 12.13 13.00
</TABLE>
TAXABLE EQUIVALENT YIELDS FOR 1999
- --------
* An investor's marginal tax rate may exceed the rates shown in the above table
due to the reduction, or possible elimination, of the personal exemption
deduction for high-income taxpayers and an overall limit on itemized
deductions. For investors who pay alternative minimum tax, tax-free yields
may be equivalent to lower taxable yields than those shown above.
Shareholders subject to income taxation by states other than Michigan will
realize a lower after-tax return than Michigan shareholders. Because Michigan
imposes a flat 4.4% tax on all brackets of income, the tax brackets shown in
the table are the Federal tax brackets to which the 4.4% Michigan tax would
apply. The tax rates shown above do not apply to corporate taxpayers subject
to the Michigan corporate tax. The tax characteristics of the Fund are
described more fully elsewhere in this prospectus. Consult your tax adviser
for further details. This chart is for illustrative purposes only and cannot
be taken as an indication of anticipated Fund performance.
58
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including April 26, 1999 (the 90th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting underwriters and with respect to their unsold allotments or
subscriptions.
4,025,000 Shares
MuniHoldings Michigan Insured Fund, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
January 26, 1999
CODE 19050-0199
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) Financial Statements
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of January 13, 1999
(2) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
(a)(1) --Articles of Incorporation of the Fund(a)
(b) --By-Laws of the Fund(a)
(c) --Not applicable
(d)(1) --Portions of the Articles of Incorporation and By-Laws of the
Fund defining the rights of holders of shares of common stock of
the Fund(c)
(d)(2) --Form of specimen certificate for shares of common stock of the
Fund(b)
(e) --Form of Dividend Reinvestment Plan(b)
(f) --Not applicable
(g) --Form of Investment Advisory Agreement between the Fund and Fund
Asset Management, L.P.(b)
(h)(1) --Form of Purchase Agreement between the Fund and Merrill Lynch,
Pierce, Fenner & Smith Incorporated(b)
(h)(2) --Merrill Lynch Standard Dealer Agreement(b)
(i) --Not applicable
(j) --Form of Custodian Contract between the Fund and The Bank of New
York(b)
(k) --Form of Registrar, Transfer Agency and Service Agreement between
the Fund and The Bank of New York(b)
(l) --Opinion and Consent of Brown & Wood LLP.
(m) --Not applicable
(n)(2) --Consent of Deloitte & Touche LLP, independent auditors for the
Fund
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.
(q) --Not applicable
(r) --Not applicable
</TABLE>
- --------
(a) Filed on December 4, 1998 as an Exhibit to the Registrant's Registration
Statement on Form N-2, File No. 333-68389.
(b) Filed on December 15, 1998 as an exhibit to Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-2 (File No. 333-
68389).
(c) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit (a) to
this Registration Statement; and to Article II, Article III (sections 1, 2,
3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to this
Registration Statement.
Item 25. Marketing Arrangements.
See Exhibits (h)(1) and (2).
C-1
<PAGE>
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees.................................................. $ 19,302
New York Stock Exchange listing fee................................ 78,300
Printing (other than stock certificates)........................... 35,000
Engraving and printing stock certificates.......................... 20,000
Legal fees and expenses............................................ 55,000
Accounting fees and expenses....................................... 7,000
NASD fees.......................................................... 7,444
Miscellaneous...................................................... 2,954
--------
Total.............................................................. $225,000
========
</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 Stock--Common Stock" and
in Note 1 to the Statement of Assets, Liabilities and Capital is incorporated
herein by reference.
Item 28. Number of Holders of Securities.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
Item 29. Indemnification.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which is filed as Exhibit (g)(1) to this
Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
C-2
<PAGE>
Item 30. Business and Other Connections of the Investment Adviser.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of MLAM
acts as investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High
Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-
State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
World Income Fund, Inc., and The Municipal Fund Accumulation Program, Inc., and
for the following closed-end registered investment companies: Apex Municipal
Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniInsured Fund, Inc., MuniVest Florida Fund, MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest
New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona
Fund, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., and Worldwide
DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch 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
C-3
<PAGE>
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.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
for the past two years for his or her or its own account or in the capacity of
director, officer, employee, partner or trustee. In addition, Mr. Zeikel is
President, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President
of all or substantially all of the investment companies described in the 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 officers of one or more of such companies.
<TABLE>
<CAPTION>
Positions with Other Substantial Business, Profession,
Name Investment Adviser Vocation or Employment
---- ------------------ ---------------------------------------
<C> <C> <S>
ML & Co. ....... Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton General Partner General Partner of MLAM
Services.......
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. Senior Vice President Senior Vice President of MLAM; Senior Vice
Federici....... President of Princeton Services
Vincent R. Senior Vice President Senior Vice President of MLAM; Senior Vice
Giordano....... President of Princeton Services
Elizabeth A. Senior Vice President Senior Vice President of MLAM; Senior Vice
Griffin........ President of Princeton Services
Norman R. Senior Vice President Senior Vice President of MLAM; Senior Vice
Harvey......... President of Princeton Services
Michael J. Senior Vice President, Senior Vice President, General Counsel and
Hennewinkel.... General Counsel Secretary of MLAM; Senior Vice President of
and Secretary Princeton Services
Philip L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Kirstein....... 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 W. Senior Vice President Senior Vice President of MLAM; Senior Vice
Landsman-Yaros. President of Princeton Services; Vice President of
PFD
Stephen M. M. Senior Vice President Executive Vice President of Princeton
Miller......... Administrators, L.P.; Senior Vice President of
Princeton Services
Joseph T. Senior Vice President Senior Vice President of MLAM; Senior Vice
Monagle, Jr. .. President of Princeton Services
Brian A. Senior Vice President Senior Vice President of MLAM; Senior Vice
Murdock........ President of Princeton Services
Gerald M. Senior Vice President Senior Vice President and Treasurer of MLAM;
Richard........ and Treasurer Senior Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of PFD
Gregory D. Upah. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Welburn........ President of Princeton Services
</TABLE>
C-4
<PAGE>
Item 31. Location of Account and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
promulgated thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(a) Registrant undertakes to suspend the offering of the shares of common
stock covered hereby until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of common stock declines more than 10% from its net asset value
per share of common stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of common stock increases to an
amount greater than its net proceeds as stated in the prospectus contained
herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Pre-Effective
Amendment to its 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 26th day of January, 1999.
MuniHoldings Michigan Insured Fund,
Inc.
(Registrant)
By: /s/ Arthur Zeikel
-----------------------------------
(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 persons in the capacities and
on the dates indicated.
<TABLE>
Signatures Title Date
<S> <C> <C>
/s/ Arthur Zeikel President (Principal January 26,
- ------------------------------------- Executive Officer) and 1999
(Arthur Zeikel) Director
/s/ Donald C. Burke Treasurer (Principal January 26,
- ------------------------------------- Financial and Accounting 1999
(Donald C. Burke) Officer
/s/ James H. Bodurtha Director January 26,
- ------------------------------------- 1999
(James H. Bodurtha)
/s/ Herbert I. London Director January 26,
- ------------------------------------- 1999
(Herbert I. London)
/s/ Robert R. Martin Director January 26,
- ------------------------------------- 1999
(Robert R. Martin)
/s/ Joseph L. May Director January 26,
- ------------------------------------- 1999
(Joseph L. May)
/s/ Andre F. Perold Director January 26,
- ------------------------------------- 1999
(Andre F. Perold)
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
Exhibit Number
--------------
(1)Opinion and consent of Brown & Wood LLP
(n)(2)Consent of Deloitte & Touche LLP, independent auditors for the Fund
(p)Certificate of Fund Asset Management, L.P.
<PAGE>
Exhibit 99(L)
January 26, 1999
MuniHoldings Michigan Insured Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
This opinion is being furnished in connection with the registration by
MuniHoldings Michigan Insured Fund, Inc., a Maryland corporation (the "Fund"),
of shares of common stock, 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, in the amount set forth under "Amount
Being Registered" on the facing page of the Registration Statement.
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 Articles of Incorporation
of the Fund, as amended, 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 shares of common stock of the
Fund.
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
<PAGE>
EXHIBIT (n)(2)
INDEPENDENT AUDITORS' CONSENT
MuniHoldings Michigan Insured Fund, Inc.
We consent to the use in Pre-Effective Amendment No. 2 to Registration Statement
No. 333-68389 of our report dated January 21, 1999 and to the reference to us
under the caption "Experts" both of which appear in the Prospectus, which is a
part of such Registration statement.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
January 26, 1999
<PAGE>
Exhibit 99(P)
CERTIFICATE OF THE SOLE STOCKHOLDER OF
MUNIHOLDINGS MICHIGAN INSURED FUND, INC.
Fund Asset Management, L.P. ("FAM"), the holder of 6.667 shares of common
stock, par value $0.10 per share, of MuniHoldings Michigan Insured Fund, Inc.
(the "Fund"), a Maryland corporation, does hereby confirm to the Fund its
representation that it purchased such shares for investment purposes, with no
present intention of redeeming or reselling any portion thereof, and further
agrees that if it redeems (by tender offer or otherwise) any portion of such
shares prior to the amortization of the Fund's organizational expenses, the
proceeds thereof will be reduced by the proportionate amount of unamortized
organizational expenses which the number of shares being redeemed bears to the
number of shares initially purchased and outstanding at the time of redemption.
FAM further agrees that, in the event such shares are sold or otherwise
transferred to any other party, prior to such sale or transfer FAM will obtain
on behalf of the Fund an agreement from such other party to comply with the
foregoing as to the reduction of redemption proceeds and to obtain a similar
agreement from any transferee of such party.
FUND ASSET MANAGEMENT, L.P.
By: /s/ Gerald M. Richard
----------------------------------
Name: Gerald M. Richard
Title: Senior Vice President
Dated: January 26, 1999
