<PAGE>
As filed with the Securities and Exchange Commission on July 21, 1999
Securities Act File No. 333-
Investment Company Act File No. 811-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] PRE-EFFECTIVE AMENDMENT NO.
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[_] AMENDMENT NO.
(Check appropriate box or boxes)
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MuniHoldings Michigan Insured Fund II, 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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Terry K. Glenn
MuniHoldings Michigan Insured Fund II, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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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 Maximum
Title of Amount Maximum Aggregate Amount of
Securities Being Being Offering Price Offering Registration
Registered Registered(1)(2) Per Unit(1) Price(1) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)............... 5,175,000 shares $15.00 $77,625,000 $21,580
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 675,000 shares subject to the underwriter's over-allotment option.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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<PAGE>
The information contained in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting
an offer to buy these securities in any State where the offer or sale is not
permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 21, 1999
PROSPECTUS
4,500,000 Shares
MuniHoldings Michigan Insured Fund II, Inc.
Common Stock
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MuniHoldings Michigan Insured Fund II, 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 plans to apply to list its shares on the New York
Stock Exchange or another national securities exchange under the symbol "MDH."
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.
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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
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<S> <C> <C>
Public Offering Price...................... $15.00 $67,500,000
Sales Load................................. None None
Proceeds, before expenses, to Fund......... $15.00 $67,500,000
</TABLE>
The Fund's investment adviser or an affiliate will pay the underwriter a
commission in the amount of % 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 675,000 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.
The shares of common stock will be ready for delivery in New York, New York
on or about August , 1999.
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Merrill Lynch & Co.
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The date of this prospectus is August , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 8
Fee Table.................................................................. 10
The Fund................................................................... 11
Use of Proceeds............................................................ 11
Investment Objective and Policies.......................................... 11
Risks and Special Considerations Of Leverage............................... 22
Investment Restrictions.................................................... 25
Directors and Officers..................................................... 27
Investment Advisory and Management Arrangements............................ 29
Portfolio Transactions..................................................... 31
Dividends and Distributions................................................ 32
Taxes...................................................................... 33
Automatic Dividend Reinvestment Plan....................................... 37
Mutual Fund Investment Option.............................................. 39
Net Asset Value............................................................ 39
Description of Capital Stock............................................... 40
Custodian.................................................................. 43
Underwriting............................................................... 43
Transfer Agent, Dividend Disbursing Agent And Registrar.................... 44
Legal Opinions............................................................. 44
Experts.................................................................... 44
Additional Information..................................................... 45
Independent Auditors' Report............................................... 46
Statement of Assets, Liabilities and Capital............................... 47
Appendix IiI--Economic and Other Conditions in Michigan.................... 48
Appendix III--Ratings of Municipal Bonds................................... 51
Appendix III--Portfolio Insurance.......................................... 58
Appendix IV--Taxable Equivalent Yields for 1999............................ 60
</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 II, Inc. is a newly organized,
non-diversified, closed-end management investment company.
The The Fund is offering 4,500,000 shares of common stock at an initial
Offering 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
675,000 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 subject to Federal and Michigan
income taxes.
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 choose not to do so. The Fund cannot guarantee
that any hedging strategies it uses will work.
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
4
<PAGE>
believes that the interest income the Fund receives from its long
term investments will exceed 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. The 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 plans to apply to list its shares of common stock on the
New York Stock Exchange or another national securities 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.
The Fund intends to distribute dividends of all or a portion of
Dividends its net investment income to common stockholders each month. Once
and the Fund issues preferred stock, the monthly dividends to common
Distributions stockholders will consist of all or a portion of net investment
income that remains after the Fund pays dividends (and any
Additional Distribution) on the preferred stock. At times in
order to maintain a stable level of monthly dividends to common
stockholders, the Fund may pay out less than all of its net
investment income or pay out accumulated undistributed income in
addition to net investment income. 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.
The yield on the Fund's common stock will vary from period to
Yield period depending on factors including, but not limited to, market
Considerations conditions, the timing of the Fund's investment in portfolio
securities, the securities comprising the Fund's portfolio,
changes in tax-exempt interest rates (which may not change to the
same extent or in the same direction as taxable rates) including
changes in the relationship between short-term rates and long-
term rates, the amount and timing of the issuance of the Fund's
preferred stock, the effects of preferred stock leverage on the
common stock discussed above under "Leverage", the timing of the
investment of preferred stock proceeds in portfolio securities,
the Fund's net assets and its operating expenses. Consequently,
the Fund cannot guarantee any particular yield on its shares and
the yield for any given period is not an indication or
representation of future yields on Fund shares. The Fund's
ability to achieve any particular yield level after it commences
6
<PAGE>
operations depends on future interest rates and other factors
mentioned above and the initial yield and later yields may be
lower. Any statements as to the estimated yield are as of the date
made and no guarantee can be given that the Fund will achieve or
maintain any particular yield level.
Automatic Dividend and capital gains distributions generally are used to
Dividend purchase additional shares of the Fund's common stock. However, an
Reinvestment investor can choose to receive distributions in cash. Since not all
Plan 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, subject to
Investment certain conditions, to purchase Class D shares of certain Merrill
Option Lynch funds with the proceeds from the sale.
7
<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 or another national securities
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. 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. Even as a non-
diversified fund, the Fund must still meet the diversification requirements of
applicable Federal income tax laws.
Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc. or
Fitch IBCA, Inc. It may also invest in unrated municipal bonds that the Fund's
investment adviser believes are of comparable quality. Obligations rated in the
lowest investment grade category 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 Federal 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
8
<PAGE>
prevent the investment adviser from managing the Fund's portfolio in accordance
with the Fund's investment objective and policies.
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 choose not to 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.
9
<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)........................................ .92%
Interest Payments on Borrowed Funds................................... None
Other Expenses(a)(b).................................................. .45%
-----
Total Annual Expenses(a)(b)......................................... 1.37%
=====
</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 total annual
expenses of 1.37% (assuming leverage of 40%
of the Fund's total assets) and a 5% annual
return throughout the periods: .............. $14 $43 $75 $165
</TABLE>
- --------
(a) Assumes leverage by issuing preferred stock in an amount of approximately
40% of the Fund's capital at a dividend rate of 3.25%. 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". 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 0.21%
and Total Annual Expenses would be 0.76%.
(b) See "Investment Advisory and Management Arrangements"--page 29.
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.
10
<PAGE>
THE FUND
MuniHoldings Michigan Insured Fund II, 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 July 9, 1999, 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.
The Board of Directors of the Fund may at any time consider a merger,
consolidation or other form of reorganization of the Fund with one or more
other closed-end investment companies advised by the Fund's investment adviser
with similar investment objectives and policies as the Fund. Any such merger,
consolidation or other form of reorganization would require the prior approval
of the Board of Directors and the stockholders of the Fund. See "Description of
Capital Stock--Certain Provisions of the Articles of Incorporation."
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment
option in full) after payment of offering expenses estimated to be
approximately $ .
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
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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.
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 a Federal
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
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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 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 a
right of demand on the part of the holder thereof to receive payment of the
unpaid principal balance plus accrued interest on a short notice period not to
exceed seven days. Participating VRDOs provide 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
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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, 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.
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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 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).
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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 private activity bonds ("PABs") are
issued by or on behalf of public authorities to finance various privately
operated facilities, including, among other things, airports, public ports,
mass commuting facilities, multifamily housing projects, as well as facilities
for water supply, gas, electricity, sewage or solid waste disposal. For
purposes of this prospectus, such obligations are Municipal Bonds if the
interest paid thereon is exempt from Federal income tax and are 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 industrial
development bonds or PABs 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 PABs and, for bonds issued on or before August 15, 1986, industrial
development bonds or "IDBs". General obligation bonds (other than those of the
State of Michigan, 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. PABs are in most cases revenue bonds and do not generally
constitute the pledge of the credit or taxing power of the issuer of such
bonds. The repayment of 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 PABs. Interest received on certain PABs is treated as an item of "tax
preference" for purposes of the Federal alternative minimum tax and may impact
the overall tax liability of certain investors in the Fund. There is no
limitation on the percentage of the Fund's assets that may be invested in
Michigan Municipal Bonds and Municipal Bonds the interest on which is treated
as an item of "tax preference" for purposes of the Federal alternative minimum
tax. See "Taxes--General." Also included within the general category of
Michigan Municipal Bonds and/or Municipal Bonds are certificates of
participation ("COPs") executed and delivered for the benefit of government
authorities or entities to finance the acquisition or construction of
equipment, land and/or facilities. COPs represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively referred to as "lease obligations") relating to such equipment,
land or facilities. Although lease obligations 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.
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Although "non-appropriation" lease obligations are secured by the lease
property, disposition of the property in the event of foreclosure might prove
difficult.
Federal tax legislation has limited and may continue to limit the types and
volume of such bonds the interest on which is excludable for Federal income tax
purposes. Such legislation 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, 1998. The Michigan Budget and Economic
Stabilization Fund had an unreserved accrued balance of $1,000.5 million.
Michigan has reported balanced budgets and year-end General Fund surpluses for
six of the last seven fiscal years. Economically, Michigan remains closely tied
to the economic cycles of the automobile industry. Current increased automobile
production and an increasingly 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.
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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 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.
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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 choose not to 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.
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
19
<PAGE>
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.
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.
20
<PAGE>
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. Use of futures transactions
involves the risk of imperfect correlation in movements in the price of
financial futures contracts and movements in the price of the security that is
the subject of the hedge. If the price of the financial futures contract moves
more or less than the price of the security that is the subject of the hedge,
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 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.
21
<PAGE>
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
Effects of Leverage
Within approximately three months after the completion of 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
22
<PAGE>
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) paid on 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 use of leverage will 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 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 it can obtain 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
23
<PAGE>
. 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 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 3.25%
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 1.30%.
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% 15%
</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.
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,
24
<PAGE>
. 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 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.
25
<PAGE>
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.
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
26
<PAGE>
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.
Terry K. Glenn (58)--President and Director (1) (2)--Executive Vice President
of the Investment Adviser and Merrill Lynch Asset Management, L.P. ("MLAM")
(which terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; President of Princeton Funds Distributor, Inc. ("PFD")
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Donald Cecil (72)--Director (2) (3)--1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Associates (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
M. Colyer Crum (66)--Director (2) (3)--104 Westcliff Road, Weston,
Massachusetts 02193. Currently James R. Williston Professor of Investment
Management Emeritus, Harvard Business School; James R. Williston Professor of
Investment Management, Havard Business School, from 1971 to 1996; Director of
Cambridge Bancorp, Copley Properties, Inc. and Sun Life Assurance Company of
Canada.
Edward H. Meyer (72)--Director (2) (3)--777 Third Avenue, New York New York
10017. President of Grey Advertising, Inc., since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Harman
International Industries, Inc. (stereo and audio equipment manufacturers) and
Ethan Allen Interiors, Inc.
Jack B. Sunderland (70)--Director (2) (3)--P.O. Box 7, West Cornwall,
Connecticut 06796. President and Director of American Independent Oil Company,
Inc. (and energy company) since 1987; Member of Council on Foreign Relations
since 1971.
J. Thomas Touchton (60)--Director (2) (3)--Suite 3405, One Tampa City Center,
201 North Franklin Street, Tampa, Florida 33062. Managing Partner of the Witt
Touchton Company and its predecessor, The Witt Co. (a private investment
partnership), since 1972; Trustee Emeritus of Washington and Lee University;
Director of TECO Energy, Inc. (an electric utility holding company).
Fred G. Weiss (57)--Director (2) (3)--16410 Maddalena Place, Del Ray Beach,
Florida 33446. Managing Director of FGW Associates since 1997; Vice President,
Planning Investment, and Development of Warner Lamber Co. from 1979 to 1997.
27
<PAGE>
Authur Zeikel (66)--Director (1) (2)--300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and MLAM from 1997 to 1999 and
President thereof from 1977 to 1999; Chairman of Princeton Services from 1997
to 1999 and Director thereof from 1993 to 1999; President of Princeton Services
from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") from 1990 to 1999.
Vincent R. Giordano (54)--Senior Vice President (1) (2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
Donald C. Burke (38)--Vice President and Treasurer (1) (2)--Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President
of PFD since 1999; First Vice President of the MLAM from 1997 to 1999; Vice
President of the MLAM from 1990 to 1997; Director of Taxation of the MLAM since
1990.
Kenneth A. Jacob (47)--Vice President (1) (2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Investment Adviser since 1984.
Robert A. DiMella, CFA (32)--Vice President and Portfolio Manager (1) (2)--
Vice President of MLAM from 1997 to 1999; 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 (1) (2)--Vice
President of MLAM since 1989.
Alice A. Pellegrino (39)--Secretary (1) (2)--Vice President of MLAM since
1999; Attorney with MLAM since 1997; Associate with Kirkpatrick & Lockhart LLP
from 1992 to 1997.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such 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") an annual 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 plus $125 per meeting attended.
28
<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>
Aggregate
Pension or Compensation from
Aggregate Retirement Benefits Fund and Other
Compensation Accrued as Part of MLAM/FAM-
Name from Fund Fund Expense Advised Funds(1)
- ---- ------------ ------------------- -----------------
<S> <C> <C> <C>
Donald Cecil(/1/)............ $4,500 None $277,808
M. Colyer Crum(/1/).......... $4,500 None $116,600
Edward H. Meyer(/1/)......... $4,500 None $214,558
Jack B. Sunderland(/1/)...... $4,500 None $133,600
J. Thomas Touchton(/1/)...... $4,500 None $133,600
Fred G. Weiss(/1/)........... $4,500 None $140,842
</TABLE>
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(1) The Directors serve on the boards of MLAM/FAM advised Funds as follows: Mr.
Cecil (35 registered investment companies consisting of 35 portfolios); Mr.
Crum (16 registered investment companies consisting of 16 portfolios); Mr.
Meyers (35 registered investment companies consisting of 34 portfolios);
Mr. Sunderland (19 registered investment companies consisting of 31
portfolios); Mr. Touchton (19 registered investment companies consisting of
31 portfolios); and Mr. Weiss (16 registered investment companies
consisting of 16 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 Asset Management
Group of ML & Co. (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
June 1999, the Asset Management Group had a total of approximately $516 billion
in investment company and other portfolio assets under management
(approximately $36 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. Robert A. DiMella and
Fred K. Stuebe are the portfolio managers of the Fund and are primarily
responsible for the Fund's day-to-day management.
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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 dividends of all or a portion of its net
investment income 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 dividends to holders of common stock normally
will consist of all or a portion of its net investment income remaining after
the payment of dividends (and any Additional Distribution) on the preferred
stock. The Fund may at times pay out less than the entire amount of net
investment income earned in any particular period and may at times pay out such
accumulated undistributed income in addition to net investment income earned in
other periods in order to permit the Fund to maintain a more stable level of
dividends to holders of common stock. As a result, the dividend paid by the
Fund to holders of common stock for any particular period may be more or less
than the amount of net investment income earned by the Fund during such period.
For Federal tax purposes, the Fund is required to distribute substantially all
of its net investment income for each year. 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.
The yield on the Fund's common stock will vary from period to period
depending on factors including, but not limited to, market conditions, the
timing of the Fund's investment in portfolio securities, the securities
comprising the Fund's portfolio, changes in tax-exempt interest rates (which
may not change to the same extent or in the same direction as taxable rates)
including changes in the relationship between short-term rates and long-term
rates, the amount and timing of the issuance of the Fund's preferred stock, the
effects of preferred stock leverage on the common stock discussed above under
"Risks and Special Considerations of Leverage,"
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the timing of the investment of preferred stock proceeds in portfolio
securities, the Fund's net assets and its operating expenses. Consequently, the
Fund cannot guarantee any particular yield on its shares and the yield for any
given period is not an indication or representation of future yields on Fund
shares.
TAXES
General
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The 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 the interest on which is excludable from gross income
for Federal income tax purposes ("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 excludable from gross income for Federal income
tax purposes 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 PABs
or IDBs 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
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annually as to the portion of the Fund's distributions that constitutes exempt-
interest dividends and the portion that 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 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 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 two or more classes of shares, it may designate
distributions made to each class in any year as consisting of no more than such
class's proportionate share of particular types of income, including exempt-
interest 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.
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The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The Federal alternative
minimum tax applies 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," which could subject certain
investors in such bonds, including shareholders of the Fund, to an increased
Federal 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 Federal alternative minimum tax purposes. The
Code further provides that corporations are subject to a Federal alternative
minimum tax based, in part, on certain differences between taxable income as
adjusted for other tax preferences and the corporation's "adjusted current
earnings," which more closely reflect a corporation's economic income. Because
an exempt-interest dividend paid by the Fund will be included in adjusted
current earnings, a corporate shareholder may be required to pay a Federal
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 income tax 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,
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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.
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.
----------------
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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.
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 , 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 , 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 , 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 or another
national securities exchange, participants in the Plan will receive any
dividends in newly issued shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in
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shares acquired in open-market purchases. It is contemplated that the Fund will
pay monthly income dividends. Therefore, the period during which open-market
purchases can be made will exist only from the payment date on the dividend
through the date before the next "ex-dividend" date, which typically will be
approximately ten days. If, before the Plan Agent has completed its open-market
purchases, the market price of a share of common stock exceeds the net asset
value per share, the average per share purchase prices paid by the Plan Agent
may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and
will invest the uninvested portion of the dividend amount in newly issued
shares at the close of business on the last purchase date.
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 .
38
<PAGE>
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of common stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares (the "Original Shares") in
Class D initial sales charge shares of certain Merrill Lynch-sponsored open-end
mutual funds ("Eligible Class D Shares") at their net asset value, without the
imposition of the initial sales charge, if the conditions set forth below are
satisfied. First, the sale of the Original Shares must be made through Merrill
Lynch, and the net proceeds therefrom must be immediately reinvested in
Eligible Class D Shares. Second, the 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 or another securities exchange, the distributor for the mutual
funds will advise Merrill Lynch Financial Consultants as to those mutual funds
that offer the investment option described above.
NET ASSET VALUE
Net asset value per share of common stock is determined as of 15 minutes
after the close of business on the 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 uses 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.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as common
stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption. Within
approximately three months after completion of the offering of the common stock
described herein, the 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
40
<PAGE>
and the Fund's Articles of Incorporation), the initial series of preferred
stock will be structured to carry either a relatively short-term dividend rate,
in which case periodic redetermination of the dividend rate will be made at
relatively short intervals (generally seven or 28 days), or a medium-term
dividend rate, in which case periodic redetermination of the dividend rate will
be made at intervals of up to five years. In either case, such redetermination
of the dividend rate will be made through an auction or remarketing procedure.
Additionally, under certain circumstances, when the Fund is required to
allocate taxable income to holders of the preferred 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.
41
<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.
42
<PAGE>
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Securities
and Exchange Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
.
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 4,500,000 shares of common stock
from the Fund. The Underwriter is committed to purchase all of such shares if
any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of common stock to the public at the public offering price set forth on
the cover page of this prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of common stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of common stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $ per share on
sales by such dealers. After the initial public offering, the public offering
price and other selling terms may be changed. Investors must pay for shares of
common stock purchased in the offering on or before August , 1999.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 675,000 additional shares of common
stock to cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
common stock.
If the Underwriter creates a short position in the shares of common stock in
connection with the offering, i.e., if it sells more shares of common stock
than are set forth on the cover page of this prospectus, the Underwriter may
reduce that short position by purchasing shares of common stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of common stock
in the open market to reduce the Underwriter's short position or to stabilize
the price of the shares of common stock, it may reclaim the amount of the
selling concession from the selling group members who sold those shares of
common stock as part of the offering.
43
<PAGE>
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of common stock. In addition, neither
the Fund nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Prior to this offering, there has been no public market for the shares of the
common stock. The Fund plans to list its shares of common stock on the NYSE or
another national securities exchange. However, during an initial period which
is not expected to exceed two weeks from the date of this prospectus, the
Fund's common stock will not be listed on any securities exchange.
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 .
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 ,
1999 included in this prospectus has been so included in reliance on the report
of , independent auditors, and on their authority as experts in auditing
and accounting. The selection of independent auditors is subject to
ratification by shareholders of the Fund.
44
<PAGE>
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the 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
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
, .
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.
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
MuniHoldings Michigan Insured Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings Michigan Insured Fund II, Inc. as of August , 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 II, Inc. as of August , 1999 in conformity with
generally accepted accounting principles.
46
<PAGE>
MuniHoldings Michigan Insured Fund II, Inc.
Statement of Assets, Liabilities and Capital
August , 1999
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Offering costs (Note 1).............................................
--------
Total assets......................................................
LIABILITIES
Liabilities and accrued expenses (Note 1)...........................
--------
</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 July 9,
1999 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 August , 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 $ . 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 % 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.
47
<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 16.0%
in 1998. While durable goods manufacturing still represents a sizable portion
of the State's economy, the service sector now represents 27.51% 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 1998, the average
monthly unemployment rate in the State was 3.9% compared to a national average
of 4.5%.
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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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 55% from the payment of State taxes
and 45% 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. The State ended the five fiscal years
1992-96 with its General Fund in balance after substantial transfers from the
General Fund to the Budget Stabilization Fund. For the 1997 fiscal year, the
State closed its books with its general fund in balance. During the 1997-98
fiscal year, an error was identified pertaining to the Medicaid program
administered by the Department of Community Health ("DCH"). Over a ten-year
period, DCH did not properly record all Medicaid expenditures and revenues on a
modified accrual basis as required by GAAP. For the fiscal year ended September
30, 1997, the General Fund did not reflect Medicaid expenditures of $178.7
million, and federal revenue of $24.6 million. As a result, the total ending
fund balance and unreserved fund balance for the fiscal year ended September
30, 1997, were reduced by $154.1 million to account for the correction of the
prior period error. The General Fund was in balance as of September 30, 1998.
The balance in the Budget Stabilization Fund as of September 30, 1998 was
$1,000.5 million. 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. No cash
flow borrowing is planned for the 1999 fiscal year.
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 paid or 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
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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. 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.
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.
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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.
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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.
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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."
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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.
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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.
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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.
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Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD," "DD," or "D" categories.
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
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APPENDIX 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
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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.
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APPENDIX IV
TAXABLE EQUIVALENT YIELDS FOR 1999
<TABLE>
<CAPTION>
Taxable Income* 1999 A Tax-Free Yield of
- ------------------------------------ 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>
- --------
* 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 Federal 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.
60
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including November , 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.
4,500,000 Shares
MuniHoldings Michigan Insured Fund II, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
August , 1999
CODE 19066-0799
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 August , 1999
(2) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
(a)(1) --Articles of Incorporation of the Fund
(b) --By-Laws of the Fund
(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(a)
(d)(2) --Form of specimen certificate for shares of common stock of the
Fund
(e) --Form of Dividend Reinvestment Plan
(f) --Not applicable
(g) --Form of Investment Advisory Agreement between the Fund and Fund
Asset Management, L.P.
(h)(1) --Form of Purchase Agreement between the Fund and Merrill Lynch,
Pierce, Fenner & Smith Incorporated
(h)(2) --Merrill Lynch Standard Dealer Agreement
(i) --Not applicable
(j) --Form of Custodian Contract between the Fund and *
(k) --Form of Registrar, Transfer Agency and Service Agreement between
the Fund and *
(l) --Opinion and Consent of Brown & Wood LLP.*
(m) --Not applicable
(n)(2) --Consent of , independent auditors for the Fund*
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.*
(q) --Not applicable
(r) --Not applicable
</TABLE>
- --------
(a) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit (a) to
this Registration Statement; and to Article II, Article III (sections 1, 2,
3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to this
Registration Statement.
* To be provided by amendment.
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..................................................... $ *
New York Stock Exchange listing fee................................... *
Printing (other than stock certificates).............................. *
Engraving and printing stock certificates............................. *
Legal fees and expenses............................................... *
Accounting fees and expenses.......................................... *
NASD fees............................................................. *
Miscellaneous......................................................... *
-----
Total................................................................. $ *
=====
</TABLE>
- --------
* To be provided by amendment.
Item 27. Persons Controlled by or Under Common Control with Registrant.
The information in the prospectus under the 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 California Insured Fund IV,
Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Florida Insured Fund III, MuniHoldings Florida Insured Fund IV,
MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II, Inc.,
MuniHoldings Insured Fund III, Inc., MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New Jersey
Insured Fund III, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniHoldings
New York Insured Fund III, Inc., MuniHoldings Pennsylvania Insured Fund,
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 Disciplined
Equity 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., Merrill Lynch
Senior Floating Rate Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II,
Inc. MLAM
C-3
<PAGE>
also acts as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill
Lynch Basic Equity Portfolio, two investment portfolios of EQ Advisors Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of the Investment Adviser, MLAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281-1201.
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. Glenn is
President and Mr. Burke is Vice President and Treasurer 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 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.......
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.
Terry K. Glenn.. Executive Vice President Executive Vice President of MLAM; President and
Director of Princeton Services; President and
Director of PFD; Director of FDS; President of
Princeton Administrations, L.P.
Donald C. Burke. Senior Vice President Senior Vice President, Treasurer and Director of
and Treasurer Taxation of MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice President of
PFD; First Vice President of MLAM from 1997 to
1999; Vice President of MLAM from 1990 to 1997
Michael G. Senior Vice President Senior Vice President of MLAM; Senior Vice
Clark.......... President of Princeton Services; Treasurer and
Director of PFD; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM from 1996 to
1997
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
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, General Counsel, Director and Secretary
of Princeton Services
Ronald M. Kloss. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra W. 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
Gregory D. Upah. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
C-4
<PAGE>
Item 31. Location of Account and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
promulgated thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(a) Registrant undertakes to suspend the offering of the shares of common
stock covered hereby until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of common stock declines more than 10% from its net asset value
per share of common stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of common stock increases to an
amount greater than its net proceeds as stated in the prospectus contained
herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and State of New Jersey, on the 21st day of July,
1999.
MuniHoldings Michigan Insured Fund
II, Inc.
(Registrant)
/s/ Alice A. Pellegrino
By:
-----------------------------------
(Alice A. Pellegrino, President)
Each person whose signature appears below hereby authorizes Alice A.
Pellegrino, William E. Zitelli, Jr. or Bradley J. Lucido, 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>
<S> <C>
</TABLE>
Signatures Title Date
/s/ Alice A. Pellegrino President (Principal July 21, 1999
- ------------------------------------- Executive Officer) and
(Alice A. Pellegrino) Director
/s/ William E. Zitelli, Jr. Treasurer (Principal
Financial and Accounting
Officer) and Director
July 21, 1999
- -------------------------------------
(William E. Zitelli, Jr.)
/s/ Bradley J. Lucido Secretary and Director July 21, 1999
- -------------------------------------
(Bradley J. Lucido)
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S> <C>
(a)(1) Articles of Incorporation
(b) By-laws
(d)(2) Form of Specimen Certificate
(e) Form of Automatic Dividend Reinvestment Plan
(g) Form Investment Advisory Agreement
(h)(1) Form of Purchase Agreement
(h)(2) Merrill Lynch Standard Dealer Agreement
</TABLE>
<PAGE>
EXHIBIT (A)(1)
ARTICLES OF INCORPORATION
OF
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
THE UNDERSIGNED, CASEY LIPSCOMB, whose post-office address is c/o Brown &
Wood llp, One World Trade Center, 56th Floor, New York, New York 10048, being at
least eighteen (18) years of age, does hereby act as incorporator, under and by
virtue of the General Laws of the State of Maryland authorizing the formation of
corporations and with the intention of forming a corporation.
ARTICLE I.
NAME
----
The name of the corporation is MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
(the "Corporation").
ARTICLE II.
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed is to act as a
closed-end, management investment company under the federal Investment Company
Act of 1940, as amended, and in effect from time to time (the "Investment
Company Act"), and to exercise and enjoy all of the powers, rights and
privileges granted to, or conferred upon, corporations by the General Laws of
the State of Maryland now or hereafter in force.
ARTICLE III.
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post-office address of the resident agent is The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202.
<PAGE>
ARTICLE IV.
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation shall
have authority to issue is 200,000,000 shares, all initially classified as one
class called Common Stock, of the par value of Ten Cents ($0.10) per share, and
of the aggregate par value of Twenty Million Dollars ($20,000,000).
(2) The Board of Directors may classify and reclassify any unissued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series provided, however, that the
total amount of shares of all classes or series shall not exceed the total
number of shares of capital stock authorized in the Charter.
(3) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series.
(4) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that as to any
matter with respect to which a separate vote of any class or series is required
by the Investment Company Act, or any rules, regulations or orders issued
thereunder, or by the Maryland General Corporation Law, such requirement as to a
separate vote by that class or series shall apply in lieu of a general vote of
all classes and series as described above.
2
<PAGE>
(5) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act, and any rules, regulations and orders issued thereunder)
to take such action upon the concurrence of a majority of the votes entitled to
be cast by holders of capital stock of the Corporation (or a majority of the
votes entitled to be cast by holders of a class or series as a separate class or
series) unless a greater proportion is specified in the Charter.
(6) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation.
(7) Any fractional shares shall carry proportionately all of the rights of
a whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(8) The presence in person or by proxy of the holders of shares entitled to
cast one-third of the votes entitled to be cast shall constitute a quorum at any
meeting of stockholders, except with respect to any matter which requires
approval by a separate vote of one or more classes or series of stock, in which
case the presence in person or by proxy of the holders of shares entitled to
cast one-third of the votes entitled to be cast by each class or series entitled
to vote as a separate class shall constitute a quorum.
(9) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of the Charter and the By-Laws of the
Corporation. As used in the Charter of the Corporation, the terms "Charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
3
<PAGE>
ARTICLE V.
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------------------------
(1) The initial number of directors of the Corporation shall be three (3),
which number may be increased or decreased pursuant to the By-Laws of the
Corporation but shall never be less than the minimum number permitted by the
General Laws of the State of Maryland. The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualify are:
Alice A. Pellegrino
Bradley J. Lucido
William E. Zitelli, Jr.
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock of any class
or series, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable, without any action by the stockholders,
subject to such limitations as may be set forth in these Articles of
Incorporation or in the By-Laws of the Corporation or in the General Laws of the
State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
and advanced expenses by the Corporation to the full extent permitted by the
General Laws of the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the full extent permitted by law
subject to the requirements of the Investment Company Act. The foregoing rights
of indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. No amendment of these Articles of
Incorporation or repeal of any provision hereof shall limit or eliminate the
benefits provided to directors and officers
4
<PAGE>
under this provision in connection with any act or omission that occurred prior
to such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State of
Maryland or decisional law, as amended or interpreted, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation or
repeal of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act.
(7) A director elected by the holders of capital stock may be removed (with
or without cause), but only by action taken by the holders of at least sixty-six
and two-thirds percent (66 2/3%) of the shares of capital stock then entitled to
vote in an election to fill that directorship.
(8) The enumeration and definition of the particular powers of the Board of
Directors included in the Charter shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereinafter in force.
ARTICLE VI.
DENIAL OF PREEMPTIVE RIGHTS
---------------------------
No stockholder of the Corporation shall by reason of his holding shares of
capital stock have any preemptive or preferential right to purchase or subscribe
to any shares of capital stock of the Corporation, now or hereafter to be
authorized, or any notes, debentures, bonds or other securities convertible into
shares of capital stock, now or hereafter to be authorized, whether or not the
issuance of any such shares, or
5
<PAGE>
notes, debentures, bonds or other securities would adversely affect the dividend
or voting rights of such stockholder; except that the Board of Directors, in its
discretion, may issue shares of any class of the Corporation, or any notes,
debentures, bonds, other securities convertible into shares of any class, either
in whole or in part, to the existing stockholders or holders of any class,
series or type of stock or other securities at the time outstanding to the
exclusion of any or all of the holders of any or all of the classes, series or
types of stock or other securities at the time outstanding.
ARTICLE VII.
DETERMINATION BINDING
---------------------
Any determination made in good faith and consistent with applicable law, so
far as accounting matters are involved, in accordance with accepted accounting
practice by or pursuant to the direction of the Board of Directors, as to the
amount of assets, obligations or liabilities of the Corporation, as to the
amount of net income of the Corporation from dividends and interest for any
period or amounts at any time legally available for the payment of dividends, as
to the amount of any reserves or charges set up and the propriety thereof, as to
the time of or purpose for creating reserves or as to the use, alteration or
cancellation of any reserves or charges (whether or not any obligation or
liability for which such reserves or as to the use, alteration or cancellation
of any reserves or charges shall have been created, shall have been paid or
discharged or shall be then or thereafter required to be paid or discharged), as
to the price of any security owned by the Corporation or as to any other matters
relating to the issuance, sale, redemption or other acquisition or disposition
of securities or shares of capital stock of the Corporation, and any reasonable
determination made in good faith by the Board of Directors as to whether any
transaction constitutes a purchase of securities on "margin," a sale of
securities "short," or an underwriting or the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of, any
securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future, and
shares of the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such determinations
shall be binding as aforesaid. No provision in this Charter shall be effective
to (a) require a waiver of
6
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compliance with any provision of the Securities Act of 1933, as amended, or the
Investment Company Act, or of any valid rule, regulation or order of the
Securities and Exchange Commission thereunder or (b) protect or purport to
protect any director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
ARTICLE VIII.
PRIVATE PROPERTY OF STOCKHOLDERS
--------------------------------
The private property of stockholders shall not be subject to the payment of
corporate debts to any extent whatsoever.
ARTICLE IX.
CONVERSION TO OPEN-END COMPANY
------------------------------
Notwithstanding any other provisions of these Articles of Incorporation or
the By-Laws of the Corporation, a favorable vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize an amendment to these Articles of Incorporation of
the Corporation that makes the Common Stock a "redeemable security" (as that
term is defined in section 2(a) (32) the Investment Company Act) unless such
action has previously been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of directors fixed in accordance
with the By-Laws of the Corporation, in which case the affirmative vote of the
holders of a majority of the outstanding shares of capital stock of the
Corporation entitled to vote thereon shall be required.
ARTICLE X.
MERGER, SALE OF ASSETS, LIQUIDATION
-----------------------------------
Notwithstanding any other provisions of these Articles of Incorporation or
the By-Laws of the Corporation, a favorable vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize (i) a merger or consolidation or statutory share
exchange of the Corporation with any other
7
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corporation, (ii) a sale of all or substantially all of the assets of the
Corporation (other than in the regular course of its investment activities), or
(iii) a liquidation or dissolution of the Corporation, unless such action has
previously been approved, adopted or authorized by the affirmative vote of at
least two-thirds of the total number of directors fixed in accordance with the
By-Laws of the Corporation, in which case the affirmative vote of the holders of
a majority of the outstanding shares of capital stock of the Corporation
entitled to vote thereon shall be required.
ARTICLE XI.
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE XII.
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in its Charter, in any manner now or hereafter prescribed by
statute, including any amendment which alters the contract rights, as expressly
set forth in the Charter, of any outstanding stock and substantially adversely
affects the stockholders' rights, and all rights conferred upon stockholders
herein are granted subject to this reservation. Notwithstanding any other
provisions of these Articles of Incorporation or the By-Laws of the Corporation
(and notwithstanding the fact that a lesser percentage may be specified by law,
these Articles of Incorporation or the By-Laws of the Corporation), the
amendment or repeal of Section (5) of Article IV, Section (1), Section (4),
Section (5), Section (6) and Section (7) of Article V, Article VIII, Article IX,
Article X, Article XI or this Article XII, of these Articles of Incorporation
shall require the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66 2/3%) of the outstanding shares of capital stock of the
Corporation entitled to be voted on the matter.
8
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator of MUNIHOLDINGS MICHIGAN
INSURED FUND II, INC. hereby executes the foregoing Articles of Incorporation
and acknowledges the same to be his act.
Dated this 8th day
of July, 1999
/s/ Casey Lipscomb
-----------------------
Casey Lipscomb
9
<PAGE>
EXHIBIT B
BY-LAWS
OF
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
ARTICLE I.
Offices
-------
Section 1. Principal Office. The principal office of the Corporation shall
----------------
be in the City of Baltimore and State of Maryland.
Section 2. Principal Executive Office. The principal executive office of
--------------------------
the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices in
-------------
such places as the Board of Directors from time to time may determine.
ARTICLE II.
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. Except as otherwise required by the rules of
--------------
any stock exchange on which the Corporation's shares of stock may be listed, the
Corporation shall not be required to hold an annual meeting of its stockholders
in any year in which the election of directors is not required to be acted upon
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). In the event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors under the Investment Company Act,
such meeting shall be held no later than 120 days after the occurrence of the
event requiring the meeting. Any stockholders' meeting held in accordance with
this Section shall for all purposes constitute the annual meeting of
stockholders for the year in which the meeting is held.
In the event an annual meeting is required by the rules of a stock exchange
on which the Corporation's shares of stock are listed, the annual meeting of the
stockholders of the Corporation for the election of directors and for the
transaction of such other business as may properly be brought before the meeting
shall be held on such day and month of each year as shall be designated annually
by the Board of Directors.
Section 2. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the written request of
the holders of at least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with Section
2-502(b) or (c) of the Maryland General Corporation Law.
<PAGE>
Section 3. Place of Meetings. The annual meeting and any special meeting
-----------------
of the stockholders shall be held at such place within the United States as the
Board of Directors from time to time may determine.
Section 4. Notice of Meetings, Waiver of Notice. Notice of the place, date
------------------------------------
and time of the holding of each annual and special meeting of the stockholders
and the purpose or purposes of each special meeting shall be given personally or
by mail, not less than ten nor more than 90 days before the date of such
meeting, to each stockholder entitled to vote at such meeting and to each other
stockholder entitled to notice of the meeting. Notice by mail shall be deemed to
be duly given when deposited in the United States mail addressed to the
stockholder at his or her address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who, either
before or after the meeting, shall submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or unless the adjournment is for
more than 120 days after the original record date, notice of such adjourned
meeting need not be given if the time and place to which the meeting shall be
adjourned were announced at the meeting at which the adjournment is taken.
Section 5. Quorum. The presence in person or by proxy of the holders of
------
shares of stock entitled to cast one-third of the votes entitled to be cast
shall constitute a quorum at any meeting of stockholders, except with respect to
any matter which requires approval by a separate vote of one or more classes or
series of stock, in which case the presence in person or by proxy of the holders
of shares entitled to cast one-third of the votes entitled to be cast by each
class or series entitled to vote as a separate class or series shall constitute
a quorum. In the absence of a quorum no business may be transacted, except that
the holders of a majority of the shares of stock present in person or by proxy
and entitled to vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by these ByLaws,
until the holders of the requisite amount of shares of stock shall be so
present. At any such adjourned meeting at which a quorum may be present any
business may be transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by proxy, of
holders of the number of shares of stock of the Corporation in excess of a
majority thereof which may be required by the laws of the State of Maryland, the
Investment Company Act, or other applicable statute, the Charter, or these By-
Laws, for action upon any given matter shall not prevent action at such meeting
upon any other matter or matters which properly may come before the meeting, if
there shall be present thereat, in person or by proxy, holders of the number of
shares of stock of the Corporation required for action in respect of such other
matter or matters.
Section 6. Organization. At each meeting of the stockholders, the Chairman
------------
of the Board (if one has been designated by the Board), or in his or her absence
or inability to act, the President, or in the absence or inability to act of the
Chairman of the Board and the President, a Vice President, shall act as chairman
of the meeting. The Secretary, or in his or her absence or inability to act, any
person appointed by the chairman of the meeting, shall act as secretary of the
meeting and keep the minutes thereof.
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<PAGE>
Section 7. Order of Business. The order of business at all meetings of the
-----------------
stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
--------
Charter, each holder of record of shares of stock of the Corporation having
voting power shall be entitled at each meeting of the stockholders to one vote
for every share of such stock standing in his or her name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 9 of this Article or, if such record date shall not have been so fixed,
then at the later of (i) the close of business on the day on which notice of the
meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or her by a proxy signed by
such stockholder or his or her attorney-in-fact. No proxy shall be valid after
the expiration of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Charter or these By-Laws, any corporate
action to be taken by vote of the stockholders (other than the election of
directors, which shall be by a plurality of votes cast) shall be authorized by a
majority of the total votes cast at a meeting of stockholders by the holders of
shares present in person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his or her proxy, if there be such
proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a record
---------------------
date for the purpose of determining stockholders entitled to vote at any meeting
of the stockholders. The record date, which may not be prior to the close of
business on the day the record date is fixed, shall be not more than 90 nor less
than ten days before the date of the meeting of the stockholders. All persons
who were holders of record of shares at such time, and not others, shall be
entitled to vote at such meeting and any adjournment thereof.
Section 10. Inspectors. The Board, in advance of any meeting of
----------
stockholders, may appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his or her duties, shall
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his or her
ability. The inspectors shall determine the number of shares outstanding and the
voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, and the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On
3
<PAGE>
request of the chairman of the meeting or any stockholder entitled to vote
thereat, the inspectors shall make a report in writing of any challenge, request
or matter determined by them and shall execute a certificate of any fact found
by them. No director or candidate for the office of director shall act as
inspector of an election of directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as otherwise
------------------------------------------
provided by statute or the Charter, any action required to be taken at any
annual or special meeting of stockholders, or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if the following are filed
with the records of stockholders' meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder entitled to vote
on the matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III.
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the Charter, the
--------------
business and affairs of the Corporation shall be managed under the direction of
the Board of Directors. All powers of the Corporation may be exercised by or
under authority of the Board of Directors except as conferred on or reserved to
the stockholders by law or by the Charter or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed from
-------------------
time to time by resolution of the Board of Directors adopted by a majority of
the entire Board of Directors then in office; provided, however, that in no
event shall the number of directors be less than the minimum permitted by the
General Law of the State of Maryland nor more than 15. Any vacancy created by an
increase in the number of directors may be filled in accordance with Section 6
of this Article III. No reduction in the number of directors shall have the
effect of removing any director from office prior to the expiration of his or
her term unless such director specifically is removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need not be
stockholders. As long as any preferred stock of the Corporation is outstanding,
the number of directors shall be not less than five.
Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article 11 of these By-Laws,
directors shall be elected at the next meeting held. The term of office of each
director shall be from the time of his election and qualification until the
election of directors next succeeding his election and until his successor shall
have been elected and shall have qualified, or until his death, or until he
shall have resigned or until December 31 of the year in which he shall have
reached seventy-two years of age, or until he shall have been removed as
hereinafter provided in these By-Laws, or as otherwise provided by statute or by
the Charter.
Section 4. Resignation. A director of the Corporation may resign at any
-----------
time by giving written notice of his or her resignation to the Board or the
Chairman of the Board or the
4
<PAGE>
President or the Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 5. Removal of Directors. Any director of the Corporation may be
--------------------
removed (with or without cause) by the stockholders by a vote of sixty-six and
two-thirds percent (66 2/3%) of the outstanding shares of capital stock then
entitled to vote in the election of such director.
Section 6. Vacancies. Subject to the provisions of the Investment Company
---------
Act, any vacancies in the Board of Directors, whether arising from death,
resignation, removal, an increase in the number of directors or any other cause,
shall be filled by a vote of a majority of the Board of Directors then in
office, regardless of whether they constitute a quorum.
Section 7. Place of Meetings. Meetings of the Board may be held at such
-----------------
place as the Board from time to time may determine or as shall be specified in
the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board may be held
----------------
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meeting. Special meetings of the Board may be called by
---------------
two or more directors of the Corporation or by the Chairman of the Board or the
President.
Section 10. Telephone Meetings. Members of the Board of Directors or of any
------------------
committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act, participation in a meeting by these means
constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting of
--------------------------
the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least 24 hours before the time at
which such meeting is to be held, or by first-class mail, postage prepaid,
addressed to him or her at his or her residence or usual place of business, at
least three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special meeting
----------------------------
need not be given to any director who, either before or after the meeting, shall
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver of notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two (unless
-----------------
there is only one director) of the members of the entire Board shall be present
in person at any meeting of the Board in order to constitute a quorum for the
transaction of business at such meeting, and except as otherwise expressly
required by statute, the Charter, these By-Laws, the Investment Company Act, or
other applicable statute, the act of a majority of the directors present at any
meeting at
5
<PAGE>
which a quorum is present shall be the act of the Board. In the absence of a
quorum at any meeting of the Board, a majority of the directors present thereat
may adjourn such meeting to another time and place until a quorum shall be
present thereat. Notice of the time and place of any such adjourned meeting
shall be given to the directors who were not present at the time of the
adjournment and, unless such time and place were announced at the meeting at
which the adjournment was taken, to the other directors. At any adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally called.
Section 14. Organization. The Board, by resolution adopted by a majority
------------
of the entire Board, may designate a Chairman of the Board, who shall preside at
each meeting of the Board. In the absence or inability of the Chairman of the
Board to preside at a meeting, the President or, in his or her absence or
inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The Secretary
(or, in his or her absence or inability to act, any person appointed by the
Chairman) shall act as secretary of the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject
-------------------------------------------------
to the provisions of the Investment Company Act, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
the committee, as the case may be, consent thereto in writing, and the writings
or writing are filed with the minutes of the proceedings of the Board or the
committee.
Section 16. Compensation. Directors may receive compensation for services
------------
to the Corporation in their capacities as directors or otherwise in such manner
and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation at all times
are consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
Prospectus of the Corporation included in the registration statement of the
Corporation relating to the initial public offering of its capital stock, as
filed with the Securities and Exchange Commission (or as such investment
policies and restrictions may be modified by the Board of Directors, or, if
required, by a majority vote of the stockholders of the Corporation in
accordance with the Investment Company Act) and as required by the Investment
Company Act. The Board, however, may delegate the duty of management of the
assets and the administration of its day to day operations to an individual or
corporate management company and/or investment adviser pursuant to a written
contract or contracts which have obtained the requisite approvals, including the
requisite approvals of renewals thereof, of the Board of Directors and/or the
stockholders of the Corporation in accordance with the provisions of the
Investment Company Act.
6
<PAGE>
ARTICLE IV.
Committees
----------
Section 1. Executive Committee. The Board, by resolution adopted by a
-------------------
majority of the entire board, may designate an Executive Committee consisting of
two or more of the directors of the Corporation, which committee shall have and
may exercise all of the powers and authority of the Board with respect to all
matters other than:
(i) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Charter;
(ii) the filling of vacancies on the Board of Directors;
(iii) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive Committee;
(iv) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the
Investment Company Act, or the taking of any other action required to be
taken by the Board of Directors by the Investment Company Act;
(v) the amendment or repeal of these By-Laws or the adoption of new
By-Laws;
(vi) the amendment or repeal of any resolution of the Board which by
its terms may be amended or repealed only by the Board;
(vii) the declaration of dividends and, except to the extent permitted
by law, the issuance of capital stock of the Corporation; and
(viii) the approval of any merger or share exchange which does not
require stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject to
revision or alteration by the Board; provided, however, that third parties shall
not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors from time
-----------------------------
to time, by resolution adopted by a majority of the whole Board, may designate
one or more other committees of the Board, each such committee to consist of two
or more directors and to have such powers and duties as the Board of Directors,
by resolution, may prescribe.
Section 3. General. One-third, but not less than two, of the members of any
-------
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and the
act of a majority present shall be the act of such committee. The Board may
designate a chairman of any committee and such chairman or
7
<PAGE>
any two members of any committee may fix the time and place of its meetings
unless the Board shall otherwise provide. In the absence or disqualification of
any member of any committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. The Board shall have the power at any time to change the membership of
any committee, to fill all vacancies, to designate alternate members to replace
any absent or disqualified member, or to dissolve any such committee. Nothing
herein shall be deemed to prevent the Board from appointing one or more
committees consisting in whole or in part of persons who are not directors of
the Corporation; provided, however, that no such committee shall have or may
exercise any authority or power of the Board in the management of the business
or affairs of the Corporation except as may be prescribed by the Board.
ARTICLE V.
Officers, Agents and Employees
------------------------------
Section 1. Number of Qualifications. The officers of the Corporation shall
------------------------
be a President, who shall be a director of the Corporation, a Secretary and a
Treasurer, each of whom shall be elected by the Board of Directors. The Board of
Directors may elect or appoint one or more Vice Presidents and also may appoint
such other officers, agents and employees as it may deem necessary or proper.
Any two or more offices may be held by the same person, except the offices of
President and Vice President, but no officer shall execute, acknowledge or
verify any instrument in more than one capacity. Such officers shall be elected
by the Board of Directors each year at its first meeting held after the annual
meeting of stockholders, each to hold office until the next meeting of the
stockholders and until his or her successor shall have been duly elected and
shall have qualified, or until his or her death, or until he or she shall have
resigned, or have been removed, as hereinafter provided in these By-Laws. The
Board from time to time may elect such officers (including one or more Assistant
Vice Presidents, one or more Assistant Treasurers and one or more Assistant
Secretaries) and such agents, as may be necessary or desirable for the business
of the Corporation. The President also shall have the power to appoint such
assistant officers (including one or more Assistant Vice Presidents, one or more
Assistant Treasurers and one or more Assistant Secretaries) as may be necessary
or appropriate to facilitate the management of the Corporation's affairs. Such
officers and agents shall have such duties and shall hold their offices for such
terms as may be prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of resignation to the Board, the Chairman of the
Board, the President or the Secretary. Any such resignation shall take effect at
the time specified therein or, if the time when it shall become effective shall
not be specified therein, immediately upon its receipt; and, unless otherwise
specified therein, the acceptance of such resignation shall be necessary to make
it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
-------------------------------------
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or
8
<PAGE>
appointed by the Board of Directors. Such removal shall be without prejudice to
such person's contract rights, if any, but the appointment of any person as an
officer, agent or employee of the Corporation shall not of itself create
contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from death,
---------
resignation, removal or any other cause, may be filled for the unexpired portion
of the term of the office which shall be vacant, in the manner prescribed in
these By-Laws for the regular election or appointment to such office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her control.
Section 6. Bonds or Other Security . If required by the Board, any officer,
-----------------------
agent or employee of the Corporation shall give a bond or other security for the
faithful performance of his or her duties, in such amount and with such surety
or sureties as the Board may require.
Section 7. President. The President shall be the chief executive officer of
---------
the Corporation. In the absence of the Chairman of the Board (or if there be
none), the President shall preside at all meetings of the stockholders and of
the Board of Directors. He or she shall have, subject to the control of the
Board of Directors, general charge of the business and affairs of the
Corporation. He or she may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he or she may
delegate these powers.
Section 8. Vice President. Each Vice President shall have such powers and
--------------
perform such duties as the Board of Directors or the President from time to time
may prescribe.
Section 9. Treasurer. The Treasurer shall:
---------
(i) have charge and custody of, and be responsible for, all of the
funds and securities of the Corporation, except those which the Corporation
has placed in the custody of a bank or trust company or member of a
national securities exchange (as that term is defined in the Securities
Exchange Act of 1934, as amended) pursuant to a written agreement
designating such bank or trust company or member of a national securities
exchange as custodian of the property of the Corporation;
(ii) keep full and accurate accounts of receipts and disbursements
in books belonging to the Corporation;
(iii) cause all moneys and other valuables to be deposited to the
credit of the Corporation;
(iv) receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever;
(v) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking
proper vouchers therefor; and
9
<PAGE>
(vi) in general, perform all of the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to
him or her by the Board or the President.
Section 10. Secretary. The Secretary shall:
---------
(i) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;
(ii) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(iii) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;
(iv) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly
kept and filed; and
(v) in general, perform all of the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him
or her by the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any officer of
--------------------
the Corporation, or for any other reason that the Board may deem sufficient, the
Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI.
Indemnification
---------------
Section 1. General Indemnification. Each officer and director of the
-----------------------
Corporation shall be indemnified by the Corporation to the full extent
permitted under the General Laws of the State of Maryland, except that such
indemnity shall not protect any such person against any liability to the
Corporation or any stockholder thereof to which such person otherwise would be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Absent a court determination that an officer or director seeking indemnification
was not liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office, the decision by the Corporation to indemnify such person must be
based upon the reasonable determination of independent legal counsel or the vote
of a majority of a quorum of the directors who are neither "interested persons,"
as defined in Section 2(a)(19) of the Investment Company Act, nor parties to the
proceeding ("non-party independent directors"), after review of the facts, that
such officer or director is not guilty of willful misfeasance, bad
10
<PAGE>
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and to
the full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Corporation a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met and a written undertaking to repay any such advance, if it ultimately should
be determined that the standard of conduct has not been met, and provided
further that at least one of the following additional conditions is met:
(i) the person seeking indemnification shall provide a security in
form and amount acceptable to the Corporation for his or her undertaking;
(ii) the Corporation is insured against losses arising by reason of
the advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based on a
review of facts readily available to the Corporation at the time the
advance is proposed to be made, that there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland, from liability arising from his or her activities as an
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any officer or director of the Corporation that
protects or purports to protect such person from liability to the Corporation or
to its stockholders to which such officer or director otherwise would be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
Section 2. Other Rights. The indemnification provided by this Article VI
------------
shall not be deemed exclusive of any other right, in respect of indemnification
or otherwise, to which those seeking such indemnification may be entitled under
any insurance or other agreement, vote of stockholders or disinterested
directors or otherwise, both as to action by a director or officer of the
Corporation in his or her official capacity and as to action by such person in
another capacity while holding such office or position, and shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such person.
11
<PAGE>
ARTICLE VII.
Capital Stock
-------------
Section 1. Stock Certificates. Each holder of stock of the Corporation
------------------
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation owned by him or her, provided, however, that
certificates for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by or in the name of
the Corporation by the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with
the seal of the Corporation. Any or all of the signatures or the seal on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate shall be issued, it may be issued by the Corporation with the same
effect as if such officer, transfer agent or registrar were still in office at
the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall be kept
-------------------------------------------
at the principal executive office of the Corporation correct and complete books
and records of account of all the business and transactions of the Corporation.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
Section 4. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
-----------------------------------------
certificates representing shares of stock of the Corporation immediately shall
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board, in its discretion, may require such owner or his or her legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the
12
<PAGE>
Board in its absolute discretion shall determine, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions. The
-------------------------------------------------------
Board may fix, in advance, a date not more than 90 days preceding the date fixed
for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of
--------------------------------------
the Corporation or his or her agent may inspect and copy during usual business
hours the Corporation's By-Laws, minutes of the proceedings of its stockholders,
annual statements of its affairs, and voting trust agreements on file at its
principal office.
ARTICLE VIII.
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors, the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland". Said seal may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
-----------
The Board of Directors shall have the power from time to time to fix the
fiscal year of the Corporation by a duly adopted resolution.
ARTICLE X.
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be deposited
------------
with such banks or other depositories as the Board of Directors of the
Corporation from time to time may determine.
Section 2. Custodians. All securities and other investments shall be
----------
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation from time to time may determine. Every arrangement
entered into with any bank or other company
13
<PAGE>
for the safekeeping of the securities and investments of the Corporation shall
contain provisions complying with the Investment Company Act, and the general
rules and regulations thereunder.
ARTICLE XI.
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts, acceptances,
--------------------------
bills of exchange and other orders or obligations for the payment of money shall
be signed by such officer or officers or person or persons as the Board of
Directors by resolution from time to time shall designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds or
------------------------------
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer or pursuant
to any procedure approved by the Board of Directors, subject to applicable law.
ARTICLE XII.
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify the
financial statements of the Corporation which are filed with the Securities and
Exchange Commission shall be selected annually by the Board of Directors and
ratified by the stockholders in accordance with the provisions of the Investment
Company Act.
ARTICLE XIII.
Annual Statement
----------------
The books of account of the Corporation shall be examined by an independent
firm of public accountants at the close of each annual period of the Corporation
and at such other times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of record of the Corporation on such date with respect to each
report as may be determined by the Board, at his or her address as the same
appears on the books of the Corporation. Such annual statement also shall be
available at the annual meeting of stockholders and shall be placed on file at
the Corporation's principal office in the State of Maryland, and if no annual
meeting is held pursuant to Article 11, Section 1, such annual statement of
affairs shall be placed on file as the Corporation's principal office within 120
days after the end of the Corporation's fiscal year. Each such report shall show
the assets and liabilities of the Corporation as of the close of the period
covered by the report and the securities in which the funds of the Corporation
then were invested. Such report also shall show the Corporation's income and
expenses for the period from the end of the Corporation's preceding fiscal year
to the close of the period covered by the report and any other information
required by
14
<PAGE>
the Investment Company Act, and shall set forth such other matters as the Board
or such firm of independent public accountants shall determine.
ARTICLE XIV.
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by the
affirmative vote of a majority of the Board of Directors. The stockholders shall
have no power to make, amend, alter or repeal By-Laws.
15
<PAGE>
Exhibit (d)(2)
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
The Corporation has the authority to issue stock of more than one class. A
statement of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of the shares of each class of stock which
the Corporation is authorized to issue and the differences in the relative
rights and preferences between the shares of each class to the extent that they
have been set, and the authority of the Board of Directors to set the relative
rights and preferences of subsequent classes and series, will be furnished by
the Corporation to any stockholder, without charge, upon request to the
Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT -_____Custodian______
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to Minors Act______
(State)
JT TEN-- as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above
list.
For value received,............hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
____________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
_____________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
________________________________________________________________________________
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated:___________________
Signature_____________________________
2
<PAGE>
NOTICE: The signature to this assignment must correspond with the name
as written upon the face of the certificate, in every particular,
without alteration or enlargement, or any change whatever.
Signature Guaranteed:___________________________________
Signatures must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934.
3
<PAGE>
EXHIBIT 99.(e)
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, __________, will act as Agent for me, and
--------------------
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present shares of common stock, par value $.10 per share
("Common Stock"), of MuniHoldings Michigan Insured Fund II, Inc. (the "Fund")
are registered, and will automatically put into effect for me the dividend
reinvestment option of the Plan as of the first record date for a dividend or
capital gains distribution (collectively referred to herein as a "dividend"),
payable at the election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan
---------------------------------
constitutes an election by me to receive dividends in shares of Common Stock
whenever the Fund declares a dividend. In such event, the dividend amount shall
automatically be made payable to me entirely in shares of Common Stock which
shall be acquired by the Agent for my account, depending upon the circumstances
described in paragraph 3, either (i) through receipt of additional shares of
unissued but authorized shares of Common Stock from the Fund ("newly-issued
shares") as described in paragraph 6 or (ii) by purchase of outstanding shares
of Common Stock on the open market ("open-market purchases") as described in
paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open-Market Purchases.
---------------------------------------------------------------------
If on the payment date for the dividend (the "valuation date"), the net asset
value per share of the Common Stock, as defined in paragraph 8, is equal to or
less than the market price per share of the Common Stock, as defined in
paragraph 8, plus estimated brokerage commissions (such condition being referred
to herein as "market premium"), the Agent shall invest the dividend amount in
newly-issued shares on my behalf as described in paragraph 6. If on the
valuation date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Agent shall
invest the dividend amount in shares acquired on my behalf in open-market
purchases as described in paragraph 7.
4. Purchase Period for Open-Market Purchases. In the event of a market
-----------------------------------------
discount on the valuation date, the Agent shall have until the last business day
before the next ex-dividend date with respect to the shares of Common Stock or
in no event more than 30 days after the valuation date (the "last purchase
date") to invest the dividend amount in shares acquired in open-market purchases
except where temporary curtailment or suspension of purchases is necessary to
comply with applicable provisions of federal securities laws.
5. Failure to Complete Open-Market Purchases During Purchase Period. If
----------------------------------------------------------------
the Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period because the market discount has shifted to a market
premium or otherwise, the Agent will invest the uninvested portion of the
dividend amount in newly-issued shares at the close of business on the last
purchase date as described in paragraph 4; except that the Agent may not acquire
newly-issued shares after the valuation date under the foregoing circumstances
unless it has received a legal opinion that registration of such shares is not
required under the Securities Act of 1933, as amended, or unless the shares to
be issued are registered under such Act.
<PAGE>
6. Acquisition of Newly-Issued Shares. In the event that all or part of
----------------------------------
the dividend amount is to be invested in newly-issued shares, you shall
automatically receive such newly-issued shares of Common Stock, including
fractions, for my account, and the number of additional newly-issued shares of
Common Stock to be credited to my account shall be determined by dividing the
dollar amount of the dividend on my shares to be invested in newly-issued shares
by the net asset value per share of Common Stock on the date the shares are
issued (the valuation date in the case of an initial market premium or the last
purchase date in case the Agent is unable to complete open-market purchases
during the purchase period); provided, that the maximum discount from the then
current market price per share on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the dividend
--------------------------------------
amount is to be invested in shares of Common Stock acquired in open-market
purchases, you shall apply the amount of such dividend on my shares (less my pro
rata share of brokerage commissions incurred with respect to your open-market
purchases) to the purchase on the open-market of shares of the Common Stock for
my account. Open-market purchases may be made on any securities exchange where
the Common Stock is traded, in the over-the-counter market or in negotiated
transactions and may be on such terms as to price, delivery and otherwise as you
shall determine. My funds held by you uninvested will not bear interest, and it
is understood that, in any event, you shall have no liability in connection with
any inability to purchase shares within 30 days after the initial date of such
purchase as herein provided, or with the timing of any purchases affected. You
shall have no responsibility as to the value of the Common Stock acquired for my
account. For the purposes of cash investments you may commingle my funds with
those of other shareholders of the Fund for whom you similarly act as Agent, and
the average price (including brokerage commissions) of all shares purchased by
you as Agent in the open market shall be the price per share allocable to me in
connection with open-market purchases.
8. Meaning of Market Price and Net Asset Value. For all purposes of the
-------------------------------------------
Plan: (a) the market price of the Common Stock on a particular date shall be the
last sales price on the New York Stock Exchange (the "Exchange") on that date,
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such stock on the Exchange on such date and
(b) net asset value per share of the Common Stock on a particular date shall be
as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold my
----------------------------------------------------
shares of Common Stock acquired pursuant to the Plan, together with the shares
of other shareholders of the Fund acquired pursuant to the Plan, in
noncertificated form in your name or that of your nominee. You will forward to
me any proxy solicitation material and will vote any shares so held for me only
in accordance with the proxy returned by me to the Fund. Upon my written
request, you will deliver to me, without charge, a certificate or certificates
for the full shares held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my
-------------
account as soon as practicable but not later than 60 days after the date
thereof.
2
<PAGE>
11. Fractional Interests. Although I may from time to time have an
--------------------
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
12. Stock Dividends or Share Purchase Rights. Any stock dividends or
----------------------------------------
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains
-----------
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan by
----------------------
notifying you in writing. Such termination will be effective immediately if my
notice is received by you not less than ten days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first trading day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be terminated
by you or the Fund upon notice in writing mailed to me at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any termination you will cause a certificate or certificates for the full
shares held for me under the Plan and cash adjustment for any fraction to be
delivered to me without charge. If I elect by notice to you in writing in
advance of such termination to have you sell part or all of my shares and remit
the proceeds to me, you are authorized to deduct brokerage commissions for this
transaction from the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or
-----------------
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date, thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
my account, all dividends and distributions payable on Common Stock of the Fund
held in my name or under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
16. Extent of Responsibility of Agent. You shall at all times act in good
---------------------------------
faith and agree to use your best efforts within reasonable limits to insure the
accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall
3
<PAGE>
not be liable for loss or damage due to errors unless such error is caused by
your negligence, bad faith, or willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the
-------------
laws of the State of New York without regard to its conflicts of laws
provisions.
4
<PAGE>
EXHIBIT 99.(g)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the ___ day of __________ 1999, by and between
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC., a Maryland corporation (the
"Fund"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (the
"Investment Adviser").
W I T N E S S E T H:
----------------------------
WHEREAS, the Fund is engaged in business as a closed-end, non-diversified,
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the promises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE>
ARTICLE I
---------
Duties of the Investment Adviser
--------------------------------
The Fund hereby employs the Investment Adviser to act as a manager and
investment adviser of the Fund and to furnish, or arrange for its affiliates to
furnish, the management and investment advisory services described below,
subject to the policies of, review by and overall control of the Board of
Directors of the Fund, for the period and on the terms and conditions set forth
in this Agreement. The Investment Adviser hereby accepts such employment and
agrees during such period, at its own expense, to render, or arrange for the
rendering of, such services and to assume the obligations herein set forth for
the compensation provided for herein. The Investment Adviser and its affiliates
for all purposes herein shall be deemed to be independent contractors and,
unless otherwise expressly provided or authorized, shall have no authority to
act for or represent the Fund in any way or otherwise be deemed agents of the
Fund.
(a) Management and Administrative Services. The Investment Adviser shall
--------------------------------------
perform, or arrange for its affiliates to perform, the management and
administrative services necessary for the operation of the Fund, including
administering shareholder accounts and handling shareholder relations. The
Investment Adviser shall provide the Fund with office space, facilities,
equipment and necessary personnel and such other services as the Investment
Adviser, subject to review by the Board of Directors, from time to time shall
determine to be necessary or useful to perform its obligations under this
Agreement. The Investment Adviser, also on behalf of the Fund, shall conduct
relations with custodians, depositories, transfer agents, pricing agents,
dividend disbursing agents, other shareholder servicing agents, accountants,
attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers,
banks and such other persons in any such other capacity deemed to be necessary
or desirable. The Investment Adviser generally shall monitor the Fund's
compliance with investment policies and restrictions as set forth in
2
<PAGE>
filings made by the Fund under the Federal securities laws. The Investment
Adviser shall make reports to the Board of Directors of its performance of
obligations hereunder and furnish advice and recommendations with respect to
such other aspects of the business and affairs of the Fund as it shall determine
to be desirable.
(b) Investment Advisory Services. The Investment Adviser shall provide,
----------------------------
or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the latter from time to time may consider
necessary for the proper supervision of the assets of the Fund, shall furnish
continuously an investment program for the Fund and shall determine from time to
time which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash, subject always to the
restrictions of the Articles of Incorporation and the By-Laws of the Fund, as
amended from time to time, the provisions of the Investment Company Act and the
statements relating to the Fund's investment objective, investment policies and
investment restrictions as the same are set forth in filings made by the Fund
under the Federal securities laws. The Investment Adviser shall make decisions
for the Fund as to the manner in which voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's portfolio
securities shall be exercised. Should the Board of Directors at any time,
however, make any definite determination as to investment policy and notify the
Investment Adviser thereof in writing, the Investment Adviser shall be bound by
such determination for the period, if any, specified in such notice or until
similarly notified that such determination has been revoked. The Investment
Adviser shall take, on behalf of the Fund, all actions which it deems necessary
to implement the investment policies determined as provided above, and in
particular to place all orders for the purchase or sale of portfolio securities
for the
3
<PAGE>
Fund's account with brokers or dealers selected by it, and to that end, the
Investment Adviser is authorized as the agent of the Fund to give instructions
to the custodian of the Fund as to deliveries of securities and payments of cash
for the account of the Fund. In connection with the selection of such brokers or
dealers and the placing of such orders with respect to assets of the Fund, the
Investment Adviser is directed at all times to seek to obtain execution and
prices within the policy guidelines determined by the Board of Directors and set
forth in filings made by the Fund under the Federal securities laws. Subject to
this requirement and the provisions of the Investment Company Act, the
Securities Exchange Act of 1934, as amended, and other applicable provisions of
law, the Investment Adviser may select brokers or dealers with which it or the
Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
--------------------------------------------------------
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Investment Adviser. The Investment Adviser shall provide the
----------------------
staff and personnel necessary to perform its obligations under this Agreement,
shall assume and pay or cause to be paid all expenses incurred in connection
with the maintenance of such staff and personnel, and, at its own expense, shall
provide the office space, facilities, equipment and necessary personnel which it
is obligated to provide under Article I hereof, and shall pay all compensation
of officers of the Fund and all Directors of the Fund who are affiliated persons
of the Investment Adviser.
4
<PAGE>
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
--------
other expenses of the Fund including, without limitation: taxes, expenses for
legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses, charges of the custodian, any sub-
custodian and transfer agent, charges of any auction agent and broker dealers in
connection with preferred stock of the Fund, expenses of portfolio transactions,
Securities and Exchange Commission fees, expenses of registering the shares of
common stock and preferred stock under Federal, state and foreign laws, fees and
actual out-of-pocket expenses of Directors who are not affiliated persons of the
Investment Adviser, accounting and pricing costs (including the daily
calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. It also is understood that the Fund will
reimburse the Investment Adviser for its costs incurred in providing accounting
services to the Fund.
ARTICLE III
-----------
Compensation of the Investment Adviser
--------------------------------------
(a) Investment Advisory Fee. For the services rendered, the facilities
-----------------------
furnished and the expenses assumed by the Investment Adviser, the Fund shall pay
to the Investment Adviser at the end of each calendar month a fee based upon the
average weekly value of the net assets of the Fund at the annual rate of 0.55 of
1.0% (0.55%) of the average weekly net assets of the Fund (i.e., the average
weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund and accumulated dividends on shares of outstanding
preferred stock), commencing on the day following effectiveness hereof. For
purposes of this calculation, average weekly net assets are determined at the
end of each month on the basis of the average net assets of the Fund for each
week during the month. The assets for each weekly period are determined by
averaging
5
<PAGE>
the net assets at the last business day of a week with the net assets at the
last business day of the prior week. It is understood that the liquidation
preference of any outstanding preferred stock (other than accumulated dividends)
is not considered a liability in determining the Fund's average weekly net
assets. If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fee as set forth above. Subject to the
provisions of subsection (b) hereof, payment of the Investment Adviser's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated by subsection (b) hereof. During any
period when the determination of net asset value is suspended by the Board of
Directors, the average net asset value of a share for the last week prior to
such suspension shall for this purpose be deemed to be the net asset value at
the close of each succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the Fund,
-------------------
including amounts payable to the Investment Adviser pursuant to subsection (a)
hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its management and investment advisory fee by the extent of such excess and, if
required pursuant to any such laws or regulations, will reimburse the Fund in
the amount of such excess; provided, however, to the extent permitted by law,
-------- -------
there shall be excluded from such expenses the amount of any interest, taxes,
distribution fees, brokerage fees and commissions and extraordinary expenses
(including but not limited to legal claims and liabilities and litigation costs
and any indemnification related thereto) paid or payable by the Fund. Whenever
the expenses of the
6
<PAGE>
Fund exceed a pro rata portion of the applicable annual expense limitations, the
estimated amount of reimbursement under such limitations shall be applicable as
an offset against the monthly payment of the fee due to the Investment Adviser.
Should two or more such expense limitations be applicable as at the end of the
last business day of the month, that expense limitation which results in the
largest reduction in the Investment Adviser's fee shall be applicable.
ARTICLE IV
----------
Limitation of Liability of the Investment Adviser
-------------------------------------------------
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
---------
Activities of the Investment Adviser
------------------------------------
The services of the Investment Adviser to the Fund are not to be deemed to
be exclusive; the Investment Adviser and any person controlled by or under
common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") are free to render services to others. It is
understood that Directors, officers, employees and shareholders of the Fund are
or may become interested in the Investment Adviser and its affiliates, as
directors, officers, employees, partners and shareholders or otherwise, and that
directors, officers,
7
<PAGE>
employees, partners and shareholders of the Investment Adviser and of its
affiliates are or may become similarly interested in the Fund, and that the
Investment Adviser and directors, officers, employees, partners and shareholders
of its affiliates may become interested in the Fund as shareholders or
otherwise.
ARTICLE VI
----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until two after the date first above written, and
thereafter, but only so long as such continuance specifically is approved at
least annually by (i) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Fund, and (ii) by the vote
of a majority of those Directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for the
purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Board of Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Investment Adviser, on sixty (60) days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment.
ARTICLE VII
-----------
Amendment of this Agreement
---------------------------
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
8
<PAGE>
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
----------
Governing Law
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York and the applicable provisions of the Investment
Company Act. To the extent that the applicable laws of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MUNIHOLDINGS MICHIGAN INSURED
FUND II, INC.
By: ______________________________
Authorized Signatory
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
10
<PAGE>
================================================================================
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
(a Maryland corporation)
Shares of Common Stock
PURCHASE AGREEMENT
Dated: August , 1999
================================================================================
<PAGE>
Table of Contents
Page
----
SECTION 1. Representations and Warranties............................. 2
(a) Representations and Warranties by the Fund and the Adviser. 2
(b) Additional Representations of the Adviser.................. 7
(c) Officer's Certificates..................................... 7
SECTION 2. Sale and Delivery to the Underwriter; Closing.................. 7
(a) Initial Shares............................................. 7
(b) Option Shares.............................................. 8
(c) Payment. 8
(d) Denominations; Registration................................ 8
SECTION 3. Covenants of the Fund.......................................... 9
(a) Compliance with Securities Regulations and Commission
Requests................................................... 9
(b) Filing of Amendments....................................... 9
(c) Delivery of Registration Statements........................ 9
(d) Delivery of Prospectus..................................... 10
(e) Continued Compliance with Securities Laws.................. 10
(f) Blue Sky Qualifications.................................... 10
(g) Rule 158................................................... 10
(h) Use of Proceeds............................................ 11
(i) Subchapter M............................................... 11
(j) Listing.................................................... 11
(k) Restrictions on Sale of Shares............................. 11
SECTION 4. Payment of Expenses............................................ 11
(a) Expenses................................................... 11
(b) Termination of Agreement................................... 12
SECTION 5. Conditions of
Underwriter's Obligations................................................ 12
(a) Effectiveness of Registration Statement.................... 12
(b) Opinion of Counsel for the Fund and the Underwriter........ 12
(c) Opinion of General Counsel of the Adviser.................. 12
(d) Officers' Certificates..................................... 12
(e) Accountant's Comfort Letter................................ 13
(f) Bring-down Comfort Letter.................................. 13
(g) Approval of Listing........................................ 13
(h) No Objection............................................... 13
(i) Conditions to Purchase Option Shares....................... 13
(j) Additional Documents....................................... 14
(k) Termination of Agreement................................... 14
(i)
<PAGE>
SECTION 6. Indemnification.............................................. 14
(a) Indemnification of the Underwriter....................... 14
(b) Indemnification of Fund, Adviser, Directors,
General Partner and Officers............................. 15
(c) Actions against Parties, Notification.................... 15
(d) Settlement without Consent if Failure to Reimburse....... 16
SECTION 7. Contribution................................................. 16
SECTION 8. Representations,Warranties and Agreements to Survive Delivery. 17
SECTION 9. Termination of Agreement..................................... 17
(a) Termination; General..................................... 18
(b) Liabilities.............................................. 18
SECTION 10. Notices..................................................... 18
SECTION 11. Parties..................................................... 18
SECTION 12. Governing Law and Time...................................... 19
SECTION 13. Effect of Headings.......................................... 19
SCHEDULE A.............................................................. 21
EXHIBITS
Exhibit A - Form of Opinion of Fund's Counsel
Exhibit B Form of Opinion of General Counsel of the Investment Adviser
Exhibit C - Form of Accountant's Comfort Letter
(iii)
<PAGE>
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
(a Maryland corporation)
Shares of Common Stock
(Par Value $.10 Per Share)
PURCHASE AGREEMENT
August , 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1201
Ladies and Gentlemen:
MuniHoldings Michigan Insured Fund II, Inc., a Maryland corporation (the
"Fund"), and Fund Asset Management, L.P., a Delaware limited partnership (the
"Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the
issue and sale by the Fund and the purchase by the Underwriter of
shares of common stock, par value $.10 per share, of the Fund (the "Common
Stock"), and, with respect to the grant by the Fund to the Underwriter of the
option described in Section 2(b) hereof to purchase all or any part of
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid shares of Common Stock (the "Initial Shares") to be
purchased by the Underwriter and all or any part of the shares of
Common Stock subject to the option described in Section 2(b) hereof (the "Option
Shares"), are hereinafter called, collectively, the "Shares."
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after this
Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No. 333-
), including the related preliminary prospectus, for the registration of the
Shares under the Securities Act of 1933, as amended (the "1933 Act"), the
Investment Company Act, and the rules and regulations of the Commission under
the 1933 Act and the Investment Company Act (together, the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such amended preliminary
<PAGE>
prospectuses as may have been required to the date hereof. Promptly after
execution and delivery of this Agreement, the Fund will either (i) prepare and
file a prospectus in accordance with the provisions of paragraph (c) of Rule 497
("Rule 497(c)") of the rules and regulations of the Commission under the 1933
Act (the "1933 Act Regulations") or a certificate in accordance with the
provisions of paragraph (j) of Rule 497 ("Rule 497(j)") of the 1933 Act
Regulations, (ii) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the 1933 Act Regulations and paragraph
(h) of Rule 497 ("Rule 497(h)") of the 1933 Act Regulations, or (iii) if the
Fund has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations,
prepare and file a term sheet (a "Term Sheet") in accordance with the provisions
of Rule 434 and Rule 497(h). The information included in any such prospectus or
in any such Term Sheet, as the case may be, that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective (a) pursuant
to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information."
Each prospectus used before such registration statement became effective, and
any prospectus that omitted, as applicable, the Rule 430A Information or the
Rule 434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto, if any, at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus in the form first furnished to the Underwriter for use in connection
with the offering of the Shares is herein called the "Prospectus." If Rule 434
is relied on, the term "Prospectus" shall refer to the preliminary prospectus
dated July , 1999, together with the applicable Term Sheet and all references in
this Agreement to the date of such Prospectus shall mean the date of the
applicable Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus, or any Term
Sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Fund and the Adviser. The Fund
and the Adviser each severally represents and warrants to the Underwriter as of
the date hereof, as of the Closing Time referred to in Section 2(c) hereof and
as of the Date of Delivery (if any) referred to in Section 2(b) hereof, and
agrees with the Underwriter, as follows:
2
<PAGE>
(i) Compliance with Registration Requirements. The Fund meets the
-----------------------------------------
requirements for use of Form N-2 under the 1933 Act. Each of the Registration
Statement and any Rule 462(b) Registration Statement has become effective under
the 1933 Act and no stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement has been issued under the
1933 Act and no proceedings for that purpose have been instituted or are pending
or, to the knowledge of the Fund, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with. If required, the Fund has received any orders exempting the Fund
from any provisions of the Investment Company Act.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Shares are purchased, at
the Date of Delivery) the Registration Statement, the Rule 462(b) Registration
Statement and any amendments or supplements thereto complied and will comply in
all material respects with the requirements of the 1933 Act, the Investment
Company Act and the Rules and Regulations and did not and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
Neither the Prospectus, nor any amendments or supplements thereto, at the time
the Prospectus or any amendments or supplements thereto were issued and at the
Closing Time (and, if any Option Shares are purchased, at the Date of Delivery)
included or will include an untrue statement of a material fact or omitted or
will omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties in this subsection shall not
apply to statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information furnished to
the Fund in writing by the Underwriter expressly for use in the Registration
Statement or in the Prospectus. If Rule 434 is used, the Fund will comply with
the requirements of Rule 434.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 497(c) or Rule 497(h) under the 1933 Act, complied
when so filed in all material respects with the Rules and Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriter for use
in connection with this offering was identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules, if any, included in the
Registration Statement are independent public accountants as required by the
1933 Act and the Rules and Regulations.
(iii) Financial Statements. The financial statements, included in
--------------------
the Registration Statement and Prospectus, together with the related schedules
and notes, present fairly the financial position of the Fund at the date
indicated and said statements
3
<PAGE>
have been prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the period involved. The
supporting schedules, if any, included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated therein.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and in the
Prospectus, except as otherwise stated therein, (A) there has been no material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Fund, whether or not arising in
the ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Fund, other than those in the ordinary
course of business, which are material with respect to the Fund and (C) there
has been no dividend or distribution of any kind declared, paid or made by the
Fund on any class of its capital stock.
(v) Good Standing of the Fund. The Fund has been duly organized and
-------------------------
is validly existing as a corporation in good standing under the laws of the
State of Maryland and has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this Agreement;
and the Fund is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect.
(vi) Subsidiaries. The Fund has no subsidiaries.
------------
(vii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Fund is as set forth in the Prospectus under the caption
"Description of Capital Stock."
(viii) Investment Company Act. The Fund is registered with the
----------------------
Commission under the Investment Company Act as a closed-end, non-diversified,
management investment company, and no order of suspension or revocation of such
registration has been issued or proceedings therefor initiated or threatened by
the Commission.
(ix) Authorization of Agreement. This Agreement been duly authorized,
--------------------------
executed and delivered by the Fund.
(x) Authorization and Description of Shares. The Shares to be
---------------------------------------
purchased by the Underwriter from the Fund have been duly authorized for
issuance and sale to the Underwriter pursuant to this Agreement, and, when
issued and delivered by the Fund pursuant to this Agreement against payment of
the consideration set forth in this Agreement will be validly issued, fully paid
and non-assessable; the Shares conform to all statements relating thereto
contained in the Prospectus and such description conforms to the rights set
forth in the instruments defining the same; no holder of the Shares will be
subject to personal liability by reason of being such a holder; and the issuance
of the
4
<PAGE>
Shares is not subject to the preemptive or other similar rights of any
securityholder of the Fund.
(xi) Absence of Defaults and Conflicts. The Fund is not in violation of
---------------------------------
its charter or by-laws or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any material contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or
other agreement or instrument to which the Fund is a party or by which it or its
properties may be bound, or to which any of the property or assets of the Fund
is subject (collectively, "Agreements and Instruments"), except for such
defaults that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement, the Investment Advisory Agreement
and the Custody Agreement referred to in the Registration Statement (as used
herein, the "Advisory Agreement" and the "Custody Agreement," respectively) and
the consummation of the transactions contemplated in this Agreement and in the
Registration Statement (including the issuance and sale of the Shares and the
use of the proceeds from the sale of the Shares as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Fund with its
obligations under this Agreement have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach of, or a
default or Repayment Event (as defined below) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Fund pursuant to the Agreements and Instruments (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not result in
a Material Adverse Effect), nor will such action result in any violation of the
provisions of the charter or the by-laws of the Fund, or any applicable law,
statute, rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having jurisdiction
over the Fund or any of its assets, properties or operations. As used herein, a
"Repayment Event" means any event or condition which gives the holder of any
note, debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness by the Fund.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental agency
or body, domestic or foreign, now pending, or, to the knowledge of the Fund,
threatened against or affecting, the Fund, which is required to be disclosed in
the Registration Statement (other than as disclosed therein), or which might
reasonably be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in this
Agreement or the performance by the Fund of its obligations hereunder; the
aggregate of all pending legal or governmental proceedings to which the Fund is
a party or of which any of its respective property or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, could not reasonably be expected
to result in a Material Adverse Effect.
3
<PAGE>
(xiii) Subchapter M Compliance. The Fund intends to, and will, direct
-----------------------
the investment of proceeds of the offering described in the Registration
Statement in such a manner as to comply with the requirements of Subchapter M of
the Internal Revenue Code of 1986, as amended ("Subchapter M of the Code"), and
intends to qualify as a regulated investment company under Subchapter M of the
Code.
(xiv) Accuracy of Exhibits. There are no contracts or documents which
--------------------
are required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits thereto which have not been so described and filed as
required.
(xv) Possession of Intellectual Property. The Fund owns or
-----------------------------------
possesses, or can acquire on reasonable terms, adequate patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks, trade names or other intellectual
property (collectively, "Intellectual Property") necessary to carry on the
business now operated by it, and the Fund has not received any notice or is
otherwise aware of any infringement or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or circumstances which
would render any Intellectual Property invalid or inadequate to protect the
interest of the Fund therein, and which infringement or conflict (if the subject
of any unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration, qualification or
decree of, any court or governmental authority or agency is necessary or
required for the performance by the Fund of its obligations hereunder, in
connection with the offering, issuance or sale of the Shares under this
Agreement or the consummation of the transactions contemplated by this
Agreement, except such as have been already obtained or as may be required under
the 1933 Act or the 1940 Act or the Rules and Regulations and foreign or state
securities or blue sky laws.
(xvii) Possession of Licenses and Permits. The Fund possesses such
----------------------------------
permits, licenses, approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state, local or
foreign regulatory agencies or bodies necessary to conduct the business now
operated by it; the Fund is in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when the
invalidity of such Governmental Licenses or the failure of such Governmental
Licenses to be in full force and effect would not have a Material Adverse
Effect; and the Fund has not received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.
6
<PAGE>
(b) Additional Representations of the Adviser. The Adviser represents and
warrants to the Underwriter as of the date hereof and as of the Representation
Date as follows:
(i) Organization and Authority of Adviser. The Adviser has been duly
-------------------------------------
organized as a limited partnership under the laws of the State of Delaware,
with power and authority to conduct its business as described in the
Registration Statement and the Prospectus.
(ii) Investment Advisers Act. The Adviser is duly registered as an
-----------------------
investment adviser under the Investment Advisers Act of 1940, as amended
(the "Investment Advisers Act"), and is not prohibited by the Investment
Advisers Act or the Investment Company Act, or the rules and regulations
under such acts, from acting under the Advisory Agreement for the Fund as
contemplated by the Registration Statement and the Prospectus.
(iii) Authorization of Agreements. This Agreement has been duly
---------------------------
authorized, executed and delivered by the Adviser; the Advisory Agreement
has been duly authorized, executed and delivered by the Adviser and
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting
creditors' rights and to general equitable principles; and neither the
execution and delivery of this Agreement or the Advisory Agreement, nor the
performance by the Adviser of its obligations hereunder or thereunder will
conflict with, or result in a breach of any of the terms and provisions of,
or constitute, with or without the giving of notice or the lapse of time or
both, a default under, any agreement or instrument to which the Adviser is
a party or by which it is bound, or any law, order, rule or regulation
applicable to it of any jurisdiction, court, Federal or state regulatory
body, administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Adviser or its
respective properties or operations.
(iv) Financial Resources. The Adviser has the financial resources
-------------------
available to it necessary for the performance of its services and
obligations as contemplated in the Registration Statement and the
Prospectus.
(v) Rule 482 Compliance. Any advertisement approved by the Adviser for
-------------------
use in the public offering of the Shares pursuant to Rule 482 under the
1933 Act Regulations (an "Omitting Prospectus") complies with the
requirements of such Rule 482.
(c) Officer's Certificates. Any certificate signed by any officer of the
Fund or any officer of the Adviser delivered to the Underwriter or to counsel
for the Fund and the Underwriter shall be deemed a representation and warranty
by the Fund or the Adviser, as the case may be, to the Underwriter as to the
matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
---------------------------------------------
(a) Initial Shares. On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth, the
Fund agrees to sell to the
7
<PAGE>
Underwriter and the Underwriter agrees to purchase from the Fund the Initial
Shares at the price per share set forth in Schedule A.
(b) Option Shares. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Fund hereby grants an option to the Underwriter to purchase up to an
additional shares of Common Stock at the price per share set forth in
Schedule A, less an amount per share equal to any dividends or distributions
declared by the Fund and payable on the Initial Shares but not payable on the
Option Shares. The option hereby granted will expire 45 days after the date
hereof and may be exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial Shares upon notice by the Underwriter
to the Fund setting forth the number of Option Shares as to which the
Underwriter is then exercising the option and the time, date and place of
payment and delivery for such Option Shares. Any such time and date of delivery
for the Option Shares (a "Date of Delivery") shall be determined by the
Underwriter, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to Closing Time, as hereinafter
defined.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Shares shall be made at the offices of Brown &
Wood LLP, One World Trade Center, New York, New York 10048-0557, or at such
other place as shall be agreed upon by the Underwriter and the Fund, at 9:00
A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day following the date hereof, or such
other time not later than ten business days after such date as shall be agreed
upon by the Underwriter and the Fund (such time and date of payment and delivery
herein being referred to as "Closing Time").
In addition, in the event that any or all of the Option Shares are
purchased by the Underwriter, payment of the purchase price for, and delivery of
certificates for, such Option Shares shall be made at the above-mentioned
offices of Brown & Wood LLP, or at such other place as shall be agreed upon by
the Underwriter and the Fund, on each Date of Delivery as specified in the
notice from the Underwriter to the Fund.
Payment shall be made to the Fund by wire transfer of immediately available
funds to a bank account designated by the Fund, against delivery to the
Underwriter of certificates for the Shares to be purchased by it.
(d) Denominations; Registration. Certificates for the Initial Shares and
---------------------------
the Option Shares, if any, shall be in such denominations and registered in such
names as the Underwriter may request in writing at least one full business day
before the Closing Time or the relevant Date of Delivery, as the case may be.
The certificates for the Initial Shares and the Option Shares will be made
available by the Fund for examination by the Underwriter not later than 10:00
A.M. on the last business day prior to Closing Time or the Date of Delivery, as
the case may be.
8
<PAGE>
SECTION 3. Covenants of the Fund. The Fund covenants with the
---------------------
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Fund, subject to Section 3(b), will comply with the requirements of Rule 430A or
Rule 434, as applicable, and will notify the Underwriter immediately, and
confirm the notice in writing, (i) if any post-effective amendment to the
Registration Statement shall have become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes, and (v) of the issuance by the Commission
of an order of suspension or revocation of the notification on Form N-8A of
registration of the Fund as an investment company under the Investment Company
Act or the initiation of any proceeding for that purpose. The Fund will make
every reasonable effort to prevent the issuance of any stop order described in
subsection (iv) hereunder or any order of suspension or revocation described in
subsection (v) hereunder and, if any such stop order or order of suspension or
revocation is issued, to obtain the lifting thereof at the earliest possible
moment. The Fund will promptly effect the filings necessary pursuant to Rule
497(c), Rule 497(j) or Rule 497(h) and will take such steps as it deems
necessary to ascertain promptly whether the certificate transmitted for filing
under Rule 497(j) or the form of prospectus transmitted for filing under Rule
497(c) or Rule 497(h) was received for filing by the Commission and, in the
event that it was not, it will promptly file such certificate or prospectus.
(b) Filing of Amendments. The Fund will give the Underwriter notice of
--------------------
its intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment or filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus included
in the Registration Statement at the time it became effective or to the
Prospectus, whether pursuant to the Investment Company Act, the 1933 Act, or
otherwise, and will furnish the Underwriter with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Underwriter or
counsel to the Underwriter and the Fund shall object.
(c) Delivery of Registration Statements. The Fund has furnished or will
charge, signed copies of the notification of registration on Form N-8A and
Registration Statement as originally filed and of each amendment thereto,
(including exhibits filed therewith, or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Underwriter a conformed copy, without charge, of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for the Underwriter. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriter will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
9
<PAGE>
(d) Delivery of Prospectus. The Fund has delivered to the Underwriter,
without charge, as many copies of each preliminary prospectus as the Underwriter
reasonably requested, and the Fund hereby consents to the use of such copies for
purposes permitted by the 1933 Act. The Fund will furnish to the Underwriter,
without charge, during the period when the Prospectus is required to be
delivered under the 1933 Act, such number of copies of the Prospectus (as
amended or supplemented) as the Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriter will be identical to the electronically transmitted copies thereof
field with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Fund will comply with
the 1933 Act, the Investment Company Act and the Rules and Regulations so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is required by
the 1933 Act to be delivered in connection with sales of the Shares, any event
shall occur or condition shall exist as a result of which it is necessary, in
the opinion of counsel to the Underwriter and the Fund, to amend the
Registration Statement or amend or supplement any Prospectus in order that the
Prospectus will not include any untrue statements of material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Fund will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Fund will
furnish to the Underwriter such number of copies of such amendment or supplement
as the Underwriter may reasonably request.
(f) Blue Sky Qualifications. The Fund will use its best efforts, in
cooperation with the Underwriter, to qualify the Shares for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Underwriter may designate and to maintain such qualifications in effect for
a period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Fund shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the Shares have been
so qualified, the Fund will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Fund will timely file such reports pursuant to the
Investment Company Act as are necessary in order to make generally available to
its securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
10
<PAGE>
(h) Use of Proceeds. The Fund will use the net proceeds received by it
from the sale of the Shares in the manner specified in the Prospectus under "Use
of Proceeds."
(i) Subchapter M. The Fund will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the Code.
(j) Listing. The Fund will use its best efforts to effect the listing of
the Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than two weeks from the date of the Prospectus.
(k) Restrictions on Sale of Shares. During a period of 180 days from the
date of the Prospectus, the Fund will not, without your prior written consent,
directly or indirectly offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any share of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or file any registration statement under the 1933 Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock of such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder or (B) any shares or Common Stock issued pursuant to any dividend
reinvestment plan.
SECTION 4. Payment of Expenses.
-------------------
(a) Expenses. The Fund will pay all expenses incident to the performance
of its obligations under this Agreement, including (i) the preparation, printing
and filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriter of this Agreement and such
other documents as may be required in connection with the offering, purchase,
sale issuance or delivery of the Shares, (iii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriter, including any
stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Shares to the Underwriter, (iv) the fees and
disbursements of the Fund's counsel, accountants and other advisors, (v) the
qualification of the Shares under the securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel to the Underwriter and the Fund in connection
therewith and in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriter of copies
of each preliminary prospectus, any Term Sheets and of the Prospectus and any
amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriter of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the Shares
and (ix) the filing fees incident to, and the reasonable fees and disbursements
of counsel to the Underwriter and the Fund in connection with the review by the
National Association of Securities Dealers, Inc. (the "NASD") of the terms of
the sale of the Shares and (x) the fees and expenses incurred in connection with
the listing of the Shares on the New York Stock Exchange.
11
<PAGE>
(b) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Fund or the Adviser shall reimburse the Underwriter for all of its
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel to the Fund and the Underwriter. In the event the transactions
contemplated hereunder are not consummated, the Adviser agrees to pay all of the
costs and expenses set forth in paragraph (a) of this Section 4 which the Fund
would have paid if such transactions had been consummated.
SECTION 5. Conditions of Underwriter's Obligations. The obligations
---------------------------------------
of the Underwriter hereunder are subject to the accuracy of the representations
and warranties of the Fund and the Adviser contained in Section 1 hereof, or in
the certificates of any officer of the Fund and the Adviser delivered pursuant
to the provisions hereof, to the performance by the Fund and the Adviser of
their respective covenants and obligations hereunder, and to the following
further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement including any Rule 462(b) Registration Statement has become effective
and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the Underwriter and the Fund. Either
(i) a certificate has been filed with the Commission in accordance with Rule
497(j) or a prospectus has been filed with the Commission in accordance with
Rule 497(c), or (ii) a prospectus containing the Rule 430A Information shall
have been filed with the Commission in accordance with Rule 497(h) (or a post-
effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A) or, if the
Fund has elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 497(h).
(b) Opinion of Counsel for the Fund and the Underwriter. At Closing
Time, the Underwriter shall have received the favorable opinion, dated as of
Closing Time, of Brown & Wood LLP, counsel to the Fund and the Underwriter, to
the effect set forth in Exhibit A hereto.
---------
(c) Opinion of General Counsel of the Adviser. At Closing Time, the
Underwriter shall have received the favorable opinion, dated as of Closing Time,
of Michael J. Hennewinkel, Esq., General Counsel to the Adviser, or a senior
attorney of the Adviser, in form and substance satisfactory to counsel to the
Underwriter, to the effect set forth in Exhibit B hereto and
---------
to such further effect as counsel to the Underwriter may reasonably request.
(d) Opinion of Special Michigan Counsel to the Fund. At Closing Time,
the Underwriter shall have received the favorable opinion, dated as of Closing
Time, of Miller, Canfield, Paddock and Stone, P.L.C., special Michigan counsel
to the Fund, to the effect set forth in Exhibit C hereto.
---------
(e) Officers' Certificates. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business
12
<PAGE>
affairs or business prospects of the Fund, whether or not arising in the
ordinary course of business, and the Underwriter shall have received (A) a
certificate of the President or a Vice President of the Fund, dated as of
Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though
expressly made at and as of Closing Time, (iii) the Fund has complied with
all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission and (B) a certificate of the President or a
Vice President of the Adviser, dated as of Closing Time, to the effect that
(i) the representations and warranties in Sections 1(a) and 1(b) hereof are
true and correct with the same force and effect as though expressly made at
and as of Closing Time, and (ii) the Adviser has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time.
(f) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the Underwriter shall have received from Ernst & Young LLP
a letter, dated such date, in form and substance satisfactory to the
Underwriter containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in the
Registration Statement and the Prospectus, to the effect set forth in
Exhibit D hereto and to such further effect as counsel to the Underwriter
---------
may reasonably request.
(g) Bring-down Comfort Letter. At Closing Time, the Underwriter
shall have received from Ernst & Young LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter,
furnished pursuant to subsection (f) of this Section, except that the
"specified date" referred to shall be a date not more than three business
days prior to Closing Time.
(h) Approval of Listing. At Closing Time, the Shares shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(i) No Objection. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(j) Conditions to Purchase Option Shares. In the event that the
Underwriter exercises its option provided in Section 2(b) hereof to
purchase all or any portion of the Option Shares, the representations and
warranties of the Fund and the Adviser contained herein and the statements
in any certificates furnished by the Fund and the Adviser hereunder shall
be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the Underwriter shall have received:
(i) Officers' Certificates. Certificates, dated such Date of
----------------------
Delivery, of the President or a Vice President of the Fund and of the
President or a Vice President of the Adviser confirming that the
respective certificates delivered at the Closing Time pursuant to
Section 5(e) hereof remains true and correct as of such Date of
Delivery.
13
<PAGE>
(ii) Opinions of Counsel. The favorable opinions of Brown & Wood
-------------------
LLP, counsel to the Fund and the Underwriter, Michael J. Hennewinkel, Esq.,
General Counsel of the Adviser, or a senior attorney of the Adviser, and
Miller, Canfield, Paddock and Stone, P.L.C., special Michigan counsel to
the Fund, each in form and substance satisfactory to the counsel for the
Underwriter, dated such Date of Delivery, relating to the Option Shares to
be purchased on such Date of Delivery and otherwise to the same effect as
the opinions required by Sections 5(b), 5(c) and 5(d) hereof, respectively.
(iii) Bring-down Comfort Letter. A letter from Ernst & Young LLP in
-------------------------
form and substance satisfactory to the Underwriter and dated such Date of
Delivery, substantially the same in form and substance as the letter
furnished to the Underwriter pursuant to Section 5(j), except that the
"specified date" in the letter furnished pursuant to this paragraph shall
be a date not more than five days prior to such Date of Delivery.
(k) Additional Documents. At Closing Time and at each Date of Delivery,
counsel to the Fund and the Underwriter shall have been furnished with such
documents and opinions as it may require for the purpose of enabling it to pass
upon the issuance and sale of the Shares as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Fund in connection with the issuance and sale of the Shares as
herein contemplated shall be satisfactory in form and substance to the
Underwriter and counsel to the Fund and the Underwriter.
(l) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Shares on
a Date of Delivery which is after the Closing Time, the obligations of the
Underwriter to purchase the relevant Option Shares, may be terminated by the
Underwriter by notice to the Fund at any time at or prior to Closing Time or
such Date of Delivery, as the case may be, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 6, 7 and 8 shall survive any such termination and remain
in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of the Underwriter. (1) The Fund and the Adviser
jointly and severally agree to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter within the meaning of Section
15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus, any Omitting Prospectus or the Prospectus (or any
amendment or supplement thereto), or the
14
<PAGE>
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by the Underwriter) reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus, any Omitting Prospectus or the
Prospectus (or any amendment or supplement thereto).
(2) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director or officer of the Fund or
controls the Fund within the meaning of Section 15 of the 1933 Act, such
indemnity agreement is subject to the undertaking of the Fund in the
Registration Statement under Item 29 thereof.
(b) Indemnification of Fund, Adviser, Directors, General Partner and
Officers. The Underwriter agrees to indemnify and hold harmless the Fund, the
Adviser, the directors of the Fund, the general partner of the Adviser, each of
the Fund's officers who signed the Registration Statement, and each person, if
any, who controls the Fund or the Adviser within the meaning of Section 15 of
the 1933 Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto) including the Rule 430A Information and the Rule 434
Information, if applicable, or in any preliminary prospectus, any Omitting
Prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the
15
<PAGE>
Registration Statement (or any amendment thereto), or any preliminary
prospectus, any Omitting Prospectus or the Prospectus (or any amendment or
supplement thereto).
(c) Actions against Parties, Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by the Underwriter, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Fund and the Adviser. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for the
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6 (a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Fund and the Adviser on the one hand and the Underwriter on the other hand from
the offering of the Shares pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is
16
<PAGE>
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares pursuant
to this Agreement (before deducting expenses) received by the Fund, and the
total underwriting commission received by the Underwriter, in each case as set
forth or otherwise indicated on the cover of the Prospectus, or, if Rule 434 is
used, the corresponding location on the Term Sheet, bear to the sum of the
aggregate initial public offering price of the Shares and the total underwriting
commission received by the Underwriter as set forth or otherwise indicated on
such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each director of the Fund and the
Adviser, respectively, each officer of the Fund who signed the Registration
Statement and each person, if any, who controls the Fund and
17
<PAGE>
the Adviser within the meaning of Section 15 of the 1933 Act, shall have the
same rights to contribution as the Fund and the Adviser.
SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Fund or of the Adviser submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of the Underwriter or controlling
person, or by or on behalf of the Fund or the Adviser and shall survive delivery
of the Shares to the Underwriter.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Underwriter may terminate this
Agreement by notice to the Fund, at any time at or prior to Closing Time (i) if
there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Fund or the Adviser,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or the international financial markets, any outbreak of hostilities or
escalation thereof or other calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case the effect of which is such as to make it,
in the judgment of the Underwriter, impracticable to market the Shares or to
enforce contracts for the sale of the Shares, or (iii) if trading in any
securities of the Fund has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices for securities have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated at North Tower, World Financial Center, New
York, New York 10281-1201, Attention: Richard Bruce, Vice President; notices to
the Fund or to the Adviser shall be directed to each of them at 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, Attention: Terry K. Glenn, President.
SECTION 11. Parties. This Agreement shall inure to the benefit of
-------
and be binding upon the Underwriter, the Fund, the Adviser and their respective
successors. Nothing expressed or
18
<PAGE>
mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the Underwriter, the Fund, the Adviser
and their respective successors and the controlling persons and officers,
directors and general partner referred to in Sections 6 and 7 and their heirs
and legal representatives, any legal or equitable right, remedy or claim under
or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriter, the Fund and the Adviser and
their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Shares from the Underwriter
shall be deemed to be a successor merely by reason of such purchase.
SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
----------------------
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 13. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
19
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
By:_____________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By:_____________________________
Authorized Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:_____________________________
Authorized Signatory
20
<PAGE>
SCHEDULE A
----------
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
(A MARYLAND CORPORATION)
SHARES OF COMMON STOCK
(PAR VALUE $.10 PER SHARE)
1. THE INITIAL PUBLIC OFFERING PRICE PER SHARE FOR THE SHARES, DETERMINED
AS PROVIDED IN SECTION 2 HEREOF, AND THE PURCHASE PRICE PER SHARE FOR THE SHARES
TO BE PAID BY THE UNDERWRITER, SHALL BE $15.00.
2. THE ADVISER WILL PAY, OR ARRANGE FOR AN AFFILIATE TO PAY, A COMMISSION
TO THE UNDERWRITER IN THE AMOUNT OF $______ PER SHARE FOR THE SHARES PURCHASED
BY THE UNDERWRITER.
21
<PAGE>
Exhibit A
FORM OF OPINION OF FUND'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
(ii) The Fund has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Fund is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary course of
business (a "Material Adverse Effect").
(iv) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Stock."
(v) The Shares to be purchased by the Underwriter from the Fund have
been duly authorized for issuance and sale to the Underwriter pursuant to the
Purchase Agreement and, when issued and delivered by the Fund pursuant to the
Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Shares is or will be subject to personal liability by reason of
being such a holder.
(vi) The issuance of the Shares is not subject to the preemptive or
other similar rights of any securityholder of the Fund.
(vii) To the best of our knowledge, the Fund does not have any
subsidiaries.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Fund and complies with all applicable provisions of the
Investment Company Act.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the certificate pursuant to Rule 497(j) or the Prospectus
pursuant to Rule 497(c) or Rule 497(h), as the case may be, has been made in the
manner and within the time period required by Rule 497(j), Rule 497(c) or Rule
497(h), as the case may be; and, to the best of our knowledge, no stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been
A-1
<PAGE>
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or omitted therefrom, as to which we need express no opinion) complied as to
form in all material respects with the requirements of the 1933 Act, the
Investment Company Act and the Rules and Regulations.
(xi) The form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Fund and the
requirements of the New York Stock Exchange.
(xii) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Fund is a
party, or to which the property of the Fund is subject, before or brought by any
court or governmental agency or body, domestic or foreign, which might
reasonably be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in the
Purchase Agreement or the performance by the Fund of its obligations thereunder,
other than those disclosed in the Prospectus.
(xiii) The information in the Prospectus under "Description of Capital
Stock" and "Taxes" (other than information related to Michigan law or legal
conclusions involving matters of Michigan law as to which we express no opinion)
and in the Registration Statement under Item 29, to the extent that it
constitutes matters of law, summaries of legal matters, the Fund's charter and
bylaws or legal proceedings, or legal conclusions, has been reviewed by us and
is correct in all material respects.
(xiv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described as
required.
(xv) All descriptions in the Prospectus of contracts and other
documents to which the Fund is a party are accurate in all material respects; to
the best of our knowledge, there are no franchises, contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments of the Fund
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed or incorporated by reference as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects.
(xvi) To the best of our knowledge, the Fund is not in violation of its
charter or by-laws and no default by the Fund exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument that is described or referred to in
A-2
<PAGE>
the Registration Statement or the Prospectus or filed or incorporated by
reference as an exhibit to the Registration Statement.
(xvii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act, the
Investment Company Act and the Rules and Regulations, which have been obtained,
or as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or required in
connection with the due authorization, execution and delivery of the Purchase
Agreement, the Advisory Agreement and the Custody Agreement or for the offering,
issuance, sale or delivery of the Shares.
(xviii) The Advisory Agreement and the Custody Agreement have each been
duly authorized and approved by the Fund and comply as to form in all material
respects with all applicable provisions of the Investment Company Act, and each
has been duly executed by the Fund.
(xix) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified management investment company, and
all required action has been taken by the Fund under the 1933 Act, the
Investment Company Act and the Rules and Regulations to make the public offering
and consummate the sale of the Shares pursuant to the Purchase Agreement; the
provisions of the charter and the by-laws of the Fund comply as to form in all
material respects with the requirements of the Investment Company Act; and, to
the best of their knowledge and information, no order of suspension or
revocation of such registration under the Investment Company Act, pursuant to
Section 8(e) of the Investment Company Act, has been issued or proceedings
therefor initiated or threatened by the Commission.
(xx) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Shares, and the use of the proceeds from the sale of the Shares as described in
the Prospectus under the caption "Use of Proceeds") and compliance by the Fund
with its obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(xi) of the Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Fund pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known to us,
to which the Fund is a party or by which it may be bound, or to which any of the
property or assets of the Fund is subject (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter or by-laws of the Fund, or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any government,
government instrumentality or court, domestic or foreign, having jurisdiction
over the Fund or any of its properties, assets or operations.
A-3
<PAGE>
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial data included
or incorporated by reference therein or omitted therefrom, as to which we need
make no statement), at the time the Prospectus was issued, at the time any such
amended or supplemented prospectus was issued or at the Closing Time, included
or includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates
and written statements of responsible officers of and accountants for the Fund
and the Adviser and public officials. Such opinion shall not state that it is
to be governed or qualified by, or that it is otherwise subject to, any
treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).
A-4
<PAGE>
Exhibit B
FORM OF OPINION OF GENERAL COUNSEL TO THE
INVESTMENT ADVISER TO BE DELIVERED
PURSUANT TO SECTION 5(c)
(i) The Adviser has been duly organized as a limited partnership
under the laws of the State of Delaware, with power and authority to conduct its
business as described in the Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers Act or
the Investment Company Act, or the rules and regulations under such Acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the Advisory Agreement
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights and to general equity principles; and, to the best of his knowledge and
information, neither the execution and delivery of this Agreement or the
Advisory Agreement nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of, any of the
terms and provisions of, or constitute, with or without the giving of notice or
the lapse of time or both, a default under, any agreement or instrument to which
the Adviser is a party or by which the Adviser is bound, or any law, order, rule
or regulation applicable to the Adviser of any jurisdiction, court, Federal or
state regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Adviser or its
properties or operations.
(iv) To the best of his knowledge and information, the description of
the Adviser in the Registration Statement and in the Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
B-1
<PAGE>
Exhibit C
FORM OF OPINION OF SPECIAL
MICHIGAN COUNSEL TO THE FUND
(i) The information in the Prospectus under the caption "Taxes", to the
extent that it constitutes matters of Michigan law or legal conclusions
involving matters of Michigan law, has been reviewed by us and is correct in all
material respects.
(ii) Nothing has come to our attention that would lead us to believe
that the information in the Registration Statement under the caption "Investment
Objective and Policies--Special Considerations Relating to Michigan Municipal
Bonds" and in Appendix I entitled "Economic and Other Conditions in Michigan",
at the time such Registration Statement or any amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the information under such caption and in such appendix
in the Prospectus, at the time the Prospectus was issued, at the time any
amended or supplemented prospectus was issued or at Closing Time, included or
includes an untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
C-1
<PAGE>
Exhibit D
FORM OF ACCOUNTANTS'
COMFORT LETTER PURSUANT TO SECTION 5(d)
(i) We are independent public accountants with respect to the Company
within the meaning of the 1933 Act and the 1933 Act Regulations.
(ii) In our opinion the financial statements audited by us and included
in the Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
the Investment Company Act and the Rules and Regulations.
Such accountants shall also state that they have performed specified
procedures, not constituting an audit, including a reading of the latest
available interim financial statements of the Fund, a reading of the minute
books of the Fund, made inquiries of officials of the Fund responsible for
financial accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that at the date of
the latest available financial statements read by such accountants, or at a
subsequent specified date not more than three days prior to the date of the
Purchase Agreement, there was any change in the capital stock or net assets of
the Fund as compared with amounts shown on the financial statements included in
the Registration Statement and the Prospectus.
D-1
<PAGE>
EXHIBIT 99.(h)(2)
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
-------------------------
Dear Sirs:
In connection with public offerings of securities underwritten by us, or by
a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute your
reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD"). Upon our request, you will advise us
of the identity of any dealer to whom you allow such a discount and any
Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
2. You represent that you are a dealer actually engaged in the investment
banking or securities business and that you are either (i) a member in good
standing of the NASD or (ii) a dealer with its principal place of business
located outside the United States, its territories or possessions and not
registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its
<PAGE>
territories or its possessions or to persons who are nationals thereof or
residents therein. Non-member foreign dealers and banks agree, in making any
sales, to comply with the NASD's interpretation with respect to free-riding and
withholding. In accepting a selling concession where we are acting as
Representative of the Underwriters, in accepting a reallowance from us whether
or not we are acting as such Representative, and in allowing a discount to any
other person, you agree to comply with the provisions of Rule 2740 of the
Conduct Rules of the NASD, and, in addition, if you are a non-member foreign
dealer or bank, you agree to comply, as though you were a member of the NASD,
with the provisions of Rules 2730 and 2750 of such Conduct Rules and to comply
with Rule 2420 thereof as that Rule applies to a non-member foreign dealer or
bank. You represent that you are fully familiar with the above provisions of the
Conduct Rules of the NASD.
3. If the securities have been registered under the Securities Act of 1933
(the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities of
an issuer that is not required to file reports under the Securities Exchange Act
of 1934 (the "1934 Act"), you agree that you will not sell any of the securities
to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such other place
as we may advise), at the offering price less the concession allowed to you, on
such date as we may advise, by certified or official bank check in New York
Clearing House funds (or such other funds as we may advise), payable to our
order, against delivery of the securities to be purchased by you. We shall have
authority to make appropriate arrangements for payment for and/or delivery
through the facility of The Depository Trust Company or any such other
depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of securities
covered by this Agreement you will, upon our request as Representative of the
Underwriters, report to us the amount of securities purchased by you which then
remains unsold and will, upon our request, sell to us for the account of one or
more of the Underwriters such amount of such unsold
2
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securities as we may designate, at the offering price less an amount to be
determined by us not in excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered by
this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
11. Any notice from us shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunications to you at the
above address or at such other address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this Agreement,
the price restrictions contained in Paragraph 1 hereof and the provisions of
Paragraphs 6 and 7 hereof shall terminate as to such offering at the close of
business on the 45th day after the securities are released for sale or, as to
any or all such provisions, at such earlier time as we may advise. All other
provisions of this Agreement shall remain operative and in full force and effect
with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New York.
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Please confirm your agreement hereto by signing the enclosed duplicate copy
hereof in the place provided below and returning such signed duplicate copy to
us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
---------------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
- ----------------------------------
Name of Dealer
- ----------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
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COMMON STOCK CUSIP
PAR VALUE [$.10] See Reverse For Certain Definitions
MUNIHOLDINGS MICHIGAN INSURED FUND II, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
MuniHoldings Michigan Insured Fund II, Inc. transferable on the books of the
Corporation by the holder in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be subject to all of the provisions of
the Articles of Incorporation and of the By-Laws of the Corporation, and of all
the amenements from time to time made thereto. This Certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
President Secretary
Countersigned and Registered:
____________________________
Transfer Agent and Registrar
Authorized Signature
