As filed with the Securities and Exchange Commission on July 9, 2003
Securities Act File No. 333-
Investment Company Act File No. 811-21348
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
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
[X] AMENDMENT NO. 2
(Check appropriate box or boxes)
_______________
MUNI INTERMEDIATE DURATION FUND, INC.
(Exact Name of Registrant as Specified in Charter)
_______________
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
_______________
(609) 282-2800
(Registrant's Telephone Number, Including Area Code)
_______________
Terry K. Glenn
Muni Intermediate Duration Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
_______________
Copies to:
Andrew J. Donohue, Esq. Laurin Blumenthal Kleiman, Esq.
FUND ASSET MANAGEMENT, L.P. SIDLEY AUSTIN BROWN & WOOD LLP
P.O. Box 9011 787 Seventh Avenue
Princeton, New Jersey 08543-9011 New York, New York 10019
_______________
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
_______________
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), other than securities offered only
in connection with dividend or interest reinvestment plans, check the
following box. [_]
_______________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
======================================================================================================================
Proposed Proposed
Title of Amount Maximum Maximum Amount of
Securities Being Being Offering Price Aggregate Registration
Registered Registered(1) Per Unit(1) Offering Price(1) Fee(2)
----------------------------------------------------------------------------------------------------------------------
Auction Market Preferred
Stock......................... 40 shares $25,000 $1,000,000 $81.00
======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted prior to the filing date to the designated lockbox of the
Securities and Exchange Commission at Mellon Bank in Pittsburgh, PA.
The Registrant hereby amends this Registration Statement on such date or dates
as may become necessary to delay its effective date until the Registrant shall
file a further amendment, which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
The information 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 , 2003
PROSPECTUS
$
Muni Intermediate Duration Fund, Inc.
Auction Market Preferred Stock ("AMPS")
________Shares, Series __
________Shares, Series __
Liquidation Preference $25,000 Per Share
_______________
Muni Intermediate Duration Fund, Inc. is a recently organized,
non-diversified, closed-end fund. The investment objective of the Fund is to
provide common stockholders with high current income exempt from Federal
income taxes. The Fund seeks to achieve its objective by investing, as a
fundamental policy, at least 80% of its net assets (including assets acquired
from the sale of preferred stock), plus the amount of any borrowings for
investment purposes, in a portfolio of municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income taxes. Under normal market conditions, the Fund expects to invest at
least 75% of its total assets in municipal obligations that are rated
investment grade or, if unrated, are considered by the Fund's investment
adviser to be of comparable quality. The Fund may invest up to 25% of its
total assets in municipal obligations that are rated below investment grade
(commonly known as "junk bonds") or, if unrated, are considered by the Fund's
investment adviser to possess similar credit characteristics. Under normal
market conditions and after the initial investment period following this
offering (expected to be approximately three months), the Fund will invest, as
a non-fundamental policy, at least 80% of its net assets (including assets
acquired from the sale of preferred stock), plus the amount of any borrowings
for investment purposes, in municipal obligations with an option-adjusted
duration, as calculated by the Fund's investment adviser, of three to ten
years. The Fund expects to maintain, under normal market conditions, a
dollar-weighted average portfolio option-adjusted duration, as calculated by
the Fund's investment adviser, of three to ten years, including after giving
effect to leverage. There can be no assurance that the Fund's investment
objective will be realized.
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. The Fund's statement of additional information
contains further information about the Fund and is incorporated by reference
(legally considered to be part of this prospectus). You may request a free
copy by writing or calling the Fund at (800) 543-6217.
_______________
Investing in the AMPS involves certain risks that are described in the
"Risk Factors and Special Considerations" section beginning on page 8 of this
prospectus. The minimum purchase amount for the AMPS is $25,000.
Per Share Total
--------- -----
Public offering price.................................................... $25,000 $
Underwriting discount...................................................... $ $
Proceeds, before expenses, to the Fund (1)................................. $ $
(1) The estimated offering expenses payable by the Fund are $ .
The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
One certificate for each series of AMPS will be ready for delivery to the
nominee of The Depository Trust Company on or about , 2003.
_______________
Merrill Lynch & Co.
_______________
The date of this prospectus is August , 2003.
TABLE OF CONTENTS
Page
----
Prospectus Summary................................................................................................3
Risk Factors and Special Considerations...........................................................................8
Financial Highlights.............................................................................................11
The Fund.........................................................................................................11
Use of Proceeds..................................................................................................12
Capitalization...................................................................................................12
Portfolio Composition............................................................................................13
Investment Objective and Policies................................................................................13
Other Investment Policies........................................................................................22
Description of AMPS..............................................................................................26
The Auction......................................................................................................31
Rating Agency Guidelines.........................................................................................39
Investment Advisory and Management Arrangements..................................................................40
Taxes............................................................................................................41
Description of Capital Stock.....................................................................................42
Custodian........................................................................................................44
Underwriting.....................................................................................................44
Transfer Agent, Dividend Disbursing Agent and Registrar..........................................................45
Accounting Services Provider.....................................................................................45
Legal Opinions...................................................................................................45
Independent Auditors and Experts.................................................................................46
Table of Contents of Statement of Additional Information.........................................................47
Glossary.........................................................................................................48
_______________
Information about the Fund can be reviewed and copied at the SEC'S Public
Reference Room in Washington, D.C. Call 1-202-942-8090 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 to the Public Reference Section of the
SEC, Washington, D.C. 20549-0102.
_______________
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have 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
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date
on the front cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that date.
2
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus and the statement of additional
information.
The Fund Muni Intermediate Duration Fund, Inc. is a recently organized, non-diversified,
closed-end management investment company.
The Offering The Fund is offering a total of shares of Auction Market Preferred
Stock, Series __ and shares of Auction Market Preferred Stock, Series ___, each at
a purchase price of $25,000 per share plus accumulated dividends, if any, from the
date the shares are first issued. The shares of AMPS are being offered by Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), as underwriter.
The AMPS of each series will be shares of preferred stock of the Fund that entitle
their holders to receive cash dividends at an annual rate that may vary for the
successive dividend periods for each series. In general, except as described below,
each dividend period for each series of AMPS following the initial dividend period
will be seven days in the case of Series __ AMPS and [28 days in the case of]
Series __ AMPS. The applicable dividend for a particular dividend period will be
determined by an auction conducted on the business day next preceding the start of
that dividend period.
Investors and potential investors in shares of AMPS of each series may participate
in auctions for the AMPS through their broker-dealers.
Generally, AMPS investors will not receive certificates representing ownership of
their shares. Ownership of AMPS will be maintained in book-entry form by the
securities depository (The Depository Trust Company) or its nominee for the account
of the investor's agent member (generally the investor's broker-dealer). The
investor's agent member, in turn, will maintain records of such investor's
beneficial ownership of AMPS.
Investment Objective The investment objective of the Fund is to provide common stockholders with high
and Policies current income exempt from Federal income taxes. The Fund seeks to achieve its
objective by investing, as a fundamental policy, at least 80% of its net assets
(including assets acquired from the sale of preferred stock), plus the amount of
any borrowings for investment purposes, in a portfolio of municipal obligations
issued by or on behalf of states, territories and possessions of the United States
and their political subdivisions, agencies or instrumentalities, each of which pays
interest that, in the opinion of bond counsel to the issuer, is exempt from Federal
income tax ("Municipal Bonds"). There can be no assurance that the Fund's
investment objective will be realized.
Under normal market conditions, and after the initial investment period following
this offering (expected to be approximately three months), the Fund will invest, as
a non-fundamental policy, at least 80% of its net assets (including assets acquired
from the sale of preferred stock), plus the amount of any borrowings for investment
purposes, in Municipal Bonds with an option-adjusted duration, as calculated by
Fund Asset Management, L.P. (the "Investment Adviser"), of three to ten years. The
Fund expects to maintain, under normal market conditions, a dollar-weighted average
portfolio option-adjusted duration, as calculated by the Investment Adviser, of
three to ten years, including after giving effect to leverage. There is no limit on
the remaining maturity of each individual Municipal Bond investment by the Fund. In
general, the Fund does not intend for
3
its investments to earn a large amount of interest income that is not exempt from
Federal income tax.
Investment Grade Municipal Bonds. Under normal market conditions, the Fund expects
to invest at least 75% of its total assets in Municipal Bonds that are rated investment
grade by one or more nationally recognized statistical rating agencies or in unrated
bonds considered by the Investment Adviser to be of comparable quality.
Junk Bonds. The Fund may invest up to 25% of its total assets in junk bonds. Junk
bonds are debt securities that are rated below investment grade by the major rating
agencies or are unrated securities that are considered by the Investment Adviser to
possess similar credit characteristics. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments that
may cause income and principal losses for the Fund. Junk bonds generally are less
liquid and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt relative to
their assets than issuers of investment grade bonds. In the event of an issuer's
bankruptcy, claims of other creditors may have priority over the claims of junk
bond holders, leaving few or no assets available to repay junk bond holders. Junk
bonds may be subject to greater call and redemption risk than higher rated debt
securities.
Indexed and Inverse Floating Rate Securities. The Fund may invest in securities
whose potential returns are directly related to changes in an underlying index or
interest rate, known as indexed securities. The return on indexed securities will
rise when the underlying index or interest rate rises and fall when the index or
interest rate falls. The Fund may also invest in securities whose return is
inversely related to changes in an interest rate (inverse floaters). In general,
income on inverse floaters will decrease when short term interest rates increase
and increase when short term interest rates decrease. Investments in inverse
floaters may subject the Fund to the risks of reduced or eliminated interest
payments and loss 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.
Hedging Transactions. The Fund may seek to hedge its portfolio against changes in
interest rates using options and financial futures contracts or swap transactions.
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 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.
Swap Agreements. The Fund is authorized to enter into swap agreements, which are
over-the-counter contracts in which one party agrees to make periodic payments
based on the change in the market value of a specific bond, basket of bonds or
index in return for periodic payments based on a fixed or variable interest rate or
the change in market value of a different bond, basket of bonds or
4
index. Swap agreements may be used to obtain exposure to a bond or market without
owning or taking physical custody of securities.
Tax Considerations. While exempt-interest dividends are excluded from gross income
for Federal income tax purposes, they may be subject to the Federal alternative
minimum tax in certain circumstances. Distributions of any capital gain or other
taxable income will be taxable to stockholders. The Fund may not be a suitable
investment for investors subject to the Federal alternative minimum tax or who
would become subject to such tax by investing in the Fund. See "Taxes."
Investment Adviser The Investment Adviser provides investment advisory and administrative services
to the Fund. For its services, the Fund pays the Investment Adviser a monthly
fee at the annual rate of 0.55% of the Fund's average daily net assets
(including any proceeds from the issuance of preferred stock), plus the
proceeds of any outstanding borrowings used for leverage. The Investment
Adviser has contractually agreed to waive a portion of its fee during the first
seven years of the Fund's operations ending July , 2010, as follows:
Fee Waiver (as
a percentage of
average daily
net assets)
-------------------
Years 1 through 5.............................. 0.15%
Year 6......................................... 0.10%
Year 7......................................... 0.05%
Year 8 and thereafter.......................... 0.00%
Dividends and Dividend Dividends on each series of AMPS will be cumulative from the date the shares are
Periods first issued and payable at the annualized cash dividend rate for the initial
dividend period on the initial dividend payment as follows:
Initial Dividend Initial Dividend Initial Dividend
AMPS Series Rate Period Ending Payment Date
---------------- ------------------- ----------------- -------------------
_____ % , 2003
_____ % , 2003
After the initial dividend period, each dividend period for each series of AMPS
will generally consist of seven days in the case of Series __ AMPS and [28 days in
the case of] Series __ AMPS; provided however, that before any auction, the Fund
may decide, subject to certain limitations and only if it gives notice to holders,
to declare a special dividend period of up to five years.
After the initial dividend period, in the case of dividend periods that are not
special dividend periods, dividends generally will be payable on each succeeding
[______] in the case of the Series __ AMPS and [fourth][____] in the case of the
Series __ AMPS.
Dividends for each series of AMPS will be paid through the securities depository
(The Depository Trust Company) on each dividend payment date for each series of
AMPS.
5
For each subsequent dividend period, the auction agent (The Bank of New York) will
hold an auction to determine the cash dividend rate on the shares of each series of
AMPS.
Determination of Generally, the applicable dividend rate for any dividend period for each series of
Maximum Dividend AMPS will not be more than the maximum applicable rate attributable to such shares.
Rates The maximum applicable rate for each series of AMPS will be the applicable
percentage of the reference rate on the auction date. The reference rate is (A) the
higher of the applicable "AA" Composite Commercial Paper Rate (as defined in the
Glossary) and the Taxable Equivalent of the Short-Term Municipal Bond Rate (as
defined in the Glossary) (for a dividend period or special dividend period of 28 or
fewer days), (B) the applicable "AA" Composite Commercial Paper Rate (for a special
dividend period of more than 28 but fewer than 183 days), or (C) the applicable
Treasury Index Rate (as defined in the Glossary)(for a special dividend period of
183 days or more). The applicable percentage as so determined may be subject to
upward but not downward adjustment in the discretion of the Board of Directors of
the Fund after consultation with the broker-dealers participating in the auction
for the AMPS. The maximum applicable rate for each series of AMPS will depend on
the credit rating assigned to the shares, the length of the dividend period and
whether or not the Fund has given notification prior to the auction for the
dividend period that any taxable income will be included in the dividend on the
AMPS for that dividend period. The applicable percentage is as follows:
Applicable Applicable
Percentage of Percentage of
Credit Ratings Reference Reference
-------------------------------------- Rate - Rate -
Moody's S&P No Notification Notification
------------------ ------------------ -------------------- -----------------
Aa3 or higher AA- or higher 110% 150%
A3 to A1 A- to A+ 125% 160%
Baa3 to Baa1 BBB- to BBB+ 150% 250%
Below Baa3 Below BBB- 200% 275%
There is no minimum applicable dividend rate for any dividend period.
Asset Maintenance Under the Fund's Articles Supplementary creating the series of AMPS (the "Articles
Supplementary"), the Fund must maintain:
o asset coverage of the AMPS as required by the rating agencies rating the AMPS;
and
o asset coverage of the AMPS of at least 200% as required by the Investment
Company Act of 1940 (the "1940 Act").
The Fund estimates that, based on the composition of its portfolio at August ,
2003, asset coverage of the AMPS as required by the 1940 Act would be approximately
% immediately after the Fund issues the shares of AMPS offered by this prospectus
representing approximately % of the Fund's capital, or approximately %
of the Fund's common stock equity, immediately after the issuance of such AMPS.
Mandatory If the required asset coverage is not maintained or, when necessary, restored,
Redemption the Fund must redeem shares of AMPS at the price of $25,000 per share plus
accumulated but unpaid dividends thereon (whether or not earned or declared).
6
The provisions of the1940 Act may restrict the Fund's ability to make such a
mandatory redemption.
Optional Redemption The Fund may, at its option, choose to redeem all or a portion of the shares of
AMPS of each series on any dividend payment date at the price of $25,000 per share,
plus accumulated but unpaid dividends thereon (whether or not earned or declared)
plus any applicable premium.
Liquidation Preference The liquidation preference (that is, the amount the Fund must pay to holders of
AMPS if the Fund is liquidated) of each share of AMPS will be $25,000, plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared).
Ratings The AMPS will be issued with a rating of Aaa from Moody's Investors Service, Inc.
("Moody's") and AAA from Standard & Poor's ("S&P").
Voting Rights The 1940 Act requires that the holders of AMPS and any other preferred stock,
voting as a separate class, have the right to elect at least two directors at all
times and to elect a majority of the directors at any time when dividends on the
AMPS or any other preferred stock are unpaid for two full years. The Fund's
Charter, the 1940 Act and the General Corporation Laws of the State of Maryland
require holders of AMPS and any other preferred stock to vote as a separate class
on certain other matters.
7
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund's AMPS should not constitute a complete
investment program.
Investment Considerations. Investors in AMPS should consider the
following factors:
o The credit ratings of the AMPS could be reduced or terminated while
an investor holds the AMPS.
o Neither broker-dealers nor the Fund are obligated to purchase shares
of AMPS in an auction or otherwise, nor is the Fund required to
redeem shares of AMPS in the event of a failed auction.
o If sufficient bids do not exist in an auction, the applicable
dividend rate will be the maximum applicable dividend rate, and in
such event, owners of AMPS wishing to sell will not be able to sell
all, and may not be able to sell any, AMPS in the auction. As a
result, investors may not have liquidity of investment.
Secondary Market. The broker-dealers intend to maintain a secondary
trading market in the AMPS outside of auctions; however, they have no
obligation to do so and there can be no assurance that a secondary market for
the AMPS will develop or, if it does develop, that it will provide holders
with a liquid trading market. The AMPS will not be registered on any stock
exchange or on any automated quotation system. An increase in the level of
interest rates likely will have an adverse effect on the secondary market
price of the AMPS, and a selling stockholder may have to sell AMPS between
auctions at a price per share of less than $25,000.
Rating Agencies. The Fund will issue the AMPS only if the AMPS have
received a rating of Aaa from Moody's and AAA from S&P. As a result of such
ratings the Fund will be subject to guidelines of Moody's, S&P or another
substitute nationally recognized statistical ratings organizations that may
issue ratings for its preferred stock. These guidelines may impose asset
coverage or portfolio composition requirements that are more stringent than
those imposed by the 1940 Act and may prohibit or limit the use by the Fund of
certain portfolio management techniques or investments. The Fund does not
expect these guidelines to prevent the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies. Also, under certain circumstances, the Fund may voluntarily
terminate compliance with Moody's or S&P's guidelines, or both, in which case
the AMPS may no longer be rated by Moody's or S&P, as applicable, but will be
rated by at least one rating agency.
Interest Rate Risk and AMPS. The Fund issues shares of AMPS, which
generally pay dividends based on short-term interest rates. The Fund generally
will purchase Municipal Bonds that pay interest at fixed or adjustable rates.
If short-term interest rates rise, dividend rates on the shares of AMPS may
rise so that the amount of dividends paid to the holders of shares of AMPS
exceeds the income from the Fund's portfolio securities. Because income from
the Fund's entire investment portfolio (not just the portion of the portfolio
purchased with the proceeds of the AMPS offering) is available to pay
dividends on the shares of AMPS, dividend rates on the shares of AMPS would
need to greatly exceed the Fund's net portfolio income before the Fund's
ability to pay dividends on the shares of AMPS would be jeopardized. If market
interest rates rise, this could negatively impact the value of the Fund's
investment portfolio, reducing the amount of assets serving as asset coverage
for the AMPS.
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 applicable to regulated investment companies under the Federal
income tax laws.
Market Risk and Selection Risk. Market risk is the risk that the bond
market will go down in value, including the possibility that the market will
go down sharply and unpredictably. Selection risk is the risk that the
securities that Fund management selects will underperform the bond market, the
market relevant indices, or other funds with similar investment objectives and
investment strategies.
8
Tax Exempt Securities Market Risk. The amount of public information
available about Municipal Bonds in the Fund's portfolio is generally less than
that for corporate equities or bonds, and the investment performance of the
Fund may therefore be more dependent on the analytical abilities of the
Investment Adviser than that of a stock fund or taxable bond fund.
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. The Fund's use of leverage by the issuance of
preferred stock and its investment in inverse floating obligations, as
discussed below, may increase interest rate risk. Because market interest
rates are currently near their lowest levels in many years, there is a greater
risk that the Fund's portfolio will decline in value when interest rates
increase in the future. 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.
Call and Redemption Risk. A Municipal Bond's issuer may call the bond for
redemption before it matures. If this happens to a Municipal Bond that the
Fund holds, the Fund may lose income and may have to invest the proceeds in
Municipal Bonds with lower yields.
Risks Associated with Non-Investment Grade Securities. Under normal
market conditions, the Fund expects to invest at least 75% of its total assets
in Municipal Bonds that are rated investment grade by Standard & Poor's,
Moody's Investors Service, Inc. or Fitch Ratings, or in unrated Municipal
Bonds that are considered by the Investment Adviser to possess similar credit
characteristics. Obligations rated in the lowest investment grade category may
have certain speculative characteristics. The Fund may invest up to 25% of its
total assets in Municipal Bonds that are rated below investment grade or are
unrated securities that are considered by the Investment Adviser to possess
similar credit characteristics. Securities rated below investment grade, also
known as junk bonds, generally entail greater credit risks than investment
grade securities. For example, their prices are more volatile, economic
downturns and financial setbacks may affect their prices more negatively, and
their trading market may be more limited.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's Municipal Bond portfolio will decline if and when the Fund invests the
proceeds from matured, traded or called bonds at market interest rates that
are below the portfolio's current earnings rate. A decline in income could
negatively affect the Fund's yield, return or the market price of the common
stock.
Sector Risk. The Fund may invest 25% or more of its total assets in tax
exempt securities of issuers in the industries comprising the same economic
sector, such as hospitals or life care facilities and transportation-related
issuers. However, the Fund will not invest 25% or more of its total assets in
any one of the industries comprising an economic sector. In addition, a
substantial part of the Fund's portfolio may be comprised of securities credit
enhanced by banks, insurance companies or companies with similar
characteristics. Emphasis on these sectors may subject the Fund to certain
risks.
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.
Liquidity of Investments. Certain Municipal Bonds in which the Fund
invests may lack an established secondary trading market or are otherwise
considered illiquid. Liquidity of a security relates to the ability to easily
dispose of the security and the price to be obtained and does not generally
relate to the credit risk or likelihood of receipt of cash at maturity.
Illiquid securities may trade at a discount from comparable, more liquid
investments.
Portfolio Strategies. The Fund may engage in various portfolio strategies
both to seek to enhance the return of the Fund and to seek to hedge its
portfolio against adverse effects from movements in interest rates and in the
securities markets. These portfolio strategies include the use of derivatives,
such as indexed securities, inverse securities, options, futures, options on
futures, interest rate transactions, credit default swaps, and the use of
short sales. Such strategies subject the Fund to the risk that, if the
Investment Adviser incorrectly forecasts market values,
9
interest rates or other applicable factors, the Fund's performance could
suffer. Certain of these strategies such as inverse securities, credit default
swaps and short sales may provide investment leverage to the Fund's portfolio.
The Fund is not required to use derivatives or other portfolio strategies to
seek to enhance return or to seek to hedge its portfolio and may not do so.
There can be no assurance that the Fund's portfolio strategies will be
effective. Some of the derivative strategies that the Fund may use to seek to
enhance its return are riskier than its hedging transactions and have
speculative characteristics. Such strategies do not attempt to limit the
Fund's risk of loss.
Derivatives Risk. Derivatives are financial contracts or instruments
whose value depends on, or is derived from, the value of an underlying asset,
reference rate or index (or relationship between two indices). The Fund may
invest in a variety of derivative instruments for hedging purposes or to seek
to enhance its return, such as options, futures contracts and swap agreements,
and may engage in short sales. The Fund may use derivatives as a substitute
for taking a position in an underlying security or other asset and/or as part
of a strategy designed to reduce exposure to other risks, such as interest
rate risk. The Fund also may use derivatives to add leverage to the portfolio.
The Fund's use of derivative instruments involves risks different from, and
possibly greater than, the risks associated with investing directly in
securities and other traditional investments. Derivatives are subject to a
number of risks such as liquidity risk, interest rate risk, credit risk,
leverage risk, the risk of ambiguous documentation and management risk. They
also involve the risk of mispricing or improper valuation and the risk that
changes in the value of the derivative may not correlate perfectly with the
underlying asset, rate or index. If the Fund invests in a derivative
instrument it could lose more than the principal amount invested. The use of
derivatives also may increase the amount of taxes payable by stockholders.
Also, suitable derivative transactions may not be available in all
circumstances and there can be no assurance that the Fund will engage in these
transactions to reduce exposure to other risks when that would be beneficial.
Antitakeover Provisions. The Fund's Charter, By-laws and the General
Corporation Law of the State of Maryland 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 stockholders to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Fund.
Market Disruption. The terrorist attacks in the United States on
September 11, 2001 have had a disruptive effect on the securities markets,
some of which were closed for a four-day period. These terrorist attacks and
related events, including recent U.S. military actions overseas, have led to
increased short term market volatility and may have long term effects on U.S.
and world economies and markets. Similar disruptions of the financial markets
could impact interest rates, auctions, secondary trading, ratings, credit
risk, inflation and other factors relating to the Fund's AMPS. Non-investment
grade securities tend to be more volatile than investment grade fixed income
securities so that these events and other market disruptions may have a
greater impact on the prices and volatility of non-investment grade securities
than on investment grade fixed income securities. There can be no assurance
that these events and other market disruptions will not have other material
and adverse implications for the non-investment grade securities markets.
10
FINANCIAL HIGHLIGHTS
Information contained in the table below shows the unaudited operating
performance of the Fund from the commencement of the Fund's investment
operations on August , 2003 to , 2003. Since the Fund was
recently organized and commenced operations on August , 2003, the table
covers a portion of time during which a substantial portion of the Fund's
portfolio was held in temporary investments pending investment in longer term
securities that meet the Fund's investment objective and policies.
Accordingly, the information presented may not provide a meaningful picture of
the Fund's operating performance.
For the Period
August , 2003+
to , 2003
--------------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Common stock net asset value, beginning of period................... $
--------------------
Investment income -- net............................................
Realized and unrealized gain on investments -- net..................
--------------------
Total from investment operations....................................
--------------------
Capital charge resulting from the issuance of common stock..........
====================
Common stock net asset value, end of period......................... $ .
====================
Market price per share, end of period............................... $ .
====================
Total Investment Return:**
Based on market price per share..................................... ( . %)++
====================
Based on common stock net asset value per share..................... . %++
====================
Ratios Based on Average Net Assets of Common Stock:
Total expenses, net of waiver....................................... . %*
====================
Total expenses...................................................... . %*
====================
Total investment income--net......................................... . %*
====================
Supplemental Data:
Net assets, applicable to common stock, end of period (in thousands) $ ,
====================
Portfolio turnover.................................................. . %
====================
_____________
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or less than the net asset value, may
result in substantially different returns. Total investment
returns exclude the effects of sales charges. [The Investment
Adviser voluntarily waived all of its management fee from
August , 2003 (commencement of operations) to , 2003.
Without such waiver, the Fund's performance would have been
lower.]
+ Commencement of operations.
++ Aggregate total investment return.
THE FUND
Muni Intermediate Duration Fund, Inc. (the "Fund") is a recently
organized, non-diversified, closed-end fund. The Fund was incorporated under
the laws of the State of Maryland on May 15, 2003, and has registered under
the Investment Company Act of 1940, as amended. The Fund's principal office is
located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2800.
The Fund commenced operations on August , 2003 upon the closing of an
initial public offering of shares of its common stock. The net proceeds of
such offering were approximately $ after the payment of offering
expenses and the deduction of the underwriting discount. In connection with
the initial public offering of the Fund's common stock, the underwriters were
granted an option to purchase up to an additional shares of common stock to
cover overallotments. On , 2003 the Fund issued an additional
shares of common stock, pursuant to the underwriters' partial exercise of
the overallotment option for additional net proceeds to the Fund of $ ,
after the deduction of the underwriting discount.
11
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 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 Charter and By-laws."
USE OF PROCEEDS
The net proceeds of this offering will be approximately $
after payment of offering expenses (estimated to be approximately $ )
and the deduction of the underwriting discount.
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 this offering, depending on market conditions and the
availability of appropriate securities. Pending such investment, it is
anticipated that the proceeds will be invested in short term, tax exempt
securities. See "Investment Objective and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund
as of August , 2003 and as adjusted to give effect to the issuance of the
shares of AMPS offered hereby and the issuance of shares of common
stock pursuant to the underwriters' partial exercise of the overallotment
option on , 2003.
Actual As Adjusted
-------------- -------------------
Stockholders' equity:
Capital Stock (200,000,000 shares authorized)
Preferred stock, par value $.10 per share (no shares issued;
shares of AMPS issued and outstanding,
as adjusted, at $25,000 per share liquidation preference)................... -- $
============== ===================
Common stock, par value $.10 per share ( shares
issued and outstanding; shares issued and outstanding, as adjusted) $
Paid-in capital in excess of par value
Undistributed investment income--net
Accumulated realized capital losses on investments--net
Unrealized appreciation on investments--net
Undistributed investment income-net............................................
Unrealized depreciation on investments-net.....................................
-------------- -------------------
Net assets..................................................................... $ $
============== ===================
12
PORTFOLIO COMPOSITION
As of , 2003, approximately % of the market value of
the Fund's portfolio was invested in intermediate duration municipal
obligations and approximately % of the market value of the Fund's
portfolio was invested in short term investments. The following table sets
forth certain information with respect to the composition of the Fund's
investment portfolio as of August , 2003.
Number of Value
Moody's* Fitch* S&P* Issues (in thousands) Percent
-------------------- ---------------- -------------- ---------------- ------------------ ---------------
Aaa AAA AAA $ %
Aa AA AA
A A A
Baa BBB BBB
Ba BB BB
B B B
Caa CCC CCC
Ca CC CC
C C C
DDD D
DD
D
---------------- -------------- ---------------- ------------------ ---------------
Total........... $ 100%
================ ============== ================ ================== ===============
_____________
* Ratings: Using the higher of Moody's, S&P or Fitch Ratings ("Fitch")
ratings on the Fund's investments. See "Schedule of Investments." Moody's
rating categories may be modified further by a 1, 2 or 3 in Aa, A, Baa,
Ba, B and Caa ratings. S&P rating categories may be modified further by a
plus (+) or minus (-) in AA, A, BBB, BB, B and CCC ratings. Fitch rating
categories may be modified further by a plus (+) or minus (-) in AA, A,
BBB, BB, B and CCC.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide common stockholders with
high current income exempt from Federal income taxes. The Fund seeks to
achieve its objective by investing at least 80% of its net assets (including
assets acquired from the sale of preferred stock), plus the amount of any
borrowings for investment purposes, in a portfolio of municipal obligations
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies or instrumentalities, each
of which pays interest that, in the opinion of bond counsel to the issuer, is
exempt from Federal income tax ("Municipal Bonds"). The Fund's investment
objective and its policy of investing at least 80% of its net assets
(including assets acquired from the sale of preferred stock), plus the amount
of any borrowings for investment purposes, in Municipal Bonds are fundamental
policies that may not be changed without the approval of a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). Under
normal market conditions, and after the initial investment period following
this offering (expected to be approximately three months), the Fund will
invest at least 80% of its net assets (including assets acquired from the sale
of preferred stock), plus the amount of any borrowings for investment
purposes, in Municipal Bonds with an option-adjusted duration, as calculated
by Fund Asset Management, L.P. (the "Investment Adviser"), of three to ten
years. This is a non-fundamental policy and may be changed by the Fund's Board
of Directors provided that stockholders are provided with at least 60 days'
prior notice of any change as required by the 1940 Act. The Fund expects to
maintain, under normal market conditions, a dollar-weighted average portfolio
option-adjusted duration of three to ten years. There is no limit on the
remaining maturity of each individual Municipal Bond investment by the Fund.
There can be no assurance that the Fund's investment objective will be
realized.
Under normal market conditions, the Fund expects to invest at least 75%
of its total assets in Municipal Bonds that are commonly referred to as
"investment grade" securities, which are obligations rated at the time of
purchase within the four highest quality ratings as determined by either
Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa),
Standard & Poor's ("S&P") (currently AAA, AA, A and BBB) or Fitch Ratings
("Fitch") (currently AAA, AA, A and BBB). If unrated, such securities will
possess creditworthiness comparable, in the opinion of the Investment Adviser,
to other obligations in which the Fund may invest. Securities rated in the
lowest investment grade category may be considered to have speculative
characteristics.
13
The Fund may invest up to 25% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by S&P or Fitch or, if unrated,
are considered by the Investment Adviser to possess similar credit
characteristics. Such securities, sometimes referred to as "high yield" or
"junk" bonds, are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. See " --Description of Municipal Bonds --`High Yield' or
`Junk' Bonds." The Fund does not intend to purchase debt securities that are
in default or which the Investment Adviser believes will soon be in default.
The Fund may invest 25% or more of its total assets in tax exempt
securities of issuers in the industries comprising the same economic sector,
such as hospitals or life care facilities and transportation-related issuers.
However, the Fund will not invest 25% or more of its total assets in any one
of the industries comprising an economic sector. In addition, a substantial
part of the Fund's portfolio may be comprised of securities credit enhanced by
banks, insurance companies or companies with similar characteristics. Emphasis
on these sectors may subject the Fund to certain risks.
The value of bonds and other fixed income obligations may fall when
interest rates rise and rise when interest rates fall. In general, bonds and
other fixed income obligations with longer maturities will be subject to
greater volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal market conditions, the Fund
expects to maintain a dollar-weighted average portfolio duration of three to
ten years, including after giving effect to leverage. "Duration" measures the
sensitivity of a security's price to changes in interest rates.
"Option-adjusted duration" takes into account the effect of embedded options
on a security's duration. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to changes in interest rates. The
Investment Adviser increases or reduces the Fund's portfolio duration based on
its interest rate outlook. When the Investment Adviser expects interest rates
to fall, it attempts to maintain a longer portfolio duration. When the
Investment Adviser expects interest rates to increase, it attempts to shorten
the portfolio's duration. Generally, as is the case with any investment grade
fixed income obligations, Municipal Bonds with longer maturities tend to
produce higher yields. Under normal market conditions, however, such
yield-to-maturity increases tend to decline in the longer maturities (i.e.,
the slope of the yield curve flattens). At the same time, due to their longer
exposure to interest rate risk, prices of longer term obligations are subject
to greater market fluctuations as a result of changes in interest rates. Based
on the foregoing premises, the Investment Adviser believes that the yield and
price volatility characteristics of an intermediate duration portfolio
generally offer an attractive trade-off between return and risk. There may be
market conditions, however, where an intermediate duration portfolio may be
less attractive due to the fact that the Municipal Bond yield curve changes
from time to time depending on supply and demand forces, monetary and tax
policies and investor expectations. As a result, there may be situations where
investments in individual Municipal Bonds with longer durations may be more
attractive than individual intermediate duration Municipal Bonds.
For temporary periods or to provide liquidity, the Fund has the authority
to invest as much as 20% of its total assets in tax exempt and taxable money
market obligations with a maturity of one year or less (such short term
obligations being referred to herein as "Temporary Investments"). In addition,
the Fund reserves the right as a defensive measure to invest temporarily a
greater portion of its assets in Temporary Investments, when, in the opinion
of the Investment Adviser, prevailing market or financial conditions warrant.
These investments will yield taxable income. From time to time, the Fund may
also realize taxable capital gains.
The Fund also may invest in 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. See
"Other Investment Policies --Temporary Investments." The Fund's hedging
strategies, which are described in more detail under "Hedging Transactions --
Financial Futures Transactions and Options," are not fundamental policies and
may be modified by the Board of Directors of the Fund without the approval of
the Fund's stockholders. The Fund is also authorized to invest in indexed and
inverse floating obligations for hedging purposes and to seek to enhance
return.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In
such instances, the Board of Directors of the Fund and the Investment Adviser
14
will take into account, in assessing the quality of such bonds, both the
creditworthiness of the issuer of such bonds and the creditworthiness of the
financial institution that provides the credit enhancement.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal income tax. The Fund 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 believes such securities to be exempt from Federal income
taxation ("Non-Municipal Tax Exempt Securities"). Non-Municipal Tax Exempt
Securities could include trust certificates or other instruments evidencing
interest in one or more long term municipal securities. Non-Municipal Tax
Exempt Securities also may include securities issued by other investment
companies that invest in Municipal Bonds, to the extent such investments are
permitted by applicable law. Non-Municipal Tax Exempt Securities are subject
to the same risks associated with an investment in Municipal Bonds as well as
many of the risks associated with investments in derivatives. Interest
received on certain otherwise tax exempt securities that are classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) may be subject to a Federal alternative minimum tax. See "Taxes."
The percentage of the Fund's total assets invested in "private activity bonds"
will vary from time to time. Federal tax legislation has limited the types and
volume of bonds the interest on which qualifies for a Federal income tax
exemption. As a result, this legislation and legislation that may be enacted
in the future may affect the availability of Municipal Bonds for investment by
the Fund.
Risk Factors and Special Considerations Relating to Municipal Bonds
The risks and special considerations involved in investment in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax Exempt Securities may present similar risks, depending on
the particular product. Certain instruments in which the Fund may invest may
be characterized as derivative instruments. See "-- Description of Municipal
Bonds" and "--Hedging Transactions --Financial Futures Transactions and
Options."
The value of Municipal Bonds generally may be affected by uncertainties
in the municipal markets as a result of legislation or litigation, including
legislation or litigation that changes the taxation of Municipal Bonds or the
rights of Municipal Bond holders in the event of a bankruptcy. Municipal
bankruptcies are rare, and certain provisions of the U.S. Bankruptcy Code
governing such bankruptcies are unclear. Further, the application of state law
to Municipal Bond issuers could produce varying results among the states or
among Municipal Bond issuers within a state. These uncertainties could have a
significant impact on the prices of the Municipal Bonds in which the Fund
invests.
Description of Municipal Bonds
Set forth below is a detailed description of the Municipal Bonds and
Temporary Investments in which the Fund may invest. Information with respect
to ratings assigned to tax exempt obligations that the Fund may purchase is
set forth in Appendix A to the statement of additional information.
Obligations are included within the term Municipal Bonds if the interest paid
thereon is excluded from gross income for Federal income tax purposes.
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the 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 bonds are issued by or on behalf of
public authorities to finance various privately owned or operated facilities,
including certain facilities for the local furnishing of electric energy or
gas, sewage facilities, solid waste disposal facilities and other specialized
facilities. Other types of industrial development bonds or private activity
bonds, the proceeds of which are used for the construction, equipment or
improvement of privately operated industrial or commercial facilities, may
constitute Municipal Bonds, although the current Federal tax laws place
substantial limitations on the size of such issues. The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. The
two principal classifications of Municipal Bonds are "general obligation" and
"revenue" bonds, which latter category includes industrial development bonds
("IDBs") and, for bonds issued after August 15, 1986, private activity bonds
("PABs").
The Fund has not established any limit on the percentage of its portfolio
that may be invested in IDBs or PABs. The Fund may not be a suitable
investment for investors who are already subject to the Federal alternative
15
minimum tax or who would become subject to the Federal alternative minimum tax
as a result of an investment in the Fund's common stock. See "Taxes."
General Obligation Bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of its state constitution or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of its tax base due to population declines, natural disasters,
declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax
base, state legislative proposals or voter initiatives to limit ad valorem
real property taxes and the extent to which the entity relies on Federal or
state aid, access to capital markets or other factors beyond the state's or
entity's control. Accordingly, the capacity of the issuer of a general
obligation bond as to the timely payment of interest and the repayment of
principal when due is affected by the issuer's maintenance of its tax base.
Revenue Bonds. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue sources such as
payments from the user of the facility being financed. Accordingly, the timely
payment of interest and the repayment of principal in accordance with the
terms of the revenue or special obligation bond is a function of the economic
viability of such facility or such revenue source.
IDBs and PABs. The Fund may purchase IDBs and PABs. IDBs and PABs are, in
most cases, tax exempt securities issued by states, municipalities or public
authorities to provide funds, usually through a loan or lease arrangement, to
a private entity for the purpose of financing construction or improvement of a
facility to be used by the entity. Such bonds are secured primarily by
revenues derived from loan repayments or lease payments due from the entity
which may or may not be guaranteed by a parent company or otherwise secured.
IDBs and PABs generally are not secured by a pledge of the taxing power of the
issuer of such bonds. Therefore, an investor should be aware that repayment of
such bonds generally depends on the revenues of a private entity and be aware
of the risks that such an investment may entail. Continued ability of an
entity to generate sufficient revenues for the payment of principal and
interest on such bonds will be affected by many factors including the size of
the entity, capital structure, demand for its products or services,
competition, general economic conditions, government regulation and the
entity's dependence on revenues for the operation of the particular facility
being financed.
Moral Obligation Bonds. The Fund also may invest in "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.
Municipal Lease Obligations. Also included within the general category of
Municipal Bonds are certificates of participation ("COPs") issued by
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 called "lease obligations") relating to such
equipment, land or facilities. Although lease obligations do not constitute
general obligations of the issuer for which the issuer's unlimited taxing
power is pledged, a lease obligation is frequently backed by the issuer's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the issuer has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event
of foreclosure might prove difficult and the value of the property may be
insufficient to issue lease obligations. Certain investments in lease
obligations may be illiquid.
Indexed and Inverse Floating Rate Securities. The Fund may invest in
Municipal Bonds (and Non- Municipal Tax Exempt Securities) that yield a return
based on a particular index of value or interest rates. For example, the Fund
may invest in Municipal Bonds that pay interest based on an index of Municipal
Bond interest rates. The principal amount payable upon maturity of certain
Municipal Bonds also may be based on the value of the index. To the extent the
Fund invests in these types of Municipal Bonds, the Fund's return on such
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Interest and principal payable on the Municipal Bonds may
also be based on relative changes among particular indices. Also, the Fund may
invest in so-
16
called "inverse floating obligations" or "residual interest bonds" on which
the interest rates 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
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
which 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 will generally 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 which contain limitations on the
extent to which the interest rate may vary. Certain investments in such
obligations may be illiquid.
When Issued Securities, Delayed Delivery Securities and Forward
Commitments. The Fund may purchase or sell securities that it is entitled to
receive on a when issued basis. The Fund may also purchase or sell securities
on a delayed delivery basis. The Fund may also purchase or sell securities
through a forward commitment. These transactions involve the purchase or sale
of securities by the Fund at an established price with payment and delivery
taking place in the future. The purchase will be received on the date the Fund
enters into the commitment and the value of the securities will thereafter be
reflected in the Fund's net asset value. The Fund enters into these
transactions to obtain what is considered an advantageous price to the Fund at
the time of entering into the transaction. The Fund has not established any
limit on the percentage of its assets that may be committed in connection with
these transactions. When the Fund purchases securities in these transactions,
the Fund segregates liquid securities in an amount equal to the amount of its
purchase commitments.
There can be no assurance that a security purchased on a when issued
basis will be issued or that a security purchased or sold through a forward
commitment will be delivered. A default by a counterparty may result in the
Fund missing the opportunity of obtaining a price considered to be
advantageous. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may
not benefit from an appreciation in the value of the security during the
commitment period.
Call Rights. The Fund may purchase a Municipal Bond issuer's right to
call all or a portion of such Municipal Bond for mandatory tender for purchase
(a "Call Right"). A holder of a Call Right may exercise such right to require
a mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid.
"High Yield" or "Junk" Bonds. The Fund may invest up to 25% of its total
assets in Municipal Bonds that are rated below Baa by Moody's or below BBB by
S&P or Fitch or are unrated securities that are considered by the Investment
Adviser to possess similar credit characteristics. See Appendix A "Ratings of
Municipal Bonds" in the statement of additional information regarding ratings
of debt securities. Junk bonds are debt securities that are rated below
investment grade by the major rating agencies or are unrated securities that
are considered by the Investment Adviser to possess similar credit
characteristics. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. The major risks in junk bond
investments include the following:
o Junk bonds may be issued by less creditworthy issuers. These
securities are vulnerable to adverse changes in the issuer's
industry and to general economic conditions. Issuers of junk bonds
may be unable to meet their interest or principal payment
obligations because of an economic downturn, specific issuer
developments or the unavailability of additional financing.
o The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade
bonds. If the issuer experiences financial stress, it may be
unable to meet its debt obligations. The issuer's ability to pay
its debt obligations also may be lessened by specific issuer
developments, or the unavailability of additional financing.
17
o Junk bonds are frequently ranked junior to claims by other
creditors. If the issuer cannot meet its obligations, the senior
obligations are generally paid off before the junior obligations.
o Junk bonds frequently have call or redemption features that permit
an issuer to repurchase the security from the Fund before it
matures. If an issuer redeems the junk bonds, the Fund may have to
invest the proceeds in bonds with lower yields and may lose
income.
o Prices of junk bonds are subject to extreme price fluctuations.
Negative economic developments may have a greater impact on the
prices of junk bonds than on other higher rated fixed income
securities.
o Junk bonds may be less liquid than higher rated fixed income
securities even under normal economic conditions. There are fewer
dealers in the junk bond market, and there may be significant
differences in the prices quoted for junk bonds by the dealers.
Because they are less liquid, judgment may play a greater role in
valuing certain of the Fund's portfolio securities than in the
case of securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
Yields. Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the financial condition of the
issuer, the maturity of the obligation and the rating of the issue. The
ability of the Fund to achieve its investment objective is also dependent on
the continuing ability of the issuers of the securities in which the Fund
invests to meet their obligations for the payment of interest and principal
when due. There are variations in the risks involved in holding Municipal
Bonds, both within a particular classification and between classifications,
depending on numerous factors. Furthermore, the rights of owners of Municipal
Bonds and the obligations of the issuer of such Municipal Bonds may be subject
to applicable bankruptcy, insolvency and similar laws and court decisions
affecting the rights of creditors generally and to general equitable
principles, which may limit the enforcement of certain remedies.
Hedging 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 Fund's shares of common stock, the net asset value of the Fund's shares
of common stock will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. The Fund has no obligation to enter
into hedging transactions and may choose not to do so. Furthermore, for so
long as the AMPS are rated by Moody's and S&P, the Fund's use of options and
certain financial futures and options thereon will be subject to the
limitations described under "Rating Agency Guidelines."
Financial Futures Transactions and Options. The Fund is authorized to
purchase and sell certain exchange traded financial futures contracts
("financial futures contracts") in order to hedge its investments in Municipal
Bonds against declines in value, and to hedge against increases in the cost of
securities it intends to purchase or to seek to enhance the Fund's return.
However, any transactions involving financial futures or options (including
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. 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. To hedge its
portfolio, the Fund may take an investment position in a futures contract
which will move in the opposite direction from the portfolio position being
hedged. 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
18
the cost of securities intended to be purchased because such appreciation may
be offset, in whole or in part, by an increase inthe value of the position in
the futures contracts.
Distributions, if any, of net long term capital gains from certain
transactions in futures or options are taxable at long term capital gains
rates for Federal income tax purposes. See "Taxes."
Futures Contracts. A futures contract is an agreement between two parties
to buy and sell a security or, in the case of an index-based futures contract,
to make and accept a cash settlement for a set price on a future date. A
majority of transactions in futures contracts, however, do not result in the
actual delivery of the underlying instrument or cash settlement, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
Futures contracts have been designed by boards of trade which have been
designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC").
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 and the relevant
contract market, which varies, but is generally about 5% of the contract
amount, must be deposited with the broker. This amount is known as "initial
margin" and represents a "good faith" deposit assuring the performance of both
the purchaser and seller under the futures contract. Subsequent payments to
and from the broker, called "variation margin," are required to be made on a
daily basis as the price of the futures contract fluctuates making the long
and short positions in the futures contract more or less valuable, a process
known as "marking to the market." At any time prior to the settlement date of
the futures contract, the position may be closed out by taking an opposite
position that will operate to terminate the position in the futures contract.
A final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
The Fund deals in financial futures contracts based on a long term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax exempt municipal revenue and general obligation bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
S&P and must have a remaining maturity of 19 years or more. Twice a month new
issues satisfying the eligibility requirements are added to, and an equal
number of old issues are deleted from, the Municipal Bond Index. The value of
the Municipal Bond Index is computed daily according to a formula based on the
price of each bond in the Municipal Bond Index, as evaluated by six
dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which is also responsible for handling daily accounting of
deposits or withdrawals of margin.
The Fund may also purchase and sell financial futures contracts on U.S.
Government securities as a hedge against adverse changes in interest rates as
described below. With respect to U.S. Government securities, currently there
are financial futures contracts based on long term U.S. Treasury bonds,
Treasury notes, Government National Mortgage Association ("GNMA") Certificates
and three-month U.S. Treasury bills. The Fund may purchase and write call and
put options on futures contracts on U.S. Government securities and purchase
and sell Municipal Bond Index futures contracts in connection with its hedging
strategies.
The Fund also may engage in other futures contracts transactions such as
futures contracts on other municipal bond indices that may become available if
the Investment Adviser should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This
strategy, however, entails increased transaction costs in the form of dealer
spreads and typically would reduce the average yield of the Fund's portfolio
securities as a result of the shortening of maturities. The sale of
19
futures contracts provides an alternative means of hedging against declines in
the value of its investments in Municipal Bonds. As such values decline, the
value of the Fund's positions in the futures contracts will tend to increase,
thus offsetting all or a portion of the depreciation in the market value of
the Fund's Municipal Bond investments that are being hedged. While the Fund
will incur commission expenses in selling and closing out futures positions,
commissions on futures transactions are lower than transaction costs incurred
in the purchase and sale of Municipal Bonds. In addition, the ability of the
Fund to trade in the standardized contracts available in the futures markets
may offer a more effective defensive position than a program to reduce the
average maturity of the portfolio securities due to the unique and varied
credit and technical characteristics of the municipal debt instruments
available to the Fund. Employing futures as a hedge also may permit the Fund
to assume a defensive posture without reducing the yield on its investments
beyond any amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such
Municipal Bonds resulting from a decrease in interest rates or otherwise, that
may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the futures contracts, subsequent
increases in the cost of Municipal Bonds should be reflected in the value of
the futures held by the Fund. As such purchases are made, an equivalent amount
of futures contracts will be closed out. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
a corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Fund may also purchase and sell
exchange traded call and put options on financial futures contracts. The
purchase of a call option on a futures contract is analogous to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the futures contract upon which it is based or the
price of the underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities. Like the
purchase of a futures contract, the Fund will purchase a call option on a
futures contract to hedge against a market advance when the Fund is not fully
invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of a put option on a
futures contract is analogous to the purchase of a protective put option on
portfolio securities. The Fund will purchase a put option on a futures
contract to hedge the Fund's portfolio against the risk of rising interest
rates.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option will be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures
contracts.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. However, the Fund may engage in options and futures transactions for
hedging purposes or to seek to enhance the Fund's return. Margin deposits may
consist of cash or securities acceptable to the broker and the relevant
contract market.
20
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade 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
futures contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged
security, the Fund will experience either a loss or gain on the futures
contract which is not completely offset by movements in the price of the
hedged securities. To compensate for imperfect correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities if the volatility of the hedged securities is historically greater
than the volatility of the futures contracts. Conversely, the Fund may
purchase or sell fewer futures contracts if the volatility of the price of the
hedged securities is historically less than that of the futures contracts.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the bonds held
by the Fund. As a result, the Fund's ability to hedge effectively all or a
portion of the value of its Municipal Bonds through the use of such financial
futures contracts will depend in part on the degree to which price movements
in the index underlying the financial futures contract correlate with the
price movements of the Municipal Bonds held by the Fund. The correlation may
be affected by disparities in the average maturity, ratings, geographical mix
or structure of the Fund's investments as compared to those comprising the
Municipal Bond Index and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the
Municipal Bond Index alter its structure. The correlation between futures
contracts on U.S. Government securities and the Municipal Bonds held by the
Fund may be adversely affected by similar factors and the risk of imperfect
correlation between movements in the prices of such futures contracts and the
prices of Municipal Bonds held by the Fund may be greater. Municipal Bond
Index futures contracts were approved for trading in 1986. Trading in such
futures contracts may tend to be less liquid than trading in other futures
contracts. The trading of futures contracts also is subject to certain market
risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
The Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract market.
There can be no assurance, however, that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of variation margin. In such situations, if the Fund has insufficient cash, it
may be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability
to close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The liquidity
of a secondary market in a futures contract may be adversely affected by
"daily price fluctuation limits" established by commodity exchanges which
limit the amount of fluctuation in a 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. The Fund will enter
into a futures position only if, in the judgment of the Investment Adviser,
there appears to be an actively traded secondary market for such futures
contracts.
The successful use of transactions in futures and related options 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 interest rates remain stable during the period in which a futures
contract or option is held by the Fund or such rates move in a direction
opposite to that anticipated, the Fund may realize a loss on the hedging
transaction which 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.
21
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by the
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a financial futures contract. Because the Fund
will engage in the purchase and sale of futures contracts for hedging purposes
or to seek to enhance the Fund's return, any losses incurred in connection
therewith should, if the hedging strategy is successful, be offset in whole or
in part by increases in the value of securities held by the Fund or decreases
in the price of securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option on a futures contract also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below.
Temporary Investments
The Fund may invest in short term tax exempt and taxable securities
subject to the limitations set forth above. The tax exempt money market
securities may include municipal notes, municipal commercial paper, municipal
bonds with a remaining maturity of less than one year, variable rate demand
notes and participations therein. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes and grant
anticipation notes. Anticipation notes are sold as interim financing in
anticipation of tax collection, bond sales, government grants or revenue
receipts. Municipal commercial paper refers to short term unsecured promissory
notes generally issued to finance short term credit needs. The taxable money
market securities in which the Fund may invest as Temporary Investments
consist of U.S. Government securities, U.S. Government agency securities,
domestic bank or savings institution certificates of deposit and bankers'
acceptances, short term corporate debt securities such as commercial paper and
repurchase agreements. These Temporary Investments must have a stated maturity
not in excess of one year from the date of purchase. The Fund may not invest
in any security issued by a commercial bank or a savings institution unless
the bank or institution is organized and operating in the United States, has
total assets of at least one billion dollars and is a member of the Federal
Deposit Insurance Corporation ("FDIC"), except that up to 10% of total assets
may be invested in certificates of deposit of smaller institutions if such
certificates are fully insured by the FDIC.
Interest Rate Swap Transactions
In order to seek to hedge the value of a Fund against interest rate
fluctuations or to seek to enhance the Fund's return, the Fund may enter into
interest rate swap transactions such as Municipal Market Data AAA Cash Curve
swaps ("MMD Swaps") or Bond Market Association Municipal Swap Index swaps
("BMA Swaps"). To the extent that the Fund enters into these transactions, the
Fund expects to do so primarily to preserve a return or spread on a particular
investment or portion of its portfolio as a duration management technique or
to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund may enter into these
transactions primarily as a hedge or for duration or risk management rather
than as a speculative investment. However, the Fund also may invest in MMD
Swaps and BMA Swaps to seek to enhance return or gain or to increase the
Fund's yield, for example, during periods of steep interest rate yield curves
(i.e., wide differences between short term and long term interest rates).
The Fund may purchase and sell BMA Swaps in the BMA swap market. In a BMA
Swap, the Fund exchanges with another party their respective commitments to
pay or receive interest (e.g., an exchange of fixed rate payments for floating
rate payments linked to the Bond Market Association Municipal Swap Index).
Because the underlying index is a tax exempt index, BMA Swaps may reduce
cross-market risks incurred by the Fund and increase the Fund's ability to
hedge effectively. BMA Swaps are typically quoted for the entire yield curve,
beginning with a seven day floating rate index out to 30 years. The duration
of a BMA Swap is approximately equal
22
to the duration of a fixed rate Municipal Bond with the same attributes as the
swap (e.g., coupon, maturity, call feature).
The Fund also may purchase and sell MMD Swaps, also known as MMD rate
locks. An MMD Swap permits the Fund to lock in a specified municipal interest
rate for a portion of its portfolio to preserve a return on a particular
investment or a portion of its portfolio as a duration management technique or
to protect against any increase in the price of securities to be purchased at
a later date. By using an MMD Swap, the Fund can create a synthetic long or
short position, allowing the Fund to select the most attractive part of the
yield curve. An MMD Swap is a contract between the Fund and an MMD Swap
provider pursuant to which the parties agree to make payments to each other on
a notional amount, contingent upon whether the Municipal Market Data AAA
General Obligation Scale is above or below a specified level on the expiration
date of the contract. For example, if the Fund buys an MMD Swap and the
Municipal Market Data AAA General Obligation Scale is below the specified
level on the expiration date, the counterparty to the contract will make a
payment to the Fund equal to the specified level minus the actual level,
multiplied by the notional amount of the contract. If the Municipal Market
Data AAA General Obligation Scale is above the specified level on the
expiration date, the Fund will make a payment to the counterparty equal to the
actual level minus the specified level, multiplied by the notional amount of
the contract.
In connection with investments in BMA and MMD Swaps, there is a risk that
municipal yields will move in the opposite direction than anticipated by the
Fund, which would cause the Fund to make payments to its counterparty in the
transaction that could adversely affect the Fund's performance.
The Fund has no obligation to enter into BMA or MMD Swaps and may not do
so. The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a
daily basis, and the Fund will segregate liquid securities having an aggregate
net asset value at least equal to the accrued excess.
Credit Default Swap Agreements
The Fund may enter into credit default swap agreements for hedging
purposes or to seek to enhance its return. The credit default swap agreement
may have as reference obligations one or more securities that are not
currently held by the Fund. The protection "buyer" in a credit default
contract may be obligated to pay the protection "seller" an upfront or a
periodic stream of payments over the term of the contract provided that no
credit event on a reference obligation has occurred. If a credit event occurs,
the seller generally must pay the buyer the "par value" (full notional value)
of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity described in the swap, or the seller may be required to
deliver the related net cash amount, if the swap is cash settled. The Fund may
be either the buyer or seller in the transaction. If the Fund is a buyer and
no credit event occurs, the Fund may recover nothing if the swap is held
through its termination date. However, if a credit event occurs, the buyer
generally may elect to receive the full notional value of the swap in exchange
for an equal face amount of deliverable obligations of the reference entity
that may have little or no value. As a seller, the Fund generally receives an
upfront payment or a fixed rate of income throughout the term of the swap,
which typically is between six months and three years, provided that there is
no credit event. If a credit event occurs, generally the seller must pay the
buyer the full notional value of the swap in exchange for an equal face amount
of deliverable obligations of the reference entity that may have little or no
value. As the seller, the Fund would effectively add leverage to its portfolio
because, in addition to its total net assets, the Fund would be subject to
investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if the Fund had
invested in the reference obligation directly since, in addition to general
market risks, credit default swaps are subject to illiquidity risk,
counterparty risk and credit risks. The Fund will enter into credit default
swap agreements only with counterparties who are rated investment grade
quality by at least one nationally recognized statistical rating organization
at the time of entering into such transaction or whose creditworthiness is
believed by the Investment Adviser to be equivalent to such rating. A buyer
generally also will lose its investment and recover nothing should no credit
event occur and the swap is held to its termination date. If a credit event
were to occur, the value of any deliverable obligation received by the seller,
coupled with the upfront or periodic payments previously received, may be less
than the full notional value it pays to the buyer, resulting in a loss of
value to the seller. The Fund's obligations under a credit default swap
agreement will be accrued daily (offset against any amounts owing to the
Fund). The Fund will at all times
23
segregate with its custodian in connection with each such transaction
unencumbered liquid securities or cash with a value at least equal to the
Fund's exposure (any accrued but unpaid net amounts owed by the Fund to any
counterparty), on a marked-to-market basis (as calculated pursuant to
requirements of the Commission). Such segregation will ensure that the Fund
has assets available to satisfy its obligations with respect to the
transaction and will avoid any potential leveraging of the Fund's portfolio.
Such segregation will not limit the Fund's exposure to loss.
VRDOs and Participating VRDOs
VRDOs are tax exempt obligations that contain a floating or variable
interest rate adjustment formula and right of demand on the part of the holder
thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is,
however, the possibility that because of default or insolvency the demand
feature of VRDOs and Participating VRDOs may not be honored. The interest
rates are adjustable at intervals (ranging from daily to up to one year) to
some prevailing market rate for similar investments, such adjustment formula
being calculated to maintain the market value of the VRDOs, at approximately
the par value of the VRDOs on the adjustment date. The adjustments typically
are based upon the Public Securities Association Index or some other
appropriate interest rate adjustment index. The Fund may invest in all types
of tax exempt instruments currently outstanding or to be issued in the future
which satisfy its short term maturity and quality standards.
Participating VRDOs provide the Fund with a specified undivided interest
(up to 100%) of 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 upon a specified number of days' notice, not to
exceed seven days. In addition, the Participating VRDO is backed by an
irrevocable letter of credit or guaranty of the financial institution. The
Fund would have an undivided interest in the underlying obligation and thus
participate on the same basis as the financial institution in such obligation
except that the financial institution typically retains fees out of the
interest paid on the obligation for servicing the obligation, providing the
letter of credit and issuing the repurchase commitment. 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 as
long as the Fund does not invest more than 20% of its total assets in such
investments and certain other conditions are met. It is contemplated that the
Fund will not invest more than 20% of its assets in Participating VRDOs.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities. The Directors
may adopt guidelines and delegate to the Investment Adviser the daily function
of determining and monitoring liquidity of such VRDOs. The Directors, however,
will retain sufficient oversight and will be ultimately responsible for such
determinations.
The Temporary Investments, VRDOs and Participating VRDOs in which the
Fund may invest will be in the following rating categories at the time of
purchase: MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1
through Prime-3 for commercial paper (as determined by Moody's), SP-1 through
SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as
determined by S&P), or F-1 through F-3 for notes, VRDOs and commercial paper
(as determined by Fitch). Temporary Investments, if not rated, must be of
comparable quality in the opinion of the Investment Adviser. In addition, the
Fund reserves the right to invest temporarily a greater portion of its assets
in Temporary Investments for defensive purposes, when, in the judgment of the
Investment Adviser, market conditions warrant.
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 primary dealer or an affiliate thereof, in U.S.
Government securities. Under such agreements, the bank or primary dealer or an
affiliate thereof 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. This results in a fixed rate of return
insulated from market fluctuations during such period. In repurchase
agreements, the prices at which the trades are conducted do not reflect
accrued interest on the underlying obligations. Such agreements usually cover
short periods, such as under one week.
24
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the
purchaser. In a repurchase agreement, the Fund will require the seller to
provide additional collateral if the market value of the securities falls
below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur
costs or possible losses in connection with the disposition of the collateral.
In the event of a default under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax exempt
interest. The treatment of purchase and sales contracts is less certain.
Short Sales
The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund may make short
sales both as a form of hedging to offset potential declines in long positions
in similar securities and in order to seek to enhance return.
When the Fund makes a short sale, it must borrow the security sold short
and deliver collateral to the broker-dealer through which it made the short
sale to cover its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash or liquid securities
similar to those borrowed. The Fund also will be required to segregate similar
collateral with its custodian to the extent, if any, necessary so that the
value of both collateral amounts in the aggregate is at all times equal to at
least 100% of the current market value of the security sold short. Depending
on arrangements made with the broker-dealer from which it borrowed the
security regarding payment over any payments received by the Fund on such
security, the Fund may not receive any payments (including interest) on its
collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss. Conversely, if the price declines, the Fund will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The Fund also may make short sales "against the box." These transactions
will involve either short sales of securities retained in the Fund's portfolio
or securities which it has the right to acquire without the payment of further
consideration.
Investment in Other Investment Companies
The Fund may invest in other investment companies whose investment
objectives and policies are consistent with those of the Fund. In accordance
with the 1940 Act, the Fund may invest up to 10% of its total assets in
securities of other investment companies. In addition, under the 1940 Act the
Fund may not own more than 3% of the total outstanding voting stock of any
investment company and not more than 5% of the value of the Fund's total
assets may be invested in securities of any investment company. The Fund has
received an exemptive order from the Commission permitting it to invest in
affiliated registered money market funds and in an affiliated private
investment company without regard to such limitations, provided however, that
in all cases the Fund's aggregate investment of cash in shares of such
investment companies shall not exceed 25% of the Fund's total assets at any
time. If the Fund acquires shares in investment companies, stockholders would
bear both their proportionate share of
25
expenses in the Fund (including management and advisory fees) and, indirectly,
the expenses of such investment companies (including management and advisory
fees).
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, including the payment of dividends and
the settlement of securities transactions which otherwise, might require
untimely dispositions of portfolio securities. Borrowings by the Fund
(commonly known, as with the issuance of preferred stock, as "leveraging")
create an opportunity for greater total return since, for example, 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.
DESCRIPTION OF AMPS
General
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of this prospectus.
The AMPS of each series will be shares of preferred stock that entitle
their holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods for each such series. After the
Initial Dividend Period, each Subsequent Dividend Period for each series of
AMPS generally will be a [7-Day Dividend Period in the case of Series __ AMPS
and a 28-Day Dividend Period in the case of Series __AMPS]; provided however,
that prior to any Auction, the Fund may elect, subject to certain limitations
described herein, upon giving notice to holders thereof, a Special Dividend
Period. The Applicable Rate for a particular Dividend Period will be
determined by an Auction conducted on the Business Day before the start of
such Dividend Period. Beneficial Owners and Potential Beneficial Owners of
shares of AMPS may participate in Auctions therefor, although, except in the
case of a Special Dividend Period of more than 28 days, Beneficial Owners
desiring to continue to hold all of their shares of AMPS regardless of the
Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
"The Auction" herein and in the statement of additional information.
The following is a brief description of the terms of the shares of AMPS.
This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the Fund's Charter and Articles
Supplementary, including the provisions thereof establishing the AMPS. The
Fund's Charter and the form of Articles Supplementary establishing the terms
of the AMPS have been filed as exhibits to the Registration Statement of which
this prospectus is a part.
Dividends
General. The holders of shares of AMPS will be entitled to receive, when,
as and if declared by the Board of Directors of the Fund, out of funds legally
available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid (i) in preference to and
in priority over any dividends so declared and payable on the Fund's common
stock, and (ii) to the extent permitted under the Code, and to the extent
available, out of net tax-exempt income earned on the Fund's investments.
Generally, dividends on shares of AMPS, to the extent that they are derived
from interest paid on Municipal Bonds, will be exempt from Federal income
taxes, subject to possible application of the alternative minimum tax. See
"Taxes."
Dividends on the shares of AMPS will accumulate from the date on which
the Fund originally issues the shares of AMPS (the "Date of Original Issue")
and will be payable on the dates described below. Dividends on
26
shares of AMPS with respect to the Initial Dividend Period shall be payable on
the Initial Dividend Payment Date. Following the Initial Dividend Payment Date
for AMPS, dividends on AMPS will be payable, at the option of the Fund, either
(i) with respect to any 7-Day Dividend Period[, 28-Day Dividend Period] and
any Short Term Dividend Period of 35 or fewer days, on the day next succeeding
the last day thereof or (ii) with respect to any Short Term Dividend Period of
more than 35 days and with respect to any Long Term Dividend Period, monthly
on the first Business Day of each calendar month during such Short Term
Dividend Period or Long Term Dividend Period and on the day next succeeding
the last day thereof (each such date referred to in clause (i) or (ii) being
referred to herein as a "Normal Dividend Payment Date"), except that if such
Normal Dividend Payment Date is not a Business Day, the Dividend Payment Date
shall be the first Business Day next succeeding such Normal Dividend Payment
Date. Thus, following the Initial Dividend Payment Date for AMPS, dividends
generally will be payable (in the case of Dividend Periods which are not
Special Dividend Periods) on each succeeding [ ] in the case of the
Series __ AMPS, and [fourth] [ ] in the case of the Series
__AMPS. Although any particular Dividend Payment Date may not occur on the
originally scheduled date because of the exceptions discussed above, the next
succeeding Dividend Payment Date, subject to such exceptions, will occur on
the next following originally scheduled date. If for any reason a Dividend
Payment Date cannot be fixed as described above, then the Board of Directors
shall fix the Dividend Payment Date. The Board of Directors by resolution
prior to authorization of a dividend by the Board of Directors may change a
Dividend Payment Date if such change does not adversely affect the contract
rights of the holders of shares of AMPS set forth in the Charter. The Initial
Dividend Period, 7-Day Dividend Periods[, 28-Day Dividend Periods] and Special
Dividend Periods are hereinafter sometimes referred to as "Dividend Periods."
Each dividend payment date determined as provided above is hereinafter
referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which holder
is expected to be the nominee of the Securities Depository. See "The Auction
-- Securities Depository." The Securities Depository will credit the accounts
of the Agent Members of the Existing Holders in accordance with the Securities
Depository's normal procedures which provide for payment in same-day funds.
The Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the
nominee of the Securities Depository. Any dividend payment made on shares of
AMPS first shall be credited against the earliest declared but unpaid
dividends accumulated with respect to such shares.
Holders of shares of AMPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described below under "--Additional Dividends" in this prospectus
and under "Description of AMPS -- Dividends -- Non-Payment Period; Late
Charge" in the statement of additional information. No interest will be
payable in respect of any dividend payment or payments on the shares of AMPS
which may be in arrears.
The amount of cash dividends per share of any series of AMPS payable (if
declared) on the Initial Dividend Payment Date, each Dividend Payment Date of
each 7-Day Dividend Period[, each Dividend Payment Date of each 28-Day
Dividend Period] and each Dividend Payment Date of each Short Term Dividend
Period shall be computed by multiplying the Applicable Rate for such Dividend
Period by a fraction, the numerator of which will be the number of days in
such Dividend Period or part thereof that such share was outstanding and for
which dividends are payable on such Dividend Payment Date and the denominator
of which will be 365, multiplying the amount so obtained by $25,000, and
rounding the amount so obtained to the nearest cent. During any Long Term
Dividend Period, the amount of cash dividends per share of AMPS payable (if
declared) on any Dividend Payment Date shall be computed by multiplying the
Applicable Rate for such Dividend Period by a fraction, the numerator of which
will be such number of days in such part of such Dividend Period that such
share was outstanding and for which dividends are payable on such Dividend
Payment Date and the denominator of which will be 360, multiplying the amount
so obtained by $25,000, and rounding the amount so obtained to the nearest
cent.
Notification of Dividend Period. With respect to each Dividend Period
that is a Special Dividend Period, the Fund, at its sole option and to the
extent permitted by law, by telephonic and written notice (a "Request for
27
Special Dividend Period") to the Auction Agent and to each Broker-Dealer, may
request that the next succeeding Dividend Period for a series of AMPS will be
a number of days (other than [seven] in the case of Series __ AMPS and [other
than 28 in the case of] Series ___ AMPS), evenly divisible by seven, and not
fewer than seven nor more than 364 in the case of a Short Term Dividend Period
or one whole year or more but not greater than five years in the case of a
Long Term Dividend Period, specified in such notice, provided that the Fund
may not give a Request for Special Dividend Period (and any such request shall
be null and void) unless, for any Auction occurring after the initial Auction,
Sufficient Clearing Bids were made in the last occurring Auction and unless
full cumulative dividends and any amounts due with respect to redemptions, and
any Additional Dividends payable prior to such date have been paid in full.
Such Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more
than seven Business Days prior to an Auction Date for the AMPS and, in the
case of a Long Term Dividend Period, shall be given on or prior to the second
Business Day but not more than 28 days prior to an Auction Date for a series
of AMPS. Upon receiving such Request for Special Dividend Period, the
Broker-Dealers jointly shall determine whether, given the factors set forth
below, it is advisable that the Fund issue a Notice of Special Dividend Period
for the series of AMPS as contemplated by such Request for Special Dividend
Period and the Optional Redemption Price of the AMPS during such Special
Dividend Period and the Specific Redemption Provisions and shall give the Fund
written notice (a "Response") of such determination by no later than the
second Business Day prior to such Auction Date. In the event the Response
indicates that it is advisable that the Fund give a notice of a Special
Dividend Period for the series of AMPS, the Fund, by no later than the second
Business Day prior to such Auction Date may give a notice (a "Notice of
Special Dividend Period") to the Auction Agent, the Securities Depository and
each Broker-Dealer. See "Description of AMPS -- Dividends -- Notification of
Dividend Period" in the statement of additional information for a detailed
description of these procedures.
Determination of Dividend Rate. The dividend rate on shares of the AMPS
during the period from and including the Date of Original Issue for each
series of AMPS to but excluding the Initial Dividend Payment Date (the
"Initial Dividend Period") with respect to each series of AMPS will be the
rate per annum set forth above under "Prospectus Summary -- Dividends and
Dividend Periods." Commencing on the Initial Dividend Payment Date for each
series of AMPS, the Applicable Rate on each series of AMPS for each Subsequent
Dividend Period, which Subsequent Dividend Period shall be a period commencing
on and including a Dividend Payment Date and ending on and including the
calendar day prior to the next Dividend Payment Date (or calendar day prior to
the last Dividend Payment Date in a Dividend Period if there is more than one
Dividend Payment Date), shall be equal to the rate per annum that results from
the Auction with respect to such Subsequent Dividend Period. The Initial
Dividend Period and Subsequent Dividend Period for AMPS is referred to herein
as a "Dividend Period." Cash dividends shall be calculated as set forth above
under "Dividends -- General."
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
Fund may not declare dividends or make other distributions on shares of common
stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, as applicable (and after giving effect thereto),
asset coverage (as defined in the 1940 Act) with respect to the outstanding
shares of AMPS would be less than 200% (or such other percentage as in the
future may be required by law). The Fund estimates that, based on the
composition of its portfolio at August , 2003, asset coverage with
respect to shares of AMPS would be approximately % representing
approximately % of the Fund's capital and % of the Fund's common
stock equity immediately after the issuance of the shares of AMPS offered
hereby. Under the Code, the Fund, among other things, must distribute at least
90% of its investment company taxable income each year in order to maintain
its qualification for tax treatment as a regulated investment company. The
foregoing limitations on dividends, distributions and purchases under certain
circumstances may impair the Fund's ability to maintain such qualification.
See "Taxes" in the statement of additional information.
Upon any failure to pay dividends on shares of AMPS for two years or
more, the holders of the shares of AMPS will acquire certain additional voting
rights. See "Voting Rights" below. Such rights shall be the exclusive remedy
of the holders of shares of AMPS upon any failure to pay dividends on shares
of the Fund.
Additional Dividends. If the Fund retroactively allocates any net capital
gain or other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
under "The Auction -- Auction Procedures -- Auction Date; Advance Notice of
Allocation of Taxable Income; Inclusion of Taxable Income in Dividends" below,
which may only happen when such allocation is made as a result of the
redemption of all or a portion of the outstanding shares of AMPS or the
liquidation of the Fund (the
28
amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Fund, within 90 days (and generally within 60 days) after
the end of the Fund's fiscal year for which a Retroactive Taxable Allocation
is made, will provide notice thereof to the Auction Agent and to each holder
of shares (initially Cede as nominee of the Securities Depository) during such
fiscal year at such holder's address as the same appears or last appeared on
the stock books of the Fund. The Fund, within 30 days after such notice is
given to the Auction Agent, will pay to the Auction Agent (who then will
distribute to such holders of shares of AMPS), out of funds legally available
therefor, an amount equal to the aggregate Additional Dividend (as defined
below) with respect to all Retroactive Taxable Allocations made to such
holders during the fiscal year in question. See "Taxes" in the statement of
additional information.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder
if the amount of the aggregate Retroactive Taxable Allocations had been
excludable from the gross income of such holder. Such Additional Dividend
shall be calculated (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of AMPS is subject to the
Federal alternative minimum tax with respect to dividends received from the
Fund; and (iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each holder of shares of AMPS at the greater of: (a)
the maximum marginal regular Federal individual income tax rate applicable to
ordinary income or capital gains depending on the taxable character of the
distribution (including any surtax); or (b) the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income or capital
gains depending on the taxable character of the distribution (disregarding in
both (a) and (b) the effect of any state or local taxes and the phase out of,
or provision limiting, personal exemptions, itemized deductions, or the
benefit of lower tax brackets). Although the Fund generally intends to
designate any Additional Dividend as an exempt-interest dividend to the extent
permitted by applicable law, it is possible that all or a portion of any
Additional Dividend will be taxable to the recipient thereof. See "Taxes --
Tax Treatment of Additional Dividends" in the statement of additional
information. The Fund will not pay a further Additional Dividend with respect
to any taxable portion of an Additional Dividend.
If the Fund does not give advance notice of the amount of taxable income
to be included in a dividend on shares of AMPS in the related Auction, the
Fund may include such taxable income in a dividend on shares of AMPS if it
increases the dividend by an additional amount calculated as if such income
were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend and notifies the Auction Agent of such inclusion at least
five Business Days prior to the applicable Dividend Payment Date. See "The
Auction -- Auction Procedures -- Auction Date; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividends" below.
Asset Maintenance
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities which are
stock, including the shares of AMPS (or such other asset coverage as in the
future may be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are stock of a closed-end investment company as a
condition of paying dividends on its common stock) ("1940 Act AMPS Asset
Coverage"). If the Fund fails to maintain 1940 Act AMPS Asset Coverage and
such failure is not cured as of the last Business Day of the following month
(the "1940 Act Cure Date"), the Fund will be required under certain
circumstances to redeem certain of the shares of AMPS. See "Redemption" below.
The 1940 Act AMPS Asset Coverage immediately following the issuance of
AMPS offered hereby (after giving effect to the deduction of the underwriting
discount and offering expenses for the shares of AMPS) will be computed as
follows:
29
Value of Fund assets less
liabilities not constituting
senior securities = $ = %
------------------------------------ ------------
Senior securities $
representing indebtedness
plus liquidation value of the
shares of AMPS
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
the last Business Day of each week (a "Valuation Date") Moody's Eligible
Assets and S&P Eligible Assets each having in the aggregate a Discounted Value
at least equal to the AMPS Basic Maintenance Amount. The AMPS Basic
Maintenance Amount includes the sum of (i) the aggregate liquidation value of
AMPS then outstanding and (ii) certain accrued and projected payment
obligations of the Fund. See "Description of AMPS -- Asset Maintenance -- AMPS
Basic Maintenance Amount" in the statement of additional information. If the
Fund fails to meet such requirement as of any Valuation Date and such failure
is not cured on or before the sixth Business Day after such Valuation Date
(the "AMPS Basic Maintenance Cure Date"), the Fund will be required under
certain circumstances to redeem certain of the shares of AMPS. Upon any
failure to maintain the required Discounted Value, the Fund will use its best
efforts to alter the composition of its portfolio to reattain a Discounted
Value at least equal to the AMPS Basic Maintenance Amount on or prior to the
AMPS Basic Maintenance Cure Date. See "Redemption" herein and in the statement
of additional information.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided in the statement
of additional information, the Fund, at its option, may redeem shares of AMPS,
in whole or in part, out of funds legally available therefor, at the Optional
Redemption Price per share on any Dividend Payment Date; provided that no
share of AMPS may be redeemed at the option of the Fund during (a) the Initial
Dividend Period with respect to such series of shares or (b) a Non-Call Period
to which such share is subject. "Optional Redemption Price" means $25,000 per
share of AMPS plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) to the date fixed for redemption plus any
applicable redemption premium, if any, attributable to the designation of a
Premium Call Period. In addition, holders of AMPS may be entitled to receive
Additional Dividends in the event of redemption of such AMPS to the extent
provided herein. See "Dividends--Additional Dividends." The Fund has the
authority to redeem the AMPS for any reason and may redeem all or part of the
outstanding shares of AMPS if it anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to holders of common stock for
any significant period of time than that obtainable if the common stock were
unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share,
shares of AMPS to the extent permitted under the 1940 Act and Maryland law, on
a date fixed by the Board of Directors, if the Fund fails to maintain Moody's
Eligible Assets and S&P Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or to satisfy
the 1940 Act AMPS Asset Coverage and such failure is not cured on or before
the AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. "Mandatory
Redemption Price" means $25,000 per share of AMPS plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption. In addition, holders of AMPS may be entitled to
receive Additional Dividends in the event of redemption of such AMPS to the
extent provided herein. See "Dividends--Additional Dividends."
For a discussion of the allocation procedures to be used if fewer than
all of the outstanding AMPS of either series are to be redeemed and for a
discussion of other redemption procedures, see "Description of AMPS --
Redemption" in the statement of additional information.
30
Liquidation Rights
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of AMPS will be entitled to
receive, out of the assets of the Fund available for distribution to
stockholders, before any distribution or payment is made upon any shares of
common stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount
of any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the date of distribution, and after such payment the holders of
AMPS will be entitled to no other payments except for Additional Dividends. If
such assets of the Fund shall be insufficient to make the full liquidation
payment on each outstanding series of AMPS and liquidation payments on any
other outstanding class or series of preferred stock of the Fund ranking on a
parity with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of such shares of AMPS and the holders of shares
of such other class or series ratably in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of liquidation distribution to which they are entitled, the holders of
AMPS will not be entitled to any further participation in any distribution of
assets by the Fund. A consolidation, merger or share exchange of the Fund with
or into any other entity or entities or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of
the assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
Voting Rights
Except as otherwise indicated in this prospectus and the statement of
additional information and except as otherwise required by applicable law,
holders of shares of AMPS will be entitled to one vote per share on each
matter submitted to a vote of stockholders of the Fund and will vote together
with holders of shares of common stock as a single class.
The 1940 Act and the Articles Supplementary require that the holders of
preferred stock, including the AMPS, voting as a separate class, have the
rights to elect two of the Fund's Directors at all times and to elect a
majority of the Directors at any time that two full years' dividends on the
AMPS are unpaid. The holders of AMPS will vote as a separate class or classes
on certain other matters as required under the Articles Supplementary, the
1940 Act and Maryland law. In addition, each series of AMPS may vote as a
separate series under certain circumstances. See "Description of AMPS --
Voting Rights" in the statement of additional information.
THE AUCTION
General
Holders of the shares of AMPS of each series will be entitled to receive
cumulative cash dividends on their shares when, as and if declared by the
Board of Directors of the Fund, out of funds legally available therefor, on
the Initial Dividend Payment Date with respect to the Initial Dividend Period
and, thereafter, on each Dividend Payment Date with respect to a Subsequent
Dividend Period (generally a period of seven days in the case of Series __
AMPS and [28 days in the case of] Series __ AMPS, subject to certain exceptions
set forth under "Description of AMPS -- Dividends -- General") at the rate per
annum equal to the Applicable Rate for each such Dividend Period.
The provisions of the Articles Supplementary establishing the terms of
the shares of AMPS offered hereby will provide that the Applicable Rate for
each series of AMPS for each Dividend Period after the Initial Dividend Period
therefor will be equal to the rate per annum that the Auction Agent advises
has resulted on the Business Day preceding the first day of such Dividend
Period due to implementation of the auction procedures set forth in the
Articles Supplementary (the "Auction Procedures") in which persons determine
to hold or offer to purchase or sell shares of AMPS of such series. The
Auction Procedures are attached as Appendix C to the statement of additional
information.
Each periodic operation of such procedures with respect to the shares of
AMPS is referred to hereinafter as an "Auction." If, however, the Fund should
fail to pay or duly provide for the full amount of any dividend on shares of
AMPS of any series or the redemption price of shares of AMPS of such series
called for redemption, the
31
Applicable Rate for shares of AMPS will be determined as set forth under
"Description of AMPS -- Dividends -- Non-Payment Period; Late Charge" in the
statement of additional information.
Auction Agent Agreement. The Fund will enter into an agreement (the
"Auction Agent Agreement") with The Bank of New York (together with any
successor bank or trust company or other entity entering into a similar
agreement with this Fund, the "Auction Agent"), which provides, among other
things, that the Auction Agent will follow the Auction Procedures for the
purpose of determining the Applicable Rate for the AMPS. The Fund will pay the
Auction Agent compensation for its services under the Auction Agent Agreement.
Broker-Dealer Agreements. The Auction Agent will enter into agreements
with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")[
and ], and may enter into similar
agreements (collectively, the "Broker-Dealer Agreements") with one or more
other broker-dealers (collectively, the "Broker-Dealers") selected by the
Fund, which provide for the participation of such Broker-Dealers in Auctions.
Merrill Lynch is an affiliate of the Investment Adviser in that they share a
common parent, Merrill Lynch & Co., Inc.
Securities Depository. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the shares of
AMPS of each series. One or more registered certificates for all of the shares
of each series of AMPS initially will be registered in the name of Cede, as
nominee of the Securities Depository. The certificate will bear a legend to
the effect that such certificate is issued subject to the provisions
restricting transfers of shares of AMPS of the series to which it relates
contained in the Articles Supplementary. Cede initially will be the holder of
record of all shares of AMPS, and Beneficial Owners will not be entitled to
receive certificates representing their ownership interest in such shares. The
Securities Depository will maintain lists of its participants and will
maintain the positions (ownership interests) of shares of AMPS held by each
Agent Member, whether as the Beneficial Owner thereof for its own account or
as nominee for the Beneficial Owner thereof. Payments made by the Fund to
holders of AMPS will be duly made by making payments to the nominee of the
Securities Depository.
Auction Procedures
The following is a brief discussion of the procedures to be used in
conducting Auctions. Separate auctions will be conducted for each series of
AMPS. This summary is qualified by reference to the Auction Procedures set
forth in Appendix C to the statement of additional information. The Settlement
Procedures to be used with respect to Auctions are set forth in Appendix B to
the statement of additional information.
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion
of Taxable Income in Dividends. An Auction to determine the Applicable Rate
for the shares of each series of AMPS offered hereby for each Dividend Period
(other than the Initial Dividend Period therefor) will be held on the first
Business Day (as hereinafter defined) preceding the first day of such Dividend
Period, which first day is also a Dividend Payment Date for the preceding
Dividend Period (the date of each Auction being referred to herein as an
"Auction Date"). "Business Day" means a day on which the New York Stock
Exchange (the "NYSE") is open for trading and which is not a Saturday, Sunday
or other day on which banks in the City of New York are authorized or
obligated by law to close. Auctions for shares of Series __ AMPS for Dividend
Periods after the Initial Dividend Period normally will be held every [ ]
after the preceding Dividend Payment Date, and each subsequent Dividend Period
normally will begin on the following [ ] (also a Dividend Payment Date).
Auctions for shares of Series __ AMPS for Dividend Periods after the Initial
Dividend Period normally will be held every [fourth] [ ] after the
preceding Dividend Payment Date, and each subsequent Dividend Period normally
will begin on the following [ ] (also a Dividend Payment Date). The
Auction Date and the first day of the related Dividend Period (both of which
must be Business Days) need not be consecutive calendar days. For example, in
most cases, if the [ ] that normally would be an Auction Date for Series
__ AMPS is not a Business Day, then such Auction Date will be the preceding
[ ] and the first day of the related Dividend Period will continue to be
the following [ ]. See "Description of AMPS -- Dividends" for information
concerning the circumstances under which a Dividend Payment Date may fall on a
date other than the days specified above, which may affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net
capital gain or other income subject to regular Federal income taxes in any
dividend on shares of AMPS, the Fund will notify the Auction Agent of the
amount to be so included at least five Business Days prior to the Auction Date
on which the Applicable Rate for
32
such dividend is to be established. Whenever the Auction Agent receives such
notice from the Fund, in turn it will notify each Broker-Dealer, who, on or
prior to such Auction Date, in accordance with its Broker-Dealer Agreement,
will notify its customers who are Beneficial Owners and Potential Beneficial
Owners believed to be interested in submitting an Order in the Auction to be
held on such Auction Date. The Fund also may include such income in a dividend
on shares of AMPS without giving advance notice thereof if it increases the
dividend by an additional amount calculated as if such income were a
Retroactive Taxable Allocation and the additional amount were an Additional
Dividend; provided that the Fund will notify the Auction Agent of the
additional amounts to be included in such dividend at least five Business Days
prior to the applicable Dividend Payment Date. See "Description of AMPS --
Dividends -- Additional Dividends" above.
Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by
telephone a:
(i) Hold Order -- indicating the number of outstanding shares,
if any, of AMPS that such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for the next Dividend
Period for such shares;
(ii) Bid -- indicating the number of outstanding shares, if
any, of AMPS that such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next Dividend Period for
such shares is not less than the rate per annum then specified by
such Beneficial Owner; and/or
(iii) Sell Order -- indicating the number of outstanding shares,
if any, of AMPS that such Beneficial Owner offers to sell without
regard to the Applicable Rate for the next Dividend Period for such
shares; and
(b) Broker-Dealers will contact customers who are Potential
Beneficial Owners of shares of AMPS to determine whether such Potential
Beneficial Owners desire to submit Bids indicating the number of shares
of AMPS which they offer to purchase provided that the Applicable Rate
for the next Dividend Period for such shares is not less than the rates
per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to
a Broker-Dealer and the communication by a Broker-Dealer, whether or not
acting for its own account, to the Auction Agent of the foregoing information
is hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted
by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or
by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on
any Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders
with respect to shares of AMPS then held by such Beneficial Owner, as well as
Bids for additional shares of AMPS. For information concerning the priority
given to different types of Orders placed by Beneficial Owners, see
"Submission of Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent.
The Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating
33
available, the equivalent of either or both of such ratings by a Substitute
Rating Agency or two Substitute Rating Agencies or, in the event that only one
such rating shall be available, such rating) and (ii) whether the Fund has
provided notification to the Auction Agent prior to the Auction establishing
the Applicable Rate for any dividend that net capital gain or other taxable
income will be included in such dividend on shares of AMPS as follows:
Applicable Applicable
Percentage of Percentage of
Credit Ratings Reference Reference
--------------------------------------------------- Rate - Rate -
Moody's S&P No Notification Notification
------------------------ ------------------- --------------- -------------
Aa3 or higher AA- or higher 110% 150%
A3 to A1 A- to A+ 125% 160%
Baa3 to Baa1 BBB- to BBB+ 150% 250%
Below Baa3 Below BBB- 200% 275%
There is no minimum Applicable Rate in respect of any Dividend Period.
The Applicable Percentage as so determined may be further subject to
upward but not downward adjustment in the discretion of the Board of Directors
of the Fund after consultation with the Broker-Dealers, provided that
immediately following any such increase, the Fund would be in compliance with
the AMPS Basic Maintenance Amount. The Fund will take all reasonable action
necessary to enable either S&P or Moody's, or both to provide a rating for the
AMPS, subject to the Fund's ability to terminate compliance with the rating
agency guidelines as discussed under "Rating Agency Guidelines." If either S&P
or Moody's, or both, shall not make such a rating available, and subject to
the Fund's ability to terminate compliance with the rating agency guidelines
discussed under "Rating Agency Guidelines," Merrill Lynch or its affiliates
and successors, after obtaining the Fund's approval, will select another NRSRO
(a "Substitute Rating Agency") or two other NRSROs ("Substitute Rating
Agencies") to act as a Substitute Rating Agency or Substitute Rating Agencies,
as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a Beneficial
Owner. A Broker-Dealer thus may submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner and therefore participate in
an Auction as an Existing Holder or Potential Holder on behalf of both itself
and its customers. Any Order placed with the Auction Agent by a Broker-Dealer
as or on behalf of a Beneficial Owner or a Potential Beneficial Owner will be
treated in the same manner as an Order placed with a Broker-Dealer by a
Beneficial Owner or a Potential Beneficial Owner. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect of any AMPS
held by it or its customers who are Beneficial Owners will be treated in the
same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an
Order in respect of AMPS held by it, as described in the next paragraph.
Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder
or a Potential Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the
priority given to different types of Orders placed by Existing Holders, see
"Submission of Orders by Broker-Dealers to Auction Agent." Each purchase or
sale in an Auction will be settled on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement" below.
34
If one or more Orders covering in the aggregate all of the outstanding
shares of AMPS held by a Beneficial Owner are not submitted to the Auction
Agent prior to the Submission Deadline, either because a Broker-Dealer failed
to contact such Beneficial Owner or otherwise, the Auction Agent shall deem a
Hold Order (in the case of an Auction relating to a Dividend Period which is
not a Special Dividend Period of more than 28 days) and a Sell Order (in the
case of an Auction relating to a Special Dividend Period of more than 28 days)
to have been submitted on behalf of such Beneficial Owner covering the number
of outstanding shares of AMPS held by such Beneficial Owner and not subject to
Orders submitted to the Auction Agent.
If all of the outstanding shares of AMPS are subject to Submitted Hold
Orders, the Dividend Period next succeeding the Auction automatically shall be
the same length as the immediately preceding Dividend Period, and the
Applicable Rate for the next Dividend Period for all shares of AMPS of such
series will be 40% of the Reference Rate on the date of the applicable Auction
(or 60% of such rate if the Fund has provided notification to the Auction
Agent prior to the Auction establishing the Applicable Rate for any dividend
that net capital gain or other taxable income will be included in such
dividend on shares of AMPS).
For the purposes of an Auction, shares of AMPS for which the Fund shall
have given notice of redemption and deposited moneys therefor with the Auction
Agent in trust or segregated in an account at the Fund's custodian bank for
the benefit of holders of such series of AMPS to be redeemed and for payment
to the Auction Agent, as set forth under "Description of AMPS -- Redemption"
in the statement of additional information, will not be considered as
outstanding and will not be included in such Auction. Pursuant to the Articles
Supplementary of the Fund, the Fund will be prohibited from reissuing and its
affiliates (other than Merrill Lynch) will be prohibited from transferring
(other than to the Fund) any shares of AMPS they may acquire. Neither the Fund
nor any affiliate of the Fund may submit an Order in any Auction, except that
an affiliate of the Fund that is a Broker-Dealer (i.e., Merrill Lynch) may
submit an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00
p.m., New York City time, on each Auction Date, or such other time on the
Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing or
through a mutually acceptable electronic means all Orders obtained by it for
the Auction to be conducted on such Auction Date, designating itself (unless
otherwise permitted by the Fund) as the Existing Holder or Potential Holder in
respect of the shares of AMPS subject to such Orders. Any Order submitted by a
Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent will round such
rate per annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(a) any Hold Order will be considered valid up to and including
the number of outstanding shares of AMPS held by such Existing Holder,
provided that if more than one Hold Order is submitted by such Existing
Holder and the number of shares of AMPS subject to such Hold Orders
exceeds the number of outstanding shares of AMPS held by such Existing
Holder, the number of shares of AMPS subject to each of such Hold Orders
will be reduced pro rata so that such Hold Orders, in the aggregate,
will cover exactly the number of outstanding shares of AMPS held by such
Existing Holder;
(b) any Bids will be considered valid, in the ascending order of
their respective rates per annum if more than one Bid is submitted by
such Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the number
of outstanding shares of AMPS subject to any Hold Order referred to in
clause (a) above (and if more than one Bid submitted by such Existing
Holder specifies the same rate per annum and together they cover more
than the remaining number of shares that can be the subject of valid
Bids after application of clause (a) above and of the foregoing portion
of this clause (b) to any Bid or Bids specifying a lower rate or rates
per annum, the number of shares subject to each of such Bids will be
reduced pro rata so that such Bids, in the aggregate, cover
35
exactly such remaining number of outstanding shares); and the number of
outstanding shares, if any, subject to Bids not valid under this clause
(b) shall be treated as the subject of a Bid by a Potential Holder; and
(c) any Sell Order will be considered valid up to and including
the excess of the number of outstanding shares of AMPS held by such
Existing Holder over the sum of the number of shares of AMPS subject to
Hold Orders referred to in clause (a) above and the number of shares of
AMPS subject to valid Bids by such Existing Holder referred to in clause
(b) above; provided that, if more than one Sell Order is submitted by
any Existing Holder and the number of shares of AMPS subject to such
Sell Orders is greater than such excess, the number of shares of AMPS
subject to each of such Sell Orders will be reduced pro rata so that
such Sell Orders, in the aggregate, will cover exactly the number of
shares of AMPS equal to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of AMPS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. Not earlier than the Submission Deadline for each Auction,
the Auction Agent will assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as
submitted or deemed submitted by a Broker-Dealer hereinafter being referred to
as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as
the case may be, or as a "Submitted Order") and will determine the excess of
the number of outstanding shares of AMPS over the number of outstanding shares
of AMPS subject to Submitted Hold Orders (such excess being referred to as the
"Available AMPS") and whether Sufficient Clearing Bids have been made in such
Auction. Sufficient Clearing Bids will have been made if the number of
outstanding shares of AMPS that are the subject of Submitted Bids of Potential
Holders with rates per annum not higher than the Maximum Applicable Rate
equals or exceeds the number of outstanding shares that are the subject of
Submitted Sell Orders (including the number of shares subject to Bids of
Existing Holders specifying rates per annum higher than the Maximum Applicable
Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate per annum specified in the Submitted Bids (the
"Winning Bid Rate") which would result in the number of shares subject to
Submitted Bids specifying such rate per annum or a lower rate per annum being
at least equal to the Available AMPS. If Sufficient Clearing Bids have been
made, the Winning Bid Rate will be the Applicable Rate for the next Dividend
Period for all shares of AMPS then outstanding.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 7-Day
Dividend Period (in the case of Series __ AMPS) and [a 28-Day Dividend Period
(in the case of Series __ AMPS)], and the Applicable Rate for such Dividend
Period will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that
have Submitted Sell Orders will not be able to sell in the Auction all, and
may not be able to sell any, shares of AMPS subject to such Submitted Sell
Orders. See "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares." Thus, under some circumstances, Beneficial
Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected
in the order of priority set forth in the Auction Procedures with the result
that Existing Holders and Potential Holders of AMPS will sell, continue to
hold and/or purchase shares of AMPS as set forth below. Existing Holders that
submit or are deemed to have submitted Hold Orders will continue to hold the
shares of AMPS subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
36
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Winning Bid Rate or a Submitted Sell
Order will sell the outstanding shares of AMPS subject to such Submitted
Bid or Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will purchase the number
of shares of AMPS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bids, unless the
number of outstanding shares of AMPS subject to all such Submitted Bids
of Existing Holders is greater than the excess of the Available AMPS
over the number of shares of AMPS accounted for in clauses (b) and (c)
above, in which event each Existing Holder with such a Submitted Bid
will sell a number of outstanding shares of AMPS determined on a pro
rata basis based on the number of outstanding shares of AMPS subject to
all such Submitted Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will purchase any Available
AMPS not accounted for in clause (b), (c) or (d) above on a pro rata
basis based on the shares of AMPS subject to all such Submitted Bids of
Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
continue to hold the outstanding shares of AMPS subject to such
Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
purchase the number of shares of AMPS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Maximum Applicable Rate or a Submitted
Sell Order will sell a number of outstanding shares of AMPS determined
on a pro rata basis based on the outstanding shares of AMPS subject to
all such Submitted Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will
round up or down the number of shares of AMPS being sold or purchased on such
Auction Date so that each share sold or purchased by each Existing Holder or
Potential Holder will be a whole share of AMPS. If any Potential Holder would
be entitled or required to purchase less than a whole share of AMPS, the
Auction Agent, in such manner as, in its sole discretion, it shall determine,
will allocate shares of AMPS for purchase among Potential Holders so that only
whole shares of AMPS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related shares of AMPS by
telephone at approximately 3:00 P.M., Eastern time, on the Auction Date for
such Auction. Each such Broker-Dealer that submitted an Order for the account
of a customer then will advise such customer whether such Bid or Sell Order
was accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling shares of AMPS as a result of the Auction and will
advise each customer purchasing or selling shares of AMPS to give instructions
to its Agent Member of the
37
Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor as appropriate. If a
customer selling shares of AMPS as a result of an Auction shall fail to
instruct its Agent Member to deliver such shares, the Broker-Dealer that
submitted such customer's Bid or Sell Order will instruct such Agent Member to
deliver such shares against payment therefor. Each Broker-Dealer that
submitted a Hold Order in an Auction on behalf of a customer also will advise
such customer of the Applicable Rate for the next Dividend Period for the
AMPS. The Auction Agent will record each transfer of shares of AMPS on the
record book of Existing Holders to be maintained by the Auction Agent. In
accordance with the Securities Depository's normal procedures, on the day
after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of shares of AMPS as determined in such
Auction. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment in same-day funds. If the
procedures of the Securities Depository applicable to AMPS shall be changed to
provide for payment in next-day funds, then purchasers may be required to make
payment in next day funds. If any Existing Holder selling shares of AMPS in an
Auction fails to deliver such shares, the Broker-Dealer of any person that was
to have purchased shares of AMPS in such Auction may deliver to such person a
number of whole shares of AMPS that is less than the number of shares that
otherwise was to be purchased by such person. In such event, the number of
shares of AMPS to be so delivered will be determined by such Broker- Dealer.
Delivery of such lesser number of shares will constitute good delivery. Each
Broker-Dealer Agreement also will provide that neither the Fund nor the
Auction Agent will have responsibility or liability with respect to the
failure of a Potential Beneficial Owner, Beneficial Owner or their respective
Agent Members to deliver shares of AMPS or to pay for shares of AMPS purchased
or sold pursuant to an Auction or otherwise.
Broker-Dealers
General. The Broker-Dealer Agreements provide that a Broker-Dealer may
submit Orders in Auctions for its own account, unless the Fund notifies all
Broker-Dealers that they no longer may do so; provided that Broker-Dealers may
continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an
Order for its own account in any Auction of any series of AMPS, it may have
knowledge of Orders placed through it in that Auction and therefore have an
advantage over other Bidders, but such Broker-Dealer would not have knowledge
of Orders submitted by other Broker-Dealers in that Auction.
Fees. The Auction Agent after each Auction will pay a service charge from
funds provided by the Fund to each Broker-Dealer on the basis of the purchase
price of shares of AMPS placed by such Broker-Dealer at such Auction. The
service charge (i) for any 7-Day Dividend Period [or 28-Day Dividend Period]
shall be payable at the annual rate of 0.25% of the purchase price of the
shares of AMPS placed by such Broker-Dealer in any such Auction and (ii) for
any Special Dividend Period shall be determined by mutual consent of the Fund
and any such Broker-Dealer or Broker-Dealers and shall be based upon a selling
concession that would be applicable to an underwriting of fixed or variable
rate preferred shares with a similar final maturity or variable rate dividend
period, respectively, at the commencement of the Dividend Period with respect
to such Auction. For the purposes of the preceding sentence, shares of AMPS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by
such Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold
such shares as a result of the Auction, (B) a Submitted Bid of a Potential
Beneficial Owner that resulted in such Potential Beneficial Owner purchasing
such shares as a result of the Auction or (C) a Submitted Hold Order.
Secondary Trading Market. The Broker-Dealers intend to maintain a
secondary trading market in the AMPS outside of Auctions; however, they have
no obligation to do so and there can be no assurance that a secondary market
for the AMPS will develop or, if it does develop, that it will provide holders
with a liquid trading market (i.e., trading will depend on the presence of
willing buyers and sellers and the trading price is subject to variables to be
determined at the time of the trade by the Broker-Dealers). The AMPS will not
be registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long-Term
Dividend Period, likely will have an adverse effect on the secondary market
price of the AMPS, and a selling stockholder may sell AMPS between Auctions at
a price per share of less than $25,000.
38
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this prospectus.
The Fund currently intends that, so long as shares of AMPS are
outstanding and the AMPS are rated by Moody's and S&P, the composition of its
portfolio will reflect guidelines established by Moody's and S&P in connection
with the Fund's receipt of a rating for such shares on or prior to their Date
of Original Issue of at least Aaa from Moody's and AAA from S&P. Moody's and
S&P, which are NRSROs, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The Board of Directors of the
Fund, however, may determine that it is not in the best interest of the Fund
to continue to comply with the guidelines of Moody's or S&P (described below).
If the Fund voluntarily terminates compliance with Moody's or S&P guidelines,
the Fund will no longer be required to maintain a Moody's Discounted Value or
a S&P Discounted Value, as applicable, at least equal to the AMPS Basic
Maintenance Amount. If the Fund voluntarily terminates compliance with Moody's
or S&P guidelines, or both, at the time of termination, it must continue to be
rated by at least one NRSRO.
The guidelines described below have been developed by Moody's and S&P in
connection with issuances of asset-backed and similar securities, including
debt obligations and variable rate preferred stock, generally on a
case-by-case basis through discussions with the issuers of these securities.
The guidelines are designed to ensure that assets underlying outstanding debt
or preferred stock will be varied sufficiently and will be of sufficient
quality and amount to justify investment-grade ratings. The guidelines do not
have the force of law but have been adopted by the Fund in order to satisfy
current requirements necessary for Moody's and S&P to issue the
above-described ratings for shares of AMPS, which ratings generally are relied
upon by institutional investors in purchasing such securities. The guidelines
provide a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act. See "Description of AMPS -- Asset
Maintenance" herein and in the statement of additional information.
The Fund intends to maintain a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has
established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and S&P guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value
at least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date, thereby incurring additional transaction costs
and possible losses and/or gains on dispositions of portfolio securities. To
the extent any such failure is not cured in a timely manner, shares of AMPS
will be subject to redemption. See "Description of AMPS -- Asset Maintenance"
and "Description of AMPS -- Redemption" herein and in the statement of
additional information.
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of AMPS, at any time, may change or
withdraw any such rating. As set forth in the Articles Supplementary, the
Board of Directors, without stockholder approval, may modify certain
definitions or restrictions that have been adopted by the Fund pursuant to the
rating agency guidelines, provided the Board of Directors has obtained written
confirmation from Moody's and S&P that any such change would not impair the
ratings then assigned by Moody's and S&P to the AMPS.
As described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines described above address the likelihood that a holder of shares of
AMPS will be able to sell such shares in an Auction. The ratings are based on
current information furnished to
39
Moody's and S&P by the Fund and the Investment Adviser and information
obtained from other sources. The ratings may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such
information. The common stock has not been rated by a nationally recognized
statistical rating organization.
For additional information concerning the Moody's and S&P ratings
guidelines, see "Rating Agency Guidelines" in the statement of additional
information.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by Merrill Lynch &
Co. Inc. ("ML & Co."), a financial services holding company and the parent of
Merrill Lynch, provides the Fund with investment advisory and administrative
services. 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 May 2003, the Investment Adviser
and its affiliates, including Merrill Lynch Investment Managers, L.P.
("MLIM"), had a total of approximately $462 billion in investment company and
other portfolio assets under management, including approximately $259 billion
in fixed income assets. This amount includes assets managed by 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 direction
of the Fund's Board of Directors, 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 portfolio manager primarily responsible for the Fund's day-to-day
management is Robert A. DiMella, CFA. Robert DiMella is a Vice President of
MLIM since 1997 and has 13 years of experience investing in Municipal Bonds.
The Fund's portfolio manager will consider analyses from various sources, make
the necessary investment decisions, and place orders for transactions
accordingly. The Fund is also assisted by 13 research analysts with an average
of 12 years experience. The Investment Adviser will also be responsible for
the performance of certain management services for the Fund.
For its services, the Fund pays the Investment Adviser a monthly fee at
the annual rate of 0.55% of the Fund's average daily net assets, plus the
proceeds of any outstanding borrowings used for leverage ("average daily net
assets" means the average daily value of the total assets of the Fund,
including the amount obtained from leverage and any proceeds from the issuance
of preferred stock, minus the sum of (i) accrued liabilities of the Fund, (ii)
any accrued and unpaid interest on outstanding borrowings and (iii)
accumulated dividends on shares of preferred stock). For purposes of this
calculation, average daily net assets is determined at the end of each month
on the basis of the average net assets of the Fund for each day during the
month. The liquidation preference of any outstanding preferred stock (other
than accumulated dividends) is not considered a liability in determining the
Fund's average daily net assets.
The Investment Adviser has contractually agreed to waive a portion of its
fee during the first seven years of the Fund's operations ending July , 2010,
as follows:
Fee Waiver (as
a percentage of
average daily
net assets)
----------------
Years 1 through 5............................................. 0.15%
Year 6........................................................ 0.10%
Year 7........................................................ 0.05%
Year 8 and thereafter......................................... 0.00%
40
The Investment Adviser has not agreed to waive any portion of its fee
beyond July , 2010.
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
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, dividend
disbursing agent and registrar, 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. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting services.
TAXES
In general, dividends on the AMPS will be exempt from Federal income tax
in the hands of holders of such AMPS, subject to the possible application of
the Federal alternative minimum tax. However, the Fund is required to allocate
net capital gain and other taxable income, if any, proportionately among the
common stock and each series of AMPS in accordance with the current position
of the Internal Revenue Service ("IRS") described under the heading "Taxes" in
the statement of additional information. The Fund may notify the Auction Agent
of the amount of any net capital gain or other anticipated taxable income to
be included in any dividend on the AMPS prior to the Auction establishing the
Applicable Dividend Rate for such dividend. The Auction Agent will in turn
notify holders of the AMPS and prospective purchasers. The Fund also may
include such income in a dividend on shares of AMPS without giving advance
notice thereof if it increases the dividend by an additional amount calculated
as if such income were a Retroactive Taxable Allocation and the additional
amount were an Additional Dividend. See "The Auction--Auction
Procedures--Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends." The amount of taxable income
allocable to each series of AMPS will depend upon the amount of such income
realized by the Fund and cannot be determined with certainty prior to the end
of the Fund's fiscal year, but it is not generally expected to be significant.
Generally within 60 days after the end of the Fund's taxable year, the
Fund will tell you the amount of exempt-interest dividends and capital gain
dividends you received during that year. Capital gain dividends are taxable as
long-term capital gains to you regardless of how long you have held your
shares. The IRS currently requires that a RIC that has two or more classes of
stock allocate to each class proportionate amounts of each type of its income
(e.g., tax-exempt interest, capital gains and other taxable income).
Accordingly, the Fund intends to designate dividends paid to each series of
AMPS as tax-exempt interest, capital gains or other taxable income, as
applicable, in proportion to each series' share of total dividends paid during
the year.
If the Fund makes a Retroactive Taxable Allocation, it will pay
Additional Dividends to holders of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS -- Dividends -- Additional
Dividends." The Federal income tax consequences of Additional Dividends under
existing law are uncertain. The Fund intends to treat a holder as receiving a
dividend distribution in the amount of any Additional Dividend only as and
when such Additional Dividend is paid. An Additional Dividend generally will
be designated by the Fund as an exempt-interest dividend except as otherwise
required by applicable law. However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year for which
the Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.
Because the Fund may from time to time invest a substantial portion of
its portfolio in Municipal Bonds bearing income that is taxable under the
Federal alternative minimum tax, the Fund would not ordinarily be a suitable
investment for investors who are subject to the alternative minimum tax.
If at any time when AMPS are outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of common stock until the asset coverage is
41
restored. See "Description of AMPS -- Dividends -- Restrictions on Dividends
and Other Payments" herein and in the statement of additional information.
This may prevent the Fund from meeting certain distribution requirements for
qualification as a RIC. Upon any failure to meet the asset coverage
requirements of the 1940 Act, the Fund, in its sole discretion, may, and under
certain circumstances will be required to, redeem AMPS in order to maintain or
restore the requisite asset coverage and avoid the adverse consequences to the
Fund and its stockholders of failing to qualify as a RIC. See "Description of
AMPS -- Redemption" herein and in the statement of additional information.
There can be no assurance, however, that any such action would achieve such
objectives.
By law, your dividends and redemption proceeds will be subject to a
withholding tax if you have not provided a tax identification number or social
security number or if the number you have provided is incorrect.
Stockholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares initially were classified as common
stock. The Board of Directors is authorized, however, to 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. In
this regard, the Board of Directors has reclassified shares of
unissued common stock as AMPS. See "Description of AMPS" herein and in the
statement of additional information.
The following table shows the amount of (i) capital stock authorized,
(ii) capital stock held by the Fund for its own account and (iii) capital
stock outstanding for each class of authorized securities of the Fund as of
August , 2003.
Amount Outstanding
Amount Held (Exclusive of Amount
Amount By Fund For Held By Fund For Its
Title of Class Authorized Its Own Account Own Account)
----------------------------------------- ----------------- --------------------- --------------------------
Common Stock............................
Auction Market Preferred Stock..........
Series __ AMPS
Series __ AMPS
Common Stock
Holders of common stock are entitled to share equally in dividends
declared by the Board of Directors payable to holders of common stock and in
the net assets of the Fund available for distribution to holders of common
stock after payment of the preferential amounts payable to holders of any
outstanding preferred stock. Neither holders of common stock nor holders of
preferred stock have pre-emptive or conversion rights and shares of common
stock are not redeemable. The outstanding shares of common stock are fully
paid and non-assessable.
Holders of common stock are entitled to one vote for each share held and
will vote with the holders of any outstanding shares of AMPS or other
preferred stock on each matter submitted to a vote of holders of common stock,
except as described under "Description of AMPS -- Voting Rights" herein and in
the statement of additional information.
Stockholders are entitled to one vote for each share held. The shares of
common stock, AMPS and any other preferred stock do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of common
stock, AMPS and any other preferred stock voting for the election of Directors
can elect all of the
42
Directors standing for election by such holders, and, in such event, the
holders of the remaining shares of common stock, AMPS and any other preferred
stock will not be able to elect any of such Directors.
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 "Description of AMPS -- Dividends --
Restrictions on Dividends and Other Payments" herein and in the statement of
additional information."
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its stockholders.
The shares of common stock commenced trading on the on August ,
2003. At , 2003, the net asset value per share of common stock was
$ and the closing price per share on the was $ .
Preferred Stock
Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of shares of AMPS. See "Description of AMPS." Under the
1940 Act, the Fund is permitted to have outstanding more than one series of
preferred stock as long as no single series has priority over another series
as to the distribution of assets of the Fund or the payment of dividends.
Neither holders of common stock nor holders of preferred stock have
pre-emptive rights to purchase any shares of AMPS or any other preferred stock
that might be issued. It is anticipated that the net asset value per share of
the AMPS will equal its original purchase price per share plus accumulated
dividends per share.
Certain Provisions of the Charter and By-laws
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving common stockholders 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 the
shares entitled to vote in an election to fill that directorship. A director
elected by all of the holders of capital stock may be removed only by action
of such holders, and a director elected by the holders of AMPS and any other
preferred stock may be removed only by action of AMPS and any other preferred
stock.
In addition, the Charter requires the favorable vote of the holders of at
least 66-2/3% of the Fund's shares to approve, adopt or authorize the following:
o a merger or consolidation or statutory share exchange of the Fund with
any other corporation;
o 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
o a liquidation or dissolution of the Fund;
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of 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 any issuance of
preferred stock by the Fund, it is anticipated that the approval, adoption or
authorization of the foregoing also would require the favorable vote of a
majority of the Fund's shares of preferred stock, including the AMPS, 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 Charter. The amendment would have to
be declared advisable by the Board of Directors prior to its submission to
stockholders. Such an amendment would require the favorable vote of the
holders of at least 66-2/3% of
43
the Fund's outstanding shares of capital stock (including the AMPS and any
other 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 (as defined in the 1940
Act) of preferred stock of the Fund (including the AMPS), voting as a separate
class. Such a vote also would satisfy a separate requirement in the 1940 Act
that the change be approved by the stockholders. Stockholders 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. 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 (including the AMPS) and would require changes in certain of the Fund's
investment policies and restrictions, such as those relating to the issuance
of senior securities, the borrowing of money and the purchase of illiquid
securities.
The Charter and By-laws provide that the Board of Directors has the
power, to the exclusion of stockholders, to make, alter or repeal any of the
By-laws (except for any By-law specified not to be amended or repealed by the
Board), subject to the requirements of the 1940 Act. Neither this provision of
the Charter, nor any of the foregoing provisions of the Charter requiring the
affirmative vote of 66-2/3% of shares of capital stock of the Fund, can be
amended or repealed except by the vote of such required number of shares.
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 stockholders
generally. Reference should be made to the Charter on file with the Commission
for the full text of these provisions.
The Fund's By-laws generally require that advance notice be given to the
Fund in the event a stockholder desires to nominate a person for election to
the Board of Directors or to transact any other business at an annual meeting
of stockholders. With respect to an annual meeting following the first annual
meeting of stockholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Fund not
less than 60 calendar days nor more than 90 calendar days prior to the
anniversary date of the prior year's annual meeting (subject to certain
exceptions). In the case of the first annual meeting of stockholders, the
notice must be given no later than the tenth calendar day following the day
upon which public disclosure of the date of the meeting is first made. Any
notice by a stockholder must be accompanied by certain information as provided
in the By-laws.
CUSTODIAN
The Fund's securities and cash are held under a custodian agreement with
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter")
has agreed, subject to the terms and conditions contained in a purchase
agreement with the Fund and the Investment Adviser, to purchase from the Fund
all of the shares of AMPS offered hereby. The Underwriter has agreed to
purchase all such shares if any are purchased.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
Underwriter may be required to make in respect of those liabilities.
The Underwriter is offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
its counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the Underwriter of
officer's certificates and legal
44
opinions. The Underwriter reserves the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.
Commissions and Discounts
The Underwriter has advised the Fund that it proposes initially to offer
the shares of AMPS to the public at the initial public offering price on the
cover page of this prospectus and to dealers at that price less a concession
not in excess of $ per share. There is a sales charge or underwriting
discount of $ per share, which is equal to % of the initial public
offering price per share. After the initial public offering, the public
offering price and concession may be changed. Investors must pay for any
AMPS purchased in the offering on or before August , 2003.
The expenses of the offering, excluding underwriting discount, are
estimated at $ and are payable by the Fund.
Other Relationships
The Investment Adviser (and not the Fund) also has agreed to pay a fee to
Merrill Lynch quarterly at the annual rate of 0.10% of the Fund's average
daily net assets through July , 2008 and at the annual rate of 0.15% of the
Fund's average daily net assets thereafter during the continuance of the
Investment Advisory Agreement. The maximum amount of this fee, plus the
partial reimbursement of underwriting expenses made by the Fund in connection
with the initial public offering of the common stock, will not exceed 4.5% of
the aggregate initial offering price of the Fund's initial public offering of
its common stock; provided, that in determining when the maximum amount has
been paid the value of each of the quarterly payments shall be discounted at
the annual rate of 10% back to the closing date of this offering. Merrill
Lynch has agreed to provide certain after-market services to the Investment
Adviser designed to maintain the visibility of the Fund on an ongoing basis
and to provide relevant information, studies or reports regarding the Fund and
the closed-end investment company industry.
Merrill Lynch will act in Auctions as a Broker-Dealer as set forth under
"The Auction -- General -- Broker-Dealer Agreements" and will be entitled to
fees for services as a Broker-Dealer as set forth under "The Auction --
Broker-Dealers." Merrill Lynch also may provide information to be used in
ascertaining the Reference Rate.
The Fund also anticipates that Merrill Lynch may from time to time act as
a broker in connection with the execution of its portfolio transactions. See
"Portfolio Transactions" in the statement of additional information. Merrill
Lynch is an affiliate of the Investment Adviser. See "Investment Restrictions"
and "Portfolio Transactions" in the statement of additional information.
The address of the Underwriter is 4 World Financial Center, New York, New
York 10080.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the
Fund's shares of AMPS is The Bank of New York, 100 Church Street, New York,
New York 10286. The transfer agent, dividend disbursing agent and registrar
for the Fund's shares of common stock is EquiServe, L.P., 150 Royall Street,
Canton, Massachusetts 02021.
ACCOUNTING SERVICES PROVIDER
State Street Bank and Trust Company, 500 College Road East, Princeton,
New Jersey 08540, provides certain accounting services for the Fund.
45
LEGAL OPINIONS
Certain legal matters in connection with the shares of common stock
offered hereby are passed on for the Fund and the Underwriter by Sidley Austin
Brown & Wood LLP, New York, New York.
INDEPENDENT AUDITORS AND EXPERTS
, independent auditors, have audited the statement of
assets and liabilities of the Fund as of August , 2003 which is included in
this prospectus and Registration Statement. The statement of assets and
liabilities is included in reliance upon their report, which is also included
in this prospectus and in the Registration Statement, given on their authority
as experts in accounting and auditing.
46
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
----
Investment Objective and Policies............................................3
Investment Restrictions......................................................5
Description of AMPS..........................................................6
The Auction.................................................................14
Rating Agency Guidelines....................................................14
Directors and Officers......................................................22
Investment Advisory and Management Arrangements.............................26
Portfolio Transactions......................................................28
Taxes.......................................................................30
Net Asset Value.............................................................34
Additional Information......................................................35
Report of Independent Auditors.............................................F-1
Statement of Assets and Liabilities (unaudited)............................F-2
Financial Statements (unaudited)...........................................F-3
APPENDIX A Ratings of Municipal Bonds.....................................A-1
APPENDIX B Settlement Procedures..........................................B-1
APPENDIX C Auction Procedures.............................................C-1
47
GLOSSARY
"'AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by
Moody's or the equivalent of such rating by another NRSRO, as such rate is
made available on a discount basis or otherwise by the Federal Reserve Bank of
New York for the Business Day immediately preceding such date, or (ii) in the
event that the Federal Reserve Bank of New York does not make available such a
rate, then the arithmetic average of the Interest Equivalent of the rate on
commercial paper placed on behalf of such issuers, as quoted on a discount
basis or otherwise by Merrill Lynch, Pierce, Fenner & Smith Incorporated or
its successors that are Commercial Paper Dealers, to the Auction Agent for the
close of business on the Business Day immediately preceding such date. If one
of the Commercial Paper Dealers does not quote a rate required to determine
the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper
Rate will be determined on the basis of the quotation or quotations furnished
by any Substitute Commercial Paper Dealer or Substitute Commercial Paper
Dealers selected by the Fund to provide such rate or rates not being supplied
by the Commercial Paper Dealer. If the number of Dividend Period days shall be
(i) 7 or more but fewer than 49 days, such rate shall be the Interest
Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more but
fewer than 70 days, such rate shall be the Interest Equivalent of the 60-day
rate on such commercial paper; (iii) 70 or more days but fewer than 85 days,
such rate shall be the arithmetic average of the Interest Equivalent on the
60-day and 90-day rates on such commercial paper; (iv) 85 or more days but
fewer than 99 days, such rate shall be the Interest Equivalent of the 90-day
rate on such commercial paper; (v) 99 or more days but fewer than 120 days,
such rate shall be the arithmetic average of the Interest Equivalent of the
90-day and 120-day rates on such commercial paper; (vi) 120 or more days but
fewer than 141 days, such rate shall be the Interest Equivalent of the 120-day
rate on such commercial paper; (vii) 141 or more days but fewer than 162 days,
such rate shall be the arithmetic average of the Interest Equivalent of the
120-day and 180-day rates on such commercial paper; and (viii) 162 or more
days but fewer than 183 days, such rate shall be the Interest Equivalent of
the 180-day rate on such commercial paper.
"Additional Dividend" has the meaning set forth on page [28] of this
prospectus.
"Agent Member" means the member of the Securities Depository that will
act on behalf of a Beneficial Owner of one or more shares of AMPS or on behalf
of a Potential Beneficial Owner.
"AMPS" means, as the case may be, the Auction Market Preferred Stock,
Series __; or the Auction Market Preferred Stock, Series __; each with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page [29] of
this prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page [29]
of this prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page [11] of
the statement of additional information.
"Anticipation Notes" shall mean the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page [33] of this
prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
"Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of the AMPS.
"Auction" means a periodic operation of the Auction Procedures.
48
"Auction Agent" means The Bank of New York unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Directors of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS.
"Auction Agent Agreement" means the agreement entered into between the
Fund and the Auction Agent which provides, among other things, that the
Auction Agent will follow the Auction Procedures for the purpose of
determining the Applicable Rate.
"Auction Date" has the meaning set forth on page [31] of this prospectus.
"Auction Procedures" means the procedures for conducting Auctions set
forth in Appendix C to the statement of additional information.
"Available AMPS" has the meaning set forth on page [35] of this
prospectus.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker- Dealer (or if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Bid" has the meaning set forth on page [35] of this prospectus.
"Bidder" has the meaning set forth on page [32] of this prospectus.
"Board of Directors" or "Board" means the Board of Directors of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in the Auction
Procedures, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker- Dealer, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
The City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares
of AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including the Articles Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Fund may
from time to time appoint, or, in lieu of any thereof, their respective
affiliates or successors.
"Common stock" means the common stock, par value $.10 per share, of the
Fund.
"Date of Original Issue" means, with respect to each share of AMPS, the
date on which such share first is issued by the Fund.
49
"Deposit Securities" means cash and Municipal Bonds rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount
Factor, as the case may be.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the fair market value thereof divided by the applicable S&P
Discount Factor and (ii) with respect to a Moody's Eligible Asset, the lower
of par and the quotient of the fair market value thereof divided by the
applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page [26] of this
prospectus.
"Dividend Period" has the meaning set forth on page [26] of this
prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets,
as the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as may
be permitted by the Fund that is listed as the holder of record of shares of
AMPS in the records of the Auction Agent.
"Fitch" means Fitch Ratings or its successors.
"Forward Commitment" has the meaning set forth on page [22] of the
statement of additional information.
"Fund" means Muni Intermediate Duration Fund, Inc., a Maryland
corporation that is the issuer of the AMPS.
"High Yield Municipal Bonds" means (a) with respect to Moody's (1)
Municipal Bonds rated Ba1 to B3 by Moody's, (2) Municipal Bonds not rated by
Moody's, but BBB-, BBB, or BBB+ by S&P, and (3) Municipal Bonds not explicitly
rated by Moody's or S&P, but rated at least the equivalent of B internally by
the Investment Adviser, provided that Moody's reviews and achieves sufficient
comfort with the Investment Adviser's internal credit rating processes, and
(b) with respect to S&P (1) Municipal Bonds not rated by S&P but rated
equivalent to BBB or lower by another NRSRO or (2) Municipal Bonds rated BB or
lower by S&P.
"Hold Order" has the meaning set forth on page [32] of this prospectus.
"Initial Dividend Payment Date" means the first Dividend Payment Date for
each series of AMPS.
"Initial Dividend Period" means the period from and including the Date of
Original Issue to but excluding the Initial Dividend Payment Date for each
series of the AMPS.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest bearing
security.
"Inverse Floaters" means trust certificates or other instruments
evidencing interests in one or more Municipal Bonds that qualify as (i) S&P
Eligible Assets the interest rates on which are adjusted at short term
50
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the
aggregate dollar amount of floating rate instruments to inverse floating rate
instruments issued by the same issuer does not exceed one to one at their time
of original issuance unless the floating rate instrument has only one reset
remaining until maturity or (ii) Moody's Eligible Assets the interest rates on
which are adjusted at short term intervals on a basis that is inverse to the
simultaneous readjustment of the interest rates on corresponding floating rate
trust certificates or other instruments issued by the same issuer, provided
that (a) such Inverse Floaters are rated by Moody's with the Investment
Adviser having the capability to collapse (or relink) within seven days as a
liquidity enhancement measure, and (b) the issuer of such Inverse Floaters
employs a leverage factor (i.e., the ratio of underlying capital appreciation
bonds or other instruments to residual long-term derivative instruments) of
not more than 2:1.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" means a Special Dividend Period consisting of
a specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" has the meaning set forth on page [30] of
this prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning set forth on page [33] of this
prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on pages [18 to 19]
of the statement of additional information.
"Moody's Eligible Assets" has the meaning set forth on pages [19 to 20]
of the statement of additional information.
"Moody's Exposure Period" means a period that is the same length or
longer than the number of days used in calculating the cash dividend component
of the AMPS Basic Maintenance Amount and shall initially be the period
commencing on a given Valuation Date and ending 49 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth on page [21] of
the statement of additional information.
51
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
% Change in Moody's Volatility
Marginal Tax Rate Factor
----------------- ------
<=5% 292%
>5% but <=10% 313%
>10% but <=15% 338%
>15% but <=20% 364%
>20% but <=25% 396%
>25% but <=30% 432%
>30% but <=35% 472%
>35% but <=40% 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean
such other potential dividend rate increase factor as Moody's advises the Fund
in writing is applicable.
"Municipal Bonds" has the meaning set forth on page [12] of this
prospectus.
"Municipal Index" has the meaning set forth on page [17] of the statement
of additional information.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page [29] of
this prospectus.
"1940 Act Cure Date" has the meaning set forth on page [29] of this
prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page [8] of the
statement of additional information.
"Non-Payment Period Rate" has the meaning set forth on page [9] of the
statement of additional information.
"Normal Dividend Payment Date" has the meaning set forth on page [26] of
this prospectus.
"Notice of Revocation" has the meaning set forth on page [8] of the
statement of additional information.
"Notice of Special Dividend Period" has the meaning set forth on page
[27] of this prospectus.
"NRSRO" means any nationally recognized statistical rating organization,
as that term is used in Rule 15a3-1 under the Securities and Exchange Act of
1934, as amended, or any successor provisions.
"Optional Redemption Price" has the meaning set forth on page [29] of
this prospectus.
"Order" has the meaning set forth on page [32] of this prospectus.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
52
"Potential Holder" means any Broker-Dealer or any such other person as
may be permitted by the Fund, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
"Preferred stock" means preferred stock, par value $.10 per share, of the
Fund and includes the AMPS.
"Premium Call Period" has the meaning set forth under "Specific
Redemption Provisions" below.
"Receivables for Municipal Bonds Sold" for Moody's has the meaning set
forth under the definition of Moody's Discount Factor, and for S&P has the
meaning set forth under the definition of S&P Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period having 28
or fewer days, the higher of the applicable "AA" Composite Commercial Paper
Rate and the Taxable Equivalent of the Short-Term Municipal Bond Rate, (ii)
with respect to any Dividend Period having more than 28 but fewer than 183
days, the applicable "AA" Composite Commercial Paper Rate, (iii) with respect
to any Dividend Period having 183 or more days, the applicable Treasury Index
Rate.
"Request for Special Dividend Period" has the meaning set forth on page
[27] of this prospectus.
"Response" has the meaning set forth on page [27] of this prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page [28]
of this prospectus.
"Rule 2a-7 Money Market Funds" means investment companies registered
under the 1940 Act that comply with the requirements of Rule 2a-7 thereunder.
"Series __ AMPS" means the Auction Market Preferred Stock, Series ___,
with a par value of $.10 per share and a liquidation preference of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared), of the Fund.
"Series __ AMPS" means the Auction Market Preferred Stock, Series __,
with a par value of $.10 per share and a liquidation preference of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared), of the Fund.
"S&P" means Standard & Poor's or its successors.
"S&P Discount Factor" has the meaning set forth on pages [14 to 15] of
the statement of additional information.
"S&P Eligible Assets" has the meaning set forth on pages [15 to 16] of
the statement of additional information.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance
Cure Date, that the Fund has under these Articles Supplementary to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount.
"S&P Hedging Transactions" has the meaning set forth on page [17] of the
statement of additional information.
"S&P Volatility Factor" means 277% or such other potential dividend
rate increase factor as S&P advises the Fund in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
53
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" means a Special Dividend Period consisting
of a specified number of days (other than seven in the case of the Series __
AMPS [and other than 28 in the case of the Series __ AMPS]) evenly divisible
by seven, and not fewer than seven days nor more than 364 days.
"Special Dividend Period" has the meaning set forth on page [26] of this
prospectus.
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period, either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Fund, after consultation
with the Auction Agent and the Broker-Dealers, during which the shares of AMPS
subject to such Dividend Period shall not be subject to redemption at the
option of the Fund and (ii) a period (a "Premium Call Period"), consisting of
a number of whole years and determined by the Board of Directors of the Fund,
after consultation with the Auction Agent and the Broker-Dealers, during each
year of which the shares of AMPS subject to such Dividend Period shall be
redeemable at the Fund's option at a price per share equal to $25,000 plus
accumulated but unpaid dividends plus a premium expressed as a percentage of
$25,000, as determined by the Board of Directors of the Fund after
consultation with the Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning set forth on page [34] of this
prospectus.
"Submitted Bid" has the meaning set forth on page [35] of this
prospectus.
"Submitted Hold Order" has the meaning set forth on page [35] of this
prospectus.
"Submitted Order" has the meaning set forth on page [35] of this
prospectus.
"Submitted Sell Order" has the meaning set forth on page [35] of this
prospectus.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
NRSRO or two NRSROs, respectively, selected by Merrill Lynch, Pierce, Fenner &
Smith Incorporated, or its respective affiliates and successors, after
obtaining the Fund's approval, to act as a substitute rating agency or
substitute rating agencies, as the case may be, to determine the credit
ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning set forth on page [33] of this
prospectus.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M., New
York City time, on such date by Kenny Information Systems Inc. or any
successor thereto, based upon 30-day yield evaluations at par of bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information
Systems Inc. or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57(a)(5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the Marginal Tax Rate (expressed as a decimal); provided, however, that
if the Kenny Index is not made so available by 8:30 A.M., New York City time,
on such date by Kenny Information Systems Inc. or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of
(A) the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal). The
Fund may not utilize a successor index to the Kenny Index unless Moody's and
S&P provide the Fund with written confirmation that the use of such successor
index will not adversely affect the then-current respective Moody's and S&P
ratings of the AMPS.
54
"Treasury Bonds" means U.S. Treasury Bonds or Notes.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable fixed interest rate U.S. Treasury Securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based
upon the yield for such securities having the next shorter and next longer
number of 30-day periods to maturity treating all Dividend Periods with a
length greater than the longest maturity for such securities as having a
length equal to such longest maturity, in all cases based upon data set forth
in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519)); provided,
however, if the most recent such statistical release shall not have been
published during the 15 days preceding the date of computation, the foregoing
computations shall be based upon the average of comparable data as quoted to
the Fund by at least three recognized dealers in U.S. Government Securities
selected by the Fund.
["28-Day Dividend Period" means a Dividend Period consisting of 28 days.]
"Valuation Date" has the meaning set forth on page [29] of this
prospectus.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Fund, the amount of cash or securities paid to
or received from a broker (subsequent to the Initial Margin payment) from time
to time as the price of such futures contract fluctuates.
"Winning Bid Rate" has the meaning set forth on page [36] of this
prospectus.
55
==============================================================================
$
Muni Intermediate Duration Fund, Inc.
Auction Market Preferred Stock ("AMPS")
Shares, Series __
Shares, Series __
________________________
PROSPECTUS
________________________
Merrill Lynch & Co.
CODE #19141-0603
==============================================================================
The information contained in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
Registration Statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not a Prospectus.
Subject to Completion
Preliminary Statement of Additional Information dated July , 2003
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
$
Muni Intermediate Duration Fund, Inc.
Auction Market Preferred Stock ("AMPS")
Shares, Series __
Shares, Series __
Liquidation Preference $25,000 Per Share
_______________
Muni Intermediate Duration Fund, Inc. (the "Fund") is a recently
organized, non-diversified, closed-end fund. The investment objective of the
Fund is to provide common stockholders with high current income exempt from
Federal income taxes. The Fund seeks to achieve its objective by investing, as
a fundamental policy, at least 80% of its net assets (including assets
acquired from the sale of preferred stock), plus the amount of any borrowings
for investment purposes, in a portfolio of municipal obligations the interest
on which, in the opinion of bond counsel to the issuer, is exempt from Federal
income taxes. Under normal market conditions, the Fund expects to invest at
least 75% of its total assets in municipal obligations that are rated
investment grade or, if unrated, are considered by the Fund's investment
adviser to be of comparable quality. The Fund may invest up to 25% of its
total assets in municipal obligations that are rated below investment grade
(commonly known as "junk bonds") or, if unrated, are considered by the Fund's
investment adviser to possess similar credit characteristics. Under normal
market conditions and after the initial investment period following this
offering (expected to be approximately three months), the Fund will invest, as
a non-fundamental policy, at least 80% of its net assets (including assets
acquired from the sale of preferred stock), plus the amount of any borrowings
for investment purposes, in municipal obligations with an option-adjusted
duration, as calculated by the Fund's investment adviser, of three to ten
years. The Fund expects to maintain, under normal market conditions, a
dollar-weighted average portfolio option-adjusted duration, as calculated by
the Fund's investment adviser, of three to ten years, including after giving
effect to leverage. There can be no assurance that the Fund's investment
objective will be realized.
Certain capitalized terms not otherwise defined in this statement of
additional information have the meaning provided in the Glossary included as
part of the prospectus.
This statement of additional information is not a prospectus, but should
be read in conjunction with the prospectus of the Fund, which has been filed
with the Securities and Exchange Commission (the "Commission") and can be
obtained, without charge, by calling (800) 543-6217. The prospectus is
incorporated by reference into this statement of additional information, and
this statement of additional information is incorporated by reference into the
prospectus.
_______________
Merrill Lynch & Co.
_______________
The date of this statement of additional information is August , 2003.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
----
Investment Objective and Policies..........................................3
Investment Restrictions....................................................5
Description of AMPS........................................................6
The Auction................................................................14
Rating Agency Guidelines...................................................14
Directors and Officers.....................................................22
Investment Advisory and Management Arrangements............................26
Portfolio Transactions.....................................................27
Taxes......................................................................30
Net Asset Value............................................................34
Additional Information.....................................................35
Report of Independent Auditors.............................................F-1
Statement of Assets and Liabilities (unaudited)............................F-2
Financial Statements (unaudited)...........................................F-3
APPENDIX A Ratings of Municipal Bonds.....................................A-1
APPENDIX B Settlement Procedures..........................................B-1
APPENDIX C Auction Procedures.............................................C-1
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide common stockholders with
high current income exempt from Federal income taxes. The Fund seeks to
achieve its objective by investing at least 80% of its net assets (including
assets acquired from the sale of preferred stock), plus the amount of any
borrowings for investment purposes, in a portfolio of municipal obligations
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies or instrumentalities, each
of which pays interest that, in the opinion of bond counsel to the issuer, is
exempt from Federal income tax ("Municipal Bonds"). The Fund's investment
objective and its policy of investing at least 80% of its net assets
(including assets acquired from the sale of preferred stock), plus the amount
of any borrowings for investment purposes, in Municipal Bonds are fundamental
policies that may not be changed without the approval of a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). Under
normal market conditions, and after the initial investment period following
this offering (expected to be approximately three months), the Fund will
invest at least 80% of its net assets (including assets acquired from the sale
of preferred stock), plus the amount of any borrowings for investment
purposes, in Municipal Bonds with an option-adjusted duration, as calculated
by Fund Asset Management, L.P. (the "Investment Adviser"), of three to ten
years. This is a non-fundamental policy and may be changed by the Fund's Board
of Directors provided that stockholders are provided with at least 60 days'
prior notice of any change as required by the 1940 Act. The Fund expects to
maintain, under normal market conditions, a dollar-weighted average portfolio
option-adjusted duration of three to ten years. There is no limit on the
remaining maturity of each individual Municipal Bond investment by the Fund.
There can be no assurance that the Fund's investment objective will be
realized.
Under normal market conditions, the Fund expects to invest at least 75%
of its total assets in Municipal Bonds that are commonly referred to as
"investment grade" securities, which are obligations rated at the time of
purchase within the four highest quality ratings as determined by either
Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa),
Standard & Poor's ("S&P") (currently AAA, AA, A and BBB) or Fitch Ratings
("Fitch") (currently AAA, AA, A and BBB). If unrated, such securities will
possess creditworthiness comparable, in the opinion of the Investment Adviser,
to other obligations in which the Fund may invest. Securities rated in the
lowest investment grade category may be considered to have speculative
characteristics.
The Fund may invest up to 25% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by S&P or Fitch or, if unrated,
are considered by the Investment Adviser to possess similar credit
characteristics. Such securities, sometimes referred to as "high yield" or
"junk" bonds, are predominantly speculative with respect to the capacity to
pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher
rating categories. The Fund does not intend to purchase debt securities that
are in default or which the Investment Adviser believes will soon be in
default.
The Fund may invest 25% or more of its total assets in tax exempt
securities of issuers in the industries comprising the same economic sector,
such as hospitals or life care facilities and transportation-related issuers.
However, the Fund will not invest 25% or more of its total assets in any one
of the industries comprising an economic sector. In addition, a substantial
part of the Fund's portfolio may be comprised of securities credit enhanced by
banks, insurance companies or companies with similar characteristics. Emphasis
on these sectors may subject the Fund to certain risks.
The value of bonds and other fixed income obligations may fall when
interest rates rise and rise when interest rates fall. In general, bonds and
other fixed income obligations with longer maturities will be subject to
greater volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal market conditions, the Fund
expects to maintain a dollar-weighted average portfolio option-adjusted
duration of three to ten years, including after giving effect to leverage.
"Duration" measures the sensitivity of a security's price to changes in
interest rates. "Option-adjusted duration" takes into account the effect of
embedded options on a security's duration. The greater a portfolio's duration,
the greater the change in the portfolio's value in response to changes in
interest rates. The Investment Adviser increases or reduces the Fund's
portfolio duration based on its interest rate outlook. When the Investment
Adviser expects interest rates to increase, it attempts to shorten the
portfolio's duration. Generally, as is the case with any investment grade
fixed income obligations, Municipal Bonds with longer maturities tend to
produce higher yields. Under normal market conditions, however, such
yield-to-maturity increases tend to decline in the longer maturities (i.e.,
the slope of the yield curve flattens). At the same time, due to their
3
longer exposure to interest rate risk, prices of longer term obligations are
subject to greater market fluctuations as a result of changes in interest
rates. Based on the foregoing premises, the Investment Adviser believes that
the yield and price volatility characteristics of an intermediate duration
portfolio generally offer an attractive trade-off between return and risk.
There may be market conditions, however, where an intermediate duration
portfolio may be less attractive due to the fact that the Municipal Bond yield
curve changes from time to time depending on supply and demand forces,
monetary and tax policies and investor expectations. As a result, there may be
situations where investments in individual Municipal Bonds with longer
durations may be more attractive than individual intermediate duration
Municipal Bonds.
For temporary periods or to provide liquidity, the Fund has the authority
to invest as much as 20% of its total assets in tax exempt and taxable money
market obligations with a maturity of one year or less (such short term
obligations being referred to herein as "Temporary Investments"). In addition,
the Fund reserves the right as a defensive measure to invest temporarily a
greater portion of its assets in Temporary Investments, when, in the opinion
of the Investment Adviser, prevailing market or financial conditions warrant.
These investments will yield taxable income. From time to time, the Fund may
also realize taxable capital gains.
The Fund also may invest in 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. See
"Other Investment Policies--Temporary Investments." The Fund's hedging
strategies, which are described in more detail under "Hedging Transactions--
Financial Futures Transactions and Options," are not fundamental policies and
may be modified by the Board of Directors of the Fund without the approval of
the Fund's stockholders. The Fund is also authorized to invest in indexed and
inverse floating obligations for hedging purposes and to seek to enhance
return.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In
such instances, the Board of Directors of the Fund and the Investment Adviser
will take into account, in assessing the quality of such bonds, both the
creditworthiness of the issuer of such bonds and the creditworthiness of the
financial institution that provides the credit enhancement.
The Fund ordinarily does not intend to realize investment income not
exempt from Federal income tax. The Fund 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 believes such securities to be exempt from Federal income
taxation ("Non-Municipal Tax Exempt Securities"). Non-Municipal Tax Exempt
Securities could include trust certificates or other instruments evidencing
interest in one or more long term municipal securities. Non-Municipal Tax
Exempt Securities also may include securities issued by other investment
companies that invest in Municipal Bonds, to the extent such investments are
permitted by applicable law. Non-Municipal Tax Exempt Securities are subject
to the same risks associated with an investment in Municipal Bonds as well as
many of the risks associated with investments in derivatives. Interest
received on certain otherwise tax exempt securities that are classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) may be subject to a Federal alternative minimum tax. See "Taxes."
The percentage of the Fund's total assets invested in "private activity bonds"
will vary from time to time. Federal tax legislation has limited the types and
volume of bonds the interest on which qualifies for a Federal income tax
exemption. As a result, this legislation and legislation that may be enacted
in the future may affect the availability of Municipal Bonds for investment by
the Fund.
Reference is made to "Investment Objective and Policies" and "Other
Investment Policies" in the prospectus for information regarding other types
of securities that the Fund may invest in to achieve its objective.
4
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares of common stock and outstanding shares of AMPS and any
other preferred stock, voting together as a single class, and the majority of
the outstanding shares of AMPS and any other preferred stock, voting as a
separate class (which for this purpose and under the 1940 Act means the lesser
of (i) 67% of the shares of each class of capital stock represented at a
meeting at which more than 50% of the outstanding shares of each class of
capital stock are represented or (ii) more than 50% of the outstanding shares
of each class of capital stock). 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 except that, to the extent permitted by applicable law, the
Fund may invest in securities directly or indirectly secured by real
estate or interests therein or issued by entities that invest in real
estate or interests therein, and the Fund may purchase and sell
financial futures contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by
Section 18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
5. Make loans to other persons, except (i) the Fund shall not be
deemed to be making a loan to the extent that the Fund purchases
Municipal Bonds or other debt instruments or enters into repurchase
agreements or any similar instruments and (ii) the Fund may lend its
portfolio securities in an amount not in excess of 33 1/3% of its total
assets, taken at market value, provided that such loans shall be made in
accordance with the guidelines set forth in this prospectus.
6. Invest more than 25% of its total assets (taken at market value
at the time of each investment) in the securities of issuers in a single
industry; provided that, for purposes of this restriction, tax exempt
securities of issuers that are states, municipalities or their political
subdivisions are not considered to be the securities of issuers in any
single industry.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors without stockholder 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 provided that 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 described under "Other Investment
Policies."
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).
5
d. Change its policy of investing, under normal market conditions,
at least 80% of the Fund's net assets (including assets acquired from
the sale of preferred stock), plus the amount of any borrowings for
investment purposes, in Municipal Bonds with an option-adjusted
duration, as calculated by the Fund's Investment Adviser, of three to
ten years, unless the Fund provides stockholders with at least 60 days'
prior written notice of such change.
If a percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not
be considered a violation.
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.
As a non-diversified fund, the Fund's investments are limited, however, in
order to allow the Fund to continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Taxes." To qualify, the Fund complies with certain requirements, including
limiting 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 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 of a single issuer and
the Fund will not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of this restriction, the Fund will regard each
state and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues
of a non-government entity then the entity with the ultimate responsibility
for the payment of interest and principal may be regarded as the sole issuer.
These tax-related limitations may be changed by the Board of Directors of the
Fund to the extent necessary to comply with changes in the Federal tax
requirements. A fund that elects to be classified as "diversified" under the
1940 Act must satisfy the foregoing 5% and 10% requirements with respect to
75% of its total assets.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by Merrill Lynch & Co., Inc. ("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. See
"Portfolio Transactions" in this statement of additional information.
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of the prospectus.
The AMPS of each series will be shares of preferred stock that entitle
their holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods for each such series. After the
Initial Dividend Period, each Subsequent Dividend Period for each series of
AMPS generally will be a 7-Day Dividend Period in the case of Series __ AMPS
and [a 28-Day Dividend Period in the case of Series __ AMPS]; provided
however, that prior to any Auction, the Fund may elect, subject to certain
limitations described herein, upon giving notice to holders thereof, a Special
Dividend Period. The Applicable Rate for a particular Dividend Period will be
determined by an Auction conducted on the Business Day before the start of
such Dividend Period. Beneficial Owners and Potential Beneficial Owners of
shares of AMPS may participate in Auctions therefor, although, except in the
case of a Special Dividend Period of more than 28 days, Beneficial Owners
desiring to continue to hold all of their shares of AMPS regardless of the
Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
Appendix C "Auction Procedures."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of each series of AMPS will be represented
by one or more certificates registered in the name of the nominee of the
6
Securities Depository (initially expected to be Cede), and no person acquiring
shares of AMPS will be entitled to receive a certificate representing such
shares. See Appendix C "Auction Procedures." As a result, the nominee of the
Securities Depository is expected to be the sole holder of record of the
shares of AMPS. Accordingly, each purchaser of AMPS must rely on (i) the
procedures of the Securities Depository and, if such purchaser is not a member
of the Securities Depository, such purchaser's Agent Member, to receive
dividends, distributions and notices and to exercise voting rights (if and
when applicable) and (ii) the records of the Securities Depository and, if
such purchaser is not a member of the Securities Depository, such purchaser's
Agent Member, to evidence its beneficial ownership of shares of AMPS.
When issued and sold, the shares of AMPS will have a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) and will be fully paid and
non-assessable. See "Description of AMPS -- Liquidation Rights" in the
prospectus. The shares of AMPS will not be convertible into shares of common
stock or other capital stock of the Fund, and the holders thereof will have no
preemptive rights. Each series of AMPS will not be subject to any sinking fund
but will be subject to redemption at the option of the Fund at the Optional
Redemption Price on any Dividend Payment Date for such series (except during
the Initial Dividend Period and during a Non-Call Period) and, under certain
circumstances, will be subject to mandatory redemption by the Fund at the
Mandatory Redemption Price stated in the prospectus. See "Description of AMPS
-- Redemption" in the prospectus.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described in the prospectus, The Bank of New York will be
the transfer agent, registrar, dividend disbursing agent and redemption agent
for the shares of AMPS. The Auction Agent, however, will serve merely as the
agent of the Fund, acting in accordance with the Fund's instructions, and will
not be responsible for any evaluation or verification of any matters certified
to it.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any shares of
AMPS so long as the Fund is current in the payment of dividends on AMPS and on
any other capital stock of the Fund ranking on a parity with the AMPS with
respect to the payment of dividends or upon liquidation.
The following supplements the description of the terms of the shares of
AMPS set forth in the prospectus. This description does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Fund's Charter and Articles Supplementary, including the provisions thereof
establishing the AMPS. The Fund's Charter and the form of Articles
Supplementary establishing the terms of the AMPS have been filed as exhibits
to the Registration Statement of which this statement of additional
information is a part.
Dividends
General. The holders of shares of each series of AMPS will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund, out
of funds legally available therefor, cumulative cash dividends on their
shares, at the Applicable Rate. Dividends on the shares of AMPS so declared
and payable shall be paid (i) in preference to and in priority over any
dividends so declared and payable on the common stock, and (ii) to the extent
permitted under the Code and to the extent available, out of net tax-exempt
income earned on the Fund's investments. Generally, dividends on shares of
AMPS, to the extent that they are derived from interest paid on Municipal
Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax. See "Taxes."
Notification of Dividend Period. In determining whether the Fund should
issue a Notice of Special Dividend for a series of AMPS, the Broker-Dealers
will consider (i) existing short-term and long-term market rates and indices
of such short-term and long-term rates, (ii) existing market supply and demand
for short-term and long term securities, (iii) existing yield curves for
short-term and long-term securities comparable to the AMPS, (iv) industry and
financial conditions which may affect the AMPS, (v) the investment objective
of the Fund, and (vi) the Dividend Periods and dividend rates at which current
and potential beneficial holders of the AMPS would remain or become beneficial
holders. If the Broker-Dealers shall not give the Fund a Response by such
second Business Day or if the Response states that given the factors set forth
above it is not advisable that the Fund give a Notice of Special Dividend
Period for the series of AMPS, the Fund may not give a Notice of Special
Dividend Period in
7
respect of such Request for Special Dividend Period. In the event the Response
indicates that it is advisable that the Fund give a Notice of Special Dividend
Period for the series of AMPS, the Fund, by no later than the second Business
Day prior to such Auction Date, may give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer, which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price as specified in the
related Response and (iii) the Specific Redemption Provisions, if any, as
specified in the related Response. The Fund also shall provide a copy of such
Notice of Special Dividend Period to Moody's and S&P. The Fund shall not give
a Notice of Special Dividend Period, and, if such Notice of Special Dividend
Period shall have been given already, shall give telephonic and written notice
of its revocation (a "Notice of Revocation") to the Auction Agent, each
Broker- Dealer, and the Securities Depository on or prior to the Business Day
prior to the relevant Auction Date if (x) either the 1940 Act AMPS Asset
Coverage is not satisfied or the Fund shall fail to maintain S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value at
least equal to the AMPS Basic Maintenance Amount, in each case on the
Valuation Date immediately preceding the Business Day prior to the relevant
Auction Date on an actual basis and on a pro forma basis giving effect to the
proposed Special Dividend Period (using as a pro forma dividend rate with
respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Fund is an approximately equal rate for
securities similar to the AMPS with an equal dividend period); provided that,
in calculating the aggregate Discounted Value of Moody's Eligible Assets for
this purpose, the Moody's Exposure Period shall be deemed to be one week
longer, (y) sufficient funds for the payment of dividends payable on the
immediately succeeding Dividend Payment Date have not been segregated in an
account at the Fund's custodian bank or on the books of the Fund by the close
of business on the third Business Day preceding the related Auction Date or
(z) the Broker-Dealers jointly advise the Fund that, after consideration of
the factors listed above, they have concluded that it is advisable to give a
Notice of Revocation. The Fund also shall provide a copy of such Notice of
Revocation to Moody's and S&P. If the Fund is prohibited from giving a Notice
of Special Dividend Period as a result of the factors enumerated in clause
(x), (y) or (z) above or if the Fund gives a Notice of Revocation with respect
to a Notice of Special Dividend Period for any series of AMPS, the next
succeeding Dividend Period for that series will be a 7-Day Dividend Period in
the case of Series __ AMPS [and a 28-Day Dividend Period in the case of Series
__ AMPS, provided that if the then current Dividend Period for Series ___ AMPS
is a Special Dividend Period of less than 28 days, the next succeeding
Dividend Period for such series of AMPS will be the same length as such
current Dividend Period.] In addition, in the event Sufficient Clearing Bids
are not made in any Auction or an Auction is not held for any reason, the next
succeeding Dividend Period will be a 7-Day Dividend Period (in the case of
Series __AMPS) or [a 28-Day Dividend Period (in the case of] Series __ AMPS),
and the Fund may not again give a Notice of Special Dividend Period (and any
such attempted notice shall be null and void) until Sufficient Clearing Bids
have been made in an Auction with respect to a 7-Day Dividend Period (in the
case of Series __ AMPS) or[ a 28-Day Dividend Period (in the case of] Series
__ AMPS).
Non-Payment Period; Late Charge. A Non-Payment Period will commence if
the Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
New York City time, on the Business Day preceding such Dividend Payment Date,
the full amount of any dividend on shares of AMPS payable on such Dividend
Payment Date or (ii) deposit, irrevocably in trust, in same-day funds, with
the Auction Agent by 12:00 noon, Eastern time, (A) on such Dividend Payment
Date the full amount of any cash dividend on such shares (if declared) payable
on such Dividend Payment Date or (B) on any redemption date for shares of AMPS
called for redemption, the Mandatory Redemption Price per share of such AMPS
or, in the case of an optional redemption, the Optional Redemption Price per
share. Such Non-Payment Period will consist of the period commencing on and
including the aforementioned Dividend Payment Date or redemption date, as the
case may be, and ending on and including the Business Day on which, by 12:00
noon, Eastern time, all unpaid cash dividends and unpaid redemption prices
shall have been so deposited or otherwise shall have been made available to
the applicable holders in same-day funds, provided that a Non-Payment Period
for any series of AMPS will not end unless the Fund shall have given at least
five days' but no more than 30 days' written notice of such deposit or
availability to the Auction Agent, the Securities Depository and all holders
of shares of AMPS of such series. Notwithstanding the foregoing, the failure
by the Fund to deposit funds as provided for by clause (ii) (A) or (ii) (B)
above within three Business Days after any Dividend Payment Date or redemption
date, as the case may be, in each case to the extent contemplated below, shall
not constitute a "Non-Payment Period."
8
The Applicable Rate for each Dividend Period for shares of AMPS of any
series, commencing during a Non-Payment Period, will be equal to the
Non-Payment Period Rate; and each Dividend Period commencing after the first
day of, and during, a Non-Payment Period shall be a 7-Day Dividend Period in
the case of Series __ AMPS and [a 28-Day Dividend Period in the case of Series
__ AMPS, provided that if the preceding Dividend Period for Series ___ AMPS is
a Special Dividend Period of less than 28 days, the Dividend Period commencing
during a Non-Payment Period for such series of AMPS will be the same length as
such preceding Dividend Period.] Any dividend on shares of AMPS due on any
Dividend Payment Date for such shares (if, prior to the close of business on
the second Business Day preceding such Dividend Payment Date, the Fund has
declared such dividend payable on such Dividend Payment Date to the persons
who held such shares as of 12:00 noon, Eastern time, on the Business Day
preceding such Dividend Payment Date) or redemption price with respect to such
shares not paid to such persons when due may be paid to such persons in the
same form of funds by 12:00 noon, Eastern time, on any of the first three
Business Days after such Dividend Payment Date or due date, as the case may
be, provided that such amount is accompanied by a late charge calculated for
such period of non-payment at the Non-Payment Period Rate applied to the
amount of such non-payment based on the actual number of days comprising such
period divided by 365. In the case of a willful failure of the Fund to pay a
dividend on a Dividend Payment Date or to redeem any shares of AMPS on the
date set for such redemption, the preceding sentence shall not apply and the
Applicable Rate for the Dividend Period commencing during the Non- Payment
Period resulting from such failure shall be the Non-Payment Period Rate. For
the purposes of the foregoing, payment to a person in same-day funds on any
Business Day at any time will be considered equivalent to payment to that
person in New York Clearing House (next-day) funds at the same time on the
preceding Business Day, and any payment made after 12:00 noon, Eastern time,
on any Business Day shall be considered to have been made instead in the same
form of funds and to the same person before 12:00 noon, Eastern time, on the
next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable
Reference Rate (or 275% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend that net capital gain or other taxable income will be included in
such dividend on shares of AMPS), provided that the Board of Directors of the
Fund shall have the authority to adjust, modify, alter or change from time to
time by resolution or otherwise the initial Non-Payment Period Rate if the
Board of Directors of the Fund determines and Moody's and S&P (and any
Substitute Rating Agency or Substitute Rating Agencies, as the case may be, in
lieu of Moody's or S&P, or both, in the event either or both of such parties
shall not rate the AMPS) advise the Fund in writing that such adjustment,
modification, alteration or change will not adversely affect their then
current ratings on the AMPS.
Restrictions on Dividends and Other Payments. For so long as any shares
of AMPS are outstanding, the Fund will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, common stock or other stock, if any, ranking junior to shares
of AMPS as to dividends or upon liquidation) in respect of common stock or any
other stock of the Fund ranking junior to or on a parity with shares of AMPS
as to dividends or upon liquidation, or call for redemption, redeem, purchase
or otherwise acquire for consideration any shares of common stock or any other
such junior stock (except by conversion into or exchange for stock of the Fund
ranking junior to AMPS as to dividends and upon liquidation) or any such
parity stock (except by conversion into or exchange for stock of the Fund
ranking junior to or on a parity with AMPS as to dividends and upon
liquidation), unless (A) immediately after such transaction, the Fund would
have S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount,
and the 1940 Act AMPS Asset Coverage (see "Asset Maintenance" and "Redemption"
below) would be satisfied, (B) full cumulative dividends on shares of AMPS due
on or prior to the date of the transaction have been declared and paid or
shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent, (C) any Additional Dividend required to be
paid on or before the date of such declaration or payment has been paid, and
(D) the Fund has redeemed the full number of shares of AMPS required to be
redeemed by any provision for mandatory redemption contained in the Articles
Supplementary.
Asset Maintenance
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities which are
stock, including the shares of
9
AMPS (or such other asset coverage as in the future may be specified in or
under the 1940 Act as the minimum asset coverage for senior securities which
are stock of a closed-end investment company as a condition of paying
dividends on its common stock) ("1940 Act AMPS Asset Coverage"). If the Fund
fails to maintain 1940 Act AMPS Asset Coverage and such failure is not cured
as of the last Business Day of the following month (the "1940 Act Cure Date"),
the Fund will be required under certain circumstances to redeem certain of the
shares of AMPS. See "Description of AMPS--Redemption" in the prospectus and
"--Redemption" below.
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary as of the last
Business Day of each week (a "Valuation Date") to maintain S&P Eligible Assets
and Moody's Eligible Assets each having in the aggregate a Discounted Value at
least equal to the AMPS Basic Maintenance Amount. If the Fund fails to meet
such requirement as of any Valuation Date and such failure is not cured on or
before the sixth Business Day after such Valuation Date (the "AMPS Basic
Maintenance Cure Date"), the Fund will be required under certain circumstances
to redeem certain of the shares of AMPS. See "Description of AMPS--Redemption"
in the prospectus and "--Redemption" below. Upon any failure to maintain the
required Discounted Value, the Fund will use its best efforts to alter the
composition of its portfolio to reattain a Discounted Value at least equal to
the AMPS Basic Maintenance Amount on or prior to the AMPS Basic Maintenance
Cure Date.
The AMPS Basic Maintenance Amount as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS outstanding on such Valuation Date multiplied by the sum of $25,000
and any applicable redemption premium attributable to the designation of a
Premium Call Period; (B) the aggregate amount of cash dividends (whether or
not earned or declared) that will have accumulated for each share of AMPS
outstanding to (but not including) the end of the current Dividend Period for
each series of AMPS that follows such Valuation Date in the event the then
current Dividend Period for each series of AMPS will end within 49 calendar
days of such Valuation Date or through the 49th day after such Valuation Date
in the event the then current Dividend Period will not end within 49 calendar
days of such Valuation Date; (C) in the event the then current Dividend Period
will end within 49 calendar days of such Valuation Date, the aggregate amount
of cash dividends that would accumulate at the Maximum Applicable Rate
applicable to a Dividend Period of 28 or fewer days on any shares of AMPS
outstanding from the end of such Dividend Period through the 49th day after
such Valuation Date, multiplied by the larger of the Moody's Volatility Factor
and the S&P Volatility Factor, determined from time to time by Moody's and
S&P, respectively (except that if such Valuation Date occurs during a
Non-Payment Period, the cash dividend for purposes of calculation would
accumulate at the then current Non-Payment Period Rate); (D) the amount of
anticipated expenses of the Fund for the 90 days subsequent to such Valuation
Date; (E) the amount of current outstanding balances of any indebtedness which
is senior to the AMPS plus interest actually accrued together with 30 days
additional interest on the current outstanding balances calculated at the
current rate; (F) the amount of the Fund's maximum potential Additional
Dividend liability as of such Valuation Date; and (G) any current liabilities
as of such Valuation Date to the extent not reflected in any of (i)(A) through
(i)(F) (including, without limitation, and immediately upon determination, any
amounts due and payable by the Fund's portfolio securities purchased as of
such Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less (ii) either (A) the Discounted Value of any of
the Fund's assets, or (B) the face value of any of the Fund's assets if such
assets mature prior to or on the date of redemption of AMPS or payment of a
liability and are either securities issued or guaranteed by the United States
Government or Deposit Securities, in both cases irrevocably deposited by the
Fund for the payment of the amount needed to redeem shares of AMPS subject to
redemption or to satisfy any of (i)(B) through (i)(G).
The Discount Factors and guidelines for determining the market value of
the Fund's portfolio holdings have been based on criteria established in
connection with rating the AMPS. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of
a debt obligation, the higher the related discount factor) and the frequency
with which the relevant asset is marked to market. In no event shall the
Discounted Value of any asset of the Fund exceed its unpaid principal balance
or face amount as of the date of calculation. The Discount Factor relating to
any asset of the Fund and the AMPS Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Fund, without stockholder
approval, but only in the event the Fund receives written confirmation from
S&P,
10
Moody's and any Substitute Rating Agency that any such changes would not
impair the ratings then assigned to the shares of AMPS by S&P or Moody's or
any Substitute Rating Agency.
On or before the seventh Business Day after a Valuation Date on which the
Fund fails to maintain S&P Eligible Assets and Moody's Eligible Assets each
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount, the Fund is required to deliver to Moody's and S&P, as the
case may be, a report with respect to the calculation of the AMPS Basic
Maintenance Amount and the value of its portfolio holdings as of the date of
such failure (an "AMPS Basic Maintenance Report"). The Fund also will deliver
an AMPS Basic Maintenance Report as of the last Valuation Date of each month
and as of the Fund's fiscal year end on or before the seventh Business Day
after such day. Within ten Business Days after delivery of such report
relating to the Fund's fiscal year end, the Fund will deliver a letter
prepared by the Fund's independent accountants regarding the accuracy of the
calculations made by the Fund in such AMPS Basic Maintenance Report. If any
such letter prepared by the Fund's independent accountants shows that an error
was made in the AMPS Basic Maintenance Report, the calculation or
determination made by the Fund's independent accountants will be conclusive
and binding on the Fund. The Fund will also provide Moody's and S&P with an
AMPS Basic Maintenance Report as of each Valuation Date on or before the
seventh Business Day after such date when the Discounted Value of Moody's
Eligible Assets or S&P Eligible Assets, as the case may be, fails to exceed
the AMPS Basic Maintenance Amount by 25% or more. Also, on or before 5:00
p.m., Eastern time, on the first Business Day after shares of common stock are
repurchased by the Fund, the Fund will complete and deliver to S&P and Moody's
an AMPS Basic Maintenance Report as of the close of business on such date that
common stock is repurchased.
Redemption
Mandatory Redemption. The number of shares of AMPS to be redeemed will be
equal to the lesser of (a) the minimum number of shares of AMPS the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, together with all other shares of the preferred
stock subject to redemption or retirement, would result in the Fund having S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or
satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, on such
Cure Date (provided that, if there is no such minimum number of shares the
redemption of which would have such result, all shares of AMPS then
outstanding will be redeemed), and (b) the maximum number of shares of AMPS,
together with all other shares of preferred stock subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor on such redemption date. In determining the number of shares of AMPS
required to be redeemed in accordance with the foregoing, the Fund shall
allocate the number required to be redeemed which would result in the Fund
having S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount or
satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, pro rata
among shares of AMPS and other preferred stock subject to redemption pursuant
to provisions similar to those set forth below; provided that, shares of AMPS
which may not be redeemed at the option of the Fund due to the designation of
a Non-Call Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to satisfy
the number of shares required to be redeemed and (B) will be selected for
redemption in an ascending order of outstanding number of days in the Non-Call
Period (with shares with the lowest number of days to be redeemed first) and
by lot in the event of shares having an equal number of days in such Non-Call
Period. The Fund is required to effect such a mandatory redemption not later
than 35 days after such Cure Date, except that if the Fund does not have funds
legally available for the redemption of all of the required number of shares
of AMPS which are subject to mandatory redemption or the Fund otherwise is
unable to effect such redemption on or prior to 35 days after such Cure Date,
the Fund will redeem those shares of AMPS which it was unable to redeem on the
earliest practicable date on which it is able to effect such redemption.
Notice of Redemption. If shares of AMPS of any series are to be redeemed,
a notice of redemption will be mailed to each record holder of such series of
AMPS (initially Cede as nominee of the Securities Depository) and to the
Auction Agent not less than 17 nor more than 60 days prior to the date fixed
for the redemption thereof. Each notice of redemption will include a statement
setting forth: (i) the redemption date, (ii) the aggregate number of shares of
AMPS of such series to be redeemed, (iii) the redemption price, (iv) the place
or places where shares of AMPS of such series are to be surrendered for
payment of the redemption price, (v) a statement that dividends on the shares
to be redeemed will cease to accumulate on such redemption date and (vi) the
provision of the Articles Supplementary pursuant to which such shares are
being redeemed. The notice also will be published in The Wall
11
Street Journal. No defect in the notice of redemption or in the mailing or
publication thereof will affect the validity of the redemption proceedings,
except as required by applicable law.
In the event that less than all of the outstanding shares of AMPS are to
be redeemed, the shares to be redeemed will be selected by lot or such other
method as the Fund shall deem fair and equitable, and the results thereof will
be communicated to the Auction Agent. The Auction Agent will give notice to
the Securities Depository, whose nominee will be the record holder of all
shares of AMPS, and the Securities Depository will determine the number of
shares to be redeemed from the account of the Agent Member of each Existing
Holder. Each Agent Member will determine the number of shares to be redeemed
from the account of each Existing Holder for which it acts as agent. An Agent
Member may select for redemption shares from the accounts of some Existing
Holders without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares of such
series, the particular shares to be redeemed shall be selected by the Fund by
lot or by such other method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Fund's custodian bank for the benefit of the holders of such series of AMPS to
be redeemed and for payment to the Auction Agent, Deposit Securities (with a
right of substitution) having an aggregate Discounted Value equal to the
redemption payment for the shares of AMPS as to which notice of redemption has
been given, with irrevocable instructions and authority to pay the redemption
price to the record holders thereof, then upon the date of such deposit or, if
no such deposit is made, upon such date fixed for redemption (unless the Fund
shall default in making payment of the redemption price), all rights of the
holders of such shares called for redemption will cease and terminate, except
the right of such holders to receive the redemption notice thereof, but
without interest, and such shares no longer will be deemed to be outstanding.
The Fund will be entitled to receive, from time to time, the interest, if any,
earned on such Deposit Securities deposited with the Auction Agent, and the
holders of any shares so redeemed will have no claim to any such interest. Any
funds so deposited which are unclaimed at the end of one year from such
redemption date will be repaid, upon demand, to the Fund, after which the
holders of the shares of AMPS of such series so called for redemption may look
only to the Fund for payment thereof.
So long as any shares of AMPS are held of record by the nominee of the
Securities Depository (initially Cede), the redemption price for such shares
will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it
to distribute the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for whom they are
acting as agent. Notwithstanding the provisions for redemption described
above, no shares of AMPS shall be subject to optional redemption (i) unless
all dividends in arrears on the outstanding shares of AMPS, and all capital
stock of the Fund ranking on a parity with the AMPS with respect to the
payment of dividends or upon liquidation, have been or are being
contemporaneously paid or declared and set aside for payment and (ii) if
redemption thereof would result in the Fund's failure to maintain Moody's
Eligible Assets or S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount.
Voting Rights
In connection with the election of the Fund's directors, holders of
shares of AMPS and any other preferred stock, voting as a separate class,
shall be entitled at all times to elect two of the Fund's directors, and the
remaining directors will be elected by holders of shares of common stock and
shares of AMPS and any other preferred stock, voting together as a single
class. In addition, if at any time dividends on outstanding shares of AMPS
shall be unpaid in an amount equal to at least two full years' dividends
thereon or if at any time holders of any shares of preferred stock are
entitled, together with the holders of AMPS, to elect a majority of the
directors of the Fund under the 1940 Act, then the number of directors
constituting the Board of Directors automatically shall be increased by the
smallest number that, when added to the two directors elected exclusively by
the holders of shares of AMPS and any other preferred stock as described
above, would constitute a majority of the Board of Directors as so increased
by such smallest number, and at a special meeting of stockholders which will
be called and held as soon as practicable, and at all subsequent meetings at
which directors are to be elected, the holders of shares of AMPS and any other
preferred stock, voting as a separate class, will be entitled to elect the
smallest number of additional directors that, together with the two directors
which such holders in any event will be entitled to elect, constitutes a
majority of the
12
total number of directors of the Fund as so increased. The terms of office of
the persons who are directors at the time of that election will continue. If
the Fund thereafter shall pay, or declare and set apart for payment in full,
all dividends payable on all outstanding shares of AMPS and any other
preferred stock for all past Dividend Periods, the additional voting rights of
the holders of shares of AMPS and any other preferred stock as described above
shall cease, and the terms of office of all of the additional directors
elected by the holders of shares of AMPS and any other preferred stock (but
not of the directors with respect to whose election the holders of common
stock were entitled to vote or the two directors the holders of shares of AMPS
and any other preferred stock have the right to elect in any event) will
terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of AMPS and any other 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 the AMPS or any other series of preferred
stock with respect to the 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 shares
of AMPS or any other preferred stock. To the extent permitted under the 1940
Act, in the event shares of more than one series of AMPS are outstanding, the
Fund shall not approve any of the actions set forth in clause (i) or (ii)
which adversely affects the contract rights expressly set forth in the Charter
of a holder of shares of a series of AMPS differently than those of a holder
of shares of any other series of AMPS without the affirmative vote of at least
a majority of votes entitled to be cast by holders of the shares of AMPS of
each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The Board of
Directors, however, without stockholder approval, may amend, alter or repeal
any or all of the various rating agency guidelines described herein in the
event the Fund receives confirmation from the rating agencies that any such
amendment, alteration or repeal would not impair the ratings then assigned to
shares of AMPS. Furthermore, the Board of Directors, without stockholder
approval, may terminate compliance with the Moody's or S&P guidelines as
discussed under "Rating Agency Guidelines" in the prospectus. Unless a higher
percentage is provided for under "Description of Capital Stock -- Certain
Provisions of the Charter and By-laws" in the prospectus, the affirmative vote
of the holders of a majority of the outstanding shares of preferred stock (as
defined under "Investment Restrictions"), including AMPS, entitled to be cast,
voting as a separate class, will be required to approve any plan of
reorganization (including bankruptcy proceedings) adversely affecting such
shares or any action requiring a vote of security holders under Section 13(a)
of the 1940 Act including, among other things, changes in the Fund's
investment objective or changes in the investment policies and restrictions
described as fundamental policies in the prospectus and under "Investment
Restrictions." The class vote of holders of shares of AMPS and any other
preferred stock described above in each case will be in addition to a separate
vote of the requisite percentage of shares of common stock and shares of AMPS
and any other preferred stock, voting together as a single class, necessary to
authorize the action in question. An increase in the number of authorized
shares of preferred stock pursuant to the Charter or the issuance of
additional shares of any series of preferred stock (including AMPS) pursuant
to the Charter shall not in and of itself be considered to adversely affect
the contract rights of the holders of the AMPS.
Notwithstanding the foregoing, and except as otherwise required by the
1940 Act, (i) holders of outstanding shares of the AMPS will be entitled as a
series, to the exclusion of the holders of all other securities, including
other preferred stock, common stock and other classes of capital stock of the
Fund, to vote on matters affecting the AMPS that do not materially adversely
affect any of the contract rights of holders of such other securities,
including other preferred stock, common stock and other classes of capital
stock, as expressly set forth in the Charter, and (ii) holders of outstanding
shares of AMPS will not be entitled to vote on matters affecting any other
preferred stock that do not materially adversely affect any of the contract
rights of holders of the AMPS, as expressly set forth in the Charter. The
foregoing voting provisions will not apply to any shares of AMPS if, at or
prior to the time when the act with respect to which such vote otherwise would
be required shall be effected, such shares shall have been (i) redeemed or
(ii) called for redemption and sufficient funds shall have been deposited in
trust to effect such redemption.
The foregoing voting provisions will not apply to any shares of AMPS if,
at or prior to the time when the act with respect to which such vote otherwise
would be required shall be effected, such shares shall have been (i) redeemed
or (ii) called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
13
THE AUCTION
Auction Agent Agreement
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the
Auction Agent Agreement, and will not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in
ascertaining, or failing to ascertain, the pertinent facts. Pursuant to the
Auction Agent Agreement, the Fund is required to indemnify the Auction Agent
for certain losses and liabilities incurred by the Auction Agent without
negligence or bad faith on its part in connection with the performance of its
duties under such agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice
to the Fund, which termination may be no earlier than 60 days following
delivery of such notice. If the Auction Agent resigns, the Fund will use its
best efforts to enter into an agreement with a successor Auction Agent
containing substantially the same terms and conditions as the Auction Agent
Agreement. The Fund may terminate the Auction Agent Agreement at any time,
provided that prior to such termination the Fund shall have entered into such
an agreement with respect thereto with a successor Auction Agent.
Broker-Dealer Agreements
The Auctions require the participation of one or more broker-dealers. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with Merrill Lynch may not be terminated without the
prior written consent of the Fund, which consent may not be unreasonably
withheld.
Auction Procedures
The Auction Procedures are set forth in Appendix C to this statement of
additional information. The Settlement Procedures to be used with respect to
Auctions are set forth in Appendix B to this statement of additional
information.
RATING AGENCY GUIDELINES
S&P AAA Rating Guidelines
The Discounted Value of the Fund's S&P Eligible Assets is calculated on
each Valuation Date. See "Description of AMPS -- Asset Maintenance -- AMPS
Basic Maintenance Amount." S&P Eligible Assets include cash, Receivables for
Municipal Bonds Sold (as defined below), Rule 2a- 7 Money Market Funds and
Municipal Bonds eligible for consideration under S&P's current guidelines. For
purposes of calculating the Discounted Value of the Fund's portfolio under
current S&P guidelines, the fair market value of Municipal Bonds eligible for
consideration under such guidelines must be discounted by the applicable S&P
Discount Factor set forth in the table below. The Discounted Value of a
Municipal Bond eligible for consideration under S&P guidelines is the fair
market value thereof divided by the S&P Discount Factor. The S&P Discount
Factor used to discount a particular Municipal Bond will be determined by
reference to (a) the rating by S&P, Moody's or Fitch on such Bond; provided,
however, for purposes of determining the S&P Discount Factor applicable to
Municipal Bonds not rated by S&P, the Municipal Bonds will carry an S&P rating
one full rating category lower than the S&P rating category that is the
equivalent of the rating category in which such Municipal Bond is placed by a
NRSRO and (b) the S&P Exposure Period. The S&P Exposure Period is the maximum
period of time following a Valuation Date, including the Valuation Date and
the AMPS Basic Maintenance Cure Date, that the Fund has to cure any failure to
maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount.
14
S&P Discount Factors applicable to Municipal Bonds for a range of S&P
Exposure Periods are set forth below:
Rating Category(1)
-------------------------------------------------------------------------------------
S&P Exposure Period AAA* AA* A* BBB* BB* B* CCC* NR
------------------- ---- --- -- ---- --- -- ---- --
5 Business Days 140.68% 143.68% 146.68% 149.68% -- -- -- --
10 Business Days 141.36% 144.36% 147.36% 150.36% -- -- -- --
15 Business Days 142.04% 145.04% 148.04% 151.04% -- -- -- --
20 Business Days 142.71% 145.71% 148.71% 151.71% -- -- -- --
25 Business Days 143.39% 146.39% 149.39% 152.39% -- -- -- --
30 Business Days 144.07% 147.07% 150.07% 153.07% -- -- -- --
35 Business Days 144.75% 147.75% 150.75% 153.75% -- -- -- --
40 Business Days 145.43% 148.43% 151.43% 154.43% -- -- -- --
45 Business Days 146.11% 149.11% 152.11% 155.11% 175.11% 195.11% 215.11% 220.00%
-------------------
* S&P rating.
(1) For Municipal Bonds rated at least BBB by S&P, or if not rated by S&P,
rated at least A by another NRSRO, 2% is added to the applicable S&P
Discount Factor for every 1% by which the fair market value of such
Municipal Bonds exceeds 5% of the aggregate fair market value of the S&P
Eligible Assets.
Since the S&P Exposure Period currently applicable to the Fund is 10
Business Days, the S&P Discount Factors currently applicable to Municipal
Bonds which are S&P Eligible Assets will be determined by reference to the
factors set forth opposite the exposure period line entitled "10 Business
Days." Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Bonds will be 115%, so long as such Municipal Bonds are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable in
30 days or less, or 120% so long as such Municipal Bonds are rated A-1 or SP-1
by S&P and mature or have a demand feature exercisable in 30 days or less, or
125% if such Municipal Bonds are not rated by S&P but are rated VMIG-1, P-1 or
MIG-1 by Moody's or F-1+ by Fitch; provided, however, such short-term
Municipal Bonds rated by Moody's or Fitch but not rated by S&P having a demand
feature exercisable in 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution
having a short-term rating of at least A-1+ from S&P; and further provided
that such short-term Municipal Bonds rated by Moody's or Fitch but not rated
by S&P may comprise no more than 50% of short-term Municipal Bonds that
qualify as S&P Eligible Assets, (ii) the S&P Discount Factor for Rule 2a- 7
Money Market Funds will be 115%, (iii) the S&P Discount Factor for Receivables
for Municipal Bonds Sold that are due in more than five Business Days from
such Valuation Date will be the S&P Discount Factor applicable to the
Municipal Bonds sold, and (iv) no S&P Discount Factor will be applied to cash
or to Receivables for Municipal Bonds Sold if such receivables are due within
five Business Days of such Valuation Date. "Receivables for Municipal Bonds
Sold," for purposes of calculating S&P Eligible Assets as of any Valuation
Date, means the book value of receivables for Municipal Bonds sold as of or
prior to such Valuation Date. For purposes of the foregoing, Anticipation
Notes rated SP-1 or, if not rated by S&P, rated VMIG-1 by Moody's or F-1+ by
Fitch, which do not mature or have a demand feature exercisable in 30 days and
which do not have a long-term rating, shall be considered to be short-term
Municipal Bonds.
The S&P guidelines require certain minimum issue size and impose other
requirements for purposes of determining S&P Eligible Assets. In order to be
considered S&P Eligible Assets, Municipal Bonds must:
(i) be issued by any of the 50 states of the United States, its
territories and their subdivisions, counties, cities, towns, villages,
and school districts, agencies, such as authorities and special
districts created by the states, and certain federally sponsored
agencies such as local housing authorities (payments made on these bonds
are exempt from regular federal income taxes and are generally exempt
from state and local taxes in the state of issuance);
(ii) be interest bearing and pay interest at least semi-annually;
(iii) be payable with respect to principal and interest in U.S.
dollars;
15
(iv) not be subject to a covered call or covered put option
written by the Fund;
(v) except for Inverse Floaters, not be part of a private
placement; and
(vi) except for Inverse Floaters and legally defeased bonds that are
secured by securities issued or guaranteed by the United States
Government, be part of an issue with an original issue size of at least
$10 million or, if of an issue with an original issue size below $10
million, is rated at least AA or higher by S&P.
Notwithstanding the foregoing:
(i) Municipal Bonds issued by issuers in any one state or territory
will be considered S&P Eligible Assets only to the extent the fair market
value of such Municipal Bonds does not exceed 25% of the aggregate fair
market value of S&P Eligible Assets;
(ii) Municipal Bonds which are escrow bonds or defeased bonds may
compose up to 100% of the aggregate fair market value of S&P Eligible
Assets if such Bonds initially are assigned a rating by S&P in accordance
with S&P's legal defeasance criteria or rerated by S&P as economic
defeased escrow bonds and assigned an AAA rating. Municipal Bonds may be
rated as escrow bonds by another NRSRO or rerated as an escrow bond and
assigned the equivalent of an S&P AAA rating, provided that such
equivalent rated Bonds are limited to 50% of the aggregate fair market
value of S&P Eligible Assets and are deemed to have an AA S&P rating for
purposes of determining the S&P Discount Factor applicable to such
Municipal Bonds. The limitations on Municipal Bonds of any one issuer in
clause (iv) below is not applicable to escrow bonds;
(iii) Municipal Bonds which are not rated by any NRSRO may comprise
no more than 10% of S&P Eligible Assets;
(iv) Municipal Bonds rated at least BBB by S&P, or if not rated by
S&P, rated at least A by another NRSRO, of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to
the extent the fair market value of such Municipal Bonds does not exceed
10% of the aggregate fair market value of the S&P Eligible Assets, High
Yield Municipal Bonds of any issuer may comprise no more than 5% of S&P
Eligible Assets, and Municipal Bonds of any one issuer which are not
rated by any NRSRO will be considered S&P Eligible Assets only to the
extent the fair market value of such Municipal Bonds does not exceed 5%
of the aggregate fair market value of the S&P Eligible Assets; and
(v) Municipal Bonds not rated by S&P but rated at least A by another
NRSRO will be included in S&P Eligible Assets only to the extent the fair
market value of such Municipal Bonds does not exceed 50% of the aggregate
fair market value of the S&P Eligible Assets.
As discussed in the prospectus, the Fund may engage in options or futures
transactions. For so long as any shares of AMPS are rated by S&P, the Fund
will not purchase or sell financial futures contracts, write, purchase or sell
options on financial futures contracts or write put options (except covered
put options) or call options (except covered call options) on portfolio
securities unless it receives written confirmation from S&P that engaging in
such transactions will not impair the ratings then assigned to the shares of
AMPS by S&P, except that the Fund may purchase or sell financial futures
contracts based on the Bond Buyer Municipal Bond Index (the "Municipal Index")
or Treasury Bonds and write, purchase or sell put and call options on such
contracts (collectively "S&P Hedging Transactions"), subject to the following
limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions that terminate a financial
futures contract or option held by the Fund by the Fund's taking an
opposite position thereto ("Closing Transactions")), that would cause the
Fund at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding financial futures contracts based on the
Municipal Index, (B) outstanding financial futures contracts based on the
Municipal Index exceeding in number 25% of the quotient of the fair
market value of the Fund's total assets divided by $1,000 or (C)
outstanding financial futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded financial
futures contracts based on the Municipal Index in the 30 days preceding
the time of effecting such transaction as reported by The Wall Street
Journal;
16
(ii) the Fund will not engage in any S&P Hedging Transaction based
on Treasury Bonds (other than Closing Transactions) that would cause the
Fund at the time of such transaction to own or have sold the lesser of
(A) outstanding financial futures contracts based on Treasury Bonds
exceeding in number 50% of the quotient of the fair market value of the
Fund's total assets divided by $100,000 ($200,000 in the case of the
two-year United States Treasury Note) or (B) outstanding financial
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded financial futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract that the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (A) the
Fund does not have S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount on two
consecutive Valuation Dates and (B) the Fund is required to pay Variation
Margin on the second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract or option thereon in the month
prior to the delivery month under the terms of such financial futures
contract or option thereon unless the Fund holds the securities
deliverable under such terms; and
(v) when the Fund writes a financial futures contract or an option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P) fixed-income securities in a
segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in
the account of or on behalf of the Fund's broker with respect to such
financial futures contract or option equals the fair market value of the
financial futures contract or option, or, in the event the Fund writes a
financial futures contract or option thereon that requires delivery of an
underlying security, it shall hold such underlying security in its
portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets with
a Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount,
the Discounted Value of cash or securities held for the payment of Initial
Margin or Variation Margin shall be zero and the aggregate Discounted Value of
S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of the
aggregate settlement value, as marked to market, of any outstanding financial
futures contracts based on the Municipal Index that are owned by the Fund plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding financial futures contracts based on Treasury Bonds which
contracts are owned by the Fund.
Moody's Aaa Rating Guidelines
The Discounted Value of the Fund's Moody's Eligible Assets is calculated
on each Valuation Date. See "Description of AMPS--Asset Maintenance--AMPS
Basic Maintenance Amount" herein. Moody's Eligible Assets include cash,
Receivables for Municipal Bonds Sold (as defined below), Rule 2a-7 Money
Market Funds and Municipal Bonds eligible for consideration under Moody's
guidelines. For purposes of calculating the Discounted Value of the Fund's
portfolio under current Moody's guidelines, the fair market value of Municipal
Bonds eligible for consideration under such guidelines must be discounted by
the applicable Moody's Discount Factor set forth in the table below. The
Discounted Value of a Municipal Bond eligible for consideration under Moody's
guidelines is the lower of par and the quotient of the fair market value
thereof divided by the Moody's Discount Factor. The Moody's Discount Factor
used to discount a particular Municipal Bond will be determined by reference
to the rating by Moody's or S&P on such Bond in accordance with the tables set
forth below:
------------------------------------------------------------
Moody's Rating Category
------------------------------------------------------------
Aaa Aa A Baa Other (1)
----------- ---------- ---------- ---------- ---------------
151% 159% 168% 202% 220%
----------- ---------- ---------- ---------- ---------------
17
(1) Municipal Bonds rated Ba1 to B3 by Moody's or if not rated by
Moody's, rated BBB-, BBB or BBB+ by S&P. In addition, Municipal
Bonds not explicitly rated by Moody's or S&P, but rated at least the
equivalent of B internally by the Investment Adviser, provided that
Moody's reviews and achieves sufficient comfort with the Investment
Adviser's internal credit rating process, shall be included.
-------------------------------------------------------------------------------
Moody's Rating Category
-------------------------------------------------------------------------------
MIG-1, VMIG-1, P-1 MIG-1, VMIG-1, P-1 NR by NR by Moody's (4)
(1) (2) Moody's (3)
------------------ ------------------ ----------- -----------------
100% 136% 125% 148%
------------------ ------------------ ----------- -----------------
(1) Moody's rated securities that have a maturity less than or equal to 49
days.
(2) Moody's rated securities that have a maturity greater than 49 days.
(3) Municipal Bonds not rated by Moody's but rated at least SP-1+ or A-1+ by
S&P that have a maturity less than or equal to 49 days.
(4) Municipal Bonds not rated by Moody's but rated at least SP-1+ or A-1+ by
S&P that have a maturity greater than 49 days.
Notwithstanding the foregoing, no Moody's Discount Factor will be applied
to cash or to Receivables for Municipal Bonds Sold that are due within five
Business Days of such Valuation Date. The Moody's Discount Factor for
Receivables for Municipal Bonds Sold that are due within six and 30 Business
Days of such Valuation Date will be the Moody's Discount Factor applicable to
the Municipal Bonds sold. "Receivables for Municipal Bonds Sold," for purposes
of calculating Moody's Eligible Assets as of any Valuation Date, means the
book value of receivables for Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within 30 Business Days of such
Valuation Date.
The Moody's Discount Factor for Inverse Floaters shall be the product of
(x) the percentage determined by reference to the rating on the security
underlying such Inverse Floaters multiplied by (y) 1.25.
The Moody's Discount Factor for Rule 2a-7 Money Market Funds shall be
110%.
The Moody's guidelines impose certain requirements as to minimum issue
size, issuer diversification and geographical concentration, as well as other
requirements for purposes of determining whether Municipal Bonds constitute
Moody's Eligible Assets, as set forth in the table below:
Minimum Maximum Maximum State
Issue Size Underlying Allowed
Rating ($ Millions) Obligor(%)(1) (%) (1)(3)
------------- ----------- ------------- -------------
Aaa.......... N/A 100 100
Aa........... 10 20 60
A............ 10 10 40
Baa.......... 10 6 20
Ba........... 10 4 12
B............ 10 3 12
Other (2).... 10 2 12
----------
(1) The referenced percentages represent maximum cumulative totals for
the related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+
by S&P, or if not rated by Moody's or S&P, be rated at least the
equivalent of B internally by the Investment Adviser.
18
(3) Territorial bonds (other than those issued by Puerto Rico and
counted collectively) are each limited to 10% of Moody's Eligible Assets.
For diversification purposes, Puerto Rico will be treated as a state.
N/A Not applicable.
For purposes of the maximum underlying obligor requirement described
above, any Municipal Bond backed by the guaranty, letter of credit or
insurance issued by a third party will be deemed to be issued by such third
party if the issuance of such third party credit is the sole determinant of
the rating on such Bond.
Current Moody's guidelines also require that Municipal Bonds constituting
Moody's Eligible Assets pay interest in cash, be publicly rated B3 or higher
by Moody's or, if not rated by Moody's but rated by S&P, that they be rated at
least BBB- by S&P, or if not explicitly rated by Moody's or S&P, be rated at
least the equivalent of B internally by the Investment Adviser, provided that
Moody's reviews and achieves sufficient comfort with the Investment Adviser's
internal credit rating process, not have suspended ratings by Moody's, if an
Inverse Floater be explicitly rated by Moody's and be part of an issue of
Municipal Bonds of at least $10,000,000 (except for issues rated Aaa by
Moody's, as provided in the chart above). For purposes of determining the
Moody's Discount Factors applicable to any such S&P-rated Municipal Bonds,
such Municipal Bonds (excluding any short-term Municipal Bonds) will be deemed
to have a Moody's rating that is one full rating category lower than its S&P
rating.
When the Fund sells a Municipal Bond and agrees to repurchase it at a
future date, the Discounted Value of such Municipal Bond will constitute a
Moody's Eligible Asset and the amount the Fund is required to pay upon
repurchase of such Bond will count as a liability for purposes of calculating
the AMPS Basic Maintenance Amount. For so long as the AMPS are rated by
Moody's, the Fund will not enter into any such reverse repurchase agreements
unless it has received written confirmation from Moody's that such
transactions would not impair the ratings then assigned the AMPS by Moody's.
When the Fund purchases a Municipal Bond and agrees to sell it at a future
date to another party, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such Bond will constitute a Moody's Eligible
Asset.
High Yield Municipal Bonds may comprise no more than 20% of Moody's
Eligible Assets. High Yield Municipal Bonds internally rated by the Investment
Adviser may comprise no more than 10% of Moody's Eligible Assets.
Inverse Floaters, including primary market and secondary market residual
interest bonds, may constitute no more than 10% of Moody's Eligible Assets.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Fund for the payment of
dividends or redemption.
For so long as shares of AMPS are rated by Moody's, in managing the
Fund's portfolio, the Investment Adviser will not alter the composition of the
Fund's portfolio if, in the reasonable belief of the Investment Adviser, the
effect of any such alteration would be to cause the Fund to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of
such Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of
Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount by 5% or
less, the Investment Adviser will not alter the composition of the Fund's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of Moody's Eligible Assets unless the Fund shall have confirmed that,
after giving effect to such alteration, the aggregate Discounted Value of
Moody's Eligible Assets would exceed the AMPS Basic Maintenance Amount.
19
For so long as any shares of AMPS are rated by Moody's, the Fund will not
engage in Bond Market Association Municipal Swap Index swap transactions ("BMA
swap transactions"), buy or sell financial futures contracts, write, purchase
or sell call options on financial futures contracts or purchase put options on
financial futures contracts or write call options (except covered call
options) on portfolio securities unless it receives written confirmation from
Moody's that engaging in such transactions would not impair the ratings then
assigned to the shares of AMPS by Moody's, except that the Fund may engage in
BMA swap transactions, purchase or sell exchange-traded financial futures
contracts based on the Municipal Index or Treasury Bonds, and purchase, write
or sell exchange-traded put options on such financial futures contracts, and
purchase, write or sell exchange-traded call options on such financial futures
contracts (collectively "Moody's Hedging Transactions"), subject to the
following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction
based on the Municipal Index (other than Closing Transactions) that would
cause the Fund at the time of such transaction to own or have sold (A)
outstanding financial futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded financial
futures contracts based on the Municipal Index in the 30 days preceding
the time of effecting such transaction as reported by The Wall Street
Journal or (B) outstanding financial futures contracts based on the
Municipal Index having fair market value exceeding 50% of the fair market
value of all Municipal Bonds constituting Moody's Eligible Assets owned
by the Fund (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) that would
cause the Fund at the time of such transaction to own or have sold (A)
outstanding financial futures contracts based on Treasury Bonds having an
aggregate fair market value exceeding 40% of the aggregate fair market
value of Moody's Eligible Assets owned by the Fund and rated Aa by
Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by S&P)
or (B) outstanding financial futures contracts based on Treasury Bonds
having an aggregate fair market value exceeding 80% of the aggregate fair
market value of all Municipal Bonds constituting Moody's Eligible Assets
owned by the Fund (other than Moody's Eligible Assets already subject to
a Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if not
rated by Moody's but rated by S&P, rated A or AA by S&P) (for purposes of
the foregoing clauses (i) and (ii), the Fund shall be deemed to own the
number of financial futures contracts that underlie any outstanding
options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract based on the Municipal Index if
the amount of open interest in the Municipal Index as reported by The
Wall Street Journal is less than 5,000;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract by no later than the fifth
Business Day of the month in which such contract expires and will engage
in a Closing Transaction to close out any outstanding option on a
financial futures contract by no later than the first Business Day of the
month in which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only with
respect to financial futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Fund (A) will not engage in options and futures
transactions for leveraging or speculative purposes, except that an
option or futures transaction so long as the combination of the Fund's
non-derivative positions, together with the relevant option or futures
transaction, produces a synthetic investment position, or the same
economic result, that could be achieved by an investment, consistent with
the Fund's investment objective and policies, in a security that is not
an option or futures transaction, subject to the Investment Adviser
periodically demonstrating to Moody's that said economic results are
achieved, and (B) will not write any call options or sell any financial
futures contracts for the purpose of hedging the anticipated purchase of
an asset prior to completion of such purchase;
(vii) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount; and
20
(viii) the Fund will not engage in BMA swap transactions with
respect to more than 20% of the Fund's net assets; provided that the
Fund's use of futures will proportionately decrease as the Fund's use of
BMA swap transactions increases, and vice-versa.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the
Fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Fund that are either exchange-traded and "readily reversible"
or that expire within 49 days after the date as of which such valuation is
made shall be valued at the lesser of (A) Discounted Value and (B) the
exercise price of the call option written by the Fund; (ii) assets subject to
call options written by the Fund not meeting the requirements of clause (i) of
this sentence shall have no value; (iii) assets subject to put options written
by the Fund shall be valued at the lesser of (A) the exercise price and (B)
the Discounted Value of the subject security; (iv) futures contracts shall be
valued at the lesser of (A) settlement price and (B) the Discounted Value of
the subject security, provided that, if a contract matures within 49 days
after the date as of which such valuation is made, where the Fund is the
seller the contract may be valued at the settlement price and where the Fund
is the buyer the contract may be valued at the Discounted Value of the subject
securities; and (v) where delivery may be made to the Fund with any security
of a class of securities, the Fund shall assume that it will take delivery of
the security with the lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(i) 10% of the exercise price of a written call option; (ii) the exercise
price of any written put option; (iii) where the Fund is the seller under a
financial futures contract, 10% of the settlement price of the financial
futures contract; (iv) where the Fund is the purchaser under a financial
futures contract, the settlement price of assets purchased under such
financial futures contract; (v) the settlement price of the underlying
financial futures contract if the Fund writes put options on a financial
futures contract; and (vi) 105% of the fair market value of the underlying
financial futures contracts if the Fund writes call options on a financial
futures contract and does not own the underlying contract.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions), except that the Fund may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its
custodian cash, cash equivalents or short term, fixed-income securities
rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of
the Forward Commitment with a fair market value that equals or exceeds
the amount of the Fund's obligations under any Forward Commitments to
which it is from time to time a party or long-term, fixed income
securities with a Discounted Value that equals or exceeds the amount of
the Fund's obligations under any Forward Commitment to which it is from
time to time a party, and
(ii) the Fund will not enter into a Forward Commitment unless,
after giving effect thereto, the Fund would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which
the Fund is a party and of all securities deliverable to the Fund pursuant to
such Forward Commitments shall be zero.
_________________
For so long as shares of AMPS are rated by S&P or Moody's, the Fund,
unless it has received written confirmation from S&P and/or Moody's, as the
case may be, that such action would not impair the ratings then assigned to
the AMPS by S&P and/or Moody's, as the case may be, will not (i) borrow money
except for the
21
purpose of clearing transactions in portfolio securities (which borrowings
under any circumstances shall be limited to the lesser of $10 million and an
amount equal to 5% of the fair market value of the Fund's assets at the time
of such borrowings and which borrowings shall be repaid within 60 days and not
be extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of stock ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Fund, (v) reissue any AMPS previously purchased or redeemed by the Fund, (vi)
merge or consolidate into or with any other corporation or entity, (vii)
change the Fund's pricing service or (viii) engage in reverse repurchase
agreements.
DIRECTORS AND OFFICERS
The Directors of the Fund consist of five individuals, four of whom are
not "interested persons" of the Fund as defined in the 1940 Act (the
"non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the 1940 Act.
Each non-interested Director is a member of the Fund's Audit and
Nominating Committee (the "Committee"). The principal responsibilities of the
Committee are the appointment, compensation and oversight of the Fund's
independent auditors, including resolution of disagreements regarding
financial reporting between Fund management and such auditors. The Board of
the Fund has adopted a written charter for the Committee. The Committee also
reviews and nominates candidates to serve as non-interested Directors. The
Committee has retained independent legal counsel to assist them in connection
with these duties. Since the Fund was incorporated, the Committee has held one
meeting.
Biographical Information
Certain biographical and other information relating to the non-interested
Directors of the Fund is set forth below, including their ages, their
principal occupations for at least the last five years, the length of time
served, the total number of portfolios overseen in the complex of funds
advised by the Investment Adviser and its affiliate, Merrill Lynch Investment
Managers, L.P. ("MLIM") ("FAM/MLIM-advised funds") and other public
directorships.
Number of
Term of FAM/MLIM-Advised
Position(s) Office** and Funds and
Held with the Length of Time Principal Occupation(s) Portfolios Public
Name, Address* and Age Fund Served During Past Five Years Overseen Directorships
---------------------- ------------- -------------- ----------------------- ---------------- -------------
Donald W. Burton (59) Director Director since General Partner of The 21 registered ITC DeltaCom,
2003 Burton Partnership, investment Inc.
Limited Partnership (an companies (telecommunica-tions);
Investment Partnership) consisting of ITC Holding
since 1979; Managing 35 portfolios Company, Inc.
General Partner of The (telecommunica-tions);
South Atlantic Venture Knology, Inc.
Funds since 1983; Member (telecommunica-tions);
of the Investment Advisory MainBancorp,
Committee of the Florida N.A. (bank
State Board of holding
Administration since 2001. company);
PriCare, Inc.
(health care);
Symbion, Inc.
22
Number of
Term of FAM/MLIM-Advised
Position(s) Office** and Funds and
Held with the Length of Time Principal Occupation(s) Portfolios Public
Name, Address* and Age Fund Served During Past Five Years Overseen Directorships
---------------------- ------------- -------------- ----------------------- ---------------- -------------
(health care)
M. Colyer Crum (71) Director Director since James R. Williston 22 registered Cambridge
2003 Professor of Investment investment Bancorp (banking
Management Emeritus, companies company)
Harvard Business School consisting of
since 1996; James R. 36 portfolios
Williston Professor of
Investment Management,
Harvard Business School,
from 1971 to 1996.
Laurie Simon Hodrick (40) Director Director since Professor of Finance and 21 registered None
2003 Economics, Graduate School investment
of Business, Columbia companies
University since 1998; consisting of
Associate Professor of 35 portfolios
Finance and Economics,
Graduate School of
Business, Columbia
University from 1996 to
1998.
Fred G. Weiss (61) Director Director since Managing Director of FGW 21 registered Watson
2003 Associates since 1977; investment Pharmaceutical
Vice President, Planning companies Inc.
Investment and Development consisting of (pharmaceutical
of Warner Lambert Co. from 35 portfolios company)
1979 to 1997; Director of
BTG International PLC (a
global technology
commercialisation company)
since 2001; Director of
the Michael J. Fox
Foundation for Parkinson's
Research.
(footnotes on the next page)
23
________________________
* The address of each non-interested Director is P.O. Box 9095, Princeton,
New Jersey 08543-9095.
** Each Director serves until his or her successor is elected and qualified,
until December 31 of the year in which he or she turns 72, or until his
or her death, resignation, or removal as provided in the Fund's By-laws,
Charter or by statute.
Certain biographical and other information relating to the Director
who is an "interested person" of the Fund as defined in the 1940 Act (the
"interested Director") and the other officers of the Fund is set forth
below, including their ages, their principal occupations for at least the
last five years, the length of time served, the total number of
portfolios overseen in FAM/MLIM-advised funds and public directorships
held.
Number of
Term of FAM/MLIM-Advised
Position(s) Office+ and Funds and
Held with the Length of Time Principal Occupation(s) Portfolios Public
Name, Address* and Age Fund Served During Past Five Years Overseen Directorships
---------------------- ------------- -------------- ----------------------- ---------------- -------------
Terry K. Glenn++(62) President President and President and Chairman 114 registered None
and Director Director+++ of the FAM/MLIM-advised investment
since 2003 funds since 1999; companies
Chairman consisting of
(Americas 159 portfolios
Region) of MLIM
from 2000
to 2002;
Executive Vice
President of
MLIM and the
Investment
Adviser (which
terms as used
herein, include
their corporate
predecessors)
from 1983 to
2002; President
of FAM
Distributors,
Inc. ("FAMD" or
the
"Distributor")
from 1986 to
2002 and
Director
thereof from
1991 to 2002;
Executive Vice
President and
Director of
Princeton
Services, Inc.
("Princeton
Services") from
1993 to 2002;
President of
Princeton
Administrators,
L.P. from 1988
to 2002;
Director of
Financial Data
Services, Inc.
from 1985 to
2002.
Donald C. Burke (43) Vice President Vice President First Vice President of 113 registered None
and Treasurer and Treasurer MLIM since 1997 and the investment
since 2003 Treasurer thereof since companies
1999; Senior Vice consisting of
President and Treasurer 158 portfolios
of Princeton Services
since 1999; Vice
President of FAMD since
1999; Vice President of
MLIM and the Investment
Adviser from 1990 to
1997; Director of
Taxation of MLIM since
1990.
(footnotes on the next page)
24
Number of
Term of FAM/MLIM-Advised
Position(s) Office+ and Funds and
Held with the Length of Time Principal Occupation(s) Portfolios Public
Name, Address* and Age Fund Served During Past Five Years Overseen Directorships
---------------------- ------------- -------------- ----------------------- ---------------- -------------
Robert A. DiMella, CFA Vice President Vice President Vice President of MLIM 5 registered None
(36) and Portfolio since 2003 since 1997; Assistant investment
Manager Vice President of MLIM companies
from 1995 to 1997; consisting of
Assistant Portfolio 5 portfolios
Investment Adviser of
MLIM from 1993 to 1995.
Brian D. Stewart (34) Secretary Secretary since Vice President of MLIM 37 registered None
2003 since 2002; Attorney investment
associated with companies
Reed Smith consisting
LLP from 2001 of 51 portfolios
of to 2002;
Attorney
associated with
Saul Ewing LLP
from 1999 to
2001.
____________________
* The address of each officer is P.O. Box 9011, Princeton, New Jersey
08543-9011.
+ Elected by and serves at the pleasure of the Board of Directors of the
Fund.
++ Mr. Glenn is a director, trustee or member of an advisory board of
certain other investment companies for which MLIM or the Investment
Adviser acts as investment adviser. Mr. Glenn is an "interested person,"
as defined in the 1940 Act, of the Fund based on his former positions
with the Investment Adviser, MLIM, FAMD, Princeton Services and Princeton
Administrators, L.P.
+++ As Director, Mr. Glenn serves until his successor is elected and
qualified, until December 31 of the year in which he turns 72, or until
his death, resignation, or removal as provided in the Fund's By-laws,
Charter or by statute.
In connection with the election of the Fund's Directors, holders of
shares of AMPS and other 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.
Mr. Crum and Ms. Hodrick have been designated as the Directors to be elected by
holders of preferred stock. See "Description of AMPS--Voting Rights."
Share Ownership
Information relating to each Director's share ownership in the Fund and
in all registered funds in the Merrill Lynch family of funds that are overseen
by the respective Director ("Supervised Merrill Lynch Funds") as of December
31, 2002 is set forth in the chart below.
Aggregate Dollar Range of
Aggregate Dollar Range Securities in Supervised
Name of Equity in the Fund Merrill Lynch Funds*
Interested Director:
Terry K. Glenn Over $100,000 Over $100,000
Non-interested Directors:
Donald W. Burton None Over $100,000
M. Colyer Crum None Over $100,000
Laurie Simon Hodrick None Over $100,000
Fred G. Weiss None Over $100,000
______________
* For the number of FAM/MLIM-advised funds from which each Director receives
compensation, see the table above under "Directors and Officers - Biographical
Information."
25
As of the date of this statement of additional information none of the
Directors and officers of the Fund owned any outstanding shares of common
stock or AMPS of the Fund. As of the date of this statement of additional
information, none of the non-interested Directors of the Fund nor any of their
immediate family members owned beneficially or of record any securities in ML
& Co.
Compensation of Directors
Pursuant to its investment advisory agreement with the Fund (the
"Investment Advisory Agreement"), the Investment Adviser pays all compensation
of officers and employees of the Fund as well as the fees of all Directors of
the Fund who are affiliated persons of ML & Co. or its subsidiaries as well as
such Directors' actual out-of-pocket expenses relating to attendance at
meetings.
The Fund pays each non-interested Director a combined fee for services on
the Board and the Committee of $3,000 per year, $500 per in person Board
meeting attended and $500 per in person committee meeting attended. The Fund
pays the Chairman of the Committee an additional fee of $1,000 per year. The
Fund reimburses each non-interested Director for his or her out-of-pocket
expenses relating to attendance at Board and Committee meetings.
The following table sets forth the estimated compensation to be paid by
the Fund to the non-interested Directors projected through the end of the
Fund's first full fiscal year and the aggregate compensation paid to them from
all registered FAM/MLIM-advised funds for the calendar year ended December 31,
2002.
Pension or Aggregate
Retirement Compensation
Benefits Estimated From Fund and
Accrued as Annual other
Position Compensation Part of Fund Benefits Upon FAM/MLIM-Advised
Name of Director with Fund From Fund Expense Retirement Funds
---------------- --------- ------------ ------------ ------------- ----------------
Donald W. Burton Director $7,000 None None $189,042
M. Colyer Crum* Director $8,000 None None $226,583
Laurie Simon Hodrick Director $7,000 None None $208,917
Fred G. Weiss Director $7,000 None None $208,917
__________
* Chairman of the Committee.
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 administrative services. 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 May 2003, the Investment Adviser and its
affiliates, including MLIM, had a total of approximately $462 billion in
investment company and other portfolio assets under management, including
approximately $259 billion in fixed income assets. This amount includes assets
managed by 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 direction
of the Fund's Board of Directors, 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 portfolio manager primarily responsible for the Fund's day-to-day
management is Robert A. DiMella, CFA. Robert DiMella is a Vice President of
MLIM since 1997 and has 13 years of experience investing in Municipal Bonds.
The Fund's portfolio manager will consider analyses from various sources, make
the necessary investment decisions, and place orders for transactions
accordingly. The Fund is also assisted by 13 research analysts with an average
of 12 years experience. The Investment Adviser will also be responsible for
the performance of certain management services for the Fund.
26
For its services, the Fund pays the Investment Adviser a monthly fee at
the annual rate of 0.55% of the Fund's average daily net assets plus the
proceeds of any outstanding borrowings used for leverage ("average daily net
assets" means the average daily value of the total assets of the Fund,
including the amount obtained from leverage and any proceeds from the issuance
of preferred stock, minus the sum of (i) accrued liabilities of the Fund, (ii)
any accrued and unpaid interest on outstanding borrowings and (iii)
accumulated dividends on shares of preferred stock). For purposes of this
calculation, average daily net assets is determined at the end of each month
on the basis of the average net assets of the Fund for each day during the
month. 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 daily net assets.
The Investment Adviser has contractually agreed to waive a portion of its
fee during the first seven years of the Fund's operations ending July , 2010,
as follows:
Fee Waiver (as
a percentage of
average daily
net assets)
---------------
Years 1 through 5................. 0.15%
Year 6............................ 0.10%
Year 7............................ 0.05%
Year 8 and thereafter............. 0.00%
The Investment Adviser has not agreed to waive any portion of its fee beyond
July , 2010.
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
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, dividend
disbursing agent and registrar, 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. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting 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 stockholders of the Fund.
In connection with the Board of Directors' consideration of the
Investment Advisory Agreement, the Board reviewed information derived from a
number of sources and covering a range of issues relating to, among other
things, alternatives to the Investment Advisory Agreement. The Board of
Directors considered the services to be provided to the Fund by the Investment
Adviser under the Investment Advisory Agreement, as well as other services
27
to be provided by the Investment Adviser and its affiliates under other
agreements, and the personnel who will provide these services. In addition to
the investment advisory services to be provided to the Fund, the Investment
Adviser and its affiliates will provide administrative services, stockholder
services, oversight of fund accounting, assistance in meeting legal and
regulatory requirements, and other services necessary for the operation of the
Fund. The Fund's Board of Directors also considered the direct and indirect
benefits to the Investment Adviser from its relationship with the Fund. The
benefits considered by the Board of Directors included not only the Investment
Adviser's compensation for investment advisory services, but also compensation
paid to the Investment Adviser or its affiliates for other non-advisory
services provided to the Fund. The Board of Directors concluded that the
advisory fee was reasonable in relation to the services to be provided by the
Investment Adviser to the Fund as well as the anticipated costs and benefits
to be gained by the Investment Adviser in providing such services.
In reaching its conclusion, the Board of Directors focused on the
experience, resources and strengths of the Investment Adviser and its
affiliates in managing leveraged, closed-end investment companies that invest
in Municipal Bonds. The Board of Directors, based on their experience as
directors of other investment companies managed by the Investment Adviser and
its affiliates, also focused on the quality of the compliance and
administrative staff at the Investment Adviser. In connection with its
consideration of the Investment Advisory Agreement, the Board of Directors
placed significant emphasis on the Fund's advisory fee rate and anticipated
expense ratios as compared to those of comparable leveraged, closed-end funds
managed by other investment advisers ("comparable funds") investing in
Municipal Bonds and similar instruments as provided by Lipper Inc. In
particular, the Board of Directors reviewed the advisory fee rate of eleven
comparable leveraged, closed-end funds with substantially similar investment
objectives and policies. The Board of Directors noted that the Fund has the
lowest contractual advisory fee rate at the estimated asset level for the Fund
among the comparable funds. Based in part on this fee comparison, and taking
into account the quality of the various services to be provided to the Fund by
the Investment Adviser and its affiliates discussed above, the Investment
Adviser's experience in managing Municipal Bonds, and the Board of Directors'
experience with the nature and quality of portfolio management, administrative
and compliance services provided by the Investment Adviser to other investment
companies, the Fund's Board of Directors concluded that the advisory fee rate
was reasonable. The Board of Directors considered whether there should be
changes in the advisory fee rate or structure in order to enable the Fund to
participate in any economies of scale that the Investment Adviser may
experience as a result of growth in the Fund's assets. The Fund's Board of
Directors also reviewed materials supplied by counsel that were prepared for
use by the Board of Directors in fulfilling its duties under the 1940 Act.
Based on the information reviewed and the discussions, the Board of
Directors, including a majority of the non-interested Directors, concluded
that it was satisfied with the nature and quality of the services to be
provided by the Investment Adviser to the Fund and that the advisory fee rate
was reasonable in relation to such services. The non-interested Directors were
represented by independent counsel who assisted them in their deliberations.
Code of Ethics
The Fund's Board of Directors approved a Code of Ethics under Rule 17j-1 of
the 1940 Act that covers the Fund and the Investment Adviser. The Code of
Ethics establishes procedures for personal investing and restricts certain
transactions. Employees subject to the Code of Ethics may invest in securities
for their personal investment accounts, including securities that may be
purchased or held by the Fund.
Proxy Voting Procedures
[TO BE PROVIDED BY AMENDMENT]
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to
deal with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Fund. Where possible, the Fund deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the
28
best results in conducting portfolio transactions for the Fund, taking into
account such factors as price (including the applicable dealer spread or
commission), the size, type and difficulty of the transaction involved, the
firm's general execution and operations facilities and the firm's risk in
positioning the securities involved. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads
and brokerage commissions. While reasonable competitive spreads or commissions
are sought, the Fund will not necessarily be paying the lowest spread or
commission available on any particular transaction.
Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as quantitative and modeling
information assessments and statistical data and provide other similar
services) to the Investment Adviser may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the
Investment Advisory Agreement and the expense of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information. Supplemental investment research obtained from such dealers might
be used by the Investment Adviser in servicing all of its accounts and such
research might not be used by the Investment Adviser in connection with the
Fund.
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 execution is
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 principal 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, may serve as its brokers in certain over-the-counter
transactions conducted on an agency basis. In addition, the Fund has received
an exemptive order, under which it may purchase investment grade Municipal
Bonds through group orders from an underwriting syndicate of which Merrill
Lynch is a member subject to conditions set forth in such order (the "Group
Order Exemptive Order"). A group order is an order for securities held in an
underwriting syndicate for the account of all members of the syndicate, and in
proportion to their respective participation in the syndicate.
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.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to
seek to recapture underwriting and dealer spreads from affiliated entities.
The Fund's Board of Directors has considered all factors deemed relevant and
has made a determination not to seek such recapture at this time. The Fund's
Board of Directors will reconsider this matter from time to time.
The Fund has received an exemptive order from the Commission permitting
it to lend portfolio securities to Merrill Lynch or its affiliates. Pursuant
to that order, the Fund also has retained an affiliated entity of the
Investment Adviser as the securities lending agent for a fee, including a fee
based on a share of the returns on investment of cash collateral. That entity
may, on behalf of the Fund, invest cash collateral received by the Fund for
such loans, among other things, in a private investment company managed by
that entity or in registered money market funds advised by the Investment
Adviser or its affiliates.
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
investment 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 other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. Transactions effected by the
Investment Adviser (or its affiliates) on behalf of more than one of its
clients during the same period may increase the demand for securities being
purchased or the supply of securities being sold, causing an adverse effect on
price.
29
Section 11(a) of the Securities Exchange Act of 1934 generally prohibits
members of the U.S. national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts that they manage
unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules
the Commission has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
Portfolio Turnover
Generally, the Fund does not purchase securities for short term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such actions, for defensive or other reasons,
appear advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances, 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 results in greater
transaction costs, which are borne directly by the Fund and also has certain
tax consequences for stockholders.
TAXES
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
stockholders) 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. If, in any taxable
year, the Fund fails to qualify as a RIC under the Code, it would be taxed in
the same manner as an ordinary corporation and all distributions from earnings
and profits to its stockholders would be taxable as ordinary income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year-end, plus certain
undistributed amounts from previous years. The required distributions,
however, are based only on the taxable income of a RIC. The excise tax,
therefore, generally will not apply to the tax-exempt income of a RIC, such as
the Fund, that pays exempt-interest dividends.
The Internal Revenue Service (the "IRS"), in a revenue ruling, held that
certain auction rate preferred stock would be treated as stock for Federal
income tax purposes. The terms of the AMPS are substantially similar, but not
identical, to the auction rate preferred stock discussed in the revenue
ruling, and in the opinion of Sidley Austin Brown & Wood LLP, counsel to the
Fund, the shares of AMPS will constitute stock of the Fund and distributions
with respect to shares of AMPS (other than distributions in redemption of
shares of AMPS subject to Section 302(b) of the Code) will constitute
dividends to the extent of the Fund's current and accumulated earnings and
profits as calculated for Federal income tax purposes. Nevertheless, it is
possible that the IRS might take a contrary position, asserting, for example,
that the shares of AMPS constitute debt of the Fund. If this position were
upheld, the discussion of the treatment of distributions below would not
apply. Instead, distributions by the Fund to holders of shares of AMPS would
constitute taxable interest income, whether or not they exceeded the earnings
and profits of the Fund, would be included in full in the income of the
recipient and would be taxed as ordinary income. Counsel believes that such a
position, if asserted by the IRS, would be unlikely to prevail.
The Fund intends to qualify to pay "exempt-interest dividends" as defined
in Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code
30
(relating generally to obligations of a state or local governmental unit), the
Fund shall be qualified to pay exempt-interest dividends to its stockholders.
Exempt-interest dividends are dividends or any part thereof paid by the Fund
which are attributable to interest on tax-exempt obligations and designated by
the Fund as exempt-interest dividends in a written notice mailed to the Fund's
stockholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's stockholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
stockholder's gross income for Federal tax purposes. Exempt-interest dividends
are included, however, in determining the portion, if any, of a person's
social security and railroad retirement benefits subject to Federal income
taxes. Each stockholder is advised to consult a tax adviser with respect to
whether exempt-interest dividends retain the exclusion under Code Section
103(a) if such stockholder would be treated as a "substantial user" or
"related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of "industrial development bonds" or "private
activity bonds," if any, held by the Fund.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
are considered ordinary income for Federal income tax purposes. Distributions,
if any, from an excess of net long-term capital gains over net short-term
capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the stockholder has owned Fund shares. Generally not later than
60 days after the close of its taxable year, the Fund will provide its
stockholders with a written notice designating the amounts of any
exempt-interest dividends and capital gain dividends. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to stockholders 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 stockholders on December 31 of the year in which such
dividend was declared. Distributions by the Fund, whether from exempt-interest
income, ordinary income or capital gains, are not eligible for the dividends
received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated for
Federal income tax purposes as ordinary income rather than capital gain. This
rule may increase the amount of ordinary income dividends received by
stockholders. 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). The sale or exchange
of AMPS could result in capital gain or loss to holders of AMPS who hold their
shares as capital assets. Generally, a stockholder's gain or loss will be long
term capital gain or loss if the shares have been held for more than one year.
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 stockholder. 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 stockholder.
If you borrow money to buy the Fund's AMPS, you may not be permitted to
deduct the interest on that loan. Under Federal income tax rules, the Fund's
AMPS may be treated as having been bought with borrowed money even if the
purchase cannot be traced directly to borrowed money. Stockholders should
consult their own tax advisers regarding the impact of an investment in AMPS
upon the deductibility of interest payable by the stockholder.
The IRS has taken the position in a revenue ruling that if a RIC has two
or more classes of shares, it may designate distributions made to each class
in any year as consisting of no more than such class's proportionate share of
particular types of income, including exempt-interest 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. Thus, the Fund is required to
allocate a portion of its net capital gain and other taxable income to the
shares of AMPS of each series. The Fund may notify the Auction Agent of the
amount of any net capital gain and other taxable income to be included in any
dividend on shares of AMPS prior to the Auction establishing the Applicable
Rate for such dividend. The Fund also may include such income in a dividend on
shares of AMPS without giving advance notice thereof if it increases the
dividend by an additional amount calculated as if such income were a
Retroactive Taxable Allocation and the additional amount were an Additional
Dividend, provided that the Fund will notify the Auction Agent of the
additional amounts to be
31
included in such dividend prior to the applicable Dividend Payment Date. See
"The Auction -- Auction Procedures -- Auction Date; Advance Notice of
Allocation of Taxable Income; Inclusion of Taxable Income in Dividends" in the
prospectus. Except for the portion of any dividend that it informs the Auction
Agent will be treated as capital gains or other taxable income, the Fund
anticipates that the dividends paid on the shares of AMPS will constitute
exempt-interest dividends. The amount of net capital gain and ordinary income
allocable to shares of AMPS (the "taxable distribution") will depend upon the
amount of such gains and income realized by the Fund and the total dividends
paid by the Fund on shares of common stock and shares of the series of AMPS
during a taxable year, but the taxable distribution generally is not expected
to be significant.
If the Fund makes a Retroactive Taxable Allocation, it will pay
Additional Dividends to holders of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS -- Dividends -- Additional
Dividends" in the prospectus. The Federal income tax consequences of
Additional Dividends under existing law are uncertain. The Fund intends to
treat a holder as receiving a dividend distribution in the amount of any
Additional Dividend only as and when such Additional Dividend is paid. An
Additional Dividend generally will be designated by the Fund as an
exempt-interest dividend except as otherwise required by applicable law.
However, the IRS may assert that all or part of an Additional Dividend is a
taxable dividend either in the taxable year for which the Retroactive Taxable
Allocation is made or in the taxable year in which the Additional Dividend is
paid.
In the opinion of Sidley Austin Brown & Wood LLP, counsel to the Fund,
under current law the manner in which the Fund intends to allocate items of
tax-exempt income, net capital gain and other taxable income among shares of
common stock and shares of the series of AMPS will be respected for Federal
income tax purposes. However, the tax treatment of Additional Dividends may
affect the Fund's calculation of each class's allocable share of capital gains
and other taxable income. In addition, there is currently no direct guidance
from the IRS or other sources specifically addressing whether the Fund's
method for allocating tax-exempt income, net capital gain and other taxable
income, if any, among shares of common stock and shares of the series of AMPS
will be respected for Federal income tax purposes, and it is possible that the
IRS could disagree with counsel's opinion and attempt to reallocate the Fund's
net capital gain or other taxable income. In the event of a reallocation, some
of the dividends identified by the Fund as exempt-interest dividends to
holders of shares of AMPS may be recharacterized as additional capital gains
or other taxable income. In the event of such recharacterization, the Fund
would not be required to make payments to such stockholders to offset the tax
effect of such reallocation. In addition, a reallocation may cause the Fund to
be liable for income tax and excise tax on any reallocated taxable income.
Sidley Austin Brown & Wood LLP has advised the Fund that, in its opinion, if
the IRS were to challenge in court the Fund's allocations of income and gain,
the IRS would be unlikely to prevail. A holder should be aware, however, that
the opinion of Sidley Austin Brown & Wood LLP represents only its best legal
judgment and is not binding on the IRS or the courts.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The Federal alternative
minimum tax applies to interest received on "private activity bonds" issued
after August 7, 1986. Private activity bonds are bonds which, although
tax-exempt, are used for purposes other than those performed by governmental
units and which benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference," which could subject certain
investors in such bonds, including stockholders of the Fund, to an increased
Federal alternative minimum tax. The Fund intends to purchase such "private
activity bonds" and will report to stockholders within 60 days after calendar
year-end the portion of its dividends declared during the year which
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 stockholder 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.
32
The Fund may engage in interest rate swaps. The Federal income tax rules
governing the taxation of interest rate swaps are not entirely clear and may
require the Fund to treat payments received under such arrangements as
ordinary income and to amortize payments under certain circumstances.
Additionally, because the treatment of swaps under the RIC qualification rules
is not clear, the Fund will monitor its activity in this regard in order to
maintain its qualification as a RIC. Because payments received by the Fund in
connection with swap transactions will be taxable rather than tax exempt, they
may result in increased taxable distributions to stockholders.
Certain transactions of the Fund are subject to complex Federal income
tax provisions that may, among other things, (a) affect the character of gains
and losses realized, (b) disallow, suspend or otherwise limit the allowance of
certain losses or deductions, and (c) accelerate the recognition of income.
Operation of these tax rules could, therefore, affect the character, amount
and timing of distributions and result in increased taxable distributions to
stockholders. Special tax rules also will require the Fund to mark-to-market
certain types of positions in its portfolio (i.e., treat them as sold on the
last day of the taxable year), and may result in the recognition of income
without a corresponding receipt of cash. The Fund intends to monitor its
transactions, make appropriate tax elections and make appropriate entries in
its books and records to lessen the effect of these tax rules and avoid any
possible disqualification for the special treatment afforded RICs under the
Code.
If at any time when shares of AMPS are outstanding the Fund does not meet
the asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of common stock until the asset coverage is
restored. See "Description of AMPS-- Dividends-- Restrictions on Dividends and
Other Payments" herein and in the prospectus. This may prevent the Fund from
distributing at least 90% of its net income, and may, therefore, jeopardize
the Fund's qualification for taxation as a RIC. If the Fund were to fail to
qualify as a RIC, some or all of the distributions paid by the Fund would be
fully taxable for Federal income tax purposes. Upon any failure to meet the
asset coverage requirements of the 1940 Act, the Fund, in its sole discretion,
may, and under certain circumstances will be required to, redeem shares of
AMPS in order to maintain or restore the requisite asset coverage and avoid
the adverse consequences to the Fund and its stockholders of failing to
qualify as a RIC. See "Description of AMPS-- Redemption" herein and in the
prospectus. 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. Additional preferred stock that the Fund has authority to issue 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. If the Fund
ultimately relies on a legal opinion with regard to such preferred stock,
there is no assurance that the IRS would agree that dividends on the preferred
stock are not preferential. If the IRS successfully disallowed the dividends
paid deduction for dividends on the preferred stock, the Fund could lose the
benefit of the special treatment afforded RICs under the Code. In this case,
dividends paid by the Fund would not be exempt from Federal income taxes.
Additionally, the Fund would be subject to Federal income tax including the
alternative minimum tax.
Under certain Code provisions, some stockholders may be subject to a
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, stockholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
The Fund is generally not an appropriate investment for retirement plans,
other entities that are not subject to tax and foreign stockholders.
State and Local Taxes
33
The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in an exemption for such dividends under the income or
other tax laws of any state or local taxing authority. Stockholders are
advised to consult their own tax advisers concerning state and local matters.
In some states, the portion of any exempt-interest dividend that is
derived from interest received by a RIC on its holdings of that state's
securities and its political subdivisions and instrumentalities is exempt from
that state's income tax. Therefore, the Fund will report annually to its
stockholders the percentage of interest income earned by the Fund during the
preceding year on tax-exempt obligations indicating, on a state-by-state basis
the source of such income.
_________________
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Stockholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
NET ASSET VALUE
Net asset value per share of common stock is determined Monday through
Friday as of the close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time), on each business day during which the NYSE is open
for trading. 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 any outstanding shares of preferred stock is divided by the total number of
shares of common stock outstanding at such time. Expenses, including the fees
payable to the Investment Adviser, are accrued daily.
The Municipal Bonds in which the Fund invests are traded primarily in the
over-the-counter markets. In determining net asset value, the Fund 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. 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 53 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 and interest rate swaps are valued at closing
prices for such contracts established by the exchange or dealer market on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods approved in good
faith by the Board of Directors.
The Fund makes available for publication the net asset value of its
shares of common stock determined as of the last business day each week.
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.
The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation. Positions in options are valued at the last sale price on the
market where any such option is principally traded. Positions in futures
contracts are valued at closing prices for such contracts established by the
exchange on which they are traded. Obligations with remaining maturities of 60
days or less are valued at amortized cost unless this method no longer
produces fair valuations. Repurchase agreements are valued at cost plus
accrued interest.
ADDITIONAL INFORMATION
34
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Commission.
Any such reports and other information, including the Fund's Code of Ethics,
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: 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 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 Exchange.
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.
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder of
Muni Intermediate Duration Fund,Inc.
We have audited the accompanying statement of assets and liabilities of
Muni Intermediate Duration Fund, Inc. (the "Fund"), as of August , 2003.
This statement of assets and liabilities is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets and liabilities based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the statement
of assets and liabilities is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of assets and liabilities. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets and liabilities
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the Muni
Intermediate Duration Fund, Inc., as of August , 2003, in conformity
with accounting principles generally accepted in the United States.
August , 2003
F-1
MUNI INTERMEDIATE DURATION FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
August , 2003
ASSETS:
Cash.........................................................$
Prepaid registration fees and Offering Costs (Note 1)........--------------
Total assets.............................................
==============
LIABILITIES:
Liabilities and accrued expenses (Note 1)....................--------------
NET ASSETS:.......................................................$
==============
NET ASSETS CONSIST OF:
Common Stock, par value $.10 per share; 200,000,000 shares
authorized; shares issued and outstanding (Note 1)........$
Paid-in Capital in excess of par.............................--------------
Net Assets-Equivalent to $ net asset value per share based
on shares of capital stock outstanding (Note 1)...........$
==============
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
Note 1. Organization
The Fund was incorporated under the laws of the State of Maryland on May
15, 2003, and is registered under the Investment Company Act of 1940, 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 shares for on ,
2003. The General Partner of the Investment Adviser is an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. Certain officers and/or
directors of the Fund are officers of the Investment Adviser.
The Investment Adviser, on behalf of the Fund, will incur organization
expenses 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. Investment Advisory 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 and management services at an annual rate
equal to 0.55% of the Fund's average daily net assets, (including the proceeds
from the issuance of preferred stock), plus the proceeds of any outstanding
borrowings used for leverage.
The Investment Adviser has contractually agreed to waive a portion of its
fee during the first five full years of operations, at the annual rate of
0.15% of the average daily net assets of the Fund and at a declining rate for
an additional two years. The Investment Adviser has not agreed to waive any
portion of its fee beyond the seven year period.
F-2
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 stockholders.
F-3
MUNI INTERMEDIATE DURATION FUND, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
, 2003
(IN THOUSANDS)
[To Be Provided by Amendment.]
F-4
MUNI INTERMEDIATE DURATION FUND, INC.
FINANCIAL STATEMENTS
AS OF , 2003 (Unaudited)
[To Be Provided by Amendment.]
F-5
MUNI INTERMEDIATE DURATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
[To Be Provided by Amendment.]
F-6
APPENDIX A
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 edged." 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 risk in Aa-rated
bonds appear somewhat larger than those securities rated Aaa.
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 some time 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.
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."
A-1
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers
to honor senior financial obligations and contracts. Such obligations
generally have an original maturity not exceeding one year, unless explicitly
noted. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short term debt 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
to repay senior short term debt 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 senior short term promissory obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Description of Standard & Poor's ("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.
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.
A-2
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation 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 An obligation 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 An obligation 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.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated `BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on
the obligation.
CC An obligation rated "CC" is currently highly vulnerable to nonpayment.
C A subordinated debt or preferred stock obligation rated "C" is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The "C" rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action
taken, but payments on this obligation are being continued. A `C' also
will be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into several categories, ranging from
"A-1" for the highest-quality obligations to "D" for the lowest. These
categories are as follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3
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 of principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Standard
& Poor's believes 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.
Description of Fitch Ratings ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax exempt nature or taxability of
payments made in respect of any security.
A-4
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.
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.
A-5
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 bonds
DD, are extremely speculative and should be valued on the basis of their
and ultimate recovery value in liquidation or reorganization of the obligor.
D "DDD" represents the highest potential for recovery on these bonds, and
Default "D" represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are not used in the
"DDD," "DD," or "D" categories.
Description of Fitch's Short Term Ratings
Fitch's short term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium term notes, and municipal and
investment notes.
The short term rating places greater emphasis than a long term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
D Default. Issues assigned this rating are in actual or imminent payment
default.
LOC The symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.
A-6
APPENDIX B
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix B constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this prospectus or this Appendix B hereto, as the
case may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of a Beneficial Owner, the number of shares, if any,
of AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on
behalf of a Potential Beneficial Owner, the number of shares, if any, of AMPS
to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell
Order exceeds the aggregate number of shares of AMPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid, the name or names of one or more Buyer's Broker-Dealers (and the name of
the Agent Member, if any, of each such Buyer's Broker-Dealer) acting for one
or more purchasers of such excess number of shares of AMPS and the number of
such shares to be purchased from one or more Beneficial Owners on whose behalf
such Broker-Dealer acted by one or more Potential Beneficial Owners on whose
behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of shares of AMPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid
exceeds the aggregate number of shares of AMPS to be sold by all Beneficial
Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the
name or names of one or more Seller's Broker-Dealers (and the name of the
Agent Member, if any, of each such Seller's Broker-Dealer) acting for one or
more sellers of such excess number of shares of AMPS and the number of such
shares to be sold to one or more Potential Beneficial Owners on whose behalf
such Broker-Dealer acted by one or more Beneficial Owners on whose behalf each
of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to
the AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an
Order on behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or its
Agent Member) through the Securities Depository the amount necessary to
purchase the number of shares of AMPS to be purchased pursuant to such Bid
against receipt of such shares and advise such Potential Beneficial Owner of
the Applicable Rate for the next succeeding Dividend Period;
B-1
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part, or a Bid that was accepted,
in whole or in part, to instruct such Beneficial Owner's Agent Member to
deliver to such Broker-Dealer (or its Agent Member) through the Securities
Depository the number of shares of AMPS to be sold pursuant to such Order
against payment therefor and advise any such Beneficial Owner that will
continue to hold shares of AMPS of the Applicable Rate for the next succeeding
Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding Dividend
Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a)
above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of AMPS received
by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids that were accepted or
Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instruct its Agent Member as provided in (b)(i) or (ii) above, as the case may
be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Beneficial Owner delivering
shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to
purchase such shares against receipt of such shares, and (B) deliver such
shares through the Securities Depository to a Buyer's Broker-Dealer (or its
Agent Member) identified to such Seller's Broker-Dealer pursuant to (a)(v)
above against payment therefor; and
(iii)each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a)(vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b)(i) above against receipt of such
shares, and (B) deliver such shares through the Securities Depository to the
Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described in
(b)(i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(iii)
above, and the Securities Depository shall execute such transactions.
B-2
(f) If a Beneficial Owner selling shares of AMPS in an Auction
fails to deliver such shares (by authorized book-entry), a Broker-Dealer may
deliver to the Potential Beneficial Owner on behalf of which it submitted a
Bid that was accepted a number of whole shares of AMPS that is less than the
number of shares that otherwise was to be purchased by such Potential
Beneficial Owner. In such event, the number of shares of AMPS to be so
delivered shall be determined solely by such Broker-Dealer. Delivery of such
lesser number of shares shall constitute good delivery. Notwithstanding the
foregoing terms of this paragraph (f), any delivery or non-delivery of shares
which shall represent any departure from the results of an Auction, as
determined by the Auction Agent, shall be of no effect unless and until the
Auction Agent shall have been notified of such delivery or non-delivery in
accordance with the provisions of the Auction Agent Agreement and the
Broker-Dealer Agreements.
B-3
APPENDIX C
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Articles
Supplementary relating to the AMPS, and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. The terms not
defined below are defined in the prospectus. Nothing contained in this
Appendix C constitutes a representation by the Fund that in each Auction each
party referred to herein actually will perform the procedures described herein
to be performed by such party.
Paragraph 10(a) Certain Definitions.
As used in this Paragraph 10, the following terms shall have the
following meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned
pursuant to this Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in
Paragraph 10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph
10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph
10(b)(i) below.
(vi) "Hold Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be
the Applicable Percentage of the Reference Rate. The Applicable
Percentage will be determined based on the lower of the credit rating or
ratings assigned on such date to such shares by Moody's and S&P (or if
Moody's or S&P or both shall not make such rating available, the
equivalent of either or both of such ratings by a Substitute Rating
Agency or two Substitute Rating Agencies or, in the event that only one
such rating shall be available, such rating) as follows:
Applicable Applicable
Percentage of Percentage of
Credit Ratings Reference Reference
------------------------ Rate - Rate -
Moody's S&P No Notification Notification
------- --- --------------- -------------
Aa3 or higher AA- or higher 110% 150%
A3 to A1 A- to A+ 125% 160%
Baa3 to Baa1 BBB- to BBB+ 150% 250%
Below Baa3 Below BBB- 200% 275%
The Applicable Percentage as so determined may be further subject to
upward but not downward adjustment in the discretion of the Board of Directors
of the Fund after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance with
the AMPS Basic Maintenance Amount. Subject to the provisions of paragraph 12
of the Articles Supplementary entitled "Termination of Rating Agency
Provisions," the Fund shall take all reasonable action necessary to enable S&P
and Moody's to provide a rating for the AMPS. If either S&P or Moody's shall
not make such a rating available or if neither S&P nor Moody's shall make such
a rating available, subject to the provisions of paragraph 12 of the Articles
Supplementary entitled "Termination of Rating Agency Provisions," Merrill
Lynch, Pierce, Fenner & Smith
C-1
Incorporated or its affiliates and successors, after obtaining the Fund's
approval, shall select a NRSRO or two NRSROs to act as a Substitute Rating
Agency or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(ix) "Sell Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(x) "Submission Deadline" shall mean 1:00 p.m., New York City
time, on any Auction Date or such other time on any Auction Date as may
be specified by the Auction Agent from time to time as the time by which
each Broker-Dealer must submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in Paragraph
10(d)(i) below.
(xii)"Submitted Hold Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiv)"Submitted Sell Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xv)"Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi)"Winning Bid Rate" shall have the meaning specified in
Paragraph 10(d)(i) below.
Paragraph 10(b) Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders And Potential Holders.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners
and as Potential Holders in respect of shares subject to Orders submitted to
them by Potential Beneficial Owners. A Broker-Dealer may also hold shares of
AMPS in its own account as a Beneficial Owner. A Broker-Dealer may thus submit
Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial
Owner and therefore participate in an Auction as an Existing Holder or
Potential Holder on behalf of both itself and its customers. On or prior to
the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for the next
succeeding Dividend Period;
(2) the number of outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Beneficial Owner; and/or
(3) the number of outstanding shares, if any, of AMPS
held by such Beneficial Owner which such Beneficial Owner offers to
sell without regard to the Applicable Rate for the next succeeding
Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial
Owners that shall be maintained in good faith for the purpose of
conducting a competitive Auction, shall contact Potential Beneficial
Owners, including Persons that are not Beneficial Owners, on such list to
determine the number of
C-2
outstanding shares, if any, of AMPS which each such Potential Beneficial
Owner offers to purchase, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an
Order containing the information referred to in clause (A)(1) of this
Paragraph 10(b)(i) is hereinafter referred to as a "Hold Order"; an Order
containing the information referred to in clause (A)(2) or (B) of this
Paragraph 10(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this Paragraph
10(b)(i) is hereinafter referred to as a "Sell Order." Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding shares of AMPS specified
in such Bid if the Applicable Rate determined on such Auction Date
shall be less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares
of AMPS to be determined as set forth in Paragraph 10(e)(i)(D) if
the Applicable Rate determined on such Auction Date shall be equal
to the rate per annum specified therein; or
(3) a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(ii)(C) if such specified
rate per annum shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding shares of AMPS specified
in such Sell Order, or
(2) such number or a lesser number of outstanding shares
of AMPS to be determined as set forth in Paragraph 10(e)(ii)(C) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable
offer to purchase:
(1) the number of outstanding shares of AMPS specified
in such Bid if the Applicable Rate determined on such Auction Date
shall be higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares
of AMPS to be determined as set forth in Paragraph 10(e)(i)(E) if
the Applicable Rate determined on such Auction Date shall be equal
to the rate per annum specified therein.
C-3
Paragraph 10(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through a
mutually acceptable electronic means to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Fund) as
an Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding shares of AMPS that
are the subject of such Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding shares, if any, of AMPS
subject to any Hold Order placed by such Existing Holder;
(2) the number of outstanding shares, if any, of AMPS
subject to any Bid placed by such Existing Holder and the rate per
annum specified in such Bid; and
(3) the number of outstanding shares, if any, of AMPS
subject to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate
per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares of
AMPS held by an Existing Holder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period which is not a Special
Dividend Period of more than 28 days) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period of more than 28 days) to have
been submitted on behalf of such Existing Holder covering the number of
outstanding shares of AMPS held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in
the aggregate more than the number of outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder
shall be considered valid up to and including the number of
outstanding shares of AMPS held by such Existing Holder; provided
that if more than one Hold Order is submitted on behalf of such
Existing Holder and the number of shares of AMPS subject to such
Hold Orders exceeds the number of outstanding shares of AMPS held by
such Existing Holder, the number of shares of AMPS subject to each
of such Hold Orders shall be reduced pro rata so that such Hold
Orders, in the aggregate, cover exactly the number of outstanding
shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall
be considered valid, in the ascending order of their respective
rates per annum if more than one Bid is submitted on behalf of such
Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the
number of shares of AMPS subject to any Hold Order referred to in
Paragraph 10(c)(iv)(A) above (and if more than one Bid submitted on
behalf of such Existing Holder specifies the same rate per annum and
together they cover more than the remaining number of shares that
C-4
can be the subject of valid Bids after application of Paragraph
10(c)(iv)(A) above and of the foregoing portion of this Paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per
annum, the number of shares subject to each of such Bids shall be
reduced pro rata so that such Bids, in the aggregate, cover exactly
such remaining number of shares); and the number of shares, if any,
subject to Bids not valid under this Paragraph 10(c)(iv)(B) shall be
treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and
including the excess of the number of outstanding shares of AMPS
held by such Existing Holder over the number of shares of AMPS
subject to Hold Orders referred to in Paragraph 10(c)(iv)(A) and
Bids referred to in Paragraph 10(c)(iv)(B); provided that if more
than one Sell Order is submitted on behalf of any Existing Holder
and the number of shares of AMPS subject to such Sell Orders is
greater than such excess, the number of shares of AMPS subject to
each of such Sell Orders shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of shares of AMPS
equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number
of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.
Paragraph 10(d) Determination of Sufficient Clearing Bids, Winning Bid Rate
and Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of
AMPS over the number of outstanding shares of AMPS that are the
subject of Submitted Hold Orders (such excess being hereinafter
referred to as the "Available AMPS");
(B) from the Submitted Orders whether the number of
outstanding shares of AMPS that are the subject of Submitted Bids by
Potential Holders specifying one or more rates per annum equal to or
lower than the Maximum Applicable Rate exceeds or is equal to the
sum of:
(1) the number of outstanding shares of AMPS that are the
subject of Submitted Bids by Existing Holders specifying one or
more rates per annum higher than the Maximum Applicable Rate,
and
(2) the number of outstanding shares of AMPS that are
subject to Submitted Sell Orders (if such excess or such
equality exists (other than because the number of outstanding
shares of AMPS in clauses (1) and (2) above are each zero
because all of the outstanding shares of AMPS are the subject
of Submitted Hold Orders), such Submitted Bids by Potential
Holders hereinafter being referred to collectively as
"Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per
annum specified in the Submitted Bids (the "Winning Bid Rate") that
if:
(1) each Submitted Bid from Existing Holders specifying
the Winning Bid Rate and all other submitted Bids from Existing
Holders specifying lower rates per annum were rejected, thus
entitling such Existing Holders to continue to hold the shares
of AMPS that are the subject of such Submitted Bids, and
C-5
(2) each Submitted Bid from Potential Holders
specifying the Winning Bid Rate and all other Submitted Bids
from Potential Holders specifying lower rates per annum were
accepted, thus entitling the Potential Holders to purchase the
shares of AMPS that are the subject of such Submitted Bids,
would result in the number of shares subject to all Submitted
Bids specifying the Winning Bid Rate or a lower rate per annum
being at least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the
Maximum Applicable Rate and, based on such determinations, the Applicable Rate
for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the
Applicable Rate for the next succeeding Dividend Period shall be
equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than
because all of the outstanding shares of AMPS are the subject of
Submitted Hold Orders), that the Applicable Rate for the next
succeeding Dividend Period shall be equal to the Maximum Applicable
Rate; or
(C) if all of the outstanding shares of AMPS are the
subject of Submitted Hold Orders, the Dividend Period next
succeeding the Auction automatically shall be the same length as the
immediately preceding Dividend Period and the Applicable Rate for
the next succeeding Dividend Period shall be equal to 40% of the
Reference Rate (or 60% of such rate if the Fund has provided
notification to the Auction Agent prior to establishing the
Applicable Rate for any dividend that net capital gain or other
taxable income will be included in such dividend on shares of AMPS)
on the date of the Auction.
Paragraph 10(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order of
priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall
be accepted and the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is higher than the Winning Bid
Rate shall be accepted, thus requiring each such Existing Holder to
sell the outstanding shares of AMPS that are the subject of such
Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is lower than the Winning Bid
Rate shall be rejected, thus entitling each such Existing Holder to
continue to hold the outstanding shares of AMPS that are the subject
of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders
specifying any rate per annum that is lower than the Winning Bid
Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders
specifying a rate per annum that is equal to the Winning Bid Rate
shall be rejected, thus entitling each such Existing Holder to
continue to hold the outstanding shares of AMPS that are the subject
of such Submitted Bid, unless the number of outstanding shares of
AMPS subject to all such Submitted Bids shall be greater than the
number of outstanding shares of AMPS ("Remaining Shares") equal to
the excess of the Available AMPS over the number of outstanding
shares of AMPS subject to Submitted Bids described in Paragraph
10(e)(i)(B) and Paragraph 10(e)(i)(C), in which event the Submitted
Bids of each such Existing Holder shall be accepted, and each such
Existing Holder shall be required to sell outstanding shares of
AMPS, but only in an amount
C-6
equal to the difference between (1) the number of outstanding shares
of AMPS then held by such Existing Holder subject to such Submitted
Bid and (2) the number of shares of AMPS obtained by multiplying (x)
the number of Remaining Shares by (y) a fraction the numerator of
which shall be the number of outstanding shares of AMPS held by such
Existing Holder subject to such Submitted Bid and the denominator of
which shall be the sum of the numbers of outstanding shares of AMPS
subject to such Submitted Bids made by all such Existing Holders
that specified a rate per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders
specifying a rate per annum that is equal to the Winning Bid Rate
shall be accepted but only in an amount equal to the number of
outstanding shares of AMPS obtained by multiplying (x) the
difference between the Available AMPS and the number of outstanding
shares of AMPS subject to Submitted Bids described in Paragraph
10(e)(i)(B), Paragraph 10(e)(i)(C) and Paragraph 10(e)(i)(D) by (y)
a fraction the numerator of which shall be the number of outstanding
shares of AMPS subject to such Submitted Bid and the denominator of
which shall be the sum of the number of outstanding shares of AMPS
subject to such Submitted Bids made by all such Potential Holders
that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the outstanding shares of AMPS are subject to Submitted Hold
Orders), subject to the provisions of Paragraph 10(e)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority
and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying
any rate per annum that is equal to or lower than the Maximum
Applicable Rate shall be rejected, thus entitling such Existing
Holder to continue to hold the outstanding shares of AMPS that are
the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder
specifying any rate per annum that is equal to or lower than the
Maximum Applicable Rate shall be accepted, thus requiring such
Potential Holder to purchase the outstanding shares of AMPS that are
the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder
specifying any rate per annum that is higher than the Maximum
Applicable Rate shall be accepted and the Submitted Sell Orders of
each Existing Holder shall be accepted, in both cases only in an
amount equal to the difference between (1) the number of outstanding
shares of AMPS then held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and (2) the number of shares
of AMPS obtained by multiplying (x) the difference between the
Available AMPS and the aggregate number of outstanding shares of
AMPS subject to Submitted Bids described in Paragraph 10(e)(ii)(A)
and Paragraph 10(e)(ii)(B) by (y) a fraction the numerator of which
shall be the number of outstanding shares of AMPS held by such
Existing Holder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which shall be the number of
outstanding shares of AMPS subject to all such Submitted Bids and
Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraph
10(e)(i) or Paragraph 10(e)(ii), any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of a share of AMPS on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine, round up
or down the number of shares of AMPS to be purchased or sold by any Existing
Holder or Potential Holder on such Auction Date so that each outstanding share
of AMPS purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph
10(e)(i), any Potential Holder would be entitled or required to purchase less
than a whole share of AMPS on any Auction Date, the Auction Agent, in such
manner as in its sole discretion it shall determine, shall allocate shares of
AMPS for purchase among Potential Holders so that only whole shares of AMPS
are purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS on such Auction Date.
C-7
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of the outstanding shares of AMPS to be purchased and the aggregate
number of outstanding shares of AMPS to be sold by such Potential Holders and
Existing Holders and, to the extent that such aggregate number of outstanding
shares to be purchased and such aggregate number of outstanding shares to be
sold differ, the Auction Agent shall determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or
more sellers such Broker-Dealer shall receive, as the case may be, outstanding
shares of AMPS.
Paragraph 10(f) Miscellaneous.
The Fund may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change
or modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid
or Sell Order in accordance with the procedures described in this Paragraph 10
or to or through a Broker-Dealer, provided that in the case of all transfers
other than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the shares of AMPS held by it maintained in book entry form by
the Securities Depository in the account of its Agent Member, which in turn
will maintain records of such Beneficial Owner's beneficial ownership. Neither
the Fund nor any affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall submit an Order in any Auction. Any Beneficial Owner that
is an affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall not sell, transfer or otherwise dispose of shares of AMPS
to any person other than the Fund. All of the outstanding shares of AMPS of a
series shall be represented by a single certificate registered in the name of
the nominee of the Securities Depository unless otherwise required by law or
unless there is no Securities Depository. If there is no Securities
Depository, at the Fund's option and upon its receipt of such documents as it
deems appropriate, any shares of AMPS may be registered in the Stock Register
in the name of the Beneficial Owner thereof and such Beneficial Owner
thereupon will be entitled to receive certificates therefor and required to
deliver certificates thereof or upon transfer or exchange thereof.
C-8
PART C. OTHER INFORMATION
Item 24. Financial Statements And Exhibits.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets and Liabilities as of August , 2003 (unaudited)
Schedule of Investments as of , 2003 (unaudited)
Financial Statements as of , 2003 (unaudited)
Exhibits Description
-------- -----------
(a)(1) Articles of Incorporation of the Registrant.(a)
(a)(2) Form of Articles Supplementary creating multiple series of
Auction Market Preferred Stock ("AMPS").
(b) By-laws of the Registrant.(c)
(c) Not applicable.
(d)(1) Portions of the Articles of Incorporation, By-laws and
Articles Supplementary of the Registrant defining the rights
of holders of shares of the Registrant.(b)
(d)(2) Form of specimen certificate for the AMPS of the
Registrant.
(e) Form of Automatic Dividend Reinvestment Plan.(c)
(f) Not applicable.
(g)(1) Form of Investment Advisory Agreement between the
Registrant and Fund Asset Management, L.P. ("FAM" or the
"Investment Adviser").(c)
(g)(2) Form of Fee Waiver Agreement between the Registrant and
FAM. (c)
(h)(1) Form of Purchase Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") relating to the AMPS.
(h)(2) Form of Merrill Lynch Standard Dealer Agreement.(c)
(i) Not applicable.
(j) Form of Custodian Agreement between the Registrant and
State Street Bank and Trust Company ("State Street").(d)
(k)(l) Form of Registrar, Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement between
the Registrant and EquiServe, L.P.(e)
(k)(2) Form of Administrative Services Agreement between the
Registrant and State Street.(f)
(k)(3) Form of Additional Compensation Agreement between FAM and
Merrill Lynch.(c)
(k)(4) Form of Auction Agent Agreement between the Registrant and
The Bank of New York.
(k)(5) Form of Broker-Dealer Agreement.
(k)(6) Form of Letter of Representations.
(l) Opinion and Consent of Sidley Austin Brown & Wood LLP.*
(m) Not applicable.
(n) Consent of , independent auditors for the
Registrant.*
(o) Not applicable.
(p) Certificate of FAM.*
(q) Not applicable.
(r) Code of Ethics.(g)
-------------
(a) Filed with the Securities and Exchange Commission
("Commission") on May 16, 2003 as an exhibit to the
Registrant's Registration Statement relating to the shares
of Common Stock (the "Common Stock Registration Statement")
on Form N-2 (File No. 333-105343).
(b) Reference is made to Article IV (sections 2, 3, 4, 5, 6, 7
and 8), Article V (sections 3, 6 and 7), Article VI,
Article VIII, Article IX, Article X, and Article XII of the
Registrant's Articles of
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Incorporation, previously filed as Exhibit (a) to the
Common Stock Registration Statement; to Article II,
Article III (sections 3.01, 3.03, 3.05 and 3.17), Article
VI (section 6.2), Article VII, Article XII, Article XIII
and Article XIV of the Registrant's By-laws, filed as
Exhibit (b) to Pre-Effective Amendment No. 1 to the Common
Stock Registration Statement; and to the Form of Articles
Supplementary filed as Exhibit (a)(2) to this Registration
Statement.
(c) Filed on June 25, 2003 with the Commission as an exhibit to
Pre-Effective Amendment No. 1 to the Common Stock
Registration Statement.
(d) Incorporated by reference to Exhibit 7 to Post-Effective
No. 10 to the Registration Statement on Form N-1A of
Merrill Lynch Maryland Municipal Bond Fund of Merrill Lynch
Multi-State Municipal Series Trust (File No. 33-49873),
filed on October 30, 2001.
(e) Incorporated by reference to Exhibit 13 to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-14
of Corporate High Yield Fund, Inc. (File No. 333-10193),
filed on December 31, 2002.
(f) Incorporated by reference to exhibit 8(d) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A
of Merrill Lynch Focus Twenty Fund, Inc. (File No. 333-89775)
filed on March 20, 2001.
(g) Incorporated by reference to Exhibit 15 to Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A
of Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust (File No. 33-50417), filed on November 22,
2000.
* To be provided by Amendment.
Item 25. Marketing Arrangements.
See Exhibits (h)(1) and (2).
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:
Registration fees $*
Printing (other than stock certificates) *
Legal fees and expenses *
Rating Agency Fees *
Miscellaneous *
__________________
Total $*
==================
__________________
* To be provided by amendment.
Item 27. Persons Controlled by or Under Common Control with Registrant.
The Registrant is not controlled by, or under common control with,
any person.
Item 28. Number of Holders of Securities.
Number of
Record Holders
At
Title of Class , 2003
---------------------------------------------------------------------- ---------------
Common Stock, $.10 par value
Preferred Stock, $.10 par value 0
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Item 29. Indemnification.
Reference is made to Section 2-418 of the General Corporation Law of the
State of Maryland, Article V of the Registrant's Articles of Incorporation,
Article VI of the Registrant's By-laws and Section 6 of the Purchase
Agreement, which provide for indemnification.
Article VI of the By-laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the Maryland General Corporation Law, except that such indemnity shall
not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person 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 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 Registrant 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 non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-laws shall be entitled to advances
from the Registrant 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 Maryland General Corporation Law;
provided, however, that the person seeking indemnification shall provide to
the Registrant a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Registrant 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 Registrant for his or her undertaking; (ii) the
Registrant 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 Registrant 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 Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the Maryland General
Corporation Law from liability arising from his or her activities as officer
or director of the Registrant. The Registrant, however, may not purchase
insurance on behalf of any officer or director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director 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 or her office.
In Section 7 of the Purchase Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify Merrill Lynch and each
person, if any, who controls Merrill Lynch within the meaning of the
Securities Act of 1933 (the "1933 Act") against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be provided to directors, officers and controlling persons of the Registrant
and Merrill Lynch, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant 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
Registrant 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 1933 Act and will be governed by the final
adjudication of such issue.
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Item 30. Business And Other Connections Of The Investment Adviser.
FAM (the "Investment Adviser"), acts as the investment adviser for a
number of affiliated open-end and closed-end registered investment companies.
Merrill Lynch Investment Managers, L.P. ("MLIM"), acts as the investment
adviser for a number of affiliated open-end and closed-end registered
investment companies, and also acts as sub-adviser to certain other
portfolios.
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 is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
The address of the Investment Adviser, MLIM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10080. The
address of the Fund's transfer agent, The Bank of New York (the "Transfer
Agent"), is 100 Church Street, New York, New York 10286.
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, her or its own account or in the
capacity of director, officer, employee, partner or Director. Mr. Burke is
Vice President and Treasurer of all or substantially all of the investment
companies advised by FAM or its affiliates, and Mr. Doll is an officer of one
or more of such companies.
Position(s) with Other Substantial Business,
Name Investment Adviser Profession, Vocation Or Employment
------------------------ ---------------------------- ------------------------------------------------------
ML & Co. Limited Partner Financial Services Holding Company; Limited Partner
of MLIM
Princeton Services General Partner General Partner of MLIM
Robert C. Doll, Jr. President President of MLIM; President of Princeton Services;
Chief Investment Officer of OppenheimerFunds, Inc.
in 1999 and Executive Vice President thereof from
1991 to 1999
Donald C. Burke First Vice President and First Vice President, Treasurer and Director of
Treasurer; Director of Taxation of MLIM; Senior Vice President and
Taxation of MLIM Treasurer of Princeton Services; Vice President of
FAMD
Lawrence D. Haber First Vice President First Vice President of MLIM; Senior Vice President
and Treasurer of Princeton Services
Brian A. Murdock Senior Vice President and Senior Vice President of MLIM and Chief Operating
Chief Operating Officer Officer of MLIM Americas; Chief Investment Officer
of EMEA Pacific Region and Global CIO for Fixed
Income and Alternative Investments; Head of MLIM's
Pacific Region and President of MLIM Japan,
Australia and Asia
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Position(s) with Other Substantial Business,
Name Investment Adviser Profession, Vocation Or Employment
------------------------ ---------------------------- ------------------------------------------------------
Andrew J. Donohue General Counsel General Counsel of MLIM and Princeton Services
Item 31. Location of Account and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act, 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), its custodian, State Street Bank and Trust
Company (225 Franklin Street, Boston, Massachusetts 02110), and its Transfer
Agent (100 Church Street, New York, New York 10286).
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(a) The 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) The 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
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, State of New Jersey, on the 9th day of July, 2003.
MUNI INTERMEDIATE DURATION FUND, INC.
(Registrant)
By: /s/ TERRY K. GLENN
------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke and Brian D. Stewart, or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendments to this Registration Statement
(including any Post-Effective Amendments) and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the dates indicated.
Signatures Title Date
--------------------------- ----------------------------------------------------- -----------
/s/ TERRY K. GLENN President (Principal Executive Officer) and
------------------- Director
(Terry K. Glenn) July 9, 2003
/s/ DONALD C. BURKE Vice President and Treasurer (Principal
------------------- Financial and Accounting Officer)
(Donald C. Burke) July 9, 2003
/s/ DONALD W. BURTON Director
-------------------
(Donald W. Burton) July 9, 2003
/s/ M. COLYER CRUM Director
-------------------
(M. Colyer Crum) July 9, 2003
/s/ LAURIE SIMON HODRICK Director
-------------------
(Laurie Simon Hodrick) July 9, 2003
/s/ FRED G. WEISS Director
-------------------
(Fred G. Weiss) July 9, 2003
C-6
EXHIBIT INDEX
(a)(2) Form of Articles Supplementary creating multiple
series of AMPS.
(d)(2) Form of specimen certificate for the AMPS of the Registrant.
(h)(1) Form of Purchase Agreement between the Registrant
and Merrill Lynch, Pierce, Fenner & Smith Incorporated
relating to the AMPS.
(k)(4) Form of Auction Agent Agreement between the Registrant and
The Bank of New York.
(k)(5) Form of Broker-Dealer Agreement.
(k)(6) Form of Letter of Representations.
C-7