<PAGE>
As filed with the Securities and Exchange Commission on October 1, 1999
Securities Act File No.
Investment Company Act File No. 811-08217
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------
PRE-EFFECTIVE AMENDMENT NO. [_] POST-EFFECTIVE AMENDMENT NO. [_]
(check appropriate box or boxes)
--------------
MuniHoldings New York Insured Fund, Inc.
(Exact Name of Registrant as Specified in its Charter)
--------------
(609) 282-2800
(Area Code and Telephone Number)
--------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)
--------------
Terry K. Glenn
MuniHoldings New York Insured Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and address of agent for service)
--------------
Copies to:
Frank P. Bruno, Esq. Michael J. Hennewinkel, Esq.
Brown & Wood LLP Merrill Lynch Asset Management, L.P.
One World Trade Center 800 Scudders Mill Road
New York, NY 10048-0557 Plainsboro, NJ 08536
--------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of Securities Being Offering Price Offering Registration
Being Registered Registered(1) Per Unit(1) Price(1) Fee(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)................ 18,340,334 $13.87 $254,380,433 $70,718
- --------------------------------------------------------------------------------
Auction Market Preferred
Stock, Series C....... 3,040 $25,000(2) $76,000,000 $21,128
- --------------------------------------------------------------------------------
Auction Market Preferred
Stock, Series D....... 2,120 $25,000(2) $53,000,000 $14,734
- --------------------------------------------------------------------------------
Auction Market Preferred
Stock, Series E....... 2,000 $25,000(2) $50,000,000 $13,900
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Represents the liquidation preference of a share of preferred stock after
the reorganization.
(3) Paid by wire transfer to the designated lockbox of the Securities and
Exchange Commission in Pittsburgh, Pennsylvania.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
MUNIHOLDINGS NEW YORK FUND, INC.
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
MUNIHOLDINGS NEW YORK INSURED FUND III, INC
P.O. Box 9011
Princeton, New Jersey 08543-9011
----------------
NOTICE OF ANNUAL MEETINGS OF STOCKHOLDERS
----------------
TO BE HELD ON DECEMBER 15, 1999
TO THE STOCKHOLDERS OF
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
MUNIHOLDINGS NEW YORK FUND, INC.
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
NOTICE IS HEREBY GIVEN that the annual meetings of stockholders (the
"Meetings") of MuniHoldings New York Insured Fund, Inc. ("New York Insured"),
MuniHoldings New York Fund, Inc. ("New York Fund"), MuniHoldings New York
Insured Fund II, Inc. ("New York Insured II") and MuniHoldings New York
Insured Fund III, Inc. ("New York Insured III") will be held at the offices of
Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New
Jersey on Wednesday, December 15, 1999 at 12:45 p.m. Eastern time (for New
York Fund), 1:00 p.m. Eastern time (for New York Insured), 1:15 p.m. Eastern
time (for New York Insured II) and 1:30 p.m. Eastern time (for New York
Insured III) for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan of Reorganization") contemplating (i) the acquisition
of substantially all of the assets and the assumption of substantially all
of the liabilities of New York Fund by New York Insured, in exchange solely
for an equal aggregate value of newly-issued shares of Common Stock of New
York Insured ("New York Insured Common Stock") and shares of a newly-
created series of Auction Market Preferred Stock ("AMPS") of New York
Insured to be designated Series C ("New York Insured Series C AMPS") and
the distribution by New York Fund of such New York Insured Common Stock to
the holders of Common Stock of New York Fund and such New York Insured
Series C AMPS to the holders of Series A and Series B AMPS of New York
Fund; (ii) the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of New York Insured II
by New York Insured, in exchange solely for an equal aggregate value of
newly-issued shares of New York Insured Common Stock and shares of a newly-
created series of AMPS of New York Insured to be designated Series D ("New
York Insured Series D AMPS") and the distribution by New York Insured II of
such New York Insured Common Stock to the holders of Common Stock of New
York Insured II and such New York Insured Series D AMPS to the holders of
Series A and Series B AMPS of New York Insured II; and (iii) the
acquisition of substantially all of the assets and the assumption of
substantially all of the liabilities of New York Insured III by New York
Insured, in exchange solely for an equal aggregate value of newly-issued
shares of New York Insured Common Stock and shares of a newly-created
series of AMPS of New York Insured to be designated Series E ("New York
Insured Series E AMPS") and the distribution by New York Insured III of
such New York Insured Common Stock to the holders of Common Stock of New
York Insured III and such New York Insured Series E AMPS to the holders of
Series A AMPS of New York Insured III. A vote in favor of this proposal
also will constitute a vote in favor of the liquidation and dissolution of
each of New York Fund, New York Insured II and New York Insured III and the
termination of their respective registration under the Investment Company
Act of 1940;
<PAGE>
(2) To elect a Board of Directors of each of New York Insured, New York
Fund, New York Insured II and New York Insured III to serve for the ensuing
year;
(3) (a) For the stockholders of New York Insured and New York Fund only:
To consider and act upon a proposal to ratify the selection of Deloitte &
Touche LLP to serve as independent auditors of each of New York Insured and
New York Fund for the respective Fund's current fiscal year; and
(b) For the stockholders of New York Insured II and New York Insured III
only: To consider and act upon a proposal to ratify the selection of Ernst
& Young LLP to serve as independent auditors of each of New York Insured II
and New York Insured III for the respective Fund's current fiscal year; and
(4) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
The Boards of Directors of New York Insured, New York Fund, New York Insured
II and New York Insured III have fixed the close of business on October 20,
1999 as the record date for the determination of stockholders entitled to
notice of, and to vote at, the Meetings or any adjournment thereof.
A complete list of the stockholders of New York Insured, New York Fund, New
York Insured II and New York Insured III entitled to vote at the Meetings will
be available and open to the examination of any stockholder of New York
Insured, New York Fund, New York Insured II or New York Insured III,
respectively, for any purpose germane to the Meetings during ordinary business
hours from and after December 1, 1999, at the offices of New York Insured, 800
Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meetings. Stockholders who do not
expect to attend the Meetings in person are requested to complete, date and
sign the enclosed form of proxy applicable to their fund and return it
promptly in the envelope provided for that purpose. The enclosed proxy is
being solicited on behalf of the Board of Directors of New York Insured, New
York Fund, New York Insured II or New York Insured III, as applicable.
By Order of the Boards of Directors
William E. Zitelli, Jr.
Secretary of MuniHoldings
New York Insured Fund, Inc.
Alice A. Pellegrino
Secretary of MuniHoldings New York
Fund, Inc.,
MuniHoldings New York Insured Fund
II, Inc.
and MuniHoldings New York Insured
Fund III, Inc.
Plainsboro, New Jersey
Dated: November , 1999
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not use this prospectus to sell 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 is not soliciting an +
+offer to buy these securities in any State where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED OCTOBER 1, 1999
PROXY STATEMENT AND PROSPECTUS
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
MUNIHOLDINGS NEW YORK FUND, INC.
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011
(609) 282-2800
-----------
ANNUAL MEETINGS OF STOCKHOLDERS
-----------
DECEMBER 15, 1999
This Joint Proxy Statement and Prospectus is furnished to you as a
stockholder of one of the funds listed above. An Annual Meeting of the
stockholders of each of these funds will be held on December 15, 1999 to
consider several items that are listed below and discussed in greater detail
elsewhere in this Proxy Statement and Prospectus. The Board of Directors of
each of the funds is requesting its stockholders to submit a proxy to be used
at the Annual Meeting to vote the shares held by the stockholder submitting the
proxy.
The proposals to be considered at the Annual Meetings are:
1. To approve or disapprove an Agreement and Plan of Reorganization among
the funds;
2. To elect a Board of Directors for each of the funds;
3. To ratify the selection of the independent auditors of each of the funds;
and
4. To transact such other business as may properly come before the Annual
Meetings or any adjournment thereof.
The Agreement and Plan of Reorganization that you are being asked to consider
involves a transaction that will be referred to in this Proxy Statement and
Prospectus as the Reorganization. The Reorganization involves the combination
of four funds into one. The four funds are:
MuniHoldings New York Insured Fund, Inc. ("New York Insured"), which will
be the surviving fund
MuniHoldings New York Fund, Inc. ("New York Fund")
Muni Holdings New York Insured Fund II, Inc. ("New York Insured II")
MuniHoldings New York Insured Fund III, Inc. ("New York Insured III")
New York Fund, New York Insured II and New York Insured III are sometimes
referred to herein collectively as the "Acquired Funds" and, together with New
York Insured, as the "Funds."
(continued on next page)
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT
AND PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Proxy Statement and Prospectus serves as a prospectus of New York
Insured in connection with the issuance of New York Insured Common Stock and
three newly-created series of New York Insured AMPS in the Reorganization.
This Proxy Statement and Prospectus sets forth information about New York
Insured, New York Fund, New York Insured II and New York Insured III that
stockholders of the Funds should know before considering the Reorganization and
should be retained for future reference. Each of the Funds has authorized the
solicitation of proxies in connection with the Reorganization solely on the
basis of this Proxy Statement and Prospectus and the accompanying documents.
The address of the principal executive offices of New York Insured, New York
Fund, New York Insured II and New York Insured III is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.
The date of this Proxy Statement and Prospectus is November , 1999.
<PAGE>
In the Reorganization, New York Insured will acquire substantially all of
the assets and assume substantially all of the liabilities of each of the
Acquired Funds solely in exchange for shares of its Common Stock, par value
$.10 per share, and shares of newly-created series of its Auction Market
Preferred Stock ("AMPS"), with a par value of $.10 per share and a liquidation
preference of $25,000 per share. The Acquired Funds will distribute the Common
Stock and AMPS received in the Reorganization to their respective stockholders
and will then liquidate and dissolve and terminate their registration under
the Investment Company Act. New York Insured will continue to operate as a
registered closed-end investment company with the investment objective and
policies described in this Proxy Statement and Prospectus.
In the Reorganization, New York Insured will issue shares of its Common
Stock and AMPS to each of the Acquired Funds based on the value of the assets
transferred to New York Insured by that Acquired Fund. These shares will then
be distributed by each Acquired Fund to its stockholders based on the value of
the shares held by each stockholder just prior to the Reorganization. A holder
of Common Stock of an Acquired Fund will receive Common Stock of New York
Insured and a holder of AMPS of an Acquired Fund will receive shares of one of
the newly-created series of AMPS of New York Insured.
The Common Stock of each of the Funds is listed on the New York Stock
Exchange (the "NYSE") under the symbols "MHN" (New York Insured), "MUN" (New
York Fund), "MNU" (New York Insured II) and "MNK" (New York Insured III).
Subsequent to the Reorganization, shares of New York Insured Common Stock will
continue to be listed on the NYSE under the symbol "MHN." Reports, proxy
materials and other information concerning any of the Funds may be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION.............................................................. 5
ITEM 1. THE REORGANIZATION................................................ 6
SUMMARY ................................................................ 6
RISK FACTORS AND SPECIAL CONSIDERATIONS ................................ 15
New York Municipal Bonds.............................................. 15
Interest Rate and Credit Risk......................................... 16
Non-diversification................................................... 16
Rating Categories..................................................... 16
Private Activity Bonds................................................ 16
Portfolio Insurance................................................... 16
Leverage.............................................................. 16
Portfolio Management.................................................. 17
Inverse Floating Obligations.......................................... 18
Options and Futures Transactions...................................... 18
Antitakeover Provisions............................................... 18
Ratings Considerations................................................ 18
COMPARISON OF THE FUNDS................................................. 19
Financial Highlights.................................................. 19
Investment Objective and Policies..................................... 28
Portfolio Insurance................................................... 30
Description of New York Municipal Bonds and Municipal Bonds........... 32
Special Considerations Relating to New York Municipal Bonds........... 33
Other Investment Policies............................................. 33
Information Regarding Options and Futures Transactions................ 35
Investment Restrictions............................................... 38
Rating Agency Guidelines.............................................. 39
Portfolio Composition................................................. 40
Portfolio Transactions................................................ 42
Portfolio Turnover.................................................... 43
Net Asset Value....................................................... 43
Capital Stock......................................................... 44
Common Stock.......................................................... 44
Management of the Funds............................................... 46
Code of Ethics........................................................ 48
Voting Rights......................................................... 48
Stockholder Inquiries................................................. 49
Dividends and Distributions........................................... 49
Automatic Dividend Reinvestment Plan.................................. 50
Mutual Fund Investment Option......................................... 52
Liquidation Rights of Holders of AMPS................................. 52
Tax Rules Applicable to the Funds and their Stockholders.............. 53
AGREEMENT AND PLAN OF REORGANIZATION.................................... 57
General............................................................... 57
Procedure............................................................. 58
Terms of the Agreement and Plan of Reorganization..................... 59
Potential Benefits to Common Stockholders of The Funds as a Result of
The Reorganization................................................... 61
Surrender and Exchange of Stock Certificates.......................... 62
Tax Consequences of the Reorganization................................ 63
Capitalization........................................................ 65
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ITEM 2. ELECTION OF DIRECTORS............................................. 66
To Be Elected by Stockholders of New York Insured....................... 66
To Be Elected by Stockholders of Each of the Acquired Funds............. 68
Committee and Board Meetings............................................ 69
Compliance with Section 16(a) of the Securities Exchange Act of 1934.... 69
Interested Persons...................................................... 69
Compensation of Directors............................................... 69
Officers of the Funds................................................... 69
ITEM 3. SELECTION OF INDEPENDENT AUDITORS................................. 70
INFORMATION CONCERNING THE ANNUAL MEETINGS................................ 70
Date, Time and Place of Meetings........................................ 70
Solicitation, Revocation and Use of Proxies............................. 70
Record Date and Outstanding Shares...................................... 71
Security Ownership of Certain Beneficial Owners and Management.......... 71
Voting Rights and Required Vote......................................... 71
ADDITIONAL INFORMATION.................................................... 73
Year 2000 Issues........................................................ 74
CUSTODIAN................................................................. 74
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR................... 74
LEGAL PROCEEDINGS......................................................... 75
LEGAL OPINIONS............................................................ 75
EXPERTS................................................................... 75
STOCKHOLDER PROPOSALS..................................................... 75
INDEX TO FINANCIAL STATEMENTS............................................. F-1
EXHIBIT IINFORMATION PERTAINING TO EACH FUND.............................. I-1
EXHIBIT IIAGREEMENT AND PLAN OF REORGANIZATION............................ II-1
EXHIBIT IIIECONOMIC AND OTHER CONDITIONS IN NEW YORK...................... III-1
EXHIBIT IVRATINGS OF MUNICIPAL BONDS ..................................... IV-1
EXHIBIT VPORTFOLIO INSURANCE.............................................. V-1
</TABLE>
4
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of New York
Insured, New York Fund, New York Insured II and New York Insured III for use
at the Meetings to be held at the offices of Merrill Lynch Asset Management,
L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey on December 15,
1999, at the time specified for each Fund in Exhibit I to this Proxy Statement
and Prospectus. The mailing address for each of the Funds is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy
Statement and Prospectus is November , 1999.
Any person giving a proxy may revoke it at any time prior to its exercise by
executing a superseding proxy, by giving written notice of the revocation to
the Secretary of New York Insured, New York Fund, New York Insured II or New
York Insured III, as applicable, at the address indicated above or by voting
in person at the appropriate Meeting. All properly executed proxies received
prior to the Meetings will be voted at the Meetings in accordance with the
instructions marked thereon or otherwise as provided therein. Unless
instructions to the contrary are marked, proxies will be voted "FOR" each of
the following Items: (1) to approve the Agreement and Plan of Reorganization
among New York Insured, New York Fund, New York Insured II and New York
Insured III (the "Agreement and Plan of Reorganization"); (2) to elect a Board
of Directors of each Fund to serve for the ensuing year; and (3) to ratify the
selection of independent auditors for each of the Funds for its current fiscal
year.
With respect to Item 1, assuming a quorum is present at the Meetings,
approval of the Agreement and Plan of Reorganization will require the
affirmative vote of stockholders representing (i) a majority of the
outstanding shares of New York Insured Common Stock and New York Insured AMPS,
voting together as a single class, and a majority of the outstanding shares of
New York Insured AMPS, Series A and B, voting together as a single class, (ii)
a majority of the outstanding shares of New York Fund Common Stock and New
York Fund AMPS, voting together as a single class, and a majority of the
outstanding shares of New York Fund AMPS, Series A and B, voting together as a
single class, (iii) a majority of the outstanding shares of New York Insured
II Common Stock and New York Insured II AMPS, voting together as a single
class, and a majority of the outstanding shares of New York Insured II AMPS,
Series A and B, voting together as a single class and (iv) a majority of the
outstanding shares of New York Insured III Common Stock and New York Insured
III AMPS, voting together as a single class, and a majority of the outstanding
shares of New York Insured III AMPS, Series A, voting separately as a class.
Because of the requirement that the Agreement and Plan of Reorganization be
approved by stockholders of all four Funds, the Reorganization will not take
place if stockholders of any one Fund do not approve the Agreement and Plan of
Reorganization.
With respect to Item 2, holders of shares of AMPS of each of the Funds are
entitled to elect two Directors of that Fund, and holders of shares of AMPS
and Common Stock, voting together as a single class, are entitled to elect the
remaining Directors of that Fund. Assuming a quorum is present at the
Meetings, election of the two Directors of each Fund to be elected by the
holders of AMPS, voting separately as a class, will require the affirmative
vote of a plurality of the votes cast by the holders of shares of a Fund's
AMPS, represented at the Meeting and entitled to vote; and election of the
remaining Directors of each Fund will require the affirmative vote of a
plurality of the votes cast by the holders of shares of that Fund's Common
Stock and AMPS, represented at the Meeting and entitled to vote, voting
together as a single class.
With respect to Item 3, assuming a quorum is present at the Meetings,
approval of the ratification of the selection of independent auditors of a
Fund will require the affirmative vote of a majority of the votes cast by the
holders of shares of Common Stock and AMPS of that Fund represented at the
Meeting in person or by proxy, and entitled to vote, voting together as a
single class.
The Board of Directors of each of the Funds has fixed the close of business
on October 20, 1999 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the
Meetings or any adjournment thereof. Stockholders on the Record Date will be
entitled to one vote for each share
5
<PAGE>
held, with no shares having cumulative voting rights. At the Record Date, each
Fund had outstanding the number of shares of Common Stock and AMPS indicated
in Exhibit I. To the knowledge of the management of each of the Funds, no
person owned beneficially more than 5% of the respective outstanding shares of
either class of capital stock of any Fund at the Record Date.
The Boards of Directors of the Funds know of no business other than that
discussed in Items 1, 2, and 3 above that will be presented for consideration
at the Meetings. If any other matter is properly presented, it is the
intention of the persons named in the enclosed proxy to vote in accordance
with their best judgment.
ITEM 1. THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained in this Proxy Statement
and Prospectus and in the Agreement and Plan of Reorganization attached hereto
as Exhibit II.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of New York Fund by New
York Insured and the subsequent distribution of New York Insured Common Stock
and New York Insured Series C AMPS to the holders of New York Fund Common
Stock and New York Fund AMPS, Series A and Series B, respectively; (ii) the
acquisition of substantially all of the assets and the assumption of
substantially all of the liabilities of New York Insured II by New York
Insured and the subsequent distribution of New York Insured Common Stock and
New York Insured Series D AMPS to the holders of New York Insured II Common
Stock and New York Insured II AMPS, Series A and Series B, respectively; (iii)
the acquisition of substantially all of the assets and the assumption of
substantially all the liabilities of New York Insured III by New York Insured
and the subsequent distribution of New York Insured Common Stock and New York
Insured Series E AMPS to the holders of New York Insured III Common Stock and
New York Insured III AMPS, Series A, respectively; and (IV) the subsequent
deregistration and dissolution of each of New York Fund, New York Insured II
and New York Insured III.
At meetings of the Boards of Directors of each of the Funds, the Board of
Directors of each of the Funds unanimously approved the Reorganization.
Subject to obtaining the necessary approvals from the stockholders of each of
the Funds, the Board of Directors of each Acquired Fund also deemed advisable
the deregistration of the Fund under the Investment Company Act of 1940, as
amended (the "Investment Company Act") and its dissolution under the laws of
the State of Maryland. The Reorganization requires approval of the
stockholders of each of the four Funds. The Reorganization will not take place
if the stockholders of any one Fund do not approve the Agreement and the Plan
of Reorganization.
Each of the Funds seeks to provide stockholders with current income exempt
from Federal income tax and New York State and New York City personal income
taxes. Each of the Funds seeks to achieve its investment objective by
investing primarily in a portfolio of long-term, investment grade municipal
obligations, the interest on which, in the opinion of bond counsel to the
issuer, is exempt from Federal income tax and New York State and New York City
personal income taxes. With the exception of New York Fund, at least 80% of
each Fund's total assets will be invested in municipal obligations with
remaining maturities of one year or more that are covered by insurance
guaranteeing the timely payment of principal at maturity and interest. Unlike
the other Funds, New York Fund is not required to invest in municipal
obligations that are covered by insurance and may invest up to 10% of its
assets in non-investment grade obligations.
Each of the Funds is a non-diversified, leveraged, closed-end management
investment company registered under the Investment Company Act. If the
stockholders of the Funds approve the Reorganization, (i) New York Insured
Common Stock and New York Insured Series C AMPS will be issued to New York
Fund in exchange
6
<PAGE>
for the assets of New York Fund; (ii) New York Insured Common Stock and New
York Insured Series D AMPS will be issued to New York Insured II in exchange
for the assets of New York Insured II; (iii) New York Insured Common Stock and
New York Insured Series E AMPS will be issued to New York Insured III in
exchange for the assets of New York Insured III; and (iv) New York Fund, New
York Insured II and New York Insured III will distribute these shares to their
respective stockholders as provided in the Agreement and Plan of
Reorganization. After the Reorganization, each of New York Fund, New York
Insured II and New York Insured III will terminate its registration under the
Investment Company Act and its incorporation under Maryland law.
Based upon their evaluation of all relevant information, the Directors of
each of the Funds have determined that the Reorganization will potentially
benefit the holders of Common Stock of that Fund. Specifically, after the
Reorganization, stockholders of each of the Acquired Funds will remain
invested in a closed-end fund with an investment objective and policies
substantially similar to the Acquired Fund's investment objective and policies
and that uses substantially the same management personnel. In addition, it is
anticipated that common stockholders of each of the Funds will be subject to a
reduced overall operating expense ratio based on the anticipated pro forma
combined total operating expenses and the total combined assets of the
surviving fund after the Reorganization. It is not anticipated that the
Reorganization will directly benefit the holders of shares of AMPS of any of
the Funds; however, the Reorganization will not adversely affect the holders
of shares of any series of AMPS of any of the Funds and the expenses of the
Reorganization will not be borne by the holders of shares of AMPS of any of
the Funds.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approval, provided
that the Funds have obtained prior to that time a favorable private letter
ruling from the Internal Revenue Service (the "IRS") concerning the tax
consequences of the Reorganization as set forth in the Agreement and Plan of
Reorganization or an opinion of counsel to the same effect. Under the
Agreement and Plan of Reorganization, however, the Board of Directors of any
Fund may cause the Reorganization to be postponed or abandoned in certain
circumstances should such Board determine that it is in the best interests of
the stockholders of that Fund to do so. The Agreement and Plan of
Reorganization may be terminated, and the Reorganization abandoned, whether
before or after approval by the Funds' stockholders, at any time prior to the
Exchange Date (as defined below), (i) by mutual consent of the Boards of
Directors of all of the Funds or (ii) by the Board of Directors of any Fund if
any condition to that Fund's obligations has not been fulfilled or waived by
such Fund's Board of Directors.
7
<PAGE>
Pro Forma Fee Table for Common Stockholders of New York Insured,
New York Fund, New York Insured II, New York Insured III and
the Combined Fund as of June 30, 1999 (Unaudited)(a)
<TABLE>
<CAPTION>
Actual
------------------------------------------
New York New York New York New York Pro Forma
Insured Fund Insured II Insured III Combined
-------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Common Stockholder
Transaction Expenses
Maximum Sales Load (as a
percentage of offering
price).................. None(b) None(b) None(b) None(b) None(c)
Dividend Reinvestment
Plan Fees............... None None None None None
Annual Expenses (as a
percentage of net assets
attributable to Common
Stock at June 30,
1999)(d)
Investment Advisory
Fees(e)................. 0.91% 0.94% 0.94% 0.96% 0.93%
Interest Payments on
Borrowed Funds.......... None None None None None
Other Expenses........... 0.36% 0.44% 0.50% 0.51% 0.30%
---- ---- ---- ---- ----
Total Annual Expenses
(e)..................... 1.27% 1.38% 1.44% 1.47% 1.23%
==== ==== ==== ==== ====
</TABLE>
- --------
(a) No information is presented with respect to AMPS because no Fund's
operating expenses or expenses of the Reorganization will be borne by the
holders of AMPS of any of the Funds. Generally, AMPS are sold at a fixed
liquidation preference of $25,000 per share and investment return is set
at an auction.
(b) Shares of Common Stock purchased in the secondary market may be subject to
brokerage commissions or other charges.
(c) No sales load will be charged on the issuance of shares in the
Reorganization. Shares of Common Stock are not available for purchase from
the Funds but may be purchased through a broker-dealer subject to
individually negotiated commission rates.
(d) The pro forma annual operating expenses for the combined fund are
projections for a 12-month period.
(e) Based on average net assets of each Fund and the combined fund, excluding
assets attributable to AMPS. If assets attributable to AMPS are included,
the Investment Advisory Fee for each Fund and the combined fund would be
0.55% and the Total Annual Expenses would be 0.77%, 0.81%, 0.85%, 0.85%
and 0.72%, respectively.
Example:
Cumulative Expenses Paid on Shares of Common Stock
for the Periods Indicated:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) the
operating expense ratio for each Fund (as a
percentage of net assets attributable to
Common Stock) set forth in the table above
and (2) a 5% annual return throughout the
period:
New York Insured.............................. $13 $40 $70 $153
New York Fund................................. 14 44 76 166
New York Insured II........................... 15 46 79 172
New York Insured III.......................... 15 46 80 176
Combined Fund*................................ 13 39 68 149
</TABLE>
- --------
* Assumes that the Reorganization had taken place on June 30, 1999.
8
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a common stockholder of each of the Funds will bear
directly or indirectly as compared to the costs and expenses that would be
borne by such investors taking into account the Reorganization. The Example
set forth above assumes that shares of Common Stock were purchased in the
initial offerings and the reinvestment of all dividends and distributions and
uses a 5% annual rate of return as mandated by Securities and Exchange
Commission (the "SEC") regulations. The Example should not be considered a
representation of past or future expenses or annual rates of return. Actual
expenses or annual rates of return may be more or less than those assumed for
purposes of the Example. See "Comparison of the Funds" and "The
Reorganization--Potential Benefits to Common Stockholders of the Funds as a
Result of the Reorganization."
Business of New York Insured... New York Insured was incorporated under the
laws of the State of Maryland on April 24,
1997 and commenced operations on September
19, 1997. New York Insured is a non-
diversified, leveraged, closed-end management
investment company whose investment objective
is to provide stockholders with current
income exempt from Federal income tax and New
York State and New York City personal income
taxes. New York Insured seeks to achieve its
investment objective by investing primarily
in a portfolio of long-term investment grade
obligations, the interest on which, in the
opinion of bond counsel to the issuer, is
exempt from Federal income taxes and New York
State and New York City personal income taxes
("New York Municipal Bonds"). Under normal
circumstances, at least 80% of New York
Insured's total assets will be invested in
municipal obligations with remaining
maturities of one year or more that are
covered by insurance guaranteeing the timely
payment of principal at maturity and
interest. See "Comparison of the Funds--
Investment Objectives and Policies."
New York Insured has outstanding Common Stock
and two series of AMPS, designated Series A
and Series B, which shall be referred to
herein collectively as "New York Insured
AMPS." As of August 31, 1999, New York
Insured had net assets of $233,595,031.
Business of New York Fund...... New York Fund was incorporated under the laws
of the State of Maryland on December 4, 1997
and commenced operations on February 27,
1998. New York Fund is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to
provide stockholders with current income
exempt from Federal income tax and New York
State and New York City personal income
taxes. New York Fund seeks to achieve its
objective by investing primarily in a
portfolio of New York Municipal Bonds. Unlike
the other Funds, New York Fund is not
required to invest in municipal obligations
that are covered by insurance and may invest
up to 10% of its assets in non-investment
grade obligations. See "Comparison of the
Funds--Investment Objectives and Policies."
New York Fund has outstanding Common Stock
and two series of AMPS, designated Series A
and Series B, which shall be referred to
herein collectively as "New York Fund AMPS."
As
9
<PAGE>
of August 31, 1999, New York Fund had net
assets of $177,759,711.
Business of New York Insured New York Insured II was incorporated under
II............................. the laws of the State of Maryland on June 8,
1998 and commenced operations on October 1,
1998. New York Insured II is a non-
diversified, leveraged, closed-end management
investment company whose investment objective
is to provide stockholders with current
income exempt from Federal income taxes and
New York State and New York City personal
income taxes. New York Insured II seeks to
achieve its investment objective by investing
primarily in a portfolio of New York
Municipal Bonds. Under normal circumstances,
at least 80% of New York Insured II's total
assets will be invested in municipal
obligations with remaining maturities of one
year or more that are covered by insurance
guaranteeing the timely payment of principal
at maturity and interest. See "Comparison of
the Funds--Investment Objectives and
Policies."
New York Insured II has outstanding Common
Stock and two series of AMPS, designated
Series A and Series B, which shall be
referred to herein collectively as "New York
Insured II AMPS." As of August 31, 1999, New
York Insured II had net assets of
$123,383,922.
Business of New York Insured New York Insured III was incorporated under
III............................ the laws of the State of Maryland on November
23, 1998 and commenced operations on January
29, 1999. New York Insured III is a non-
diversified, leveraged, closed-end management
investment company whose investment objective
is to provide stockholders with current
income exempt from Federal income taxes and
New York State and New York City personal
income taxes. New York Insured III seeks to
achieve its investment objective by investing
primarily in a portfolio of New York
Municipal Bonds. Under normal circumstances,
at least 80% of New York Insured III's total
assets will be invested in municipal
obligations with remaining maturities of one
year or more that are covered by insurance
guaranteeing the timely payment of principal
at maturity and interest. See "Comparison of
the Funds--Investment Objectives and
Policies."
New York Insured III has outstanding Common
Stock and one series of AMPS, designated
Series A (the "New York Insured III AMPS").
As of August 31, 1999, New York Insured III
had net assets of $113,390,626.
Comparison of the Funds........ Investment Objectives and Policies. The Funds
have substantially similar investment
objectives and policies. All four Funds seek
to provide current income exempt from Federal
income tax and New York State and New York
City personal income taxes and seek to invest
substantially all (at least 65%) of its
assets in New York Municipal Bonds except
when there is an
10
<PAGE>
insufficient supply of New York Municipal
Bonds at appropriate prices. The policies of
New York Fund, however, differ from the
policies of the other Funds in two respects:
New York Fund is not subject to the
requirement that 80% of its assets be
invested in municipal obligations covered by
insurance and New York Fund may invest up to
10% of its assets in non-investment grade
obligations. See "Comparison of the Funds--
Investment Objectives and Policies."
Capital Stock. Each Fund has outstanding both
Common Stock and AMPS. The Common Stock of
each of the Funds is traded on the NYSE. As
of August 31, 1999, (i) the net asset value
per share of New York Insured Common Stock
was $14.16 and the market price per share was
$14.00; (ii) the net asset value per share of
New York Fund Common Stock was $13.42 and the
market price per share was $12.75; (iii) the
net asset value per share of New York Insured
II Common Stock was $12.56 and the market
price per share was $12.4375; and (iv) the
net asset value per share of New York Insured
III Common Stock was $12.64 and the market
price per share was $12.3125. The AMPS of
each of the Funds have a liquidation
preference of $25,000 per share and are sold
principally at auctions. See "Comparison of
the Funds--Capital Stock."
Auctions generally have been held and will be
held every seven days for each series of AMPS
of each of the Funds unless the applicable
Fund elects, subject to certain limitations,
to have a special dividend period. In
connection with the Reorganization, a holder
of AMPS of an Acquired Fund may receive New
York Insured AMPS with a dividend payment
date and an auction date that fall on a day
of the week that is different from the
schedule of the AMPS of the Acquired Fund
that he or she holds. See "Comparison of the
Funds--Capital Stock." The following table
provides information about the dividend rates
for each series of AMPS of each of the Funds
as of a recent auction.
<TABLE>
<CAPTION>
Dividend
Auction Date Fund Series Rate
------------ -------------------- ------ --------
<S> <C> <C> <C>
September 8, 1999 New York Insured A 3.30%
September 9, 1999 New York Insured B 3.30%
September 3, 1999 New York Fund A 3.35%
September 7, 1999 New York Fund B 3.30%
September 9, 1999 New York Insured II A 3.30%
September 10, 1999 New York Insured II B 3.30%
September 7, 1999 New York Insured III A 3.30%
</TABLE>
Advisory Fees. The investment adviser for
each of the Funds is Fund Asset Management,
L.P. ("FAM"). FAM is an affiliate of MLAM,
and both FAM and MLAM are owned and
controlled by Merrill Lynch & Co., Inc. ("ML
& Co."). The principal business address of
FAM is 800 Scudders Mill Road, Plainsboro,
New Jersey 08536. The Asset Management Group
of ML & Co. (which includes FAM) acts as
investment adviser for over 100
11
<PAGE>
other registered investment companies and
also offers portfolio management and
portfolio analysis services to individuals
and institutional accounts.
FAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund. Robert
A. DiMella and Roberto W. Roffo serve as the
portfolio managers for New York Insured II
and New York Insured III; Robert A. DiMella
and Robert D. Sneeden serve as the portfolio
managers for New York Insured and New York
Fund. After the Reorganization, Messrs.
DiMella and Sneeden will serve as portfolio
managers of the combined fund.
Pursuant to separate investment advisory
agreements between each Fund and FAM, each
Fund pays FAM a monthly fee at the annual
rate of 0.55% of such Fund's average weekly
net assets, including assets acquired from
the sale of AMPS. Subsequent to the
Reorganization, FAM will continue to receive
compensation at the rate of 0.55% of the
average weekly net assets, including assets
acquired from the sale of AMPS, of the
combined fund. See "Comparison of the Funds--
Management of the Funds."
Other Significant Fees. The Bank of New York
is the custodian, transfer agent, dividend
disbursing agent and registrar for the Common
Stock of New York Insured, New York Fund and
New York Insured III. State Street Bank and
Trust Company is the custodian, transfer
agent, dividend disbursing agent and
registrar for the Common Stock of New York
Insured II. The Bank of New York is the
transfer agent, dividend disbursing agent,
registrar and auction agent for each Fund's
AMPS. The principal business addresses are as
follows: The Bank of New York, 90 Washington
Street, New York, New York 10286 (for its
custodial services) and 101 Barclay Street,
New York, New York 10286 (for its transfer
and auction agency services); and State
Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110. See
"Comparison of the Funds--Management of the
Funds."
Overall Expense Ratio. As of June 30, 1999,
the overall annualized operating expense
ratio for New York Insured was 1.27%, based
on average net assets of approximately $145.1
million excluding AMPS, and 0.77%, based on
average net assets of approximately $240.1
million including AMPS; the overall
annualized operating expense ratio for New
York Fund was 1.38%, based on average net
assets of approximately $107.2 million
excluding AMPS, and 0.81%, based on average
net assets of approximately $183.2 million
including AMPS; the overall annualized
operating expense ratio for New York Insured
II was 1.44%, based on average net assets of
approximately $74.8 million excluding AMPS,
and 0.85%, based on average net assets of
approximately $127.8 million including AMPS;
and the overall annualized operating expense
ratio for New York Insured
12
<PAGE>
III was 1.47%, based on average net assets of
approximately $67.8 million excluding AMPS,
and 0.85%, based on average net assets of
approximately $117.8 million including AMPS.
If the Reorganization had taken place on June
30, 1999, the estimated pro forma combined
annualized operating expense ratio for the
combined fund on a pro forma basis would have
been 1.23%, based on average net assets of
approximately $394.8 million excluding AMPS,
and 0.72%, based on average net assets of
approximately $668.8 million including AMPS.
Purchases and Sales of Common Stock and
AMPS. Purchase and sale procedures for the
Common Stock of each of the Funds are
identical, and investors typically purchase
and sell shares of Common Stock of the Funds
through a registered broker-dealer on the
NYSE, thereby incurring a brokerage
commission set by the broker-dealer.
Alternatively, investors may purchase or sell
shares of Common Stock of the Funds through
privately negotiated transactions with
existing stockholders.
Purchase and sale procedures for the AMPS of
each of the Funds also are identical. Such
AMPS generally are purchased and sold at
separate auctions conducted on a regular
basis by The Bank of New York, as the auction
agent for each Fund's AMPS (the "Auction
Agent"). Unless otherwise permitted by the
Funds, existing and potential holders of AMPS
only may participate in auctions through
their broker-dealers. Broker-dealers submit
the orders of their respective customers who
are existing and potential holders of AMPS to
the Auction Agent. On or prior to each
auction date for the AMPS (the business day
next preceding the first day of each dividend
period), each holder may submit orders to
buy, sell or hold AMPS to its broker-dealer.
Outside of these auctions, shares of AMPS may
be purchased or sold through broker-dealers
for the AMPS in a secondary trading market
maintained by the broker-dealers. However,
there can be no assurance that a secondary
market will develop or if it does develop,
that it will provide holders with a liquid
trading market for the AMPS of any of the
Funds.
Ratings of AMPS. The AMPS of each Fund have
each been assigned a rating of AAA from
Standard & Poor's ("S&P") and "aaa" from
Moody's Investors Service, Inc. ("Moody's").
See "Comparison of the Funds--Rating Agency
Guidelines."
Portfolio Insurance. With the exception of
New York Fund, each of the other Funds has a
similar policy with respect to obtaining
insurance for portfolio securities. Under
normal circumstances, at least 80% of each
Fund's assets will be invested in municipal
obligations either (i) insured under an
insurance policy purchased by the Fund or
(ii) insured under an insurance policy
obtained by the issuer thereof or any other
party. New York Fund has no policy with
respect to maintaining insurance on its
portfolio. See "Comparison of the Funds--
Investment Objectives and Policies--Portfolio
Insurance."
13
<PAGE>
Ratings of Municipal Obligations. With the
exception of New York Fund, each of the Funds
will invest only in municipal obligations
that at the time of purchase are considered
investment grade. New York Fund may invest up
to 10% of its assets in non-investment grade
municipal obligations.
Portfolio Transactions. The portfolio
transactions in which the Funds may engage
are similar, as are the procedures for such
transactions. See "Comparison of the Funds--
Portfolio Transactions."
Dividends and Distributions. The methods of
dividend payment and distributions are
similar for all of the Funds, both with
respect to the Common Stock and the AMPS of
each Fund. See "Comparison of the Funds--
Dividends and Distributions."
Net Asset Value. The net asset value per
share of Common Stock of each Fund is
determined after the close of business on the
NYSE (generally, 4:00 p.m., Eastern time) on
the last business day in each week. For
purposes of determining the net asset value
of a share of Common Stock of each Fund, the
value of the securities held by the Fund plus
any cash or other assets (including interest
accrued but not yet received) minus all
liabilities (including accrued expenses) and
the aggregate liquidation value of the
outstanding shares of AMPS of the Fund is
divided by the total number of shares of
Common Stock of the Fund outstanding at such
time. Expenses, including fees payable to
FAM, are accrued daily. See "Comparison of
the Funds--Net Asset Value."
Voting Rights. The corresponding voting
rights of the holders of shares of each
Fund's Common Stock are substantially
similar. Likewise, the corresponding voting
rights of the holders of shares of each
Fund's AMPS are substantially similar. See
"Comparison of the Funds--Capital Stock."
Stockholder Services. An automatic dividend
reinvestment plan is available to holders of
shares of each Fund's Common Stock. The plans
are similar for the four Funds. See
"Comparison of the Funds--Automatic Dividend
Reinvestment Plan." Other stockholder
services, including the provision of annual
and semi-annual reports, are the same for the
four Funds.
14
<PAGE>
Outstanding Securities of New York Insured, New York Fund, New York
Insured II and New York Insured III as of August 31, 1999
<TABLE>
<CAPTION>
Amount
Outstanding
Amount Held By Exclusive of Amount
Amount Fund for its Own Shown in Previous
Title of Class Authorized Account Column
-------------- ----------- ---------------- -------------------
<S> <C> <C> <C>
New York Insured
Common Stock................. 199,996,200 -0- 9,787,106
AMPS......................... 3,800 -0- 3,800
New York Fund
Common Stock................. 199,996,960 -0- 7,580,698
AMPS......................... 3,040 -0- 3,040
New York Insured II
Common Stock................. 199,997,880 -0- 5,601,930
AMPS......................... 2,120 -0- 2,120
New York Insured III
Common Stock................. 199,998,000 -0- 5,016,422
AMPS......................... 2,000 -0- 2,000
</TABLE>
Tax Considerations............. The Funds have jointly requested a private
letter ruling from the IRS with respect to
the Reorganization to the effect that, among
other things, no Fund will recognize gain or
loss on the transaction and the stockholders
of the Acquired Funds will not recognize gain
or loss on the exchange of their shares for
New York Insured Common Stock (except to the
extent that a common stockholder in an
Acquired Fund receives cash representing an
interest in less than a full share of New
York Insured Common Stock in the
Reorganization) or New York Insured AMPS. The
consummation of the Reorganization is subject
to the receipt of such ruling or of an
opinion of counsel to the same effect. The
Reorganization will not affect the status of
New York Insured as a regulated investment
company (a "RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). Each
of the Acquired Funds will liquidate pursuant
to the Reorganization. See "Agreement and
Plan of Reorganization--Tax Consequences of
the Reorganization."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since each of the four Funds invests primarily in a portfolio of New York
Municipal Bonds, any risks inherent in such investments are equally applicable
to all four Funds and will be similarly pertinent to the combined fund after
the Reorganization. It is expected that the Reorganization itself will not
adversely affect the rights of holders of shares of Common Stock or of any
series of AMPS of any of the Funds or create additional risks.
New York Municipal Bonds
Each of the Funds ordinarily invests at least 65% of its portfolio in New
York Municipal Bonds. As a result, each Fund is more exposed to risks
affecting issuers of New York Municipal Bonds than is a municipal bond fund
that invests more widely. See "Comparison of the Funds--Special Considerations
Relating to New York Municipal Bonds" and "Exhibit III--Economic and Other
Conditions in New York."
15
<PAGE>
Interest Rate and Credit Risk
Each Fund invests in municipal bonds, which are subject to interest rate and
credit risk. Interest rate risk is the risk that prices of municipal bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer-term securities generally change more in
response to interest rate changes than prices of shorter-term securities.
Credit risk is the risk that the issuer will be unable to pay the interest or
principal when due. The degree of credit risk depends on both the financial
condition of the issuer and the terms of the obligation.
Non-diversification
Each 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 a Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more exposed to the effects of any single economic, political or
regulatory occurrence than a more widely-diversified fund. Even as a non-
diversified fund, each Fund must still meet the diversification requirements
of applicable Federal income tax law.
Rating Categories
The Funds intend to invest in municipal bonds that are rated investment
grade by S&P, Moody's or Fitch IBCA, Inc. ("Fitch") or are considered by FAM
to be of comparable quality. Obligations rated in the lowest investment grade
category may have certain speculative characteristics. New York Fund may also
invest up to 10% of its total assets in municipal bonds that are rated below
investment grade or in unrated municipal bonds that FAM believes are of
comparable quality. Although below-investment grade bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for New York Fund.
Private Activity Bonds
Each Fund may invest in certain tax-exempt securities classified as "private
activity bonds." These bonds may subject certain investors in a Fund to the
Federal alternative minimum tax.
Portfolio Insurance
Each of the Funds, other than New York Fund, is subject to certain
investment restrictions imposed by guidelines of the insurance companies that
issue portfolio insurance. The Funds do not believe these guidelines prevent
FAM from managing the Funds' portfolios in accordance with the Funds'
investment objective and policies. Investing in insured Municipal Bonds and
New York Municipal Bonds may result in a Fund's having a lower yield than a
fund that does not invest in insured bonds. FAM believes, however, that any
such decrease in yield would not be material and would be offset by the lower
overall operating expense ratio of the combined fund after the Reorganization.
Leverage
Use of leverage, through the issuance of AMPS, involves certain risks to
holders of Common Stock of each of the Funds. For example, each Fund's
issuance of AMPS may result in higher volatility of the net asset value of its
Common Stock and potentially more volatility in the market value of its Common
Stock. In addition, changes in the short-term and medium-term dividend rates
on, and the amount of taxable income allocable to, the AMPS will affect the
yield to holders of Common Stock. Under certain circumstances, when a Fund is
required to allocate taxable income to holders of AMPS, the Fund may be
required to make an additional distribution to such holders in an amount
approximately equal to the tax liability resulting from that allocation (an
"Additional Distribution"). Leverage will allow holders of each Fund's Common
Stock to realize a higher current rate of return than if the Fund were not
leveraged as long as the Fund, while accounting for its costs and operating
expenses, is able to realize a higher net return on its investment portfolio
than the then-current dividend rate (and any Additional Distribution) paid on
the AMPS. Similarly, since a pro rata portion of each Fund's net
16
<PAGE>
realized capital gains is generally payable to holders of the Fund's Common
Stock, the use of leverage will increase the amount of such gains distributed
to holders of the Fund's Common Stock. However, short-term, medium-term and
long-term interest rates change from time to time as do their relationships to
each other (i.e., the slope of the yield curve) depending upon such factors as
supply and demand forces, monetary and tax policies and investor expectations.
Changes in any or all of such factors could cause the relationship between
short-term, medium-term and long-term rates to change (i.e., to flatten or to
invert the slope of the yield curve) so that short-term and medium-term rates
may substantially increase relative to the long-term obligations in which each
Fund may be invested. To the extent that the current dividend rate (and any
Additional Distribution) on the AMPS approaches the net return on a Fund's
investment portfolio, the benefit of leverage to holders of Common Stock will
be decreased. If the current dividend rate (and any Additional Distribution)
on the AMPS were to exceed the net return on a Fund's portfolio, holders of
Common Stock would receive a lower rate of return than if the Fund were not
leveraged. Similarly, since both the costs of issuing AMPS and any decline in
the value of a Fund's investments (including investments purchased with the
proceeds from any AMPS offering) will be borne entirely by holders of the
Fund's Common Stock, the effect of leverage in a declining market would result
in a greater decrease in net asset value to holders of Common Stock than if
the Fund were not leveraged. If a Fund is liquidated, holders of that Fund's
AMPS will be entitled to receive liquidating distributions before any
distribution is made to holders of Common Stock of that Fund.
In an extreme case, a decline in net asset value could affect each Fund's
ability to pay dividends on its Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a RIC under the
Federal tax laws. See "Comparison of the Funds--Tax Rules Applicable to the
Funds and their Stockholders." However, each Fund intends to take all measures
necessary to make Common Stock dividend payments. If a Fund's current
investment income is ever insufficient to meet dividend payments on either the
Common Stock or the AMPS, the Fund may have to liquidate certain of its
investments. In addition, each Fund has the authority to redeem its AMPS for
any reason and may redeem all or part of its AMPS under the following
circumstances:
. if the Fund anticipates that its leveraged capital structure will result
in a lower rate of return for any significant amount of time to holders
of the Common Stock than the Fund can obtain if the Common Stock were not
leveraged,
. if the asset coverage for the AMPS declines below 200%, either as a
result of a decline in the value of the Fund's portfolio investments or
as a result of the repurchase of Common Stock in tender offers or
otherwise, or
. in order to maintain the asset coverage established by Moody's and S&P in
rating the AMPS.
Redemption of the AMPS or insufficient investment income to make dividend
payments may reduce the net asset value of the Common Stock and require the
Fund to liquidate a portion of its investments at a time when it may be
disadvantageous to do so.
Portfolio Management
The portfolio management strategies of the Funds are the same. In the event
of an increase in short-term or medium-term rates or other change in market
conditions to the point where a Fund's leverage could adversely affect holders
of Common Stock as noted above, or in anticipation of such changes, each Fund
may attempt to shorten the average maturity of its investment portfolio, which
would tend to offset the negative impact of leverage on holders of its Common
Stock. Each Fund also may attempt to reduce the degree to which it is
leveraged by redeeming AMPS pursuant to the provisions of the Fund's Articles
Supplementary establishing the rights and preferences of the AMPS or otherwise
purchasing shares of AMPS. Purchases and sales or redemptions of AMPS, whether
on the open market or in negotiated transactions, are subject to limitations
under the Investment Company Act. If market conditions subsequently change,
each Fund may sell previously unissued shares of AMPS or shares of AMPS that
the Fund previously issued but later repurchased or redeemed.
17
<PAGE>
Inverse Floating Obligations
A Fund's investments in "inverse floating obligations" or "residual interest
bonds" provide investment leverage because their market value increases or
decreases in response to market changes at a greater rate than fixed rate,
long term tax exempt securities. The market values of such securities are more
volatile than the market values of fixed rate, tax exempt securities.
Options and Futures Transactions
Each Fund may engage in certain options and futures transactions to reduce
its exposure to interest rate movements. If a Fund incorrectly forecasts
market values, interest rates or other factors, that Fund's performance could
suffer. Each Fund also may suffer a loss if the other party to the transaction
fails to meet its obligations. The Funds are not required to use hedging and
may choose not to do so.
Antitakeover Provisions
The Articles of Incorporation of each of the Funds (in each case the
"Charter") include provisions that could limit the ability of other entities
or persons to acquire control of that 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.
Ratings Considerations
The Funds have received ratings of their AMPS of AAA from S&P and "Aaa" from
Moody's. In order to maintain these ratings, the Funds are required to
maintain portfolio holdings meeting specified guidelines of such rating
agencies. These guidelines may impose asset coverage requirements that are
more stringent than those imposed by the Investment Company Act.
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 of 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 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 Moody's and S&P by the Funds and FAM 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 of the Funds has not been rated by a nationally
recognized statistical rating organization.
The Board of Directors of each of the Funds, without stockholder approval,
may amend, alter or repeal certain definitions or restrictions which have been
adopted by the Fund pursuant to the rating agency guidelines, 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.
18
<PAGE>
COMPARISON OF THE FUNDS
Financial Highlights
New York Insured
The financial information in the table below except for the fiscal year
ended August 31, 1999 has been audited in conjunction with the annual audits
of the financial statements of the Fund by Deloitte & Touche LLP, independent
auditors. The following per share data and ratios have been derived from
information provided in the financial statements of the Fund.
<TABLE>
<CAPTION>
For the Period
For the Year Ended September 19, 1997+
August 31, 1999## to August 31, 1998
------------------ -------------------
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period... $ 15.00
--- --------
Investment income--net................. 1.13
Realized and unrealized gain (loss) on
investments--net...................... 1.11
--- --------
Total from investment operations....... 2.24
--- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net................ (.75)
Realized gain on investments--net..... --
--- --------
Total dividends and distributions to
Common Stock shareholders............. (.75)
--- --------
Capital charge resulting from issuance
of Common Stock....................... (.03)
--- --------
Effect of Preferred Stock activity:++
Dividends and distributions to
Preferred Stock shareholders:
Investment income--net................ (.30)
Realized gain on investments--net..... --
Capital charge resulting from issuance
of Preferred Stock................... (.09)
--- --------
Total effect of Preferred Stock
activity.............................. (.39)
--- --------
Net asset value, end of period......... $ 16.07
=== ========
Market price per share, end of period.. $15.3125
=== ========
Total Investment Return:**
Based on market price per share........ 7.21%#
=== ========
Based on net asset value per share..... 12.52%#
=== ========
Ratios Based on Average Net Assets of
Common Stock:
Total expenses, net of
reimbursement***...................... .77%*
=== ========
Total expenses***...................... 1.15%*
=== ========
Total investment income--net***........ 7.41%*
=== ========
Amount of Dividends to Preferred
Stockholders 1.99%*
=== ========
Investment Income-net, to Common
Stockholders 5.42%*
=== ========
Ratios Based on Total Average Net
Assets+++***
Expenses, net of reimbursement......... .50%*
=== ========
Total expenses......................... 75%*
=== ========
Total investment income--net........... 4.81%*
=== ========
Ratios Based on Average Net Assets of
Preferred Stock:
Dividends to Preferred Stockholders.... 3.73%*
=== ========
Supplemental Data:
Net assets, net of Preferred Stock, end
of period (in thousands).............. $157,321
=== ========
Preferred Stock outstanding, end of
period (in thousands)................. $ 95,000
=== ========
Portfolio turnover..................... 52.91%
=== ========
Dividends Per Share on Preferred Stock
Outstanding
Series A Investment income--net........ $ 796
=== ========
Series B Investment income--net........ $ 769
=== ========
Leverage:
Asset coverage per $1,000.............. $ 2,656
=== ========
</TABLE>
(footnotes on following page)
19
<PAGE>
- --------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on October 7, 1997.
+++ Includes Common and Preferred Stock average net assets.
# Aggregate total investment return.
## To be filed by amendment.
20
<PAGE>
New York Fund
The financial information in the table below, has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. The following per share data and
ratios have been derived from information provided in the financial statements
of the Fund.
<TABLE>
<CAPTION>
For the Period
For the Year Ended February 27, 1998+
June 30, 1999 to June 30, 1998
------------------ ------------------
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.... $ 15.08 $ 15.00
-------- --------
Investment income--net.................. 1.14 .36
Realized and unrealized gain (loss) on
investments--net....................... (.89) .14
-------- --------
Total from investment operations........ .25 .50
-------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net................. (.82) (.22)
Realized gain on investments--net...... (.05) --
-------- --------
Total dividends and distributions to
Common Stock shareholders.............. (.87) (.22)
-------- --------
Capital charge resulting from issuance
of Common Stock........................ -- (.04)
-------- --------
Effect of Preferred Stock activity:++
Dividends and distributions to
Preferred Stock shareholders:
Investment income--net................. (.30) (.07)
Realized gain on investments--net...... (.02) --
Capital charge resulting from issuance
of Preferred Stock.................... -- (.09)
-------- --------
Total effect of Preferred Stock
activity............................... (.32) (.16)
-------- --------
Net asset value, end of period.......... $ 14.14 $ 15.08
======== ========
Market price per share, end of period... $ 13.25 $14.5625
======== ========
Total Investment Return:**
Based on market price per share......... (3.55)% (1.47)%#
======== ========
Based on net asset value per share...... (0.60)% 2.03%#
======== ========
Ratios Based on Average Net Assets of
Common Stock
Total Expenses, net of reimbursement***. 1.15% .43%*
======== ========
Total Expenses**........................ 1.29% 1.25%*
======== ========
Total investment income--net***......... 7.50% 8.42%*
======== ========
Amount of Dividends to Preferred
Stockholders........................... 1.98% 2.29%*
======== ========
Investment Income--net, to Common
Stockholders........................... 5.52% 6.13%*
======== ========
Ratios Based on Total Average Net
Assets+++***
Total expenses, net of reimbursement.... .69% .26%*
======== ========
Total expenses.......................... .78% .77%*
======== ========
Total investment income--net............ 4.52% 5.22%*
======== ========
Ratios Based on Average Net Assets of
Preferred Stock:
Dividends to Preferred Stockholders..... 3.01% 3.73%*
======== ========
Supplemental Data:
Net assets, net of Preferred Stock, end
of period (in thousands)............... $107,157 $113,918
======== ========
Preferred Stock outstanding, end of
period (in thousands).................. $ 76,000 $ 76,000
======== ========
Portfolio turnover...................... 100.06% 28.25%
======== ========
Dividends Per Share on Preferred Stock
Outstanding:
Series A--Investment income--net........ $ 745 $ 286
======== ========
Series B--Investment income--net........ $ 762 $ 245
======== ========
Leverage:
Asset coverage per $1,000............... $ 2,410 $ 2,499
======== ========
</TABLE>
21
<PAGE>
- --------
* 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
loads.
*** Does not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on March 19, 1998.
+++ Includes Common and Preferred Stock average net assets.
# Aggregate total investment return.
22
<PAGE>
New York Insured II
The financial information in the table below except for the leverage
information has been audited in conjunction with the annual audit of the
financial statements of the Fund by Ernst & Young LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in the financial statements of the Fund.
<TABLE>
<CAPTION>
For the Period
October 1, 1998+ to
September 30, 1999+++
---------------------
<S> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.....................
Investment income--net...................................
-------
Realized and unrealized gain (loss) on investments--net..
-------
Total from investment operations.........................
-------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net..................................
Realized gain on investment--net........................
-------
Total dividends and distributions to Common Stock
shareholders............................................
-------
Capital charge resulting from issuance of Common Stock...
-------
Effect of Preferred Stock activity:++
Dividends and distributions to Preferred Stock
shareholders:
Investment income--net..................................
Realized gain on investments--net.......................
Capital charge resulting from issuance of Preferred
Stock..................................................
-------
Total effect of Preferred Stock activity.................
-------
Net asset value, end of period...........................
=======
Market price per share, end of period....................
=======
Total Investment Return:**
Based on market price per share..........................
=======
Based on net asset value per share.......................
=======
Ratios Based on Average Net Assets Attributable to Common
Shares:***
Expenses, net of reimbursement...........................
=======
Expenses.................................................
=======
Investment income--net...................................
=======
Amount of Dividends to Preferred Stockholders............
=======
Investment Income Net, to Common Stockholders............
=======
Ratios Based on Total Average Net Assets.................
Supplemental Data:
Net assets, net of Preferred Stock, end of period (in
thousands)..............................................
=======
Preferred Stock outstanding, end of period (in
thousands)..............................................
=======
Portfolio turnover.......................................
=======
Dividends Per Share on Preferred Stock Outstanding:
Investment income--net...................................
=======
Leverage:
Asset coverage per $1,000................................
=======
</TABLE>
(footnotes on following page)
23
<PAGE>
- --------
* 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
loads.
*** Does not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on October 22, 1998.
+++ To be filed by amendment.
# Aggregate total investment return.
24
<PAGE>
New York Insured III
The financial information in the table below except for the leverage
information has been audited in conjunction with the annual audit of the
financial statements of the Fund by Ernst & Young LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in the financial statements of the Fund.
<TABLE>
<CAPTION>
For the Period
January 29, 1999+ to
September 30, 1999+++
---------------------
<S> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period....................
-------
Investment income--net..................................
Realized and unrealized gain (loss) on investments--net.
-------
Total from investment operations........................
-------
Less dividends and distributions to Common Stock
shareholders:..........................................
Investment income--net.................................
Realized gain on investment--net.......................
-------
Total dividends and distributions to Common Stock
shareholders...........................................
-------
Capital charge resulting from issuance of Common Stock..
-------
Effect of Preferred Stock activity:++
Dividends and distributions to Preferred Stock
shareholders:
Investment income--net.................................
Realized gain on investments--net......................
Capital charge resulting from issuance of Preferred
Stock.................................................
-------
Total effect of Preferred Stock activity................
-------
Net asset value, end of period..........................
=======
Market price per share, end of period...................
=======
Total Investment Return:**
Based on market price per share.........................
=======
Based on net asset value per share......................
=======
Ratios to Average Net Assets:***
Ratios Based on Average Net Assets......................
=======
Attributable to Common Shares: ***
Expenses, net of reimbursement..........................
=======
Expenses................................................
=======
Investment income--net..................................
=======
Amount of Dividends to Preferred Stockholders...........
=======
Investment Income Net, to Common Stockholders...........
=======
Ratios Based on Total Average Net Assets................
=======
Supplemental Data:
Net assets, net of Preferred Stock, end of period (in
thousands).............................................
=======
Preferred Stock outstanding, end of period (in
thousands).............................................
=======
Portfolio turnover......................................
=======
Dividends Per Share on Preferred Stock Outstanding:
Investment income--net..................................
=======
Leverage:
Asset coverage per $1,000...............................
=======
</TABLE>
(footnotes on following page)
25
<PAGE>
- --------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or less than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Does not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on February 22, 1999.
+++ To be filed by amendment.
# Aggregate total investment return.
26
<PAGE>
Per Share Data for Common Stock*
Traded on the New York Stock Exchange (unaudited)
New York Insured
<TABLE>
<CAPTION>
Premium
(Discount)
to Net
Market Price($)** Net Asset Value($) Asset Value(%)
----------------- ------------------- ----------------
Quarter Ended* High Low High Low High Low
-------------- ----------------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
November 30, 1997+...... 15.875 15.4375 15.26 15.00 4.66 0.35
February 28, 1998....... 15.8125 15.5 15.94 15.68 2.50 (2.11)
May 31, 1998............ 15.9375 14.625 15.75 15.34 4.59 (5.93)
August 31, 1998......... 15.375 14.8125 16.07 15.72 (3.15) (6.69)
November 30, 1998....... 15.9375 15.5 16.18 15.99 (1.01) (5.92)
February 28, 1999....... 15.75 15.4375 16.06 15.85 0.63 (3.99)
May 31, 1999............ 15.25 14.5 15.86 15.49 (2.21) (6.47)
August 31, 1999......... 14.625 13.4375 15.38 13.20 (1.13) (8.60)
New York Fund
<CAPTION>
Premium
(Discount)
to Net
Market Price($)** Net Asset Value($) Asset Value(%)
----------------- ------------------- ----------------
Quarter Ended* High Low High Low High Low
-------------- ----------------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998++........ 15.6875 15.00 15.55 14.81 4.59 0.20
June 30, 1998........... 14.75 14.25 15.29 15.01 (0.37) (5.50)
September 30, 1998...... 15.00 14.6875 15.74 15.35 (1.73) (5.13)
December 31, 1998....... 15.75 14.875 15.63 15.25 1.16 (4.19)
March 31, 1999.......... 15.1875 14.5 15.34 15.11 (0.56) (6.17)
June 30, 1999........... 14.4375 13.125 14.70 14.07 (2.03) (5.29)
September 30, 1999......
New York Insured II
<CAPTION>
Premium
(Discount)
to Net
Market Price($)** Net Asset Value($) Asset Value(%)
----------------- ------------------- ----------------
Quarter Ended* High Low High Low High Low
-------------- ----------------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998+++.... 15.625 14.375 14.93 14.51 3.74 (2.68)
March 31, 1999.......... 14.75 14.25 14.70 14.47 2.47 (3.61)
June 30, 1999........... 13.5625 12.375 13.90 13.30 1.51 (7.05)
September 30, 1999......
New York Insured III
<CAPTION>
Premium
(Discount)
to Net
Market Price($)** Net Asset Value($) Asset Value(%)
----------------- ------------------- ----------------
Quarter Ended* High Low High Low High Low
-------------- ----------------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999++++...... 15.00 14.75 14.87 14.66 1.35 (0.60)
June 30, 1999........... 14.125 13.00 14.09 13.42 1.46 (2.92)
September 30, 1999......
</TABLE>
- --------
* Calculations are based upon shares of Common Stock outstanding at the end
of each quarter.
** As reported in the consolidated transaction operating system.
+ For the period September 19, 1997 to November 30, 1997.
++ For the period February 27, 1998 to March 31, 1998.
+++ For the period October 1, 1998 to December 31, 1998.
++++For the period January 29, 1999 to March 31, 1999.
27
<PAGE>
As indicated in the tables above, for the periods shown the Common Stock of
the Funds generally has traded at prices close to net asset value, with
premiums or discounts to net asset value of less than 10% being reflected in
the market value of the shares from time to time. Although there is no reason
to believe that this pattern should be affected by the Reorganization, it is
not possible to predict whether shares of the surviving fund will trade at a
premium or discount to net asset value following the Reorganization, or what
the extent of any such premium or discount might be.
Investment Objective and Policies
The structure, organization and investment policies of the Funds are
substantially similar, with the differences among the four Funds set forth
below. Each Fund seeks as a fundamental investment objective current income
exempt from Federal income tax and New York State and New York City personal
income taxes. The investment objective of each Fund is a fundamental policy
that may not be changed without a vote of a majority of the Fund's outstanding
voting securities.
Each Fund seeks to achieve its investment objective by investing primarily
in a portfolio of New York Municipal Bonds. At all times, at least 65% of each
Fund's total assets will be invested in New York Municipal Bonds and at least
80% of each Fund's total assets will be invested in New York Municipal Bonds
and in other long-term municipal obligations exempt from Federal income tax
but not New York State and New York City personal income taxes ("Municipal
Bonds"), except during interim periods pending investment of the net proceeds
of public offerings of its securities and during temporary defensive periods.
At times, each Fund may seek to hedge its portfolio through the use of futures
and options transactions to reduce volatility in the net asset value of its
shares of Common Stock. With respect to New York Insured, New York Insured II
and New York Insured III, under normal circumstances, at least 80% of each
Fund's total assets will be invested in municipal obligations with remaining
maturities of one year or more that are covered by insurance guaranteeing the
timely payment of principal at maturity and interest. New York Fund is not
subject to a similar requirement regarding insurance coverage for its
portfolio securities.
Ordinarily, none of the Funds intends to realize significant investment
income subject to Federal income tax and New York State and New York City
personal income taxes. To the extent FAM considers that suitable New York
Municipal Bonds are not available for investment, the Funds may purchase
Municipal Bonds. Each Fund may invest all or a portion of its assets in
certain tax-exempt securities classified as "private activity bonds" (in
general, bonds that benefit non-governmental entities) that may subject
certain investors in the Fund to a Federal alternative minimum tax.
Each Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in New York Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act. Other Non-Municipal Tax-Exempt Securities could include trust
certificates or other instruments evidencing interests in one or more long-
term New York Municipal Bonds or Municipal Bonds. Certain Non-Municipal Tax-
Exempt Securities may be characterized as derivative instruments. Non-
Municipal Tax-Exempt Securities will be considered "New York Municipal Bonds"
or "Municipal Bonds" for purposes of a Fund's investment objective and
policies.
The investment grade New York Municipal Bonds and Municipal Bonds in which
each Fund primarily invests are those New York Municipal Bonds and Municipal
Bonds that are rated at the date of purchase in the four highest rating
categories of S&P, Moody's or Fitch or, if unrated, are considered to be of
comparable quality by FAM. In the case of long-term debt, the investment grade
rating categories are AAA through BBB for S&P and Fitch and Aaa through Baa
for Moody's. In the case of short-term notes, the investment grade rating
categories are SP-1 through SP-3 for S&P, MIG-1 through MIG-3 for Moody's and
F-1+ through F-3 for Fitch.
28
<PAGE>
In the case of tax-exempt commercial paper, the investment grade rating
categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moody's
and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment
grade rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-3 and Prime-3 for
Moody's; and BBB and F-3 for Fitch), while considered "investment grade," may
have certain speculative characteristics. There may be sub-categories or
gradations indicating relative standing within the rating categories set forth
above. In assessing the quality of New York Municipal Bonds and Municipal
Bonds with respect to the foregoing requirements, FAM takes into account the
portfolio insurance as well as the nature of any letters of credit or similar
credit enhancement to which particular New York Municipal Bonds and Municipal
Bonds are entitled and the creditworthiness of the insurance company or
financial institution that provided such insurance or credit enhancements.
Consequently, if New York Municipal Bonds or Municipal Bonds are covered by
insurance policies issued by insurers whose claims-paying ability is rated AAA
by S&P or Fitch or Aaa by Moody's, FAM may consider such municipal obligations
to be equivalent to AAA-- or Aaa-- rated securities, as the case may be, even
though such New York Municipal Bonds or Municipal Bonds would generally be
assigned a lower rating if the rating were based primarily upon the credit
characteristics of the issuers without regard to the insurance feature. The
insured New York Municipal Bonds and Municipal Bonds must also comply with the
standards applied by the insurance carriers in determining eligibility for
portfolio insurance. See Exhibit IV--"Ratings of Municipal Bonds and
Commercial Paper" and Exhibit V--"Portfolio Insurance."
New York Fund may invest up to 10% of its assets in New York Municipal Bonds
and Municipal Bonds that are rated below investment grade or, if unrated, are
considered to be of comparable quality by FAM. These high yield bonds are
commonly referred to as "junk bonds" and are regarded as predominantly
speculative as to the issuer's ability to make payments of principal and
interest. Consequently, although such bonds can be expected to provide higher
yields and be less subject to interest rate fluctuations, they may be subject
to greater market price fluctuations and risk of loss of principal than lower
yielding, higher rated fixed-income securities. Such securities are
particularly vulnerable to adverse changes in the issuer's industry and in
general economic conditions. Issuers of high yield bonds may be highly
leveraged and may not have available to them more traditional methods of
financing. The risk of loss due to default by the issuer is significantly
greater for holders of these bonds because such securities may be unsecured
and may be subordinated to other creditors of the issuer. In addition, while
the high yield bonds in which the Fund may invest normally will not include
securities that, at the time of investment, are in default or the issuers of
which are in bankruptcy, there can be no assurance that such events will not
occur after New York Fund purchases a particular security, in which case New
York Fund may experience losses and incur costs. Although New York Fund may
invest up to 10% of its total assets in lower-rated New York Municipal Bonds
and Municipal Bonds, the asset coverage requirements established by the
nationally recognized statistical ratings organizations ("NRSROs") who may
rate the Fund's preferred stock currently limits such investments to less than
10% of total assets. Currently, there are no lower-rated bonds in New York
Fund's portfolio.
High yield bonds frequently have call or redemption features that permit an
issuer to repurchase such bonds from the Fund, which may decrease the net
investment income to New York Fund and dividends to stockholders in the event
that New York Fund is required to replace a called security with a lower
yielding security. New York Fund may have difficulty disposing of certain high
yield bonds because there may be a thin trading market for such securities.
Reduced secondary market liquidity may have an adverse impact on market price
and New York Fund's ability to dispose of particular issues when necessary to
meet its liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations are generally available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Each of the Funds 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,
typically a commercial bank. The VRDOs in which each Fund may invest are tax-
exempt obligations, in the opinion of counsel to the issuer, that contain a
floating or variable interest rate adjustment formula and a right of demand on
the part of the holder thereof to receive payment of the unpaid principal
balance plus accrued interest on a short notice period not to exceed seven
days. Participating VRDOs provide each Fund with a
29
<PAGE>
specified undivided interest (up to 100%) in the underlying obligation and the
right to demand payment of the unpaid principal balance plus accrued interest
on the Participating VRDOs from the financial institution on a specified
number of days' notice, not to exceed seven days. There is, however, the
possibility that because of default or insolvency, the demand feature of VRDOs
or Participating VRDOs may not be honored. Each Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations for Federal income
tax purposes.
The average maturity of each Fund's portfolio securities varies based upon
FAM's assessment of economic and market conditions. The net asset value of the
shares of common stock of a closed-end investment company, such as each Fund,
which invests primarily in fixed-income securities, changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of
a fixed income portfolio can be expected to rise. Conversely, when interest
rates rise, the value of a fixed income portfolio can be expected to decline.
Prices of longer-term securities generally fluctuate more in response to
interest rate changes than do short-term or medium-term securities. These
changes in net asset value are likely to be greater in the case of a fund
having a leveraged capital structure, such as that used by the Funds.
Each Fund intends to invest primarily in long-term New York Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. However, each Fund
may also invest in short-term tax-exempt securities, short-term U.S.
Government securities, repurchase agreements or cash. Such short-term
securities or cash will not exceed 20% of each Fund's total assets except
during interim periods pending investment of the net proceeds from public
offerings of the Fund's securities or in anticipation of the repurchase or
redemption of the Fund's securities and temporary periods when, in the opinion
of FAM, prevailing market or economic conditions warrant.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act
in the proportion of its total assets that it may invest in securities of a
single issuer. However, each Fund's investments are limited so as to qualify
the Fund for the special tax treatment afforded RICs under the Federal tax
laws. To qualify, among other requirements, each Fund limits its investments
so that, at the close of each quarter of the taxable year, (i) not more than
25% of the market value of the Fund's total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer. A fund
that elects to be classified as "diversified" under the Investment Company Act
must satisfy the foregoing 5% requirement with respect to 75% of its total
assets. To the extent that any Fund assumes large positions in the securities
of a small number of issuers, the Fund's yield may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
Portfolio Insurance
Under normal circumstances, at least 80% of the assets of New York Insured,
New York Insured II and New York Insured III (referred to in this section as
the "Insured Funds") will be invested in New York Municipal Bonds and
Municipal Bonds either (i) insured under an insurance policy purchased by the
Insured Fund, or (ii) insured under an insurance policy obtained by the issuer
thereof or any other party. The Insured Funds will seek to limit their
investments to municipal obligations insured under insurance policies issued
by insurance carriers that have total admitted assets (unaudited) of at least
$75,000,000 and capital and surplus (unaudited) of at least $50,000,000 and
insurance claims-paying ability ratings of AAA from S&P or Fitch, or Aaa from
Moody's. There can be no assurance that insurance from insurance carriers
meeting these criteria will be available. See Exhibit V to this Proxy
Statement and Prospectus for a brief description of insurance claims-paying
ability ratings of S&P, Moody's and Fitch. Currently, it is anticipated that a
majority of the insured New York Municipal Bonds and Municipal Bonds in each
Insured Fund's portfolio will be insured by the following insurance companies
which satisfy the foregoing criteria: AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company, Financial Security Assurance and Municipal Bond
Investors Assurance Corporation. Each
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Insured Fund also may purchase New York Municipal Bonds and Municipal Bonds
covered by insurance issued by any other insurance company that satisfies the
foregoing criteria. A majority of insured New York Municipal Bonds and
Municipal Bonds held by each Insured Fund will be insured under policies
obtained by parties other than the Fund.
New York Fund is not subject to any requirement to invest in New York
Municipal Bonds or Municipal Bonds that are insured. Currently 46% of the
portfolio of New York Fund is comprised of insured New York Municipal Bonds
and Municipal Bonds. After the Reorganization, stockholders of New York Fund
will be invested in a fund that is subject to the requirement that under
normal circumstances, at least 80% of its assets will be invested in insured
New York Municipal Bonds and Municipal Bonds as described in the preceding
paragraph. Investing in insured Municipal Bonds and New York Municipal Bonds
may result in a Fund's having a lower yield than a fund that does not invest
in insured bonds. FAM believes however that any such decrease in yield would
not be material and would be offset by the lower overall operating expense
ratio of the combined fund after the Reorganization.
Each Insured Fund may purchase, but has no obligation to purchase, separate
insurance policies (the "Policies") from insurance companies meeting the
criteria set forth above that guarantee payment of principal and interest on
specified eligible New York Municipal Bonds and Municipal Bonds purchased by
the Insured Funds. A New York Municipal Bond or Municipal Bond will be
eligible for coverage if it meets certain requirements of the insurance
company set forth in a Policy. In the event interest or principal of an
insured New York Municipal Bond or Municipal Bond is not paid when due, the
insurer will be obligated under its Policy to make such payment not later than
30 days after it has been notified by, and provided with documentation from,
the Fund that such nonpayment has occurred.
The Policies will be effective only as to insured New York Municipal Bonds
and Municipal Bonds beneficially owned by an Insured Fund. In the event of a
sale of any New York Municipal Bonds and Municipal Bonds held by an Insured
Fund, the issuer of the relevant Policy will be liable only for those payments
of interest and principal that are then due and owing. The Policies will not
guarantee the market value of an insured New York Municipal Bond or Municipal
Bond or the value of the shares of an Insured Fund.
The insurer will not have the right to withdraw coverage on securities
insured by its Policies and held by an Insured Fund so long as such securities
remain in the Insured Fund's portfolio. In addition, the insurer may not
cancel its Policies for any reason except failure to pay premiums when due.
The Board of Directors of each Insured Fund reserves the right to terminate
any of the Policies if it determines that the benefits to the Insured Fund of
having its portfolio insured under such Policy are not justified by the
expense involved.
The premiums for the Policies are paid by the Insured Fund and the yield on
its portfolio is reduced thereby. FAM estimates that the cost of the annual
premiums for the Policies of each Insured Fund currently range from
approximately .02 of 1% to .15 of 1% of the principal amount of the New York
Municipal Bonds and Municipal Bonds covered by such Policies. The estimate is
based on the expected composition of each Insured Fund's portfolio of New York
Municipal Bonds and Municipal Bonds. Additional information regarding the
Policies is set forth in Exhibit V to this Proxy Statement and Prospectus. In
instances in which an Insured Fund purchases New York Municipal Bonds and
Municipal Bonds insured under policies obtained by parties other than the
Insured Fund, the Insured Fund does not pay the premiums for such policies;
rather, the cost of such policies may be reflected in the purchase price of
the New York Municipal Bonds and Municipal Bonds.
It is the intention of FAM to retain any insured securities that are in
default or in significant risk of default and to place a value on the
insurance, which ordinarily will be the difference between the market value of
the defaulted security and the market value of similar securities which are
not in default. In certain circumstances, however, FAM may determine that an
alternate value for the insurance, such as the difference between the market
value of the defaulted security and its par value, is more appropriate. FAM's
ability to manage the portfolio of an Insured Fund may be limited to the
extent it holds defaulted securities, which may limit its ability in certain
circumstances to purchase other New York Municipal Bonds and Municipal Bonds.
See "Net Asset Value" below for a more complete description of each Fund's
method of valuing defaulted securities and securities that have a significant
risk of default.
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There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to each Insured Fund. In the event the Board of Directors of an
Insured Fund determines that such insurance is unavailable or that the cost of
such insurance outweighs the benefits to the Insured Fund, the Insured Fund
may modify the criteria for insurance carriers or the terms of the insurance,
or may discontinue its policy of maintaining insurance for all or any of the
New York Municipal Bonds and Municipal Bonds held in the Insured Fund's
portfolio. Although FAM periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honor
their obligations under all circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured New York Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured New York Municipal Bonds or Municipal Bonds
are subject to market risk (i.e., fluctuations in market value as a result of
changes in prevailing interest rates).
Description of New York Municipal Bonds and Municipal Bonds
New York Municipal Bonds and Municipal Bonds include debt obligations issued
to obtain funds for various public purposes, including construction of a wide
range of public facilities, refunding of outstanding obligations and obtaining
funds for general operating expenses and loans to other public institutions
and facilities. In addition, certain types of private activity bonds ("PABs")
are issued by or on behalf of public authorities to finance various privately
operated facilities, including, among other things, airports, public ports,
mass commuting facilities and multi-family housing projects as well as
facilities for water supply, gas, electricity, sewage or solid waste disposal.
For purposes of this Proxy Statement and Prospectus, such obligations are
considered Municipal Bonds if the interest paid thereon is exempt from Federal
income tax and as New York Municipal Bonds if the interest thereon is exempt
from Federal income tax and New York State and New York City personal income
taxes, even though such bonds may be PABs as discussed below. Also, for
purposes of this Proxy Statement and Prospectus, Non-Municipal Tax-Exempt
Securities as discussed above will be considered New York Municipal Bonds or
Municipal Bonds.
The two principal classifications of New York Municipal Bonds and Municipal
Bonds are "general obligation" bonds and "revenue" bonds, which latter
category includes PABs and, for bonds issued on or before August 15, 1986,
industrial development bonds or IDBs. General obligation bonds are secured by
the issuer's pledge of faith, credit and taxing power for the repayment of
principal and the payment of interest. Revenue or special obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as from the user of the facility being
financed. PABs are in most cases revenue bonds and do not generally constitute
the pledge of the credit or taxing power of the issuer of such bonds. The
repayment of the principal and the payment of interest on such IDBs depends
solely on the ability of the user of the facility financed by the bonds to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. New York Municipal Bonds
and Municipal Bonds may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Each Fund may purchase New York Municipal Bonds and Municipal Bonds
classified as PABs. Interest received on certain PABs is treated as an item of
"tax preference" for purposes of the Federal alternative minimum tax and may
impact the overall tax liability of investors in the Fund. There is no
limitation on the percentage of each Fund's assets that may be invested in New
York Municipal Bonds and Municipal Bonds the interest on which is treated as
an item of "tax preference" for purposes of the Federal alternative minimum
tax. See "Comparison of the Funds--Tax Rules Applicable to the Funds and their
Stockholders."
Also included within the general category of New York Municipal Bonds and
Municipal Bonds are certificates of participation ("COPs") executed and
delivered for the benefit of government authorities or entities
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to finance the acquisition or construction of equipment, land and/or
facilities. COPs represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively referred to
as "lease obligations") relating to such equipment, land or facilities.
Although lease obligations do not constitute general obligations of the issuer
for which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is backed by the issuer's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses which provide that the issuer
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the lease
property, disposition of the property in the event of foreclosure might prove
difficult.
Federal tax legislation has limited and may continue to limit the types and
volume of bonds the interest on which is excludable from income for Federal
income tax purposes. As a result, this legislation and legislation that may be
enacted in the future may affect the availability of New York Municipal Bonds
and Municipal Bonds for investment by the Funds.
Special Considerations Relating to New York Municipal Bonds
Each Fund ordinarily will invest at least 65% of its total assets in New
York Municipal Bonds and, therefore, is more susceptible to factors adversely
affecting issuers of New York Municipal Bonds than is a municipal bond fund
that is not concentrated in issuers of New York Municipal Bonds to this
degree. As of June 18, 1999, Moody's, S&P and Fitch rated New York City's
general obligation bonds A3, A-, and A, respectively. As of June 15, 1999,
Moody's and S&P rated New York State's outstanding general obligation bonds A2
and A, respectively. Because each Fund's portfolio will comprise investment
grade securities (except that New York Fund may invest up to 10% in "junk
bonds"), each Fund is expected to be insulated from the market and credit
risks that may exist in connection with investments in non-investment grade
New York Municipal Bonds. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. The value of
Municipal Bonds generally may be affected by uncertainties in the municipal
markets as a result of legislation or litigation changing 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 or the New York Municipal Bonds in which the Funds invest. FAM does not
believe that the current economic conditions in New York or other factors
described above will have a significant adverse effect on any Fund's ability
to invest in high quality New York Municipal Bonds. For a discussion of
economic and other conditions in the State of New York, see Exhibit III,
"Economic and Other Conditions in New York," to this Proxy Statement and
Prospectus.
Other Investment Policies
The Funds have adopted certain other policies as set forth below:
Borrowings. Each Fund is authorized to borrow amounts of up to 5% of the
value of its total assets at the time of such borrowings; provided,
however, that each Fund is authorized to borrow moneys in amounts of up to
33 1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own common stock pursuant to tender offers or
otherwise to redeem or repurchase shares of preferred stock or for
temporary, extraordinary or emergency purposes. Borrowings by each Fund
(commonly known, as with the issuance of preferred stock, as "leveraging")
create an opportunity for greater total return since the Fund will not be
required to sell portfolio securities to repurchase or redeem shares but,
at the same time, increase exposure to capital risk. In addition, borrowed
funds are subject to interest costs that may offset or exceed the return
earned on the borrowed funds.
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When-Issued Securities and Delayed Delivery Transactions. Each Fund may
purchase or sell New York Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms.
These transactions arise when securities are purchased or sold by a Fund
with payment and delivery taking place in the future. The purchase will be
recorded on the date that the Fund enters into the commitment, and the
value of the obligation thereafter will be reflected in the calculation of
the Fund's net asset value. The value of the obligation on the delivery day
may be more or less than its purchase price. A separate account of the Fund
will be established with its custodian consisting of cash, cash equivalents
or liquid securities having a market value at all times at least equal to
the amount of the commitment.
Indexed and Inverse Floating Obligations. Each Fund may invest in New
York Municipal Bonds and Municipal Bonds yielding a return based on a
particular index of value or interest rates. For example, each Fund may
invest in New York Municipal Bonds and Municipal Bonds that pay interest
based on an index of Municipal Bond interest rates. The principal amount
payable upon maturity of certain New York Municipal Bonds and Municipal
Bonds also may be based on the value of an index. To the extent a Fund
invests in these types of Municipal Bonds, the Fund's return on such New
York Municipal Bonds and Municipal Bonds will be subject to risk with
respect to the value of the particular index. Also, a Fund may invest in
so-called "inverse floating obligations" or "residual interest bonds" on
which the interest rates typically vary inversely with a short-term
floating rate (which may be reset periodically by a dutch auction, a
remarketing agent, or by reference to a short-term tax-exempt interest rate
index). Each Fund may purchase synthetically-created inverse floating
obligations evidenced by custodial or trust receipts. Generally, income on
inverse floating obligations will decrease when short-term rates increase,
and will increase when short-term rates decrease. Such securities have the
effect of providing a degree of investment leverage, since they may
increase or decrease in value in response to changes, as an illustration,
in market interest rates at a rate that is a multiple (typically two) of
the rate at which fixed-rate, long-term, tax-exempt securities increase or
decrease in response to such changes. As a result, the market values of
such securities generally will be more volatile than the market values of
fixed-rate tax-exempt securities. To seek to limit the volatility of these
securities, a Fund may purchase inverse floating obligations with shorter-
term maturities or limitations on the extent to which the interest rate may
vary. FAM believes that indexed and inverse floating obligations represent
a flexible portfolio management instrument for the Funds that allows FAM to
vary the degree of investment leverage relatively efficiently under
different market conditions.
Call Rights. Each of the Funds may purchase a New York Municipal Bond or
Municipal Bond issuer's rights to call all or a portion of such New York
Municipal Bond or Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related New York Municipal Bonds or
Municipal Bonds, subject to certain conditions. A Call Right that is not
exercised prior to the maturity of the related New York Municipal Bond or
Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related New York Municipal Bond or Municipal
Bond is identical to holding a New York Municipal Bond or Municipal Bond as
a non-callable security.
Repurchase Agreements. The Funds may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with
a member bank of the Federal Reserve System or a primary dealer in U.S.
government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security
at a mutually agreed-upon time and price, thereby determining the yield
during the term of the agreement. The Funds may not invest in repurchase
agreements maturing in more than seven days if such investments, together
with all other illiquid investments, would exceed 15% of the Fund's net
assets. In the event of default by the seller under a repurchase agreement,
the Funds may suffer time delays and incur costs or possible losses in
connection with the disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
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Information Regarding Options and Futures Transactions
Each 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 each Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of the common stock, the net asset value of the common stock will fluctuate.
There can be no assurance that a Fund's hedging transactions will be
effective. In addition, because of the leveraged nature of the Common Stock,
hedging transactions will result in a larger impact on the net asset value of
the Common Stock than would be the case if the Common Stock were not
leveraged. Furthermore, a Fund may only engage in hedging activities from time
to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur. No Fund has an obligation to enter into
hedging transactions and each may choose not to do so.
Certain Federal income tax requirements may limit a Fund's ability to engage
in hedging transactions. Gains from transactions in options and futures
contracts distributed to stockholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to stockholders. In
addition, in order to obtain ratings of the AMPS from one or more NRSROs, a
Fund may be required to limit its use of hedging techniques in accordance with
the specified guidelines of such rating organizations. See "Rating Agency
Guidelines" below.
The following is a description of the options and futures transactions in
which each Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of a Fund are not fundamental policies and
may be modified by the Board of Directors of the Fund without the approval of
the Fund's stockholders.
Writing Covered Call Options. Each Fund is authorized to write (i.e., sell)
covered call options with respect to New York Municipal Bonds and Municipal
Bonds it owns, thereby giving the holder of the option the right to buy the
underlying security covered by the option from the Fund at the stated exercise
price until the option expires. Each Fund writes only covered call options,
which means that so long as the Fund is obligated as the writer of a call
option, it will own the underlying securities subject to the option. The Fund
may not write covered call options on underlying securities in an amount
exceeding 15% of the market value of its total assets.
Each Fund receives a premium from writing a call option, which increases the
Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as a writer continues. Covered call options serve as a partial
hedge against a decline in the price of the underlying security. Each Fund may
engage in closing transactions in order to terminate outstanding options that
it has written.
Purchase of Options. Each Fund may purchase put options in connection with
its hedging activities. By buying a put, the Fund has a right to sell the
underlying security at the exercise price, thus limiting its risk of loss
through a decline in the market value of the security until the put expires.
The amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be sold
in a closing sale transaction; profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. In certain circumstances, the Fund may purchase call options
on securities held in its portfolio on which it has written call options, or
on securities which it intends to purchase. A Fund will not purchase options
on securities if, as a result of such purchase, the aggregate cost of all
outstanding options on securities held by the Fund would exceed 5% of the
market value of the Fund's total assets.
Financial Futures Contracts and Options. Each Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purposes of hedging its investments in New York Municipal
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Bonds and Municipal Bonds against declines in value and hedging against
increases in the cost of securities it intends to purchase. A financial
futures contract obligates the seller of a contract to deliver and the
purchaser of a contract to take delivery of the type of financial instrument
covered by the contract or, in the case of index-based financial futures
contracts, to make and accept a cash settlement, at a specific future time for
a specified price. A sale of financial futures contracts may provide a hedge
against a decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase in the value
of the position in the financial futures contracts or options. A purchase of
financial futures contracts may provide a hedge against an increase in the
cost of securities intended to be purchased, because such appreciation may be
offset, in whole or in part, by an increase in the value of the position in
the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or
received. Instead, an amount of cash or securities acceptable to the broker
equal to approximately 5% of the contract amount must be deposited with the
broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the
price of the financial futures contract fluctuates making the long and short
positions in the financial futures contract more or less valuable.
Each Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value
of 40 large tax-exempt issues, and purchase and sell put and call options on
such financial futures contracts for the purpose of hedging New York Municipal
Bonds and Municipal Bonds that the Fund holds or anticipates purchasing
against adverse changes in interest rates. Each Fund also may purchase and
sell financial futures contracts on U.S. Government securities and purchase
and sell put and call options on such financial futures contracts for such
hedging purposes. With respect to U.S. Government securities, currently there
are financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by its Board of Directors, each Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if FAM should determine that there is normally sufficient correlation between
the prices of such financial futures contracts and the New York Municipal
Bonds and Municipal Bonds in which the Fund invests to make such hedging
appropriate.
Over-The-Counter Options. Each Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC option transactions are two-party contracts with price and terms
negotiated by the buyer and seller.
Restrictions on OTC Options. Each Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Funds are considered to be illiquid. The illiquidity of such options or
assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that otherwise might be
realized.
Risk Factors in Financial Futures Contracts and Options Thereon. Use of
futures transactions involves the risk of imperfect correlation in movements
in the price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, a Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics different from those of the security being hedged. In
addition, the correlation may be affected by additions to or deletions from
the index that serves as a basis for a financial futures contract. Finally, in
the case of financial futures contracts on U.S. Government securities and
options on such
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financial futures contracts, the anticipated correlation of price movements
between the U.S. Government securities underlying the futures or options and
New York Municipal Bonds and Municipal Bonds may be adversely affected by
economic, political, legislative or other developments which have a disparate
impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a Fund being deemed a
"commodity pool," as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
financial futures contracts and options thereon (i) for bona fide hedging
purposes, without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) for non-hedging purposes, if, immediately
thereafter the sum of the amount of initial margin deposits on the Fund's
existing futures positions and option premiums entered into for non-hedging
purposes do not exceed 5% of the market value of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses on any such transactions. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When a Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian, so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Although certain risks are involved in options and futures transactions, FAM
believes that, because each Fund will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of a Fund will not subject the Fund to the risks associated with
speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to New York
Municipal Bonds or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
Each Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an option or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to hedge effectively its portfolio. There
is also the risk of loss by a Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past reached or exceeded the daily limit on a number of
consecutive trading days.
If it is not possible to close a financial futures position entered into by
a Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
The successful use of these transactions also depends on the ability of FAM
to forecast correctly the direction and extent of interest rate movements
within a given time frame. To the extent these rates remain stable during the
period in which a financial futures contract is held by a Fund or move in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction that is not fully or partially offset by an
37
<PAGE>
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaging in hedging transactions
when movements in interest rates occur.
Investment Restrictions
The Funds have identical investment restrictions. The following are
fundamental investment restrictions of each Fund and may not be changed
without the approval of the holders of a majority of the outstanding shares of
Common Stock and the outstanding shares of AMPS and any other preferred stock,
voting together as a single class, and a majority of the outstanding shares of
AMPS and any other preferred stock, voting separately as a class. (For this
purpose and under the Investment Company Act, "majority" means for each such
class 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.) No Fund may:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies 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 Investment Company Act.
4. Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 (the "Securities
Act") in selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase New York
Municipal Bonds, Municipal Bonds and other debt securities and enter into
repurchase agreements in accordance with its investment objective, policies
and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided, that for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by each Fund, which may be
changed by the Board of Directors without stockholder approval, provide that
no Fund may:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the
38
<PAGE>
Fund of initial or variation margin in connection with financial futures
contracts and options thereon is not considered the purchase of a security
on margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on New York Municipal Bonds,
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may purchase
and sell Call Rights to require mandatory tender for the purchase of
related New York Municipal Bonds and Municipal Bonds.
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
For so long as shares of AMPS are rated by Moody's, no Fund will change
these additional investment restrictions unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of AMPS by Moody's.
FAM and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
are owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co."). Because of
the affiliation of Merrill Lynch with FAM, each 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
Investment Company Act and the rules and regulations thereunder. Included
among such restricted transactions will be purchases from or sales to Merrill
Lynch of securities in transactions in which it acts as principal. An
exemptive order has been obtained that permits the Funds to effect principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities subject to conditions set forth in such order. The Funds may
consider in the future requesting an order permitting other principal
transactions with Merrill Lynch, but there can be no assurance that such
application will be made and, if made, that such order would be granted.
Rating Agency Guidelines
Each Fund intends that, so long as shares of its AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's
and S&P in connection with the Fund's receipt of a rating for such shares on
or prior to their date of original issue of at least "aaa" from Moody's and
AAA from S&P. Moody's and S&P, which are nationally recognized statistical
rating organizations, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The guidelines for rating AMPS
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 each 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 Investment
Company Act.
Each 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 the 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
of each Fund, 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
39
<PAGE>
not impair the ratings then assigned by Moody's and S&P to the AMPS. See "The
Reorganization--Risk Factors and Special Considerations--Ratings
Considerations."
For so long as any shares of a Fund's AMPS are rated by Moody's or S&P, as
the case may be, a Fund's use of options and financial futures contracts and
options thereon will be subject to certain limitations mandated by the rating
agencies.
Portfolio Composition
There are small differences in concentration among the categories of issuers
of the New York Municipal Bonds and Municipal Bonds held in the portfolios of
the Funds. For New York Insured, as of August 31, 1999, the highest
concentration of New York Municipal Bonds and Municipal Bonds was in
Transportation, Housing and Hospitals/Healthcare, accounting for 22%, 19% and
16% of the Fund's portfolio, respectively; for New York Fund, the highest
concentration was in [General Obligation Bonds, Transportation and Housing],
accounting for 25%, 15% and 15% of the Fund's portfolio; for New York Insured
II, the highest concentration was in [Education, Housing and General
Obligation Bonds], accounting for 23%, 17% and 17% of the Fund's portfolio,
respectively; and for New York Insured III, the highest concentration was in
[Hospitals/Healthcare, Education and Transportation] accounting for 21%, 18%
and 14% of the Fund's portfolio, respectively.
Although the investment portfolios of all four Funds must satisfy the same
standards of credit quality (except that New York Fund may invest up to 10% of
its assets in "junk bonds"), the actual securities owned by each Fund are
different, as a result of which there are certain differences in the
composition of the four investment portfolios. The tables below set forth
rating information for the New York Municipal Bonds and Municipal Bonds held
by each Fund, as of a certain date.
New York Insured
As of August 31, 1999, approximately 98% of the market value of New York
Insured's portfolio was invested in long-term municipal obligations and
approximately 2% of the market value of New York Insured's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of New York Insured's
long-term municipal obligation investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 48 $191,607 84.2%
AA Aa 6 16,638 7.3
A A 3 19,378 8.5
--- -------- -----
57 $227,623 100.0%
=== ======== =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating categories
may be modified further by a 1, 2 or 3 in Aa, A and Baa ratings. See
Exhibit IV--"Ratings of Municipal Bonds and Commercial Paper."
40
<PAGE>
New York Fund
As of August 31, 1999, approximately 99.8% of the market value of New York
Fund's portfolio was invested in long-term municipal obligations and
approximately 0.2% of the market value of New York Fund's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of New York Fund's long-
term municipal obligation investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 27 $114,386 65.2%
AA Aa 5 24,298 13.9
A A 7 26,782 15.3
BBB Baa 4 9,880 5.6
--- -------- -----
43 $175,346 100.0%
=== ======== =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A, BBB, BB and B ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B
ratings. See Exhibit IV--"Ratings of Municipal Bonds and Commercial Paper."
New York Insured II
As of August 31, 1999, approximately 98% of the market value of New York
Insured II's portfolio was invested in long-term municipal obligations and
approximately 2% of the market value of New York Insured II's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of New York Insured II's
long-term municipal obligation investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 33 $106,418 88.9%
AA Aa 2 13,227 11.1
--- -------- -----
35 $119,645 100.0%
=== ======== =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating categories
may be modified further by a 1, 2 or 3 in Aa, A and Baa ratings. See
Exhibit IV--"Ratings of Municipal Bonds and Commercial Paper."
41
<PAGE>
New York Insured III
As of August 31, 1999, approximately 99% of the market value of New York
Insured III's portfolio was invested in long-term municipal obligations and
approximately 1% of the market value of New York Insured III's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of New York Insured III's
long-term municipal obligation investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 30 $ 98,830 89.0%
AA Aa 2 8,216 7.4
A A 1 3,943 3.6
--- -------- -----
33 $110,989 100.0%
=== ======== =====
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations, S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating categories
may be modified further by a 1, 2 or 3 in Aa, A and Baa ratings. See
Exhibit IV--"Ratings of Municipal Bonds and Commercial Paper."
Portfolio Transactions
The procedures for engaging in portfolio transactions are the same for each
of the Funds. Subject to policies established by the Board of Directors of
each Fund, FAM is primarily responsible for the execution of each Fund's
portfolio transactions. In executing such transactions, FAM seeks to obtain
the best results for each Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While FAM generally
seeks reasonably competitive commission rates, the Funds do not necessarily
pay the lowest commission or spread available.
None of the Funds has any obligation to deal with any broker or dealer in
the execution of transactions in portfolio securities. Subject to obtaining
the best price and execution, securities firms that provide supplemental
investment research to FAM, including Merrill Lynch, may receive orders for
transactions by a Fund. Information so received will be in addition to, and
not in lieu of, the services required to be performed by FAM under its
investment advisory agreements with the Funds, and the expenses of FAM will
not necessarily be reduced as a result of the receipt of such supplemental
information.
Each Fund invests in securities that are primarily traded in the over-the-
counter markets, and each Fund normally deals directly with the dealers who
make markets in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Under the Investment
Company Act, except as permitted by exemptive order, persons affiliated with a
Fund are prohibited from dealing with the Fund as principals in the purchase
and sale of securities. Since transactions in the over-the-counter markets
usually involve transactions with dealers acting as principals for their own
account, the Funds do not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions, except that,
pursuant to an exemptive order obtained by FAM, a Fund may engage in principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities. An affiliated person of a Fund may serve as its broker in over-
the-counter transactions conducted on an agency basis.
The Funds 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 Funds may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
The Board of Directors of each Fund has considered the possibility of
recapturing for the benefit of the Funds brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as
42
<PAGE>
underwriting commissions, by conducting portfolio transactions through
affiliated entities, including Merrill Lynch. For example, brokerage
commissions received by Merrill Lynch could be offset against the investment
advisory fees paid by the Fund to FAM. After considering all factors deemed
relevant, the Directors of each Fund made a determination not to seek such
recapture. The Directors will reconsider this matter from time to time.
Periodic auctions are conducted for the AMPS of each of the Funds by the
Auction Agent for the Funds. The auctions require the participation of one or
more broker-dealers, each of whom enters into an agreement with the Auction
Agent. After each auction, the Auction Agent pays a service charge, from funds
provided by the issuing Fund, to each broker-dealer at the annual rate of
.25%, calculated on the basis of the purchase price of shares of the relevant
AMPS placed by such broker-dealer at such auction.
Portfolio Turnover
Generally, no Fund purchases securities for short-term trading profits.
However, any of the Funds may dispose of securities without regard to the time
that they have been held when such action, for defensive or other reasons,
appears advisable to FAM. (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 a 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. The portfolio turnover
rate for each of the Funds for the periods indicated is set forth below:
<TABLE>
<S> <C> <C>
Period 9/19/97+ Year
New York Insured to 8/31/98 Ended 8/31/99
--------------- -------------
52.91% 34.48%
Period 2/27/98+ Year
New York Fund to 6/30/98 Ended 6/30/99
--------------- -------------
28.25% 100.06%
Period 10/1/98+
New York Insured II to 9/30/99
---------------
%
Period 1/29/99+
New York Insured III to 9/30/99
---------------
%
</TABLE>
- --------
+ Commencement of operations
Net Asset Value
The net asset value per share of Common Stock of each Fund is determined
after the close of business on the NYSE (generally, 4:00 p.m., Eastern time)
on the last business day in each week. For purposes of determining the net
asset value of a share of Common Stock of each Fund, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
AMPS is divided by the total number of shares of Common Stock outstanding at
such time. Expenses, including the fees payable to FAM, are accrued daily.
43
<PAGE>
The New York Municipal Bonds and Municipal Bonds in which each Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value, each Fund uses the valuations of portfolio securities furnished by a
pricing service approved by its Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. New York Municipal Bonds and Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a
matrix system to determine valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of each Fund under the general
supervision of the Board of Directors of the Fund. The Board of Directors of
each Fund has determined in good faith that the use of a pricing service is a
fair method of determining the valuation of portfolio securities. Positions in
futures contracts are valued at closing prices for such contracts established
by the exchange on which they are traded, or if market quotations are not
readily available, are valued at fair value on a consistent basis using
methods determined in good faith by the Board of Directors of each Fund.
Each Fund determines and makes available for publication the net asset value
of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
Capital Stock
Each of the Funds has outstanding both Common Stock and AMPS. The Common
Stock of each of the Funds is traded on the NYSE. The shares of New York
Insured Common Stock commenced trading on the NYSE on September 27, 1997. As
of August 31, 1999, the net asset value per share of New York Insured Common
Stock was $14.16 and the market price per share was $14.00. The shares of New
York Fund Common Stock commenced trading on the NYSE on March 2, 1998. As of
August 31, 1999, the net asset value per share of New York Fund Common Stock
was $13.42 and the market price per share was $12.75. The shares of New York
Insured II Common Stock commenced trading on the NYSE on October 8, 1998. As
of August 31, 1999, the net asset value per share of New York Insured II
Common Stock was $12.56 and the market price per share was $12.4375. The
shares of New York Insured III Common Stock commenced trading on the NYSE on
February 8, 1999. As of August 31, 1999, the net asset value per share of New
York Insured III Common Stock was $12.64 and the market price per share was
$12.3125.
Each Fund is authorized to issue 200,000,000 shares of capital stock, all of
which shares initially were classified as Common Stock. The Board of Directors
of each Fund is authorized to classify or reclassify any unissued shares of
capital stock by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. In connection with each
respective Fund's offering of shares of AMPS, New York Insured reclassified
3,800 shares of unissued capital stock as AMPS, New York Fund reclassified
3,040 shares of unissued capital stock as AMPS, New York Insured II
reclassified 2,120 shares of unissued capital stock as AMPS and New York
Insured III reclassified 2,000 shares of unissued capital stock as AMPS.
Common Stock
Holders of each Fund's Common Stock are entitled to share equally in
dividends declared by the Fund's Board of Directors payable to holders of the
Common Stock and in the net assets of the Fund available for distribution to
holders of the Common Stock after payment of the preferential amounts payable
to holders of any outstanding preferred stock. See "Voting Rights" and
"Liquidation Rights of Holders of AMPS" below. Holders of a Fund's Common
Stock do not have preemptive or conversion rights and shares of a Fund's
Common Stock are not redeemable. The outstanding shares of Common Stock of
each Fund are fully paid and nonassessable.
So long as any shares of a Fund's AMPS or any other preferred stock are
outstanding, holders of the Fund's Common Stock will not be entitled to
receive any dividends of or other distributions from the Fund unless all
44
<PAGE>
accumulated dividends on outstanding shares of the Fund's AMPS and any other
preferred stock have been paid, and unless asset coverage (as defined in the
Investment Company Act) with respect to such AMPS and any other preferred
stock would be at least 200% after giving effect to such distributions.
Preferred Stock
The AMPS of each of the Funds have a similar structure. The AMPS of each
Fund are shares of preferred stock of the Fund 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. The AMPS of all of the Funds have liquidation
preferences of $25,000 per share; none of the Fund's AMPS are traded on any
stock exchange or over-the-counter. Each Fund's AMPS can be purchased at an
auction or through broker-dealers who maintain a secondary market in the AMPS.
Auctions generally have been held and will be held every seven days for the
AMPS of each of the Funds, unless the applicable Fund elects, subject to
certain limitations, to declare a special dividend period. The following table
provides information about the dividend rates for each series of AMPS of each
of the Funds as of a recent auction.
<TABLE>
<CAPTION>
Auction Date Fund Series Dividend Rate
------------ -------------------- ------ ------------- ---
<S> <C> <C> <C> <C>
September 8, 1999 New York Insured A 3.30%
September 9, 1999 New York Insured B 3.30%
September 3, 1999 New York Fund A 3.35%
September 7, 1999 New York Fund B 3.30%
September 9, 1999 New York Insured II A 3.30%
September 10, 1999 New York Insured II B 3.30%
September 7, 1999 New York Insured III A 3.30%
</TABLE>
Under the Investment Company Act, each 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. Holders of a Fund's preferred stock do not have
preemptive rights to purchase any shares of AMPS or any other preferred stock
that might be issued. The net asset value per share of a Fund's AMPS equals
its liquidation preference plus accumulated dividends per share.
The redemption provisions pertaining to the AMPS of each Fund are
substantially similar. It is anticipated that shares of AMPS of each Fund will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference of $25,000 per share plus accumulated but unpaid
dividends (whether or not earned or declared) to the date of redemption plus,
under certain circumstances, a redemption premium. Shares of AMPS will also be
subject to mandatory redemption at a price equal to their liquidation
preference plus accumulated but unpaid dividends (whether or not earned or
declared) to the date of redemption upon the occurrence of certain specified
events, such as the failure of the Fund to maintain the asset coverage for the
AMPS specified by Moody's and S&P in connection with their issuance of ratings
on the AMPS.
Certain Provisions of the Charter
Each 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 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 by vote of the holders of at least 66 2/3% of the votes
entitled to be voted on the matter. A Director elected by all 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 the holders of AMPS and any other preferred stock.
45
<PAGE>
In addition, the Charter of each Fund requires the favorable vote of the
holders of at least 66 2/3% of all of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
. a merger or consolidation or statutory share exchange of the Fund with
any other corporation or entity,
. a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities), or
. a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by stockholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing also would require the favorable vote of at least a majority of the
Fund's shares of preferred stock then entitled to be voted thereon, including
the AMPS, voting as a separate class.
In addition, conversion of a 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 affirmative vote of the
holders of at least 66 2/3% of 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 at least two-
thirds of the total number of Directors fixed in accordance with the by-laws),
and the affirmative vote of at least a majority of outstanding shares of
preferred stock of a Fund (including the AMPS), voting as a separate class.
Such a vote also would satisfy a separate requirement in the Investment
Company 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 Investment Company Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption.
All redemptions will be made in cash. If the Fund is converted to an open-end
investment company, it could be required to liquidate portfolio securities to
meet requests for redemption and the Common Stock no longer would 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 Board of Directors of each Fund has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the Investment Company Act, are in the best interests of
stockholders generally. Reference should be made to the Charter of each Fund
on file with the SEC for the full text of these provisions.
Management of the Funds
Directors and Officers. The Boards of Directors of New York Fund, New York
Insured II and New York Insured III currently consist of the same seven
persons, five of whom are not "interested persons," as defined in the
Investment Company Act, of any of those Funds. The Board of Directors of New
York Insured currently consists of seven persons, five of whom are not
"interested persons" of New York Insured. Terry K. Glenn serves as a Director
and President of each of the Funds, and Arthur Zeikel serves as a Director of
each of the Funds. The Directors of each Fund 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 Investment Company Act
and under applicable Maryland law. The Funds have the same slate of officers
with a few exceptions. For further information regarding the Directors and
officers of each Fund, see "Item 2. Election of Directors" and Exhibit I--
"Information Pertaining to Each Fund."
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Robert A. DiMella and Roberto W. Roffo serve as the portfolio managers for
New York Insured II and New York Insured III. Robert A. DiMella and Robert D.
Sneeden serve as the portfolio managers for New York Insured and New York
Fund. Mr. DiMella and Mr. Sneeden will continue to serve as the portfolio
managers of the combined fund after the Reorganization. The portfolio managers
are primarily responsible for the management of the applicable Fund's
portfolio. Biographical information about Messrs. DiMella, Roffo and Sneeden
is contained in Exhibit I--"Information Pertaining to Each Fund."
Management and Advisory Arrangements. FAM, which is owned and controlled by
ML & Co., serves as the investment adviser for each of the Funds pursuant to
separate investment advisory agreements that, except for their termination
dates, are identical. FAM provides each Fund with the same investment advisory
and management services. The Asset Management Group of ML & Co. (which
includes FAM) acts as the investment adviser to more than 100 other registered
investment companies and offers services to individuals and institutional
accounts. As of , the Asset Management Group had a total of approximately
$ billion in investment company and other portfolio assets under management
(approximately $ billion of which were invested in municipal securities).
This amount includes assets managed for certain affiliates of FAM. FAM is a
limited partnership, the partners of which are ML & Co. and Princeton
Services, Inc. The principal business address of FAM is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Each Fund's investment advisory agreement with FAM provides that, subject to
the supervision of the Board of Directors of the Fund, FAM is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security for each Fund rests with
FAM, subject to review by the Board of Directors of the Fund.
FAM provides the portfolio management for each of the Funds. Such portfolio
management considers analyses from various sources (including brokerage firms
with which each Fund does business), makes the necessary investment decisions,
and places orders for transactions accordingly. FAM also is responsible for
the performance of certain administrative and management services for each
Fund.
For the services provided by FAM under each Fund's investment advisory
agreement, the Fund pays a monthly fee at an annual rate of .55 of 1% of the
Fund's average weekly net assets (i.e., the average weekly value of the total
assets of the Fund, including assets acquired from the sale of preferred
stock, minus the sum of accrued liabilities of the Fund and accumulated
dividends on its shares of preferred stock). For purposes of this calculation,
average weekly net assets are determined at the end of each month on the basis
of the average net assets of the Fund for each week during the month. The
assets for each weekly period are determined by averaging the net assets at
the last business day of a week with the net assets at the last business day
of the prior week.
Each Fund's investment advisory agreement obligates FAM 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
FAM or any of its affiliates. Each Fund pays all other expenses incurred in
the operation of the Fund, including, among other things, expenses for legal
and auditing services, taxes, costs of printing proxies, listing fees, stock
certificates and stockholder reports, charges of the custodian and the
transfer agent, dividend disbursing agent and registrar, fees and expenses
with respect to the issuance of AMPS, SEC fees, fees and expenses of
unaffiliated 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. FAM provides
accounting services to each Fund, and each Fund reimburses FAM for its
respective costs in connection with such services.
Unless earlier terminated as described below, the investment advisory
agreement between each Fund and FAM will continue from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding shares of the Fund's Common Stock and AMPS, voting together
as a single class,
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and (b) by a majority of the Directors of the Fund who are not parties to such
contract or "interested persons," as defined in the Investment Company Act, of
any such party. The contract is not assignable and it 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.
Securities held by a Fund may also be held by, or be appropriate investments
for, other funds or investment advisory clients for which FAM or its
affiliates act as an adviser. Because of different objectives or other
factors, a particular security may be bought for an advisory client when other
clients are selling the same security. If purchases or sales of securities by
FAM for a Fund or other funds for which it acts as investment adviser or for
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. Transactions
effected by FAM (or its affiliates) on behalf of more than one of its clients
during the same period may increase the demand for securities being purchased
or the supply of securities being sold, causing an adverse effect on price.
Code of Ethics
The Board of Directors of each of the Funds has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act that incorporates the
Code of Ethics of FAM (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of FAM and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of FAM preclear any personal securities
investment (with limited exceptions, such as U.S. Government securities). The
preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of FAM
include a ban on acquiring any securities in a "hot" initial public offering
and a prohibition from profiting on short-term trading securities. In
addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by FAM.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of each of the Funds within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
Voting Rights
Voting rights are identical for the holders of shares of each Fund's Common
Stock. Holders of each Fund's Common Stock are entitled to one vote for each
share held and will vote with the holders of any outstanding shares of the
Fund's AMPS or other preferred stock on each matter submitted to a vote of
holders of Common Stock, except as set forth below.
Stockholders of each Fund are entitled to one vote for each share held. The
shares of each Fund's 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 a Fund's Common Stock, AMPS and any other preferred stock
voting for the election of Directors can elect all of the Directors standing
for election by such holders, and, in such event, the holders of the remaining
shares of a Fund's Common Stock, AMPS and any other preferred stock will not
be able to elect any of such Directors.
Voting rights of the holders of each Fund's AMPS are identical. Except as
otherwise indicated below, and except as otherwise required by applicable law,
holders of shares of a Fund's AMPS will be entitled to one vote per share on
each matter submitted to a vote of the Fund's stockholders and will vote
together with the holders of shares of the Fund's Common Stock as a single
class.
In connection with the election of a Fund's Directors, holders of shares of
a Fund's AMPS, voting separately as a class, shall be entitled at all times to
elect two of the Fund's Directors, and the remaining Directors will be
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elected by holders of shares of the Fund's Common Stock and shares of the
Fund's AMPS and any other preferred stock, voting together as a single class.
In addition, if at any time dividends on outstanding shares of a Fund's 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 a Fund's preferred stock
are entitled, together with the holders of shares of the Fund's AMPS, to elect
a majority of the Directors of the Fund under the Investment Company 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 the Fund's AMPS and any other preferred stock, voting separately as
a 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 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 shares 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 the holders of a majority of the outstanding shares
of a Fund's AMPS, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.
Stockholder Inquiries
Stockholder inquiries with respect to any of the Funds may be addressed to
such Fund by telephone at (609) 282-2800 or at the address set forth on the
cover page of this Proxy Statement and Prospectus.
Dividends and Distributions
The Funds' current policies with respect to dividends and distributions
relating to shares of their Common Stock are identical. Each Fund intends to
distribute all of its net investment income. Dividends from such net
investment income are declared and paid monthly to holders of a Fund's Common
Stock. Monthly distributions to holders of a Fund's Common Stock normally
consist of substantially all of the net investment income remaining after the
payment of dividends on the Fund's AMPS. All net realized long-term or short-
term capital gains, if any, are distributed at least annually, pro rata to
holders of shares of a Fund's Common Stock and AMPS. While any shares of a
Fund's AMPS are outstanding, the Fund may not declare any cash dividend or
other distribution on the Fund's Common Stock, unless at the time of such
declaration (1) all accumulated dividends on the Fund's AMPS have been paid,
and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200%
of the liquidation value of the Fund's outstanding shares of AMPS. This
limitation on a Fund's ability to make distributions on its Common Stock under
certain circumstances could impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company under the Federal
tax laws which would have an adverse impact on stockholders. See "Comparison
of the Funds--Tax Rules Applicable to the Funds and their Stockholders."
Similarly, the Funds' current policies with respect to dividends and
distributions on shares of their AMPS are identical. The holders of shares of
a Fund's AMPS are 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.
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Dividends on a Fund's 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. Dividends for each Fund's AMPS are paid through The Depository
Trust Company ("DTC") (or a successor securities depository) on each dividend
payment date. DTC's normal procedures now provide for it to distribute
dividends in same-day funds to agent members, who in turn are expected to
distribute such dividends to the person for whom they are acting as agent in
accordance with the instructions of such person. Prior to each dividend
payment date, the relevant Fund is required to deposit with the Auction Agent
sufficient funds for the payment of such declared dividends. None of the Funds
intends to establish any reserves for the payment of dividends, and no
interest will be payable in respect of any dividend payment or payment on the
shares of a Fund's AMPS which may be in arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on New York Municipal Bonds, are exempt from Federal income tax and New
York State and New York City personal income taxes, subject to the possible
application of the Federal alternative minimum tax. However, each Fund is
required to allocate net capital gains and other income subject to regular
Federal income tax and New York State and New York City personal income taxes,
if any, proportionately between shares of its Common Stock and shares of its
AMPS in accordance with the current position of the IRS described herein. See
"Tax Rules Applicable to the Funds and their Shareholders" below. Each Fund
notifies the Auction Agent of the amount of any net capital gains or 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 Auction Agent
in turn notifies each broker-dealer whenever it receives any such notice from
a Fund, and each broker-dealer then notifies its customers who are holders of
the Fund's AMPS. Each Fund also may include such income in a dividend on
shares of its AMPS without giving advance notice thereof if it increases the
dividend by an additional amount to offset the tax effect thereof. The amount
of taxable income allocable to shares of a Fund's AMPS will depend upon the
amount of such income realized by the Fund and other factors, but generally is
not expected to be significant.
For information concerning the manner in which dividends and distributions
to holders of each Fund's Common Stock may be reinvested automatically in
shares of the Fund's Common Stock, see "Automatic Dividend Reinvestment Plan"
below. Dividends and distributions will be subject to the tax treatment
discussed below, whether they are reinvested in shares of a Fund or received
in cash.
If any Fund retroactively allocates any net capital gains or other income
subject to regular Federal income tax and New York State and New York City
personal income taxes to shares of its AMPS without having given advance
notice thereof as described above, which only may happen when such allocation
is made as a result of the redemption of all or a portion of the outstanding
shares of its AMPS or the liquidation of the Fund, the Fund will make certain
payments to holders of shares of its AMPS to which such allocation was made to
offset substantially the tax effect thereof. In no other instances will the
Fund be required to make payments to holders of shares of its AMPS to offset
the tax effect of any reallocation of net capital gains or other taxable
income.
Automatic Dividend Reinvestment Plan
Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, a
"Plan"), unless a holder of a Fund's Common Stock elects otherwise, all
dividend and capital gains distributions are automatically reinvested by
either The Bank of New York or State Street Bank and Trust Company, as
applicable, as agent for stockholders in administering the Plan (as
applicable, the "Plan Agent"), in additional shares of the Fund's Common
Stock. The Bank of New York is the Plan Agent for New York Insured and will be
the Plan Agent following the Reorganization. Holders of a Fund's Common Stock
who elect not to participate in the Plan receive all distributions in cash
paid by check mailed directly to the stockholder of record (or, if the shares
are held in street or other nominee name, then to such nominee) by The Bank of
New York or State Street Bank and Trust Company, as applicable, as dividend
paying agent. Such stockholders may elect not to participate in the Plan and
to receive all distributions of dividends and capital gains in cash by sending
written instructions to The Bank
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of New York or State Street Bank and Trust Company, as applicable, as dividend
paying agent, at the address set forth below. Participation in the Plan is
completely voluntary and may be terminated or resumed at any time without
penalty by written notice if received by the Plan Agent not less than ten days
prior to any dividend record date; otherwise, such termination or resumption
will be effective with respect to any subsequently declared dividend or
capital gains distribution.
Whenever a Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in the Plan receive cash, and participants in the
Plan receive the equivalent in shares of the Fund's Common Stock. The shares
are acquired by the Plan Agent for the participant's account, depending upon
the circumstances described below, either (i) through receipt of additional
unissued but authorized shares of the Fund's Common Stock from the Fund
("newly-issued shares") or (ii) by purchase of outstanding shares of the
Fund's Common Stock on the open market ("open-market purchases"), on the NYSE
or elsewhere. If on the payment date for the dividend, the net asset value per
share of the Fund's Common Stock is equal to or less than the market price per
share of the Fund's Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent
invests the dividend amount in newly-issued shares on behalf of the
participant. The number of newly-issued shares of the Fund's Common Stock to
be credited to the participant's account is determined by dividing the dollar
amount of the dividend by the net asset value per share on the date the shares
are issued, provided that the maximum discount from the then-current market
price per share on the date of issuance may not exceed 5%. If on the dividend
payment date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Plan Agent
invests the dividend amount in shares acquired on behalf of the participant in
open-market purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent has until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. Each Fund intends to pay monthly
income dividends. Therefore, the period during which open-market purchases can
be made exists only from the payment date on the dividend through the date
before the next "ex-dividend" date, which typically is approximately ten days.
If, before the Plan Agent has completed its open-market purchases, the market
price of a share of a Fund's Common Stock exceeds the net asset value per
share, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's shares, resulting in the acquisition of
fewer shares than if the dividend had been paid in newly-issued shares on the
dividend payment date. Because of the foregoing difficulty with respect to
open-market purchases, the Plan provides that if the Plan Agent is unable to
invest the full dividend amount in open-market purchases during the purchase
period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent ceases making open-market purchases and
invests the uninvested portion of the dividend amount in newly-issued shares
at the close of business on the last purchase date.
The Plan Agent maintains all stockholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders for tax records. Shares in the account of
each Plan participant are held by the Plan Agent in non-certificated form in
the name of the participant, and each stockholder's proxy includes those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of stockholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record stockholders as representing the total amount registered
in the record stockholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There are no brokerage charges with respect to shares issued directly by any
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant pays a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
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The automatic reinvestment of dividends and distributions does not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Comparison of the Funds--Tax
Rules Applicable to the Funds and their Stockholders."
Stockholders participating in the Plan may receive benefits not available to
stockholders not participating in the Plan. If the market price (plus
commissions) of a Fund's shares of Common Stock is higher than net asset
value, participants in the Plan receive shares of the Fund's Common Stock at
less than they otherwise could purchase them and have shares with a cash value
greater than the value of any cash distribution they would have received on
their shares. If the market price plus commissions is less than net asset
value, participants receive distributions of shares with a net asset value
greater than the value of any cash distribution they would have received on
their shares. However, there may be insufficient shares available in the
market to make distributions of shares at prices below the net asset value.
Also, since the Funds normally do not redeem their shares, the price on resale
may be more or less than the net asset value. See "Comparison of the Funds--
Tax Rules Applicable to the Funds and their Stockholders" for a discussion of
the tax consequences of the Plan.
Each Fund reserves the right to amend or terminate its Plan. There is no
direct service charge to participants in the Plan; however, each Fund reserves
the right to amend its Plan to include a service charge payable by the
participants.
After the Reorganization, a holder of shares of an Acquired Fund who has
elected to receive dividends in cash will continue to receive dividends in
cash; all other holders will have their dividends automatically reinvested in
shares of the combined fund. However, if a stockholder owns shares in an
Acquired Fund and in New York Insured, after the Reorganization, the
stockholder's election with respect to the dividends of New York Insured will
control unless the stockholder specifically elects a different option at that
time. Following the Reorganization, all correspondence should be directed to
the Plan Agent, The Bank of New York, at 101 Barclay Street, New York, New
York 10286.
Mutual Fund Investment Option
A holder of Common Stock of any Fund, who purchased his or her shares
through Merrill Lynch in the Fund's initial public offering, has the right to
reinvest the net proceeds from a sale of such shares in Class D shares of
certain Merrill Lynch-sponsored open-end funds without the imposition of an
initial sales charge, if certain conditions are satisfied. A holder of Common
Stock of an Acquired Fund who qualifies for this option will have the same
option with respect to the shares of New York Insured Common Stock received in
the Reorganization.
Liquidation Rights of Holders of AMPS
Upon any liquidation, dissolution or winding up of any Fund, whether
voluntary or involuntary, the holders of shares of the Fund's 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
the Fund's Common Stock or any other capital stock of the Fund ranking junior
in right of payment upon liquidation to AMPS, $25,000 per share together with
the amount of any dividends accumulated but unpaid (whether or not earned or
declared) thereon to the date of distribution, and after such payment the
holders of AMPS will be entitled to no other payments except for any
additional dividends. If such assets of the Fund shall be insufficient to make
the full liquidation payment on the 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 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
shares of a Fund's AMPS will not be entitled to any further participation in
any distribution of assets by the Fund except for any additional dividends. A
consolidation, merger or share exchange of a 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 for this purpose.
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Tax Rules Applicable to the Funds and their Stockholders
The tax consequences of investing in shares of Common Stock or AMPS of each
of the Funds are identical. Each of the Funds has elected (or will elect, as
the case may be) and qualified (or will qualify, as applicable) for the
special tax treatment afforded RICs under the Code. As a result, in any
taxable year in which they distribute an amount equal to at least 90% of
taxable net income and 90% of tax-exempt net income (see below), the Funds are
not subject to Federal income tax to the extent that they distribute their net
investment income and net realized capital gains. In all taxable years through
the taxable year of the Reorganization, each Fund has distributed
substantially all of its income. New York Insured intends to continue to
distribute substantially all of its income following the Reorganization.
Each Fund is qualified 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 a Fund's total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund is qualified to
pay exempt-interest dividends to its stockholders. Exempt-interest dividends
are dividends or any part thereof paid by a 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 stockholders within 60 days
after the close of its taxable year. To the extent that the dividends
distributed to a Fund's stockholders are derived from interest income exempt
from Federal income tax under Code Section 103(a) and are properly designated
as exempt-interest dividends, they are excludable from a stockholder's gross
income for Federal income tax purposes. Exempt-interest dividends are
included, however, in determining the portion, if any, of a person's social
security benefits and railroad retirement benefits subject to Federal income
taxes. Interest on indebtedness incurred or continued to purchase or carry a
Fund's shares is not deductible for Federal income tax purposes to the extent
attributable to exempt-interest dividends. A tax adviser should be consulted
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if a stockholder would be treated as a "substantial user"
or "related person" under Code Section 147(a) with respect to property
financed with the proceeds from an issue of "industrial development bonds" or
"private activity bonds," if any, held by a Fund.
The portion of exempt-interest dividends paid from interest received by a
Fund from New York Municipal Bonds also is exempt from New York State and New
York City personal income taxes. However, exempt-interest dividends paid to a
corporate stockholder are subject to New York State corporation franchise tax
and New York City general corporation tax. Stockholders subject to income
taxation by states other than New York and cities other than New York City
realize a lower after-tax rate of return than New York State and City
stockholders since the dividends distributed by a Fund generally are not
exempt, to any significant degree, from income taxation by such other states
or cities. Each Fund informs its stockholders annually as to the portion of
the Fund's distributions that constitutes exempt-interest dividends and the
portion that is exempt from New York State and New York City personal income
taxes. Interest on indebtedness incurred or continued to purchase or carry a
Fund's shares is not deductible for Federal income tax or New York State or
New York City personal income tax purposes to the extent attributable to
exempt-interest dividends.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the currently outstanding
AMPS of each of the Funds, as well as the Series C, D and E AMPS to be issued
by New York Insured Fund, are substantially similar, but not identical, to the
AMPS discussed in the revenue ruling. In the opinion of Brown & Wood LLP,
counsel to all four Funds, the shares of each Fund's currently outstanding
AMPS, as well as the Series C, D and E AMPS to be issued by New York Insured,
constitute stock, and distributions with respect to shares of such 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 current and
accumulated earnings and profits as calculated for Federal income tax
purposes. Nevertheless, the IRS could take a contrary position, asserting, for
example, that the shares of AMPS constitute debt. If this position were
upheld, the discussion of the treatment of distributions below would not apply
to holders of shares of AMPS. Instead, distributions by each Fund to holders
of shares of its AMPS would constitute interest, whether or not they exceed
the earnings and profits of the Fund, would be included in full in the income
of the recipient
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and taxed as ordinary income. Counsel believes that such a position, if
asserted by the IRS, would be unlikely to prevail.
To the extent that a 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 taxable ordinary income for Federal income tax and New York State
and New York City personal 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, and for New York State and New York City personal
income tax purposes will be treated as capital gains which are taxed at
ordinary income rates. Certain categories of capital gains are taxable at
different rates for Federal income tax purposes. Generally not later than 60
days after the close of its taxable year, a Fund provides its stockholders
with a written notice designating the amounts of any exempt-interest dividends
and capital gain dividends, as well as any amount of capital gain dividends in
the different categories of capital gain referred to above. Distributions by a
Fund, whether from exempt-interest income, ordinary income or capital gains,
are not eligible for the dividends received deduction for corporations under
the Code.
A loss realized on a sale or exchange of shares of a Fund is disallowed if
other Fund shares are acquired (whether under the Automatic Dividend
Reinvestment Plan or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
All or a portion of a Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by stockholders. Any loss upon the sale or exchange of Fund
shares held for six months or less is treated as long-term capital loss to the
extent of exempt-interest dividends received by the stockholder. In addition,
such loss is disallowed to the extent of any capital gain dividends received
by the stockholder. Distributions in excess of a Fund's earnings and profits
first will 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). If a 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 is treated for tax purposes as paid by the Fund and
received by its stockholders on December 31 of the year in which such dividend
was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two or
more classes of shares it may designate distributions made to each class in
any year as consisting of no more than such class' proportionate share of
particular types of income, including exempt-interest dividends and capital
gain dividends. A class's proportionate share of a particular type of income
is determined according to the percentage of total dividends paid by the RIC
during such year that was paid to such class. Consequently, when Common Stock
and one or more series of AMPS are outstanding, each Fund intends to designate
distributions made to the classes as consisting of particular types of income
in accordance with each class's proportionate share of such income. After the
Reorganization, New York Insured will, likewise, so designate distributions
with respect to its Common Stock and its AMPS, Series A, B, C, D and E. Each
Fund may notify the Auction Agent of the amount of any net capital gains and
other taxable income to be included in any dividend on shares of its AMPS
prior to the auction establishing the applicable rate for such dividend.
Except for the portion of any dividend that a Fund informs the Auction Agent
will be treated as capital gains or other taxable income, the dividends paid
on the shares of AMPS constitute exempt-interest dividends. Alternatively,
each Fund may include such income in a dividend on shares of its AMPS without
giving advance notice thereof if it increases the dividend by an additional
amount to offset the tax effect thereof. The amount of net capital gains and
ordinary income allocable to shares of a Fund's AMPS (the "taxable
distribution") depends upon the amount of such gains and income realized by
the Fund and the total dividends paid by the Fund on shares of its Common
Stock and shares of its AMPS during a taxable year, but the taxable
distribution generally is not significant.
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In the opinion of Brown & Wood LLP, counsel to all four Funds, under current
law the manner in which each Fund allocates, and New York Insured Fund will
allocate, items of tax-exempt income, net capital gains, and other taxable
income, if any, among shares of Common Stock and outstanding AMPS (including,
for New York Insured, Series A and B AMPS and the newly issued series of AMPS)
will be respected for Federal income tax purposes. However, the tax treatment
of additional dividends may affect a Fund's calculation of each class'
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 a Fund's method for allocating tax-exempt income, net
capital gains and other taxable income among shares of Common Stock and the
outstanding 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 a Fund's net capital gains or other taxable income. In
the event of a reallocation, some of the dividends identified by a Fund as
exempt-interest dividends to holders of shares of its AMPS could be
recharacterized as additional capital gains or other taxable income. In the
event of such recharacterization, a Fund is not required to make payments to
such stockholders to offset the tax effect of such reallocation. In addition,
a reallocation could cause a Fund to be liable for income tax and excise tax
on all reallocated taxable income. Brown & Wood LLP advised each Fund that, in
its opinion, if the IRS were to challenge in court a Fund's allocations of
income and gain, the IRS would be unlikely to prevail. The opinion of Brown &
Wood LLP, however, represents only its best legal judgment and is not binding
on the IRS or the courts.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
it 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 does not apply
to the tax-exempt income of RICs, such as the Funds, that pay exempt-interest
dividends.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The 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 generally performed by governmental units
and which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference" which could subject investors in such bonds,
including stockholders of the Funds, to an increased Federal alternative
minimum tax. Each Fund purchases such "private activity bonds" and reports 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 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 a Fund is included in adjusted current earnings, a corporate
stockholder may be required to pay a Federal alternative minimum tax on
exempt-interest dividends paid by such Fund.
New York Fund may invest in non-investment grade obligations, as previously
described. Furthermore, the Funds 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 a 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 non-investment
grade obligations and/or nontraditional instruments could be recharacterized
as taxable ordinary income.
If at any time when shares of AMPS are outstanding a Fund does not meet the
asset coverage requirements of the Investment Company Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent such
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. If a
Fund were to fail to qualify as a RIC, some or all of the distributions paid
by the Fund
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would be fully taxable to stockholders for Federal income and New York State
and New York City personal income tax purposes. Upon any failure to meet the
asset coverage requirements of the Investment Company Act, a Fund, in its sole
discretion, may 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. There can be no assurance,
however, that any such action would achieve such objectives.
As noted above, a Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred stock that the Funds have issued and that New
York Insured contemplates issuing may raise an issue as to whether
distributions on such preferred stock are "preferential" under the Code and,
therefore, not eligible for the dividends paid deduction. Counsel has advised
the Funds that the outstanding preferred stock and the preferred stock to be
issued by New York Insured will not result in the payment of a preferential
dividend. If a Fund ultimately relies solely on a legal opinion when it issues
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 Funds could be disqualified as RICs. In this case, dividends paid by the
Funds on the Common Stock and the AMPS would not be exempt from Federal income
taxes. Additionally, the Funds would be subject to the Federal alternative
minimum tax.
Under certain circumstances, when a Fund is required to allocate taxable
income to the AMPS, it will pay Additional Distributions to holders of shares
of AMPS. The Federal income tax consequences of Additional Distributions under
existing law are uncertain. The Funds treat and New York Insured intends to
continue to treat a holder as receiving a dividend distribution in the amount
of any Additional Distribution only as and when such Additional Distribution
is paid. An Additional Distribution generally is designated by a 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 Distribution is
a taxable dividend either in the taxable year for which the allocation of
taxable income is made or in the taxable year in which the Additional
Distribution is paid.
The value of shares acquired pursuant to a Fund's dividend reinvestment plan
is generally excluded from gross income to the extent that the cash amount
reinvested would be excluded from gross income. If, when a Fund's shares are
trading at a premium over net asset value, the Fund issues shares pursuant to
the dividend reinvestment plan that have a greater fair market value than the
amount of cash reinvested, it is possible that all or a portion of such
discount (which may not exceed 5% of the fair market value of the Fund's
shares) could be viewed as a taxable distribution. If the discount is viewed
as a taxable distribution, it is also possible that the taxable character of
this discount would be allocable to all of the stockholders, including
stockholders who do not participate in the Fund's dividend reinvestment plan.
Thus, stockholders who do not participate in the dividend reinvestment plan,
as well as dividend reinvestment plan participants, might be required to
report as ordinary income a portion of their distributions equal to the
allocable share of the discount.
Under certain provisions of the Code, some stockholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with a 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 stockholder is not otherwise subject to backup withholding.
Ordinary income dividends paid to stockholders who are nonresident aliens or
foreign entities are subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident stockholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
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The Code provides that every stockholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Funds) during the taxable
year.
Tax Treatment of Options and Futures Transactions. Each Fund may purchase or
sell municipal bond index financial futures contracts and interest rate
financial futures contracts on U.S. Government securities. Each Fund may also
purchase and write call and put options on such financial futures contracts.
In general, unless an election is available to a Fund or an exception applies,
such options and financial futures contracts that are "Section 1256 contracts"
will be "marked to market" for Federal income tax purposes at the end of each
taxable year, i.e., each such option or financial futures contract will be
treated as sold for its fair market value on the last day of the taxable year,
and any gain or loss attributable to Section 1256 contracts will be 60% long-
term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by a Fund may alter the timing and character of
distributions to stockholders. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by a Fund solely
to reduce the risk of changes in price or interest rates with respect to its
investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of a Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, a Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New York State and New
York City tax laws presently in effect. For the complete provisions, reference
should be made to the pertinent Code sections, the Treasury Regulations
promulgated thereunder and the applicable tax laws. The Code and the Treasury
Regulations, as well as the New York State and New York City tax laws, 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, foreign, state or local tax consequences of an
investment in a Fund.
AGREEMENT AND PLAN OF REORGANIZATION
General
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
II), (i) New York Insured will acquire substantially all of the assets, and
will assume substantially all of the liabilities, of New York Fund, in
exchange solely for shares of an equal aggregate value of New York Insured
Common Stock and New York Insured Series C AMPS to be issued by New York
Insured, (ii) New York Insured will acquire substantially all of the assets,
and will assume substantially all of the liabilities, of New York Insured II,
in exchange solely for shares of an equal aggregate value of New York Insured
Common Stock and New York Insured Series D AMPS to be issued by New York
Insured and (iii) New York Insured will acquire substantially all of the
assets, and will assume substantially all of the liabilities, of New York
Insured III, in exchange solely for shares of an equal aggregate value of New
York Insured Common Stock and New York Insured Series E AMPS to be issued by
New York Insured. The number of shares of New York Insured Common Stock issued
to each Acquired Fund will have an aggregate net asset value equal to the
aggregate net asset value of the shares of Common Stock of that Acquired Fund
(except that cash will be paid in lieu of any fractional shares), and the
number of shares of New York Insured Series C AMPS, New York Insured Series D
AMPS and New York Insured Series E AMPS issued to New York Fund, New York
Insured II and New York Insured III, respectively, will have an aggregate
liquidation preference and value equal to the aggregate liquidation preference
and value of each such Fund's AMPS. Upon receipt by the Acquired Funds of such
shares, the Acquired Funds will (i) distribute the shares of New York Insured
Common Stock to the holders of New York Fund Common Stock, New York Insured II
Common Stock and New York Insured III Common Stock, as applicable, in exchange
for their shares of
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Common Stock in the Acquired Funds and (ii) distribute the shares of New York
Insured Series C AMPS to the holders of New York Fund AMPS, the shares of New
York Insured Series D AMPS to the holders of New York Insured II AMPS and the
shares of New York Insured Series E AMPS to the holders of New York Insured
III AMPS, in exchange for their shares of AMPS in the Acquired Funds. New York
Insured will file Articles Supplementary establishing the powers, rights and
preferences of the New York Insured Series C AMPS, the New York Insured Series
D AMPS and the New York Insured Series E AMPS with the State Department of
Assessments and Taxation of Maryland (the "Maryland Department") prior to the
closing of the Reorganization. As soon as practicable after the date that the
Reorganization takes place (the "Exchange Date"), each of the Acquired Funds
will file Articles of Dissolution with the Maryland Department to effect the
formal dissolution of such Funds, and will dissolve.
Each of the Acquired Funds will distribute the shares of New York Insured
Common Stock and the shares of New York Insured Series C AMPS, New York
Insured Series D AMPS or New York Insured Series E AMPS received by it pro
rata to its holders of record of Common Stock and AMPS, as applicable, in
exchange for such stockholders' shares in the Acquired Funds. Such
distribution would be accomplished by opening new accounts on the books of New
York Insured in the names of the common and preferred stockholders of each of
the Acquired Funds and transferring to those stockholder accounts the New York
Insured Common Stock or New York Insured AMPS previously credited on those
books to the accounts of the Acquired Funds. Each newly-opened account on the
books of New York Insured for the previous holders of Common Stock of the
Acquired Funds would represent the respective pro rata number of shares of New
York Insured Common Stock (rounded down, in the case of fractional shares, to
the next largest number of whole shares) due such holder of Common Stock. No
fractional shares of New York Insured Common Stock will be issued. In lieu
thereof, New York Insured's transfer agent, The Bank of New York, will
aggregate all fractional shares of New York Insured Common Stock and sell the
resulting whole shares on the NYSE for the account of all holders of
fractional interests, and each such holder will be entitled to the pro rata
share of the proceeds from such sale upon surrender of the Common Stock
certificates of the applicable Acquired Fund. Similarly, each newly-opened
account on the books of New York Insured for the previous holders of AMPS of
an Acquired Fund would represent the respective pro rata number of shares of
New York Insured Series C AMPS, New York Insured Series D AMPS or New York
Insured Series E AMPS due such holder of AMPS. See "Surrender and Exchange of
Stock Certificates" below for a description of the procedures to be followed
by the stockholders of the Acquired Funds to obtain their New York Insured
Common Stock (and cash in lieu of fractional shares, if any). Because AMPS are
held in "street name" by the Depository Trust Company, all transfers are
accomplished by book entry and no surrender of share certificates representing
AMPS is necessary.
Accordingly, as a result of the Reorganization, every holder of Common Stock
of an Acquired Fund would own shares of New York Insured Common Stock that
(except for cash payments received in lieu of fractional shares) would have an
aggregate net asset value immediately after the Exchange Date equal to the
aggregate net asset value of that stockholder's Common Stock immediately prior
to the Exchange Date. Since the New York Insured Common Stock would be issued
at net asset value and the shares of Common Stock of the Acquired Fund would
be valued at net asset value for the purposes of the exchange the holders of
Common Stock of each of the Funds will not be diluted as a result of the
Reorganization. Similarly, since the New York Insured Series C AMPS, New York
Insured Series D AMPS and New York Insured Series E AMPS would be issued at a
liquidation preference and value per share equal to the liquidation preference
and value per share of the AMPS of the Acquired Funds, holders of AMPS of each
of the Funds will not be diluted as a result of the Reorganization. However,
as a result of the Reorganization, a stockholder of any of the Funds likely
will hold a reduced percentage of ownership in the larger combined entity than
he or she did in any of the constituent Funds.
Procedure
At meetings of the Boards of Directors of each of the Acquired Funds, and at
a meeting of the Board of Directors of New York Insured, the Board of
Directors of each of the Funds, including all of the Directors who are not
"interested persons," as defined in the Investment Company Act, of the
applicable Fund, unanimously approved the Agreement and Plan of Reorganization
and the submission of such Agreement and Plan of Reorganization to the
stockholders of each of the Funds for approval.
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Also, the Board of Directors of New York Insured approved the filing of
Articles Supplementary establishing the powers, rights and preferences of the
New York Insured Series C AMPS, the New York Insured Series D AMPS and the New
York Insured Series E AMPS in order that they may be distributed to holders of
AMPS of each of the Acquired Funds as part of the Reorganization.
As a result of such Board approvals, the Funds have jointly filed this proxy
statement with the SEC soliciting a vote of the stockholders of each of the
Funds to approve the Reorganization. The costs of such solicitation are to be
paid by New York Insured after the Reorganization so as to be borne equally
and exclusively on a per share basis by the holders of Common Stock of each of
the Funds. Annual meetings of stockholders of the Funds will be held on
December 15, 1999. If the stockholders of all four Funds approve the
Reorganization, the Reorganization will take place as soon as practicable
after such approval, provided that the Funds have obtained prior to that time
a favorable private letter ruling from the IRS concerning the tax consequences
of the Reorganization as set forth in the Agreement and Plan of Reorganization
or an opinion of counsel to the same effect.
The Boards of Directors of New York Insured, New York Fund, New York Insured
II and New York Insured III recommend that the stockholders of the respective
Funds approve the Agreement and Plan of Reorganization.
Terms of the Agreement and Plan of Reorganization
The following is a summary of the significant terms of the Agreement and
Plan of Reorganization. This summary is qualified in its entirety by reference
to the Agreement and Plan of Reorganization, attached hereto as Exhibit II.
Valuation of Assets and Liabilities. The respective assets of each of the
Funds will be valued on the business day prior to the Exchange Date (the
"Valuation Date"). The valuation procedures are the same for all four Funds:
net asset value per share of the Common Stock of each Fund will be determined
after the close of business on the NYSE (generally, 4:00 P.M., Eastern time)
on the Valuation Date. For the purpose of determining the net asset value of a
share of Common Stock of each Fund, the value of the securities held by the
issuing Fund plus any cash or other assets (including interest accrued but not
yet received) minus all liabilities (including accrued expenses) and the
aggregate liquidation value of the outstanding shares of AMPS of the issuing
Fund is divided by the total number of shares of Common Stock of the issuing
Fund outstanding at such time. Daily expenses, including the fees payable to
FAM, will accrue on the Valuation Date.
The New York Municipal Bonds and Municipal Bonds in which each Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value on the Valuation Date, each Fund will use the valuations of portfolio
securities furnished by a pricing service approved by the Boards of Directors
of the Funds. The pricing service typically values portfolio securities at the
bid price or the yield equivalent when quotations are readily available. New
York Municipal Bonds and Municipal Bonds for which quotations are not readily
available will be valued at fair market value on a consistent basis as
determined by the pricing service using a matrix system to determine
valuations. The Boards of Directors of the Funds have determined in good faith
that the use of a pricing service is a fair method of determining the
valuation of portfolio securities. Positions in financial futures contracts
will be valued on the Valuation Date at closing prices for such contracts
established by the exchange on which they are traded, or if market quotations
are not readily available, will be valued at fair value on a consistent basis
using methods determined in good faith by the Board of Directors.
Distribution of New York Insured Common Stock, New York Insured Series C
AMPS, New York Insured Series D AMPS and New York Insured Series E AMPS. On
the Exchange Date, New York Insured will issue to each Acquired Fund a number
of shares of New York Insured Common Stock the aggregate net asset value of
which will equal the respective aggregate net asset value of shares of Common
Stock of the Acquired Fund on the Valuation Date. Each holder of Common Stock
of an Acquired Fund will receive the number of shares of
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New York Insured Common Stock corresponding to his or her proportionate
interest in the respective aggregate net asset value of the Common Stock of
the Acquired Fund, as applicable.
On the Exchange Date, New York Insured also will issue (i) to New York Fund
a number of shares of New York Insured Series C AMPS, the aggregate
liquidation preference and value of which will equal the aggregate liquidation
preference and value of New York Fund AMPS on the Valuation Date, (ii) to New
York Insured II a number of shares of New York Insured Series D AMPS, the
aggregate liquidation preference and value of which will equal the aggregate
liquidation preference and value of New York Insured II AMPS on the Valuation
Date and (iii) to New York Insured III a number of shares of New York Insured
Series E AMPS, the aggregate liquidation preference and value of which will
equal the aggregate liquidation preference and value of New York Insured III
AMPS on the Valuation Date. Each holder of AMPS of an Acquired Fund will
receive the number of shares of New York Insured Series C AMPS, New York
Insured Series D AMPS or New York Insured Series E AMPS corresponding to his
or her proportionate interest in the aggregate liquidation preference and
value of the AMPS of the Acquired Fund. No sales charge or fee of any kind
will be charged to stockholders of the Acquired Funds in connection with their
receipt of New York Insured Common Stock or AMPS in the Reorganization.
Holders of certain series of AMPS of the Acquired Funds will find that the
auction date and dividend payment date for the New York Insured AMPS received
in the Reorganization fall on different days of the week than the auction date
and dividend payment date of the AMPS currently held. Any such change in the
auction date and dividend payment date will not adversely affect the value of
a holder's AMPS. It is anticipated that (i) the auction for New York Insured
Series C AMPS will be held on Monday; New York Fund Series A AMPS are
auctioned on Monday, but New York Fund Series B AMPS are auctioned on Tuesday;
(ii) the auction for New York Insured Series D AMPS will be held on Friday;
the New York Insured II Series A AMPS are auctioned on Thursday and the New
York Insured II Series B AMPS are auctioned on Friday; and (iii) the auction
for New York Insured Series E AMPS will be held on Tuesday; the New York
Insured III Series A AMPS are also auctioned on Tuesday. The auction
procedures for all of the AMPS are substantially the same. As a result of the
Reorganization, the last dividend period for the AMPS of each Acquired Fund
prior to the Exchange Date may be shorter than the dividend period for such
AMPS determined as set forth in the applicable Articles Supplementary.
Expenses. New York Insured shall pay, subsequent to the Exchange Date, all
expenses incurred in connection with the Reorganization, including, but not
limited to, all costs related to the preparation and distribution of materials
distributed to each Fund's Board of Directors, expenses incurred in connection
with the preparation of the Agreement and Plan of Reorganization, a
registration statement on Form N-14 and a private letter ruling request
submitted to the IRS, SEC and state securities commission filing fees and
legal and audit fees in connection with the Reorganization, costs of printing
and distributing this Proxy Statement and Prospectus, legal fees incurred
preparing each Fund's board materials, attending each Fund's board meetings
and preparing the minutes, accounting fees associated with each Fund's
financial statements, stock exchange fees, rating agency fees, portfolio
transfer taxes (if any) and any similar expenses incurred in connection with
the Reorganization. In this regard, expenses of the Reorganization will be
deducted from the assets of the combined fund so as to be borne equally and
exclusively on a per share basis by the holders of Common Stock of each of the
Funds. No Fund shall pay any expenses of its respective stockholders arising
out of or in connection with the Reorganization.
Required Approvals. Under Articles of Incorporation of each Fund (as amended
to date and including Articles Supplementary establishing the powers, rights
and preferences of the AMPS of each Fund), relevant Maryland law and the rules
of the NYSE, stockholder approval of the Agreement and Plan of Reorganization
requires the affirmative vote of stockholders representing more than 50% of
the outstanding shares of Common Stock and AMPS, voting together as a single
class, and more than 50% of the AMPS, voting separately as a class. Because of
the requirement that the Agreement and Plan of Reorganization be approved by
the stockholders of all four Funds, the Reorganization will not take place if
the stockholders of any one Fund do not approve the Agreement and Plan of
Reorganization.
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Deregistration and Dissolution. Following the transfer of the assets and
liabilities of the Acquired Funds and the distribution of shares of New York
Insured Common Stock, New York Insured Series C AMPS, New York Insured Series
D AMPS and New York Insured Series E AMPS to stockholders of the Acquired
Funds, in accordance with the foregoing, each of the Acquired Funds will
terminate its registration under the Investment Company Act and its
incorporation under Maryland law and will withdraw its authority to do
business in any state where it is required to do so.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the
terms therein. The obligations of each Fund pursuant to the Agreement and Plan
of Reorganization are subject to various conditions, including a registration
statement on Form N-14 being declared effective by the Commission, approval by
the stockholders of each of the Funds, favorable IRS rulings or an opinion of
counsel being received as to tax matters, an opinion of counsel as to
securities matters being received and the continuing accuracy of various
representations and warranties of the Funds being confirmed by the respective
parties.
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Directors of any of the Funds may cause the Reorganization to be
postponed or abandoned under certain circumstances should such Board determine
that it is in the best interests of the stockholders of its respective Fund to
do so. The Agreement and Plan of Reorganization may be terminated, and the
Reorganization abandoned at any time (whether before or after adoption thereof
by the stockholders of any of the Funds) prior to the Exchange Date, or the
Exchange Date may be postponed: (i) by mutual consent of the Boards of
Directors of the four Funds and (ii) by the Board of Directors of any Fund if
any condition to that Fund's obligations set forth in the Agreement and Plan
of Reorganization has not been fulfilled or waived by such Board.
Potential Benefits to Common Stockholders of The Funds as a Result of The
Reorganization
In approving the Reorganization, the Board of Directors of each Fund
identified certain benefits that are likely to result from the Reorganization,
including lower aggregate operating expenses per share of Common Stock,
greater efficiency and flexibility in portfolio management and a more liquid
trading market for the shares of Common Stock of the combined fund. With
respect to each of the Acquired Funds, following the Reorganization their
respective stockholders will remain invested in a closed-end fund that has
investment objectives and policies substantially similar to those of the
Acquired Fund. The Boards also considered the possible risks and costs of
combining the Funds, and examined the relative credit strength, maturity
characteristics, mix of type and purpose, and yield of the Funds' portfolios
of New York Municipal Bonds and Municipal Bonds and the costs involved in a
transaction such as the Reorganization. The Boards noted the many similarities
between the Funds, including their substantially similar investment objectives
and investment policies, their use of substantially the same management
personnel and their similar portfolios of New York Municipal Bonds and
Municipal Bonds. The Boards also considered the relative tax positions of the
Funds' portfolios. Based on these factors, the Boards concluded that the
Reorganization will potentially benefit the stockholders of each Fund in that
it (i) presents no significant risks that would outweigh the benefits
discussed above and (ii) involves minimal costs (including relatively minor
legal, accounting and administrative costs).
The surviving fund that would result from the Reorganization would have a
larger asset base than any of the Funds has currently. Based on data presented
by FAM, the Board of each Fund believes that administrative expenses for a
larger combined fund would be less than the aggregate expenses for the
individual Funds, resulting in a lower expense ratio for common stockholders
of the combined fund and higher earnings per common share. In particular,
certain fixed costs, such as costs of printing stockholder reports and proxy
statements, legal expenses, audit fees, mailing costs and other expenses will
be spread across a larger asset base, thereby lowering the expense ratio for
the combined fund. To illustrate the potential economies of scale, the table
below shows the total annualized operating expense ratio of each Fund based on
average net assets both excluding and including assets attributable to AMPS as
of June 30, 1999:
61
<PAGE>
<TABLE>
<CAPTION>
Total annualized Average net Total annualized Average net
operating assets, excluding operating assets, including
expense ratio, AMPS expense ratio, AMPS
Fund excluding AMPS (in millions) including AMPS (in millions)
---- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
New York Insured........ 1.27% $145.1 0.77% $240.1
New York Fund........... 1.38% $107.2 0.81% $183.2
New York Insured II..... 1.44% $ 74.8 0.85% $127.8
New York Insured III.... 1.47% $ 67.8 0.85% $117.8
Combined Fund/1......... 1.23% $394.8 0.72% $668.8
</TABLE>
- --------
/1/Assumes Reorganization had taken place on June 30, 1999.
Management projections estimate that New York Insured will have net assets
in excess of $668.8 million including assets attributable to AMPS upon
completion of the Reorganization. A larger asset base should provide benefits
in portfolio management. After the Reorganization, New York Insured should be
able to purchase larger amounts of New York Municipal Bonds and Municipal
Bonds at more favorable prices than any of the Funds separately and, with this
greater purchasing power, request improvements in the terms of the New York
Municipal Bonds and Municipal Bonds (e.g., added indenture provisions covering
call protection, sinking funds and audits for the benefit of large holders)
prior to purchase.
Based on the foregoing, the Boards concluded that the Reorganization is in
the best interests of the stockholders of each of the Funds because the
Reorganization presents no significant risks or costs (including legal,
accounting and administrative costs) that would outweigh the benefits
discussed above.
In approving the Reorganization, the Board of Directors of each Fund
determined that the Reorganization is in the best interests of that Fund and,
with respect to net asset value and liquidation preference, that the interests
of existing stockholders of that Fund would not be diluted as a result of the
Reorganization. Although the Reorganization is expected to result in a
reduction in net asset value per share of the combined fund after the
Reorganization of approximately $.02 as a result of the estimated costs of the
Reorganization, management of each Fund advised its Board that it expects that
such costs would be recovered within [18] months after the Exchange Date due
to a decrease in the operating expense ratio.
It is not anticipated that the Reorganization directly would benefit the
holders of shares of AMPS of any of the Funds; however, the Reorganization
will not adversely affect the holders of shares of AMPS of any of the Funds
and the expenses of the Reorganization will not be borne by the holders of
shares of AMPS of any of the Funds.
Surrender and Exchange of Stock Certificates
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of Common Stock of any one of the
Acquired Funds will be entitled to receive, upon surrender of his or her
certificate or certificates, a certificate or certificates representing the
number of shares of New York Insured Common Stock distributable with respect
to such holder's shares of Common Stock of the Acquired Fund, together with
cash in lieu of any fractional shares of Common Stock. Promptly after the
Exchange Date, the transfer agent for the New York Insured Common Stock will
mail to each holder of certificates formerly representing shares of Common
Stock of an Acquired Fund a letter of transmittal for use in surrendering his
or her certificates for certificates representing shares of New York Insured
Common Stock and cash in lieu of any fractional shares of Common Stock.
62
<PAGE>
Shares of AMPS are held in "street name" by the Depository Trust Company,
and all transfers will be accomplished by book entry. Surrender of physical
certificates for AMPS is not required.
<TABLE>
<CAPTION>
If prior to the Reorganization you held: After the Reorganization, you will hold:
---------------------------------------- ----------------------------------------
<S> <C>
New York Insured Common Stock New York Insured Common Stock
New York Insured Series A AMPS New York Insured Series A AMPS
New York Insured Series B AMPS New York Insured Series B AMPS
New York Fund Common Stock New York Insured Common Stock
New York Fund Series A AMPS New York Insured Series C AMPS
New York Fund Series B AMPS New York Insured Series C AMPS
New York Insured II Common Stock New York Insured Common Stock
New York Insured II Series A
AMPS New York Insured Series D AMPS
New York Insured II Series B
AMPS New York Insured Series D AMPS
New York Insured III Common
Stock New York Insured Common Stock
New York Insured III Series A
AMPS New York Insured Series E AMPS
</TABLE>
Please do not send in any stock certificates at this time. Upon consummation
of the Reorganization, common stockholders of the Acquired Funds will be
furnished with instructions for exchanging their stock certificates for New
York Insured stock certificates and, if applicable, cash in lieu of fractional
shares.
From and after the Exchange Date, certificates formerly representing shares
of Common Stock or AMPS of an Acquired Fund will be deemed for all purposes to
evidence ownership of the number of full shares of New York Insured Common
Stock, New York Insured Series C AMPS, New York Insured Series D AMPS or New
York Insured Series E AMPS distributable with respect to the shares of the
Acquired Fund held before the Reorganization as described above and as shown
in the table above, provided that, until such stock certificates have been so
surrendered, no dividends payable to the holders of record of Common Stock or
AMPS of an Acquired Fund as of any date subsequent to the Exchange Date will
be paid to the holders of such outstanding stock certificates. Dividends
payable to holders of record of shares of Common Stock or AMPS of New York
Insured, as of any date after the Exchange Date and prior to the exchange of
certificates by any stockholder of an Acquired Fund, will be paid to such
stockholder, without interest, at the time such stockholder surrenders his or
her stock certificates for exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of any Acquired Fund. If, after the Exchange Date, certificates
representing shares of Common Stock or AMPS of an Acquired Fund are presented
to New York Insured, they will be canceled and exchanged for certificates
representing Common Stock or AMPS of New York Insured, as applicable, and cash
in lieu of fractional shares of Common Stock, if any, distributable with
respect to such Common Stock or AMPS in the Reorganization.
Tax Consequences of the Reorganization
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Each of the four Funds has elected and
qualified (or will elect and qualify, as applicable) for the special tax
treatment afforded RICs under the Code, and New York Insured intends to
continue to so qualify after the Reorganization. The Funds have jointly
requested a private letter ruling from the IRS that for Federal income tax
purposes: (i) the exchange of assets by each Acquired Fund for New York
Insured stock, as described, will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code, and each of the Acquired Funds
and New York Insured will be deemed a "party" to a reorganization within the
meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a)
of the Code, no gain or loss will be recognized to the Acquired Funds as a
result of the Reorganization or on the distribution of New York Insured Common
Stock and New York Insured Series C AMPS, New York Insured Series D AMPS or
New York Insured Series E AMPS to the respective stockholders of the Acquired
Funds under Section 361(c)(1) of the Code; (iii) under Section 1032 of the
Code, no gain or loss
63
<PAGE>
will be recognized to New York Insured as a result of the Reorganization; (iv)
in accordance with Section 354(a)(1) of the Code, no gain or loss will be
recognized to the stockholders of the Acquired Funds on the receipt of New
York Insured Common Stock and New York Insured Series C AMPS, New York Insured
Series D AMPS or New York Insured Series E AMPS in exchange for their
corresponding shares of Common Stock or AMPS of an Acquired Fund (except to
the extent that common stockholders receive cash representing an interest in
fractional shares of New York Insured in the Reorganization); (v) in
accordance with Section 362(b) of the Code, the tax basis of the assets of the
Acquired Funds in the hands of New York Insured will be the same as the tax
basis of such assets in the hands of the Acquired Fund that transferred them
immediately prior to the consummation of the Reorganization; (vi) in
accordance with Section 358 of the Code, immediately after the Reorganization,
the tax basis of the New York Insured Common Stock, New York Insured Series C
AMPS, New York Insured Series D AMPS or New York Insured Series E AMPS
received by the stockholders of the Acquired Funds in the Reorganization will
be equal to the tax basis of the Common Stock or AMPS of the Acquired Fund
surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a
stockholder's holding period for the New York Insured Common Stock, New York
Insured Series C AMPS, New York Insured Series D AMPS or New York Insured
Series E AMPS will be determined by including the period for which such
stockholder held the Common Stock or AMPS of the Acquired Fund exchanged
therefor, provided that such shares were held as a capital asset; (viii) in
accordance with Section 1223 of the Code, New York Insured's holding period
with respect to the assets of the Acquired Funds transferred will include the
period for which such assets were held by the Acquired Fund; (ix) the payment
of cash to common stockholders of an Acquired Fund in lieu of fractional
shares of New York Insured Common Stock will be treated as though the
fractional shares were distributed as part of the Reorganization and then
redeemed, with the result that such stockholders will have short- or long-term
capital gain or loss to the extent that the cash distribution differs from the
stockholder's basis allocable to the New York Insured fractional shares; and
(x) the taxable year of each of the Acquired Funds will end on the effective
date of the Reorganization and pursuant to Section 381(a) of the Code and
regulations thereunder, New York Insured will succeed to and take into account
certain tax attributes of the Acquired Funds, such as earnings and profits,
capital loss carryovers and method of accounting.
As noted in the discussion under "Comparison of the Funds--Tax Rules
Applicable to the Funds and Their Stockholders," a Fund must distribute
annually at least 90% of its net taxable and tax-exempt income. A distribution
only will be counted for this purpose if it qualifies for the dividends paid
deduction under the Code. In the opinion of Brown & Wood LLP, the issuance of
New York Insured Series C AMPS, New York Insured Series D AMPS and New York
Insured Series E AMPS pursuant to the Reorganization in addition to the
already existing New York Insured Series A AMPS and New York Insured Series B
AMPS will not cause distributions on any series of New York Insured AMPS to be
treated as preferential dividends ineligible for the dividends paid deduction.
It is possible, however, that the IRS may assert that, because there are
several series of AMPS, distributions on such shares are preferential under
the Code and therefore not eligible for the dividends paid deduction. If the
IRS successfully disallowed the dividends paid deduction for dividends on the
AMPS, New York Insured could lose the special tax treatment afforded RICs. In
this case, dividends on the shares of New York Insured Common Stock and AMPS
would not be exempt from Federal income tax. Additionally, New York Insured
would be subject to the Federal alternative minimum tax.
Under Section 381(a) of the Code, New York Insured will succeed to and take
into account certain tax attributes of the Acquired Funds, including, but not
limited to, earnings and profits, any net operating loss carryovers, any
capital loss carryovers and method of accounting. The Code, however, contains
special limitations with regard to the use of net operating losses, capital
losses and other similar items in the context of certain reorganizations,
including tax-free reorganizations pursuant to Section 368(a)(1)(C) of the
Code, which could reduce the benefit of these attributes to New York Insured.
Stockholders should consult their tax advisers regarding the effect of the
Reorganization in light of their individual circumstances. As the foregoing
relates only to Federal income tax consequences, stockholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Reorganization.
64
<PAGE>
Regulated Investment Company Status. The Funds have elected and qualified
(or will elect, and will qualify, as the case may be) for taxation as RICs
under Sections 851-855 of the Code, and after the Reorganization New York
Insured intends to continue to so qualify.
Capitalization
The following table sets forth as of March 31, 1999 (i) the capitalization
of New York Insured, (ii) the capitalization of New York Fund, (iii) the
capitalization of New York Insured II, (iv) the capitalization of New York
Insured III and (v) the pro forma capitalization of New York Insured as
adjusted to give effect to the Reorganization.
Pro Forma Capitalization of New York Insured, New York Fund, New York Insured
II,
New York Insured III and the Combined Fund as of March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Combined
New York New York New York New York Pro Forma Fund as
Insured Fund Insured II Insured III Adjustment adjusted(a)
------------ ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets:
Net Assets
Attributable to
Common Stock......... $154,982,048 $115,195,662 $81,060,473 $73,976,747 $(3,051,255) $422,163,675
Net Assets
Attributable to AMPS. $ 95,000,000 $ 76,000,000 $53,000,000 $50,000,000 -- $274,000,000
Shares Outstanding:
Common Stock.......... 9,787,106 7,580,698 5,591,168 5,006,667 -- 26,825,089(b)
AMPS
Series A............ 1,900 1,520 1,060 2,000 -- 1,900
Series B............ 1,900 1,520 1,060 -- 1,900
Series C............ -- -- -- -- 3,040(b)
Series D............ -- -- -- -- 2,120(b)
Series E............ -- -- -- -- 2,000(b)
Net Asset Value Per
Share:
Common Stock.......... $15.84 $15.20 $14.50 $14.78 -- $15.74(c)
</TABLE>
- -------
(a) The adjusted balances are presented as if the Reorganization had been
consummated on March 31, 1999 and are for informational purposes only.
Assumes distribution of undistributed net investment income and
undistributed realized capital gains. No assurance can be given as to how
many shares of New York Insured Common Stock that stockholders of New York
Fund, New York Insured II or New York Insured III will receive on the
Exchange Date, and the foregoing should not be relied upon to reflect the
number of shares of New York Insured Common Stock that actually will be
received on or after such date.
(b) Assumes the issuance of 17,037,983 shares of New York Insured Common Stock
and three newly-created series of AMPS consisting of 3,040 Series C
shares, 2,120 Series D shares and 2,000 Series E shares, respectively, in
exchange for the net assets of each of New York Fund, New York Insured II
and New York Insured III. The number of shares issued was based on the net
asset value of each Fund, net of distributions, on March 31, 1999.
(c) Net Asset Value Per Share of Common Stock after distribution of
undistributed net investment income and undistributed capital gains.
65
<PAGE>
ITEM 2. ELECTION OF DIRECTORS
At the Meetings, the Board of Directors for each of the Funds will be
elected to serve until the next Annual Meeting of Stockholders and until their
successors are elected and qualified. If the stockholders of all of the Funds
approve the Reorganization, then the Board of Directors of New York Insured
elected at the Meetings will serve as the Board of the combined fund, until
its next Annual Meeting of Stockholders. If the stockholders of any Fund vote
against the Reorganization, then the Board of Directors of each Fund elected
at the Meetings will continue to serve until the next Annual Meeting of
Stockholders of each Fund. It is intended that all properly executed proxies
will be voted (unless such authority has been withheld in the proxy) as
follows:
(1) All proxies of the holders of shares of AMPS of any Fund, voting
separately as a class, will be voted in favor of the two persons designated
as Directors to be elected by the holders of shares of AMPS of that Fund;
and
(2) All proxies of the holders of shares of Common Stock and AMPS of any
Fund, voting together as a single class, will be voted in favor of the five
persons designated as Directors to be elected by the holders of shares of
Common Stock and AMPS of that Fund.
The Boards of Directors of the Funds know of no reason why any of these
nominees will be unable to serve, but in the event of any such unavailability,
the proxies received will be voted for such substitute nominee or nominees as
the appropriate Board of Directors may recommend.
Certain information concerning the nominees is set forth below. Additional
information concerning the nominees and other information relevant to the
election of Directors is set forth in Exhibit I.
TO BE ELECTED BY STOCKHOLDERS OF NEW YORK INSURED
<TABLE>
<CAPTION>
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships(1)
---------------- --- --------------------------------------
<S> <C> <C>
Terry K. Glenn(1)(3)*........ 59 Executive Vice President of FAM and Merrill
P. O. Box 9011 Lynch Asset Management, L.P. ("MLAM") (which
Princeton, New Jersey terms as used herein include their corporate
08543-9011 predecessors) since 1983; Executive Vice
President and Director of Princeton Services
Inc. ("Princeton Services") since 1993;
President of Princeton Funds Distributor,
Inc. ("PFD") since 1986 and Director thereof
since 1991; President of Princeton
Administrators, L.P. ("Princeton
Administrators") since 1988.
Ronald W. Forbes(1)(2)(3).... 59 Professor of Finance, School of Business,
1400 Washington Avenue State University of New York at Albany, since
Albany, New York 12222 1989; Consultant, Urban Institute,
Washington, D.C. since 1995.
Cynthia A. 47 Professor, Harvard Business School since
Montgomery(1)(2)(3)......... 1989; Associate Professor, J.L. Kellogg
Harvard Business School Graduate School of Management, Northwestern
Soldiers Field Road University from 1985 to 1989; Assistant
Boston, Massachusetts 02163 Professor, Graduate School of Business
Administration, The University of Michigan
from 1979 to 1985; Director, UNUM Corporation
since 1990 and Director of Newell Co. since
1995.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships(1)
---------------- --- --------------------------------------
<S> <C> <C>
Charles C. Reilly(1)(2)(3)... 68 Self-employed financial consultant since
9 Hampton Harbor Road 1990; President and Chief Investment Officer
Hampton Bays, New York 11946 of Verus Capital, Inc. from 1979 to 1990;
Senior Vice President of Arnhold and S.
Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate
School of Business from 1990 to 1991; Adjunct
Professor, Wharton School, The University of
Pennsylvania from 1989 to 1990; Partner,
Small Cities Cable Television from 1986 to
1997.
Kevin A. Ryan(1)(2)(3)....... 67 Founder and current Director of The Boston
127 Commonwealth Avenue University Center for the Advancement of
Chestnut Hill, Massachusetts Ethics and Character; Professor of Education
02167 at Boston University since 1982; formerly
taught on the faculties of The University of
Chicago, Stanford University and Ohio State
University.
Richard R. West(1)(2)(3)..... 61 Professor of Finance since 1984, and Dean
Box 604 from 1984 to 1993, and currently Dean
Genoa, Nevada 89411 Emeritus of New York University, Leonard N.
Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial
printers), Vornado Realty Trust, Inc. (real
estate holding company) and Alexander's Inc.
(real estate company).
Arthur Zeikel(1)(3)*......... 67 Chairman of FAM and MLAM from 1997 to 1999;
300 Woodland Avenue President of FAM and MLAM from 1977 to 1997;
Westfield, New Jersey 07090 Chairman of Princeton Services from 1997 to
1999, Director thereof from 1993 to 1999 and
President thereof from 1993 to 1997;
Executive Vice President of ML & Co. from
1990 to 1999.
</TABLE>
67
<PAGE>
TO BE ELECTED BY STOCKHOLDERS OF EACH OF THE ACQUIRED FUNDS
<TABLE>
<CAPTION>
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships(1)
---------------- --- --------------------------------------
<S> <C> <C>
Terry K. Glenn(1)(3)*... 59 Executive Vice President of FAM and MLAM since
P.O. Box 9011 1983; Executive Vice President and Director of
Princeton, New Jersey Princeton Services since 1993; President of PFD
08543-9011 since 1986 and Director thereof since 1991; Presi-
dent of Princeton Administrators since 1988.
James H. 55 Director and Executive Vice President, The China
Bodurtha(1)(2)(3)...... Business Group, Inc. since 1996; Chairman and
36 Popponesset Road Chief Executive Officer, China Enterprise Manage-
Cotuit, Massachusetts ment Corporation from 1993 to 1996; Chairman,
02635 Berkshire Corporation since 1980; Partner, Squire,
Sanders & Dempsey from 1980 to 1993.
Herbert I. 60 John M. Olin Professor of Humanities, New York
London(1)(2)(3)........ University since 1993 and Professor since 1980;
2 Washington Square President, Hudson Institute since 1997 and Trustee
Village thereof since 1980; Dean, Gallatin Division of New
New York, New York York University from 1976 to 1993; Distinguished
10012 Fellow, Herman Kahn Chair, Hudson Institute from
1984 to 1985; Director, Damon Corp. from 1991 to
1995; Overseer, Center for Naval Analyses from
1983 to 1993; Limited Partner, Hypertech LP in
1996.
Robert R. 72 Chairman and Chief Executive Officer, Kinnard In-
Martin(1)(2)(3)........ vestments, Inc. from 1990 to 1993; Executive Vice
513 Grand Hill President, Dain Bosworth from 1974 to 1989; Direc-
St. Paul, Minnesota tor, Carnegie Capital Management from 1977 to 1985
55103 and Chairman thereof in 1979; Director, Securities
Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman
of the Board, WTC Industries, Inc. in 1994; Trust-
ee, Northland College since 1992.
Joseph L. May(1)(2)(3).. 70 Attorney in private practice since 1984; Presi-
424 Church Street dent, May and Athens Hosiery Mills Division.
Suite 2000 Wayne-Gosssard Corporation from 1954 to 1983: Vice
Nashville, Tennessee President, Wayne-Gossard Corporation from 1972 to
37219 1983; Chairman, The May Corporation (personal
holding company) from 1972 to 1983; Director, Sig-
nal Apparel Co. from 1972 to 1989.
Andre F. 47 Professor, Harvard Business School since 1989 and
Perold(1)(2)(3)........ Associate Professor from 1983 to 1989; Trustee,
Morgan Hall The Common Fund since 1989; Director, Quantec Lim-
Solders Field ited since 1991, TIBCO from 1994 to 1996 and
Boston, Massachusetts Genbel Securities Limited and Genbel Bank since
02163 1999.
Arthur Zeikel(1)(3)*.... 67 Chairman of FAM and MLAM from 1997 to 1999; Presi-
300 Woodland Avenue dent of FAM and MLAM from 1977 to 1997; Chairman
Westfield, New Jersey of Princeton Services from 1997 to 1999, Director
07090 thereof from 1993 to 1999 and President thereof
from 1993 to 1997; Executive Vice President of ML
& Co. from 1990 to 1999.
</TABLE>
- --------
(1) Each of the nominees is a director, trustee or member of an advisory board
of one or more additional investment companies for which FAM, MLAM or
their affiliates act as investment adviser. "See "Compensation of Board
Members" in Exhibit I.
(2) Member of Audit Committee of the Board of Directors
(3) Please see Exhibit I for information, with respect to each Fund,
indicating the names of the nominees to be elected by holders of AMPS,
voting separately as a class, and the names of the nominees to be elected
by holders of Common Stock and AMPS, voting together as a single class.
* Interested person, as defined in the Investment Company Act, of each of the
Funds.
68
<PAGE>
Committee and Board Meetings
The Board of each Fund has a standing Audit Committee, which consists of
Board members who are not "interested persons" of the Fund within the meaning
of the Investment Company Act. The principal purpose of the Audit Committee is
to review the scope of the annual audit conducted by the Fund's independent
auditors and the evaluation by such auditors of the accounting procedures
followed by the Fund. The non-interested Board members have retained
independent legal counsel to assist them in connection with these duties. No
Fund's Board has a nominating committee.
During each Fund's last fiscal year, each of the Board members then in
office attended at least 75% of the aggregate of the total number of meetings
of the Board held during the fiscal year and, if a member, of the total number
of meetings of the Audit Committee held during the period for which he or she
served. See Exhibit I for further information about Audit Committee and Board
meetings.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and directors of each Fund and persons
who own more than ten percent of a registered class of the Fund's equity
securities, to file reports of ownership and changes in ownership on Forms 3,
4 and 5 with the SEC and the NYSE. Officers, directors and greater than ten
percent stockholders are required by SEC regulations to furnish the Fund with
copies of all Forms 3, 4 and 5 they file.
Based solely on each Fund's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its most recent
fiscal year, and written representations from certain reporting persons that
they were not required to file Form 5 with respect to the most recent fiscal
year, each Fund believes that all of its officers, directors, greater than ten
percent beneficial owners and other persons subject to Section 16 of the
Exchange Act because of the requirements of Section 30 of the Investment
Company Act, i.e., any advisory board member, investment adviser or affiliated
person of the Fund's investment adviser, have complied with all filing
requirements applicable to them with respect to transactions during the Fund's
most recent fiscal year, except that [ ].
Interested Persons
Each Fund considers Mr. Zeikel and Mr. Glenn to be "interested persons" of
the Fund within the meaning of Section 2(a)(19) of the Investment Company Act
because of the positions each holds or has held with FAM and its affiliates.
Mr. Glenn is the President of each Fund.
Compensation of Directors
FAM, the investment adviser of each Fund, pays all compensation to all
officers of each Fund and all Directors of each Fund who are affiliated with
ML & Co. or its subsidiaries. Each Fund pays each Director not affiliated with
FAM (each a "non-affiliated Director") an annual fee plus a fee for each
meeting attended, and each Fund also pays each member of its Audit Committee,
which consists of all of the non-affiliated Directors, an annual fee plus a
fee for each meeting attended, together with such Director's out-of-pocket
expenses relating to attendance at such meetings. Information with respect to
fees and expenses paid to the non-affiliated Directors for each Fund's most
recently completed fiscal year is set forth in Exhibit I.
Officers of the Funds
Information regarding the officers of each Fund is set forth in Exhibit I.
Officers of the Funds are elected and appointed by the Board and hold office
until they resign, are removed or are otherwise disqualified to serve.
69
<PAGE>
ITEM 3. SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of each Fund, including a majority of the Directors
who are not interested persons of the Fund, has selected independent auditors
to examine the financial statements of the Fund for the Fund's current fiscal
year. Deloitte & Touche LLP ("D&T") acts as independent auditors for New York
Insured and New York Fund and is expected to act as independent auditors for
the combined fund. Ernst & Young LLP ("E&Y") acts as independent auditors for
New York Insured II and New York Insured III. The current fiscal year for New
York Insured is the fiscal year ending August 31, 2000; for New York Fund, the
fiscal year ending June 30, 2000; for New York Insured II, the fiscal year
ending September 30, 2000; and for New York Insured III, the fiscal year
ending September 30, 2000.
No Fund knows of any direct or indirect financial interest of such auditors
in any Fund. Such appointment is subject to ratification or rejection by the
stockholders of each respective Fund. If the stockholders of each of the Funds
approve the Reorganization, then the independent auditors selected at the
Meeting for New York Insured will serve as the independent auditors of the
combined fund until its next Annual Meeting of Stockholders. If the
stockholders of any of the Funds vote against the Reorganization, then the
independent auditors of each Fund selected at the Meetings will continue to
serve as independent auditors of that Fund until the next Annual Meeting of
Stockholders of that Fund. Unless a contrary specification is made, the
accompanying proxy of each Fund will be voted in favor of ratifying the
selection of such Fund's auditors.
D&T also acts as independent auditors for ML & Co. and most of its
subsidiaries, including FAM and MLAM, and for most other investment companies
for which FAM or MLAM acts as investment adviser. Additionally, E&Y also acts
as independent auditors for several other investment companies for which FAM
or MLAM acts as investment adviser. The fees received by the independent
auditors from these other entities are substantially greater, in the
aggregate, than the total fees received by the independent auditors from each
applicable Fund. The Board of Directors of each of New York Insured and New
York Fund considered the fact that D&T have been retained as the independent
auditors for ML & Co. and the other entities described above in its evaluation
of the independence of D&T with respect to each applicable Fund. The Board of
Directors of each of New York Insured II and New York Insured III considered
the fact that E&Y have been retained as independent auditors for the other
entities described above in its evaluation of the independence of E&Y with
respect to each applicable Fund.
Representatives of the independent auditors are expected to be present at
the Meetings and will have the opportunity to make a statement if they so
desire and to respond to questions from stockholders.
INFORMATION CONCERNING THE ANNUAL MEETINGS
Date, Time and Place of Meetings
The Meetings will be held on December 15, 1999 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at the times listed on Exhibit I.
Solicitation, Revocation and Use of Proxies
A stockholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy, by giving
written notice of the revocation to the Secretary of the appropriate Fund or
by voting in person at the Meeting. Although mere attendance at the Meetings
will not revoke a proxy, a stockholder present at the Meetings may withdraw
his or her proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meetings in accordance with
the directions on the proxies; if no direction is indicated, the shares will
be voted "FOR" (i) the approval of the Agreement and Plan of Reorganization,
(ii) the election of the applicable nominees to the Board of Directors and
(iii) the ratification of the selection of D&T or E&Y, as
70
<PAGE>
applicable, as independent accountants. It is not anticipated that any other
matters will be brought before the Meetings. If, however, any other business
properly is brought before the Meetings, proxies will be voted in accordance
with the judgment of the persons designated on such proxies.
Record Date and Outstanding Shares
Only holders of record of shares of Common Stock or AMPS of any of the Funds
at the close of business on the Record Date are entitled to vote at the
Meetings or any adjournment thereof. At the close of business on the Record
Date, the Funds had the number of shares outstanding indicated in Exhibit I.
Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the Funds, at the date hereof, no person or entity owns
beneficially 5% or more of the shares of the Common Stock or AMPS of any Fund.
As of the Record Date, none of the nominees held shares of the Funds except
as set forth in the table below:
<TABLE>
<CAPTION>
Nominee Fund and Class of Shares No. of Shares Held*
------- ------------------------ -------------------
<S> <C> <C>
</TABLE>
- --------
* These holdings represent less than [ ]% of the shares of Common Stock
outstanding.
As of the Record Date, the Directors and officers of New York Insured as a
group (12 persons) owned an aggregate of less than 1% of the outstanding
shares of New York Insured Common Stock and [owned no] New York Insured AMPS.
As of the Record Date, the Directors and officers of New York Fund as a
group (12 persons) owned an aggregate of less than 1% of the outstanding
shares of New York Fund Common Stock and [owned no] New York Fund AMPS.
As of the Record Date, the Directors and officers of New York Insured II as
a group (13 persons) owned an aggregate of less than 1% of the outstanding
shares of New York Insured II Common Stock and [owned no] New York Insured II
AMPS.
As of the Record Date, the Directors and officers of New York Insured III as
a group (13 persons) owned an aggregate of less than 1% of the outstanding
shares of New York Insured III Common Stock and [owned no] New York Insured
III AMPS.
On the Record Date, Mr. Glenn, a Director and an officer of each of the
Funds, Mr. Zeikel, a Director of each of the Funds, and the other Directors
and officers of each Fund owned an aggregate of less than 1% of the
outstanding shares of Common Stock of ML & Co.
Voting Rights and Required Vote
For purposes of this Proxy Statement and Prospectus, each share of Common
Stock and AMPS of each of the Funds is entitled to one vote. Approval of the
Agreement and Plan of Reorganization requires the approval of each Fund. With
respect to each Fund, approval of the Agreement and Plan of Reorganization
requires the affirmative vote of stockholders representing (i) a majority of
the outstanding shares of the Fund's Common Stock and AMPS, voting together as
a single class, and (ii) a majority of the outstanding shares of the Fund's
AMPS, voting separately as a class.
71
<PAGE>
Under Maryland law, stockholders of a registered investment company whose
shares are traded publicly on a national securities exchange, such as each of
the Acquired Funds, are not entitled to demand the fair value of their shares
upon a transfer of assets; therefore, the common stockholders of each of the
Acquired Funds will be bound by the terms of the Reorganization, if approved
at the Meetings. However, any common stockholder of an Acquired Fund may sell
his or her shares of Common Stock at any time on the NYSE. Conversely, since
the AMPS are not traded publicly on a national securities exchange, holders of
AMPS issued by an Acquired Fund will be entitled to appraisal rights upon the
consummation of the Reorganization. As stockholders of the corporation
acquiring the assets of the Acquired Funds, neither holders of New York
Insured Common Stock nor holders of New York Insured AMPS are entitled to
appraisal rights under Maryland law.
Under Maryland law, a holder of AMPS of any of the Acquired Funds desiring
to receive payment of the fair value of his or her stock (an "objecting
stockholder") (i) must file with the applicable Acquired Fund a written
objection to the Reorganization at or before the Meeting, (ii) must not vote
in favor of the Reorganization, and (iii) must make written demand on New York
Insured for payment of his or her stock, stating the number and class of
shares for which he or she demands payment, within 20 days after the Maryland
Department of Assessments and Taxation accepts for filing the Articles of
Transfer with respect to the Reorganization (New York Insured is required
promptly to give written notice to all objecting stockholders of the date that
the Articles of Transfer are accepted for record). An objecting stockholder
who fails to adhere to this procedure will be bound by the terms of the
Reorganization. An objecting stockholder ceases to have any rights of a
stockholder except the right to receive fair value for his or her shares and
has no right to receive any dividends or distribution payable to such holders
on a record date after the close of business on the date on which fair value
is to be determined, which, for these purposes, will be the date of the
Meeting. A demand for payment of fair market value may not be withdrawn,
except upon the consent of New York Insured. Within 50 days after the Articles
of Transfer have been accepted for filing, an objecting stockholder who has
not received payment for his or her shares may petition a court located in
Baltimore, Maryland for an appraisal to determine the fair market value of his
or her stock.
For purposes of each Meeting, a quorum consists of one-third of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the
time scheduled for each Meeting, a quorum of the applicable Fund's
stockholders is not present, or if a quorum is present but sufficient votes in
favor of the Agreement and Plan of Reorganization are not received from the
stockholders of the applicable Fund, the persons named as proxies may propose
one or more adjournments of the Meeting to permit further solicitation of
proxies from stockholders. Any such adjournment will require the affirmative
vote of a majority of the shares of the applicable Fund present in person or
by proxy and entitled to vote at the session of the Meeting to be adjourned.
The persons named as proxies will vote in favor of any such adjournment if
they determine that adjournment and additional solicitation are reasonable and
in the interests of the applicable Fund's stockholders.
With respect to the election of Directors, assuming a quorum is present,
holders of shares of a Fund's AMPS, voting separately as a class, are entitled
to elect two Directors of the Fund and holders of shares of a Fund's Common
Stock and AMPS, voting together as a single class, are entitled to elect the
remaining Directors of that Fund. With respect to each Fund, assuming a quorum
is present, (x) election of the two Directors of the Fund to be elected by the
holders of shares of that Fund's AMPS, voting separately as a class, will
require the affirmative vote of a plurality of the votes cast by the holders
of that Fund's AMPS, represented at the Meeting and entitled to vote, voting
together as a single class; and (y) election of the remaining Directors of the
Fund will require the affirmative vote of a plurality of the votes cast by the
holders of that Fund's Common Stock and AMPS, represented at the Meetings and
entitled to vote, voting together as a single class.
Assuming a quorum is present, approval of the ratification of the selection
of the independent auditors of each Fund, will require the affirmative vote of
a majority of the votes cast by the holders of that Fund's Common Stock and
AMPS represented at the Meetings and entitled to vote, voting together as a
single class.
72
<PAGE>
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by New York Insured, the surviving fund after the Reorganization, so as
to be borne equally and exclusively on a per share basis by the holders of
Common Stock of each of the Funds. If the Reorganization is not approved,
these expenses will be allocated among the Funds according to the net asset
value of the Common Stock of each Fund on the Meeting date.
The Funds likewise will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of each of the Funds and certain persons that the
Funds may employ for their reasonable expenses in assisting in the
solicitation of proxies from such beneficial owners of shares of capital stock
of the Funds.
In order to obtain the necessary quorum at the Meetings, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of the Funds. Each of the Funds has retained Shareholders
Communication Corp., 17 State Street, New York, New York 10004 to aid in the
solicitation of proxies, at a cost to be borne by each of the Funds of
approximately $7,500, plus out-of-pocket expenses.
Broker-dealer firms, including Merrill Lynch, holding Fund shares in "street
name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
proposal before the Meetings. The Funds understand that, under the rules of
the NYSE, such broker-dealer firms may, without instructions from their
customers and clients, grant authority to the proxies designated to vote on
the election of the Directors of each Fund (Item 2) and the ratification of
the selection of independent auditors for each Fund (Item 3) if no
instructions have been received prior to the date specified in the broker-
dealer firm's request for voting instructions. With respect to shares of
Common Stock of each Fund, broker-dealer firms, including Merrill Lynch, will
not be permitted to grant voting authority without instructions with respect
to the approval of the Agreement and Plan of Reorganization (Item 1). Shares
of AMPS of a Fund held in "street name," however, may be voted without
instructions under certain conditions by broker-dealer firms with respect to
Item 1 and counted for purposes of establishing a quorum of that Fund if no
instructions are received one business day before the Meeting or, if
adjourned, one business day before the day to which the Meeting is adjourned.
With respect to each Fund, these conditions include, among others, that (i) at
least 30% of that Fund's AMPS outstanding have voted on Item 1, (ii) less than
10% of that Fund's AMPS outstanding have voted against Item 1 and (iii)
holders of that Fund's Common Stock have voted to approve Item 1. In such
instances, the broker-dealer firm will vote that Fund's shares of AMPS on Item
1 in the same proportion as the votes cast by all holders of that Fund's AMPS
who voted on Item 1. The Funds will include shares held of record by broker-
dealers as to which such authority has been granted in its tabulation of the
total number of shares present for purposes of determining whether the
necessary quorum of stockholders of each Fund exists. Proxies that are
returned to a Fund but that are marked "abstain" or on which a broker-dealer
has declined to vote on any item ("broker non-votes") will be counted as
present for the purposes of determining a quorum. Merrill Lynch has advised
the Funds that it intends to vote shares held in its name for which no
instructions are received, except as limited by agreement or applicable law,
on Items 2 and 3 (with respect to Common Stock and AMPS) and on Item 1 (with
respect to AMPS only) in the same proportion as the votes received from
beneficial owners of those shares for which instructions have been received,
whether or not held in nominee name. Abstentions and broker non-votes will not
be counted as votes cast. Abstentions and broker non-votes, therefore, will
not have an effect on the vote on Items 2 and 3. Abstentions and broker non-
votes will have the same effect as a vote against Item 1.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statement and the exhibits relating thereto that
New York Insured has filed with the Commission under the Securities Act and
the Investment Company Act, to which reference is hereby made.
The Funds are subject to the informational requirements of the Exchange Act
and the Investment Company Act and in accordance therewith are required to
file reports, proxy statements and other information with the SEC. Any such
reports, proxy statements and other information can be inspected and copied at
the public
73
<PAGE>
reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the SEC: Regional Office, at Seven World Trade Center, Suite 1300, New York,
New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The SEC maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Funds, that file electronically with the
SEC. Reports, proxy statements and other information concerning the Funds can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
Year 2000 Issues
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). The Funds could be
adversely affected if the computer systems used by FAM or other Fund service
providers do not properly address this problem before January 1, 2000. FAM
expects to have addressed this problem before then, and does not anticipate
that the services it provides will be adversely affected. The Fund's other
service providers have told FAM that they also expect to resolve the Year 2000
Problem, and FAM will continue to monitor the situation as the Year 2000
approaches. However, if the problem has not been fully addressed, the Funds
could be negatively affected. The Year 2000 Problem could also have a negative
impact on the issuers of securities in which the Funds invest, and this could
hurt the Funds' investment returns.
CUSTODIAN
The Bank of New York acts as the custodian for cash and securities of New
York Insured, New York Fund and New York Insured III. The principal business
address of The Bank of New York in such capacity is 90 Washington Street, New
York, New York 10286. State Street Bank and Trust Company acts as the
custodian for cash and securities of New York Insured II. The principal
business address of State Street Bank and Trust Company in such capacity is
One Heritage Drive, P2N, North Quincy, Massachusetts 02171.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Bank of New York serves as the transfer agent, dividend disbursing agent
and registrar with respect to the Common Stock of New York Insured, New York
Fund and New York Insured III, pursuant to separate registrar, transfer agency
and service agreements with each of the Funds. The principal business address
of The Bank of New York in such capacity is 101 Barclay Street, New York, New
York 10286.
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent and registrar with respect to the Common Stock of New York
Insured II, pursuant to a registrar, transfer agency and service agreement
with the Fund. The principal business address of State Street Bank and Trust
Company in such capacity is 225 Franklin Street, Boston, Massachusetts 02110.
The Bank of New York serves as the transfer agent, dividend disbursing
agent, registrar and auction agent to New York Insured, New York Fund, New
York Insured II and New York Insured III, in connection with their respective
AMPS, pursuant to separate registrar, transfer agency, dividend disbursing
agency and service agreements with each of the Funds. The principal business
address of The Bank of New York in such capacity is 101 Barclay Street, New
York, New York 10286.
74
<PAGE>
LEGAL PROCEEDINGS
There are no material legal proceedings to which any Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for the Funds by Brown & Wood LLP, New York, New York.
EXPERTS
The audited financial statements and financial highlights of New York
Insured and New York Fund included in this Proxy Statement and Prospectus have
been so included in reliance on the reports of D&T, independent auditors for
each of these Funds, given on their authority as experts in auditing and
accounting. The principal business address of D&T is 117 Campus Drive,
Princeton, New Jersey 08540. D&T will serve as the independent auditors for
the combined fund after the Reorganization.
Ernst & Young LLP, independent auditors, have audited the financial
statements and financial highlights of New York Insured II and New York
Insured III as of September 30, 1999, as set forth in their reports which
appear in this Proxy Statement and Prospectus. The financial statements and
financial highlights of New York Insured II and New York Insured III are
included in reliance upon their reports, given on their authority as experts
in accounting and auditing. The principal business address of Ernst & Young
LLP is 99 Wood Avenue South, Iselin, New Jersey 08830.
STOCKHOLDER PROPOSALS
If a stockholder of any of the Funds intends to present a proposal at the
2000 Annual Meeting of Stockholders of any of the Funds, all of which are
anticipated to be held in December 2000, and desires to have the proposal
included in the Fund's proxy statement and form of proxy for that meeting, the
stockholder must deliver the proposal to the offices of the appropriate Fund
by .
By Order of the Boards of Directors
William E. Zitelli, Jr.
Secretary of MuniHoldings New York
Insured Fund, Inc.
Alice A. Pellegrino
Secretary of MuniHoldings New York
Fund, Inc., MuniHoldings New York
Insured Fund II, Inc. and
MuniHoldings New York Insured Fund
III, Inc.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements for MuniHoldings New York Insured Fund, Inc.
for the Fiscal Year Ended August 31, 1999(1)............................. F-2
Audited Financial Statements for MuniHoldings New York Fund, Inc. for the
Fiscal Year Ended June 30, 1999.......................................... F-4
Unaudited Financial Statements for MuniHoldings New York Insured Fund II,
Inc. for the Six-Month Period Ended March 31, 1999(2).................... F-20
Unaudited Financial Statements for MuniHoldings New York Insured Fund III,
Inc. for the Period January 29, 1999 to March 31, 1999(2)................ F-34
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis,
as of March 31, 1999..................................................... F-45
</TABLE>
- --------
(1) To be filed by amendment.
(2) Audited financial statements for the period commencement of operations to
September 30, 1999 will be filed by amendment.
F-1
<PAGE>
Audited Financial Statements for MuniHoldings New York Insured Fund, Inc. for
the Fiscal Year Ended August 31, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
[TO COME]
F-3
<PAGE>
Audited Financial Statements for MuniHoldings New York Fund, Inc. for the
Fiscal Year Ended June 30, 1999
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
MuniHoldings New York Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniHoldings New York Fund, Inc. as
of June 30, 1999, the related statements of operations for the year then
ended, changes in net assets and the financial highlights for the year then
ended and for the period February 27, 1998 (commencement of operations) to
June 30, 1998. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on
our audits.
We conducted out audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at June 30, 1999 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniHoldings New
York Fund, Inc. as of June 30, 1999, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 13, 1999
F-5
<PAGE>
MuniHoldings New York Fund, Inc., June 30, 1999
Portfolio
Abbreviations
To simplify the listings of MuniHoldings New York Fund, Inc.'s
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.
AMT Alternative Minimum Tax (subject to)
FLOATS Floating Rate Securities
GO General Obligation Bonds
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New York-- NR* Aaa $ 5,000 Battery Park City Authority, New York, Revenue Bonds, RITR,
93.7% Series 25, 6.82% due 11/01/2026 (a)(f) $ 5,035
AAA Aaa 2,000 Buffalo, New York, Municipal Water Finance Authority, Water
System Revenue Bonds, 5% due 7/01/2025 (b) 1,868
A1+ VMIG1++ 100 Long Island Power Authority, New York, Electric System Revenue
Bonds, VRDN, Sub-Series 7, 3.95% due 4/01/2025 (d)(e) 100
Long Island Power Authority, New York, Electric System Revenue
Refunding Bonds, Series A:
AAA Aaa 7,000 5.25% due 12/01/2026 (d) 6,773
A- Baa1 3,150 5.50% due 12/01/2029 3,109
AAA Aaa 2,600 5.50% due 12/01/2029 (d) 2,619
Metropolitan Transportation Authority, New York, Commuter
Facilities Revenue Refunding Bonds:
AAA Aaa 2,000 Series B, 5% due 7/01/2017 (a) 1,906
AAA Aaa 1,000 Series D, 5.125% due 7/01/2022 (d) 956
AAA Aaa 14,710 Metropolitan Transportation Authority, New York, Dedicated Tax
Fund Revenue Bonds, Series A, 5% due 4/01/2029 (c) 13,678
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 2,690 Nassau County, New York, IDA, Civic Facility Revenue Refunding
Bonds (Hofstra University Project), 5% due 7/01/2023 (d) 2,536
A1+ VMIG1++ 100 New York City, New York, Cultural Resource Trust, Revenue Bonds
(Soloman R. Guggenheim Foundation), VRDN, Series B, 3.85% due
12/01/2015 (e) 100
New York City, New York, GO:
A- A3 5,000 Refunding, Series H, 5.125% due 8/01/2025 4,663
A- A3 2,000 Series J, 5.50% due 2/15/2026 1,975
AAA Aaa 7,500 Series J, 5.125% due 5/15/2029 (d) 7,110
A1+ VMIG1++ 1,290 VRDN, Series B-2, Sub-Series B-5, 3.95% due 8/15/2009 (d)(e) 1,290
New York City, New York, IDA, Civic Facilities Revenue Bonds:
BBB NR* 1,000 (College of Aeronautics Project), 5.45% due 5/01/2018 (h) 984
A A3 5,765 (Nightingale-Bamford School Project), 5.85% due 1/15/2020 5,896
A A2 6,750 New York City, New York, IDA, Special Facilities Revenue
Bonds (British Airways PLC Project), AMT, 5.25% due 12/01/2032 6,298
New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Refunding Bonds:
AAA Aaa 7,250 Series A, 5.50% due 6/15/2023 (b) 7,268
A A1 4,750 Series B, 5.25% due 6/15/2029 4,536
A1+ VMIG1++ 1,350 VRDN, Series A, 3.90% due 6/15/2025 (b)(e) 1,350
AA Aa3 5,000 New York City, New York, Transitional Finance Authority
Revenue Bonds, Future Tax Secured, Series C, 5.50% due 5/01/2025 5,021
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 2,200 (835 Schools Program), Issue 2, Series D, 5% due 7/01/2018 (a) 2,086
BBB+ A3 7,550 (Court Facilities Lease), Series A, 5.25% due 5/15/2021 7,191
AAA Aaa 4,500 (Library Facilities-Service Contract), 5.25% due 7/01/2019 (g) 4,397
A- A3 2,370 (Mental Health Services Facilities Improvement), Series B,
5.375% due 2/15/2026 2,309
AAA A3 5,485 (Mental Health Services Facilities Improvement), Series D,
5.125% due 8/15/2027 (c) 5,207
BBB+ Baa1 7,000 (Secured Hospital--Interfaith Medical Center), Series D,
5.40% due 2/15/2028 6,620
BBB+ Baa1 1,750 (Secured Hospital--Saint Agnes Hospital), Series A, 5.40%
due 2/15/2025 1,662
BBB+ Baa1 1,000 (Secured Hospital--Saint Clare's Hospital), Series B, 5.30%
due 2/15/2019 951
New York State Dormitory Authority Revenue Refunding Bonds:
NR* Aaa 2,920 (Culinary Institute of America), 5.375% due 7/01/2015 (d) 2,942
A- A3 2,000 (State University Educational Facilities), 5.125% due
5/15/2021 1,893
AAA Aaa 1,455 (University of Rochester), Series A, 5.125% due 7/01/2022 (d) 1,392
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 3,500 (University of Rochester), Series A, 5% due 7/01/2023 (d) 3,299
AA Aa3 4,000 (Vassar College), 5% due 7/01/2025 3,725
A- Baa3 5,000 New York State Energy Research and Development Authority,
Electric Facilities Revenue Bonds (LILCO Project), AMT, Series B,
5.30% due 11/01/2023 4,732
AAA NR* 2,000 New York State Energy Research and Development Authority, PCR
(New York State Electric and Gas Co. Project), AMT, Series A,
6.15% due 7/01/2026 (d) 2,099
New York State Energy Research and Development Authority, PCR,
Refunding (Niagara Mohawk Power Corporation Project), Series A:
AAA Aaa 2,000 5.15% due 11/01/2025 (a) 1,908
NR* P1 200 FLOATS, 3.90% due 3/01/2027 (e) 200
AAA Aaa 3,955 New York State, GO, Refunding, Series D, 5% due 7/15/2018 (a) 3,777
NR* Aaa 5,065 New York State Local Government Assistance Corporation, RITR,
Series 27, 6.82% due 4/01/2021 (f) 5,089
New York State Mortgage Agency Revenue Bonds:
NR* Aa2 7,435 (Homeowner Mortgage), AMT, Series 69, 5.40% due 10/01/2019 7,318
NR* Aa2 3,900 (Homeowner Mortgage), AMT, Series 69, 5.50% due 10/01/2028 3,811
NR* Aaa 4,900 Series 41-A, 6.45% due 10/01/2014 5,245
NR* Aaa 5,000 New York State Urban Development Corporation, Revenue
Refunding Bonds, RITR, Series 26, 6.82% due 1/01/2025 (f) 5,024
AAA NR* 1,000 Niagara, New York, Frontier Authority, Airport Revenue Bonds
(Buffalo Niagara International Airport), AMT, 5% due
4/01/2018 (b) 939
AAA Aaa 1,700 Oneida County, New York, IDA, Civic Facilitities Revenue
Bonds (Mohawk Valley), Series A, 5.20% due 2/01/2013 (c) 1,669
AAA Aaa 1,250 Yonkers, New York, GO, Series C, 5% due 6/01/2019 (b) 1,181
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Puerto A Baa1 $ 9,420 Puerto Rico Public Buildings Authority, Guaranteed Government
Rico--5.0% Facilities Revenue Bonds, Series B, 5.25% due 7/01/2021 $ 9,098
Total Investments (Cost--$186,349)--98.7% 180,835
</TABLE>
F-8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Variation Margin on Financial Futures Contracts**--(0.1%) (214)
Other Assets Less Liabilities--1.4% 2,536
---------
Net Assets--100.0% $ 183,157
=========
<FN>
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at June 30, 1999.
(f)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at June 30, 1999.
(g)CAPMAC Insured.
(h)All or a portion of security held as collateral in connection
with open financial futures contracts.
*Not Rated.
**Financial futures contracts sold as of June 30, 1999 were as
follows:
(in Thousands)
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
245 US Treasury Bonds September 1999 $ 28,397
---------
Total Financial Futures Contracts Sold
(Total Contract Price--$27,972) $ 28,397
=========
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
QUALITY PROFILE
The quality ratings of securities in the Fund as of June 30, 1999
were as follows:
F-9
<PAGE>
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 52.4%
AA/Aa 10.8
A/A 28.2
BBB/Baa 5.6
Other++ 1.7
[FN]
++Temporary investments in short-term municipal securities.
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of June 30, 1999
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$186,349,481) (Note 1a) $180,835,419
Cash 27,107
Receivables:
Securities sold $ 7,303,421
Interest 2,696,871 10,000,292
------------
Deferred organization expenses (Note 1e) 11,899
Prepaid expenses 11,655
------------
Total assets 190,886,372
------------
Liabilities: Payables:
Securities purchased 7,086,451
Variation margin (Note 1b) 214,375
Dividends to shareholders (Note 1f) 189,059
Investment adviser (Note 2) 75,900
Offering costs (Note 1e) 60,000 7,625,785
------------
Accrued expenses 103,563
------------
Total liabilities 7,729,348
------------
Net Assets: Net assets $183,157,024
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (3,040 shares of
AMPS* issued and outstanding at $25,000 per share liquidation
preference) $ 76,000,000
Common Stock, par value $.10 per share (7,580,698 shares
</TABLE>
F-10
<PAGE>
<TABLE>
<S> <C> <C> <C>
issued and outstanding) $ 758,070
Paid-in capital in excess of par 111,975,013
Undistributed investment income--net 708,483
Accumulated realized capital losses on investments--net (345,636)
Unrealized depreciation on investments--net (5,938,906)
------------
Total--Equivalent to $14.14 net asset value per share of Common
Stock (market price--$13.25) 107,157,024
------------
Total capital $183,157,024
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
MuniHoldings New York Fund, Inc., June 30, 1999
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended June 30, 1999
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 9,985,755
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 1,053,213
Commission fees (Note 4) 194,697
Professional fees 62,147
Accounting services (Note 2) 42,971
Transfer agent fees 41,665
Directors' fees and expenses 23,149
Printing and shareholder reports 22,766
Custodian fees 15,580
Listing fees 13,457
Pricing fees 7,595
Amortization of organization expenses (Note 1e) 3,248
Other 8,367
------------
Total expenses before reimbursement 1,488,855
Reimbursement of expenses (Note 2) (166,173)
------------
Total expenses after reimbursement 1,322,682
------------
Investment income--net 8,663,073
------------
</TABLE>
F-11
<PAGE>
<TABLE>
<S> <C> <C> <C>
Realized & Realized gain on investments--net 1,039,531
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net (7,804,850)
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 1,897,754
- --Net (Notes ============
1b, 1d & 3):
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the
For the Period
Year Ended Feb. 27, 1998++
June 30, to June 30,
Increase (Decrease) in Net Assets: 1999 1998
<S> <C> <C> <C>
Operations: Investment income--net $ 8,663,073 $ 2,967,254
Realized gain (loss) on investments--net 1,039,531 (827,645)
Change in unrealized appreciation/depreciation on
investments--net (7,804,850) 1,865,944
------------ ------------
Net increase in net assets resulting from operations 1,897,754 4,005,553
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (6,180,250) (1,644,233)
Shareholders Preferred Stock (2,290,033) (807,287)
(Note 1f): Realized gain on investments--net:
Common Stock (388,828) --
Preferred Stock (168,735) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (9,027,846) (2,451,520)
------------ ------------
Capital Stock Proceeds from issuance of Common Stock -- 113,250,000
Transactions Proceeds from issuance of Preferred Stock -- 76,000,000
(Notes 1e & 4): Value of shares issued to Common Stock Shareholders in
reinvestment of dividends and distributions 368,635 --
Offering costs resulting from the issuance of Common Stock -- (278,202)
Offering and underwriting costs resulting from the issuance of
Preferred Stock -- (707,355)
------------ ------------
Net increase in net assets derived from capital stock
transactions 368,635 188,264,443
------------ ------------
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Assets: Total increase (decrease) in net assets (6,761,457) 189,818,476
Beginning of period 189,918,481 100,005
------------ ------------
End of period* $183,157,024 $189,918,481
============ ============
<FN>
*Undistributed investment income--net (Note 1g) $ 708,483 $ 515,734
============ ============
++Commencement of operations.
See Notes to Financial Statements.
MuniHoldings New York Fund, Inc., June 30, 1999
FINANCIAL HIGHLIGHTS
For the
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Year Ended Feb. 27, 1998++
June 30, to June 30,
Increase (Decrease) in Net Asset Value: 1999 1998
Per Share Net asset value, beginning of period $ 15.08 $ 15.00
Operating ------------ ------------
Performance: Investment income--net 1.14 .36
Realized and unrealized gain (loss) on investments--net (.89) .14
------------ ------------
Total from investment operations .25 .50
------------ ------------
Less dividends and distributions to Common Stock shareholders:
Investment income--net (.82) (.22)
Realized gain on investments--net (.05) --
------------ ------------
Total dividends and distributions to Common Stock shareholders (.87) (.22)
------------ ------------
Capital charge resulting from issuance of Common Stock -- (.04)
------------ ------------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred Stock shareholders:
Investment income--net (.30) (.07)
Realized gain on investments--net (.02) --
Capital charge resulting from issuance of Preferred Stock -- (.09)
------------ ------------
</TABLE>
F-13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total effect of Preferred Stock activity (.32) (.16)
------------ ------------
Net asset value, end of period $ 14.14 $ 15.08
============ ============
Market price per share, end of period $ 13.25 $ 14.5625
============ ============
Total Investment Based on market price per share (3.55%) (1.47%)+++
Return:** ============ ============
Based on net asset value per share (0.60%) 2.03%+++
============ ============
Ratios Based on Total expenses, net of reimbursement*** 1.15% .43%*
Average Net ============ ============
Assets of Total expenses*** 1.29% 1.25%*
Common Stock: ============ ============
Total investment income--net*** 7.50% 8.42%*
============ ============
Amount of dividends to Preferred Stock shareholders 1.98% 2.29%*
============ ============
Investment income--net, to Common Stock shareholders 5.52% 6.13%*
============ ============
Ratios Based Total expenses, net of reimbursement .69% .26%*
on Total ============ ============
Average Net Total expenses .78% .77%*
Assets:++++++*** ============ ============
Total investment income--net 4.52% 5.22%*
============ ============
Ratios Based on Dividends to Preferred Stock shareholders 3.01% 3.73%*
Average Net ============ ============
Assets of
Preferred Stock:
Supplemental Net assets, net of Preferred Stock, end of period
Data: (in thousands) $ 107,157 $ 113,918
============ ============
Preferred Stock outstanding, end of period (in thousands) $ 76,000 $ 76,000
============ ============
Portfolio turnover 100.06% 28.25%
============ ============
Leverage: Asset coverage per $1,000 $ 2,410 $ 2,499
============ ============
Dividends Series A--Investment income--net $ 745 $ 286
Per Share on ============ ============
Preferred Stock Series B--Investment income--net $ 762 $ 245
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C> <C> <C>
Outstanding: ============ ============
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Commencement of operations.
++++The Fund's Preferred Stock was issued on March 19, 1998.
++++++Includes Common and Preferred Stock average net assets.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings New York Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund's financial statements are
prepared in accordance with generally accepted accounting
principles, which may require the use of management accruals and
estimates. The Fund determines and makes available for publication
the net asset value of its Common Stock on a weekly basis. The
Fund's Common Stock is listed on the New York Stock Exchange under
the symbol MUN. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund,
F-15
<PAGE>
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
MuniHoldings New York Fund, Inc., June 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
* Options--The Fund is authorized to write covered call options and
purchase call and put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
F-16
<PAGE>
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization and offering expenses--Deferred
organization expenses are amortized on a straight-line basis over a
period not exceeding five years. In accordance with Statement of
Position 98-5, any unamortized organization expenses will be
expensed on July 1, 1999. This charge will not have any material
impact on the operations of the Fund. Direct expenses relating to
the public offering of the Fund's Common and Preferred Stock were
charged to capital at the time of issuance of the shares.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
(g) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $41
have been reclassified between accumulated net realized capital
losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
per share.
2. Investment Advisory Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock. For the year ended June 30, 1999, FAM
earned fees of $1,053,213, of which $166,173 was reimbursed.
F-17
<PAGE>
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 1999 were $194,758,639 and $186,189,994,
respectively.
Net realized gains for the year ended June 30, 1999 and net
unrealized losses as of June 30, 1999 were as follows:
Realized Unrealized
Gains Losses
Long-term investments $ 588,309 $ (5,514,062)
Financial futures contracts 451,222 (424,844)
------------- -------------
Total $ 1,039,531 $ (5,938,906)
============= =============
As of June 30, 1999, net unrealized depreciation for Federal income
tax purposes aggregated $5,514,062, of which $70,699 related to
appreciated securities and $5,584,761 related to depreciated
securities. The aggregate cost of investments at June 30, 1999 for
Federal income tax purposes was $186,349,481.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of holders of Common Stock.
Common Stock
Shares issued and outstanding during the year ended June 30, 1999
increased by 24,031 as a result of dividend reinvestment and during
the period February 27, 1998 to June 30, 1998 increased by 7,550,000
as a result of the initial offering.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund, with a par value of $.10 per share and a
liquidation preference of $25,000 per share, that entitle their
holders to receive cash dividends at an annual rate that may vary
for the successive dividend periods. The yields in effect at June
30, 1999 were as follows: Series A, 4% and Series B, 3.75%.
F-18
<PAGE>
Shares issued and outstanding during the year ended June 30, 1999
remained constant and during the period February 27, 1998 to June
30, 1998 increased by 3,040 as a result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended June
30, 1999, Merrill Lynch, Pierce, Fenner & Smith Incorporated, an
affiliate of FAM, earned $129,951 as commissions.
5. Subsequent Event:
On July 8, 1999, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.067616 per share, payable on July 29, 1999 to shareholders of
record as of July 23, 1999.
F-19
<PAGE>
Unaudited Financial Statements for MuniHoldings New York Insured Fund II, Inc.
for the Six-Month Period Ended March 31, 1999
F-20
<PAGE>
MuniHoldings New York Insured Fund II, Inc., March 31, 1999
Portfolio Abbreviations
To simplify the listings of MuniHoldings New York Insured Fund II,
Inc.'s portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New York - 100.8% AAA Aaa $ 6,000 Long Island Power Authority, New York, Electric System
Revenue Bonds, Series A, 5.125% due 12/01/2022 (e) $ 6,002
AAA Aaa 8,000 Metropolitan Transportation Authority, New York,
Commuter Facilities Revenue Bonds, Series C-1,
5.375% due 7/01/2027 (c) 8,251
AAA Aaa 3,500 Metropolitan Transportation Authority, New York,
Commuter Facilities Revenue Refunding Bonds (Service
Contract), Series Q, 5.125% due 7/01/2012 (b) 3,629
AAA NR* 6,045 Nassau County, New York, GO, General Improvement,
Series V, 5.25% due 3/01/2010 (b) 6,389
Nassau County, New York, IDA, Civic Facility Revenue
Refunding Bonds (Hofstra University Project):
AAA Aaa 2,000 5% due 7/01/2023 (f) 1,967
AAA Aaa 2,000 4.75% due 7/01/2028 1,882
New York City, New York, GO:
AAA NR* 5,000 Series C, 5% due 8/15/2028 (e) 4,894
</TABLE>
F-21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
A1+ VMIG1++ 1,100 VRDN, Series B-2, Sub-Series B-5, 3% due 8/15/2011 (a)(f) 1,100
New York City, New York, Municipal Water Finance
Authority, Water and Sewer System Revenue Bonds:
AAA NR* 2,750 Refunding, Series B, 5.25% due 8/15/2029 (e) 2,786
AAA Aaa 5,000 Series B, 5.125% due 6/15/2030 (c) 4,980
A1+ VMIG1++ 3,000 VRDN, Series G, 2.95% due 6/15/2024 (a)(c) 3,000
AAA NR* 2,500 New York City, New York, Transitional Finance
Authority Revenue Bonds, Future Tax
Secured, Series B, 5% due 11/01/2008 (c) 2,636
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 5,000 (Consolidated City University System), Series 1,
5.125% due 7/01/2027 (f) 4,989
AAA NR* 2,325 (Gustavus Adolphus Childrens School), Series B,
5.50% due 7/01/2018 (b) 2,435
AAA Aaa 1,425 (Rochester Institute of Technology), 5.25% due
7/01/2022 (f)(h) 1,445
AAA Aaa 4,000 (Saint Barnabas Hospital), 5.45% due 8/01/2035 (d) 4,124
AAA Aaa 6,000 (University of Rochester), Series A, 5% due 7/01/2023 (f) 5,900
New York State Dormitory Authority, Revenue Refunding Bonds:
BBB+ Baa1 5,000 (City University System), Consolidated Third, Series 1,
5.25% due 7/01/2025 4,985
AAA NR* 6,535 (Consolidated City University), Series A, 5.75%
due 7/01/2009 (e) 7,263
NR* Aaa 2,445 (Ithaca College), 5% due 7/01/2026 (b) 2,395
AAA NR* 3,315 (Mental Health Services Facilities), Series C, 5.125%
due 8/15/2015 (f) 3,372
AAA Aaa 3,000 (North Shore University Hospital), 5% due 11/01/2023 (f) 2,942
AAA NR* 14,435 RIB, Series 45, 7.115% due 7/01/2025 (f)(g) 14,874
BBB+ NR* 5,000 (Secured Hospital--Wyckoff Heights), Series H, 5.30%
due 8/15/2021 4,948
AAA Aaa 2,550 New York State Energy Research and Development Authority,
PCR, Refunding (Niagara Mohawk Power Project), Series A,
5.15% due 11/01/2025 (b) 2,563
AAA Aaa 3,000 New York State Environmental Facilities Corporation,
Special Obligation Revenue Refunding Bonds (Riverbank
State Park), 5.125% due 4/01/2022 (b) 3,001
NR* Aa2 9,125 New York State Mortgage Agency Revenue Bonds (Homeowner
Mortgage), AMT, Series 73-A, 5.30% due 10/01/2028 9,163
AAA Aaa 2,465 New York State Urban Development Corporation,
Revenue Bonds (Correctional Capital Facilities),
Series 6, 5.375% due 1/01/2025 (b) 2,533
</TABLE>
F-22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA NR* 2,000 New York State Urban Development Corporation, Revenue
Refunding Bonds (Correctional Facilities), 5% due
1/01/2019 (e) 1,990
A1+ VMIG1++ 900 Port Authority of New York and New Jersey, Special
Obligation Revenue Refunding Bonds (Versatile Structure
Obligation), VRDN, Series 2, 2.90% due 5/01/2019 (a) 900
AAA Aaa 1,500 Saint Lawrence County, New York, Industrial Development
Civic Facility Revenue Bonds (Saint Lawrence University
Project), Series A, 5% due 7/01/2028 (f) 1,468
A1+ VMIG1++ 6,300 Syracuse, New York, IDA, Civic Facility Revenue Bonds
(Multi-Modal--Syracuse University Project), VRDN,
2.80% due 3/01/2023 (a) 6,300
Total Investments (Cost--$136,200)--100.8%135,106
Variation Margin on Financial Futures Contracts**--0.1% 110
Liabilities in Excess of Other Assets--(0.9%) (1,156)
---------
Net Assets--100.0% $ 134,060
=========
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at March 31, 1999.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)FHA Insured
(e)FSA Insured.
(f)MBIA Insured.
(g)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at March 31, 1999.
(h)All or a portion of security held as collateral in conjunction
with open financial futures contracts.
++Highest short-term rating by Moody's Investors Service, Inc.
*Not Rated.
**Financial futures contracts sold as of March 31, 1999 were as
follows:
(in Thousands)
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
</TABLE>
F-23
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
110 Municipal Bonds June 1999 $ 13,595
110 US Treasury Bonds June 1999 13,262
--------------
Total Financial Futures Contracts Sold
(Total Contract Price--$26,722) $ 26,857
==============
See Notes to Financial Statements.
</TABLE>
Quality
Profile
The quality ratings of securities in the Fund as of March 31, 1999
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 78.1%
AA/Aa 6.8
BBB/Baa 7.4
Other++ 8.5
[FN]
++Temporary investment in short-term municipal securities.
MuniHoldings New York Insured Fund II, Inc., March 31, 1999
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of March 31, 1999
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$136,199,552)(Note 1a) $135,106,485
Receivables:
Interest $ 1,768,093
Variation margin (Note 1b) 110,000 1,878,093
------------
Deferred organization expenses (Note 1e) 10,602
Other assets 75,336
------------
Total assets 137,070,516
------------
</TABLE>
F-24
<PAGE>
<TABLE>
<S> <C> <C> <C>
Liabilities: Payables:
Securities purchased 2,457,995
Offering costs (Note 1e) 239,272
Dividends to shareholders (Note 1f) 181,022
Investment adviser (Note 2) 39,518 2,917,807
------------
Accrued expenses and other liabilities 92,236
------------
Total liabilities 3,010,043
------------
Net Assets: Net assets $134,060,473
============
Capital: Capital Stock (200,000,000 shares authorized)(Note 4):
Preferred Stock, par value $.10 per share (2,120 shares
of AMPS* issued and outstanding at $25,000
per share liquidation preference) $ 53,000,000
Common Stock, par value $.10 per share (5,591,168
shares issued and outstanding) $ 559,117
Paid-in capital in excess of par 82,480,635
Undistributed investment income--net 436,647
Accumulated realized capital losses on investments--net (1,187,547)
Unrealized depreciation on investments--net (1,228,379)
------------
Total--Equivalent to $14.50 net asset value per share of
Common Stock (market price--$14.3125) 81,060,473
------------
Total capital $134,060,473
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF OPERATIONS
For the Period October 1, 1998++ to March 31, 1999
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 3,266,160
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 345,264
Commission fees (Note 4) 56,657
Accounting services (Note 2) 29,641
Professional fees 18,486
Transfer agent fees 17,129
</TABLE>
F-25
<PAGE>
<TABLE>
<S> <C> <C> <C>
Directors' fees and expenses 9,584
Listing fees 7,372
Custodian fees 3,527
Printing and shareholder reports 3,346
Pricing fees 3,013
Amortization of organization expenses (Note 1e) 296
Other 7,035
------------
Total expenses before reimbursement 501,350
Reimbursement of expenses (Note 2) (281,337)
------------
Total expenses after reimbursement 220,013
------------
Investment income--net 3,046,147
------------
Realized & Realized loss on investments--net (1,187,547)
Unrealized Loss on Unrealized depreciation on investments--net (1,228,379)
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 630,221
============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
Oct. 1, 1998++ to
Increase (Decrease) in Net Assets: March 31, 1999
<S> <C> <C>
Operations: Investment income--net $ 3,046,147
Realized loss on investments--net (1,187,547)
Unrealized depreciation on investments--net (1,228,379)
------------
Net increase in net assets resulting from operations 630,221
------------
Dividends to Investment income--net:
Shareholders Common Stock (1,876,479)
(Note 1f): Preferred Stock (733,021)
------------
Net decrease in net assets resulting from dividends to shareholders (2,609,500)
------------
Capital Stock Proceeds from issuance of Common Stock 83,250,000
</TABLE>
F-26
<PAGE>
<TABLE>
<S> <C> <C>
Transactions Proceeds from issuance of Preferred Stock 53,000,000
(Notes 1e & 4): Value of shares issued to Common Stock shareholders in reinvestment of dividends 505,295
Offering costs resulting from the issuance of Common Stock (270,213)
Offering and underwriting costs resulting from the issuance of Preferred Stock (545,335)
------------
Net increase in net assets derived from capital stock transactions 135,939,747
------------
Net Assets: Total increase in net assets 133,960,468
Beginning of period 100,005
------------
End of period* $134,060,473
============
<FN>
*Undistributed investment income--net $ 436,647
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings New York Insured Fund II, Inc., March 31, 1999
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Oct. 1, 1998++ to
Increase (Decrease) in Net Asset Value: March 31, 1999
<S> <C> <C>
Per Share Net asset value, beginning of period $ 15.00
Operating ------------
Performance: Investment income--net .55
Realized and unrealized loss on investments--net (.43)
------------
Total from investment operations .12
------------
Less dividends to Common Stock shareholders from investment income--net (.34)
------------
Capital charge resulting from issuance of Common Stock (.05)
------------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.13)
Capital charge resulting from issuance of Preferred Stock (.10)
------------
</TABLE>
F-27
<PAGE>
<TABLE>
<S> <C> <C>
Total effect of Preferred Stock activity (.23)
------------
Net asset value, end of period $ 14.50
============
Market price per share, end of period $ 14.3125
============
Total Investment Based on market price per share (2.37%)+++
Return:** ============
Based on net asset value per share (1.09%)+++
============
Ratios to Average Expenses, net of reimbursement .35%*
Net Assets:*** ============
Expenses .80%*
============
Investment income--net 4.85%*
============
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 81,060
Data: ============
Preferred Stock outstanding, end of period (in thousands) $ 53,000
============
Portfolio turnover 92.01%
============
Leverage: Asset coverage per $1,000 $ 2,529
Dividends ============
Per Share on Series A--Investment income--net $ 337
Preferred Stock ============
Outstanding: Series B--Investment income--net $ 355
============
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Commencement of operations.
++++The Fund's Preferred Stock was issued on October 22, 1998.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
F-28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings New York Insured Fund II, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a non-
diversified, closed-end management investment company. The Fund's
financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of
management accruals and estimates. These unaudited financial
statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal
recurring nature. Prior to commencement of operations on October 1,
1998, the Fund had no operations other than those relating to
organizational matters and the sale of 6,667 shares of Common Stock
on September 18, 1998 to Fund Asset Management, L.P. ("FAM") for
$100,005. The Fund determines and makes available for publication
the net asset value of its Common Stock on a weekly basis. The
Fund's Common Stock is listed on the New York Stock Exchange under
the symbol MNU. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
F-29
<PAGE>
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase call and put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization and offering expenses--Deferred
organization expenses are amortized on a straight-line basis over a
F-30
<PAGE>
period not exceeding five years. In accordance with Statement of
Position 98-5, any unamortized organization expenses will be
expensed on the first day of the next fiscal year beginning after
December 15, 1998. This charge will not have any material impact on
the operations of the Fund. Direct expenses relating to the public
offering of the Fund's Common and Preferred Stock were charged to
capital at the time of issuance of the shares.
MuniHoldings New York Insured Fund II, Inc., March 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock. For the period October 1, 1998 to March
31, 1999, FAM earned fees of $345,264, of which $250,360 was
voluntarily waived. In addition, FAM also reimbursed the Fund
$30,977 in additional expenses.
During the period October 1, 1998 to March 31, 1999, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM,
received underwriting fees of $397,500, in connection with the
issuance of the Fund's Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period October 1, 1998 to March 31, 1999 were $243,094,462
and $116,768,903, respectively.
F-31
<PAGE>
Net realized gains (losses) for the period October 1, 1998 to March
31, 1999 and net unrealized losses as of March 31, 1999 were as
follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $(1,396,859) $(1,093,067)
Financial futures contracts 209,312 (135,312)
----------- -----------
Total $(1,187,547) $(1,228,379)
=========== ===========
As of March 31, 1999, net unrealized depreciation for Federal income
tax purposes aggregated $1,093,067, of which $83,025 related to
appreciated securities and $1,176,092 related to depreciated
securities. The aggregate cost of investments at March 31, 1999 for
Federal income tax purposes was $136,199,552.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of holders of Common Stock.
Common Stock
Shares issued and outstanding during the period October 1, 1998 to
March 31, 1999 increased by 5,543,333 from shares sold and by 41,168
as a result of dividend reinvestment.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund, with a par value of $.10 per share and a
liquidation preference of $25,000 per share, that entitle their
holders to receive cash dividends at an annual rate that may vary
for the successive dividend periods. The yields in effect at March
31, 1999 were for Series A, 3.30% and Series B, 3.30%.
In connection with the offering of AMPS, the Board of Directors
reclassified 2,120 shares of unissued capital stock as AMPS. Shares
issued and outstanding during the period October 1, 1998 to March
31, 1999 increased by 2,120 as a result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the period October
1, 1998 to March 31, 1999, MLPF&S, an affiliate of FAM, earned
F-32
<PAGE>
$28,518 as commissions.
5. Subsequent Event:
On April 8, 1999, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.067666 per share, payable on April 29, 1999 to shareholders of
record as of April 22, 1999.
F-33
<PAGE>
Unaudited Financial Statements for
Muniholdings New York Insured Fund III, Inc.
for the Period
January 29, 1999 to March 31, 1999
F-34
<PAGE>
MuniHoldings New York Insured Fund III, Inc., March 31, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1A)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
New York--97.4% NR* Aaa $ 4,205 Albany County, New York, Airport Authority, Airport Revenue
Bonds, RITR, Series RI-7, 8.57% due 12/15/2023 (g) $ 4,963
- ------------------------------------------------------------------------------------------------------------------------------------
Allegany County, New York, IDA, Civic Facilities Revenue Refunding
Bonds (Alfred University) (b):
NR* Aaa 1,100 5.25% due 8/01/2010 1,170
NR* Aaa 3,000 5% due 8/01/2028 2,937
- ------------------------------------------------------------------------------------------------------------------------------------
Long Island Power Authority, New York, Electric System Revenue Bonds:
AAA Aaa 4,000 Series A, 5.125% due 12/01/2022 (d) 4,001
AAA Aaa 5,000 Series A, 5.50% due 12/01/2029 (b) 5,158
A1+ VMIG1+ 900 VRDN, Sub-Series 5, 3% due 5/01/2033 (f) 900
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Metropolitan Transportation Authority, New York, Commuter Facilities
Revenue Bonds, Series C-1, 5.375% due 7/01/2027 (c) 10,313
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,250 Metropolitan Transportation Authority, New York, Dedicated Tax Fund
Revenue Bonds, Series A, 5% due 4/01/2023 (c) 5,164
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Nassau County, New York, IDA, Civic Facilities Revenue Refunding Bonds
(Hofstra University Project), 4.75% due 7/01/2028 (b) 3,765
- ------------------------------------------------------------------------------------------------------------------------------------
New York City, New York, GO, VRDN (f):
A1+ VMIG1+ 176 Series B, Sub-Series B-5, 3% due 8/15/2022 (b) 176
A1+ VMIG1+ 324 Series B2, Sub-Series B-5, 3% due 8/15/2009 (b) 324
A1+ VMIG1+ 350 Sub-Series A-4, 3% due 8/01/2022 350
A1+ VMIG1+ 700 Sub-Series A-4, 3% due 8/01/2023 700
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 New York City, New York, Health and Hospital Corporation, Revenue
Refunding Bonds (Health System), Series A, 5.125% due 2/15/2014 (a) 4,092
- ------------------------------------------------------------------------------------------------------------------------------------
NR* A1 4,000 New York City, New York, Municipal Water Finance Authority, Water and
Sewer System Revenue Bonds, RITR, Series 21, 7.87% due 6/15/2029 (g) 4,584
- ------------------------------------------------------------------------------------------------------------------------------------
New York City, New York, Municipal Water Finance Authority, Water and
Sewer System, Revenue Refunding Bonds:
AAA Aaa 5,000 Series B, 5.25% due 6/15/2029 (a) 5,065
AAA Aaa 1,250 Series D, 4.75% due 6/15/2025 (b) 1,180
A1+ VMIG1+ 2,900 VRDN, Series A, 3.10% due 6/15/2025 (c)(f) 2,900
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 New York City, New York, Transitional Finance Authority Revenue Bonds,
Future Tax Secured, Series B, 5% due 11/01/2008 (c) 5,272
- ------------------------------------------------------------------------------------------------------------------------------------
New York State Dormitory Authority, Lease Revenue Bonds (Municipal
Health Facilities Improvement Program), Series 1 (d):
</TABLE>
F-35
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AAA Aaa 2,000 5% due 1/15/2019 1,978
AAA Aaa 4,250 4.75% due 1/15/2029 3,986
- ------------------------------------------------------------------------------------------------------------------------------------
New York State Dormitory Authority Revenue Bonds:
AAA NR* 5,000 (Mental Health Services), Series B, 5.375% due 2/15/2026 (d) 5,136
AAA Aaa 3,500 (Saint Barnabas Hospital), 5.45% due 8/01/2035 (a)(e)(h) 3,608
- ------------------------------------------------------------------------------------------------------------------------------------
New York State Dormitory Authority, Revenue Refunding Bonds:
AAA Aaa 6,250 (Hospital for Special Surgery), 5% due 2/01/2028 (b)(e) 6,119
NR* Aaa 1,020 (Ithaca College), 5% due 7/01/2026 (a) 999
AAA Aaa 3,000 (New York and Presbyterian Hospitals), 4.75% due 8/01/2027 (a)(e) 2,809
AAA Aaa 3,750 (New York Medical College), 4.75% due 7/01/2027 (b) 3,533
AAA Aaa 4,000 (North Shore University Hospital), 5.25% due 11/01/2019 (b) 4,055
AAA Aaa 3,000 (State University Educational Facilities), Series A, 4.75% due
5/15/2025 (b) 2,833
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,800 New York State Energy Research and Development Authority, PCR,
Refunding (Niagara Mohawk Power Project), Series A, 5.15% due
11/01/2025 (a) 3,820
- ------------------------------------------------------------------------------------------------------------------------------------
NR* NR* 3,000 New York State Mortgage Agency Revenue Bonds, RITR, Series 24,
8.12% due 10/01/2028 (g) 3,385
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 New York State Thruway Authority, Highway and Bridge Trust Fund
Revenue Bonds, Series A, 5% due 4/01/2009 (c) 2,878
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,250 Port Authority of New York and New Jersey, Consolidated Revenue Bonds,
116th Series, 4.375% due 10/01/2033 (c) 5,500
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,055 Suffolk County, New York, GO, Refunding, Public Improvements, Series
D, 4.75% due 11/01/2019 (c) 1,013
- ------------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Triborough Bridge and Tunnel Authority, New York, General Purpose
Revenue Bonds, Series B, 5.20% due 1/01/2027 (c) 6,059
====================================================================================================================================
Total Investments (Cost--$121,341)--97.4% 120,725
Variation Margin on Financial Futures Contracts++--0.0% 47
Other Assets Less Liabilities--2.6% 3,205
--------
Net Assets--100.0% $123,977
========
====================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) MBIA Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) FHA Insured.
(f) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effectat March 31, 1999.
(g) The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at March 31, 1999.
F-36
<PAGE>
(h) All or a portion of security held as collateral in connection with
open financial futures contracts.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
++ Financial futures contracts sold as of March 31, 1999 were as
follows:
- --------------------------------------------------------------------------------
(in Thousands)
- --------------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
- --------------------------------------------------------------------------------
100 Municipal Bonds June 1999 $12,359
- --------------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$12,265) $12,359
=======
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
Portfolio
Abbreviations
To simplify the listings of MuniHoldings New York Insured Fund III, Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated the names
of many of the securities according to the list at right.
GO General Obligation Bonds
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
MuniHoldings New York Insured Fund III, Inc., March 31, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of March 31, 1999
==================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$121,341,109) (Note 1a) .. $120,724,973
Cash ............................................................. 54,597
Receivables:
Securities sold ................................................ $ 6,734,700
Interest ....................................................... 1,631,675
Variation margin (Note 1b) ..................................... 46,875
Investment adviser (Note 2) .................................... 15,496 8,428,746
-----------
Prepaid expenses and other assets ................................ 8,492
------------
</TABLE>
F-37
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total assets ..................................................... 129,216,808
------------
==================================================================================================================
Liabilities: Payables:
Securities purchased ........................................... 4,945,080
Offering costs (Note 1e) ....................................... 280,303 5,225,383
-----------
Accrued expenses and other liabilities ........................... 14,678
------------
Total liabilities ................................................ 5,240,061
------------
==================================================================================================================
Net Assets: Net assets ....................................................... $123,976,747
============
==================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (2,000 shares of
AMPS* issued and outstanding at $25,000 per share
liquidation preference) ........................................ $ 50,000,000
Common Stock, par value $.10 per share (5,006,667
shares issued and outstanding) ................................. $ 500,667
Paid-in capital in excess of par ................................. 73,852,435
Undistributed investment income--net ............................. 712,230
Accumulated realized capital losses on investments--net .......... (378,168)
Unrealized depreciation on investments--net ...................... (710,417)
-----------
Total--Equivalent to $14.78 net asset value per share of Common
Stock (market price--$14.75) ................................... 73,976,747
Total capital .................................................... $123,976,747
============
==================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period January 29, 1999+ to March 31, 1999
==================================================================================================================
<S> <C> <C>
Investment Interest and amortization of premium and discount earned .. $ 891,025
Income (Note 1d):
==================================================================================================================
Expenses: Investment advisory fees (Note 2) ......................... $ 90,545
Commission fees (Note 4) .................................. 15,481
Accounting services (Note 2) .............................. 6,767
Professional fees ......................................... 5,117
Directors' fees and expenses .............................. 3,715
Transfer agent fees ....................................... 3,711
Listing fees .............................................. 2,138
Custodian fees ............................................ 1,631
Printing and shareholder reports .......................... 1,310
</TABLE>
F-38
<PAGE>
<TABLE>
<S> <C> <C>
Pricing fees .............................................. 834
Other ..................................................... 1,185
-----------
Total expenses before reimbursement ....................... 132,434
Reimbursement of expenses (Note 2) ........................ (106,041)
-----------
Total expenses after reimbursement ........................ 26,393
------------
Investment income--net .................................... 864,632
------------
==================================================================================================================
Realized & Realized loss on investments--net ......................... (378,168)
Unrealized Loss on Unrealized depreciation on investments--net ............... (710,417)
Investments--Net ------------
(Notes 1b, 1d & 3): Net Decrease in Net Assets Resulting from Operations ...... $ (223,953)
============
==================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
MuniHoldings New York Insured Fund III, Inc., March 31, 1999
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
Jan. 29, 1999+ to
Increase (Decrease) in Net Assets: March 31, 1999
=================================================================================================================
<S> <C> <C>
Operations: Investment income--net ........................................................ $ 864,632
Realized loss on investments--net ............................................. (378,168)
Unrealized depreciation on investments--net ................................... (710,417)
------------
Net decrease in net assets resulting from operations .......................... (223,953)
------------
=================================================================================================================
Dividends to Investment income--net to Preferred Stock shareholders ........................ (152,402)
Shareholders ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders ........... (152,402)
------------
=================================================================================================================
Capital Stock Proceeds from issuance of Common Stock ........................................ 75,000,000
Transactions Proceeds from issuance of Preferred Stock ..................................... 50,000,000
(Notes 1e & 4): Offering costs resulting from the issuance of Common Stock .................... (225,903)
Offering and underwriting costs resulting from the issuance of Preferred Stock (521,000)
------------
Net increase in net assets derived from capital stock transactions ............ 124,253,097
------------
</TABLE>
F-39
<PAGE>
<TABLE>
<S> <C> <C>
=================================================================================================================
Net Assets: Total increase in net assets .................................................. 123,876,742
Beginning of period ........................................................... 100,005
------------
End of period* ................................................................ $123,976,747
============
=================================================================================================================
* Undistributed investment income--net ........................................ $ 712,230
============
=================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Jan. 29, 1999+ to
Increase (Decrease) in Net Asset Value: March 31, 1999
============================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period .................................. $ 15.00
Operating --------
Performance: Investment income--net ................................................ .17
Realized and unrealized loss on investments--net ...................... (.21)
--------
Total from investment operations ...................................... (.04)
--------
Capital charge resulting from issuance of Common Stock ................ (.05)
--------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income--net ............................................ (.03)
Capital charge resulting from issuance of Preferred Stock ........... (.10)
--------
Total effect of Preferred Stock activity .............................. (.13)
--------
Net asset value, end of period ........................................ $ 14.78
========
Market price per share, end of period ................................. $ 14.75
========
============================================================================================================
Total Investment Based on market price per share ....................................... (1.67%)+++
Return:** ========
Based on net asset value per share .................................... (1.47%)+++
========
============================================================================================================
Ratios to Average Expenses, net of reimbursement ........................................ .16%*
Net Assets:*** ========
Expenses .............................................................. .80%*
========
Investment income--net ................................................ 5.25%*
========
</TABLE>
F-40
<PAGE>
<TABLE>
<S> <C> <C>
============================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) ...... $ 73,977
========
Preferred Stock outstanding, end of period (in thousands) ............. $ 50,000
========
Portfolio turnover .................................................... 34.88%
========
============================================================================================================
Leverage: Asset coverage per $1,000 ............................................. $ 2,480
========
============================================================================================================
Dividends Investment income--net ................................................ $ 76
Per Share on ========
Preferred Stock
Outstanding:
============================================================================================================
</TABLE>
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on February 22, 1999.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MuniHoldings New York Insured Fund III, Inc., March 31, 1999
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings New York Insured Fund III, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. Prior to commencement of operations on January
29, 1999, the Fund had no operations other than those relating to organizational
matters and the sale of 6,667 shares of Common Stock on January 13, 1999 to Fund
Asset Management, L.P. ("FAM") for $100,005. The Fund determines and makes
available for publication the net asset value of its Common Stock on a weekly
basis. The Fund's Common Stock is listed on the New York Stock Exchange under
the symbol MNK. The following is a summary of significant accounting policies
followed by the Fund.
F-41
<PAGE>
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities and assets with
remaining maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
o Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options--The Fund is authorized to write covered call options and purchase
call and put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid (or
received) is added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund realizes a
gain or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
F-42
<PAGE>
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Offering expenses--Direct expenses relating to the public offering of the
Fund's Common and Preferred Stock were charged to capital at the time of
issuance of the shares.
(f) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.55% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred Stock. For the period January 29, 1999
to March 31, 1999, FAM earned fees of $90,545, all of which were voluntarily
waived. In addition, FAM also reimbursed the Fund $15,496 in additional
expenses.
During the period January 29, 1999 to March 31, 1999, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, received
underwriting fees of $375,000 in connection with the issuance of the Fund's
Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period January 29, 1999 to March 31, 1999 were $151,417,136 and $34,831,463,
respectively.
Net realized gains (losses) for the period January 29, 1999 to March 31, 1999
and net unrealized losses as of March 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments .................... $(587,481) $(616,136)
Financial futures contracts .............. 209,313 (94,281)
--------- ---------
F-43
<PAGE>
Total .................................... $(378,168) $(710,417)
========= =========
- --------------------------------------------------------------------------------
As of March 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $616,136, of which $105,721 related to appreciated
securities and $721,857 related to depreciated securities. The aggregate cost of
investments at March 31, 1999 for Federal income tax purposes was $121,341,109.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share,
MuniHoldings New York Insured Fund III, Inc., March 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
all of which were initially classified as Common Stock. The Board of Directors
is authorized, however, to reclassify any unissued shares of capital stock
without approval of holders of Common Stock.
Common Stock
Shares issued and outstanding during the period January 29, 1999 to March 31,
1999 increased by 5,000,000 from shares sold.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.10 per share and a liquidation preference of $25,000
per share, that entitle their holders to receive cash dividends at an annual
rate that may vary for the successive dividend periods. The yield in effect at
March 31, 1999 was 3.20%.
In connection with the offering of AMPS, the Board of Directors reclassified
2,000 shares of unissued capital stock as AMPS. Shares issued and outstanding
during the period January 29, 1999 to March 31, 1999 increased by 2,000 as a
result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of
each auction. For the period January 29, 1999 to March 31, 1999, MLPF&S, an
affiliate of FAM, earned $11,628 as commissions.
5. Subsequent Event:
On April 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.141380 per share,
payable on April 29, 1999 to shareholders of record as of April 22, 1999.
QUALITY PROFILE
The quality ratings of securities in the Fund as of March 31, 1999 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ................................................ 86.7%
A/A .................................................... 3.7
NR (Not Rated) ......................................... 2.7
Other+ ................................................. 4.3
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
F-44
<PAGE>
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis, as
of March 31, 1999
F-45
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York -- 98.3% Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
Albany County, New
York, Airport
Authority,
Airport Revenue
Bonds, AMT(d):
AAA Aaa $ 1,500 5.375% due $ 1,540 $ -- $ -- $ -- $ 1,540
12/15/2017........
AAA Aaa 1,500 5.50% due 1,556 -- -- -- 1,556
12/15/2019........
NR* Aaa 4,205 Albany County, New
York, Airport
Authority,
Airport Revenue
Bonds, RITR,
Series RI-7,
8.57% due
12/15/2023(d)(g). -- -- -- 4,963 4,963
Allegany County,
New York, IDA,
Civic Facilities
Revenue Refunding
Bonds (Alfred
University):
NR* Aaa 1,100 5.25% due -- -- -- 1,170 1,170
8/01/2010.........
NR* Aaa 3,000 5% due -- -- -- 2,937 2,937
8/01/2028(e)......
AAA Aaa 7,325 Battery Park City
Authority, New
York, Revenue
Bonds, RITR,
Series 25, 7.62%
due
11/01/2026(a)(g). 2,540 5,461 -- -- 8,001
AAA Aaa 2,000 Buffalo, New York,
Municipal Water
Finance
Authority, Water
System Revenue
Bonds, 5% due
7/01/2025(b)..... -- 1,960 -- -- 1,960
Long Island Power
Authority, New
York, Electric
System Revenue
Bonds,
AAA Aaa 10,000 Series A, 5.125%
due 12/01/2022(d). -- -- 6,002 4,001 10,003
AAA Aaa 5,000 Series A, 5.50%
due 12/01/2029(e). -- -- -- 5,158 5,158
AA Aa3 900 Sub-Series 5,
VRDN, 3% due
5/01/2033(h)...... -- -- -- 900 900
Long Island Power
Authority, New
York, Electric
System Revenue
Refunding Bonds,
Series A:
AAA Aaa 3,375 5% due 3,341 -- -- -- 3,341
12/01/2018(d).....
AAA Aaa 11,750 5.25% due 4,822 7,106 -- -- 11,928
12/01/2026(e).....
A- Baa1 3,150 5.50% due -- 3,236 -- -- 3,236
12/01/2029(a).....
AAA Aaa 2,600 5.50% due -- 2,682 -- -- 2,682
12/01/2029(e).....
A-1+ VMIG1+ 6,500 Long Island Power
Authority, New
York, Electric
System Revenue
Bonds, VRDN, Sub-
Series 7, 3.05%
due
4/01/2025(e)(h).. 3,200 3,300 -- -- 6,500
Metropolitan
Transportation
Authority, New
York, Commuter
Facilities
Revenue Bonds:
AAA Aaa 3,000 (Grand Central
Terminal), Series
1, 5.70% due
7/01/2024(d)..... 3,175 -- -- -- 3,175
AAA Aaa 7,695 Series A, 5.625%
due 7/01/2027(e).. 8,152 -- -- -- 8,152
AAA Aaa 1,000 Series B, 5% due 984 -- -- -- 984
7/01/2020(a)......
</TABLE>
F-46
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York (continued) Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
AAA Aaa $18,000 Series C-1,
5.375% due
7/01/2027(a)..... $ -- $ -- $ 8,251 $ 10,313 $ 18,564
AAA Aaa 2,625 Series E, 5% due 2,583 -- -- -- 2,583
7/01/2021(a).....
Metropolitan
Transportation
Authority, New
York, Commuter
Facilities
Revenue
Refunding Bonds:
AAA Aaa 2,000 Series B, 5% due
7/01/2017(a)..... -- 1,995 -- -- 1,995
AAA Aaa 1,000 Series D, 5.125%
due 7/01/2022(e). -- 1,000 -- -- 1,000
AAA Aaa 3,500 (Service
Contract), Series
Q, 5.125% due
7/01/2012(a)..... -- -- 3,629 -- 3,629
Metropolitan
Transportation
Authority, New
York, Dedicated
Tax Fund Revenue
Bonds, Series A,
AAA Aaa 5,250 5% due
4/01/2023(b)..... -- -- -- 5,164 5,164
AAA Aaa 16,500 5.25% due 16,731
4/01/2026(e)..... 16,731 -- -- --
AAA Aaa 1,000 Metropolitan
Transportation
Authority, New
York, Transit
Facilities
Revenue Bonds,
Series C-1,
5.50% due
7/01/2022(e).... 1,048 -- -- -- 1,048
AAA Aaa 5,000 Metropolitan
Transportation
Authority, New
York, Transit
Facilities
Revenue
Refunding Bonds,
Series B-2, 5%
due
7/01/2017(e).... -- 4,988 -- -- 4,988
AAA Aaa 2,385 Monroe Woodbury,
New York,
Central School
District, GO,
5.625% due
5/15/2023(e).... 2,502 -- -- -- 2,502
AAA NR* 6,045 Nassau County,
New York, GO,
General
Improvement,
Series V, 5.25%
due
3/01/2010(a).... -- -- 6,389 -- 6,389
Nassau County,
New York, IDA,
Civic Facility
Revenue
Refunding Bonds
(Hofstra
University
Project):
AAA Aaa 2,000 5% due
7/01/2023(e)..... -- -- 1,967 -- 1,967
AAA NR* 6,000 4.75% due
7/01/2028(e)..... -- -- 1,882 3,765 5,647
New York City,
New York, City
Transitional
Finance
Authority
Revenue Bonds
(Future Tax
Secured):
AA Aa3 5,000 Series A, 5.125%
due 8/15/2021.... -- 4,964 -- -- 4,964
AA Aa3 2,840 Series C, 5% due
5/01/2016........ -- 2,842 -- -- 2,842
AAA Aaa 10,500 New York City,
New York,
Educational
Construction
Fund Revenue
Bonds, Junior
Sub-Lien, 5.50%
due
4/01/2026(a).... 10,962 -- -- -- 10,962
New York City,
New York, GO:
A- A3 5,820 Series C, 5.375%
due 11/15/2027... 5,897 -- -- -- 5,897
AAA NR* 5,000 Series C, 5% due
8/15/2028(d)..... -- -- 4,894 -- 4,894
A- A3 2,000 Series J, 5.50%
due 2/15/2026.... -- 2,056 -- -- 2,056
</TABLE>
F-47
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York (continued) Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
A- A3 $ 5,000 New York City,
New York, GO,
Refunding,
Series H, 5.125%
due 8/01/2025... $ -- $ 4,904 $ -- $ -- $ 4,904
New York City,
New York, GO,
VRDN(h):
AAA Aaa 324 Series B, Sub-
Series B-5, 3%
due 8/15/2009(c). -- -- -- 324 324
AAA Aaa 1,100 Series B, Sub-
Series B-5, 3%
due 8/15/2011(e). -- -- 1,100 -- 1,100
AAA Aaa 176 Series B, Sub-
Series B-5, 3%
due 8/15/2022(c). -- -- -- 176 176
AA Aa2 350 Sub-Series A-4,
3% due 8/01/2022. -- -- -- 350 350
AA Aa2 700 Sub-Series A-4,
3% due 8/01/2023. -- -- -- 700 700
AAA Aaa 4,000 New York City,
New York, Health
and Hospital
Corporation
Revenue
Refunding Bonds
(Health System),
Series A, 5.125%
due
2/15/2014(a).... -- -- -- 4,092 4,092
A-1+ NR* 100 New York City,
New York,
Housing
Development
Corporation,
Residential
Mortgage Revenue
Bonds (East 17th
Street), VRDN,
Series A, 2.85%
due
1/01/2023(h).... -- 100 -- -- 100
New York City,
New York, IDA,
Civic Facilities
Revenue Bonds:
BBB NR* 1,000 (College of
Aeronautics
Project), 5.45%
due 5/01/2018.... -- 1,021 -- -- 1,021
A A3 5,765 (Nightingale-
Bamford School
Project), 5.85%
due 1/15/2020.... -- 6,083 -- -- 6,083
AAA Aaa 1,830 (Rockefeller
Foundation
Project), 5.375%
due 7/01/2023.... 1,873 -- -- -- 1,873
New York City,
New York, IDA,
Special
Facilities
Revenue Bonds
A A2 6,750 (British Airways
PLC Project),
AMT, 5.25% due
12/01/2032....... -- 6,693 -- -- 6,693
A A3 5,000 (Terminal One
Group Association
Project), AMT,
6.125% due
1/01/2024........ 5,307 -- -- -- 5,307
A- A-1 13,000 New York City,
New York,
Municipal Water
Finance
Authority, Water
and Sewer System
Revenue Bonds
RITR, Series 21,
7.92% due
6/15/2029....... 10,313 -- -- 4,584 14,897
New York City,
New York,
Municipal Water
Finance
Authority, Water
and Sewer System
Revenue
Refunding Bonds:
AAA Aaa 7,250 Series A, 5.50%
due 6/15/2023(b). -- 7,476 -- -- 7,476
A A1 12,500 Series B, 5.25%
due 6/15/2029(d). -- 4,767 2,786 5,065 12,618
AAA Aaa 5,000 Series B, 5.125%
due 6/15/2030(b). -- -- 4,980 -- 4,980
</TABLE>
F-48
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York (continued) Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
AAA Aaa $ 3,400 Series C, 5% due
6/15/2021(b)..... $ 3,346 $ -- $ -- $ -- $ 3,346
AAA Aaa 1,250 Series D, 4.75%
due 6/15/2025(e). -- -- -- 1,180 1,180
AAA Aaa 2,900 VRDN, Series A,
3.10% due
6/15/2025(b)(h).. -- -- -- 2,900 2,900
AAA NR* 3,000 VRDN, Series G,
2.95% due
6/15/2024(b)(h).. -- -- 3,000 -- 3,000
New York City,
New York,
Transitional
Finance
Authority
Revenue Bonds
(Future Tax
Secured):
AA Aa3 5,000 Series A, 5% due
8/15/2027........ 4,859 -- -- -- 4,859
AAA NR* 7,500 Series B, 5% due
11/01/2008(b).... -- -- 2,636 5,272 7,908
New York State
Dormitory
Authority
Revenue Bonds:
AAA Aaa 2,200 (835 Schools
Program), Issue
2, Series D, 5%
due 7/01/2018(a). -- 2,186 -- -- 2,186
AAA Aaa 5,000 (Consolidated
City University
System), Series
1, 5.125% due
7/01/2027(e)..... -- -- 4,989 -- 4,989
BBB+ A3 7,550 (Court Facilities
Lease), Series A,
5.25% due
5/15/2021........ -- 7,540 -- -- 7,540
AAA Aaa 10,000 (Frances
Schervier
Project), 5.50%
due 7/01/2027
(d).............. 10,437 -- -- -- 10,437
AAA Aaa 4,625 (Gustavus
Adolphus
Childrens
School), Series
B, 5.50% due
7/01/2018(a)..... 2,409 -- 2,435 -- 4,844
AAA Aaa 4,500 (Liberal
Facilities-
Service
Contract), 5.25%
due 7/01/2019(i). -- 4,562 -- -- 4,562
AAA Aaa 13,370 (Mental Health
Services
Facilities
Improvement),
Series B, 5.375%
due 2/15/2026(d). 6,164 2,412 -- 5,136 13,712
AAA A3 5,485 (Mental Health
Services
Facilities
Improvement),
Series D, 5.125%
due 8/15/2027(d). -- 5,472 -- -- 5,472
AAA Aaa 2,000 (Niagra Nursing
Home), 5.60% due
8/01/2037(e)..... 2,091 -- -- -- 2,091
AAA Aaa 1,425 (Rochester
Institute of
Technology),
5.25% due
7/01/2022(e)(j).. -- -- 1,445 -- 1,445
AAA Aaa 12,500 (Saint Barnabas
Hospital), 5.45%
due 8/01/2035
(a)(c)(h)........ 5,155 -- 4,124 3,608 12,887
BBB+ Baa1 7,000 (Secured
Hospital-
Interfaith
Medical Center),
Series D, 5.40%
due 2/15/2028.... -- 7,011 -- -- 7,011
BBB+ Baa1 1,750 (Secured
Hospital-Saint
Agnes Hospital),
Series A, 5.40%
due 2/15/2025.... -- 1,754 -- -- 1,754
BBB+ Baa1 1,000 (Secured
Hospital-Saint
Clare's
Hospital), Series
B, 5.30% due
2/15/2019........ -- 995 -- -- 995
BBB+ Baa1 6,500 (Secured
Hospital-Saint
Clare's
Hospital), Series
B, 5.40% due
2/15/2025........ -- 6,515 -- -- 6,515
</TABLE>
F-49
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York (continued) Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
AAA Aaa $ 6,000 (University of
Rochester),
Series A, 5% due
7/01/2023(e)..... $ -- $ -- $ 5,900 $ -- $ 5,900
New York State
Dormitory
Revenue
Refunding Bonds:
BBB+ Baa1 5,000 (City University
System),
Consolidated
Third, Series 1,
5.25% due
7/01/2025........ -- -- 4,985 -- 4,985
AAA Aaa 6,535 (Consolidated
City University
System), Series
A, 5.75% due
7/01/2009(c)..... -- -- 7,263 -- 7,263
AAA Aaa 7,180 (Consolidated
City University
System), Series
1, 5.125% due
7/01/2027(e)..... 7,163 -- -- -- 7,163
NR* Aaa 2,920 (Culinary
Institute of
America), 5.375%
due 7/01/2015(e). -- 3,068 -- -- 3,068
AAA Aaa 6,250 (Hosptital for
Special Surgery),
5% due
2/01/2028(e)(c).. -- -- -- 6,119 6,119
NR* Aaa 3,465 (Ithaca College),
5% due
7/01/2026(a)..... -- -- 2,395 999 3,394
AAA Aaa 3,315 (Mental Health
Services
Facilities),
Series C, 5.125%
due 8/15/2015(e). -- -- 3,372 -- 3,372
AAA Aaa 5,320 (Millard Fillmore
Hospital
Project), 5.375%
due 2/01/2032(a). 5,466 -- -- -- 5,466
AAA Aaa 3,750 (New York Medical
College), 4.75%
due 7/01/2027(e). -- -- -- 3,533 3,533
AAA Aaa 3,000 (New York and
Presbyterian
Hospitals), 4.75%
due
8/01/2027(a)(c).. -- -- -- 2,809 2,809
AAA Aaa 7,460 (North Shore
University
Hospital), 5.25%
due
11/01/2019(e).... 3,508 -- -- 4,055 7,563
AAA Aaa 3,000 (North Shore
University
Hospital), 5% due
11/01/2023(e).... -- -- 2,942 -- 2,942
AAA NR* 14,435 RIB, Series 45,
7.115% due
7/01/2025(e)(g).. -- -- 14,874 -- 14,874
A Baa1 3,000 (Secured
Hospital-North
General
Hospital), Series
G, 5.30% due
2/15/2019........ -- 2,985 -- -- 2,985
BBB+ Baa1 12,500 (Secured
Hospital--Wyckoff
Heights), Series
H, 5.30% due
8/15/2021........ -- 7,422 4,948 -- 12,370
AAA Aaa 3,000 (State University
Educational
Facilities),
Series A, 4.75%
due 5/15/2025(e). -- -- -- 2,833 2,833
A- A3 2,000 (State University
Educational
Facilities),
5.125% due
5/15/2021........ -- 1,978 -- -- 1,978
AAA Aaa 10,780 (United Health
Services
Hospitals),
5.375% due
8/01/2027(a)..... 11,087 -- -- -- 11,087
AAA Aaa 1,455 (University of
Rochester),
Series A, 5.125%
due 7/01/2022(e). -- 1,455 -- -- 1,455
AA Aa3 4,000 (Vassar College),
5% due 7/01/2025. -- 3,897 -- -- 3,897
</TABLE>
F-50
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York (continued) Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
New York State
Dormitory
Authority, Lease
Revenue Bonds
(Municipal
Health
Facilities
Improvement
Program), Series
1(d):
AAA Aaa $ 2,000 5% due 1/15/2019. $ -- $ -- $ -- $ 1,978 $ 1,978
AAA Aaa 4,250 4.75% due
1/15/2029........ -- -- -- 3,986 3,986
A- Baa3 5,000 New York State
Energy Research
and Development
Authority,
Electric
Facilities
Revenue Bonds
(LILCO Project),
AMT, Series B,
5.30% due
11/01/2023...... -- 4,981 -- -- 4,981
AAA Aaa 7,500 New York State
Energy Research
and Development
Authority,
Facilities
Revenue
Refunding Bonds
(Consolidated
Edison Co., New
York), Series A,
6.10% due
8/15/2020(a).... 8,249 -- -- -- 8,249
AAA Aaa 2,500 New York State
Energy Research
and Development
Authority, Gas
Facilities
Revenue Bonds,
RITR, Series 9,
7.62% due
1/01/2021(e).... 2,714 -- -- -- 2,714
New York State
Energy Research
and Development
Authority,
PCR,AMT:
AAA Aaa 4,305 (New York State
Electric and Gas
Co. Project),
DATES, Series A,
6.15% due
7/01/2026(e)(h). 2,507 2,175 -- -- 4,682
A-1+ NR* 300 (Niagara Mohawk
Power Corp.
Project), Series
A, 3.55% due
7/01/2015........ 300 -- -- -- 300
A-1+ NR* 1,000 (Niagara Power
Corporation
Project), VRDN,
Series B, 3.60%
due 7/01/2027(h). 1,000 -- -- -- 1,000
AAA Aaa 8,350 New York State
Energy Research
and Development
Authority, PCR,
Refunding
(Niagara Mohawk
Power Project),
Series A, 5.15%
due
11/01/2025(a)... -- 2,010 2,563 3,820 8,393
AAA Aaa 1,285 New York State
Energy Research
and Development
Authority, Solid
Waste Disposal
Revenue Bonds
(New York State
Electric and Gas
Co. Project),
AMT, Series A,
5.70% due
12/01/2028(e)... 1,337 -- -- -- 1,337
AAA Aaa 3,765 New York State
Environmental
Facilities
Corporation,
Special
Obligation
Revenue
Refunding Bonds
(Riverbank State
Park), 5.125%
due
4/01/2022(a).... 765 -- 3,001 -- 3,766
New York State,
GO, Refunding,
Series D:
AAA Aaa 3,410 5% due
7/15/2015(c)..... 3,439 -- -- -- 3,439
AAA Aaa 3,765 5% due
7/15/2017(c)..... 3,760 -- -- -- 3,760
AAA Aaa 3,955 5% due
7/15/2018(a)..... -- 3,935 -- -- 3,935
</TABLE>
F-51
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York (continued) Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
AAA Aaa $ 2,000 New York State
HFA Revenue
Refunding Bonds
(Fulton Manor),
6.10% due
11/15/2025(a)... $ 2,171 $ -- $ -- $ -- $ 2,171
New York State
HFA Revenue
Refunding Bonds
(Housing
Mortgage
Project) Series
A(d):
AAA Aaa 1,740 6.10% due
11/01/2015....... 1,886 -- -- -- 1,886
AAA Aaa 2,990 6.125% due
11/01/2020....... 3,223 -- -- -- 3,223
New York State
Local Government
Assistance
Corporation
Revenue
Refunding Bonds:
NR* Aaa 5,065 RITR, Series 27,
7.62% due
4/01/2021(e)(g).. -- 5,372 -- -- 5,372
AAA Aaa 2,800 Series B, 5.50%
due 4/01/2021(a). 2,885 -- -- -- 2,885
AAA Aaa 1,000 New York State
Medical Care
Facilities
Finance Agency
Revenue Bonds
(Mental Health
Services),
Series A, 6% due
2/15/2005(e)(f). 1,119 -- -- -- 1,119
New York State
Mortgage Agency
Revenue Bonds:
NR* Aaa 4,900 Series 41-A,
6.45% due
10/01/2014....... -- 5,298 -- -- 5,298
NR* Aaa 3,000 RITR, AMT, Series
24, 8.12% due
10/01/2028(g).... -- -- -- 3,385 3,385
NR* Aa2 9,125 New York State
Mortgage Agency
Revenue Bonds
(Homeowner
Mortgage), AMT,
Series 73-A,
5.30% due
10/01/2028...... -- -- 9,163 -- 9,163
New York State
Mortgage Agency
Revenue
Refunding Bonds
(Homeowner
Mortgage):
NR* Aa2 1,500 Series 59, 6.25%
due 4/01/2027.... 1,624 -- -- -- 1,624
NR* Aa2 1,000 Series 61, 5.80%
due 10/01/2017... 1,051 -- -- -- 1,051
New York State
Mortgage Agency
Revenue
Refunding Bonds
(Homeowner
Mortgage), AMT:
NR* Aa2 2,500 Series 54, 6.20%
due 10/01/2026... 2,685 -- -- -- 2,685
NR* Aa2 975 Series 58, 6.40%
due 4/01/2027.... 1,060 -- -- -- 1,060
AAA Aaa 2,140 Series 67, 5.70%
due
10/01/2017(e).... 2,260 -- -- -- 2,260
NR* Aa2 5,990 Series 67, 5.80%
due 10/01/2028... 6,375 -- -- -- 6,375
NR* Aa2 7,435 Series 69, 5.40%
due 10/01/2019... -- 7,551 -- -- 7,551
NR* Aa2 3,900 Series 69, 5.50%
due 10/01/2028... -- 3,964 -- -- 3,964
New York State
Thruway
Authority,
Highway and
Bridge Trust
Fund Revenue
Bonds, Series
A(b):
AAA Aaa 2,750 5% due 4/01/2009. -- -- -- 2,878 2,878
AAA Aaa 8,765 5.125% due
4/01/2016........ 4,845 4,067 -- -- 8,912
</TABLE>
F-52
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York (continued) Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
New York State
Urban
Development
Corporation,
Revenue Bonds:
AAA Aaa $12,465 (Correctional
Capital
Facilities),
Series 6, 5.375%
due 1/01/2025(a). $ 10,277 $ -- $ 2,533 $ -- $ 12,810
AAA Aaa 8,875 RITR, Series 26,
7.62% due
1/01/2025(e)(g).. 4,151 5,356 9,507
AAA Aaa 2,000 New York State
Urban
Development
Corporation
Revenue
Refunding Bonds
(Correctional
Facilities), 5%
due
1/01/2019(d).... 1,990 1,990
AAA Aaa 2,775 Niagara, New
York, Frontier
Authority,
Airport Revenue
Bonds (Buffalo
Niagra
International
Airport), AMT,
5% due
4/01/2028(b).... 1,707 986 2,693
AAA Aaa 1,700 Oneida County,
New York, IDA,
Civic
Facilitities
Revenue Bonds
(Mohawk Valley),
Series A, 5.20%
due
2/01/2013(d).... 1,747 1,747
AAA Aaa 6,250 Port Authority of
New York and New
Jersey,
Consolidated
Revenue Bonds,
116th Series,
4.375% due
10/01/2033(b)... 5,500 5,500
AAA Aaa 9,980 Port Authority of
New York and New
Jersey, Special
Obligation
Revenue Bonds
(JFK
International
Air Terminal
Project), AMT,
Series 6, 5.75%
due
12/01/2022(e)... 10,678 10,678
A-1+ VMIG1+ 900 Port Authority of
New York and New
Jersey, Special
Obligation
Revenue
Refunding Bonds
(Versatile
Structure
Obligation),
VRDN, Series 2,
2.90% due
5/01/2019(h).... 900 900
AAA Aaa 1,500 Saint Lawrence
County, New
York, Industrial
Development
Civic Facility
Revenue Bonds
(Saint Lawrence
University
Project), Series
A, 5% due
7/01/2028(e).... 1,468 1,468
AAA Aaa 1,055 Suffolk County,
New York, GO,
Refunding,
Public
Improvement,
Series D, 4.75%
due
11/01/2019(b)... 1,013 1,013
AAA Aaa 7,090 Suffolk County,
New York, Water
Authority,
Waterworks
Revenue Bonds,
Series A, 5% due
6/01/2022(a).... 6,975 6,975
AAA NR* 11,000 Syracuse, New
York, Housing
Authority,
Mortgage Revenue
Bonds (Loretto
Rest), Series A,
5.70% due
8/01/2027(a)(c). 11,618 11,618
AA+ Aa3 6,300 Syracuse, New
York, IDA, Civic
Facility Revenue
Bonds (Multi-
Modal-Syracuse
University
Project), VRDN,
2.80% due
3/01/2023(h).... 6,300 6,300
</TABLE>
F-53
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
MARCH 31, 1999
(in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MuniHoldings MuniHoldings MuniHoldings MuniHoldings Pro Forma
New York New York New York New York for Combined
New York (continued) Insured Fund++ Fund++ Insured Fund II++ Insured Fund III++ Fund ++
- --------------------------------------------------------------------------------
S&P Moody's Face
Ratings Ratings Amount Issue Value Value Value Value Value
- --------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
AAA Aaa $6,000 Triborough Bridge
and Tunnel
Authority, New
York, General
Purpose Revenue
Bonds, Series B,
5.20% due
1/01/2027(b)..... $ -- $ -- $ -- $ 6,059 $ 6,059
<CAPTION>
Puerto Rico -- 1.4%
<C> <C> <C> <S> <C> <C> <C> <C> <C>
A Baa1 9,420 Puerto Rico Public
Buildings
Authority,
Guaranteed
Government
Facilities
Revenue Bonds,
Series B, 5.25%
due 7/01/2021.... -- 9,479 -- -- 9,479
- --------------------------------------------------------------------------------
Total Investments (Cost -- $685,181) --
99.7%................................... 248,872 188,807 135,106 120,725 693,510
Variation Margin on Financial Futures Con-
tracts -- 0.0%........................... 0 0 110 47 157
Other Assets Less Liabilities -- 0.3%..... 1,110 2,389 (1,156) 3,205 5,548
-------- -------- -------- -------- --------
Net Assets -- 100.0%...................... $249,982 $191,196 $134,060 $123,977 $699,215
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<S> <C>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FHA Insured.
(d) FSA Insured.
(e) MBIA Insured.
(f) Prerefunded.
(g) The interest rate is subject to change periodically and inversely based upon prevailing market
rates. The interest rate shown is the rate in effect at March 31, 1999.
The interest rate is subject to change periodically based upon prevailing market rates. The interest
(h) rate shown is the rate in effect at March 31, 1999.
(i) CAPMAC Insured.
All or a portion of security held as collateral in conjunction with open financial futures
(j) contracts.
* Not rated
+ Highest short-term rating by Moody's Investors Service, Inc.
++ Value as discussed in the Combined Notes to Financial Statements.
+++ Financial futures contracts sold as of March 31, 1999 were as follows:
</TABLE>
<TABLE>
<CAPTION>
(in thousands)
-------------------------------------------------------------------------------------------
Value
Number of Contracts Issue Expiration Date (Notes 1a & 1b)
-------------------------------------------------------------------------------------------
<C> <S> <C> <C>
210 Municipal Bonds June 1999 $25,955
110 US Treasury Bonds June 1999 13,262
-------------------------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price -- $38,987) $39,217
-------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-54
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited) (Concluded)
MARCH 31, 1999
(in Thousands)
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniHoldings New York Insured Fund, Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated the
names of many of the securities according to the list below.
<TABLE>
<S> <C>
AMT Alternative Minimum Tax (subject to)
DATES Daily Adjustable Tax-Exempt Securities
FLOATS Floating Rate Securities
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
</TABLE>
F-55
<PAGE>
The following unaudited pro forma Combined Statement of Assets, Liabilities
and Capital for the Combined Fund has been derived from the Statements of
Assets, Liabilities and Capital of the respective Funds as of March 31, 1999
and such information has been adjusted to give effect to the Reorganization as
if the Reorganization had occurred at March 31, 1999. The pro forma Combined
Statement of Assets, Liabilities and Capital is presented for informational
purposes only and does not purport to be indicative of the financial condition
that actually would have resulted if the Reorganization had been consummated
at March 31, 1999. The pro forma Combined Statement of Assets, Liabilities and
Capital should be read in conjunction with the Funds' financial statements and
related notes thereto which are included in the Joint Proxy Statement and
Prospectus.
PRO FORMA COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
FOR MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND,
INC., MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
As of March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
New York New York New York New York for
Insured Fund Insured II Insured III Adjustments Combined Fund
------------ ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments, at value*
(Note 1a).............. $248,871,730 $188,806,857 $135,106,485 $120,724,973 $ 0 $693,510,045
Cash.................... 29,392 88,819 0 54,597 0 172,808
Receivables:
Interest............... 3,949,298 2,731,427 1,768,093 1,631,675 0 10,080,493
Securities sold........ 20,000 0 0 6,734,700 0 6,754,700
Variation margin (Note
1b)................... 0 0 110,000 46,875 0 156,875
Investment advisor
(Note 2).............. 0 0 0 15,496 0 15,496
Prepaid expenses and
other assets.......... 11,465 19,260 85,938 8,492 0 99,407
------------ ------------ ------------ ------------ ----------- ------------
Total assets......... $252,881,885 191,646,363 137,070,516 129,216,808 0 710,815,572
------------ ------------ ------------ ------------ ----------- ------------
Liabilities:
Payables:
Securities purchased... 2,431,565 0 2,457,995 4,945,080 0 9,834,640
Dividends to
shareholders
(Note 1f)............. 139,765 208,357 181,022 0 3,051,255(1) 3,580,399
Offering costs (Note
1e)................... 145,819 85,090 239,272 280,303 0 750,484
Investment adviser
(Note 2).............. 108,639 81,440 39,518 0 0 229,597
Accrued expenses and
other liabilities...... 74,049 75,814 92,236 14,678 256,777
------------ ------------ ------------ ------------ ----------- ------------
Total liabilities.... 2,899,837 450,701 3,010,043 5,240,061 3,051,255 14,651,897
------------ ------------ ------------ ------------ ----------- ------------
Net Assets:
Net Assets.............. $249,982,048 $191,195,662 $134,060,473 $123,976,747 $(3,051,255) $696,163,675
============ ============ ============ ============ =========== ============
Capital
Capital Stock
(200,000,000 shares of
each Fund authorized;
200,000,000 shares as
adjusted)
Preferred Stock, par
value $.10 per share
of AMPS** issued and
outstanding+ at
$25,000 per share
liquidation
preference............ $ 95,000,000 $ 76,000,000 $ 53,000,000 $ 50,000,000 $ 0 $274,000,000
Common Stock par value
$.10 per share issued
and outstanding++..... 978,711 758,070 559,117 500,667 (114,056) 2,682,509
Paid-in capital in
excess of par.......... 144,677,714 111,975,013 82,480,635 73,852,435 114,056 413,099,853
Undistributed
(accumulated)
investment income
(loss) -- net.......... 956,320 697,171 436,647 712,230 (2,802,368) 0
Undistributed
(accumulated) realized
capital gains (losses)
on investments -- net.. 0 248,887 (1,187,547) (378,168) (248,887) (1,565,715)
Accumulated
distributions in excess
of realized capital
gains on investments --
net (Note 1f)......... (151,984) 0 0 0 0 (151,984)
Unrealized appreciation
(depreciation) on
investments -- net..... 8,521,287 1,516,521 (1,228,379) (710,417) 0 8,099,012
------------ ------------ ------------ ------------ ----------- ------------
Total Capital+++........ $249,982,048 $191,195,662 $134,060,473 $123,976,747 $(3,051,255) $696,163,675
============ ============ ============ ============ =========== ============
</TABLE>
F-56
<PAGE>
PRO FORMA COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
FOR MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND, INC.,
MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
As of March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
New York New York New York New York for
Insured Fund Insured II Insured III Adjustments Combined Fund
------------ ------------ ------------ ------------ ----------- -------------
- --------
<S> <C> <C> <C> <C> <C> <C>
*Identified Cost...... $240,350,443 $187,290,336 $136,199,552 $121,341,109 -- $685,181,440
============ ============ ============ ============ ========== ============
+AMPS** issued and
outstanding............ 3,800 3,040 2,120 2,000 -- 10,960
============ ============ ============ ============ ========== ============
++Shares issued and
outstanding............ 9,787,106 7,580,698 5,591,168 5,006,667 (1,140,550) 26,825,089
============ ============ ============ ============ ========== ============
+++ Net asset value per
share of Common
Stock............... $15.84 $15.20 $14.50 $14.78 -- $15.74
============ ============ ============ ============ ========== ============
</TABLE>
**Auction Market Preferred Stock.
(1)Assumes the distribution of undistributed investment income and
undistributed realized capital gains.
See Notes to Financial Statements.
F-57
<PAGE>
The following unaudited pro forma Combined Statement of Operations for the
Combined Fund has been derived from the statement of operations of the
respective Funds for the periods indicated below and such information has been
adjusted to give effect to the Reorganization as if the Reorganization had
occurred on September 1, 1998. The pro forma Combined Statement of Operations
is presented for informational purposes only and does not purport to be
indicative of the results of operations that actually would have resulted if
the Reorganization had been consummated on September 1, 1998 nor which may
result from future operations. The pro forma Combined Statement of Operations
should be read in conjunction with the Funds' financial statements and related
notes thereto which are included in the Joint Proxy Statement and Prospectus.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR MUNIHOLDINGS NEW YORK INSURED FUND, INC., MUNIHOLDINGS NEW YORK FUND,
INC., MUNIHOLDINGS NEW YORK INSURED FUND II, INC. AND
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
(Unaudited)
<TABLE>
<CAPTION>
New York New York New York New York
Insured Fund Insured II Insured III
For the Period For the period For the period For the period Pro Forma
September 1, 1998 September 1, 1998 October 1, 1998+ January 29, 1999+ for
to March 31, 1999 to March 31, 1999 to March 31, 1999 to March 31, 1999 Adjustments Combined Fund
----------------- ----------------- ----------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Investment Income
(Note 1d)
Interest and
amortization of premium
and discount earned.... $7,635,560 $5,797,511 $3,266,160 $ 891,025 $17,590,256
---------- ---------- ---------- --------- -------- -----------
Expenses:
Investment advisory fees
(Note 2)............... 747,922 560,310 345,264 90,545 1,744,041
Commission fees........ 141,207 113,066 56,657 15,481 326,411
Professional fees...... 38,672 36,067 18,486 5,117 (53,742)(1) 44,600
Accounting services
(Note 2).............. 15,019 26,005 29,641 6,767 (45,432)(1) 32,000
Transfer agent fees.... 25,292 25,786 17,129 3,711 71,918
Directors' fees and
expenses.............. 10,847 13,413 9,584 3,715 (26,712)(1) 10,847
Printing and
shareholder reports... 13,890 13,340 3,346 1,310 (7,386)(1) 24,500
Listing fees........... 9,486 7,815 7,372 2,138 26,811
Custodian fees......... 10,762 8,836 3,527 1,631 24,756
Pricing fees........... 5,215 4,413 3,013 834 13,475
Amortization of
organization expenses
(Note 1e)............. 0 1,886 296 0 2,182
Organization expense... 0 0 0 0 0
Other.................. 10,496 4,347 7,035 1,185 23,063
---------- ---------- ---------- --------- -------- -----------
Total expenses before
reimbursement......... 1,028,808 815,284 501,350 132,434 (133,272) 2,344,604
Reimbursement of
expenses (Note 2)..... 0 (21,242) (281,337) (106,041) (408,620)
---------- ---------- ---------- --------- -------- -----------
Total expenses after
reimbursement......... 1,028,808 794,042 220,013 26,393 (133,272) 1,935,984
---------- ---------- ---------- --------- -------- -----------
Investment income--net. 6,606,752 5,003,469 3,046,147 864,632 133,272 15,654,272
---------- ---------- ---------- --------- -------- -----------
Realized & Unrealized
Gains (Loss) on
Investments--Net
(Notes 1b & 1d)
Realized gain (loss) on
investments--net...... 791,629 1,083,630 (1,187,547) (378,168) 309,544
Change in unrealized
appreciation/depreciation
on investments--net... (1,483,371) (2,483,707) (1,228,379) (710,417) (5,905,874)
---------- ---------- ---------- --------- -------- -----------
Net Increase (Decrease)
in Net Assets Resulting
from Operations........ $5,915,010 $3,603,392 $ 630,221 $(223,953) $133,272 $10,057,942
========== ========== ========== ========= ======== ===========
</TABLE>
- -------
+ Commencement of operations.
(1) Reflects the anticipated savings of the Reorganization.
(2) These Pro Forma Combined Statements of Operations exclude non-recurring
estimated reorganization expenses of $495,000 to be paid by New York
Insured subsequent to the Reorganization.
F-58
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings New York Insured Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. These unaudited financial statements
reflect all adjustments which are, in the opinion of management necessary to a
fair statement of the results for the interim period presented. All such
adjustments are of a normal recurring nature. The Fund will determine and make
available for publication the net asset value of its Common Stock on a weekly
basis. The Fund's Common Stock is listed on the New York Stock Exchange under
the symbol MHN. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased). Securities with
remaining maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
. Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts for the purpose
of hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific price
or yield. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments
are known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed.
. Options -- The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
F-59
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS -- (Continued)
(c) Income taxes -- It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
securities transactions are determined on the identified cost basis.
(e) Deferred organization and offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a period not exceeding
five years. In accordance with Statement of Position 98-5, any unamortized
organization expenses will be expensed on the first day of the next fiscal
year beginning after December 15, 1998. This charge will not have any material
impact on the operations of the Fund. Direct expenses relating to the public
offering of the Fund's Common and Preferred shares were charged to capital at
the time of issuance of the shares.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distribution of capital gains are recorded on the
ex-dividend dates. Distributions in excess of realized capital gains on
investments are due primarily to differing tax treatments for post-October
losses.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net
assets, including proceeds from the issuance of Preferred Stock.
For MuniHoldings New York Fund, Inc., FAM earned fees of $560,310 for the
period September 1, 1998 to March 31, 1999, of which $21,242 was voluntarily
waived. For MuniHoldings New York Insured Fund II, Inc., FAM earned fees of
$345,264 for the period October 1, 1998 to March 31, 1999, of which $250,360
was voluntarily waived. In addition FAM also reimbursed MuniHoldings New York
Insured Fund II, Inc. $30,977 in additional expenses. For MuniHoldings New
York Insured Fund III, Inc., FAM earned fees of $90,545 for the period January
29, 1999 to March 31, 1999, all of which was voluntarily waived. In addition
FAM also reimbursed MuniHoldings New York Insured Fund III, Inc. $15,496 in
additional expenses.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors
of FAM, PSI, and/or ML & Co.
F-60
<PAGE>
EXHIBIT I
INFORMATION PERTAINING TO EACH FUND
.General Information Pertaining to the Funds
<TABLE>
<CAPTION>
State of
Defined Term Fiscal Organiza- Meeting
Fund Used in Exhibit I Year End tion Time
- ---- -------------------- -------- --------- ----------
<S> <C> <C> <C> <C>
MuniHoldings New York
Insured Fund, Inc.......... New York Insured 8/31 MD 1:00 p.m.
MuniHoldings New York Fund,
Inc........................ New York Fund 6/30 MD 12:45 p.m.
MuniHoldings New York
Insured Fund II, Inc....... New York Insured II 9/30 MD 1:15 p.m.
MuniHoldings New York
Insured Fund III, Inc...... New York Insured III 9/30 MD 1:30 p.m.
</TABLE>
<TABLE>
<CAPTION>
Shares of Capital Stock
Outstanding as of
the Record Date
-------------------------
Common
Fund Stock AMPS
- ---- ------------ ------------
<S> <C> <C>
New York Insured...................................... 3,800
New York Fund......................................... 3,040
New York Insured II................................... 2,120
New York Insured III.................................. 2,000
</TABLE>
.Information Pertaining to Officers and Directors
<TABLE>
<CAPTION>
Year in Which Each Nominee of New York Insured
Became a Member of the Board
-----------------------------------------------
Fund Forbes Glenn Montgomery Reilly Ryan West Zeikel
- ---- ------ ----- ---------- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
New York Insured................ 1997 1999 1997 1997 1997 1997 1997
</TABLE>
<TABLE>
<CAPTION>
Year in Which Each Nominee of New York Fund,
New York Insured II
and New York Insured III Became a Member of the
Board
-----------------------------------------------
Fund Bodurtha Glenn London Martin May Perold Zeikel
- ---- -------- ----- ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
New York Fund................... 1997 1999 1997 1997 1997 1997 1997
New York Insured II............. 1998 1999 1998 1998 1998 1998 1998
New York Insured III............ 1998 1999 1998 1998 1998 1998 1998
</TABLE>
Set forth in the table below, with respect to each Fund, are the names of the
nominees to be elected by holders of AMPS, voting separately as a class, and
the names of the nominees to be elected by holders of shares of Common Stock
and AMPS, voting together as a single class.
<TABLE>
<CAPTION>
Nominees to be Elected by
Nominees to be Holders of Shares of Common Stock and
Fund Elected by Holders of AMPS AMPS
- ---- --------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
New York Insured........ Charles C. Reilly Richard R. West Ronald W. Forbes Kevin A. Ryan
Terry K. Glenn Arthur Zeikel
Cynthia A. Montgomery
New York Fund........... James H. Bodurtha Joseph L. May Herbert I. London Robert R. Martin
Terry K. Glenn Arthur Zeikel
Andre F. Perold
New York Insured II..... Joseph L. May Andre F. Perold James H. Bodurtha Robert R. Martin
Terry K. Glenn Arthur Zeikel
Herbert I. London
New York Insured III.... Joseph L. May Andre F. Perold James H. Bodurtha Robert R. Martin
Terry K. Glenn Arthur Zeikel
Herbert I. London
</TABLE>
I-1
<PAGE>
Set forth in the table below is information regarding board and committee
meetings held and the aggregate fees and expenses paid by the Fund to non-
affiliated Board members during each Fund's most recently completed fiscal
year.
<TABLE>
<CAPTION>
Board Audit Committee
------------------------- ---------------------------
# Per # Per Aggregate
Meetings Annual Meeting Meetings Annual Meeting Fees and
Fund Held* Fee($) Fee($)*** Held* Fee($)** Fee($)*** Expenses($)
- ---- -------- ------ --------- -------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
New York Insured........ 9 2,000 200 4 800 0***
New York Fund........... 4 2,500 250 4 500 125
New York Insured II..... 4 2,500 250 4 500 125
New York Insured III.... 4 2,500 250 4 500 125
</TABLE>
- --------
* Includes meetings held via teleconferencing equipment.
** The Chairman of the Audit Committee receives an annual fee of $1,000.
*** The fee is payable for each meeting attended in person. A fee is not paid
for telephonic meetings.
Set forth in the table below is information regarding compensation paid by
the Fund to the non-affiliated Board members for the most recently completed
fiscal year.
<TABLE>
<CAPTION>
Compensation From New York Fund,
New York Insured II and New York
Insured III($)*
-----------------------------------
Fund Bodurtha London Martin May Perold
- ---- -------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
New York Fund............................... 4,875 4,875 4,875 4,875 4,875
New York Insured II......................... 4,750 4,750 4,750 4,750 4,750
New York Insured III........................ 4,375 4,375 4,375 4,375 4,375
</TABLE>
<TABLE>
<CAPTION>
Compensation From New York
Insured($)*
------------------------------------
Fund Forbes Montgomery Reilly Ryan West
- ---- ------ ---------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
New York Insured........................... 3,400 3,400 4,400 3,400 3,400
</TABLE>
- --------
* No pension or retirement benefits are accrued as part of Fund expenses.
Set forth in the table below is information regarding the aggregate
compensation paid by all registered investment companies advised by FAM and
its affiliate, MLAM ("FAM/MLAM Advised Funds"), including the Funds, to the
non-affiliated Board members for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate Compensation From FAM/MLAM Advised Funds
Name of Board Member Paid to Board members($)(1)
- -------------------- --------------------------------------------------
<S> <C>
James H. Bodurtha............ 163,500
Herbert I. London............ 163,500
Robert R. Martin............. 163,500
Joseph L. May................ 163,500
Andre F. Perold.............. 163,500
</TABLE>
- --------
(1) The Directors serve on the boards of FAM/MLAM Advised Funds as follows:
Mr. Bodurtha (29 registered investment companies consisting of 47
portfolios); Mr. London (29 registered investment companies consisting of
47 portfolios); Mr. Martin (29 registered investment companies consisting
of 47 portfolios); Mr. May (29 registered investment companies consisting
of 47 portfolios); and Mr. Perold (29 registered investment companies
consisting of 47 portfolios).
I-2
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation From FAM/MLAM Advised Funds
Name of Board Member Paid to Board members($)(2)
- -------------------- --------------------------------------------------
<S> <C>
Ronald W. Forbes............. 192,567
Cynthia A. Montgomery........ 192,567
Charles C. Reilly............ 362,858
Kevin A. Ryan................ 192,567
Richard R. West.............. 346,125
</TABLE>
- --------
(2) The Directors serve on the boards of FAM/MLAM-advised funds as follows:
Mr. Forbes (42 registered investment companies consisting of 55
portfolios); Ms. Montgomery (42 registered investment companies consisting
of 55 portfolios); Mr. Reilly (60 registered investment companies
consisting of 73 portfolios); Mr. Ryan (42 registered investment companies
consisting of 55 portfolios); and Mr. West (62 registered investment
companies consisting of 86 portfolios).
Set forth in the table below is information about the officers of each of
the Funds.
<TABLE>
<CAPTION>
Officer Since
-----------------------------
New New
New New York York
York York Insured Insured
Name and Biography Age Office Insured Fund II III
- ------------------ --- -------------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Terry K. Glenn............... 59 President 1997* 1997* 1998* 1998*
Executive Vice President of
MLAM and FAM since 1983;
Executive Vice President and
Director of Princeton
Services since 1993;
President of Princeton Funds
Distributor, Inc. ("PFD")
since 1986 and Director
thereof since 1991;
President of Princeton
Administrators, L.P. since
1998.
Vincent R. Giordano.......... 55 Senior Vice 1997 1997 1998 1998
Senior Vice President of FAM President
and MLAM since 1984;
Portfolio Manager of FAM and
MLAM since 1977; Senior Vice
President of Princeton
Services since 1993.
Kenneth A. Jacob............. 48 Vice President 1997 1997 1998 1998
First Vice President of MLAM
since 1997; Vice President
of MLAM from 1984 to 1997;
Vice President of FAM since
1984.
Donald C. Burke.............. 39 Vice President 1997 1997 1998 1998
Senior Vice President and and Treasurer 1999 1999 1999 1999
Treasurer of MLAM and FAM
since 1999; Senior Vice
President and Treasurer of
Princeton Services since
1999; Vice President of PFD
since 1999; First Vice
President of MLAM from 1997
to 1999; Vice President of
MLAM from 1990 to 1997;
Director of Taxation of MLAM
since 1990.
Robert A. DiMella, CFA....... 33 Vice President 1998 1998 1998 1998
Vice President of MLAM since and Portfolio
1997; Assistant Vice Manager
President of MLAM from 1995
to 1997; Assistant Portfolio
Manager of MLAM from 1993 to
1995.
Roberto W. Roffo............. 33 Vice President -- -- 1998 1998
Vice President of MLAM since and Portfolio
1996; Portfolio Manager with Manager
MLAM since 1992.
Robert D. Sneeden............ 38 Vice President 1999 1999 -- --
Assistant Vice President and and Portfolio
Portfolio Manager of MLAM Manager
since 1994; Vice President
of Lehman Brothers from 1990
to 1994.
Alice A. Pellegrino.......... 39 Secretary -- 1999 1998 1998
Vice President of MLAM since
1999; Attorney associated
with MLAM since 1997;
Associate with Kirkpatrick &
Lockhart LLP from 1992 to
1997.
William E. Zitelli........... 31 Secretary 1999 -- -- --
Attorney with MLAM since
1998; Attorney associated
with Pepper Hamilton LLP
from 1997 to 1998; Attorney
associated with Reboul,
MacMurray, Hewitt, Maynard &
Kristol from 1994 to 1997.
</TABLE>
- --------
* Mr. Glenn was elected President of each Fund in 1999. Prior to that he
served as Executive Vice President of each Fund.
I-3
<PAGE>
EXHIBIT II
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the day of , 1999, by and between MuniHoldings New York Insured Fund,
Inc., a Maryland corporation ("New York Insured"), MuniHoldings New York Fund,
Inc., a Maryland corporation ("New York Fund"), MuniHoldings New York Insured
Fund II, Inc., a Maryland corporation ("New York Insured II") and MuniHoldings
New York Insured Fund III, Inc., a Maryland corporation ("New York Insured
III") (New York Insured, New York Fund, New York Insured II and New York
Insured III are sometimes referred to herein collectively as the "Funds"; New
York Fund, New York Insured II and New York Insured III are sometimes referred
to herein collectively as the "Acquired Funds").
PLAN OF REORGANIZATION
The reorganization will comprise the following:
(a) (1) the acquisition by New York Insured of substantially all of the
assets, and the assumption by New York Insured of substantially all of the
liabilities of New York Fund in exchange solely for an equal aggregate
value of newly issued shares of (A) common stock, with a par value of $0.10
per share, of New York Insured ("New York Insured Common Stock") and (B)
auction market preferred stock of New York Insured, with a liquidation
preference of $25,000 per share plus an amount equal to accumulated by
unpaid dividends thereon (whether or not earned or declared) to be
designated Series C ("New York Insured Series C AMPS"), and (2) the
subsequent distribution by New York Fund to New York Fund stockholders of
(x) all of the New York Insured Common Stock received by New York Fund in
exchange for such stockholders' shares of common stock, with a par value of
$0.10 per share, of New York Fund ("New York Fund Common Stock") and (y)
all of the New York Insured Series C AMPS received by New York Fund in
exchange for such stockholders' shares of auction market preferred stock of
New York Fund, with a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) designated Series A ("New York Fund Series A AMPS") and
such stockholders' shares of auction market preferred stock of New York
Fund, with a liquidation preference of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared), designated Series B ("New York Fund Series B AMPS, " and
together with the New York Fund Series A AMPS the "New York Fund AMPS").
(b) (1) the acquisition by New York Insured of substantially all of the
assets, and the assumption by New York Insured of substantially all of the
liabilities of New York Insured II in exchange solely for an equal
aggregate value of newly issued shares of (A) New York Insured Common Stock
and (B) auction market preferred stock of New York Insured, with a
liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to be designated Series D ("New York Insured Series D AMPS"), and
(2) the subsequent distribution by New York Insured II to New York Insured
II stockholders of (x) all of the New York Insured Common Stock received by
New York Insured II in exchange for such stockholders' shares of common
stock, with a par value of $0.10 per share, of New York Insured II ("New
York Insured II Common Stock") and (y) all of the New York Insured Series D
AMPS received by New York Insured II in exchange for such stockholders'
shares of auction market preferred stock of New York Insured II, with a
liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) designated Series A ("New York Insured II Series A AMPS") and all
of such stockholders' shares of auction market preferred stock of New York
Insured II, with a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) designated Series B ("New York Insured II Series B
AMPS," and together with New York Insured II Series A AMPS the "New York
Insured II AMPS");
II-1
<PAGE>
(c) (1) the acquisition by New York Insured of substantially all of the
assets, and the assumption by New York Insured of substantially all of the
liabilities of New York Insured III in exchange solely for an equal
aggregate value of newly issued shares of (A) New York Insured Common Stock
and (B) auction market preferred stock of New York Insured, with a
liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to be designated Series E ("New York Insured Series E AMPS"), and
(2) the subsequent distribution by New York Insured III to New York Insured
III stockholders of (x) all of the New York Insured Common Stock received
by New York Insured III in exchange for such stockholders' shares of common
stock, with a par value of $0.10 per share, of New York Insured III ("New
York Insured III Common Stock") and (y) all of the New York Insured Series
E AMPS received by New York Insured III in exchange for such stockholders'
shares of auction market preferred stock, of New York Insured III, with a
liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) designated Series A ("New York Insured III AMPS");
all upon and subject to the terms hereinafter set forth (collectively, the
"Reorganization").
In the course of the Reorganization, New York Insured Common Stock, New York
Insured Series C AMPS, New York Insured Series D AMPS and New York Insured
Series E AMPS will be distributed to the stockholders of the Acquired Funds as
follows:
(a) (1) each holder of New York Fund Common Stock will be entitled to
receive a number of shares of New York Insured Common Stock equal to the
aggregate net asset value of the New York Fund Common Stock owned by such
stockholder on the Exchange Date (as defined in Section 9(a) of the
Agreement); and (2) each holder of New York Fund AMPS will be entitled to
receive a number of shares of New York Insured Series C AMPS equal to the
aggregate liquidation preference (and aggregate value) of the New York Fund
AMPS owned by such stockholder on the Exchange Date;
(b) (1) each holder of New York Insured II Common Stock will be entitled
to receive a number of shares of New York Insured Common Stock equal to the
aggregate net asset value of the New York Insured II Common Stock owned by
such stockholder on the Exchange Date; and (2) each holder of New York
Insured II AMPS will be entitled to receive a number of shares of New York
Insured Series D AMPS equal to the aggregate liquidation preference (and
aggregate value) of the New York Insured II AMPS owned by such stockholder
on the Exchange Date; and
(c) (1) each holder of New York Insured III Common Stock will be entitled
to receive a number of shares of New York Insured Common Stock equal to the
aggregate net asset value of the New York Insured III Common Stock owned by
such stockholder on the Exchange Date; and (2) each holder of New York
Insured III AMPS will be entitled to receive a number of shares of New York
Insured Series E AMPS equal to the aggregate liquidation preference (and
aggregate value) of the New York Insured III AMPS owned by such stockholder
on the Exchange Date.
It is intended that the Reorganization described in this Plan shall be a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.
Prior to the Exchange Date, each Acquired Fund shall declare a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to their respective stockholders all of their
respective net investment company taxable income to and including the Exchange
Date, if any (computed without regard to any deduction for dividends paid),
and all of its net capital gain, if any, realized to and including the
Exchange Date. In this regard and in connection with the Reorganization, the
last dividend period for the New York Fund AMPS, New York Insured II AMPS and
New York Insured III AMPS prior to the Exchange Date may be shorter than the
dividend period for such AMPS determined as set forth in the applicable
Articles Supplementary.
II-2
<PAGE>
Articles Supplementary to New York Insured's Articles of Incorporation
establishing the powers, rights and preferences of the New York Insured Series
C AMPS, the New York Insured Series D AMPS and the New York Insured Series E
AMPS will have been filed with the State Department of Assessments and
Taxation of Maryland (the "Maryland Department") prior to the Exchange Date.
As promptly as practicable after the consummation of the Reorganization,
each Acquired Fund shall be dissolved in accordance with the laws of the State
of Maryland and will terminate its registration under the Investment Company
Act of 1940, as amended (the "1940 Act").
AGREEMENT
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, each of the Funds hereby agrees as follows:
1.Representations and Warranties of New York Insured.
New York Insured represents and warrants to, and agrees with, the Acquired
Funds that:
(a) New York Insured is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland,
and has the power to own all of its assets and to carry out this Agreement.
New York Insured has all necessary Federal, state and local authorizations
to carry on its business as it is now being conducted and to carry out this
Agreement.
(b) New York Insured is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-08217),
and such registration has not been revoked or rescinded and is in full
force and effect. New York Insured has elected and qualified for the
special tax treatment afforded regulated investment companies ("RICs")
under Sections 851-855 of the Code at all times since its inception and
intends to continue to so qualify until consummation of the Reorganization
and thereafter.
(c) Each of the Acquired Funds has been furnished with New York Insured's
Annual Report to Stockholders for the fiscal year ended August 31, 1999,
and the audited financial statements appearing therein, having been
examined by Deloitte & Touche LLP, independent public accountants, fairly
present the financial position of New York Insured as of the respective
dates indicated, in conformity with generally accepted accounting
principles applied on a consistent basis.
(d) An unaudited statement of assets, liabilities and capital of New York
Insured and an unaudited schedule of investments of New York Insured, each
as of the Valuation Time (as defined in Section 5(d) of this Agreement),
will be furnished to each of the Acquired Funds, at or prior to the
Exchange Date for the purpose of determining the number of shares of New
York Insured Common Stock, New York Insured Series C AMPS, New York Insured
Series D AMPS, and New York Insured Series E AMPS to be issued pursuant to
Section 6 of this Agreement; each will fairly present the financial
position of New York Insured as of the Valuation Time in conformity with
generally accepted accounting principles applied on a consistent basis.
(e) New York Insured has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors, and this Agreement constitutes a valid
and binding contract enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance
and similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of New York Insured, threatened against it
which assert liability on the part of New York Insured or which materially
affect its financial condition or its ability to consummate the
Reorganization. New York Insured
II-3
<PAGE>
is not charged with or, to the best of its knowledge, threatened with any
violation or investigation of any possible violation of any provisions of
any Federal, state or local law or regulation or administrative ruling
relating to any aspect of its business.
(g) New York Insured is not obligated under any provision of its Articles
of Incorporation, as amended, or its by-laws, as amended, or a party to any
contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under
this Agreement, except insofar as the Funds have mutually agreed to amend
such contract or other commitment or obligation to cure any potential
violation as a condition precedent to the Reorganization.
(h) There are no material contracts outstanding to which New York Insured
is a party that have not been disclosed in the N-14 Registration Statement
(as defined in subsection (l) below) or will not otherwise be disclosed to
the Acquired Funds prior to the Valuation Time.
(i) New York Insured has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since August 31,
1999; and those incurred in connection with the Reorganization. As of the
Valuation Time, New York Insured will advise each Acquired Fund in writing
of all known liabilities, contingent or otherwise, whether or not incurred
in the ordinary course of business, existing or accrued as of such time.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by New York Insured
of the Reorganization, except such as may be required under the Securities
Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of
1934, as amended (the "1934 Act") and the 1940 Act or state securities laws
(which term as used herein shall include the laws of the District of
Columbia and Puerto Rico).
(k) The registration statement filed by New York Insured on Form N-14
which includes the joint proxy statement of the Funds with respect to the
transactions contemplated herein and the prospectus of New York Insured
relating to the New York Insured Common Stock, New York Insured Series C
AMPS, New York Insured Series D AMPS and New York Insured Series E AMPS to
be issued pursuant to this Agreement, (the "Joint Proxy Statement and
Prospectus"), and any supplement or amendment thereto or to the documents
therein (as amended or supplemented, the "N-14 Registration Statement"), on
its effective date, at the time of the stockholders' meetings referred to
in Section 8(a) of this Agreement and at the Exchange Date, insofar as it
relates to New York Insured (i) complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act
and the rules and regulations thereunder and (ii) did not or will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and the Joint Proxy Statement and
Prospectus included therein did not or will not contain any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by New York
Insured for use in the N-14 Registration Statement as provided in Section
8(e) of this Agreement.
(l) New York Insured is authorized to issue 200,000,000 shares of capital
stock, of which 1,900 shares have been designated as Series A AMPS, 1,900
shares have been designated as Series B AMPS and 199,996,200 shares have
been designated as common stock, par value $.10 per share; each outstanding
share of which is fully paid and nonassessable and has full voting rights.
(m) The shares of New York Insured Common Stock, New York Insured Series
C AMPS, New York Insured Series D AMPS and New York Insured Series E AMPS
to be issued to the Acquired Funds pursuant to this Agreement will have
been duly authorized and, when issued and delivered pursuant to this
Agreement, will be legally and validly issued and will be fully paid and
nonassessable and will have full voting rights, and no stockholder of New
York Insured will have any preemptive right of subscription or purchase in
respect thereof.
II-4
<PAGE>
(n) At or prior to the Exchange Date, the New York Insured Common Stock
to be transferred to the Acquired Funds for distribution to the
stockholders of the Acquired Funds on the Exchange Date will be duly
qualified for offering to the public in all states of the United States in
which the sale of shares of the Funds presently are qualified, and there
will be a sufficient number of such shares registered under the 1933 Act
and, as may be necessary, with each pertinent state securities commission
to permit the transfers contemplated by this Agreement to be consummated.
(o) At or prior to the Exchange Date, the shares of New York Insured
Series C AMPS to be transferred to New York Fund on the Exchange Date, the
shares of New York Insured Series D AMPS to be transferred to New York
Insured II on the Exchange Date and the shares of New York Insured Series E
AMPS to be transferred to New York Insured III on the Exchange Date will be
duly qualified for offering to the public in all states of the United
States in which the sale of AMPS of the Acquired Funds presently are
qualified, and there are a sufficient number of each series of New York
Insured AMPS registered under the 1933 Act and with each pertinent state
securities commission to permit the transfers contemplated by this
Agreement to be consummated.
(p) At or prior to the Exchange Date, New York Insured will have obtained
any and all regulatory, Director and stockholder approvals necessary to
issue the New York Insured Common Stock, New York Insured Series C AMPS,
New York Insured Series D AMPS and New York Insured Series E AMPS to New
York Fund, New York Insured II and New York Insured III, as applicable.
2.Representations and Warranties of New York Fund.
New York Fund represents and warrants to, and agrees with, New York Insured,
New York Insured II and New York Insured III that:
(a) New York Fund is a corporation duly organized, validly existing and
in good standing in conformity with the laws of the State of Maryland, and
has the power to own all of its assets and to carry out this Agreement. New
York Fund has all necessary Federal, state and local authorizations to
carry on its business as it is now being conducted and to carry out this
Agreement.
(b) New York Fund is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-08575),
and such registration has not been revoked or rescinded and is in full
force and effect. New York Fund has elected and qualified for the special
tax treatment afforded RICs under Sections 851-855 of the Code at all times
since its inception, and intends to continue to so qualify through its
taxable year ending upon liquidation.
(c) As used in this Agreement, the term "New York Fund Investments" shall
mean (i) the investments of New York Fund shown on the schedule of its
investments as of the Valuation Time furnished to each of New York Insured,
New York Insured II and New York Insured III; and (ii) all other assets
owned by New York Fund or liabilities incurred as of the Valuation Time.
(d) New York Fund has full power and authority to enter into and perform
its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) Each of New York Insured, New York Insured II and New York Insured
III has been furnished with New York Fund's Annual Report to Stockholders
for the fiscal year ended June 30, 1999, and the audited financial
statements appearing therein, having been examined by Deloitte & Touche
LLP, independent public accountants, fairly present the financial position
of New York Fund as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
II-5
<PAGE>
(f) An unaudited statement of assets, liabilities and capital of New York
Fund and an unaudited schedule of investments of New York Fund, each as of
the Valuation Time, will be furnished to each of New York Insured, New York
Insured II and New York Insured III at or prior to the Exchange Date for
the purpose of determining the number of shares of New York Insured Common
Stock and New York Insured Series C AMPS to be issued to New York Fund
pursuant to Section 6 of this Agreement; each will fairly present the
financial position of New York Fund as of the Valuation Time in conformity
with generally accepted accounting principles applied on a consistent
basis.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of New York Fund, threatened against it which
assert liability on the part of New York Fund or which materially affect
its financial condition or its ability to consummate the Reorganization.
New York Fund is not charged with or, to the best of its knowledge,
threatened with any violation or investigation of any possible violation of
any provisions of any Federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which New York Fund is
a party that have not been disclosed in the N-14 Registration Statement or
will not otherwise be disclosed to New York Insured, New York Insured II
and New York Insured III prior to the Valuation Time.
(i) New York Fund is not obligated under any provision of its Articles of
Incorporation, as amended, or its by-laws, as amended, or a party to any
contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under
this Agreement, except insofar as the Funds have mutually agreed to amend
such contract or other commitment or obligation to cure any potential
violation as a condition precedent to the Reorganization.
(j) New York Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since June 30,
1999 and those incurred in connection with the Reorganization. As of the
Valuation Time, New York Fund will advise New York Insured, New York
Insured II and New York Insured III in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
(k) New York Fund has filed, or has obtained extensions to file, all
Federal, state and local tax returns which are required to be filed by it,
and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Exchange
Date occurs. All tax liabilities of New York Fund have been adequately
provided for on its books, and no tax deficiency or liability of New York
Fund has been asserted and no question with respect thereto has been raised
by the Internal Revenue Service or by any state or local tax authority for
taxes in excess of those already paid, up to and including the taxable year
in which the Exchange Date occurs.
(l) At both the Valuation Time and the Exchange Date, New York Fund will
have full right, power and authority to sell, assign, transfer and deliver
the New York Fund Investments. At the Exchange Date, subject only to the
obligation to deliver the New York Fund Investments as contemplated by this
Agreement, New York Fund will have good and marketable title to all of the
New York Fund Investments, and New York Insured will acquire all of the New
York Fund Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except
those imposed by the Federal or state securities laws and those
imperfections of title or encumbrances as do not materially detract from
the value or use of the New York Fund Investments or materially affect
title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by New York Fund of
the Reorganization, except such as may be required under the 1933 Act, the
1934 Act, the 1940 Act or state securities laws.
II-6
<PAGE>
(n) The N-14 Registration Statement, on its effective date, at the time
of the stockholders' meetings referred to in Section 8(a) of this Agreement
and on the Exchange Date, insofar as it relates to New York Fund (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
Joint Proxy Statement and Prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information
furnished by New York Fund for use in the N-14 Registration Statement as
provided in Section 8(e) of this Agreement.
(o) New York Fund is authorized to issue 200,000,000 shares of capital
stock, of which 1,520 shares have been designated as Series A AMPS, 1,520
shares have been designated as Series B AMPS and 199,996,960 shares have
been designated as common stock, par value $.10 per share; each outstanding
share of which is fully paid and nonassessable and has full voting rights.
(p) All of the issued and outstanding shares of New York Fund Common
Stock and New York Fund AMPS were offered for sale and sold in conformity
with all applicable Federal and state securities laws.
(q) The books and records of New York Fund made available to New York
Insured, New York Insured II, New York Insured III and/or their counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of New York Fund.
(r) New York Fund will not sell or otherwise dispose of any of the shares
of New York Insured Common Stock or New York Insured Series C AMPS to be
received in the Reorganization, except in distribution to the stockholders
of New York Fund, as provided in Section 5 of this Agreement.
3.Representations and Warranties of New York Insured II.
New York Insured II represents and warrants to, and agrees with, New York
Insured, New York Fund and New York Insured III that:
(a) New York Insured II is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland,
and has the power to own all of its assets and to carry out this Agreement.
New York Insured II has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
(b) New York Insured II is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-08813),
and such registration has not been revoked or rescinded and is in full
force and effect. New York Insured II has elected and qualified for the
special tax treatment afforded RICs under Sections 851-855 of the Code at
all times since its inception and intends to continue to so qualify through
its taxable year ending upon liquidation.
(c) As used in this Agreement, the term "New York Insured II Investments"
shall mean (i) the investments of New York Insured II shown on the schedule
of its investments as of the Valuation Time furnished to each of New York
Insured, New York Fund and New York Insured III; and (ii) all other assets
owned by New York Insured II or liabilities incurred as of the Valuation
Time.
(d) New York Insured II has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
II-7
<PAGE>
(e) Each of New York Insured, New York Fund and New York Insured III has
been furnished with New York Insured II's Annual Report to Stockholders for
the fiscal year ended September 30, 1998, and the audited financial
statements appearing therein, having been examined by Ernst & Young LLP,
independent public accountants, fairly present the financial position of
New York Insured II as of the respective dates indicated, in conformity
with generally accepted accounting principles applied on a consistent
basis.
(f) Each of New York Insured, New York Fund and New York Insured III has
been furnished with New York Insured II's Semi-Annual Report to
Stockholders for the six months ended March 31, 1999, and the unaudited
financial statements appearing therein fairly present the financial
position of New York Insured II as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(g) An unaudited statement of assets, liabilities and capital of New York
Insured II and an unaudited schedule of investments of New York Insured II,
each as of the Valuation Time, will be furnished to each of New York
Insured, New York Fund and New York Insured III at or prior to the Exchange
Date for the purpose of determining the number of shares of New York
Insured Common Stock and New York Insured Series D AMPS to be issued to New
York Insured II pursuant to Section 6 of this Agreement; each will fairly
present the financial position of New York Insured II as of the Valuation
Time in conformity with generally accepted accounting principles applied on
a consistent basis.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of New York Insured II, threatened against it
which assert liability on the part of New York Insured II or which
materially affect its financial condition or its ability to consummate the
Reorganization. New York Insured II, is not charged with or, to the best of
its knowledge, threatened with any violation or investigation of any
possible violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which New York Insured
II is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to New York Insured, New York
Fund and New York Insured III prior to the Valuation Time.
(j) New York Insured II is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a
party to any contract or other commitment or obligation, and is not subject
to any order or decree which would be violated by its execution of or
performance under this Agreement, except insofar as the Funds have mutually
agreed to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
(k) New York Insured II has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since March 31,
1999 and those incurred in connection with the Reorganization. As of the
Valuation Time, New York Insured II will advise New York Insured, New York
Fund and New York Insured III in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
(l) New York Insured II has filed, or has obtained extensions to file,
all Federal, state and local tax returns which are required to be filed by
it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Exchange
Date occurs. All tax liabilities of New York Insured II have been
adequately provided for on its books, and no tax deficiency or liability of
New York Insured II has been asserted and no question with respect thereto
has been raised by the Internal Revenue Service or by any state or local
tax authority for taxes in excess of those already paid, up to and
including the taxable year in which the Exchange Date occurs.
II-8
<PAGE>
(m) At both the Valuation Time and the Exchange Date, New York Insured II
will have full right, power and authority to sell, assign, transfer and
deliver the New York Insured II Investments. At the Exchange Date, subject
only to the obligation to deliver the New York Insured II Investments as
contemplated by this Agreement, New York Insured II will have good and
marketable title to all of the New York Insured II Investments, and New
York Insured will acquire all of the New York Insured II Investments free
and clear of any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed by the Federal
or state securities laws and those imperfections of title or encumbrances
as do not materially detract from the value or use of the New York Insured
II Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by New York Insured
II of the Reorganization, except such as may be required under the 1933
Act, the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the time
of the stockholders' meetings referred to in Section 8(a) of this Agreement
and on the Exchange Date, insofar as it relates to New York Insured II (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
Joint Proxy Statement and Prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information
furnished by New York Insured II for use in the N-14 Registration Statement
as provided in Section 8(e) of this Agreement.
(p) New York Insured II is authorized to issue 200,000,000 shares of
capital stock, of which 1,060 shares have been designated as Series A AMPS,
1,060 shares have been designated as Series B AMPS and 199,997,880 shares
have been designated as common stock, par value $.10 per share; each
outstanding share of which is fully paid and nonassessable and has full
voting rights.
(q) All of the issued and outstanding shares of New York Insured II
Common Stock and New York Insured II AMPS were offered for sale and sold in
conformity with all applicable Federal and state securities laws.
(r) The books and records of New York Insured II made available to New
York Insured, New York Fund, and New York Insured III and/or their counsel
are substantially true and correct and contain no material misstatements or
omissions with respect to the operations of New York Insured II.
(s) New York Insured II will not sell or otherwise dispose of any of the
shares of New York Insured Common Stock or New York Insured Series D AMPS
to be received in the Reorganization, except in distribution to the
stockholders of New York Insured II, as provided in Section 5 of this
Agreement.
4.Representations and Warranties of New York Insured III.
New York Insured III represents and warrants to, and agrees with, New York
Insured, New York Fund and New York Insured II that:
(a) New York Insured III is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. New York Insured III has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
(b) New York Insured III is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-09131),
and such registration has not been revoked or
II-9
<PAGE>
rescinded and is in full force and effect. New York Insured III has elected
and qualified for the special tax treatment afforded RICs under Sections
851-855 of the Code at all times since its inception, and intends to
continue to so qualify through its taxable year ending upon liquidation.
(c) As used in this Agreement, the term "New York Insured III
Investments" shall mean (i) the investments of New York Insured III shown
on the schedule of its investments as of the Valuation Time furnished to
each of New York Insured, New York Fund and New York Insured II; and (ii)
all other assets owned by New York Insured III or liabilities incurred as
of the Valuation Time. The New York Insured III Investments together with
the New York Fund Investments and the New York Insured II Investments may
sometimes be referred to herein collectively as the "Acquired Fund
Investments".
(d) New York Insured III has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) Each of New York Insured, New York Fund and New York Insured II has
been furnished with New York Insured III's Annual Report to Stockholders
for the fiscal year ended September 30, 1998, and the audited financial
statements appearing therein, having been examined by Ernst & Young LLP,
independent public accountants, fairly present the financial position of
New York Insured III as of the respective dates indicated, in conformity
with generally accepted accounting principles applied on a consistent
basis.
(f) Each of New York Insured, New York Fund and New York Insured II has
been furnished with New York Insured III's Semi-Annual Report to
Stockholders for the period ended March 31, 1999, and the unaudited
financial statements appearing therein fairly present the financial
position of New York Insured III as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(g) An unaudited statement of assets, liabilities and capital of New York
Insured III and an unaudited schedule of investments of New York Insured
III, each as of the Valuation Time, will be furnished to each of New York
Insured, New York Fund and New York Insured II at or prior to the Exchange
Date for the purpose of determining the number of shares of New York
Insured Common Stock and New York Insured Series E AMPS to be issued to New
York Insured III pursuant to Section 6 of this Agreement; each will fairly
present the financial position of New York Insured III as of the Valuation
Time in conformity with generally accepted accounting principles applied on
a consistent basis.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of New York Insured III, threatened against it
which assert liability on the part of New York Insured III or which
materially affect its financial condition or its ability to consummate the
Reorganization. New York Insured III, is not charged with or, to the best
of its knowledge, threatened with any violation or investigation of any
possible violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which New York Insured
III is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to New York Insured, New York
Fund and New York Insured II prior to the Valuation Time.
(j) New York Insured III is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a
party to any contract or other commitment or obligation, and is not subject
to any order or decree which would be violated by its execution of or
performance under this Agreement, except insofar as the Funds have mutually
agreed to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
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(k) New York Insured III has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since March 31,
1999 and those incurred in connection with the Reorganization. As of the
Valuation Time, New York Insured III will advise New York Insured, New York
Fund and New York Insured II in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
(l) New York Insured III has filed, or has obtained extensions to file,
all Federal, state and local tax returns which are required to be filed by
it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Exchange
Date occurs. All tax liabilities of New York Insured III have been
adequately provided for on its books, and no tax deficiency or liability of
New York Insured III has been asserted and no question with respect thereto
has been raised by the Internal Revenue Service or by any state or local
tax authority for taxes in excess of those already paid, up to and
including the taxable year in which the Exchange Date occurs.
(m) At both the Valuation Time and the Exchange Date, New York Insured
III will have full right, power and authority to sell, assign, transfer and
deliver the New York Insured III Investments. At the Exchange Date, subject
only to the obligation to deliver the New York Insured III Investments as
contemplated by this Agreement, New York Insured III will have good and
marketable title to all of the New York Insured III Investments, and New
York Insured will acquire all of the New York Insured III Investments free
and clear of any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed by the Federal
or state securities laws and those imperfections of title or encumbrances
as do not materially detract from the value or use of the New York Insured
III Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by New York Insured
III of the Reorganization, except such as may be required under the 1933
Act, the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the time
of the stockholders' meetings referred to in Section 8(a) of this Agreement
and on the Exchange Date, insofar as it relates to New York Insured III (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
Joint Proxy Statement and Prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection shall
apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information
furnished by New York Insured III for use in the N-14 Registration
Statement as provided in Section 8(e) of this Agreement.
(p) New York Insured III is authorized to issue 200,000,000 shares of
capital stock, of which 2,000 shares have been designated as Series A AMPS,
and 199,998,000 shares have been designated as common stock, par value $.10
per share; each outstanding share of which is fully paid and nonassessable
and has full voting rights.
(q) All of the issued and outstanding shares of New York Insured III
Common Stock and New York Insured III AMPS were offered for sale and sold
in conformity with all applicable Federal and state securities laws.
(r) The books and records of New York Insured III made available to New
York Insured, New York Fund and New York Insured II and/or their counsel
are substantially true and correct and contain no material misstatements or
omissions with respect to the operations of New York Insured III.
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<PAGE>
(s) New York Insured III will not sell or otherwise dispose of any of the
shares of New York Insured Common Stock or New York Insured Series E AMPS
to be received in the Reorganization, except in distribution to the
stockholders of New York Insured III, as provided in Section 5 of this
Agreement.
5.The Reorganization.
(a) Subject to receiving the requisite approvals of the stockholders of
each of the Funds, and to the other terms and conditions contained herein,
(i) New York Fund agrees to convey, transfer and deliver to New York
Insured and New York Insured agrees to acquire from New York Fund, on the
Exchange Date, all of the New York Fund Investments (including interest
accrued as of the Valuation Time on debt instruments), and assume
substantially all of the liabilities of New York Fund, in exchange solely
for that number of shares of New York Insured Common Stock and New York
Insured Series C AMPS provided in Section 6 of this Agreement; (ii) New
York Insured II agrees to convey, transfer and deliver to New York Insured
and New York Insured agrees to acquire from New York Insured II on the
Exchange Date, all of the New York Insured II Investments (including
interest accrued as of the Valuation Time on debt instruments) and assume
substantially all of the liabilities of New York Insured II in exchange
solely for that number of shares of New York Insured Common Stock and New
York Insured Series D AMPS provided in Section 6 of this Agreement; and
(iii) New York Insured III agrees to convey, transfer and deliver to New
York Insured and New York Insured agrees to acquire from New York Insured
III on the Exchange Date, all of the New York Insured III Investments
(including interest accrued as of the Valuation Time on debt instruments)
and assume substantially all of the liabilities of New York Insured III in
exchange solely for that number of shares of New York Insured Common Stock
and New York Insured Series E AMPS provided in Section 6 of this Agreement.
Pursuant to this Agreement, as soon as practicable after the Exchange
Date (i) New York Fund will distribute all shares of New York Insured
Common Stock and New York Insured Series C AMPS received by it to its
stockholders in exchange for their shares of New York Fund Common Stock and
New York Fund AMPS; (ii) New York Insured II will distribute all shares of
New York Insured Common Stock and New York Insured Series D AMPS received
by it to its stockholders in exchange for their shares of New York Insured
II Common Stock and New York Insured II AMPS; and (iii) New York Insured
III will distribute all shares of New York Insured Common Stock and New
York Insured Series E AMPS received by it to its stockholders in exchange
for their shares of New York Insured III Common Stock and New York Insured
III AMPS. Such distributions shall be accomplished by the opening of
stockholder accounts on the stock ledger records of New York Insured in the
amounts due the stockholders of each Acquired Fund based on their
respective holdings in such Acquired Fund as of the Valuation Time.
(b) Prior to the Exchange Date, each Acquired Fund shall declare a
dividend or dividends which, together with all such previous dividends,
shall have the effect of distributing to their respective stockholders all
of their respective net investment company taxable income to and including
the Exchange Date, if any (computed without regard to any deduction for
dividends paid), and all of its net capital gain, if any, realized to and
including the Exchange Date. In this regard and in connection with the
Reorganization, the last dividend period for the New York Fund AMPS, the
New York Insured II AMPS and the New York Insured III AMPS prior to the
Exchange Date may be shorter than the dividend period for such AMPS
determined as set forth in the applicable Articles Supplementary.
(c) Each of the Acquired Funds will pay or cause to be paid to New York
Insured any interest such Acquired Fund receives on or after the Exchange
Date with respect to any of the Acquired Fund Investments transferred to
New York Insured hereunder.
(d) The Valuation Time shall be 4:00 p.m., Eastern time, on February ,
2000, or such earlier or later day and time as may be mutually agreed upon
in writing (the "Valuation Time").
(e) Recourse for liabilities assumed from each Acquired Fund by New York
Insured in the Reorganization will be limited to the net assets of each
such fund acquired by New York Insured. The known liabilities of the
Acquired Funds, as of the Valuation Time, shall be confirmed in writing to
New York Insured pursuant to Sections 2(j), 3(j) and 4(j) of this
Agreement.
II-12
<PAGE>
(f) The Funds will jointly file Articles of Transfer with the Maryland
Department and any other such instrument as may be required by the State of
Maryland to effect the transfer of the Acquired Fund Investments.
(g) The Acquired Funds will each be dissolved following the Exchange Date
by filing separate Articles of Dissolution with the Maryland Department.
(h) New York Insured will file with the Maryland Department Articles
Supplementary to its Articles of Incorporation establishing the powers,
rights and preferences of the New York Insured Series C AMPS, the New York
Insured Series D AMPS and the New York Insured Series E AMPS prior to the
closing of the Reorganization.
(i) As promptly as practicable after the liquidation of each of the
Acquired Fund pursuant to the Reorganization, each Acquired Fund shall
terminate its respective registration under the 1940 Act.
6. Issuance and Valuation of New York Insured Common Stock, New York Insured
Series C AMPS, New York Insured Series D AMPS and New York Insured Series E
AMPS in the Reorganization.
Full shares of New York Insured Common Stock and New York Insured Series C
AMPS of an aggregate net asset value or liquidation preference, as the case
may be, equal (to the nearest one ten thousandth of one cent) to the value of
the assets of New York Fund acquired in the Reorganization determined as
hereinafter provided, reduced by the amount of liabilities of New York Fund
assumed by New York Insured in the Reorganization, shall be issued by New York
Insured to New York Fund in exchange for such assets of New York Fund, plus
cash in lieu of fractional shares. New York Insured will issue to New York
Fund (a) a number of shares of New York Insured Common Stock, the aggregate
net asset value of which will equal the aggregate net asset value of the
shares of New York Fund Common Stock, determined as set forth below, and (b) a
number of shares of New York Insured Series C AMPS, the aggregate liquidation
preference and value of which will equal the aggregate liquidation preference
and value of the New York Fund AMPS, determined as set forth below.
Full shares of New York Insured Common Stock and New York Insured Series D
AMPS of an aggregate net asset value or liquidation preference, as the case
may be, equal (to the nearest one ten thousandth of one cent) to the value of
the assets of New York Insured II acquired in the Reorganization determined as
hereinafter provided, reduced by the amount of liabilities of New York Insured
II assumed by New York Insured in the Reorganization, shall be issued by New
York Insured to New York Insured II in exchange for such assets of New York
Insured II, plus cash in lieu of fractional shares. New York Insured will
issue to New York Insured II (a) a number of shares of New York Insured Common
Stock, the aggregate net asset value of which will equal the aggregate net
asset value of the shares of New York Insured II Common Stock, determined as
set forth below, and (b) a number of shares of New York Insured Series D AMPS,
the aggregate liquidation preference and value of which will equal the
aggregate liquidation preference and value of the New York Insured II AMPS,
determined as set forth below.
Full shares of New York Insured Common Stock and New York Insured Series E
AMPS of an aggregate net asset value or liquidation preference, as the case
may be, equal (to the nearest one ten thousandth of one cent) to the value of
the assets of New York Insured III acquired in the Reorganization determined
as hereinafter provided, reduced by the amount of liabilities of New York
Insured III assumed by New York Insured to New York Insured III in the
Reorganization, shall be issued by New York Insured in exchange for such
assets of New York Insured III, plus cash in lieu of fractional shares. New
York Insured will issue to New York Insured III (a) a number of shares of New
York Insured Common Stock, the aggregate net asset value of which will equal
the aggregate net asset value of the shares of New York Insured III Common
Stock, determined as set forth below, and (b) a number of shares of New York
Insured Series E AMPS, the aggregate liquidation preference and value of which
will equal the aggregate liquidation preference and value of the New York
Insured III AMPS, determined as set forth below.
II-13
<PAGE>
The net asset value of each of the Funds and the liquidation preference and
value of the AMPS of each of the Funds shall be determined as of the Valuation
Time in accordance with the procedures described in (i) the prospectus of New
York Insured, dated September 16, 1997, relating to the New York Insured
Common Stock and (ii) the final prospectus of New York Insured, dated October
2, 1997, relating to the New York Insured AMPS, and no formula will be used to
adjust the net asset value so determined of any Fund to take into account
differences in realized and unrealized gains and losses. Values in all cases
shall be determined as of the Valuation Time. The value of the Acquired Fund
Investments to be transferred to New York Insured shall be determined by New
York Insured pursuant to the procedures utilized by New York Insured in
valuing its own assets and determining its own liabilities for purposes of the
Reorganization. Such valuation and determination shall be made by New York
Insured in cooperation with the Acquired Funds and shall be confirmed in
writing by New York Insured to the Acquired Funds. The net asset value per
share of the New York Insured Common Stock and the liquidation preference and
value per share of the New York Insured Series C AMPS, the New York Insured
Series D AMPS and the New York Insured Series E AMPS shall be determined in
accordance with such procedures and New York Insured shall certify the
computations involved. For purposes of determining the net asset value of a
share of Common Stock of each Fund, the value of the securities held by the
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding shares of AMPS of that Fund is divided by
the total number of shares of Common Stock of that Fund outstanding at such
time.
New York Insured shall issue to New York Fund separate certificates or share
deposit receipts for the New York Insured Common Stock and the New York
Insured Series C AMPS, each registered in the name of New York Fund. New York
Fund then shall distribute the New York Insured Common Stock and the New York
Insured Series C AMPS to the holders of New York Fund Common Stock and New
York Fund AMPS by redelivering the certificates or share deposit receipts
evidencing ownership of (i) the New York Insured Common Stock to The Bank of
New York, as the transfer agent and registrar for the New York Insured Common
Stock for distribution to the holders of New York Fund Common Stock on the
basis of such holder's proportionate interest in the aggregate net asset value
of the Common Stock of New York Fund and (ii) the New York Insured Series C
AMPS to The Bank of New York, as the transfer agent and registrar for the New
York Insured Series C AMPS for distribution to the holders of New York Fund
AMPS on the basis of such holder's proportionate interest in the aggregate
liquidation preference and value of the AMPS of New York Fund. With respect to
any New York Fund stockholder holding certificates evidencing ownership of
either New York Fund Common Stock or New York Fund AMPS as of the Exchange
Date, and subject to New York Insured being informed thereof in writing by New
York Fund, New York Insured will not permit such stockholder to receive new
certificates evidencing ownership of the New York Insured Common Stock or New
York Insured Series C AMPS, exchange New York Insured Common Stock or New York
Insured Series C AMPS credited to such stockholder's account for shares of
other investment companies managed by Merrill Lynch Asset Management, L.P.
("MLAM") or any of its affiliates, or pledge or redeem such New York Insured
Common Stock or New York Insured Series C AMPS, in any case, until notified by
New York Fund or its agent that such stockholder has surrendered his or her
outstanding certificates evidencing ownership of New York Fund Common Stock or
New York Fund AMPS or, in the event of lost certificates, posted adequate
bond. New York Fund, at its own expense, will request its stockholders to
surrender their outstanding certificates evidencing ownership of New York Fund
Common Stock or New York Fund AMPS, as the case may be, or post adequate bond
therefor.
New York Insured shall issue to New York Insured II separate certificates or
share deposit receipts for the New York Insured Common Stock and the New York
Insured Series D AMPS, each registered in the name of New York Insured II. New
York Insured II then shall distribute the New York Insured Common Stock and
the New York Insured Series D AMPS to the holders of New York Insured II
Common Stock and New York Insured II AMPS by redelivering the certificates or
share deposit receipts evidencing ownership of (i) the New York Insured Common
Stock to The Bank of New York, as the transfer agent and registrar for the New
York Insured Common Stock for distribution to the holders of New York Insured
II Common Stock on the basis of such holder's proportionate interest in the
aggregate net asset value of the Common Stock of New York Insured II and (ii)
the New York Insured Series D AMPS to The Bank of New York, as the transfer
agent and registrar for
II-14
<PAGE>
the New York Insured Series D AMPS for distribution to the holders of New York
Insured II AMPS on the basis of such holder's proportionate interest in the
aggregate liquidation preference and value of the AMPS of New York Insured II.
With respect to any New York Insured II stockholder holding certificates
evidencing ownership of either New York Insured II Common Stock or New York
Insured II AMPS as of the Exchange Date, and subject to New York Insured being
informed thereof in writing by New York Insured II, New York Insured will not
permit such stockholder to receive new certificates evidencing ownership of
the New York Insured Common Stock or New York Insured Series D AMPS, exchange
New York Insured Common Stock or New York Insured Series D AMPS credited to
such stockholder's account for shares of other investment companies managed by
MLAM or any of its affiliates, or pledge or redeem such New York Insured
Common Stock or New York Insured Series D AMPS, in any case, until notified by
New York Insured II or its agent that such stockholder has surrendered his or
her outstanding certificates evidencing ownership of New York Insured II
Common Stock or New York Insured II AMPS or, in the event of lost
certificates, posted adequate bond. New York Insured II, at its own expense,
will request its stockholders to surrender their outstanding certificates
evidencing ownership of New York Insured II Common Stock or New York Insured
II AMPS, as the case may be, or post adequate bond therefor.
New York Insured shall issue to New York Insured III separate certificates
or share deposit receipts for the New York Insured Common Stock and the New
York Insured Series E AMPS, each registered in the name of New York Insured
III. New York Insured III then shall distribute the New York Insured Common
Stock and the New York Insured Series E AMPS to the holders of New York
Insured III Common Stock and New York Insured III AMPS by redelivering the
certificates or share deposit receipts evidencing ownership of (i) the New
York Insured Common Stock to The Bank of New York, as the transfer agent and
registrar for the New York Insured Common Stock for distribution to the
holders of New York Insured III Common Stock on the basis of such holder's
proportionate interest in the aggregate net asset value of the Common Stock of
New York Insured III and (ii) the New York Insured Series E AMPS to The Bank
of New York, as the transfer agent and registrar for the New York Insured
Series E AMPS for distribution to the holders of New York Insured III AMPS on
the basis of such holder's proportionate interest in the aggregate liquidation
preference and value of the AMPS of New York Insured III. With respect to any
New York Insured III stockholder holding certificates evidencing ownership of
either New York Insured III Common Stock or New York Insured III AMPS as of
the Exchange Date, and subject to New York Insured being informed thereof in
writing by New York Insured III, New York Insured will not permit such
stockholder to receive new certificates evidencing ownership of New York
Insured Common Stock or New York Insured Series E. AMPS, exchange New York
Insured Common Stock or New York Insured Series E. AMPS credited to such
stockholder's account for shares of other investment companies managed by MLAM
or any of its affiliates, or pledge or redeem such New York Insured Common
Stock or New York Insured Series E AMPS, in any case, until notified by New
York Insured III or its agent that such stockholder has surrendered his or her
outstanding certificates evidencing ownership of New York Insured III Common
Stock or New York Insured III AMPS or, in the event of lost certificates,
posted adequate bond. New York Insured III, at its own expense, will request
its stockholders to surrender their outstanding certificates evidencing
ownership of New York Insured III Common Stock or New York Insured III AMPS,
as the case may be, or post adequate bond therefor.
Dividends payable to holders of record of shares of New York Insured Common
Stock, New York Insured Series C AMPS, New York Insured Series D AMPS, or New
York Insured Series E AMPS, as the case may be, as of any date after the
Exchange Date and prior to the exchange of certificates by any stockholder of
an Acquired Fund shall be payable to such stockholder without interest;
however, such dividends shall not be paid unless and until such stockholder
surrenders the stock certificates representing shares of common stock or AMPS
of the Acquired Funds, as the case may be, for exchange.
No fractional shares of New York Insured Common Stock will be issued to
holders of New York Fund Common Stock, New York Insured II Common Stock or New
York Insured III Common Stock. In lieu thereof, New York Insured's transfer
agent, The Bank of New York, will aggregate all fractional shares of New York
Insured Common Stock and sell the resulting full shares on the New York Stock
Exchange at the current market
II-15
<PAGE>
price for shares of New York Insured Common Stock for the account of all
holders of fractional interests, and each such holder will receive such
holder's pro rata share of the proceeds of such sale upon surrender of such
holder's certificates representing New York Fund Common Stock, New York
Insured II Common Stock or New York Insured III Common Stock.
7.Payment of Expenses.
(a) With respect to expenses incurred in connection with the Reorganization,
(i) each Fund shall pay all expenses incurred that are attributable solely to
such Fund and the conduct of its business, and (ii) New York Insured shall
pay, subsequent to the Exchange Date and pro rata according to each Fund's net
assets on the Exchange Date, all expenses incurred in connection with the
Reorganization, including, but not limited to, all costs related to the
preparation and distribution of the N-14 Registration Statement. Such fees and
expenses shall include the cost of preparing and filing a ruling request with
the Internal Revenue Service, legal and accounting fees, printing costs,
filing fees, stock exchange fees, rating agency fees, portfolio transfer taxes
(if any) and any similar expenses incurred in connection with the
Reorganization.
(b) If for any reason the Reorganization is not consummated, no party shall
be liable to any other party for any damages resulting therefrom, including,
without limitation, consequential damages.
8.Covenants of the Funds.
(a) Each Fund agrees to call an annual meeting of its stockholders as soon
as is practicable after the effective date of the N-14 Registration Statement
for the purpose of considering the Reorganization as described in this
Agreement.
(b) Each Fund covenants to operate its business as presently conducted
between the date hereof and the Exchange Date.
(c) Each Acquired Fund agrees that following the consummation of the
Reorganization, it will dissolve in accordance with the laws of the State of
Maryland and any other applicable law, it will not make any distributions of
any shares of New York Insured Common Stock, New York Insured Series C AMPS,
New York Insured Series D AMPS or New York Insured Series E AMPS, as
applicable other than to its respective stockholders and without first paying
or adequately providing for the payment of all of its respective liabilities
not assumed by New York Insured, if any, and on and after the Exchange Date it
shall not conduct any business except in connection with its dissolution.
(d) Each Acquired Fund undertakes that if the Reorganization is consummated,
it will file an application pursuant to Section 8(f) of the 1940 Act for an
order declaring that such Acquired Fund has ceased to be a registered
investment company.
(e) New York Insured will file the N-14 Registration Statement with the
Securities and Exchange Commission (the "Commission") and will use its best
efforts to provide that the N-14 Registration Statement becomes effective as
promptly as practicable. Each Fund agrees to cooperate fully with the others,
and each will furnish to the others the information relating to itself to be
set forth in the N-14 Registration Statement as required by the 1933 Act, the
1934 Act, the 1940 Act, and the rules and regulations thereunder and the state
securities laws.
(f) New York Insured has no plan or intention to sell or otherwise dispose
of the Acquired Fund Investments, except for dispositions made in the ordinary
course of business.
(g) Each of the Funds agrees that by the Exchange Date all of its Federal
and other tax returns and reports required to be filed on or before such date
shall have been filed and all taxes shown as due on said returns either have
been paid or adequate liability reserves have been provided for the payment of
such taxes. In connection with this covenant, the Funds agree to cooperate
with each other in filing any tax return, amended return or claim for refund,
determining a liability for taxes or a right to a refund of taxes or
participating in or conducting any
II-16
<PAGE>
audit or other proceeding in respect of taxes. New York Insured agrees to
retain for a period of ten (10) years following the Exchange Date all returns,
schedules and work papers and all material records or other documents relating
to tax matters of the Acquired Funds for each of such Fund's taxable period
first ending after the Exchange Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential except
as otherwise may be necessary in connection with the filing of returns or
claims for refund or in conducting an audit or other proceeding. After the
Exchange Date, each of the Acquired Funds shall prepare, or cause its agents
to prepare, any Federal, state or local tax returns, including any Forms 1099,
required to be filed by such fund with respect to its final taxable year
ending with its complete liquidation and for any prior periods or taxable
years and further shall cause such tax returns and Forms 1099 to be duly filed
with the appropriate taxing authorities. Notwithstanding the aforementioned
provisions of this subsection, any expenses incurred by the Acquired Funds
(other than for payment of taxes) in connection with the preparation and
filing of said tax returns and Forms 1099 after the Exchange Date shall be
borne by each such Fund to the extent such expenses have been accrued by such
Fund in the ordinary course without regard to the Reorganization; any excess
expenses shall be borne by Fund Asset Management, L.P. ("FAM") at the time
such tax returns and Forms 1099 are prepared.
(h) The Funds each agree to mail to its respective stockholders of record
entitled to vote at the annual meeting of stockholders at which action is to
be considered regarding this Agreement, in sufficient time to comply with
requirements as to notice thereof, a combined proxy statement and prospectus
which complies in all material respects with the applicable provisions of
Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules
and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, New York Insured will
stay in existence and continue its business as a non-diversified, closed-end
management investment company registered under the 1940 Act.
9.Exchange Date.
(a) Delivery of the assets of the Acquired Funds to be transferred, together
with any other Acquired Fund Investments, and the shares of New York Insured
Common Stock, New York Insured Series C AMPS, New York Insured Series D AMPS
and New York Insured Series E AMPS to be issued as provided in this Agreement,
shall be made at the offices of Brown & Wood LLP, One World Trade Center, New
York, New York 10048, at 10:00 a.m. on the next full business day following
the Valuation Time, or at such other place, time and date agreed to by the
Funds, the date and time upon which such delivery is to take place being
referred to herein as the "Exchange Date." To the extent that any Acquired
Fund Investments, for any reason, are not transferable on the Exchange Date,
the applicable Acquired Fund shall cause such Acquired Fund Investments to be
transferred to New York Insured's account with The Bank of New York at the
earliest practicable date thereafter.
(b) Each of the Acquired Funds will deliver to New York Insured on the
Exchange Date confirmations or other adequate evidence as to the tax basis of
each of their respective Acquired Fund Investments delivered to New York
Insured hereunder, certified by Deloitte & Touche LLP (for New York Fund) and
by Ernst & Young LLP (for New York Insured II and New York Insured III).
(c) As soon as practicable after the close of business on the Exchange Date,
each of the Acquired Funds shall deliver to New York Insured a list of the
names and addresses of all of the stockholders of record of such Acquired Fund
on the Exchange Date and the number of shares of common stock and AMPS of such
Acquired Fund owned by each such stockholder, certified to the best of their
knowledge and belief by the applicable transfer agent for such Acquired Fund
or by its President.
II-17
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10.Conditions of the Acquired Funds.
The obligations of each Acquired Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of two-thirds of the
members of the Board of Directors of each of the Funds and by the
affirmative vote of (i) the holders of (a) a majority of the New York
Insured Common Stock and New York Insured AMPS, voting together as a single
class, and (b) a majority of the New York Insured AMPS, voting separately
as a class, in each case issued and outstanding and entitled to vote
thereon; (ii) the holders of (a) a majority of the New York Fund Common
Stock and New York Fund AMPS, voting together as a single class, and (b) a
majority of the New York Fund AMPS, voting separately as a class, in each
case issued and outstanding and entitled to vote thereon; (iii) the holders
of (a) a majority of the New York Insured II Common Stock and New York
Insured II AMPS, voting together as a single class, and (b) a majority of
the New York Insured II AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon; (iv) the holders of
(a) a majority of the New York Insured III Common Stock and New York
Insured III AMPS, voting together as a single class, and (b) a majority of
the New York Insured III AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon; and further that each
Fund shall have delivered to each other Fund a copy of the resolution
approving this Agreement adopted by such Fund's Board of Directors, and a
certificate setting forth the vote of such Fund's stockholders obtained at
its Annual Meeting, each certified by the Secretary of the appropriate
Fund.
(b) That each Acquired Fund shall have received from New York Insured and
from each other Acquired Fund a statement of assets, liabilities and
capital, with values determined as provided in Section 6 of this Agreement,
together with a schedule of such fund's investments, all as of the
Valuation Time, certified on the Fund's behalf by its President (or any
Vice President) and its Treasurer, and a certificate signed by the Fund's
President (or any Vice President) and its Treasurer, dated as of the
Exchange Date, certifying that as of the Valuation Time and as of the
Exchange Date there has been no material adverse change in the financial
position of the Fund since the date of such Fund's most recent Annual or
Semi-Annual Report as applicable, other than changes in its portfolio
securities since that date or changes in the market value of its portfolio
securities.
(c) That New York Insured shall have furnished to the Acquired Funds a
certificate signed by New York Insured's President (or any Vice President)
and its Treasurer, dated as of the Exchange Date, certifying that, as of
the Valuation Time and as of the Exchange Date all representations and
warranties of New York Insured made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of such
dates, and that New York Insured has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or
satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That the Acquired Funds shall have received an opinion or opinions of
Brown & Wood LLP, as counsel to the Funds, in form and substance
satisfactory to the Acquired Funds and dated the Exchange Date, to the
effect that (i) each of the Funds is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland; (ii) the shares of New York Insured Common Stock, New York
Insured Series C AMPS, New York Insured Series D AMPS and New York Insured
Series E AMPS to be issued pursuant to this Agreement are duly authorized
and, upon delivery, will be validly issued and outstanding and fully paid
and nonassessable by New York Insured, and no stockholder of New York
Insured has any preemptive right to subscription or purchase in respect
thereof (pursuant to the Articles of Incorporation or the by-laws of New
York Insured or the state law of Maryland, or to the best of such counsel's
knowledge, otherwise); (iii) this Agreement has been duly authorized,
executed and delivered by each of the Funds, and represents a valid and
binding contract, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws pertaining to the enforcement of creditors' rights
generally and court decisions with respect thereto;
II-18
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provided, such counsel shall express no opinion with respect to the
application of equitable principles in any proceeding, whether at law or in
equity; (iv) the execution and delivery of this Agreement does not, and the
consummation of the Reorganization will not, violate any material
provisions of Maryland law or the Articles of Incorporation, as amended,
the by-laws, as amended, or any agreement (known to such counsel) to which
any Fund is a party or by which any Fund is bound, except insofar as the
parties have agreed to amend such provision as a condition precedent to the
Reorganization; (v) each of the Acquired Funds has the power to sell,
assign, transfer and deliver the assets transferred by it hereunder and,
upon consummation of the Reorganization in accordance with the terms of
this Agreement, each of the Acquired Funds will have duly transferred such
assets and liabilities in accordance with this Agreement; (vi) to the best
of such counsel's knowledge, no consent, approval, authorization or order
of any United States federal court, Maryland state court or governmental
authority is required for the consummation by the Funds of the
Reorganization, except such as have been obtained under the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder and under Maryland law and such as may be required
under state securities laws; (vii) the N-14 Registration Statement has
become effective under the 1933 Act, no stop order suspending the
effectiveness of the N-14 Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and the N-14 Registration Statement, and
each amendment or supplement thereto, as of their respective effective
dates, appear on their face to be appropriately responsive in all material
respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act
and the published rules and regulations of the Commission thereunder;
(viii) the descriptions in the N-14 Registration Statement of statutes,
legal and governmental proceedings and contracts and other documents are
accurate and fairly present the information required to be shown; (ix) the
information in the Joint Proxy Statement and Prospectus under "Comparison
of the Funds--Tax Rules Applicable to the Funds and their Stockholders" and
"Agreement and Plan of Reorganization--Tax Consequences of the
Reorganization," to the extent that it constitutes matters of law,
summaries of legal matters or legal conclusions, has been reviewed by such
counsel and is correct in all material respects as of the date of the Joint
Proxy Statement and Prospectus; (x) such counsel does not know of any
statutes, legal or governmental proceedings or contracts or other documents
related to the Reorganization of a character required to be described in
the N-14 Registration Statement which are not described therein or, if
required to be filed, filed as required; (xi) no Fund, to the knowledge of
such counsel, is required to qualify to do business as a foreign
corporation in any jurisdiction except as may be required by state
securities laws, and except where each has so qualified or the failure so
to qualify would not have a material adverse effect on such Fund or its
respective stockholders; (xii) such counsel does not have actual knowledge
of any material suit, action or legal or administrative proceeding pending
or threatened against any of the Funds, the unfavorable outcome of which
would materially and adversely affect such Fund; (xiii) all corporate
actions required to be taken by the Funds to authorize this Agreement and
to effect the Reorganization have been duly authorized by all necessary
corporate actions on the part of such Fund; and (xiv) such opinion is
solely for the benefit of the Funds and their Directors and officers. Such
opinion also shall state that (x) while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in
the N-14 Registration Statement or any amendment or supplement thereto,
nothing has come to their attention that would lead them to believe that,
on the respective effective dates of the N-14 Registration Statement and
any amendment or supplement thereto, (1) the N-14 Registration Statement or
any amendment or supplement thereto contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2)
the prospectus included in the N-14 Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (y) such counsel does not
express any opinion or belief as to the financial statements or other
financial or statistical data relating to any Fund contained or
incorporated by reference in the N-14 Registration Statement. In giving the
opinion set forth above, Brown & Wood LLP may state that it is relying on
certificates of officers of a Fund with regard to matters of fact and
certain certificates and written statements of governmental officials with
respect to the good standing of a Fund.
II-19
<PAGE>
(f) That each Acquired Fund shall have received either (a) a private
letter ruling from the Internal Revenue Service or (b) an opinion of Brown
& Wood LLP, to the effect that for Federal income tax purposes (i) the
transfer by such Acquired Fund of substantially all of its assets to New
York Insured in exchange solely for shares of New York Insured Common Stock
and New York Insured Series C AMPS, New York Insured Series D AMPS or New
York Insured Series E AMPS as provided in this Agreement will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
the respective Funds will each be deemed to be a "party" to a
reorganization within the meaning of Section 368(b); (ii) in accordance
with Section 361(a) of the Code, no gain or loss will be recognized to an
Acquired Fund as a result of the asset transfer solely in exchange for
shares of New York Insured Common Stock and New York Insured Series C AMPS,
New York Insured Series D AMPS or New York Insured Series E AMPS, as the
case may be, or on the distribution of the New York Insured stock to
stockholders of the respective Acquired Fund under Section 361(c)(1); (iii)
under Section 1032 of the Code, no gain or loss will be recognized to New
York Insured on the receipt of assets of an Acquired Fund in exchange for
its shares; (iv) in accordance with Section 354(a)(1) of the Code, no gain
or loss will be recognized to the stockholders of an Acquired Fund on the
receipt of shares of New York Insured in exchange for their shares of the
Acquired Fund (except to the extent that common stockholders receive cash
representing an interest in fractional shares of New York Insured Common
Stock in the Reorganization); (v) in accordance with Section 362(b) of the
Code, the tax basis of an Acquired Fund's assets in the hands of New York
Insured will be the same as the tax basis of such assets in the hands of
the Acquired Fund immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code,
immediately after the Reorganization, the tax basis of the shares of New
York Insured received by the stockholders of an Acquired Fund in the
Reorganization will be equal, in the aggregate, to the tax basis of the
shares of the Acquired Fund surrendered in exchange; (vii) in accordance
with Section 1223 of the Code, a stockholder's holding period for the
shares of New York Insured will be determined by including the period for
which such stockholder held the Acquired Fund shares exchanged therefor,
provided, that such shares were held as a capital asset; (viii) in
accordance with Section 1223 of the Code, New York Insured's holding period
with respect to an Acquired Fund's assets transferred will include the
period for which such assets were held by the Acquired Fund; (ix) the
payment of cash to common stockholders of an Acquired Fund in lieu of
fractional shares of New York Insured Common Stock will be treated as
though the fractional shares were distributed as part of the Reorganization
and then redeemed, with the result that such stockholders will have short-
or long-term capital gain or loss to the extent that the cash distribution
differs from the stockholder's basis allocable to the New York Insured
fractional shares; and (x) the taxable year of each Acquired Fund will end
on the effective date of the Reorganization and pursuant to Section 381(a)
of the Code and regulations thereunder, New York Insured will succeed to
and take into account certain tax attributes of each Acquired Fund, such as
earnings and profits, capital loss carryovers and method of accounting.
(g) That all proceedings taken by each of the Funds and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to the others.
(h) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of New York Insured, be
contemplated by the Commission.
(i) That Acquired Funds shall have received from Deloitte & Touche LLP a
letter dated as of the effective date of the N-14 Registration Statement
and a similar letter dated within five days prior to the Exchange Date, in
form and substance satisfactory to them, to the effect that (i) they are
independent public accountants with respect to New York Insured within the
meaning of the 1933 Act and the applicable published rules and regulations
thereunder; (ii) in their opinion, the financial statements and
supplementary information of New York Insured included or incorporated by
reference in the N-14 Registration Statement and reported on by them comply
as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder; (iii) on the basis of limited procedures agreed upon by the
Funds and described in such letter (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of any
unaudited interim financial statements and unaudited supplementary
information of New York Insured included in the N-14
II-20
<PAGE>
Registration Statement, and inquiries of certain officials of New York
Insured responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that (a) such unaudited
financial statements and related unaudited supplementary information do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder, (b) such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is
not fairly stated in all material respects in relation to the unaudited
financial statements taken as a whole; and (iv) on the basis of limited
procedures agreed upon by the Funds and described in such letter (but not
an examination in accordance with generally accepted auditing standards),
the information relating to New York Insured appearing in the N-14
Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of New York Insured or from schedules prepared by officials of New York
Insured having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations
made therefrom.
(j) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of New York Insured or
would prohibit the Reorganization.
(k) That the Acquired Funds shall have received from the Commission such
orders or interpretations as Brown & Wood LLP, as their counsel, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall
be in full force and effect.
11.New York Insured Conditions.
The obligations of New York Insured hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Directors and the stockholders of
each of the Funds as set forth in Section 10(a); and that each of the
Acquired Funds shall have delivered to New York Insured a copy of the
resolution approving this Agreement adopted by such Acquired Fund's Board
of Directors, and a certificate setting forth the vote of the stockholders
of such Acquired Fund obtained, each certified by its Secretary.
(b) That each Acquired Fund shall have furnished to New York Insured a
statement of its assets, liabilities and capital, with values determined as
provided in Section 6 of this Agreement, together with a schedule of
investments with their respective dates of acquisition and tax costs, all
as of the Valuation Time, certified on such Fund's behalf by its President
(or any Vice President) and its Treasurer, and a certificate signed by such
Fund's President (or any Vice President) and its Treasurer, dated as of the
Exchange Date, certifying that as of the Valuation Time and as of the
Exchange Date there has been no material adverse change in the financial
position of the Acquired Fund since the date of such Fund's most recent
Annual Report or Semi-Annual Report, as applicable, other than changes in
the Acquired Fund Investments since that date or changes in the market
value of the Acquired Fund Investments.
(c) That each Acquired Fund shall have furnished to New York Insured a
certificate signed by such Fund's President (or any Vice President) and its
Treasurer, dated the Exchange Date, certifying that as of the Valuation
Time and as of the Exchange Date all representations and warranties of the
Acquired Fund made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of such dates and the
Acquired Fund has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied at or prior to such
dates.
II-21
<PAGE>
(d) That each Acquired Fund shall have delivered to New York Insured a
letter from Deloitte & Touche LLP (for New York Fund) or Ernst & Young LLP
(for New York Insured II and New York Insured III), dated the Exchange
Date, stating that such firm has performed a limited review of the Federal,
state and local income tax returns of the Acquired Fund for the period
ended (which returns originally were prepared and filed by the Acquired
Fund), and that based on such limited review, nothing came to their
attention which caused them to believe that such returns did not properly
reflect, in all material respects, the Federal, state and local income
taxes of the Acquired Fund for the period covered thereby; and that for the
period from , to and including the Exchange Date and for any taxable
year of the Acquired Fund ending upon the liquidation of that Acquired
Fund, such firm has performed a limited review to ascertain the amount of
applicable Federal, state and local taxes, and has determined that either
such amount has been paid or reserves have been established for payment of
such taxes, this review to be based on unaudited financial data; and that
based on such limited review, nothing has come to their attention which
caused them to believe that the taxes paid or reserves set aside for
payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from
, to and including the Exchange Date and
for any taxable year of that Acquired Fund, ending upon the liquidation of
such fund or that such fund would not qualify as a regulated investment
company for Federal income tax purposes for the tax years in question.
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That New York Insured shall have received an opinion of Brown & Wood
LLP, as counsel to the Funds, in form and substance satisfactory to New
York Insured and dated the Exchange Date, with respect to the matters
specified in Section 10(e) of this Agreement and such other matters as New
York Insured reasonably may deem necessary or desirable.
(g) That New York Insured shall have received a private letter ruling
from the Internal Revenue Service or an opinion of Brown & Wood LLP with
respect to the matters specified in Section 10(f) of this Agreement.
(h) That New York Insured shall have received from Deloitte & Touche LLP
(for New York Fund) or Ernst & Young LLP (for New York Insured II and New
York Insured III) a letter dated as of the effective date of the N-14
Registration Statement and a similar letter dated within five days prior to
the Exchange Date, in form and substance satisfactory to New York Insured,
to the effect that (i) they are independent public accountants with respect
to such fund within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder; (ii) in their opinion, the
financial statements and supplementary information of such fund included or
incorporated by reference in the N-14 Registration Statement and reported
on by them comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the published rules and
regulations thereunder; (iii) on the basis of limited procedures agreed
upon by the Funds and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of the Acquired Fund included in the N-14
Registration Statement, and inquiries of certain officials of the Acquired
Fund responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that (a) such unaudited
financial statements and related unaudited supplementary information do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder, (b) such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles,
applied on a basis substantially consistent with that of the audited
financial statements, or (c) such unaudited supplementary information is
not fairly stated in all material respects in relation to the unaudited
financial statements taken as a whole; and (iv) on the basis of limited
procedures agreed upon by the Funds and described in such letter (but not
an examination in accordance with generally accepted auditing standards),
the information relating to the Acquired Fund appearing in the N-14
Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars)
II-22
<PAGE>
(with the exception of performance comparisons, if any), if any, has been
obtained from the accounting records of the Acquired Fund or from schedules
prepared by officials of the Acquired Fund having responsibility for
financial and reporting matters and such information is in agreement with
such records, schedules or computations made therefrom.
(i) That the Acquired Fund Investments to be transferred to New York
Insured shall not include any assets or liabilities which New York Insured,
by reason of charter limitations or otherwise, may not properly acquire or
assume.
(j) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of any Acquired Fund, be
contemplated by the Commission.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of any Acquired Fund or
would prohibit the Reorganization.
(l) That New York Insured shall have received from the Commission such
orders or interpretations as Brown & Wood LLP, as counsel to New York
Insured, deems reasonably necessary or desirable under the 1933 Act and the
1940 Act in connection with the Reorganization, provided, that such counsel
shall have requested such orders as promptly as practicable, and all such
orders shall be in full force and effect.
(m) That all proceedings taken by each Acquired Fund and its respective
counsel in connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to New York Insured.
(n) That prior to the Exchange Date, each of the Acquired Funds shall
have declared a dividend or dividends which, together with all such
previous dividends, shall have the effect of distributing to its
stockholders all of its net investment company taxable income for the
period to and including the Exchange Date, if any (computed without regard
to any deduction for dividends paid), and all of its net capital gain, if
any, realized to and including the Exchange Date. In this regard, the last
dividend period for the New York Fund AMPS, the New York Insured II AMPS
and the New York Insured III AMPS may be shorter than the dividend period
for such AMPS determined as set forth in the applicable Articles
Supplementary.
12.Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the stockholders of the Funds)
prior to the Exchange Date, or the Exchange Date may be postponed, (i) by
mutual consent of the Boards of Directors of the Funds, (ii) by the Board of
Directors of any Acquired Fund if any condition of such Acquired Fund's
obligations set forth in Section 10 of this Agreement has not been fulfilled
or waived by such Board; or (iii) by the Board of Directors of New York
Insured if any condition of New York Insured's obligations set forth in
Section 11 of this Agreement have not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by August , 2000, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of
Directors of the Funds.
(c) In the event of termination of this Agreement pursuant to the provisions
hereof, the same shall become void and have no further effect, and there shall
not be any liability on the part of any Fund or persons who are their
directors, trustees, officers, agents or stockholders in respect of this
Agreement.
(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Directors of any Fund
(whichever is entitled to the benefit thereof), if, in the judgment of such
Board after consultation with its counsel, such action or waiver will not have
a material adverse effect
II-23
<PAGE>
on the benefits intended under this Agreement to the stockholders of their
respective fund, on behalf of which such action is taken. In addition, the
Boards of Directors of the Funds have delegated to FAM the ability to make
non-material changes to the transaction if it deems it to be in the best
interests of the Funds to do so.
(e) The respective representations and warranties contained in Sections 1,
2, 3 and 4 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and no Fund nor any of its officers,
directors, trustees, agents or stockholders shall have any liability with
respect to such representations or warranties after the Exchange Date. This
provision shall not protect any officer, director, trustee, agent or
stockholder of any Fund against any liability to the entity for which that
officer, director, trustee, agent or stockholder so acts or to its
stockholders, to which that officer, director, trustee, agent or stockholder
otherwise would be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this Agreement
shall be issued prior to the Exchange Date and shall impose any terms or
conditions which are determined by action of the Boards of Directors of the
Funds to be acceptable, such terms and conditions shall be binding as if a
part of this Agreement without further vote or approval of the stockholders of
the Funds unless such terms and conditions shall result in a change in the
method of computing the number of shares of New York Insured Common Stock, New
York Insured Series C AMPS, New York Insured Series D AMPS and New York
Insured Series E AMPS to be issued to the Acquired Funds, as applicable, in
which event, unless such terms and conditions shall have been included in the
proxy solicitation materials furnished to the stockholders of the Funds prior
to the meetings at which the Reorganization shall have been approved, this
Agreement shall not be consummated and shall terminate unless the Funds
promptly shall call a special meeting of stockholders at which such conditions
so imposed shall be submitted for approval.
13.Indemnification.
(a) Each Acquired Fund hereby severally agrees to indemnify and hold New
York Insured harmless from all loss, liability and expenses (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which New York Insured may incur or sustain by reason of the fact that
(i) New York Insured shall be required to pay any corporate obligation of such
Acquired Fund, whether consisting of tax deficiencies or otherwise, based upon
a claim or claims against such Acquired Fund which were omitted or not fairly
reflected in the financial statements to be delivered to New York Insured in
connection with the Reorganization; (ii) any representations or warranties
made by such Acquired Fund in this Agreement should prove to be false or
erroneous in any material respect; (iii) any covenant of such Acquired Fund
has been breached in any material respect; or (iv) any claim is made alleging
that (a) the N-14 Registration Statement included any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein attributable to such Fund
not misleading or (b) the Joint Proxy Statement and Prospectus delivered to
the stockholders of the Funds and forming a part of the N-14 Registration
Statement included any untrue statement of a material fact or omitted to state
any material fact necessary to make the statements therein attributable to
such Fund, in the light of the circumstances under which they were made, not
misleading, except with respect to (iv)(a) and (b) herein insofar as such
claim is based on written information furnished to the Acquired Funds by New
York Insured.
(b) New York Insured hereby agrees to indemnify and hold each Acquired Fund
harmless from all loss, liability and expenses (including reasonable counsel
fees and expenses in connection with the contest of any claim) which such
Acquired Fund may incur or sustain by reason of the fact that (i) any
representations or warranties made by New York Insured in this Agreement
should prove false or erroneous in any material respect, (ii) any covenant of
New York Insured has been breached in any material respect, or (iii) any claim
is made alleging that (a) the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, not misleading
or (b) the Joint Proxy Statement and Prospectus delivered to stockholders of
the Funds and forming a part of the
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<PAGE>
N-14 Registration Statement included any untrue statement of a material fact
or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except with respect to (iii)(a) and (b) herein insofar as such
claim is based on written information furnished to New York Insured by the
Acquired Fund seeking indemnification.
(c) In the event that any claim is made against New York Insured in respect
of which indemnity may be sought by New York Insured from an Acquired Fund
under Section 13(a) of this Agreement, or in the event that any claim is made
against an Acquired Fund in respect of which indemnity may be sought by an
Acquired Fund from New York Insured under Section 13(b) of this Agreement,
then the party seeking indemnification (the "Indemnified Party"), with
reasonable promptness and before payment of such claim, shall give written
notice of such claim to the other party (the "Indemnifying Party"). If no
objection as to the validity of the claim is made in writing to the
Indemnified Party by the Indemnifying Party within thirty (30) days after the
giving of notice hereunder, then the Indemnified Party may pay such claim and
shall be entitled to reimbursement therefor, pursuant to this Agreement. If,
prior to the termination of such thirty-day period, objection in writing as to
the validity of such claim is made to the Indemnified Party, the Indemnified
Party shall withhold payment thereof until the validity of such claim is
established (i) to the satisfaction of the Indemnifying Party, or (ii) by a
final determination of a court of competent jurisdiction, whereupon the
Indemnified Party may pay such claim and shall be entitled to reimbursement
thereof, pursuant to this Agreement, or (iii) with respect to any tax claims,
within seven (7) calendar days following the earlier of (A) an agreement
between New York Insured and the Acquired Fund seeking indemnification that an
indemnity amount is payable, (B) an assessment of a tax by a taxing authority,
or (C) a "determination" as defined in Section 1313(a) of the Code. For
purposes of this Section 13, the term "assessment" shall have the same meaning
as used in Chapter 63 of the Code and Treasury Regulations thereunder, or any
comparable provision under the laws of the appropriate taxing authority. In
the event of any objection by the Indemnifying Party, the Indemnifying Party
promptly shall investigate the claim, and if it is not satisfied with the
validity thereof, the Indemnifying Party shall conduct the defense against
such claim. All costs and expenses incurred by the Indemnifying Party in
connection with such investigation and defense of such claim shall be borne by
it. These indemnification provisions are in addition to, and not in limitation
of, any other rights the parties may have under applicable law.
14.Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization pursuant to
Rule 145(c), New York Insured will cause to be affixed upon the certificate(s)
issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO MUNIHOLDINGS NEW YORK INSURED FUND, INC. (OR ITS STATUTORY
SUCCESSOR), OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF
1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
FUND, SUCH REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to New York
Insured's transfer agent with respect to such shares. Each Acquired Fund will
provide New York Insured on the Exchange Date with the name of any stockholder
of an Acquired Fund who is to the knowledge of such Acquired Fund an affiliate
of that Acquired Fund on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
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(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be made by hand delivery, prepaid
certified mail or overnight service, addressed to any Fund, at 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, Attn: Terry K. Glenn, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, and Articles
Supplementary of each Fund are on file with the Maryland Department and notice
is hereby given that this instrument is executed on behalf of the Directors of
each Fund.
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be deemed to be an original but all such
counterparts together shall constitute but one instrument.
Attest: Muniholdings New York Insured Fund,
Inc.
_____________________________________
Attest: By: _________________________________
Muniholdings New York Fund, Inc.
_____________________________________ By: _________________________________
Attest: Muniholdings New York Insured Fund
II, Inc.
_____________________________________
Attest: By: _________________________________
Muniholdings New York Insured Fund
III, Inc.
_____________________________________
By: _________________________________
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EXHIBIT III
ECONOMIC AND OTHER CONDITIONS IN NEW YORK
The following information is a brief summary of factors affecting the
economy of New York City (the "City") or New York State (the "State" or "New
York"). Other factors will affect issuers. The summary is based primarily upon
one or more of the most recent publicly available offering statements relating
to debt offerings of State issuers, however, it has not been updated. The Fund
has not independently verified this information.
The State, some of its agencies, instrumentalities and public authorities
and certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for
or the market value of the New York Municipal Bonds in which the Fund invests.
New York City
General. More than any other municipality, the fiscal health of the City has
a significant effect on the fiscal health of the State. The City's current
financial plan assumes that, after strong growth in 1998-1999, moderate
economic growth will exist through calendar year 2003, with moderate job
growth and wage increases.
For each of the 1981 through 1998 fiscal years, the City had an operating
surplus, before discretionary and other transfers, and achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"), after discretionary and other transfers. The City has
been required to close substantial gaps between forecast revenues and forecast
expenditures in order to maintain balanced operating results. There can be no
assurance that the City will continue to maintain balanced operating results
as required by State law without tax or other revenue increases or reductions
in City services or entitlement programs, which could adversely affect the
City's economic base.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's financial plan, including the City's current financial plan for the
2000 through 2003 fiscal years (the "2000-2003 Financial Plan", "Financial
Plan" or "City Financial Plan"). The City's projections set forth in the City
Financial Plan are based on various assumptions and contingencies that are
uncertain and may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
City's Financing Program. Implementation of the City Financial Plan is also
dependent upon the City's ability to market its securities successfully. The
City's program for financing capital projects for fiscal years 1999 through
2003 contemplates the issuance of $10.091 billion of general obligation bonds,
$5.340 billion of bonds to be issued by the New York City Transitional Finance
Authority (the "Transitional Finance Authority") and $2.8 billion of bonds to
be issued by the Tobacco Settlement Asset Securitization Corporation ("TSASC")
and paid from revenues received pursuant to a settlement of litigation with
the four leading cigarette companies. The Transitional Finance Authority and
TSASC were created to assist the City in financing its capital program while
keeping City indebtedness within the forecast level of the constitutional
restrictions on the amount of debt the City is authorized to incur.
Without additional borrowing capacity, under current projections the City
would reach the limit of its capacity to enter into new contractual
commitments in fiscal year 2000. If TSASC is not able to issue $2.8 billion of
bonds, the City will need to find another source of financing or substantially
curtail or halt its capital program. City officials have indicated that,
should their efforts to securitize a portion of City tobacco settlement
proceeds fail or not be accomplished in a timely manner, the City will request
that the State increase the borrowing authority of the Transitional Finance
Authority. Even with the ability to issue $2.8 billion in bonds by TSASC, the
City expects that it will be required to postpone a substantial part of its
capital program from the latter part of fiscal year 2001 to fiscal year 2002.
In addition, the City issues revenue notes and tax anticipation notes to
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finance its seasonal working capital requirements (See "Seasonal Financing
Requirements" within). The success of projected public sales of City bonds and
notes, New York City Municipal Water Finance Authority (the "Water Authority")
bonds and Transitional Finance Authority and other bonds will be subject to
prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation bonds and
notes, as well as Water Authority, Transitional Finance Authority and TSASC
bonds.
1998 Fiscal Year. For the 1998 fiscal year, the City had an operating
surplus, before discretionary and other transfers, and achieved balanced
operating results, after discretionary and other transfers, in accordance with
GAAP. The 1998 fiscal year is the eighteenth year that the City has achieved
an operating surplus, before discretionary and other transfers, and balanced
operating results, after discretionary and other transfers.
1999 Modification and 2000-2003 Financial Plan. The most recent quarterly
modification to the City's financial plan for the 1999 fiscal year (July 1,
1998-June 30, 1999) submitted to the New York State Financial Control Board
(the "Control Board") on June 14, 1999 (the "1999 Modification"), projects a
balanced budget in accordance with GAAP for the 1999 fiscal year.
On June 14, 1999, the City released the Financial Plan for the 2000 through
2003 fiscal years, which relates to the City and certain entities which
receive funds from the City. The Financial Plan projects revenues and
expenditures for the 2000 fiscal year balanced in accordance with GAAP, and
project gaps of $1.8 billion, $1.9 billion and $1.8 billion for fiscal years
2001 through 2003, respectively.
The 1999 Modification and the 2000-2003 Financial Plan includes a proposed
discretionary transfer in the 1999 fiscal year of $2.6 billion to pay debt
service due in fiscal year 2000, for budget stabilization purposes, a proposed
discretionary transfer in fiscal year 2000 to pay debt service due in fiscal
year 2001 totaling $429 million, and a proposed discretionary transfer in
fiscal year 2001 to pay debt service due in fiscal year 2002 totaling $345
million.
In addition, the Financial Plan sets forth gap-closing actions to eliminate
a previously projected gap for the 2000 fiscal year and to reduce projected
gaps for fiscal years 2001 through 2003 which include additional (i) City
agency actions, (ii) Federal revenue sharing and Medicaid aid and (iii) State
actions including Medicaid cost containment initiatives. The Financial Plan
also reflects a tax reduction program, which includes the elimination of the
City's non-residents earning tax, the proposed extension of current tax
reductions for owners of cooperative and condominium apartments and a proposed
income tax credit for low income wage earners.
Assumptions. The 2000-2003 Financial Plan is based on numerous assumptions,
including the condition of the City's and the region's economies and modest
employment growth and the concomitant receipt of economically sensitive tax
revenues in the amounts projected. The 2000-2003 Financial Plan is subject to
various other uncertainties and contingencies relating to, among other
factors, the extent, if any, to which wage increases for City employees exceed
the annual wage costs assumed for the 1999 through 2003 fiscal years;
continuation of projected interest earnings assumptions for pension fund
assets and current assumptions with respect to wages for City employees
affecting the City's required pension fund contributions; the willingness and
ability of the State to provide the aid contemplated by the Financial Plan and
to take various other actions to assist the City; the ability of Health and
Hospitals Corporation (the "HHC"), the Board of Education (the "BOE") and
other such agencies to maintain balanced budgets; the willingness of the
Federal government to provide the amount of Federal aid contemplated in the
Financial Plan; the impact on City revenues and expenditures of Federal and
State welfare reform and any future legislation affecting Medicare or other
entitlement programs; adoption of the City's budgets by the City Council in
substantially the forms submitted by the Mayor; the ability of the City to
implement cost reduction initiatives, and the success with which the City
controls expenditures; the impact of conditions in the real estate market on
real estate tax revenues; and unanticipated expenditures that may be incurred
as a result of the need to maintain the City's infrastructure. Certain of
these assumptions have been questioned by the City Comptroller and other
public officials.
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The Financial Plan assumes: (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which
is scheduled to expire on December 31, 1999, and which is projected to provide
revenue of $572 million, $585 million, $600 million and $638 million in the
2000 through 2003 fiscal years, respectively; (ii) collection of projected
rent payments for the City's airports, totaling $365 million, $185 million and
$155 million in the 2001 through 2003 fiscal years, respectively, a
substantial portion of which may depend on the successful completion of
negotiations with The Port Authority of New York and New Jersey (the "Port
Authority") or the enforcement of the City's rights under the existing leases
through pending legal action; (iii) State and Federal approval of the State
and Federal gap-closing actions proposed by the City in the Financial Plan;
and (iv) receipt of the tobacco settlement funds providing revenues or
expenditure offsets in annual amounts ranging between $250 million and $300
million. In addition, the economic and financial condition of the City may be
affected by various financial, social, economic and political factors which
could have a material effect on the City.
Municipal Unions. The Financial Plan reflects the costs of the settlements
and arbitration awards with certain municipal unions and other bargaining
units, which together represent approximately 98% of the City's workforce, and
assumes that the City will reach agreement with its remaining municipal unions
under terms which are generally consistent with such settlements and
arbitration awards. These contracts are approximately five years in length and
have a total cumulative net increase of 13%. Assuming the City reaches similar
settlements with its remaining municipal unions, the cost of all settlements
for all City-funded employees would total $1.2 billion in the 1999 fiscal year
and exceed $2 billion thereafter. The Financial Plan provides no additional
wage increases for City employees after their contracts expire in fiscal years
2000 and 2001.
Intergovernmental Aid. The City depends on the State for aid both to enable
the City to balance its budget and to meet its cash requirements. There can be
no assurance that there will not be reductions in State aid to the City from
amounts projected; that State budgets will be adopted by the April 1 statutory
deadline, or interim appropriations enacted; or that any such reductions or
delays will not have adverse effects on the City's cash flow or expenditures.
In addition, the Federal budget negotiation process could result in reductions
or delays in the receipt of Federal grants which could have additional adverse
effects on the City's cash flow or revenues.
Year 2000 Computer Matters. The year 2000 presents potential operational
problems for computerized data files and computer programs which may recognize
the year 2000 as the year 1900, resulting in possible system failures or
miscalculations. In November 1996, the City's Year 2000 Project Office was
established to develop a project methodology, coordinate the efforts of City
agencies, review plans and oversee implementation of year 2000 projects. At
that time, the City also evaluated the capabilities of the City's Integrated
Financial Management System and Capital Projects Information System, which are
the City's central accounting, budgeting and payroll systems, identified the
potential impact of the year 2000 on these systems, and developed a plan to
replace these systems with a new system which is expected to be year 2000
compliant prior to December 31, 1999. The City has also performed an
assessment of its other mission-critical and high priority computer systems in
connection with making them year 2000 compliant, and the City's agencies have
developed and begun to implement both strategic and operational plans for non-
compliant application systems. In addition, the City Comptroller is conducting
audits of the progress of City agencies in achieving year 2000 compliance.
While these efforts may involve additional costs beyond those assumed in the
Financial Plan, the City believes, based on currently available information,
that such additional costs will not be material.
The Mayor's Office of Operations has stated that work has been completed,
and all or part of the necessary testing has been performed, on approximately
69% (current as of June 18, 1999) of the mission-critical and high priority
systems of Mayoral agencies. The City's computer systems may not all be year
2000 compliant in a timely manner and there could be an adverse impact on City
operations or revenues as a result. The City is in the process of developing
contingency plans for all mission-critical and high priority systems of
Mayoral agencies, if such systems are not year 2000 compliant by pre-
determined dates. The City is also in the process of contacting its
significant third party vendors regarding the status of their compliance. Such
compliance is not within the City's control, and therefore the City cannot
assure that there will not be any adverse effects on the City resulting from
any failure of these third parties.
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Certain Reports. The City's financial plans have been the subject of
extensive public comment and criticism. From time to time, the Control Board
staff, the Office of the State Deputy Comptroller (the "OSDC"), the City
Comptroller, the City's Independent Budget Office (the "IBO") and others issue
reports and make public statements regarding the City's financial condition,
commenting on, among other matters, the City's financial plans, projected
revenues and expenditures and actions by the City to eliminate projected
operating deficits. Some of these reports and statements have warned that the
City may have underestimated certain expenditures and overestimated certain
revenues and have suggested that the City may not have adequately provided for
future contingencies. Certain of these reports have analyzed the City's future
economic and social conditions and have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of
its expenditure increases and to provide necessary services.
On May 24, 1999, the City Comptroller issued a report on the City's
financial plan as previously updated in April 1999 (the "April Financial
Plan"). With respect to the 1999 fiscal year, the report identified a possible
surplus of $94 million, after $2.1 billion of discretionary transfers and
subsidy payments assumed in the April Financial Plan, due to the possibility
of higher than forecasted tax revenues. In addition, taking into account the
risks and additional resources identified in the report and the budget gaps
projected in the April Financial Plan, the report projected budget gaps of
between $1.8 billion and $3.0 billion, $1.8 billion and $3.1 billion, and $2.0
billion and $3.6 billion in fiscal years 2001 through 2003, respectively.
With respect to fiscal years 2000 through 2003, the report identified
baseline risks of between $698 million and $873 million, $1.0 billion and $2.2
billion, $978 million and $2.2 billion, and $1.1 billion and $2.7 billion,
respectively, depending upon whether the State approves the extension of the
14% personal income tax surcharge and whether the City incurs additional labor
costs as a result of the expiration of labor contracts starting in fiscal year
2001 which, if settled at the current forecast level of inflation, would
result in additional costs totaling $345 million in fiscal year 2001, $713
million in fiscal year 2002 and $1.1 billion in fiscal year 2003. Additional
risks identified in the report for fiscal years 2000 through 2003 include the
revenues from the non-residents earnings tax, which the State Legislature has
voted to repeal, at a potential cost to the City of between $360 million and
$398 million annually starting in fiscal year 2000; assumed payments from the
Port Authority relating to the City's claim for back rentals, which are the
subject of arbitration, State and Federal gap-closing actions proposed in the
April Financial Plan; possible increased overtime expenditures, the sale of
the New York City Coliseum in fiscal year 2001; and the write-down of
outstanding education aid receivables of approximately $100 million in each of
fiscal years 2002 and 2003. The report noted that these risks may be offset by
additional resources of approximately $900 million in each of fiscal years
2000 through 2002 and approximately $800 million in fiscal year 2003. The
report further noted that expenditure growth continued to exceed revenue
growth, and that deficits could increase if the economy deteriorates. In
addition, the report noted that HHC faces a number of uncertainties that may
have a negative impact on its long-term viability, including proposed State
and Federal reductions to both Medicaid and Medicare and a significant decline
in patient utilization. The decline in utilization has been primarily
reflected in Medicaid revenue which accounts for approximately 50% of HHC's
total revenues, and which has been adversely affected by a smaller welfare
population, local welfare cost containment initiatives and greater competition
for Medicaid funds among area hospitals. The report also indicated that a
possible negotiated settlement of a class action, filed on behalf of
approximately 63,000 persons challenging the Department of Corrections policy
of strip searching detainees arrested for non-felony offenses, may expose the
City to substantial costs from the settlement of litigation.
On August 25, 1998, the City Comptroller issued a report reviewing the
current condition of the City's major physical assets and the capital
expenditures required to bring them to a state of good repair. The report's
findings relate only to current infrastructure and do not address future
capacity or technology needs. The report estimated that the expenditure of
approximately $91.83 billion would be required over the next decade to bring
the City's infrastructure to a systematic state of good repair and address new
capital needs already identified. The report stated that the City's current
Ten-Year Capital Strategy, together with funding received from other sources,
is projected to provide approximately $52.08 billion. The report noted that
the City's ability to meet all capital obligations is limited by law, as well
as funding capacity, and that the issue for the City is how best to set
priorities and manage limited resources.
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On May 20, 1999, the staff of the OSDC issued a report on the City's
Executive Budget for fiscal year 2000. The report notes that tax revenues are
likely to be higher than forecast by the City for fiscal years 1999 and 2000
by a total of $275 million, which may be needed to offset potential budget
risks, such as a possible delay in the receipt of the proceeds from the
tobacco settlement and shortfalls in Federal and State gap-closing aid assumed
in the April Financial Plan. With respect to the subsequent fiscal years in
the April Financial Plan, the report noted that, while the budget gaps have
been reduced to about $1.7 billion annually, they make no provision for wage
increases after the expiration of current contracts which, at the projected
rate of inflation, would increase costs by more than $1 billion by fiscal year
2003.
In addition, the report noted that it is anticipated that an independent
actuarial consulting firm reviewing the assumptions and methodologies to
compute City pension contributions will issue its report and will recommend
changes, such as a reduction in the pension fund investment earnings
assumption. These changes, in addition to those that the City Actuary may
recommend, could cost in excess of $500 million annually. In addition, the
report noted that legislation is under consideration that would increase
retirement benefits for certain City employees. Finally, the report noted that
the City remains vulnerable to an economic downturn which could result in a
significant shortfall in projected non-property tax revenues and higher
pension fund contributions and public assistance costs.
On May 27, 1999, the staff of the Control Board issued a report on the April
Financial Plan. The report noted that the City will end the 1999 fiscal year
with a substantial surplus and that the budget proposed by the Mayor for
fiscal year 2000 also appears to be balanced. However, the report noted that
the lack of a State budget left uncertainties as to the amount of
intergovernmental aid which will be available to the City in fiscal year 2000,
and that the proposed elimination by the State of the City's non-residents
earnings tax will require the City to make appropriate adjustments to its
revenue and expenditure forecasts. The report further noted that large gaps
still exist in subsequent fiscal years of the April Financial Plan, even
before accounting for known risks such as the impact of future collective
bargaining negotiations. Finally, the report noted that the City's business
and personal income taxes are particularly susceptible to the vagaries of the
financial markets and, if the economy falters, the City will likely experience
a decline in revenues and an increase in social service costs which will
increase the out-year gaps in the April Financial Plan.
On May 14, 1999, the IBO released a report providing its analysis of the
April Financial Plan. The report estimated a potential surplus of $356 million
in fiscal year 2000 and potential gaps of $2.3 billion, $3.0 billion and $3.1
billion for fiscal years 2001 through 2003, respectively, which reflect, among
other things, salary increases for City employees totaling $232 million, $607
million and $1.0 billion in fiscal years 2001 through 2003, respectively,
which are not included in the April Financial Plan. Uncertainties identified
in the report include Federal and State gap-closing actions assumed in the
April Financial Plan relating to Medicaid assistance or cost containment,
State tort reform legislation and State funding for low income uninsured
disabled children. The report noted that, while the strength of the local
economy is helping the City solve many of its near term budget problems,
persistently large projected out-year gaps remain a major concern for the
City, and even a modest slackening of the growth forecast for the next four
years could increase projected budget gaps.
Seasonal Financing Requirements. The City since 1981 has fully satisfied its
seasonal financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. The City issued $500 million
of short-term obligations in the 1999 fiscal year to finance the City's cash
flow needs for the 1999 fiscal year. The City issued $1.075 billion in short-
term obligations in fiscal year 1998 to finance the City's projected cash flow
needs for the 1998 fiscal year. The City issued $2.4 billion of short-term
obligations in fiscal year 1997. Seasonal financing requirements for the 1996
fiscal year increased to $2.4 billion from $2.2 billion and $1.75 billion in
the 1995 and 1994 fiscal years, respectively. The delay in the adoption of the
State's budget in certain past fiscal years has required the City to issue
short-term notes in amounts exceeding those expected early in such fiscal
years.
Ratings. As of June 18, 1999, Moody's rated the City's outstanding general
obligation bonds A3, Standard & Poor's rated such bonds A- and Fitch rated
such bonds A. In July 1995, Standard & Poor's revised downward
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its ratings on outstanding general obligation bonds of the City from A- to
BBB+. In July 1998, Standard & Poor's revised its rating of City bonds upward
to A-. Moody's rating of City bonds was revised in February 1998 to A3 from
Baa1. On March 8, 1999, Fitch revised its rating of City bonds upward to A.
Such ratings reflect only the view of Moody's, Standard & Poor's and Fitch,
from which an explanation of the significance of such ratings may be obtained.
There is no assurance that such ratings will continue for any given period of
time or that they will not be revised downward or withdrawn entirely. Any such
downward revision or withdrawal could have an adverse effect on the market
prices of City bonds.
Outstanding Indebtedness. As of March 31, 1999, the City and the Municipal
Assistance Corporation for the City of New York had respectively approximately
$26.8 and $3.2 billion of outstanding net long-term debt. As of May 19, 1999,
the Water Authority had approximately $8.7 billion aggregate principal amount
of outstanding bonds, inclusive of subordinate second resolution bonds, and a
$600 million commercial paper program.
Water, Sewer and Waste. Debt service on Water Authority obligations is
secured by fees and charges collected from the users of the City's water and
sewer system. State and Federal regulations require the City's water supply to
meet certain standards to avoid filtration. The City's water supply now meets
all technical standards and the City has taken the position that increased
regulatory, enforcement and other efforts to protect its water supply, will
prevent the need for filtration. On May 6, 1997, the U.S. Environmental
Protection Agency granted the City a filtration avoidance waiver through April
15, 2002 in response to the City's adoption of certain watershed regulations.
The estimated incremental cost to the City of implementing this Watershed
Memorandum of Agreement, beyond investments in the watershed which were
planned independently, is approximately $400 million. The City has estimated
that if filtration of the upstate water supply system is ultimately required,
the construction expenditures required could be between $4 billion and $5
billion.
Legislation has been passed by the State which prohibits the disposal of
solid waste in any landfill located within the City after December 31, 2001.
The Financial Plan includes the estimated costs of phasing out the use of
landfills located within the City. A suit has been commenced against the City
by private individuals under the Resource Conservation and Recovery Act
seeking to compel the City to take certain measures or, alternatively, to
close the Fresh Kills landfill. If as a result of such litigation, the City is
required to close the landfill earlier than required by State legislation, the
City could incur additional costs during the Financial Plan period. Pursuant
to court order, the City prior to July 1999 was required to recycle 2,100 tons
per day of solid waste and is required to recycle 3,400 tons per day by July
1999 and 4,250 tons per day by July 2001. The City as of June 18, 1999 was
recycling slightly over 2,100 tons per day of solid waste. The City may seek
to obtain amendments to Local Law No. 19 to modify this requirement. If the
City is unable to obtain such amendments and is required to fully implement
Local Law No. 19, the City may incur substantial costs.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the City of
the proceedings and claims are not currently predictable, adverse
determination in certain of them might have a material adverse effect upon the
City's ability to carry out the City Financial Plan. The City has estimated
that its potential future liability on account of outstanding claims against
it as of June 30, 1998 amounted to approximately $3.5 billion.
New York State
Current Economic Outlook. The State's 1999-2000 Financial Plan is based upon
a June 1999 projection by the State Division of Budget of national and State
economic activity. The information in this section, obtained from the State's
Annual Information Statement, dated August 24, 1999, summarizes the national
and State economic situation and outlook upon which projections of receipts
and certain disbursements were made for the
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State's 1999-2000 Financial Plan. The State Division of Budget expects that
national Economic growth will be quite robust throughout calendar year 1999.
Real Gross Domestic Product ("GDP") growth is projected to be 4.0 percent in
1999, above the 1998 growth rate of 3.9 percent. In 2000, real GDP growth is
expected to be 2.4 percent.
The forecast of the State's economy shows continued expansion during the
1999 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to
continue to do well, while employment in the manufacturing sector is expected
to post a modest decline. On an average annual basis, the employment growth
rate in the State is expected to be somewhat lower than in 1998 and the
unemployment rate is expected to drop further to 5.1 percent. Personal income
is expected to record moderate gains in 1999. Wage growth in 1999 is expected
to be slower than in the previous year as the recent robust growth rate in
bonus payments moderates.
Overall employment growth in the State was 2.0 percent in 1998, but is
expected to drop to 1.7 percent in 1999 and to 1.3 percent in 2000. On the
national level, employment growth was 2.6 percent for 1998 and is projected to
be 2.1 percent and 1.8 percent for 1999 and 2000, respectively.
On an average annual basis, the State unemployment rate was 5.6 percent in
1998 and is projected to be 5.1 percent and 5.0 percent for 1999 and 2000,
respectively. For the nation as a whole, the unemployment rate was 4.5 percent
for 1998, and is projected to be 4.2 percent in 1999 and 4.1 percent in 2000.
Personal income in the State grew by 5.3 percent in 1998, and is projected
to grow by 4.7 percent in 1999 and 4.1 percent in 2000. For the nation,
personal income grew by 5.0 percent in 1998, and is projected to grow by 5.1
percent and 4.8 percent, respectively, for 1999 and 2000.
The forecast for continued growth, and any resultant impact on the State's
1999-2000 Financial Plan, contains some uncertainties. Stronger-than-expected
gains in employment and wages or in stock market prices could lead to
unanticipated strong growth in consumer spending. Inventory investment dues to
year 2000 computer matters may be significantly stronger than expected towards
the end of 1999 possibly followed by significant weakness early in 2000. Also,
improvements in foreign economies may be weaker-than-expected and therefore
may have unanticipated effects on the domestic economy. The inflation rate may
differ significantly from expectations due to the conflicting impacts of a
tight labor market and improved productivity growth as well as to the
direction and magnitude of fluctuations in oil prices. In addition, the State
economic forecast could over- or underestimate the level of future bonus
payments, financial sector profits or inflation growth, resulting in
unexpected economic impacts. Similarly, the State forecast could fail to
correctly estimate the amount of employment change in the banking, financial
and other business service sectors as well as the direction of employment
change that is likely to accompany telecommunications and energy deregulation.
The New York Economy. New York is the third most populous state in the
nation and has a relatively high level of personal wealth. The State's economy
is diverse, with a comparatively large share of the nation's finance,
insurance, transportation, communications and services employment, and a very
small share of the nation's farming and mining activity. The services sector
accounts for more than three of every ten nonagricultural jobs in New York and
has a noticeably higher proportion of total jobs than does the rest of the
nation. Manufacturing employment continues to decline in importance in New
York, as in most other states, and New York's economy is less reliant on this
sector than is the nation. Wholesale and retail trade is the second largest
sector in terms of nonagricultural jobs in New York but is considerably
smaller when measured by income share. The finance, insurance and real estate
sector is far more important in the State than in the nation as a whole.
Although this sector accounts for under one-tenth of all nonagricultural jobs
in the State, it contributes about one-fifth of all nonfarm labor and
proprietors' income. Farming is an important part of large regions of the
State, although it constitutes a very minor part of total State output.
Federal, State and local government together are the third largest sector in
terms of nonagricultural jobs, with the bulk of the employment accounted for
by local
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governments. The State is likely to be less affected than the nation as a
whole during an economic recession that is concentrated in manufacturing and
construction, but likely to be more affected during a recession that is
concentrated in the service-producing sector.
The 1999-2000 Fiscal Year. The State's 1999-2000 fiscal year began on April
1, 1999 and ends on March 31, 2000. On March 31, 1999, the State adopted the
debt service portion of the State budget for the 1999-2000 fiscal year; four
months later, on August 4, 1999, it enacted the remainder of the budget. The
Governor approved the budget as passed by the Legislature. Prior to passing
the budget in its entirety for the 1999-2000 fiscal year, the State enacted
appropriations that permitted the State to continue its operations. Following
the enactment of the budget, the State prepared a Financial Plan for the 1999-
2000 fiscal year (the "1999-2000 Financial Plan" or the "State Financial
Plan") that sets forth projected receipts and disbursements based on the
actions taken by the Legislature.
General Fund receipts, including transfers from other funds, are projected
to be $39.31 billion, an increase of $2.57 billion from the $36.74 billion
recorded in the 1998-1999 fiscal year. General Fund disbursements, including
transfers to other funds, are estimated at $37.36 billion, an increase of $868
million or 2.38 percent over the 1998-1999 fiscal year. The 1999-2000
Financial Plan projects the State to close the 1999-2000 fiscal year with a
closing balance of $2.85 billion in the General Fund.
Receipts. The $39.31 billion in total General Fund receipts includes $35.93
billion in tax receipts, $1.36 billion in miscellaneous receipts and $2.02
billion in transfers from other funds. The transfer of the $1.82 billion
surplus recorded in the 1998-1999 fiscal year to the 1999-2000 fiscal period
has the effect of exaggerating the growth in State receipts from year to year
by depressing reported 1998-1999 figures and inflating 1999-2000 projections.
Personal income taxes are imposed on the income of individuals, estates and
trusts and are based, with certain modifications, on federal definitions of
income and deductions. Potential changes to Federal tax law could alter the
Federal definitions of income on which certain State taxes rely. Such changes
could have a significant impact on State revenues in the future. Net General
Fund personal income tax collections are projected to reach $22.95 billion in
the 1999-2000 fiscal year, well over half of all General Fund receipts and
nearly $2.87 billion above the reported 1998-1999 fiscal year collection
total. Much of this growth is associated with the $1.82 billion net impact of
the transfer of the surplus from 1998-1999 to 1999-2000 as partially offset by
the diversion of an additional $661 million in income tax receipts to the
School Tax Relief (STAR) fund. The STAR program was created in 1997 as a
State-funded local property tax relief program funded through the use of
personal income tax receipts. Adjusted for these transactions, the growth in
net income tax receipts is roughly $1.8 billion, an increase of almost 9
percent.
User taxes and fees are comprised of three-quarters of the State's four
percent sales and use tax, cigarette, alcoholic beverage, container, and auto
rental taxes, and a portion of the motor fuel excise levies. This category
also includes receipts from the motor vehicle registration fees and alcoholic
beverage license fees. Dedicated transportation funds outside of the General
Fund receive a portion of motor fuel tax and motor vehicle registration fees
and all of the highway use taxes. User taxes and fees are projected to total
$7.35 billion in 1999-2000, an increase of $105 million from reported
collection in the 1998-1999 fiscal year. The sales tax component of this
category accounts for virtually all of the 1999-2000 fiscal year growth.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as gross-receipts-
based taxes on utilities and gallonage-based petroleum business taxes.
Business tax receipts are expected to total approximately $4.63 billion in
1999-2000, $230 million below 1998-1999 results. The year-over-year decline in
projected receipts in this category is largely attributable to statutory
changes.
Transfers from other funds to the General Fund consists primarily of tax
revenues in excess of debt service requirements, including the one percent
sales tax used to support payments to Local Government Assistance
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Corporation (see Local Government Assistance Corporation within). Transfers
form other funds are expected to total $2.02 billion, or $99 million more than
total receipts from this category during 1998-1999. Total transfers of sale
taxes in excess of LGAC debt service requirements are expected to increase by
approximately $93 million, while transfers from all other funds are expected
to increase by $6 million.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Miscellaneous
receipts are expected to total $1.36 billion in the 1999-2000 fiscal year,
down $142 million from the prior year amount. This reflects the loss of non-
recurring receipts received in the 1998-1999 fiscal year and the growing
effects of the phase-out of the medical provider assessments, scheduled to be
eliminated in January 2000.
Other taxes include the estate and gift tax, the real property gains tax and
pari-mutuel taxes. Taxes in this category are projected to total $1 billion
for 1999-2000, $137 million below the 1998-1999 level. The primary factors
accounting for most of the expected decline include: an adverse tax tribunal
decision resulting in significant refunds of the now repealed real property
gains tax; pari-mutuel tax reductions enacted with the 1999-2000 budget; and
the effects of already enacted reductions in the estate and gift taxes.
Non-recurring Resources. The State Division of the Budget estimates that the
1999-2000 State Financial Plan contains actions that provide non-recurring
resources or savings totaling approximately $500 million, or 1.3 percent of
General Fund resources, the largest of which is the first phase of the
privatization of the Medical Malpractice Insurance Association. To the
greatest extent possible, one-time resources are expected to be utilized to
finance one-time costs, including Year 2000 compliance costs and certain
capital spending.
Disbursements. Grants to Local Governments is projected to constitute
approximately 68.5 percent of all 1999-2000 fiscal year General Fund
disbursements, and include payments to local governments, non-profit providers
and entitlement benefits to individuals. It is projected to be approximately
$25.60 billion for the 1999-2000 fiscal year, an increase of $910 million or
3.68 percent from the level for the 1998-1999 fiscal year. Under the 1999-2000
enacted budget, General Fund spending on school aid is projected at $10.52
billion on a State fiscal year basis, an increase of $831 million from the
prior year. Spending for Medicaid in 1999-2000 is projected to total $5.54
billion, essentially unchanged from the 1998-1999 fiscal year. Disbursements
for all other health and social welfare programs are projected to total $2.70
billion, a decrease of $252 million. Lower welfare spending, driven by State
and federal reforms and a robust economy, accounts for most of the decline.
State Operations is projected to constitute approximately 18.4 percent of
all 1999-2000 fiscal year General Fund disbursements. State Operations
reflects the costs of running the Executive, Legislative and Judicial branches
of government, including the prison system, mental hygiene institutions, and
the State University system (SUNY). It is projected to be approximately $6.89
billion for the 1999-2000 fiscal year. Personal service costs account for
approximately 73 percent of spending in this category. Spending in this
category is projected to increase by $207 million or 3.1 percent above 1998-
1999. The growth reflects $100 million in projected spending for new
collective bargaining agreements that the State expects to be ratified during
the 1999-2000 fiscal year. The annualized costs of current collective
bargaining agreements, growth in the Legislative and Judiciary budgets, and
staffing costs for the State's Year 2000 compliance programs also contribute
to the year-to-year growth in spending. The State's overall workforce is
projected to remain stable at approximately 191,300 persons.
General State Charges is projected to constitute approximately 5.5 percent
of all 1999-2000 fiscal year General Fund disbursements. This category
accounts primarily for the costs of providing fringe benefits to State
employees and retirees of the Executive, Legislature and Judiciary. It
includes employer contributions for pensions, social security, health
insurance, workers' compensation and unemployment insurance. This category
also covers State payments-in-lieu of-taxes to local governments for certain
State-owned lands, and the costs of defending lawsuits against the State and
its public officers. Disbursements in this category are estimated at $2.04
billion for the 1999-2000 fiscal year, a decrease of $222 million from the
1998-1999 fiscal year.
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Transfers to Other Funds from the General Fund are made primarily to finance
certain portions of State capital projects spending and debt service on long-
term bonds where these costs are not funded from other sources. State Debt
Service is projected to constitute approximately 6.1 percent of all 1999-2000
fiscal year General Fund disbursements. Capital/Other is projected to
constitute approximately 1.5 percent of all such General Fund disbursements.
Long-term debt service transfers are projected at $2.27 billion in the 1999-
2000 fiscal year, an increase of $183 million from 1998-1999. Transfers for
capital projects are projected to total $168 million in 1999-2000, a decline
of $78 million from the 1998-1999 fiscal year which is primarily due to the
delay of the receipt of payment of certain reimbursements in the 1998-1999
fiscal year.
Future Fiscal Years. State law requires the Governor to propose a balanced
budget each year. Preliminary analysis by the State Division of the Budget
indicates that the State will have a 2000-2001 fiscal year budget gap of
approximately $1.9 billion, or about $300 million above the 1999-2000
Executive Budget estimate (after adjusting for the projected costs of
collective bargaining). This estimate includes an assumption of the projected
costs of new collective bargaining agreements, $500 million in assumed
operating efficiencies, as well as the planned application of approximately
$615 million of the $1.82 billion tax reduction reserve. In recent years, the
State has closed projected budget gaps which the State Division of the Budget
estimates at $5.0 billion (1995-96), $3.9 billion (1996-97), $2.3 billion
(1997-98), and less than $1 billion (1998-99).
The State and the United University Professionals (UUP) union have reached a
tentative agreement on a new four-year labor contract. The State is continuing
negotiations with other unions representing State employees, the largest of
which is the Civil Service Employees Association (CSEA). CSEA previously
failed to ratify a tentative agreement on a new four-year contract earlier in
1999. The 1999-2000 Financial Plan has reserved $100 million for possible
collective bargaining agreements, and reserves are contained in the
preliminary outyear projection for 2000-2001 to cover the recurring costs of
any new agreements. To the extent these reserves are inadequate to finance
such agreements, the costs of new labor contracts could increase the size of
future budget gaps.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of higher-
than-projected tax receipts and in lower-than-expected entitlement spending.
The State assumes that the 2000-2001 Financial Plan will achieve $500 million
in savings from initiatives by state agencies to deliver services more
efficiently, workforce management efforts, maximization of Federal and non-
General Fund spending offsets, and other actions necessary to help bring
projected disbursements and receipts into balance. The projections do not
assume any gap-closing benefit from the potential settlement of State claims
against the tobacco industry.
Special Considerations. Many complex political, social and economic forces
influence the State's economy and finances, which may in turn affect the
State's Financial Plan. These forces may affect the State unpredictably from
fiscal year to fiscal year and are influenced by governments, institutions,
and events that are not subject to the State's control. The Financial Plan is
also necessarily based upon forecasts of national and State economic activity.
Economic forecasts have frequently failed to predict accurately the timing and
magnitude of changes in the national and State economies.
The State Financial Plan is based upon forecasts of national and State
economic activity. Many uncertainties exists in forecasts of both the national
and the State economies, including consumer attitudes toward spending, the
extent of corporate and governmental restructuring, the condition of the
financial sector, Federal fiscal and monetary policies, the level of interest
rates, and the condition of the world economy, which could have an adverse
effect on the State. There can be no assurance that the State economy will not
experience results in the current or any future fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based on
the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. Projections of total State disbursements are based on
assumptions relating to economic and
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demographic factors, potential collective bargaining agreements, levels of
disbursements for various services provided by local governments (where the
cost is partially reimbursed by the State), and the results of various
administrative and statutory mechanisms in controlling disbursements for State
operations.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts
and disbursements. The State Financial Plan assumes no significant litigation
or federal disallowance or other federal actions that could affect State
finances, but has significant reserves in the event of such an action.
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996
created a new Temporary Assistance to Needy Families program (TANF) partially
funded with a fixed federal block grant to states. States are required to meet
work activity participation targets for their TANF caseload and conform with
certain other federal standards or face potential sanctions in the form of a
reduced federal block grant and increased State/local funding requirements.
Any future reduction could have an adverse impact on the State's Financial
Plan. However, the State has been able to demonstrate compliance with TANF
work requirements to date and does not now expect to be subject to associated
federal fiscal penalties.
Despite recent budgetary surpluses recorded by the State, actions affecting
the level of receipts and disbursements, the relative strength of the State
and regional economy, and actions by the Federal Government could impact
projected budget gaps for the State. To address a potential imbalance in any
given fiscal year, the State would be required to take actions to increase
receipts and/or reduce disbursements as it enacts the budget for that year,
and under the State Constitution, the Governor is required to propose a
balanced budget each year. There can be no assurance, however, that the State
Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in any given fiscal year or
to align recurring receipts and disbursements in any given fiscal year.
To help guard against these risks, the State has projected reserves of $2.4
billion in the 1999-2000 fiscal year.
Year 2000 Computer Matters. New York State is currently addressing "Year
2000" ("Y2K") data processing compliance issues. Since its inception, the
computer industry has used a two-digit date convention to represent the year.
In the year 2000, the date field will contain "00" and, as a result, many
computer systems and equipment may not be able to process dates properly or
may fail since they may not be able to distinguish between the years 1900 and
2000. The Y2K issue not only affects computer programs, but also the hardware,
software and networks on which they operate. In addition, any system or
equipment that is dependent on an embedded chip, such as telecommunication
equipment and security systems, may also be adversely affected.
In April 1999 the State Comptroller released an audit on the State's Y2K
compliance. The audit, which reviewed the State's Y2K compliance activities
through October 1998, found that the State had made progress in achieving Y2K
compliance, but needed to improve its activities in several areas, including
data interchanges and contingency planning.
The Office for Technology ("OFT") will continue to monitor compliance
progress for the State's mission-critical and high-priority systems and is
reporting compliance progress to the Governor's office on a quarterly basis.
Mission-critical systems are those that may impact the public health, safety
and welfare of the State and its citizens, and for which failure could have a
material and adverse impact on State operations. High-priority systems are
critical for a State agency to fulfill its mission or deliver services. OFT
reported that as of June 1999, the State had completed over 98 percent of the
overall compliance effort for its mission-critical systems; 55 of the 56
systems are now Y2K compliant. As of June 1999, the State had completed 87
percent of the overall compliance effort on the high-priority systems; 236
systems are now Y2K compliant. The State has also procured independent
validation and verification services from a qualified vendor to perform an
automated review of code that has been fixed and a testing review process for
all mission-critical systems which is scheduled to be completed by September
1999.
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The State is also addressing a number of issues related to bringing its
mission-critical systems into compliance, including: testing throughout 1999
of over 800 data exchange interfaces with Federal, State, local and private
data partners; completing an inventory of priority equipment and systems that
may depend on embedded chips and may therefore need remediation in 1999; and
contacting critical vendors and supply partners to obtain Y2K compliance
status information and assurances. Since problems could be identified during
the compliance testing phase that could produce compliance delays, the State
agencies were required to complete contingency plans for priority systems and
business processes by the first quarter of calendar year 1999. These plans
have been completed and tested as of June 1999 and are being integrated into
the State Emergency Response Plan under the direction of the State Emergency
Management Office. In addition, the State Public Service Commission has
ordered that all State-regulated utilities complete Y2K activities for
mission-critical systems, including contingency plans, by July 1, 1999. The
Public Service Commission is currently reviewing these plans as part of their
Y2K regulatory and oversight role. The State has also been working with local
governments since December 1996 to raise awareness, promote action and provide
assistance with Y2K compliance.
While the State is taking what it believes to be appropriate action to
address Y2K compliance, there can be no guarantee that all of the State's
systems and equipment will be Y2K compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Y2K
compliance by outside parties is beyond the State's control to remediate, the
failure of outside parties to achieve Y2K compliance could have an adverse
impact on State operations or finances as well.
Prior Fiscal Years (GAAP-Basis). GAAP requires fund accounting for all
government resources and the modified accrual basis of accounting for
measuring the financial position and changes therein of governmental funds.
The modified accrual basis of accounting recognizes revenues when they become
measurable and available to finance expenditures, and expenditures when a
liability to pay for goods or services is incurred or a commitment to make aid
payments is made, regardless of when actually paid. There are four GAAP-
defined Governmental Fund types. The General Fund is the major operating fund
of the State and receives all receipts that are not required by law to be
deposited in another fund. Debt Service Funds account for the accumulation of
resources for the payment of general long-term debt service and related costs
and payments under lease-purchase and contractual-obligation financing
arrangements. Capital Project Funds account for financial resources of the
State to be used for the acquisition or construction of major capital
facilities (other than those financed by Special Revenue Funds, Proprietary
Funds and Fiduciary Funds). Special Revenue Funds account for the proceeds of
specific revenue sources (other than expendable trusts or major capital
projects), such as Federal grants, that are legally restricted to specified
purposes.
The State completed its 1998-1999 fiscal year with a combined governmental
funds operating surplus of $1.32 billion, which included operating surpluses
in the General Fund ($1.078 billion), in the Debt Service Funds ($209 million)
and in the Capital Projects Funds ($154 million) offset, in part, by an
operating deficit in Special Revenue Funds ($117 million). The State reported
an accumulated surplus of $1.645 billion in the General Fund.
The State completed its 1997-1998 fiscal year with a combined Governmental
Funds operating surplus of $1.80 billion, which included an operating surplus
in the General Fund of $1.56 billion, in Capital Projects Funds of $232
million and in Special Revenue Funds of $49 million, offset in part by an
operating deficit of $43 million in Debt Service Funds. The State reported an
accumulated surplus of $567 million in the General Fund for the first time
since it began reporting its operations on a GAAP-basis.
The State completed its 1996-1997 fiscal year with a combined Governmental
Funds operating surplus of $2.1 billion, which included an operating surplus
in the General Fund of $1.9 billion, in the Capital Projects Funds of $98
million and in the Special Revenue Funds of $65 million, offset in part by an
operating deficit of $37 million in the Debt Service Funds. The State reported
an accumulated deficit of $995 million in the General Fund.
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Prior Fiscal Years (Cash Basis). Cash basis accounting results in the
recording of receipts at the time money or checks are deposited in the State
Treasury and the recording of disbursements at the time a check is drawn,
regardless of the fiscal period to which the receipts or disbursements relate.
The State ended its 1998-1999 fiscal year on March 31, 1999 in balance on a
cash basis, with a General Fund cash surplus as reported by the State Division
of the Budget of $1.82 billion. The cash surplus was derived primarily from
higher-than-projected tax collections as a result of continued economic
growth, particularly in the financial markets and the securities industries.
General Fund receipts and transfers from other funds (net of tax refund
reserve account activity) for the 1998-1999 fiscal year totaled $36.74
billion, an increase of 6.34 percent from the 1997-1998 fiscal year levels.
General Fund disbursements and transfers to other funds totaled $36.49 billion
for the 1998-1999 fiscal year, an increase of 6.23 percent from the 1997-1998
fiscal year levels.
The State reported a General Fund closing cash balance of $892 million. The
closing fund balance excludes $2.31 billion that the State deposited into the
tax refund reserve account at the close of the 1998-1999 fiscal year to pay
for tax refunds in the 1999-2000 fiscal year. The tax refund reserve account
transaction has the effect of decreasing reported personal income tax receipts
in the 1998-1999 fiscal year, while increasing reported receipts in the 1999-
2000 fiscal year.
The State ended its 1997-1998 fiscal year balanced on a cash basis, with a
reported General Fund cash surplus of $2.04 billion resulting from revenue
growth and lower spending on welfare, Medicaid, and other entitlement
programs. General Fund receipts and transfers from other funds for the 1997-
1998 fiscal year (including net tax refund reserve account activity) totaled
$34.55 billion, an annual increase of $1.51 billion, or 4.57 percent over the
1996-1997 fiscal year. General Fund disbursements and transfers to other funds
were $34.35 billion, an annual increase of $1.45 billion or 4.41 percent. The
State closed a budget gap of approximately $2.3 billion for the 1997-1998
fiscal year. Gap-closing actions included cost containment in State Medicaid,
the use of the $1.4 billion 1996-1997 fiscal year budget surplus to finance
1997-1998 fiscal year spending, control on State agency spending and other
actions.
The State ended its 1996-1997 fiscal year balanced on a cash basis, with a
1996-1997 General Fund cash surplus as reported by the State Division of the
Budget of approximately $1.4 billion that was used to finance the 1997-1998
Financial Plan. The surplus resulted primarily from higher-than-expected
revenues and lower-than-expected spending for social service programs. General
Fund receipts and transfers from other funds for the 1996-1997 fiscal year
totaled $33.04 billion, an increase of 0.7 percent from the 1995-1996 fiscal
year (excluding deposits into the tax refund reserve account). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-1997 fiscal year, an increase of 0.7 percent from the 1995-1996 fiscal
year.
Local Government Assistance Corporation. In 1990, as part of a State fiscal
reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. The
legislation imposed a cap on the annual seasonal borrowing of the State at
$4.7 billion, except in cases where the Governor and the legislative leaders
have certified the need for additional borrowing and provided a schedule for
reducing it to the cap. If borrowing above the cap is thus permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth
fiscal year after the limit was first exceeded. This provision capping the
seasonal borrowing was included as a covenant with LGAC's bondholders in the
resolutions authorizing such bonds. As of June 1995, LGAC had issued bonds to
provide net proceeds of $4.7 billion, completing the program. The impact of
LGAC's borrowing, as well as other changes in revenue and spending patterns,
is that the State has been able to meet its cash flow needs throughout the
fiscal year without relying on short-term seasonal borrowing.
Financing Activities. State financing activities include general obligation
debt of the State and State-guaranteed debt, to which the full faith and
credit of the State has been pledged, as well as lease-purchase and
contractual-obligation financings, moral obligation financings and other
financings through public authorities and municipalities, where the State's
obligation to make payments for debt service is generally subject to annual
appropriation by the State Legislature.
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As of March 31, 1999, the total amount of outstanding general obligation
debt was approximately $4.825 billion, including $185 million in bond
anticipation notes. The total amount of moral obligation debt was $629 million
(down from $1.39 billion as of March 31, 1998). $25.902 billion of bonds
issued primarily in connection with lease-purchase and contractual-obligation
financing of State capital programs were outstanding.
For purposes of analyzing the financial condition of the State, debt of the
State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State, LGAC debt and lease
purchase and contractual obligations of public authorities (and
municipalities) where debt service is paid from State appropriations
(including dedicated tax sources, and other revenues such as patient charges
and dormitory facilities rentals). In addition, a broader classification,
referred to as State-related debt, includes State-supported debt, as well as
certain types of contingent obligations, including moral obligation financing,
certain contingent contractual-obligation financing arrangements, and State-
guaranteed debt, where debt service is expected to be paid from other sources
and State appropriations are contingent in that they may be made and used only
under certain circumstances.
The total amount of State-supported debt outstanding grew from 3.48 percent
of personal income in the State in the 1989-1990 fiscal year to 6.21 percent
for the 1998-1999 fiscal year while State-related debt outstanding remained
relatively stable at 6.53 percent of personal income for the same period.
Thus, State-supported debt grew at a faster rate than personal income while
State-related obligations grew at a slightly slower rate. At the end of the
1998-1999 fiscal year, there was $37.74 billion of outstanding State-related
debt and $35.84 billion of outstanding State-supported debt.
During the prior ten years, State-supported long-term debt service increased
on an average annual basis by 8.8 percent to $3.39 billion by the 1998-1999
fiscal year while all governmental funds receipts increased on an average
annual basis of 5.3 percent. This resulted in a general trend of increases in
the ratio of debt service to receipts from fiscal year 1989-1990 to fiscal
year 1998-1999.
Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurring of debt which
apply to the State itself, and may issue bonds and notes within the amounts
of, and as otherwise restricted by, their legislative authorization. As of
December 31, 1998, there were 17 public authorities that had outstanding debt
of $100 million or more, and the aggregate outstanding debt, including
refunding bonds, of all State public authorities was $94 billion, up from $84
billion as of December 31, 1997. The State's access to the public credit
markets could be impaired and the market price of its outstanding debt may be
adversely affected if any of its public authorities were to default on their
respective obligations.
Ratings. As of June 15, 1999, Moody's and Standard & Poor's rated the
State's outstanding general obligation bonds A2 and A, respectively. Standard
& Poor's revised its ratings upward from A- to A on August 28, 1997. Ratings
reflect only the respective views of such organizations, and explanation of
the significance of such ratings must be obtained from the rating agency
furnishing the same. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. A downward
revision or withdrawal of such ratings may have an effect on the market price
of the New York Municipal Bonds in which the Fund invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and
other alleged violations of State and Federal laws. State programs are
frequently challenged on State and Federal constitutional grounds. Adverse
developments in legal proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced State Financial Plan in
any given fiscal year. There can be no assurance that an adverse decision in
one or more legal proceedings would not exceed the amount the
III-14
<PAGE>
State reserves for the payment of judgments or materially impair the State's
financial operations. In its audited financial statements for the fiscal year
ended March 31, 1999, the State reported its estimated liability for awarded
and anticipated unfavorable judgments at $895 million.
Other Localities. Certain localities outside the City have experienced
financial problems and have requested and received additional State assistance
during the last several State fiscal years. The potential impact on the State
of such actions by localities is not included in the projections of the State
receipts and disbursements for the State's 1999-2000 fiscal year.
In 1997, the total indebtedness of all localities in the State, other than
the City, was approximately $21.0 billion. A small portion (approximately $80
million) of that indebtedness represented borrowing to finance budgetary
deficits and was issued pursuant to enabling State legislation.
III-15
<PAGE>
EXHIBIT IV
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment 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 a 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 arc rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aal,
Al, Baal, Bal and Bl.
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."
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Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1
repayment capacity will often be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins, in earning coverage of fixed financial charges and high internal
cash generation; and with established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the
level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's, a Division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity of the obligor to meet its financial commitment on the
obligation is extremely strong.
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<PAGE>
AA - Debt rated "AA" differs from the highest-rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A - Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB - Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BBB, CCC, CC, C - Debt 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 degree of speculation. 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.
D - Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition or the taking of
similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (--): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest quality obligations to "D" for the lowest. These categories
are as follows:
A-1 - This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 - Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B - Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired unless Standard &
Poor's believes that such payments will be made during such grace period.
c - The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered
bonds if the long-term credit rating of the issuer is below an investment-
grade level and/or the issuer's bonds are deemed taxable.
p - The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
financed by the debt being rated and indicates that payment of the debt
service requirements is largely or entirely dependent upon the successful,
timely completion of the project. This
IV-3
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rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his
own judgment with respect to such likelihood and risk.
Continuance of the ratings is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r - The "r" highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
- Amortization schedule - the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
- Source of payment - the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest
Description of Fitch IBCA, Inc.'s ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
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<PAGE>
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
A - Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an 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 three to 12 months.
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Ratings Outlook
An outlook is used to describe the most likely direction of any rating
change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB - Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B - Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC - Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC - Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C - Bonds are in imminent default in payment of interest or principal.
DDD, DD, D - Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
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<PAGE>
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-l+".
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-l"
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.
IV-7
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EXHIBIT V
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured New York Municipal Bonds and Municipal Bonds
held by the Fund. The Fund has no obligation to obtain any such Policies, and
the terms of any Policies actually obtained may vary significantly from the
terms discussed below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards
such companies normally use in establishing the insurability of new issues of
New York Municipal Bonds and Municipal Bonds and are not necessarily the
criteria that would be used in regard to the purchase of such bonds by the
Fund. The Policies do not insure (i) municipal securities ineligible for
insurance and (ii) municipal securities no longer owned by the Fund.
The Policies do not guarantee the market value of the insured New York
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable
to meet its obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the
insurance company will not have any obligation to insure any issue held by the
Fund that is adversely affected by either of the above described events. In
addition to the payment of premium, the policies may require that the Fund
notify the insurance company as to all New York Municipal Bonds and Municipal
Bonds in the Fund's portfolio and permit the insurance company to audit their
records. The insurance premiums will be payable monthly by the Fund in
accordance with a premium schedule to be furnished by the insurance company at
the time the Policies are issued. Premiums are based upon the amounts covered
and the composition of the portfolio.
The Fund will seek to utilize insurance companies that have insurance
claims-paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch
IBCA, Inc. ("Fitch") or Aaa from Moody's Investors Service ("Moody's"). There
can be no assurance, however, that insurance from insurance carriers meeting
these criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by Fitch.
The ability to pay claims is adjudged by Fitch to be extremely strong for
insurance companies with this highest rating. In the opinion of Fitch,
foreseeable business and economic risk factors should not have any material
adverse impact on the ability of these insurers to pay claims. In Fitch's
opinion, profitability, overall balance sheet strength, capitalization and
liquidity are all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment or cyclical events. A Moody's
insurance claims-paying ability rating is an opinion of the ability of an
insurance company to repay punctually senior policyholder obligations and
claims. An insurer with an insurance claims-paying ability rating of Aaa is
considered by Moody's to be of the best quality. In the opinion of Moody's,
the policy obligations of an insurance company with an insurance claims-paying
ability rating of Aaa carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can
only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or
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cancellation penalties or the timeliness of payment; nor does it address the
ability of a company to meet nonpolicy obligations (i.e., debt contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings.
The likelihood of a timely flow of funds from the insurer to the trustee for
the bondholders is a key element in the rating determination for such debt
issues.
V-2
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PART C
OTHER INFORMATION
Item 15. Indemnification.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Amended and Restated Articles of Incorporation,
a form of which was previously filed as an exhibit to the Common Stock
Registration Statement (defined below); Article VI of the Registrant's By-
Laws, which was previously filed as an exhibit to the Common Stock
Registration Statement, and the Investment Advisory Agreement, a form of which
was previously filed as an exhibit to the Common Stock Registration Statement,
provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be provided to directors, officers
and controlling persons of the Registrant, 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.
Reference is made to (i) Section 6 of the Purchase Agreement relating to the
Registrant's Common Stock, a form of which was filed as an exhibit to the
Common Stock Registration Statement, and (ii) Section 7 of the Purchase
Agreement relating to the Registrant's AMPS, a form of which was filed as an
exhibit to the AMPS Registration Statement (defined below), for provisions
relating to the indemnification of the underwriter.
Item 16. Exhibits.
<TABLE>
<C> <S>
1(a) --Articles of Incorporation of the Registrant, dated April 24, 1997.(a)
(b) --Articles of Amendment relating to name change.(a)
(c) --Form of Articles Supplementary creating the Series A AMPS and the
Series B AMPS.(c)
(d) --Form of Articles Supplementary creating the Series C AMPS, the Series
D AMPS and the Series E AMPS.
2 --By-Laws of the Registrant.(a)
3 --Not Applicable.
4 --Form of Agreement and Plan of Reorganization among the Registrant and
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund
II, Inc. and MuniHoldings New York Insured Fund III, Inc. (included in
Exhibit II to the Proxy Statement and Prospectus contained in this
Registration Statement)
5(a) --Copies of instruments defining the rights of stockholders, including
the relevant portions of the Articles of Incorporation and the By-Laws
of the Registrant.(d)
(b) --Form of specimen certificate for the Common Stock of the Registrant.(b)
(c) --Form of specimen certificate for the AMPS of the Registrant.(c)
6 --Form of Investment Advisory Agreement between Registrant and Fund
Asset Management, L.P.(b)
7(a) --Form of Purchase Agreement for the Common Stock.(b)
(b) --Form of Purchase Agreement for the AMPS.(c)
(c) --Form of Merrill Lynch Standard Dealer Agreement.(b)
8 --Not applicable.
9 --Custodian Contract between the Registrant and The Bank of New York.(b)
</TABLE>
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<TABLE>
<C> <S>
10 --Not applicable.
11 --Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.*
12 --Private Letter Ruling from the Internal Revenue Service.*
13(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between the Registrant and The Bank of New York.(b)
(b) --Form of Auction Agent Agreement between the Registrant and The Bank of
New York.(*)
(c) --Form of Broker-Dealer Agreement.(c)
(d) --Form of Letter of Representations.(c)
14(a) --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
(b) --Consent of Deloitte & Touche LLP, independent auditors for
MuniHoldings New York Fund, Inc.
(c) --Consent of Ernst & Young LLP, independent auditors for MuniHoldings
New York Insured
Fund II, Inc. and MuniHoldings New York Insured Fund III, Inc.
15 --Not applicable.
16 --Power of Attorney (Included on the signature page of this Registration
Statement).
</TABLE>
- --------
* To be filed by amendment.
(a) Incorporated by reference to the Registrant's Registration Statement on
Form N-2 relating to the Registrant's Common Stock (File No. 333-26899)
(the "Common Stock Registration Statement"), filed on May 12, 1997.
(b) Incorporated by reference to Pre-Effective Amendment No. 1 to the Common
Stock Registration Statement, filed on September 16, 1997.
(c) Incorporated by reference to the Registrant's Registration Statement on
Form N-2 relating to the Registrant's Auction Market Preferred Stock (File
No. 333-36275) (the "AMPS Registration Statement"), filed on September 24,
1997.
(d) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, previously filed as
Exhibit (1) to the Common Stock Registration Statement, and to Article II,
Article III (sections 1, 2, 3, 5 and 17), Article VI, Article VII, Article
XII, Article XIII and Article XIV of the Registrant's By-Laws previously
filed as Exhibit (2) to the Common Stock Registration Statement. Reference
is also made to the Form of Articles Supplementary filed as Exhibit a(2)
to the AMPS Registration Statement and as Exhibit 1(d) hereto.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
as amended, the reoffering prospectus will contain information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering of
securities at that time shall be deemed to be the initial bona fide offering
of them.
(3) The Registrant undertakes to file, by post-effective amendment, either a
copy of the Internal Revenue Service private letter ruling applied for or an
opinion of counsel as to certain tax matters, within a reasonable time after
receipt of such ruling or opinion.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 4th day of October, 1999.
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
(Registrant)
/s/ Terry K. Glenn
By: ______________________________________
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K. Glenn,
Donald C. Burke and William E. Zitelli, Jr., or any of them, as attorney-in-
fact, to sign on his behalf, individually and in each capacity stated below,
any amendments to this Registration Statement (including post-effective
amendments) and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President and Director October 4, 1999
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
/s/ Donald C. Burke Treasurer (Principal October 4, 1999
______________________________________ Financial and Accounting
(Donald C. Burke) Officer)
/s/ Ronald W. Forbes Director October 4, 1999
______________________________________
(Ronald W. Forbes)
/s/ Cynthia A. Montgomery Director October 4, 1999
______________________________________
(Cynthia A. Montgomery)
/s/ Charles C. Reilly Director October 4, 1999
______________________________________
(Charles C. Reilly)
/s/ Kevin A. Ryan Director October 4, 1999
______________________________________
(Kevin A. Ryan)
/s/ Richard R. West Director October 4, 1999
______________________________________
(Richard R. West)
/s/ Arthur Zeikel Director October 4, 1999
______________________________________
(Arthur Zeikel)
</TABLE>
C-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1(d) Form of Articles Supplementary creating the Series C AMPS, the Series
D AMPS and the Series E AMPS.
4 Form of Agreement and Plan of Reorganization among the Registrant and
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund
II Inc. and MuniHoldings New York Insured Fund III, Inc. (included in
Exhibit II to the Proxy Statement and Prospectus).
14(a) Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
(b) Consent of Deloitte & Touche LLP, independent auditors for
MuniHoldings New York Fund, Inc.
(c) Consent of Ernst & Young LLP, independent auditors for MuniHoldings
New York Insured Fund II, Inc. and MuniHoldings New York Insured Fund
III, Inc.
</TABLE>
<PAGE>
[Proxy Card Front]
COMMON STOCK
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Patrick D. Sweeney and
William E. Zitelli, Jr. as proxies, each with the power to appoint his
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the Common Stock of MuniHoldings New
York Insured Fund, Inc. (the "Fund") held of record by the undersigned on
October 20, 1999 at the Annual Meeting of Stockholders of the Fund to be held on
December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
1
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc. and MuniHoldings New York
Insured Fund III, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
(Instruction: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Kevin A. Ryan,
Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president
2
<PAGE>
or other authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
3
<PAGE>
[Proxy Card Front]
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Patrick D. Sweeney and
William E. Zitelli, Jr. as proxies, each with the power to appoint his
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all the Auction Market Preferred Stock of
MuniHoldings New York Insured Fund, Inc. (the "Fund") held of record by the
undersigned on October 20, 1999 at the Annual Meeting of Stockholders of the
Fund to be held on December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
1
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc. and MuniHoldings New York
Insured Fund III, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
(Instruction: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.) Ronald W.
Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C. Reilly, Kevin A.
Ryan, Richard R. West, Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Stock, in the same proportion as
votes cast by holders of Auction Market Preferred Stock, who have responded
to this proxy solicitation.
2
<PAGE>
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name
by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
3
<PAGE>
[Proxy Card Front]
COMMON STOCK
MUNIHOLDINGS NEW YORK FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all of the Common Stock of MuniHoldings New York Fund, Inc.
(the "Fund") held of record by the undersigned on October 20, 1999 at the Annual
Meeting of Stockholders of the Fund to be held on December 15, 1999, or any
adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
1
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc. and MuniHoldings New York
Insured Fund III, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
(Instruction: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Terry K. Glenn, Herbert I. London, Robert R. Martin, Andre' F. Perold,
Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president
2
<PAGE>
or other authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
3
<PAGE>
[Proxy Card Front]
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS NEW YORK FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all the Auction Market Preferred Stock of MuniHoldings New
York Fund, Inc. (the "Fund") held of record by the undersigned on October 20,
1999 at the Annual Meeting of Stockholders of the Fund to be held on December
15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
1
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc. and MuniHoldings New York
Insured Fund III, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
(Instruction: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Terry K. Glenn, Herbert I. London, Robert R. Martin,
Joseph L. May, Andre' F. Perold, Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal
year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Stock, in the same proportion as
votes cast by holders of Auction Market Preferred Stock, who have responded
to this proxy solicitation.
2
<PAGE>
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name
by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
3
<PAGE>
[Proxy Card Front]
COMMON STOCK
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all of the Common Stock of MuniHoldings New York Insured
Fund II, Inc. (the "Fund") held of record by the undersigned on October 20, 1999
at the Annual Meeting of Stockholders of the Fund to be held on December 15,
1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
1
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc. and MuniHoldings New York Insured
Fund III, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
(Instruction: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Terry K. Glenn, Herbert I. London, Robert R. Martin,
Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the
independent auditors of the Fund to serve for the current fiscal
year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president
2
<PAGE>
or other authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
3
<PAGE>
[Proxy Card Front]
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all the Auction Market Preferred Stock of MuniHoldings New
York Insured Fund II, Inc. (the "Fund") held of record by the undersigned on
October 20, 1999 at the Annual Meeting of Stockholders of the Fund to be held on
December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
1
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc. and MuniHoldings New York Insured
Fund III, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
(Instruction: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Terry K. Glenn, Herbert I. London, Robert R. Martin,
Joseph L. May, Andre F. Perold, Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Stock, in the same proportion as
votes cast by holders of Auction Market Preferred Stock, who have responded
to this proxy solicitation.
2
<PAGE>
Please sign exactly as name appears hereon. When shares are held
by joint tenants, both should sign. When signing as attorney or
as executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate
name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
3
<PAGE>
[Proxy Card Front]
COMMON STOCK
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all of the Common Stock of MuniHoldings New York Insured
Fund III, Inc. (the "Fund") held of record by the undersigned on October 20,
1999 at the Annual Meeting of Stockholders of the Fund to be held on December
15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
1
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc. and MuniHoldings New York Insured
Fund II, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
(Instruction: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Terry K. Glenn, Herbert I. London, Robert R. Martin,
Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president
2
<PAGE>
or other authorized officer. If a partnership, please sign
in partnership name by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
3
<PAGE>
[Proxy Card Front]
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all the Auction Market Preferred Stock of MuniHoldings New
York Insured Fund III, Inc. (the "Fund") held of record by the undersigned on
October 20, 1999 at the Annual Meeting of Stockholders of the Fund to be held on
December 15, 1999, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" items 1, 2 and 3.
(Continued and to be signed on the reverse side)
1
<PAGE>
[Proxy Card Reverse]
Please mark boxes /X/ or [X] in blue or black ink.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc. and MuniHoldings New York Insured
Fund II, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. ELECTION OF DIRECTORS
FOR all nominees listed below
(except as marked to the contrary below) [_]
WITHHOLD AUTHORITY
to vote for all nominees listed below [_]
(Instruction: to withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Terry K. Glenn, Herbert I. London, Robert R. Martin,
Joseph L. May, Andre F. Perold, Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Stock, in the same proportion as
votes cast by holders of Auction Market Preferred Stock, who have responded
to this proxy solicitation.
2
<PAGE>
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney or as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name
by authorized persons.
Dated: ______________________________
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
3
<PAGE>
EXHIBIT 1(d)
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
Articles Supplementary creating three series of
Auction Market Preferred Stock(R) ("AMPS(R)")
MUNIHOLDINGS NEW YORK INSURED FUND, INC., a Maryland corporation having its
principal Maryland office in the City of Baltimore (the "Corporation"),
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by article fifth of its Charter, the Board of Directors has
reclassified 7,160 authorized and unissued shares of common stock of the
Corporation as preferred stock of the Corporation and has authorized the
issuance of three series of preferred stock, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) thereon, to be designated
respectively: Auction Market Preferred Stock, Series C; Auction Market
Preferred Stock, Series D; and Auction Market Preferred Stock, Series E.
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of each such series of preferred stock are as follows:
_____________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
DESIGNATION
Series C: A series of 3,040 shares of preferred stock, par value $.10 per
share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series C." Each share of
Auction Market Preferred Stock, Series C (sometimes referred to herein as
"Series C AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series C shall constitute a
separate series of preferred stock of the Corporation, and each share of Auction
Market Preferred Stock, Series C shall be identical.
Series D: A series of 2,120 shares of preferred stock, par value $.10 per
share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series D." Each share of
Auction Market Preferred Stock, Series D (sometimes referred to herein as
"Series D AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms
2
<PAGE>
and conditions of redemption as are set forth in these Articles Supplementary.
The Auction Market Preferred Stock, Series D shall constitute a separate series
of preferred stock of the Corporation, and each share of Auction Market
Preferred Stock, Series D shall be identical.
Series E: A series of 2,000 shares of preferred stock, par value $.10 per
share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series E." Each share of
Auction Market Preferred Stock, Series E (sometimes referred to herein as
"Series E AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series E shall constitute a
separate series of preferred stock of the Corporation, and each share of Auction
Market Preferred Stock, Series E shall be identical.
1. Definitions. (a) Unless the context or use indicates another or
-----------
different meaning or intent, in these Articles Supplementary the following terms
have the following meanings, whether used in the singular or plural:
"`AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's
or the equivalent of such rating by
3
<PAGE>
another nationally recognized rating agency, as such rate is made available on a
discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day immediately preceding such date, or (ii) in the event that the
Federal Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
Merrill Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on the
Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to 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 Corporation 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
4
<PAGE>
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c) of
these Articles Supplementary.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of these
Articles Supplementary.
"Adviser" means the Corporation's investment adviser which initially shall
be Fund Asset Management, L.P.
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Corporation.
"Agent Member" means a member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more shares of AMPS or a Potential
Beneficial Owner.
"AMPS" means, as the case may be, the Auction Market Preferred Stock,
Series C; the Auction Market Preferred Stock, Series D; or the Auction Market
Preferred Stock, Series E.
"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
of each series and Other AMPS Outstanding on such Valuation Date multiplied by
the sum of (a) $25,000 and (b) any applicable redemption premium attributable
to the designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have
5
<PAGE>
accumulated for each share of AMPS and Other AMPS Outstanding, in each case, to
(but not including) the end of the current Dividend Period for each series of
AMPS that follows such Valuation Date in the event the then current Dividend
Period will end within 49 calendar days of such Valuation Date or through the
49th day after such Valuation Date in the event the then current Dividend Period
for each series of AMPS will not end within 49 calendar days of such Valuation
Date; (C) in the event the then current Dividend Period will end within 49
calendar days of such Valuation Date, the aggregate amount of cash dividends
that would accumulate at the Maximum Applicable Rate applicable to a Dividend
Period of 28 or fewer days on any shares of AMPS and Other AMPS Outstanding from
the end of such Dividend Period through the 49th day after such Valuation Date,
multiplied by the larger of the Moody's Volatility Factor and the S&P Volatility
Factor, determined from time to time by Moody's and S&P, respectively (except
that if such Valuation Date occurs during a Non-Payment Period, the cash
dividend for purposes of calculation would accumulate at the then current Non-
Payment Period Rate); (D) the amount of anticipated expenses of the Corporation
for the 90 days subsequent to such Valuation Date (including any premiums
payable with respect to a Policy); (E) the amount of the Corporation's Maximum
Potential Additional Dividend Liability as of such Valuation Date; and (F) any
current liabilities as of such Valuation Date to the extent not reflected in any
of (i)(A) through (i)(E) (including, without limitation, and immediately upon
determination, any amounts due and payable by the Corporation pursuant to
repurchase agreements and any amounts payable for New York Municipal Bonds or
Municipal Bonds purchased as of such Valuation Date) less (ii) either (A) the
Discounted Value of any of the Corporation's assets, or (B) the face value of
any of the Corporation'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
6
<PAGE>
Government or Deposit Securities, in both cases irrevocably deposited by the
Corporation for the payment of the amount needed to redeem shares of AMPS
subject to redemption or to satisfy any of (i)(B) through (i)(F). For Moody's
and S&P, the Corporation shall include as a liability an amount calculated semi-
annually equal to 150% of the estimated cost of obtaining other insurance
guaranteeing the timely payment of interest on a Moody's Eligible Asset or S&P
Eligible Asset and principal thereof to maturity with respect to Moody's
Eligible Assets and S&P Eligible Assets that (i) are covered by a Policy which
provides the Corporation with the option to obtain such other insurance and (ii)
are discounted by a Moody's Discount Factor or a S&P Discount Factor, as the
case may be, determined by reference to the insurance claims-paying ability
rating of the issuer of such Policy.
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance Amount (as required by
paragraph 7(a) of these Articles Supplementary) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Corporation which sets forth, as of the related Valuation Date, the assets of
the Corporation, the Market Value and the Discounted Value thereof (seriatim and
in aggregate), and the AMPS Basic Maintenance Amount.
7
<PAGE>
"Anticipation Notes" shall mean the following New York Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph 10(a)(vii)
of these Articles Supplementary.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Whitehall Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Directors of the Corporation or a duly
authorized committee thereof enters into an agreement with the Corporation 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 and Other AMPS.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 10 of these Articles Supplementary.
"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.
8
<PAGE>
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 10 of these
Articles Supplementary, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of these Articles Supplementary.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York are authorized or obligated by law to close.
"New York Municipal Bonds" means Municipal Bonds issued by or on behalf of
the State of New York, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and New York
income taxes, and includes Inverse Floaters.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including these Articles Supplementary), of the Corporation on file in the
State Department of Assessments and Taxation of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
9
<PAGE>
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the
Corporation 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
Corporation.
"Corporation" means MuniHoldings New York Insured Fund, Inc., a Maryland
corporation.
"Date of Original Issue" means, with respect to any share of AMPS or Other
AMPS, the date on which the Corporation originally issues such share.
"Deposit Securities" means cash and New York Municipal Bonds and Municipal
Bonds rated at least A2 (having a remaining maturity of 12 months or less), P-1,
VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or
less), A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set forth in
paragraph 2(b)(i) of these Articles Supplementary and, with respect to Other
AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.
10
<PAGE>
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Corporation that is listed as the holder of record of shares of
AMPS in the Stock Books.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of these
Articles Supplementary.
"Holder" means a Person identified as a holder of record of shares of AMPS
in the Stock Register.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Corporation, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Directors of the Corporation with respect to each
series of AMPS or Other AMPS, as the case may be.
"Initial Dividend Period," with respect to each series of AMPS, has the
meaning set forth in paragraph 2(c)(i) of these Articles Supplementary and, with
respect to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to each series of AMPS, means the
rate per annum applicable to the Initial Dividend Period for such series of AMPS
and, with respect to Other AMPS, has the equivalent meaning.
11
<PAGE>
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Inverse Floaters" means trust certificates or other instruments evidencing
interests in one or more New York Municipal Bonds that qualify as S&P Eligible
Assets (and are not part of a private placement of New York Municipal Bonds and
satisfy the issuer and original size requirements of clause (vi) of the
definition of S&P Eligible Assets) the interest rates on which are adjusted at
short term intervals on a basis that is inverse to the simultaneous readjustment
of the interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time of original
issuance unless the floating rate instruments have only one reset remaining
until maturity.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends.
12
<PAGE>
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Corporation shall be the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value portfolio
securities at the quoted bid prices or the mean between the quoted bid and asked
price or the yield equivalent when quotations are not readily available.
Securities for which quotations are not readily available shall be valued at
fair value as determined by the Pricing Service using methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
type of issue, coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The Pricing Service may employ
electronic data processing techniques and/or a matrix system to determine
valuations. In the event the Pricing Service is unable to value a security, the
security shall be valued at the lower of two dealer bids obtained by the
Corporation from dealers who are members of the National Association of
Securities Dealers, Inc. and who make a market in the security, at least one of
which shall be in writing. Futures contracts and options are valued at closing
prices for such instruments established by the exchange or board of trade on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Directors.
"Maximum Applicable Rate," with respect to AMPS, has the meaning set forth
in paragraph 10(a)(vii) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
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<PAGE>
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Corporation were to make Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Corporation, as of the end of the calendar month immediately preceding such
Valuation Date and assuming such Additional Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any New York Municipal Bond or Municipal Bond which constitutes a
Moody's Eligible Asset, the percentage determined by reference to (a)(i) the
rating by Moody's or S&P on such Bond or (ii) in the event the Moody's Eligible
Asset is insured under a Policy and the terms of the Policy permit the
Corporation, at its option, to obtain other insurance guaranteeing the timely
payment of interest on such Moody's Eligible Asset and principal thereof to
maturity, the Moody's insurance claims-paying ability rating of the issuer of
the Policy or (iii) in the event the Moody's Eligible Asset is insured under an
insurance policy which guarantees the timely payment of interest on such Moody's
Eligible Asset and principal thereof to maturity, the Moody's insurance claims-
paying ability rating of the issuer of the insurance policy (provided that for
purposes of clauses (ii) and (iii) if the insurance claims-paying ability of an
issuer of a Policy or insurance policy is not rated by Moody's but is rated by
S&P, such issuer shall be deemed to have a Moody's insurance claims-paying
ability rating which is two full categories lower than the S&P insurance claims-
paying ability rating) and (b) the Moody's Exposure Period, in accordance with
the table set forth below:
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<PAGE>
<TABLE>
<CAPTION>
Rating Category
-----------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
- ------------------------------- ----- ---- ---- ------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less................ 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks....... 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks....... 158 169 179 209 242 138 150
</TABLE>
- ---------------
* Moody's rating.
** New York Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
*** New York Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1 or,
if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature or
have a demand feature at par exercisable within the Moody's Exposure Period
and which do not have a long-term rating. For the purposes of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of "A" by Moody's.
; provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the applicable
rating category and (b) the percentage set forth in the foregoing table under
the rating category which is one category lower than the applicable rating
category.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term New York Municipal Bonds and short-term Municipal Bonds,
so long as such New York Municipal Bonds and Municipal Bonds are rated at least
MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount Factor
for such Bonds will be 125% if such Bonds are not rated by Moody's but are rated
A-1+ or SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for New York Municipal Bonds or
Municipal Bonds Sold. "Receivables for New York Municipal Bonds or Municipal
Bonds Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means no more than
15
<PAGE>
the aggregate of the following: (i) the book value of receivables for New York
Municipal Bonds or Municipal Bonds sold as of or prior to such Valuation Date if
such receivables are due within five Business Days of such Valuation Date, and
if the trades which generated such receivables are (x) settled through clearing
house firms with respect to which the Corporation has received prior written
authorization from Moody's or (y) with counterparties having a Moody's long-term
debt rating of at least Baa3; and (ii) the Moody's Discounted Value of New York
Municipal Bonds or Municipal Bonds sold as of or prior to such Valuation Date
which generated receivables, if such receivables are due within five Business
Days of such Valuation Date but do not comply with either of conditions (x) or
(y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for New York Municipal
Bonds or Municipal Bonds Sold, a New York Municipal Bond or a Municipal Bond
that (i) pays interest in cash, (ii) is publicly rated Baa or higher by Moody's
or, if not rated by Moody's but rated by S&P, is rated at least BBB by S&P
(provided that, for purposes of determining the Moody's Discount Factor
applicable to any such S&P-rated New York Municipal Bond or S&P-rated Municipal
Bond, such New York Municipal Bond or Municipal Bond (excluding any short-term
New York Municipal Bond or Municipal Bond) will be deemed to have a Moody's
rating which is one full rating category lower than its S&P rating), (iii) does
not have its Moody's rating suspended by Moody's; and (iv) is part of an issue
of New York Municipal Bonds or Municipal Bonds of at least $10,000,000. In
addition, New York Municipal Bonds and Municipal Bonds in the Corporation's
portfolio must be within the following diversification requirements in order to
be included within Moody's Eligible Assets:
<TABLE>
<S> <C> <C> <C> <C> <C>
Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or Territory
Rating ($ Millions) Obligor (%)(1) Concentration(%)(1)(3) Concentration(%)(1)(4) Concentration (1)(5)
- ------ ------------ --------------- ---------------------- ---------------------- ----------------------
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Aaa........ 10 100 100 100 100
Aa......... 10 20 60 60 60
A.......... 10 10 40 40 40
Baa........ 10 6 20 20 20
Other(2)... 10 4 12 12 12
</TABLE>
- -----------------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) New York Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to New York Municipal Bonds. Territorial bonds (other than
those issued by Puerto Rico and counted collectively) are each limited to
10% of Moody's Eligible Assets. For diversification purposes, Puerto Rico
will be treated as a state.
For purposes of the maximum underlying obligor requirement described above, any
New York Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Bond. For purposes of the issue type concentration
requirement described above, New York Municipal Bonds and Municipal Bonds will
be classified within one of the following categories: health care issues
(teaching and non-teaching hospitals, public and private), housing issues
(single- and multi-family), educational facilities issues (public and private
schools), student loan issues, resource recovery issues, transportation issues
(mass transit, airport and highway bonds), industrial revenue/pollution control
bond issues, utility issues (including water, sewer and electricity), general
obligation issues, lease obligations/certificates of participation, escrowed
bonds and other issues ("Other Issues") not falling within one of the
aforementioned categories (includes special obligations to crossover, excise and
sales tax revenue, recreation revenue, special assessment and telephone revenue
bonds). In no event shall (a) more than 10% of Moody's Eligible Assets consist
of student loan issues, (b) more than 10% of Moody's Eligible Assets consist of
resource recovery issues or (c) more than 10% of Moody's Eligible Assets consist
of Other Issues.
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<PAGE>
When the Corporation sells a New York Municipal Bond or Municipal Bond and
agrees to repurchase it at a future date, the Discounted Value of such Bond will
constitute a Moody's Eligible Asset and the amount the Corporation is required
to pay upon repurchase of such Bond will count as a liability for purposes of
calculating the AMPS Basic Maintenance Amount. When the Corporation purchases a
New York Municipal Bond or Municipal Bond and agrees to sell it at a future date
to another party, cash receivable by the Corporation thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Corporation for the payment of dividends or
redemption.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and shall initially be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b)
of these Articles Supplementary.
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<PAGE>
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION>
% Change in Marginal Moody's Volatility
Tax Rate Factor
-------------- -------------
<S> <C>
less than or equal to 5% 292%
greater than 5% but less than or equal to 10% 313%
greater than 10% but less than or equal to 15% 338%
greater than 15% but less than or equal to 20% 364%
greater than 20% but less than or equal to 25% 396%
greater than 25% but less than or equal to 30% 432%
greater than 30% but less than or equal to 35% 472%
greater than 35% but less than or equal to 40% 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such other
potential dividend rate increase factor as Moody's advises the Corporation in
writing is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the Corporation's
Registration Statement on Form N-14 (File No. 333- _______) relating to the AMPS
on file with the Securities and Exchange Commission, as such Registration
Statement may be amended from time to time, as well as short-term municipal
obligations and Inverse Floaters.
"Municipal Index" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Corporation which are stock, including all outstanding shares
of AMPS and Other AMPS (or such other asset
19
<PAGE>
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of paying dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of these
Articles Supplementary) as of the last Business Day of each month, means the
last Business Day of the following month.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Non-Payment Period" means, with respect to each series of AMPS, any period
commencing on and including the day on which the Corporation shall fail to (i)
declare, prior to the close of business on the second Business Day preceding any
Dividend Payment Date, for payment on or (to the extent permitted by paragraph
2(c)(i) of these Articles Supplementary) within three Business Days after such
Dividend Payment Date to the Holders as of 12:00 noon, New York City time, on
the Business Day preceding such Dividend Payment Date, the full amount of any
dividend on 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, New York City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on such shares payable (if declared) on such
Dividend Payment Date or (B) on any redemption date for any 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,
and ending on and including the Business Day on which, by 12:00 noon, New York
City time, all
20
<PAGE>
unpaid cash dividends and unpaid redemption prices shall have been so deposited
or shall have otherwise been made available to Holders in same-day funds;
provided that, a Non-Payment Period shall not end unless the Corporation shall
have given at least five days' but no more than 30 days' written notice of such
deposit or availability to the Auction Agent, all Existing Holders (at their
addresses appearing in the Stock Books) and the Securities Depository.
Notwithstanding the foregoing, the failure by the Corporation to deposit funds
as provided for by clauses (ii)(A) or (ii)(B) above within three Business Days
after any Dividend Payment Date or redemption date, as the case may be, in each
case to the extent contemplated by paragraph 2(c)(i) of these Articles
Supplementary, shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Corporation has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS), provided that the Board of Directors of the Corporation shall
have the authority to adjust, modify, alter or change from time to time the
initial Non-Payment Period Rate if the Board of Directors of the Corporation
determines and Moody's and S&P (and any Substitute Rating Agency in lieu of
Moody's or S&P in the event either of such parties shall not rate the AMPS)
advise the Corporation in writing that such adjustment, modification, alteration
or change will not adversely affect their then-current ratings on the AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of these Articles Supplementary.
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<PAGE>
"Notice of Redemption" means any notice with respect to the redemption of
shares of AMPS pursuant to paragraph 4 of these Articles Supplementary.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
these Articles Supplementary.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of these Articles Supplementary.
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Other AMPS" means the auction rate preferred stock of the Corporation,
other than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, shares of
AMPS theretofore issued by the Corporation except, without duplication, (A) any
shares of AMPS theretofore cancelled or delivered to the Auction Agent for
cancellation, or redeemed by the Corporation, or as to which a Notice of
Redemption shall have been given and Deposit Securities shall have been
deposited in trust or segregated by the Corporation pursuant to paragraph 4(c)
and (B) any shares of AMPS as to which the Corporation or any Affiliate thereof
shall be a Beneficial Owner, provided that shares of AMPS held by an Affiliate
shall be deemed
22
<PAGE>
outstanding for purposes of calculating the AMPS Basic Maintenance Amount and
(ii) with respect to shares of other Preferred Stock, has the equivalent
meaning.
"Parity Stock" means the AMPS and each other outstanding series of
Preferred Stock the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Policy" means an insurance policy purchased by the Corporation which
guarantees the payment of principal and interest on specified New York Municipal
Bonds or Municipal Bonds during the period in which such New York Municipal
Bonds or Municipal Bonds are owned by the Corporation; provided, however, that,
as long as the AMPS are rated by Moody's and S&P, the Corporation will not
obtain any Policy unless Moody's and S&P advise the Corporation in writing that
the purchase of such Policy will not adversely affect their then-current rating
on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
23
<PAGE>
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Corporation, 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 the preferred stock, par value $.10 per share, of
the Corporation, and includes AMPS and Other AMPS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Pricing Service" means J.J. Kenny or any pricing service designated by the
Board of Directors of the Corporation provided the Corporation obtains written
assurance from S&P and Moody's that such designation will not impair the rating
then assigned by S&P and Moody's to the AMPS.
"Quarterly Valuation Date" means the twenty-fifth day of the last month of
each fiscal quarter of the Corporation (or, if such day is not a Business Day,
the next succeeding Business Day) in each fiscal year of the Corporation,
commencing ___________, 2000.
"Receivables for New York Municipal Bonds Sold" has the meaning set forth
under the definition of S&P Discount Factor.
"Receivables for New York Municipal Bonds or Municipal Bonds Sold" has the
meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper
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<PAGE>
Rate and the Taxable Equivalent of the Short-Term Municipal Bond Rate, (ii) with
respect to any Short Term Dividend Period having more than 28 but fewer than 183
days, the applicable "AA" Composite Commercial Paper Rate, (iii) with respect to
any Short Term Dividend Period having 183 or more but fewer than 364 days, the
applicable U.S. Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Response" has the meaning set forth in paragraph 2(c)(iii) of these
Articles Supplementary.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.
"Right," with respect to each series of AMPS, has the meaning set forth in
paragraph 2(e) of these Articles Supplementary and, with respect to Other AMPS,
has the equivalent meaning.
"S&P" means Standard & Poor's, a division of The McGraw Hill Companies,
Inc., or its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any New York Municipal Bond which constitutes an S&P Eligible Asset,
the percentage determined by reference to (a)(i) the rating by S&P, Moody's or
Fitch on such Bond or (ii) in the event the New York Municipal Bond is insured
under a Policy and the terms of the Policy permit the Corporation, at its
option, to obtain other permanent insurance guaranteeing the timely payment
25
<PAGE>
of interest on such New York Municipal Bond and principal thereof to maturity,
the S&P insurance claims-paying ability rating of the issuer of the Policy or
(iii) in the event the New York Municipal Bond is insured under an insurance
policy which guarantees the timely payment of interest on such New York
Municipal Bond and principal thereof to maturity, the S&P insurance claims-
paying ability rating of the issuer of the insurance policy and (b) the S&P
Exposure Period, in accordance with the tables set forth below:
<TABLE>
<CAPTION>
For New York Municipal Bonds:
- ----------------------------
Rating Category
------------------------------------------------
S&P Exposure Period AAA* AA* A* BBB*
- ------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
45 Business Days 210% 215% 230% 270%
25 Business Days 190 195 210 250
10 Business Days 175 180 195 235
7 Business Days 170 175 190 230
3 Business Days 150 155 170 210
</TABLE>
- -------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
New York Municipal Bonds will be 115%, so long as such New York 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 New York 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 New York 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 New York 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 New York
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<PAGE>
Municipal Bonds rated by Moody's or Fitch but not rated by S&P may comprise no
more than 50% of short-term New York Municipal Bonds that qualify as S&P
Eligible Assets, (ii) the S&P Discount Factor for Receivables for New York
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 New York
Municipal Bonds sold, and (iii) no S&P Discount Factor will be applied to cash
or to Receivables for New York Municipal Bonds Sold if such receivables are due
within five Business Days of such Valuation Date. "Receivables for New York
Municipal Bonds Sold," for purposes of calculating S&P Eligible Assets as of any
Valuation Date, means the book value of receivables for New York Municipal Bonds
sold as of or prior to such Valuation Date. The Corporation may adopt S&P
Discount Factors for Municipal Bonds other than New York Municipal Bonds
provided that S&P advises the Corporation in writing that such action will not
adversely affect its then current rating on the AMPS. For purposes of the
foregoing, Anticipation Notes rated SP-1 or, if not rated by S&P, rated VMIG-1
by Moody's or F-1+ by Fitch, which do not mature or have a demand feature
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term New York Municipal Bonds.
"S&P Eligible Asset" means cash, Receivables for New York Municipal Bonds
Sold or a New York Municipal Bond that (i) is interest bearing and pays interest
at least semi-annually; (ii) is payable with respect to principal and interest
in United States Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are grant anticipation notes or
bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's or Fitch, is rated at
least A by Moody's or Fitch (provided that such Moody's-rated or Fitch-rated New
York Municipal Bonds will be
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<PAGE>
included in S&P Eligible Assets only to the extent the Market Value of such New
York Municipal Bonds does not exceed 50% of the aggregate Market Value of the
S&P Eligible Assets; and further provided that, for purposes of determining the
S&P Discount Factor applicable to any such Moody's-rated or Fitch-rated New York
Municipal Bond, such New York Municipal Bond will be deemed to have an S&P
rating which is one full rating category lower than its Moody's rating or Fitch
rating); (iv) is not subject to a covered call or covered put option written by
the Corporation; (v) except for Inverse Floaters, is not part of a private
placement of New York Municipal Bonds; and (vi) except for Inverse Floaters, is
part of an issue of New York Municipal Bonds with an original issue size of at
least $20 million or, if of an issue with an original issue size below $20
million (but in no event below $10 million), is issued by an issuer with a total
of at least $50 million of securities outstanding. Notwithstanding the
foregoing:
(1) New York Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to the
extent the Market Value of such New York Municipal Bonds does not exceed 10% of
the aggregate Market Value of the S&P Eligible Assets, provided that 2% is added
to the applicable S&P Discount Factor for every 1% by which the Market Value of
such New York Municipal Bonds exceeds 5% of the aggregate Market Value of the
S&P Eligible Assets;
(2) New York Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent the
Market Value of such Bonds does not exceed 25% of the aggregate Market Value of
S&P Eligible Assets, except that New York Municipal Bonds falling within the
utility issue type category will be broken down into three sub-categories (as
described below) and such New York Municipal Bonds will be
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<PAGE>
considered S&P Eligible Assets to the extent the Market Value of such Bonds in
each such sub-category does not exceed 25% of the aggregate Market Value of S&P
Eligible Assets and the Market Value of such Bonds in all three sub-categories
combined does not exceed 60% of the aggregate Market Value of S&P Eligible
Assets, except that New York Municipal Bonds falling within the transportation
issue type category will be broken down into two sub-categories (as described
below) and such New York Municipal Bonds will be considered S&P Eligible Assets
to the extent the Market Value of such Bonds in both sub-categories combined (as
described below) does not exceed 40% of the aggregate Market Value of S&P
Eligible Assets and except that New York Municipal Bonds falling within the
general obligation issue type category will be considered S&P Eligible Assets to
the extent the Market Value of such Bonds does not exceed 50% of the aggregate
Market Value of S&P Eligible Assets. For purposes of the issue type category
requirement described above, New York Municipal Bonds will be classified within
one of the following categories: health care issues, housing issues, educational
facilities issues, student loan issues, transportation issues, industrial
development bond issues, utility issues, general obligation issues, lease
obligations, escrowed bonds and other issues not falling within one of the
aforementioned categories. The general obligation issue type category includes
any issuer that is directly or indirectly guaranteed by the State of New York or
its political subdivisions. Utility issuers are included in the general
obligation issue type category if the issuer is directly or indirectly
guaranteed by the State of New York or its political subdivisions. For purposes
of the issue type category requirement described above, New York Municipal Bonds
in the utility issue type category will be classified within one of the three
following sub-categories: (i) electric, gas and combination issues (if the
combination issue includes an electric issue), (ii) water and sewer utilities
and combination issues (if the combination issue does not
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<PAGE>
include an electric issue), and (iii) irrigation, resource recovery, solid waste
and other utilities, provided that New York Municipal Bonds included in this
sub-category (iii) must be rated by S&P in order to be included in S&P Eligible
Assets. For purposes of the issue type category requirement described above, New
York Municipal Bonds in the transportation issue type category will be
classified within one of the two following sub-categories: (i) streets and
highways, toll roads, bridges and tunnels, airports and multi-purpose port
authorities (multiple revenue streams generated by toll roads, airports, real
estate, bridges), (ii) mass transit, parking, seaports and others. Exposure to
transportation sub-category (i) is limited to 25% of the aggregate Market Value
of S&P Eligible Assets, provided, however, exposure to transportation sub-
category (i) can exceed the 25% limit to the extent that exposure to
transportation sub-category (ii) is reduced, for a total exposure up to and not
exceeding 40% of the aggregate Market Value of S&P Eligible Assets for the
transportation issue type category; and
(3) New York Municipal Bonds which are escrow bonds or defeased bonds
may compose up to 100% of the aggregate Market Value of S&P Eligible Assets if
such Bonds initially are assigned a rating by S&P in accordance with S&P's legal
defeasance criteria or rerated by S&P as economic defeased escrow bonds and
assigned an AAA rating. New York Municipal Bonds may be rated as escrow bonds
by another nationally recognized rating agency or rerated as an escrow bond and
assigned the equivalent of an S&P AAA rating, provided that such equivalent
rated Bonds are limited to 50% of the aggregate Market Value of S&P Eligible
Assets and are deemed to have an AA S&P rating for purposes of determining the
S&P Discount Factor applicable to such New York Municipal Bonds. The
limitations on New York Municipal
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<PAGE>
Bonds of any one issuer in clause (1) above is not applicable to escrow bonds,
however, economically defeased bonds that are either initially rate or rerated
by S&P or another nationally recognized rating agency and assigned the same
rating level as the issuer of the Bonds will remain in its original issue type
category set forth in clause (2) above. New York Municipal Bonds that are
legally defeased and secured by securities issued or guaranteed by the United
States Government are not required to meet the minimum issuance size requirement
set forth above.
The Corporation may include Municipal Bonds other than New York Municipal
Bonds as S&P Eligible Assets pursuant to guidelines and restrictions to be
established by S&P provided that S&P advises the Corporation in writing that
such action will not adversely affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Corporation 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 (as described in
paragraph 7(a) of these Articles Supplementary).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
these Articles Supplementary.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Corporation in writing is applicable.
31
<PAGE>
"Securities Depository" means The Depository Trust Company or any successor
company or other entities elected by the Corporation as securities depository
for the shares of AMPS that agrees to follow the procedures required to be
followed by such securities depository in connection with the shares of AMPS.
"Service" means the United States Internal Revenue Service.
"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) evenly divisible by seven and not
fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Corporation, 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 Corporation and (ii) a period (a "Premium Call Period"), consisting of a
number of whole years and determined by the Board of Directors of the
Corporation, after consultation with the Auction Agent and the Broker-Dealers,
during each year
32
<PAGE>
of which the shares of AMPS subject to such Dividend Period shall be redeemable
at the Corporation'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 Corporation after
consultation with the Auction Agent and the Broker-Dealers.
"Stock Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the AMPS.
"Stock Register" means the register of Holders maintained on behalf of the
Corporation by the Auction Agent in its capacity as transfer agent and registrar
for the AMPS.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or, in
lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Corporation, to act as the substitute rating agency
or substitute rating agencies, as the case may be, to determine the credit
ratings of the shares of AMPS.
33
<PAGE>
"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 Corporation may not utilize a successor
index to the Kenny Index unless Moody's and S&P provide the Corporation 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.
34
<PAGE>
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate"
on any date means the Interest Equivalent of the yield as calculated by
reference to the arithmetic average of the bid price quotations of the actively
traded Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate"
on any date means the yield as calculated by reference to the arithmetic average
of the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related
35
<PAGE>
Dividend Period, as determined by the bid price quotations as of any time on the
Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"Valuation Date" means, for purposes of determining whether the Corporation
is maintaining the AMPS Basic Maintenance Amount, each Business Day commencing
with the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Corporation, the amount of cash or securities paid
to or received from a broker (subsequent to the Initial Margin payment) from
time to time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Inverse Floaters, Market Value, Maximum Potential Additional Dividend
Liability, Moody's Discount Factor, Moody's Eligible Asset, Moody's Exposure
Period, Moody's Hedging Transactions, Moody's Volatility Factor, S&P Discount
Factor, S&P Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P
Volatility Factor, Valuation Date and Variation Margin have been determined by
the Board of Directors of the Corporation in order to obtain a "aaa" rating from
Moody's and a AAA rating from S&P on the AMPS on their Date of Original Issue;
and the Board of Directors of the Corporation shall have the authority, without
shareholder approval, to amend, alter or repeal from time to time the foregoing
definitions and the restrictions and
36
<PAGE>
guidelines set forth thereunder if Moody's and S&P or any Substitute Rating
Agency advises the Corporation in writing that such amendment, alteration or
repeal will not adversely affect their then current ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as and
---------
if declared by the Board of Directors of the Corporation, out of funds legally
available therefor, cumulative dividends each consisting of (i) cash at the
Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
below, and (iii) any additional amounts as set forth in paragraph 2(f) below,
and no more, payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends 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 Corporation's investments. To the extent
permitted under the Code, dividends on shares of AMPS will be designated as
exempt-interest dividends. For the purposes of this section, the term "net tax-
exempt income" shall exclude capital gains of the Corporation.
(b) (i) Cash dividends on shares of AMPS shall accumulate from the Date of
Original Issue and shall be payable, when, as and if declared by the Board of
Directors, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date with respect to each series of AMPS. Following the
Initial Dividend Payment Date for each series of AMPS, dividends on each series
of AMPS will be payable, at the option of the Corporation, either (i) with
respect to any 7-Day Dividend Period and any Short Term Dividend Period of 35 or
fewer days, on the day next succeeding the last day thereof or (ii) with respect
to any Short Term Dividend Period of more than 35 days and with respect to any
Long Term Dividend Period,
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monthly on the first Business Day of each calendar month during such Short Term
Dividend Period or Long Term Dividend Period and on the day next succeeding the
last day thereof (each such date referred to in clause (i) or (ii) being herein
referred to as a "Normal Dividend Payment Date"), except that if such Normal
Dividend Payment Date is not a Business Day, then the Dividend Payment Date
shall be the first Business Day next succeeding such Normal Dividend Payment
Date. Although any particular Dividend Payment Date may not occur on the
originally scheduled date because of the exceptions discussed above, the next
succeeding Dividend Payment Date, subject to such exceptions, will occur on the
next following originally scheduled date. If for any reason a Dividend Payment
Date cannot be fixed as described above, then the Board of 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 and Special Dividend Periods are hereinafter sometimes
referred to as Dividend Periods. Each dividend payment date determined as
provided above is hereinafter referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the
Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as they appear on the Stock Register on a
date, not exceeding 15 days prior to the payment date therefor, as may be fixed
by the Board of Directors of the Corporation.
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(c) (i) During the period from and including the Date of Original Issue to
but excluding the Initial Dividend Payment Date for each series of AMPS (the
"Initial Dividend Period"), the Applicable Rate shall be the Initial Dividend
Rate. Commencing on the Initial Dividend Payment Date for each series of AMPS,
the Applicable Rate for each subsequent dividend period (hereinafter referred to
as a "Subsequent Dividend Period"), which Subsequent Dividend Period shall
commence on and include a Dividend Payment Date and shall end on and include the
calendar day prior to the next Dividend Payment Date (or last Dividend Payment
Date in a Dividend Period if there is more than one Dividend Payment Date),
shall be equal to the rate per annum that results from implementation of the
Auction Procedures.
The Applicable Rate for each Dividend Period commencing during a Non-
Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend
Period, commencing after the first day of, and during, a Non-Payment Period
shall be a 7-Day Dividend Period in the case of each series of AMPS. Except in
the case of the willful failure of the Corporation to pay a dividend on a
Dividend Payment Date or to redeem any shares of AMPS on the date set for such
redemption, any amount of any dividend due on any Dividend Payment Date (if,
prior to the close of business on the second Business Day preceding such
Dividend Payment Date, the Corporation has declared such dividend payable on
such Dividend Payment Date to the Holders of such shares of AMPS as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date) or redemption price with respect to any shares of AMPS not paid to such
Holders when due may be paid to such Holders in the same form of funds by 12:00
noon, New York City time, on any of the first three Business Days after such
Dividend Payment Date or due date, as the case may be, provided that, such
amount is accompanied by a late charge
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<PAGE>
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 Corporation
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 shall be considered equivalent to payment to such person in New
York Clearing House (next-day) funds at the same time on the preceding Business
Day, and any payment made after 12:00 noon, New York City time, on any Business
Day shall be considered to have been made instead in the same form of funds and
to the same person before 12:00 noon, New York City time, on the next Business
Day.
(ii) The amount of cash dividends per share of any series of AMPS
payable (if declared) on the Initial Dividend Payment Date, each 7-Day Dividend
Period and each Dividend Payment Date of each Short Term Dividend Period shall
be computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of AMPS payable (if declared) on
any Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such
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<PAGE>
share was outstanding and for which dividends are payable on such Dividend
Payment Date and the denominator of which will be 360, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Corporation may, at its sole option and to the extent permitted by
law, by telephonic and written notice (a "Request for Special Dividend Period")
to the Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for a series of AMPS be a number of days (other than seven),
evenly divisible by seven, and not fewer than seven nor more than 364 in the
case of a Short Term Dividend Period or one whole year or more but not greater
than five years in the case of a Long Term Dividend Period, specified in such
notice, provided that the Corporation may not give a Request for Special
Dividend Period of greater than 28 days (and any such request shall be null and
void) unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the last occurring Auction and unless full cumulative
dividends, any amounts due with respect to redemptions, and any Additional
Dividends payable prior to such date have been paid in full. Such Request for
Special Dividend Period, in the case of a Short Term Dividend Period, shall be
given on or prior to the second Business Day but not more than seven Business
Days prior to an Auction Date for a series of AMPS and, in the case of a Long
Term Dividend Period, shall be given on or prior to the second Business Day but
not more than 28 days prior to an Auction Date for the AMPS. Upon receiving
such Request for Special Dividend Period, the Broker-Dealer(s) shall jointly
determine whether, given the factors set forth below, it is advisable that the
Corporation issue a Notice of Special Dividend Period for the series of AMPS as
contemplated by such Request for Special Dividend
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Period and the Optional Redemption Price of the AMPS during such Special
Dividend Period and the Specific Redemption Provisions and shall give the
Corporation and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination the Broker-Dealer(s) will consider (1)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the AMPS, (4) industry and financial conditions which
may affect the AMPS, (5) the investment objective of the Corporation, and (6)
the Dividend Periods and dividend rates at which current and potential
beneficial holders of the AMPS would remain or become beneficial holders. If the
Broker-Dealer(s) shall not give the Corporation and the Auction Agent a Response
by such second Business Day or if the Response states that given the factors set
forth above it is not advisable that the Corporation give a Notice of Special
Dividend Period for the series of AMPS, the Corporation may not give a Notice of
Special Dividend Period in respect of such Request for Special Dividend Period.
In the event the Response indicates that it is advisable that the Corporation
give a Notice of Special Dividend Period for the series of AMPS, the Corporation
may by no later than the second Business Day prior to such Auction Date give a
notice (a "Notice of Special Dividend Period") to the Auction Agent, the
Securities Depository and each Broker-Dealer which notice will specify (i) the
duration of the Special Dividend Period, (ii) the Optional Redemption Price as
specified in the related Response and (iii) the Specific Redemption Provisions,
if any, as specified in the related Response. The Corporation also shall provide
a copy of such Notice of Special Dividend Period to Moody's and S&P. The
Corporation shall not give a Notice of Special Dividend Period and, if the
Corporation has given
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a Notice of Special Dividend Period, the Corporation is required to give
telephonic and written notice of its revocation (a "Notice of Revocation") to
the Auction Agent, each Broker-Dealer, and the Securities Depository on or prior
to the Business Day prior to the relevant Auction Date if (x) either the 1940
Act AMPS Asset Coverage is not satisfied or the Corporation shall fail to
maintain S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount, in each
case on each of the two Valuation Dates immediately preceding the Business Day
prior to the relevant Auction Date on an actual basis and on a pro forma basis
giving effect to the proposed Special Dividend Period (using as a pro forma
dividend rate with respect to such Special Dividend Period the dividend rate
which the Broker-Dealers shall advise the Corporation is an approximately equal
rate for securities similar to the AMPS with an equal dividend period), provided
that, in calculating the aggregate Discounted Value of Moody's Eligible Assets
for this purpose, the Moody's Exposure Period shall be deemed to be one week
longer, (y) sufficient funds for the payment of dividends payable on the
immediately succeeding Dividend Payment Date have not been irrevocably deposited
with the Auction Agent by the close of business on the third Business Day
preceding the related Auction Date or (z) the Broker-Dealer(s) jointly advise
the Corporation that after consideration of the factors listed above they have
concluded that it is advisable to give a Notice of Revocation. The Corporation
also shall provide a copy of such Notice of Revocation to Moody's and S&P. If
the Corporation is prohibited from giving a Notice of Special Dividend Period as
a result of any of the factors enumerated in clause (x), (y) or (z) above or if
the Corporation gives a Notice of Revocation with respect to a Notice of Special
Dividend Period for any series of AMPS, the next succeeding Dividend Period will
be a 7-Day Dividend Period. In addition, in the event Sufficient Clearing Bids
are not made in the applicable Auction or such
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Auction is not held for any reason, such next succeeding Dividend Period will be
a 7-Day Dividend Period and the Corporation may not again give a Notice of
Special Dividend Period for the AMPS (and any such attempted notice shall be
null and void) until Sufficient Clearing Bids have been made in an Auction with
respect to a 7-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends and
applicable late charges, as herein provided, on the shares of AMPS (except for
Additional Dividends as provided in paragraph 2(e) hereof and additional
payments as provided in paragraph 2(f) hereof). Except for the late charge
payable pursuant to paragraph 2(c)(i) hereof, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment on the
shares of AMPS that may be in arrears.
(ii) For so long as any share of AMPS is Outstanding, the Corporation
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Stock or other
stock, if any, ranking junior to the shares of AMPS as to dividends or upon
liquidation) in respect of the Common Stock or any other stock of the
Corporation ranking junior to or on a parity with the shares of AMPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the Common Stock or any other
such junior stock (except by conversion into or exchange for stock of the
Corporation ranking junior to the shares of AMPS as to dividends and upon
liquidation) or any other such Parity Stock (except by conversion into or
exchange for stock of the Corporation ranking junior to or on a parity with the
shares of AMPS as to dividends and upon liquidation),
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unless (A) immediately after such transaction, the Corporation shall have S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount and the
Corporation shall maintain the 1940 Act AMPS Asset Coverage, (B) full cumulative
dividends on shares of AMPS and shares of Other AMPS due on or prior to the date
of the transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid under paragraph 2(e) below on or
before the date of such declaration or payment has been paid and (D) the
Corporation has redeemed the full number of shares of AMPS required to be
redeemed by any provision for mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii) an
uncertificated right (a "Right") to receive an Additional Dividend (as defined
below), and (iii) any additional amounts as set forth in paragraph 2(f) below.
Each Right shall thereafter be independent of the share or shares of AMPS on
which the dividend was paid. The Corporation shall cause to be maintained a
record of each Right received by the respective Holders. A Right may not be
transferred other than by operation of law. If the Corporation retroactively
allocates any net capital gains or other income subject to regular Federal
income taxes to shares of AMPS without having given advance notice thereof to
the Auction Agent as described in paragraph 2(f) hereof solely by reason of the
fact that such allocation is made as a result of the redemption of all or a
portion of the outstanding shares of AMPS or the liquidation of the Corporation
(the amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Corporation will, within 90 days (and generally within 60
days) after the end of the Corporation's fiscal year for
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<PAGE>
which a Retroactive Taxable Allocation is made, provide notice thereof to the
Auction Agent and to each holder of a Right applicable to such shares of AMPS
(initially Cede & Co. as nominee of The Depository Trust Company) during such
fiscal year at such holder's address as the same appears or last appeared on the
Stock Books of the Corporation. The Corporation will, within 30 days after such
notice is given to the Auction Agent, pay to the Auction Agent (who will then
distribute to such holders of Rights), out of funds legally available therefor,
an amount equal to the aggregate Additional Dividend with respect to all
Retroactive Taxable Allocations made to such holders during the fiscal year in
question.
An "Additional Dividend" means payment to a present or former holder of
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 and New York income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder if
the amount of the aggregate Retroactive Taxable Allocations would have been
excludable from the gross income of such holder. Such Additional Dividend shall
be calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of shares of AMPS is subject to the Federal
alternative minimum tax with respect to dividends received from the Corporation;
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: (x) the maximum
combined marginal regular Federal and New York individual income tax rate
applicable to ordinary income or capital gains depending on the taxable
character of the distribution (including any surtax); or
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<PAGE>
(y) the maximum combined marginal regular Federal and New York corporate income
tax rate applicable to ordinary income or capital gains depending on the taxable
character of the distribution (taking into account in both (x) and (y) the
Federal income tax deductibility of state taxes paid or incurred but not any
phase out of, or provision limiting, personal exemptions, itemized deductions,
or the benefit of lower tax brackets and assuming the taxability of Federally
tax-exempt dividends for corporations for New York state income tax purposes).
(f) Except as provided below, whenever the Corporation intends to include
any net capital gains or other income subject to regular Federal income taxes in
any dividend on shares of AMPS, the Corporation will notify the Auction Agent of
the amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established. The
Corporation may also include such income in a dividend on shares of a series of
AMPS without giving advance notice thereof if it increases the dividend by an
additional amount calculated as if such income was a Retroactive Taxable
Allocation and the additional amount was an Additional Dividend, provided that
the Corporation will notify the Auction Agent of the additional amounts to be
included in such dividend at least five Business Days prior to the applicable
Dividend Payment Date.
(g) No fractional shares of AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or winding up of
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the Corporation, whether voluntary or involuntary, the Holders shall be entitled
to receive, out of the assets of the Corporation available for distribution to
shareholders, before any distribution or payment is made upon any Common Stock
or any other capital stock ranking junior in right of
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payment upon liquidation to the AMPS, the sum of $25,000 per share plus
accumulated but unpaid dividends (whether or not earned or declared) thereon to
the date of distribution, and after such payment the Holders will be entitled to
no other payments other than Additional Dividends as provided in paragraph 2(e)
hereof. If upon any liquidation, dissolution or winding up of the Corporation,
the amounts payable with respect to the AMPS and any other Outstanding class or
series of Preferred Stock of the Corporation ranking on a parity with the AMPS
as to payment upon liquidation are not paid in full, the Holders and the holders
of such other class or series will share ratably in any such distribution of
assets in proportion to the respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the Holders will not be entitled to any further
participation in any distribution of assets by the Corporation except for any
Additional Dividends. A consolidation, merger or statutory share exchange of the
Corporation with or into any other corporation or entity or a sale, whether for
cash, shares of stock, securities or properties, of all or substantially all or
any part of the assets of the Corporation shall not be deemed or construed to be
a liquidation, dissolution or winding up of the Corporation.
4. Redemption. (a) Shares of AMPS shall be redeemable by the Corporation
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as provided below:
(i) To the extent permitted under the 1940 Act and Maryland law, upon
giving a Notice of Redemption, the Corporation 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 Corporation during (A) the
Initial Dividend Period with respect to a series of shares
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or (B) a Non-Call Period to which such share is subject. In addition, holders of
AMPS which are redeemed shall be entitled to receive Additional Dividends to the
extent provided herein. The Corporation may not give a Notice of Redemption
relating to an optional redemption as described in this paragraph 4(a)(i)
unless, at the time of giving such Notice of Redemption, the Corporation has
available Deposit Securities with maturity or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount due to Holders by reason of the redemption of their shares of AMPS on
such redemption date.
(ii) The Corporation shall 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 Corporation fails to maintain S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount as provided in paragraph 7(a) or
to satisfy the 1940 Act AMPS Asset Coverage as provided in paragraph 6 and such
failure is not cured on or before the AMPS Basic Maintenance Cure Date or the
1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the
case may be. In addition, holders of AMPS so redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The number of
shares of AMPS to be redeemed shall be equal to the lesser of (i) 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
shares of other Preferred Stock subject to redemption or retirement, would
result in the Corporation 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
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Asset Coverage, as the case may be, on such Cure Date (provided that, if there
is no such minimum number of shares of AMPS and shares of other Preferred Stock
the redemption of which would have such result, all shares of AMPS and shares of
other Preferred Stock then Outstanding shall be redeemed), and (ii) the maximum
number of shares of AMPS, together with all shares of other 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 Corporation shall allocate the number required to be redeemed
which would result in the Corporation 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 of all series, Other
AMPS and other Preferred Stock subject to redemption pursuant to provisions
similar to those contained in this paragraph 4(a)(ii); provided that, shares of
AMPS which may not be redeemed at the option of the Corporation 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 Corporation shall effect such redemption on a Business Day
which is not later than 35 days after such Cure Date, except that if the
Corporation does not have funds legally available for the redemption of all of
the required number of shares of AMPS and shares of other Preferred Stock which
are subject to mandatory redemption or the Corporation otherwise is unable to
effect such redemption on or
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prior to 35 days after such Cure Date, the Corporation shall redeem those shares
of AMPS which it is unable to redeem on the earliest practicable date on which
it is able to effect such redemption out of funds legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares of
AMPS may be redeemed pursuant to paragraph 4(a)(i) of these Articles
Supplementary (i) unless all dividends in arrears on all remaining outstanding
shares of Parity Stock shall have been or are being contemporaneously paid or
declared and set apart for payment and (ii) if redemption thereof would result
in the Corporation's failure to maintain Moody's Eligible Assets or S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount. In the event that less than all the outstanding
shares of a series of AMPS are to be redeemed and there is more than one Holder,
the shares of that series of AMPS to be redeemed shall be selected by lot or
such other method as the Corporation shall deem fair and equitable.
(c) Whenever shares of AMPS are to be redeemed, the Corporation, not less
than 17 nor more than 60 days prior to the date fixed for redemption, shall mail
a notice ("Notice of Redemption") by first-class mail, postage prepaid, to each
Holder of shares of AMPS to be redeemed and to the Auction Agent. The
Corporation shall cause the Notice of Redemption to also be published in the
eastern and national editions of The Wall Street Journal. The Notice of
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Redemption shall set forth (i) the redemption date, (ii) the amount of the
redemption price, (iii) the aggregate number of shares of AMPS of such series to
be redeemed, (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 shall cease to accumulate on
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such redemption date (except that holders may be entitled to Additional
Dividends) and (vi) the provision of these Articles Supplementary pursuant to
which such shares are being redeemed. No defect in the Notice of Redemption or
in the mailing or publication thereof shall affect the validity of the
redemption proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Corporation shall have deposited in trust with
the Auction Agent, or segregated in an account at the Corporation's custodian
bank for the benefit of the Auction Agent, Deposit Securities (with a right of
substitution) having an aggregate Discounted Value (utilizing in the case of S&P
an S&P Exposure Period of 22 Business Days) equal to the redemption payment for
the shares of AMPS as to which such Notice of Redemption has been given with
irrevocable instructions and authority to pay the redemption price to the
Holders of such shares, then upon the date of such deposit or, if no such
deposit is made, then upon such date fixed for redemption (unless the
Corporation shall default in making the redemption payment), all rights of the
Holders of such shares as shareholders of the Corporation by reason of the
ownership of such shares will cease and terminate (except their right to receive
the redemption price in respect thereof and any Additional Dividends, but
without interest), and such shares shall no longer be deemed outstanding. The
Corporation shall be entitled to receive, from time to time, from the Auction
Agent the interest, if any, on such Deposit Securities deposited with it and the
Holders of any shares so redeemed shall have no claim to any of such interest.
In case the Holder of any shares so called for redemption shall not claim the
redemption payment for his shares within one year after the date of redemption,
the Auction Agent shall, upon demand, pay over to the Corporation such amount
remaining on deposit and the Auction Agent shall thereupon be
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relieved of all responsibility to the Holder of such shares called for
redemption and such Holder thereafter shall look only to the Corporation for the
redemption payment.
5. Voting Rights. (a) General. Except as otherwise provided in the
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Charter or By-Laws, each Holder of shares of AMPS shall be entitled to one vote
for each share held on each matter submitted to a vote of shareholders of the
Corporation, and the holders of outstanding shares of Preferred Stock, including
AMPS, and of shares of Common Stock shall vote together as a single class;
provided that, at any meeting of the shareholders of the Corporation held for
the election of directors, the holders of outstanding shares of Preferred Stock,
including AMPS, shall be entitled, as a class, to the exclusion of the holders
of all other securities and classes of capital stock of the Corporation, to
elect two directors of the Corporation. Subject to paragraph 5(b) hereof, the
holders of outstanding shares of capital stock of the Corporation, including the
holders of outstanding shares of Preferred Stock, including AMPS, voting as a
single class, shall elect the balance of the directors.
(b) Right to Elect Majority of Board of Directors. During any period in
---------------------------------------------
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically increased by the
smallest number that, when added to the two directors elected exclusively by the
holders of shares of Preferred Stock, would constitute a majority of the Board
of Directors as so increased by such smallest number; and the holders of shares
of Preferred Stock shall be entitled, voting separately as one class (to the
exclusion of the holders of all other securities and classes of capital stock of
the Corporation), to elect such smallest number of
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additional directors, together with the two directors that such holders are in
any event entitled to elect. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of AMPS equal to at least two
full years' dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the payment
of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Stock are
entitled to elect a majority of the directors of the Corporation under the 1940
Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this paragraph 5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as any
---------------------------------------------------
shares of AMPS are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of Preferred Stock
Outstanding at the time, voting separately as one class: (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 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
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outstanding, the Corporation 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 the holders of at least a majority 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 Corporation shall notify Moody's and
S&P ten Business Days prior to any such vote described in clause (i) or (ii).
Unless a higher percentage is provided for under the Charter, the affirmative
vote of the holders of a majority of the outstanding shares of Preferred Stock,
including AMPS, voting together as a single class, will be required to approve
any plan of reorganization (including bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act. The class vote of holders of shares of Preferred
Stock, including AMPS, described above will in each case be in addition to a
separate vote of the requisite percentage of shares of Common Stock and shares
of Preferred Stock, including AMPS, voting together as a single class necessary
to authorize the action in question.
(d) Voting Procedures.
-----------------
(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Stock to elect additional directors as described
in paragraph 5(b) above, the Corporation shall call a special meeting of such
holders and instruct the Auction Agent to mail a notice of such special meeting
to such holders, such meeting to be held not less than 10 nor more than 20 days
after the date of mailing of such notice. If the Corporation fails to send such
notice to the Auction Agent or if the Corporation does not call such a special
meeting, it may be called
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by any such holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice is
mailed. At any such special meeting and at each meeting held during a Voting
Period, such Holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of capital stock of the
Corporation), shall be entitled to elect the number of directors prescribed in
paragraph 5(b) above. At any such meeting or adjournment thereof in the absence
of a quorum, a majority of such holders present in person or by proxy shall have
the power to adjourn the meeting without notice, other than by an announcement
at the meeting, to a date not more than 120 days after the original record date.
(ii) For purposes of determining any rights of the Holders to vote on
any matter or the number of shares required to constitute a quorum, whether such
right is created by these Articles Supplementary, by the other provisions of the
Charter, by statute or otherwise, a share of AMPS which is not Outstanding shall
not be counted.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of Holders and holders of other
Preferred Stock to elect directors shall continue, notwithstanding the election
at such meeting by the Holders and such other holders of the number of directors
that they are entitled to elect, and the persons so elected by the Holders and
such other holders, together with the two incumbent directors elected by the
Holders and such other holders of Preferred Stock and the remaining incumbent
directors elected by the holders of the Common Stock and Preferred Stock, shall
constitute the duly elected directors of the Corporation.
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(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional directors elected by the Holders and holders of
other Preferred Stock pursuant to paragraph 5(b) above shall terminate, the
remaining directors shall constitute the directors of the Corporation and the
voting rights of the Holders and such other holders to elect additional
directors pursuant to paragraph 5(b) above shall cease, subject to the
provisions of the last sentence of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
----------------
shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
remedy of the Holders shall be the right to vote for directors pursuant to the
provisions of this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders of
-------------------------------
AMPS is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Corporation shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify S&P and Moody's that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and, not later than ten Business Days after the date on which such vote is
taken, notify S&P and Moody's of the result of such vote.
6. 1940 Act AMPS Asset Coverage. The Corporation shall maintain, as of
----------------------------
the last Business Day of each month in which any share of AMPS is outstanding,
the 1940 Act AMPS Asset Coverage.
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7. AMPS Basic Maintenance Amount. (a) The Corporation shall maintain, on
-----------------------------
each Valuation Date, and shall verify to its satisfaction that it is maintaining
on such Valuation Date, (i) S&P Eligible Assets having an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount and (ii)
Moody's Eligible Assets having an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount. Upon any failure to maintain the
required Discounted Value, the Corporation will use its best efforts to alter
the composition of its portfolio to reattain a Discounted Value at least equal
to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic Maintenance
Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Corporation fails to satisfy the AMPS Basic
Maintenance Amount, the Corporation shall complete and deliver to the Auction
Agent, and Moody's and S&P, as the case may be, a complete AMPS Basic
Maintenance Report as of the date of such failure, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy or
telecopy, telex or other electronic transcription thereof and on the same day
the Corporation mails to the Auction Agent for delivery on the next Business Day
the complete AMPS Basic Maintenance Report. The Corporation will deliver an
AMPS Basic Maintenance Report to the Auction Agent and Moody's and S&P, as the
case may be, on or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Corporation cures its failure to
maintain Moody's Eligible Assets or S&P Eligible Assets, as the case may be,
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or on which the Corporation fails to maintain Moody's
Eligible Assets or S&P Eligible Assets, as the case may be, with an aggregate
Discounted Value which exceeds the AMPS Basic
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Maintenance Amount by 5% or more. The Corporation will also deliver an AMPS
Basic Maintenance Report to the Auction Agent, Moody's and S&P as of each
Quarterly Valuation Date on or before the third Business Day after such date.
Additionally, on or before 5:00 p.m., New York City time, on the third Business
Day after the first day of a Special Dividend Period, the Corporation will
deliver an AMPS Basic Maintenance Report to S&P and the Auction Agent. The
Corporation shall also provide Moody's and S&P with an AMPS Basic Maintenance
Report when specifically requested by either Moody's or S&P. A failure by the
Corporation to deliver an AMPS Basic Maintenance Report under this paragraph
7(b) shall be deemed to be delivery of an AMPS Basic Maintenance Report
indicating the Discounted Value for S&P Eligible Assets and Moody's Eligible
Assets of the Corporation is less than the AMPS Basic Maintenance Amount, as of
the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an AMPS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent, S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other AMPS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Corporation during the quarter ending on such Quarterly Valuation Date),
(ii) that, in such Report (and in such randomly selected Report), the
Corporation correctly determined the assets of the Corporation which constitute
S&P Eligible Assets or Moody's Eligible Assets, as the case may be, at such
Quarterly Valuation Date in accordance with these Articles Supplementary, (iii)
that, in such Report (and in such randomly selected Report), the Corporation
determined whether the Corporation had, at such Quarterly Valuation Date (and at
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the Valuation Date addressed in such randomly selected Report) in accordance
with these Articles Supplementary, S&P Eligible Assets of an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount and Moody's
Eligible Assets of an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount, (iv) with respect to the S&P ratings on New York
Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon rate
listed in such Report, that the Independent Accountant has requested that S&P
verify such information and the Independent Accountant shall provide a listing
in its letter of any differences, (v) with respect to the Moody's ratings on New
York Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon
rate listed in such Report, that such information has been verified by Moody's
(in the event such information is not verified by Moody's, the Independent
Accountant will inquire of Moody's what such information is, and provide a
listing in its letter of any differences), (vi) with respect to the bid or mean
price (or such alternative permissible factor used in calculating the Market
Value) provided by the custodian of the Corporation's assets to the Corporation
for purposes of valuing securities in the Corporation's portfolio, the
Independent Accountant has traced the price used in such Report to the bid or
mean price listed in such Report as provided to the Corporation and verified
that such information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
and (vii) with respect to such confirmation to Moody's, that the Corporation has
satisfied the requirements of paragraph 8(b) of these Articles Supplementary
(such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above
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relating to any Valuation Date on which the Corporation failed to maintain S&P
Eligible Assets with an aggregate Discounted Value and Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount, and relating to the AMPS Basic Maintenance Cure Date with
respect to such failure, the Independent Accountant will provide to the Auction
Agent, S&P and Moody's an Accountant's Confirmation as to such AMPS Basic
Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph (c)
or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Corporation was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Corporation, and the Corporation shall accordingly amend and deliver the AMPS
Basic Maintenance Report to the Auction Agent, S&P and Moody's promptly
following receipt by the Corporation of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the shares of AMPS, the Corporation will
complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report as of
the close of business on such Date of Original Issue. Within five Business Days
of such Date of Original Issue, the Independent Accountant will confirm in
writing to S&P and Moody's (i) the mathematical accuracy of the calculations
reflected in such Report and (ii) that the aggregate Discounted Value of S&P
Eligible Assets and the aggregate Discounted Value of Moody's Eligible Assets
reflected thereon
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equals or exceeds the AMPS Basic Maintenance Amount reflected thereon. Also, on
or before 5:00 p.m., New York City time, on the first Business Day after shares
of Common Stock are repurchased by the Corporation, the Corporation 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.
(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the effect
of any such alteration would be to cause the Corporation to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of such
Valuation Date; provided, however, that in the event that, as of the immediately
preceding Valuation Date, the aggregate Discounted Value of Moody's Eligible
Assets exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Adviser will not alter the composition of the Corporation's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of Moody's
Eligible Assets unless the Corporation shall have confirmed that, after giving
effect to such alteration, the aggregate Discounted Value of Moody's Eligible
Assets would exceed the AMPS Basic Maintenance Amount.
8. Certain Other Restrictions and Requirements.
-------------------------------------------
(a) For so long as any shares of AMPS are rated by S&P, the Corporation
will not purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions
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will not impair the ratings then assigned to the shares of AMPS by S&P, except
that the Corporation may purchase or sell futures contracts based on the Bond
Buyer Municipal Bond Index (the "Municipal Index") or United States Treasury
Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and call
options on such contracts (collectively, "S&P Hedging Transactions"), subject to
the following limitations:
(i) the Corporation will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a futures
contract or option held by the Corporation by the Corporation's taking an
opposite position thereto ("Closing Transactions")), which would cause the
Corporation at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding futures contracts based on the Municipal Index, (B)
outstanding futures contracts based on the Municipal Index exceeding in number
25% of the quotient of the Market Value of the Corporation's total assets
divided by $1,000 or (C) outstanding futures contracts based on the Municipal
Index exceeding in number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
-----------------------
(ii) the Corporation will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause the
Corporation at the time of such transaction to own or have sold the lesser of
(A) outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Corporation's total assets
divided by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts based on
Treasury Bonds in
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the 30 days preceding the time of effecting such transaction as reported by The
---
Wall Street Journal;
- -------------------
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract which the Corporation owns or has sold or
any outstanding option thereon owned by the Corporation in the event (A) the
Corporation 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 Corporation is required to pay Variation Margin on
the second such Valuation Date;
(iv) the Corporation will engage in a Closing Transaction to close out
any outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon unless
the Corporation holds the securities deliverable under such terms; and
(v) when the Corporation writes a futures contract or option thereon,
it will either maintain an amount of cash, cash equivalents or high grade (rated
A or better by S&P), fixed-income securities in a segregated account with the
Corporation'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
Corporation's broker with respect to such futures contract or option equals the
Market Value of the futures contract or option, or, in the event the Corporation
writes a futures contract or option thereon which requires delivery of an
underlying security, it shall hold such underlying security in its portfolio.
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For purposes of determining whether the Corporation has S&P Eligible Assets
with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Corporation plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on Treasury Bonds which contracts are owned
by the Corporation.
(b) For so long as any shares of AMPS are rated by Moody's, the Corporation
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the ratings then assigned to the shares of AMPS by Moody's, except that
the Corporation may purchase or sell exchange-traded futures contracts based on
the Municipal Index or Treasury Bonds and purchase, write or sell exchange-
traded put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively, "Moody's
Hedging Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any Moody's Hedging Transaction
based on the Municipal Index (other than Closing Transactions) which would cause
the Corporation at the time of such transaction to own or have sold (A)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting
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such transaction as reported by The Wall Street Journal or (B) outstanding
-----------------------
futures contracts based on the Municipal Index having a Market Value exceeding
50% of the Market Value of all Municipal Bonds constituting Moody's Eligible
Assets owned by the Corporation (other than Moody's Eligible Assets already
subject to a Moody's Hedging Transaction);
(ii) the Corporation will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions) which
would cause the Corporation at the time of such transaction to own or have sold
(A) outstanding futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 20% of the aggregate Market Value of Moody's Eligible
Assets owned by the Corporation and rated Aa by Moody's (or, if not rated by
Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding futures contracts
based on Treasury Bonds having an aggregate Market Value exceeding 40% of the
aggregate Market Value of all Municipal Bonds constituting Moody's Eligible
Assets owned by the Corporation (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 Corporation shall be deemed to own the
number of futures contracts that underlie any outstanding options written by the
Corporation);
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index if the amount
of open interest in the Municipal Index as reported by The Wall Street Journal
-----------------------
is less than 5,000;
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(iv) the Corporation will engage in a Closing Transaction to close out
any outstanding futures contract by no later than the fifth Business Day of the
month in which such contract expires and will engage in a Closing Transaction to
close out any outstanding option on a futures contract by no later than the
first Business Day of the month in which such option expires;
(v) the Corporation will engage in Moody's Hedging Transactions only
with respect to futures contracts or options thereon having the next settlement
date or the settlement date immediately thereafter;
(vi) the Corporation will not engage in options and futures
transactions for leveraging or speculative purposes and will not write any call
options or sell any futures contracts for the purpose of hedging the anticipated
purchase of an asset prior to completion of such purchase; and
(vii) the Corporation will not enter into an option or futures
transaction unless, after giving effect thereto, the Corporation 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 Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets which the
Corporation 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 Corporation which are either exchange-traded and "readily
reversible" or which expire within 49 days after the date as of which such
valuation is made shall
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be valued at the lesser of (a) Discounted Value and (b) the exercise price of
the call option written by the Corporation; (ii) assets subject to call options
written by the Corporation not meeting the requirements of clause (i) of this
sentence shall have no value; (iii) assets subject to put options written by the
Corporation 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 Corporation is the seller the
contract may be valued at the settlement price and where the Corporation 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 Corporation with any
security of a class of securities, the Corporation shall assume that it will
take delivery of the security with the lowest Discounted Value.
For purposes of determining whether the Corporation 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 Corporation: (i)
10% of the exercise price of a written call option; (ii) the exercise price of
any written put option; (iii) where the Corporation is the seller under a
futures contract, 10% of the settlement price of the futures contract; (iv)
where the Corporation is the purchaser under a futures contract, the settlement
price of assets purchased under such futures contract; (v) the settlement price
of the underlying futures contract if the Corporation writes put options on a
futures contract; and (vi) 105% of the Market Value of the underlying
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futures contracts if the Corporation writes call options on a futures contract
and does not own the underlying contract.
(c) For so long as any shares of AMPS are rated by Moody's, the Corporation
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions that are permitted under paragraph 8(b)
of these Articles Supplementary), except that the Corporation 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 Corporation will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities rated P-
1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a Market Value that equals or exceeds the amount of the
Corporation'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 Corporation's obligations under any
Forward Commitment to which it is from time to time a party; and
(ii) the Corporation will not enter into a Forward Commitment unless,
after giving effect thereto, the Corporation 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 Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount,
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the Discounted Value of all Forward Commitments to which the Corporation is a
party and of all securities deliverable to the Corporation pursuant to such
Forward Commitments shall be zero.
(d) For so long as shares of AMPS are rated by S&P or Moody's, the
Corporation will not, unless it has received written confirmation from S&P
and/or Moody's, as the case may be, that such action would not impair the
ratings then assigned to shares of AMPS by S&P and/or Moody's, as the case may
be, (i) borrow money except for the purpose of clearing transactions in
portfolio securities (which borrowings shall under any circumstances be limited
to the lesser of $10 million and an amount equal to 5% of the Market Value of
the Corporation'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 Corporation, (v) reissue any AMPS previously purchased or
redeemed by the Corporation, (vi) merge or consolidate into or with any other
corporation or entity, (vii) change the Pricing Service or (viii) engage in
reverse repurchase agreements.
(e) For so long as AMPS are rated by Moody's, the Corporation agrees to
provide Moody's with the following, unless the Corporation has received written
confirmation from Moody's that the provision of such information is no longer
required and that the current rating then assigned to the AMPS by Moody's would
not be impaired: a notification letter at least 30 days prior to any material
change in the Charter; a copy of the AMPS Basic Maintenance
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Report prepared by the Corporation in accordance with these Articles
Supplementary; and a notice upon the occurrence of any of the following events:
(i) any failure by the Corporation to declare or pay any dividends on the AMPS
or successfully remarket the AMPS; (ii) any mandatory or optional redemption of
the AMPS effected by the Corporation; (iii) any assumption of control of the
Board of Directors of the Corporation by the holders of the AMPS; (iv) a general
unavailability of dealer quotes on the assets of the Corporation; (v) any
material auditor discrepancies on valuations; (vi) the dividend rate on the AMPS
equals or exceeds 95% of the Aaa Composite Commercial Paper Rate; (vii) the
occurrence of any Special Dividend Period; (viii) any change in the Maximum
Applicable Rate or the Reference Rate; (ix) the acquisition by any person of
beneficial ownership of more than 5% of the Corporation's voting stock
(inclusive of Common Stock and Preferred Stock); (x) the occurrence of any
change in Internal Revenue Service rules with respect to the payment of
Additional Dividends; (xi) any change in the Pricing Service employed by the
Corporation; (xii) any change in the Investment Adviser; (xiii) any increase of
greater than 40% to the maximum marginal Federal income tax rate applicable to
individuals or corporations; and (xiv) the maximum marginal Federal income tax
rate applicable to individuals or corporations is increased to a rate in excess
of 50%.
9. Notice. All notices or communications, unless otherwise specified in
------
the By-Laws of the Corporation or these Articles Supplementary, shall be
sufficiently given if in writing and delivered in person or mailed by first-
class mail, postage prepaid. Notice shall be deemed given on the earlier of the
date received or the date seven days after which such notice is mailed.
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10. Auction Procedures. (a) Certain definitions. As used in this
------------------ -------------------
paragraph 10, the following terms shall have the following meanings, unless the
context otherwise requires:
(i) "AMPS" means the shares of AMPS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph
10(d)(i) below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such ratings
by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and (ii) whether the
Corporation has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph 2(f)
hereof that net capital gains or other taxable income will be included in such
dividend on shares of AMPS as follows:
72
<PAGE>
<TABLE>
<CAPTION>
Credit Ratings Applicable Percentage Applicable Percentage
-------------- of Reference Rate - of Reference Rate -
Moody's S&P No Notification Notification
- ---------------------- ----------------------- --------------- ------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Corporation shall take all reasonable action necessary to enable S&P
and Moody's to provide a rating for each series of the AMPS. If either S&P or
Moody's shall not make such a rating available, or neither S&P nor Moody's shall
make such a rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated
or its affiliates and successors, after consultation with the Corporation, shall
select a nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating Agency
or Substitute Rating Agencies, as the case may be.
(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by the
Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
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<PAGE>
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in
paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders.
(i) Unless otherwise permitted by the Corporation, 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
74
<PAGE>
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 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.
75
<PAGE>
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
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<PAGE>
(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.
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<PAGE>
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) 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 Corporation);
(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
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<PAGE>
(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 28 days or more) and a Sell Order (in the case of an Auction relating
to a Special Dividend Period of 28 days or more) to have been submitted on
behalf of such Existing Holder covering the number of Outstanding 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 Order 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
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<PAGE>
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, will 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 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
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<PAGE>
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 as a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
---------------------------------------------------------------
Applicable Rate.
- ---------------
(i) Not earlier than the Submission Deadline on each Auction Date,
the Auction Agent shall assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
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<PAGE>
(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 clause (1)
above and this clause (2) are each zero because all of the Outstanding
shares of AMPS are the subject of Submitted Hold Orders), such
Submitted Bids by Potential Holders being hereinafter 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
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<PAGE>
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
(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 Corporation
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, that the Dividend Period next succeeding the
Auction shall automatically
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<PAGE>
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
Corporation has provided notification to the Auction Agent prior to
the Auction establishing the Applicable Rate for any dividend pursuant
to paragraph 2(f) hereof that net capital gains or other taxable
income will be included in such dividend on shares of AMPS) on the
date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
--------------------------------------------------------------------
and Allocation of Shares. Based on the determinations made pursuant to
- ------------------------
paragraph 10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as set
forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order of
priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is higher than the Winning Bid Rate shall be
accepted, thus requiring each such Existing Holder to sell the
Outstanding shares of AMPS that are the subject of such Submitted Sell
Order or Submitted Bid;
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<PAGE>
(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
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
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<PAGE>
number 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
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<PAGE>
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
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<PAGE>
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 shall, in such
manner as in its sole discretion it shall determine, 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.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of
Outstanding shares of AMPS to be purchased and the aggregate number of the
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.
88
<PAGE>
(f) Miscellaneous. The Corporation 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 Corporation nor any Affiliate shall submit an Order in
any Auction. Any Beneficial Owner that is an Affiliate shall not sell, transfer
or otherwise dispose of shares of AMPS to any Person other than the Corporation.
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 Corporation'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 therefor upon
transfer or exchange thereof.
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11. Securities Depository; Stock Certificates. (a) If there is a
-----------------------------------------
Securities Depository, one certificate for all of the shares of AMPS of each
series shall be issued to the Securities Depository and registered in the name
of the Securities Depository or its nominee. Additional certificates may be
issued as necessary to represent shares of AMPS. All such certificates shall
bear a legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of AMPS contained in these
Articles Supplementary. Unless the Corporation shall have elected, during a
Non-Payment Period, to waive this requirement, the Corporation will also issue
stop-transfer instructions to the Auction Agent for the shares of AMPS. Except
as provided in paragraph (b) below, the Securities Depository or its nominee
will be the Holder, and no Beneficial Owner shall receive certificates
representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all shares of AMPS of a series
shall be the Non-Payment Period Rate or there is no Securities Depository, the
Corporation may at its option issue one or more new certificates with respect to
such shares (without the legend referred to in paragraph 11(a)) registered in
the names of the Beneficial Owners or their nominees and rescind the stop-
transfer instructions referred to in paragraph 11(a) with respect to such
shares.
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IN WITNESS WHEREOF, MUNIHOLDINGS NEW YORK INSURED FUND, INC. has caused
these presents to be signed in its name and on its behalf by a duly authorized
officer, and attested by its Secretary, and the said officers of the Corporation
further acknowledge said instrument to be the corporate act of the Corporation,
and state under penalties of perjury that to the best of their knowledge,
information and belief the matters and facts herein set forth with respect to
approval are true in all material respects, all on ___________, 2000.
MUNIHOLDINGS NEW YORK INSURED FUND, INC.
By ____________________________________________
Vice President
Attest:
___________________________
William E. Zitelli
Secretary
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Exhibit 14(a)
INDEPENDENT AUDITORS' CONSENT
MuniHoldings New York Insured Fund, Inc.
We consent to the reference to us under the captions "Comparison of the Funds -
Financial Highlights" and "Experts" appearing in the Proxy Statement and
Prospectus which is a part of this Registration Statement on Form N-14.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1999
<PAGE>
Exhibit 14(b)
INDEPENDENT AUDITORS' CONSENT
MuniHoldings New York Fund, Inc.
We consent to the use in the Registration Statement on Form N-14 of our report
dated August 13, 1999 appearing in the Proxy Statement and Prospectus, which is
a part of such Registration Statement, and to the reference to us under the
captions "Comparison of the Funds - Financial Highlights" and "Experts" also
appearing in such Proxy Statement and Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
September 30, 1999
<PAGE>
Exhibit 14(c)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "The Reorganization -
Comparison of the Funds - Financial Highlights", "Selection of Independent
Auditors" and "Experts" and to the use of our reports dated October XX, 1999 for
MuniHoldings New York Insured Fund II, Inc. and October XX, 1999 for
MuniHoldings New York Insured Fund III, Inc. included in the Registration
Statement (Form N-14 No. 333-0000) and related combined Preliminary Proxy
Statement and Prospectus of MuniHoldings New York Insured Fund, Inc.,
Muniholdings New York Fund, Inc., MuniHoldings New York Insured Fund II, Inc.
and MuniHoldings New York Insured Fund III, Inc. filed with the Securities and
Exchange Commission.
Ernst & Young LLP
MetroPark, New Jersey
The foregoing consent is in the form that will be signed upon the conclusion of
our audits of the financial statements of Muniholdings New York Insured Fund II,
Inc. and MuniHoldings New York Insured Fund III, Inc. to be added by amendment.
/s/ Ernst & Young LLP
MetroPark, New Jersey
September 27, 1999
