<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1998
SECURITIES ACT FILE NO. 333-56719
INVESTMENT COMPANY ACT FILE NO. 811-08813
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 1
(CHECK APPROPRIATE BOX OR BOXES)
--------------
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
--------------
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
ARTHUR ZEIKEL
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
ALICE A. PELLEGRINO, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
--------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
--------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES BEING BEING OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)............... 7,705,000 shares $15.00 $115,575,000 $34,095
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 1,005,000 shares subject to the Underwriter's over-allotment
option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$295 was previously paid. $33,800 was transmitted earlier in connection
with the filing.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
- --------------------- ---------------------
<S> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1.Outside Front Cover Page............ Outside Front Cover Page
2.Inside Front and Outside Back Cover Inside Front and Outside Back Cover
Pages............................. Pages; Underwriting
3.Fee Table and Synopsis.............. Prospectus Summary; Fee Table
4.Financial Highlights................ Not Applicable
5.Plan of Distribution................ Prospectus Summary; Net Asset Value;
Underwriting
6.Selling Shareholders................ Not Applicable
7.Use of Proceeds..................... Use of Proceeds; Investment Objective
and Policies
8.General Description of the Prospectus Summary; The Fund;
Registrant........................ Investment Objective and Policies;
Risks and Special Considerations of
Leverage; Investment Restrictions;
Dividends and Distributions; Automatic
Dividend Reinvestment Plan; Mutual Fund
Investment Option
9.Management.......................... Directors and Officers; Investment
Advisory and Management Arrangements;
Custodian; Transfer Agent, Dividend
Disbursing Agent and Registrar
10.Capital Stock, Long-Term Debt, and Description of Capital Stock
Other Securities..................
11.Defaults and Arrears on Senior Not Applicable
Securities........................
12.Legal Proceedings................... Not Applicable
13.Table of Contents of the Statement
of Additional Information......... Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14.Cover Page.......................... Not Applicable
15.Table of Contents................... Not Applicable
16.General Information and History..... Not Applicable
17.Investment Objective and Policies... Prospectus Summary; Investment
Objective and Policies; Investment
Restrictions
18.Management.......................... Directors and Officers; Investment
Advisory and Management Arrangements
19.Control Persons and Principal Investment Advisory and Management
Holders of Securities............. Arrangements
20.Investment Advisory and Other Investment Advisory and Management
Services.......................... Arrangements; Custodian; Underwriting;
Transfer Agent, Dividend Disbursing
Agent and Registrar; Legal Opinions;
Experts
21.Brokerage Allocation and Other Portfolio Transactions
Practices.........................
22.Tax Status.......................... Taxes; Automatic Dividend Reinvestment
Plan
23.Financial Statements................ Report of Independent Auditors;
Statement of Assets, Liabilities and
Capital
</TABLE>
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PROSPECTUS PRELIMINARY PROSPECTUS DATED AUGUST 19, 1998
6,700,000 SHARES
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
COMMON STOCK
--------------
MuniHoldings New York Insured Fund II, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New York State and New York City personal income taxes. The Fund 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. The Fund intends to
invest in municipal obligations that are rated investment grade or, if unrated,
are considered by Fund Asset Management, L.P. (the "Investment Adviser") to be
of comparable quality. Under normal circumstances, at least 80% of the Fund's
assets will be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest. Investors are advised to read this
Prospectus carefully and retain it for future reference.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. See "Prospectus Summary--Risk Factors and Special
Considerations."
Within approximately three months after completion of the offering of Common
Stock described herein, the Fund intends to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's capital will
actually be issued. INVESTORS SHOULD NOTE THE SPECIAL RISKS ASSOCIATED WITH THE
LEVERAGING OF THE COMMON STOCK. SEE "RISKS AND SPECIAL CONSIDERATIONS OF
LEVERAGE" AND "DESCRIPTION OF CAPITAL STOCK."
(Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO SALES LOAD PROCEEDS TO
PUBLIC (1)(2) FUND(3)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $15.00 None $15.00
- ------------------------------------------------------------------------------
Total(4).............. $100,500,000 None $100,500,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Investment Adviser or an affiliate will pay the Underwriter a
commission in the amount of % of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby. See
"Underwriting."
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deducting organizational and offering expenses payable by the Fund
estimated at $ .
(4) The Fund has granted the Underwriter an option to purchase up to an
additional 1,005,000 shares to cover over-allotments. If all such shares
are purchased, the total Price to Public and Proceeds to Fund will be
$115,575,000. See "Underwriting."
--------------
The shares are offered by the Underwriter, subject to prior sale, when, as
and if issued by the Fund and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares will be made in New York, New York on or about September
, 1998.
--------------
MERRILL LYNCH & CO.
--------------
The date of this Prospectus is September , 1998.
<PAGE>
(Continued from preceding page)
The Fund may invest all or a portion of its assets in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Fund to an alternative minimum tax. At times, the Fund may
seek to hedge its portfolio through the use of options and futures
transactions. There can be no assurance that the investment objective of the
Fund will be realized. The Fund is designed primarily for long-term investors
and should not be considered a vehicle for trading purposes. The address of
the Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2800.
Prior to this offering, there has been no public market for the Common Stock
of the Fund. Application has been made to list the Fund's Common Stock on the
New York Stock Exchange. However, during an initial period which is not
expected to exceed two weeks from the date of this Prospectus, the Fund's
Common Stock will not be listed on any securities exchange. During such
period, the Underwriter does not intend to make a market in the Fund's Common
Stock. Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period.
The issuance of the preferred stock will result in leveraging of the Common
Stock. Although the terms of the preferred stock offering will be determined
by the Fund's Board of Directors, it is anticipated that the preferred stock
will pay dividends that will be adjusted over either relatively short-term
periods (generally seven to 28 days) or medium-term periods (up to five years)
and that the dividend rate will be based upon prevailing interest rates for
debt obligations of comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in accordance with the
Fund's investment objective. Because under normal market conditions,
obligations with longer maturities produce higher yields than short-term and
medium-term obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term rates paid
by the Fund and the longer-term rates received by the Fund will provide
holders of Common Stock with a potentially higher yield.
The Underwriter may engage in transactions that stabilize, maintain, or
otherwise affect the price of the Fund's Common Stock. Such transactions may
include stabilizing, the purchase of the Fund's Common Stock to cover short
positions and the imposition of penalty bids. For a description of these
activities, see "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE FUND MuniHoldings New York Insured Fund II, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment
company. See "The Fund."
THE
OFFERING The Fund is offering 6,700,000 shares of Common Stock at an initial
offering price of $15.00 per share. The Common Stock is being
offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch" or the "Underwriter"). The Underwriter has been
granted an option, exercisable for 45 days from the date of this
Prospectus, to purchase up to 1,005,000 additional shares of Common
Stock to cover over-allotments. See "Underwriting."
INVESTMENT The investment objective of the Fund is to provide shareholders
OBJECTIVE with current income exempt from Federal income tax and New York
AND State and New York City personal income taxes. The Fund seeks to
POLICIES 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 ("New York Municipal Bonds"). The Fund
intends to invest in municipal obligations that are rated
investment grade or, if unrated, are considered by the Investment
Adviser to be of comparable quality. The Fund will seek to achieve
its investment objective by seeking to invest substantially all (a
minimum of 80%) of its assets in New York Municipal Bonds, except
at times when, in the judgment of the Investment Adviser, New York
Municipal Bonds of sufficient quality and quantity are unavailable
for investment at suitable prices by the Fund. At all times, except
during interim periods pending investment of the net proceeds of
public offerings of the Fund's securities and during temporary
defensive periods, the Fund will maintain at least 65% of its
assets in New York Municipal Bonds and at least 80% of its assets
in New York Municipal Bonds and other long-term municipal
obligations exempt from Federal income tax, but not from New York
State and New York City personal income taxes ("Municipal Bonds").
Under normal circumstances, at least 80% of the Fund's assets will
be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the
timely payment of principal at maturity and interest. The Fund does
not ordinarily intend to realize significant investment income not
exempt from Federal income tax and New York State and New York City
personal income taxes. See "Investment Objective and Policies."
LISTING
Prior to this offering, there has been no public market for the
Common Stock of the Fund. Application has been made to list the
Fund's Common Stock on the New York Stock Exchange. However, during
an initial period which is not expected to exceed two weeks from
the date of this Prospectus, the Fund's shares of Common Stock will
not be listed on any securities exchange. During such period, the
Underwriter does not intend to make a market in the Fund's shares
of Common Stock. Consequently, it is anticipated that an investment
in the Fund will be illiquid during such period. See
"Underwriting."
3
<PAGE>
LEVERAGE The Fund anticipates that it will be substantially invested in
longer-term municipal obligations within approximately three months
after completion of the offering of Common Stock described herein.
To leverage the Common Stock, the Fund intends to offer shares of
preferred stock within three months after completion of this
offering representing approximately 40% of the Fund's capital
immediately after the issuance of such preferred stock. There can
be no assurance, however, that preferred stock representing such
percentage of the Fund's capital will actually be issued. The
issuance of the preferred stock will result in the leveraging of
the Common Stock. Although the terms of the preferred stock
offering will be determined by the Fund's Board of Directors, it is
anticipated that the preferred stock will pay dividends that will
be adjusted over either relatively short-term periods (generally
seven to 28 days) or medium-term periods (up to five years) and
that the dividend rate will be based upon prevailing interest rates
for debt obligations of comparable maturity. The proceeds of the
preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne
by the Fund and will reduce the net asset value of the Common
Stock. Additionally, under certain circumstances, when the Fund is
required to allocate taxable income to holders of preferred stock,
it is anticipated that the terms of the preferred stock will
require the Fund to make an additional distribution to such holders
in an amount approximately equal to the tax liability resulting
from such allocation and such additional distribution (such amount,
an "Additional Distribution").
The use of leverage by the Fund creates an opportunity for
increased net income, but, at the same time, creates special risks.
Because, under normal market conditions, obligations with longer
maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term
rates (and any Additional Distribution) paid by the Fund and the
longer-term rates received by the Fund will provide holders of
Common Stock with a potentially higher yield. Investors should
note, however, that leverage creates certain risks for holders of
Common Stock, including higher volatility of both the net asset
value and market value of the Common Stock. Since any decline in
the value of the Fund's investments will be borne entirely by
holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value than
if the Fund were not leveraged, which would likely be reflected in
a decline in the market price for shares of Common Stock.
Additionally, fluctuations in the dividend rates on, and the amount
of taxable income allocable to, the preferred stock will affect the
yield to holders of Common Stock. See "Risks and Special
Considerations of Leverage." Upon issuance of the preferred stock,
holders of the Common Stock will receive all net income of the Fund
remaining after payment of dividends (and any Additional
Distribution) on the preferred stock and will generally be entitled
to a pro rata share of net realized capital gains. Upon any
liquidation of the Fund, the holders of shares of preferred stock
will be entitled to receive liquidating distributions (expected to
equal the original purchase price per share of preferred stock plus
any accumulated and unpaid dividends thereon and any accumulated
and unpaid Additional Distribution) before any distribution is made
to holders of Common Stock. See "Description of Capital Stock--
Preferred Stock."
4
<PAGE>
Holders of preferred stock, voting as a separate class, will be
entitled to elect two of the Fund's Directors, and holders of
common and preferred stock, voting together as a single class, will
be entitled to elect the remaining Directors. If, at any time,
dividends on the Fund's preferred stock were to be in arrears in an
amount equal to two full years of dividend payments, the holders of
all outstanding shares of preferred stock, voting as a separate
class, would be entitled to elect a majority of the Fund's
Directors. The holders of preferred stock will also vote separately
on certain other matters as required under the Fund's Articles of
Incorporation, the Investment Company Act of 1940, as amended (the
"1940 Act") and Maryland law, but otherwise will have equal voting
rights with holders of Common Stock (one vote per share) and will
vote together with holders of Common Stock as a single class. See
"Description of Capital Stock--Preferred Stock--Voting Rights."
There can be no assurance that the Fund will be able to realize a
higher net return on its investment portfolio than the then current
dividend rate (and any Additional Distribution) on the preferred
stock. Changes in certain factors could cause the relationship
between the short-term and medium-term dividend rates (and any
Additional Distribution) paid by the Fund on the preferred stock
and the long-term rates received by the Fund on its investment
portfolio to change so that such short-term and medium-term rates
(and any Additional Distribution) may substantially increase
relative to rates on the long-term obligations in which the Fund
may be invested. Under such conditions, the benefit of leverage to
holders of Common Stock will be reduced, and the Fund's leveraged
capital structure could result in a lower rate of return to holders
of Common Stock than if the Fund were not leveraged. The Fund will
have the authority to redeem the preferred stock for any reason and
may redeem all or part of the preferred stock if it anticipates
that the Fund's leveraged capital structure will result in a lower
rate of return to holders of the Common Stock than that obtainable
if the Common Stock were unleveraged for any significant amount of
time.
Prior to the time it offers the preferred stock, the Fund intends
to apply for ratings on such stock from one or more nationally
recognized statistical rating organizations ("NRSROs"). The Fund
believes that obtaining a rating for the preferred stock will
enhance the marketability of the preferred stock and thereby reduce
the dividend rate on the preferred stock from that which the Fund
would be required to pay if the preferred stock were not rated.
INVESTMENT
ADVISER Fund Asset Management, L.P. is the Fund's investment adviser and is
responsible for the management of the Fund's investment portfolio
and for providing administrative services to the Fund. For its
services, the Fund pays the Investment Adviser a monthly fee at the
annual rate of 0.55 of 1% of the Fund's average weekly net assets,
including proceeds from the sale of preferred stock. The Investment
Adviser is an affiliate of Merrill Lynch Asset Management, L.P.
("MLAM"), which is owned and controlled by Merrill Lynch & Co.,
Inc. ("ML & Co."). The Asset Management Group of ML & Co. (which
includes the Investment Adviser) acts as the investment adviser for
over 100 registered management investment companies and offers
portfolio management and portfolio analysis services to individuals
and institutional accounts. As of July 1998, the Asset Management
Group had a total of approximately $488 billion in investment
company and other portfolio assets under management (approximately
$37
5
<PAGE>
billion of which was invested in municipal securities). This amount
includes assets managed for certain affiliates of the Investment
Adviser. See "Investment Advisory and Management Arrangements."
DIVIDENDS
AND
DISTRIBUTIONS
The Fund intends to pay dividends monthly and to distribute
substantially all of its net investment income to holders of Common
Stock. From and after issuance of the preferred stock, monthly
distributions to holders of Common Stock will consist of
substantially all net investment income remaining after the payment
of dividends (and any Additional Distribution) on the preferred
stock. It is expected that the Fund will commence paying dividends
to holders of Common Stock within approximately 90 days from the
date of this Prospectus. Net capital gains, if any, will be
distributed at least annually to holders of Common Stock and, after
issuance of the preferred stock, on a pro rata basis to holders of
Common Stock and preferred stock. When capital gains or other
taxable income is allocated to holders of preferred stock under
certain circumstances, it is anticipated that the terms of the
preferred stock will require the Fund to make an Additional
Distribution. The Fund is not permitted to declare any cash
dividend or other distribution on its Common Stock unless asset
coverage (as defined in the 1940 Act) with respect to the Fund's
preferred stock is at least 200%. If the Fund issues preferred
stock representing 40% of its capital after the time of issuance,
its asset coverage with respect to the preferred stock will be
approximately 250%. If the Fund's ability to make distributions on
its Common Stock is limited, this could under certain circumstances
impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company, which would have
adverse tax consequences for holders of Common Stock. See "Taxes."
AUTOMATIC All dividend and capital gains distributions will be automatically
DIVIDEND reinvested in additional shares of Common Stock of the Fund unless
REINVESTMENTa shareholder elects to receive cash. Shareholders whose shares are
PLAN held in the name of a broker or nominee should contact such broker
or nominee to confirm that they may participate in the Fund's
dividend reinvestment plan. See "Automatic Dividend Reinvestment
Plan."
MUTUAL Purchasers of shares of Common Stock of the Fund through Merrill
FUND Lynch in this offering will have an investment option consisting of
INVESTMENT the right to reinvest the net proceeds from a sale of such shares
OPTION (the "Original Shares") in Class D initial sales charge shares of
certain Merrill Lynch-sponsored open-end mutual funds ("Eligible
Class D Shares") at their net asset value, without the imposition
of the initial sales charge, if the conditions set forth below are
satisfied. First, the sale of the Original Shares must be made
through Merrill Lynch, and the net proceeds therefrom must be
immediately reinvested in Eligible Class D Shares. Second, the
Original Shares must have been either acquired in this offering or
be shares representing reinvested dividends from shares of Common
Stock acquired in this offering. Third, the Original Shares must
have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class D shares of the mutual
funds are subject to an account maintenance fee at an annual rate
of up to 0.25% of the average daily net asset value of such mutual
fund. See "Mutual Fund Investment Option."
6
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a newly organized, non-diversified, closed-end management
investment company and has no operating history. Shares of closed-end
investment companies frequently trade at a discount from their net asset value.
This risk may be greater for investors expecting to sell their shares in a
relatively short period after completion of the public offering. Accordingly,
the Common Stock of the Fund is designed primarily for long-term investors and
should not be considered a vehicle for trading purposes. The net asset value of
the Fund's shares of Common Stock will fluctuate with interest rate changes as
well as with price changes of the Fund's portfolio securities, and these
fluctuations are likely to be greater in the case of a fund having a leveraged
capital structure, as contemplated for the Fund. See "Risks and Special
Considerations of Leverage."
The Fund intends to invest a substantial portion of its assets in New York
Municipal Bonds and, therefore, it 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.
See "Investment Objective and Policies--Special Considerations Relating to New
York Municipal Bonds" and Appendix I, "Economic and Other Conditions in New
York."
The Fund has registered as a "non-diversified" investment company so that it
will be able to invest more than 5% of its assets in the obligations of any
single issuer, subject to the diversification requirements of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to the
Fund. Since the Fund may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Fund may be more
susceptible than a more widely-diversified fund to any single economic,
political or regulatory occurrence.
The Fund intends to invest in municipal obligations that are rated in the
investment grade rating categories by Standard & Poor's ("S&P"), Moody's
Investors Service, Inc. ("Moody's") or Fitch IBCA, Inc. ("Fitch") or, if not
rated, are considered to be of comparable quality by the Investment Adviser.
Obligations rated in the lowest investment grade category may have certain
speculative characteristics. See "Investment Objective and Policies." The Fund
may invest in certain tax-exempt securities classified as "private activity
bonds" that may subject certain investors in the Fund to the alternative
minimum tax. See "Taxes--General."
The Fund will be subject to certain restrictions on investments imposed by
guidelines of the insurance companies issuing the portfolio insurance and to
guidelines of one or more NRSROs that may issue ratings for the preferred
stock. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. It is
not anticipated that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments that may be characterized as
derivatives. These investments include various types of options transactions
and futures and options thereon. Such investments also may consist of non-
municipal tax-exempt securities and securities the potential investment return
on which is based on the change in particular measurements of value or interest
rates ("indexed securities"), including securities the potential investment
return on which is inversely related to a change in particular measurements of
value or interest rates ("inverse
7
<PAGE>
securities"). Certain of such investments may be made solely for hedging
purposes, not for speculation, and may in some cases require limitations as to
the type of permissible counterparty to the transaction. Investments in indexed
securities, including inverse securities, subject the Fund to the risks
associated with changes in the particular indices, which may include reduced or
eliminated interest payments and losses of invested principal. Derivative
instruments may have certain characteristics that have a similar effect on the
return to Common Stock investors as the leverage transactions discussed under
"Risks and Special Considerations of Leverage;" however, certain derivative
investments will not be taken into account for purposes of calculating the
percentage of leverage of the Fund's portfolio. For a further discussion of the
risks associated with derivative investments, see "Investment Objective and
Policies," "Investment Objective and Policies--Other Investment Policies--
Indexed and Inverse Floating Obligations," "--Call Rights" and "Investment
Objective and Policies--Options and Futures Transactions."
Subject to its investment restrictions, the Fund is authorized to engage in
options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security that is the subject of the hedge and the inability to close futures
transactions under certain conditions. Because of the anticipated leveraged
nature of the Common Stock, hedging transactions will result in a larger impact
on the net asset value of the Common Stock than would be the case if the Common
Stock were not leveraged. Certain OTC options and assets used to cover OTC
options written by the Fund may be considered to be illiquid. The illiquidity
of such options or assets may prevent a successful sale of such options or
assets, result in a delay of sale, or reduce the amount of proceeds that might
be otherwise realized. See "Investment Objective and Policies--Options and
Futures Transactions." The Fund intends to apply for ratings of the preferred
stock from one or more NRSROs. In order to obtain these ratings, the Fund may
be required to limit its use of hedging techniques in accordance with the
specified guidelines of such NRSRO.
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. See "Description of Capital Stock--
Certain Provisions of the Articles of Incorporation."
8
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment Plan Fees....................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to shares of
Common Stock):
Management Fees(a)(b)................................................. 0.55%
Interest Payments on Borrowed Funds................................... None
Other Expenses(b)..................................................... 0.21%
----
Total Annual Expenses(b)............................................ 0.76%
====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
EXAMPLE ---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) total annual expenses
of 0.76% (assuming no leverage) and 1.35% (assuming
leverage) and (2) a 5% annual return throughout the
periods:
Assuming No Leverage.................................. $ 8 $24 $42 $ 94
Assuming Leverage..................................... $14 $43 $74 $162
</TABLE>
- --------
(a) See "Investment Advisory and Management Arrangements"--page 26.
(b) In the event that the Fund utilizes leverage by issuing preferred stock in
an amount of approximately 40% of the Fund's capital, it is estimated
that, as a percentage of net assets attributable to Common Stock, the
Management Fees would be .92%, Other Expenses would be .43% and Total
Annual Expenses would be 1.35%. See "Risks and Special Considerations of
Leverage."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by the Securities and Exchange Commission regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
9
<PAGE>
THE FUND
MuniHoldings New York Insured Fund II, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company. The Fund
was incorporated under the laws of the State of Maryland on June 8, 1998, and
has registered under the 1940 Act. The Fund's principal office is located at
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number
is (609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their
securities at the option of the shareholder, whereas open-end companies issue
securities redeemable at net asset value at any time at the option of the
shareholder and typically engage in a continuous offering of their shares.
Accordingly, open-end investment companies are subject to continuous asset in-
flows and out-flows that can complicate portfolio management. Shares of
closed-end investment companies, however, frequently trade at a discount from
their net asset value. This risk may be greater for investors expecting to
sell their shares in a relatively short period after completion of the public
offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment
option in full) after payment of organizational and offering expenses.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of Common Stock, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-
term, tax-exempt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with current
income exempt from Federal income tax and New York State and New York City
personal income taxes. The Fund seeks to achieve its investment objective by
investing primarily in a portfolio of long-term, investment grade municipal
obligations issued by or on behalf of the State of 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 income tax and New York State and New York City personal
income taxes. The Fund will seek to achieve its investment objective by
seeking to invest substantially all (a minimum of 80%) of its assets in New
York Municipal Bonds, except at times when, in the judgment of the Investment
Adviser, New York Municipal Bonds of sufficient quality and quantity are
unavailable for investment by the Fund. At all times, except during interim
periods pending investment of the net proceeds of public offerings of the
Fund's securities and during temporary defensive periods, the Fund will
maintain at least 65% of its assets in New York Municipal Bonds and at least
80% of its assets in New York Municipal Bonds and Municipal Bonds that are
exempt from Federal income taxes, but not New York State and New York City
personal income taxes. Under normal circumstances, at least 80% of the Fund's
assets will be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest. The investment objective of the Fund is
a fundamental policy that may not be changed without a vote of a majority of
the Fund's outstanding voting securities, as defined below under "Investment
Restrictions." There can be no assurance that the investment objective of the
Fund will be realized. At times the Fund may seek to hedge its portfolio
through the use of futures transactions and options to reduce volatility in
the net asset value of its shares of Common Stock.
10
<PAGE>
The Fund ordinarily does not intend to realize significant investment income
not exempt from Federal income tax and New York State and New York City
personal income taxes. To the extent that suitable New York Municipal Bonds
are not available for investment by the Fund, as determined by the Investment
Adviser, the Fund may purchase long-term obligations issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities paying interest which, in the
opinion of bond counsel to the issuer, is exempt from Federal income tax but
not New York State and New York City personal income taxes. At all times,
except during interim periods pending investment of the net proceeds of public
offerings of the Fund's securities and during temporary defensive periods, the
Fund will have at least 80% of its assets invested in New York Municipal Bonds
and Municipal Bonds. The Fund may invest all or a portion of its assets in
certain tax-exempt securities classified as "private activity bonds" (in
general, bonds that benefit non-governmental entities) that may subject
certain investors in the Fund to an alternative minimum tax.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may also 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 1940 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 the Fund's investment objective and policies.
Investment in shares of Common Stock of the Fund offers several potential
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal income tax and New York State and New York City personal income
taxes by investing in a professionally managed portfolio comprised primarily
of investment grade insured New York Municipal Bonds. Investment in the Fund
also relieves the investor of the burdensome administrative details involved
in managing a portfolio of New York Municipal Bonds. Additionally, the
Investment Adviser will seek to enhance the yield on the Common Stock by
leveraging the Fund's capital structure through the issuance of preferred
stock. The benefits are at least partially offset by the expenses involved in
operating an investment company. Such expenses primarily consist of the
advisory fee and operational costs. Additionally, the use of leverage involves
certain expenses and special risk considerations. See "Risks and Special
Considerations of Leverage."
The investment grade New York Municipal Bonds and Municipal Bonds in which
the Fund will primarily invest are those New York Municipal Bonds and
Municipal Bonds 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 the Investment Adviser. In the case of long-term debt,
the investment grade rating categories are AAA through BBB for S&P, Aaa
through Baa for Moody's and AAA through BBB for Fitch. In the case of short-
term notes, the investment grade rating categories are SP-1+ through SP-3 for
S&P, MIG-1 through MIG-4 for Moody's and F-1+ through F-3 for Fitch. In the
case of tax-exempt commercial paper, the investment grade rating categories
are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+
through F-3 for Fitch. Obligations ranked in the fourth highest rating
category (BBB, SP-3 and A-3 for S&P; Baa, MIG-4 and Prime-3 for Moody's; and
BBB and F-3 for Fitch), while considered "investment grade," may have certain
speculative characteristics. There may be sub-categories or gradations
indicating relative standing within the rating categories set forth above. See
Appendix II to this Prospectus for a description of S&P's, Moody's and
11
<PAGE>
Fitch's ratings of Municipal Bonds. In assessing the quality of New York
Municipal Bonds and Municipal Bonds with respect to the foregoing
requirements, the Investment Adviser will take into account the portfolio
insurance as well as the nature of any letters of credit or similar credit
enhancements to which particular New York Municipal Bonds and Municipal Bonds
are entitled and the creditworthiness of the insurance company or the
financial institution that provided such insurance or credit enhancements.
Consequently, if 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, the Investment Adviser may consider such
municipal obligations to be equivalent to AAA- or Aaa- rated securities, as
the case may be, even though such 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.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations, in the opinion of counsel to the issuer,
that contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short
notice period not to exceed seven days. Participating VRDOs provide the Fund
with a specified undivided interest (up to 100%) in the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Fund has been advised by
its counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio
can be expected to decline. Prices of longer-term securities generally
fluctuate more in response to interest rate changes than do short-term or
medium-term securities. These changes in net asset value are likely to be
greater in the case of a fund having a leveraged capital structure, as
proposed for the Fund. See "Risks and Special Considerations of Leverage."
The Fund intends to invest primarily in long-term New York Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term New York Municipal Bonds and Municipal Bonds with
a maturity of between three years and ten years. The Fund may invest in short-
term, tax-exempt securities, short-term U.S. Government securities, repurchase
agreements or cash. Such short-term securities or cash will not exceed 20% of
its total assets except during interim periods pending investment of the net
proceeds of public offerings of the Fund's securities or in anticipation of
the repurchase or redemption of the Fund's securities and temporary periods
when, in the opinion of the Investment Adviser, prevailing market or economic
conditions warrant. The Fund does not ordinarily intend to realize significant
interest income not exempt from Federal income tax and New York State and New
York City personal income taxes.
12
<PAGE>
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for special tax
treatment afforded regulated investment companies under the Code. See "Taxes."
To qualify, among other requirements, the Fund will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer. A fund
that elects to be classified as "diversified" under the 1940 Act must satisfy
the foregoing 5% requirement with respect to 75% of its total assets. To the
extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's yield may fluctuate to a greater extent than
that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's assets will be
invested in New York Municipal Bonds and Municipal Bonds either (i) insured
under an insurance policy purchased by the Fund or (ii) insured under an
insurance policy obtained by the issuer thereof or any other party. The Fund
will seek to limit its investments to municipal bonds insured under insurance
policies issued by insurance carriers that have total admitted assets
(unaudited) of at least $75,000,000 and capital and surplus (unaudited) of at
least $50,000,000 and insurance claims-paying ability ratings of AAA from S&P
or Fitch or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be at all times available. See
Appendix III to this Prospectus for a brief description of S&P's, Fitch's and
Moody's insurance claims-paying ability ratings. Currently, it is anticipated
that a majority of the insured New York Municipal Bonds and Municipal Bonds in
the Fund's portfolio will be insured by the following insurance companies that
satisfy the foregoing criteria: AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company, Financial Security Assurance and Municipal Bond
Investors Assurance Corporation. The Fund also may purchase New York Municipal
Bonds and Municipal Bonds covered by insurance issued by any other insurance
company that satisfies the foregoing criteria. It is anticipated that
initially a majority of insured New York Municipal Bonds and Municipal Bonds
held by the Fund will be insured under policies obtained by parties other than
the Fund.
The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible New York Municipal Bonds and Municipal Bonds purchased by the Fund. A
New York Municipal Bond or a Municipal Bond will be eligible for coverage if
it meets certain requirements of the insurance company set forth in a Policy.
In the event interest or principal on an insured New York Municipal Bond and
Municipal Bond is not paid when due, the insurer will be obligated under its
Policy to make such payment not later than 30 days after it has been notified
by, and provided with documentation from, the Fund that such nonpayment has
occurred.
The Policies will be effective only as to insured New York Municipal Bonds
and Municipal Bonds beneficially owned by the Fund. In the event of a sale of
any New York Municipal Bonds and Municipal Bonds held by the Fund, the issuer
of the relevant Policy will be liable only for those payments of interest and
principal that are then due and owing. The Policies will not guarantee the
market value of the insured New York Municipal Bonds and Municipal Bonds or
the value of the shares of the Fund.
13
<PAGE>
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities
remain in the Fund's portfolio. In addition, the insurer may not cancel its
Policies for any reason except failure to pay premiums when due. The Board of
Directors of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately .02 of 1% to .15 of 1% of the principal amount of the New York
Municipal Bonds and Municipal Bonds covered by such Policies. The estimate is
based on the expected composition of the Fund's portfolio of New York
Municipal Bonds and Municipal Bonds. Additional information regarding the
Policies is set forth in Appendix III to this Prospectus. In instances in
which the Fund purchases New York Municipal Bonds and Municipal Bonds insured
under policies obtained by parties other than the Fund, the Fund does not pay
the premiums for such policies; rather, the cost of such policies may be
reflected in the purchase price of the New York Municipal Bonds and Municipal
Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place
a value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser's ability to manage
the portfolio may be limited to the extent it holds defaulted securities,
which may limit its ability in certain circumstances to purchase other New
York Municipal Bonds and Municipal Bonds. See "Net Asset Value" below for a
more complete description of the Fund's method of valuing defaulted securities
and securities that have a significant risk of default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Directors determines that
such insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or may discontinue its policy of maintaining
insurance for all or any of the New York Municipal Bonds and Municipal Bonds
held in the Fund's portfolio. Although the Investment Adviser periodically
reviews the financial condition of each insurer, there can be no assurance
that the insurers will be able to honor their obligations under all
circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured 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 industrial development bonds
("IDBs") are issued by or on behalf of
14
<PAGE>
public authorities to finance various privately operated facilities, including
certain local facilities for water supply, gas, electricity, sewage or solid
waste disposal. For purposes of this Prospectus, such obligations are
Municipal Bonds if the interest paid thereon is exempt from Federal income tax
and as New York Municipal Bonds if the interest thereon is exempt from Federal
income tax and exempt from New York State and New York City personal income
taxes, even though such bonds may be IDBs or "private activity bonds" as
discussed below. Also, for purposes of this Prospectus, Non-Municipal Tax-
Exempt securities as discussed above will be considered 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 IDBs and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds (other than those of the State of New
York which has limited taxing powers) 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. IDBs are in most
cases revenue bonds and do not generally constitute the pledge of the credit
or taxing power of the issuer of such bonds. The repayment of principal and
the payment of interest on such industrial development bonds depends solely on
the ability of the user of the facility financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment. 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.
The Fund may purchase New York Municipal Bonds and Municipal Bonds
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities). Interest received on certain tax-exempt securities
that are classified as "private activity bonds" may subject certain investors
in the Fund to an alternative minimum tax. There is no limitation on the
percentage of the Fund's assets that may be invested in New York Municipal
Bonds and Municipal Bonds that may subject certain investors to an alternative
minimum tax. See "Taxes--General." Also included within the general category
of New York Municipal Bonds and Municipal Bonds are participation certificates
issued by government authorities or entities to finance the acquisition or
construction of equipment, land and/or facilities. The certificates represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations do
not constitute general obligations of the issuer for which the issuer's
unlimited taxing power is pledged, a lease obligation frequently is backed by
the issuer's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses, which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of New York Municipal Bonds and Municipal Bonds for
investment by the Fund.
15
<PAGE>
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL BONDS
The Fund ordinarily will invest at least 80% of its total assets in New York
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of New York Municipal Bonds than is a municipal bond mutual
fund that is not concentrated in issuers of New York Municipal Bonds to this
degree. As of June 5, 1998, Moody's, S&P and Fitch rated New York City's
general obligation bonds A3, BBB+ and A-, respectively. Moody's, S&P and Fitch
currently rate New York State's outstanding general obligation bonds A2, A and
A+, respectively. Because the Fund's portfolio will comprise investment grade
securities, the 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 Fund invests. The
Investment Adviser does not believe that the current economic conditions in
New York or other factors described above will have a significant adverse
effect on the 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 Appendix I, "Economic and Other Conditions in New York."
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known,
as with the issuance of preferred stock, as "leveraging") create an
opportunity for greater total return since the Fund will not be required to
sell portfolio securities to repurchase or redeem shares but, at the same
time, increase exposure to capital risk. In addition, borrowed funds are
subject to interest costs that may offset or exceed the return earned on the
borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell 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 the Fund
with payment and delivery taking place in the future. The purchase will be
recorded on the date the Fund enters into the commitment, and the value of the
obligation will thereafter be reflected in the calculation of the Fund's net
asset value. The value of the obligation on the delivery day may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or liquid
securities having a market value at all times at least equal to the amount of
the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in New York
Municipal Bonds and Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the
16
<PAGE>
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 the 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, the Fund may invest in so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically vary inversely with a short-term floating rate (which
may be reset periodically by a dutch auction, a remarketing agent, or by
reference to a short-term tax-exempt interest rate index). The Fund may
purchase synthetically-created inverse floating rate bonds evidenced by
custodial or trust receipts. Generally, interest rates on inverse floating
rate bonds 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, in market interest rates at a rate that is a multiple
(typically two) of the rate at which fixed-rate, long-term, tax-exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities generally will be more volatile than the
market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or limitations on the extent to which
the interest rate may vary. The Investment Adviser believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund that allows the Investment Adviser to vary the degree
of investment leverage relatively efficiently under different market
conditions.
Call Rights. The Fund may purchase a New York Municipal Bond or Municipal
Bond issuer's right 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 Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts and options thereon. While the Fund's use of
hedging
17
<PAGE>
strategies is intended to reduce the volatility of the net asset value of the
Common Stock, the net asset value of the Common Stock will fluctuate. There
can be no assurance that the Fund's hedging transactions will be effective. In
addition, because of the anticipated leveraged nature of the Common Stock,
hedging transactions will result in a larger impact on the net asset value of
the Common Stock than would be the case if the Common Stock were not
leveraged. Furthermore, the Fund will only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the preferred stock from one or more NRSROs, the
Fund may be required to limit its use of hedging techniques in accordance with
the specified guidelines of such organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and
risks associated therewith. The investment policies with respect to the
hedging transactions of the Fund are not fundamental policies and may be
modified by the Board of Directors of the Fund without the approval of the
Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to 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. The Fund writes only covered call options, which
means that so long as the Fund is obligated as the writer of a call option, it
will own the underlying securities subject to the option. The Fund may not
write covered call options on underlying securities in an amount exceeding 15%
of the market value of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the sale
will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities that it intends to purchase. The Fund will not
purchase options on securities if, as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
18
<PAGE>
Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in New York Municipal Bonds and
Municipal Bonds against declines in value and to hedge against increases in
the cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract
or, in the case of index-based futures contracts, to make and accept a cash
settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or
in part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be purchased because
such appreciation may be offset, in whole or in part, by an increase in the
value of the position in the futures contracts.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately
5% of the contract amount must be deposited with the broker. This amount is
known as initial margin. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the
financial futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging New York Municipal
Bonds and Municipal Bonds that the Fund holds or anticipates purchasing
against adverse changes in interest rates. The Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and
sell put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the New
York Municipal Bonds and Municipal Bonds in which the Fund invests to make
such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
19
<PAGE>
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and New York
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments that have a disparate impact on
the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that
the Fund adheres to certain restrictions. In particular, the Fund may purchase
and sell financial futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes 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 the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Although certain risks are involved in options and futures transactions, the
Investment Adviser believes that, because the Fund will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to New York
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
20
<PAGE>
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately three months after the completion of the offering of
shares of Common Stock, the Fund intends to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's capital will
actually be issued. The issuance of the preferred stock will result in the
leveraging of the Common Stock. Although the terms of the preferred stock
offering will be determined by the Fund's Board of Directors, it is
anticipated that the preferred stock will pay dividends that will be adjusted
over either relatively short-term periods (generally seven to 28 days) or
medium-term periods (up to five years) and that the dividend rate will be
based upon prevailing interest rates for debt obligations of comparable
maturity. The proceeds of the preferred stock offering will be invested in
longer-term obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne by the Fund
and will reduce the net asset value of the Common Stock. Additionally, under
certain circumstances, when the Fund is required to allocate taxable income to
holders of preferred stock, it is anticipated that the terms of the preferred
stock will require the Fund to make an additional distribution to such holders
in an amount approximately equal to the tax liability resulting from such
allocation and such additional distribution (such amount, an "Additional
Distribution"). Because under normal market conditions, obligations with
longer maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread inherent in the
difference between the short-term and medium-term rates (and any Additional
Distribution) paid by the Fund as dividends on the preferred stock and the
longer-term rates received by the Fund will provide holders of Common Stock
with a potentially higher yield.
Utilization of leverage, however, involves certain risks to the holders of
Common Stock. For example, issuance of the preferred stock may result in
higher volatility of the net asset value of the Common Stock and
21
<PAGE>
potentially more volatility in the market value of the Common Stock. In
addition, fluctuations in the short-term and medium-term dividend rates on,
and the amount of taxable income allocable to, the preferred stock will affect
the yield to holders of Common Stock. So long as the Fund, taking into account
the costs associated with the preferred stock and the Fund's operating
expenses, is able to realize a higher net return on its investment portfolio
than the then current dividend rate (and any Additional Distribution) of the
preferred stock, the effect of leverage will be to cause holders of Common
Stock to realize a higher current rate of return than if the Fund were not
leveraged. Similarly, since a pro rata portion of the Fund's net realized
capital gains on its investment assets are generally payable to holders of
Common Stock if net capital gains are realized by the Fund, the effect of
leverage will be to increase the amount of such gains distributed to holders
of Common Stock. However, short-term, medium-term and long-term interest rates
change from time to time as does their relationship to each other (i.e., the
slope of the yield curve) depending upon such factors as supply and demand
forces, monetary and tax policies and investor expectations. Changes in any or
all of such factors could cause the relationship between short-term, medium-
term and long-term rates to change (i.e., to flatten or to invert the slope of
the yield curve) so that short-term and medium-term rates may substantially
increase relative to the long-term obligations in which the Fund may be
invested. To the extent that the current dividend rate (and any Additional
Distribution) on the preferred stock approaches the net return on the Fund's
investment portfolio, the benefit of leverage to holders of Common Stock will
be reduced, and if the current dividend rate (and any Additional Distribution)
on the preferred stock were to exceed the net return on the Fund's portfolio,
the Fund's leveraged capital structure would result in a lower rate of return
to holders of Common Stock than if the Fund were not leveraged. Similarly,
since both the cost associated with the issuance of preferred stock and any
decline in the value of the Fund's investments (including investments
purchased with the proceeds from any preferred stock offering) will be borne
entirely by holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value to holders of
Common Stock than if the Fund were not leveraged.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Code. See "Taxes." The Fund intends, however, to
take all measures necessary to continue to make Common Stock dividend
payments. If the Fund's current investment income were not sufficient to meet
dividend requirements on either the Common Stock or the preferred stock, it
could be necessary for the Fund to liquidate certain of its investments. In
addition, the Fund will have the authority to redeem the preferred stock for
any reason and may redeem all or part of the preferred stock if (i) it
anticipates that the Fund's leveraged capital structure will result in a lower
rate of return for any significant amount of time to holders of the Common
Stock than that obtainable if the Common Stock were unleveraged, (ii) the
asset coverage for the preferred stock declines below 200% either as a result
of a decline in the value of the Fund's portfolio investments or as a result
of the repurchase of Common Stock in tender offers, or (iii) in order to
maintain the asset coverage guidelines established by the NRSROs that have
rated the preferred stock. Redemption of the preferred stock or insufficient
investment income to make dividend payments, may reduce the net asset value of
the Common Stock and require the Fund to liquidate a portion of its
investments at a time when it may be disadvantageous, in the absence of such
extraordinary circumstances, to do so.
Assuming the utilization of leverage by the issuance of preferred stock that
pays dividends at a rate that generally will be adjusted every 28 days in an
amount representing approximately 40% of the Fund's capital at an annual
dividend rate of 3.50% payable on such preferred stock based on market rates
as of the date of this Prospectus, the annual return that the Fund's portfolio
must experience (net of expenses) in order to cover such dividend payments
would be 1.40%.
22
<PAGE>
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of the leverage obtained by the issuance of
preferred stock representing approximately 40% of the Fund's capital, assuming
hypothetical annual returns on the Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and decreases the return when the portfolio
return is negative. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses).................................. (10)% (5)% 0% 5% 10%
Corresponding Common Stock Return................... (19)% (11)% (2)% 6% 14%
</TABLE>
Leveraging of the Common Stock cannot be fully achieved until preferred
stock is issued and the proceeds of the offering of preferred stock have been
invested in long-term New York Municipal Bonds and Municipal Bonds.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term or medium-term rates or other
change in market conditions to the point where the Fund's leverage could
adversely affect holders of Common Stock as noted above, or in anticipation of
such changes, the Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of Common Stock. The Fund also may attempt to reduce the
degree to which it is leveraged by redeeming preferred stock pursuant to the
provisions of the Fund's Articles Supplementary establishing the rights and
preferences of the preferred stock or otherwise purchasing shares of preferred
stock. Purchases and redemptions of preferred stock, whether on the open
market or in negotiated transactions, are subject to limitations under the
1940 Act. In determining whether or not it is in the best interest of the Fund
and its stockholders to redeem outstanding preferred stock, the Board of
Directors will take into account a variety of factors including market
conditions, the ratio of preferred stock to Common Stock and the expenses
associated with such redemption. If market conditions subsequently change, the
Fund may sell previously unissued shares of preferred stock or shares of
preferred stock that the Fund previously issued but later repurchased or
redeemed.
The Fund intends to apply for ratings of the preferred stock from one or
more NRSROs. In order to obtain these ratings, the Fund may be required to
maintain portfolio holdings meeting specified guidelines of such
organizations. These guidelines may impose asset coverage requirements that
are more stringent than those imposed by the 1940 Act. It is not anticipated
that these guidelines will impede the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies. Ratings on preferred stock issued by the Fund should not be confused
with ratings on obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding
preferred stock (expected to equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated and unpaid Additional Distribution). In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Stock unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or distribution) is at least 200% of the liquidation value of
the outstanding preferred stock. Under the Fund's proposed capital structure,
assuming the sale of shares of preferred
23
<PAGE>
stock representing approximately 40% of the Fund's capital, the net asset
value of the Fund's portfolio is expected to be approximately 250% of the
liquidation value of the Fund's preferred stock. To the extent possible, the
Fund intends to purchase or redeem shares of preferred stock from time to time
to maintain coverage of preferred stock of at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred stock, may not be changed without the approval of
the holders of a majority of the Fund's outstanding shares of Common Stock
(which for this purpose and under the 1940 Act means the lesser of (i) 67% of
the shares of Common Stock represented at a meeting at which more than 50% of
the outstanding shares of Common Stock are represented or (ii) more than 50%
of the outstanding shares). Subsequent to the issuance of the preferred stock,
the following investment restrictions may not be changed without the approval
of a majority of the outstanding shares of Common Stock and of the outstanding
shares of preferred stock, voting together as a class, and the approval of a
majority of the outstanding shares of preferred stock, voting separately as a
class. The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase 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 the Fund, which may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned
24
<PAGE>
in investment restriction (3) above or except as may be necessary in
connection with transactions in financial futures contracts and options
thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on 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 investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. Because of the affiliation of Merrill Lynch with the
Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in
which it acts as principal. An exemptive order has been obtained that permits
the Fund to effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such
order. The Fund may consider in the future requesting an order permitting
other principal transactions with Merrill Lynch, but there can be no assurance
that such application will be made and, if made, that such order would be
granted.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (66)--President and Director (1)(2)--Chairman of the
Investment Adviser and MLAM (which terms, as used herein, include their
corporate predecessors) since 1997; President of the Investment Adviser and
MLAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997, Director since 1993 and President from 1993 to 1997;
Executive Vice President of ML & Co. since 1990.
James H. Bodurtha (54)--Director (2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation
since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (59)--Director (2)--113-115 University Place, New York,
New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; President,
25
<PAGE>
Hudson Institute since 1997 and Trustee since 1980; Dean, Gallatin Division of
New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn
Chair, Hudson Institute from 1984 to 1985; Director, Damon Corporation from
1991 to 1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited
Partner, Hypertech LP in 1996.
Robert R. Martin (71)--Director (2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof
in 1979; Director, Securities Industry Association from 1981 to 1982 and
Public Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
Joseph L. May (69)--Director (2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold (46)--Director (2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
Terry K. Glenn (57)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of
Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (53)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
Donald C. Burke (38)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Kenneth A. Jacob (46)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997.
Roberto W. Roffo (31)--Vice President and Portfolio Manager (1)(2)--Vice
President of MLAM since 1996 and a Portfolio Manager since 1992.
Robert A. DiMella, CFA (31)--Vice President (1)(2)--Vice President of MLAM
since 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995; Assistant
Portfolio Manager with Prudential Investment Advisers from 1991 to 1993.
Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of PFD since
1981 and Treasurer thereof since 1984.
26
<PAGE>
Alice A. Pellegrino (38)--Secretary (1)(2)--Attorney with MLAM since 1997;
Associate with Kirkpatrick & Lockhart LLP from 1992-1996.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors,
and the remaining Directors will be elected by all holders of capital stock,
voting as a single class. See "Description of Capital Stock."
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser a fee
of $2,500 per year plus $250 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings.
The Fund also compensates members of its Audit Committee, which consists of
all the non-affiliated Directors, an annual fee of $500 per year plus $125 per
Committee meeting attended.
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31, 1997 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
affiliated Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM FUND FUND EXPENSE DIRECTORS
- ---------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
James H. Bodurtha(1)........ $4,500 None $148,500
Herbert I. London(1)........ $4,500 None $148,500
Robert R. Martin(1)......... $4,500 None $148,500
Joseph L. May(1)............ $4,500 None $148,500
Andre F. Perold(1).......... $4,500 None $148,500
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Bodurtha (24 registered investment
companies consisting of 42 portfolios); Mr. London (24 registered
investment companies consisting of 42 portfolios); Mr. Martin (24
registered investment companies consisting of 42 portfolios); Mr. May (24
registered investment companies consisting of 42 portfolios); and Mr.
Perold (24 registered investment companies consisting of 42 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM and is owned and controlled
by ML & Co., a financial services holding company. The Investment Adviser will
provide the Fund with investment advisory and management services. The Asset
Management Group of ML & Co. (which includes the Investment Adviser) acts as
the investment adviser for over 100 other registered investment companies and
offers portfolio management and portfolio analysis services to individuals and
institutional accounts. As of July 1998, the Asset Management Group had a
total of approximately $488 billion in investment company and other portfolio
assets under management (approximately $37 billion of which were invested in
municipal securities). This amount
27
<PAGE>
includes assets managed for certain affiliates of the Investment Adviser. The
principal business address of the Investment Adviser is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the supervision of
the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors. The Fund's portfolio
manager will consider analyses from various sources (including brokerage firms
with which the Fund does business), make the necessary investment decisions,
and place orders for transactions accordingly. The Investment Adviser will
also be responsible for the performance of certain administrative and
management services for the Fund. Roberto Roffo is the portfolio manager for
the Fund and is primarily responsible for the Fund's day-to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the sale of preferred
stock, minus the sum of accrued liabilities of the Fund and accumulated
dividends on the shares of preferred stock). For purposes of this calculation,
average weekly net assets are determined at the end of each month on the basis
of the average net assets of the Fund for each week during the month. The
assets for each weekly period are determined by averaging the net assets at
the last business day of a week with the net assets at the last business day
of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, stock certificates and shareholder reports,
charges of the custodian and the transfer and dividend disbursing agent and
registrar, fees and expenses with respect to the issuance of preferred stock,
Securities and Exchange Commission fees, fees and expenses of 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. Accounting services are provided
to the Fund by the Investment Adviser, and the Fund reimburses the Investment
Adviser for its costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at
28
<PAGE>
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. To the extent that transactions on behalf of more than one client of
the Investment Adviser or its affiliates during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provided supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses
of the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information.
The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal 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 1940 Act, except as permitted by exemptive order, persons affiliated with
the Fund are prohibited from dealing with the Fund as principal in the
purchase and sale of securities. Since transactions in the over-the-counter
market usually involve
29
<PAGE>
transactions with dealers acting as principal for their own account, the Fund
will 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 the Investment Adviser, the Fund may engage in
principal transactions with Merrill Lynch in high quality, short-term, tax-
exempt securities. See "Investment Restrictions." An affiliated person of the
Fund may serve as its broker in over-the-counter transactions conducted on an
agency basis.
The Fund may also purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons
appears advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances after
the Fund's portfolio is invested in accordance with its investment objective,
will be less than 100%. The portfolio turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by the monthly average of the value of the portfolio securities
owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared and paid monthly to holders of
Common Stock. It is expected that the Fund will commence paying dividends to
holders of Common Stock within approximately 90 days of the date of this
Prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of Common Stock normally will consist of
substantially all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the preferred stock. All net
realized capital gains, if any, will be distributed pro rata at least annually
to holders of Common Stock and any preferred stock. While any shares of
preferred stock are outstanding, the Fund may not declare any cash dividend or
other distribution on its Common Stock, unless at the time of such
declaration, (i) all accumulated preferred stock dividends, including any
Additional Distribution, have been paid, and (ii) the net asset value of the
Fund's portfolio (determined after deducting the amount of such dividend or
other distribution) is at least 200% of the liquidation value of the
outstanding preferred stock (expected to equal the original purchase price of
the outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated but unpaid Additional Distribution). If
the Fund's ability to make distributions on its Common Stock is limited, such
limitation could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company,
which would have adverse tax consequences for holders of Common Stock. See
"Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of Common Stock may be
automatically reinvested in shares of Common Stock of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
30
<PAGE>
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Fund intends to distribute substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Fund that are
attributable to interest on tax-exempt obligations and designated by the Fund
as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security and railroad retirement benefits subject to Federal
income taxes. Each shareholder is advised to consult a tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Code
Section 103(a) if such shareholder would be treated as a "substantial user" or
"related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of "industrial development bonds" or "private
activity bonds," if any, held by the Fund.
The portion of exempt-interest dividends paid from interest received by the
Fund from New York Municipal Bonds also will be exempt from New York State and
New York City personal income tax. However, exempt-interest dividends paid to
a corporate shareholder will be subject to New York State corporation
franchise tax and New York City general corporation tax. Shareholders subject
to income taxation by states other than New York and cities other than New
York City will realize a lower after-tax rate of return than New York State
and City shareholders since the dividends distributed by the Fund generally
will not be exempt, to any significant degree, from income taxation by such
other states or cities. The Fund will inform shareholders annually as to the
portion of the Fund's distributions which constitutes exempt-interest
dividends and the portion which is exempt from New York State and New York
City personal income taxes. Interest on indebtedness incurred or continued to
purchase or carry Fund shares is not deductible for Federal income tax
purposes or for New York State and New York City personal income tax purposes
to the extent attributable to exempt-interest dividends.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such
31
<PAGE>
distributions will be considered taxable ordinary income for Federal income
tax purposes 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 shareholder has owned Fund shares and, for New York
State and New York City personal income tax purposes, are treated as capital
gains which are taxed at ordinary income tax rates. Recent legislation created
additional categories of capital gains taxable at different rates. Additional
legislation eliminates the highest 28% category for most sales of capital
assets occurring after December 31, 1997. Generally not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any exempt-interest
dividends, ordinary income dividends or capital gain dividends, as well as the
amount of capital gain dividends in the different categories of capital gain
referred to above. Distributions by the Fund, whether from exempt-income,
ordinary income or capital gains, will not be eligible for the dividends
received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January that was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Internal Revenue Service ("Service") has taken the position in a revenue
ruling that if a RIC has two classes of shares, it may designate distributions
made to each class in any year as consisting of no more than such class's
proportionate share of particular types of income, including exempt-interest
income and net long-term capital gains (including the additional categories of
capital gains discussed above). 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 both Common Stock and preferred stock are outstanding, the Fund intends
to designate distributions made to the classes as consisting of particular
types of income in accordance with each class's proportionate share of such
income. Thus, the Fund will designate dividends paid as exempt-interest
dividends in a manner that allocates such dividends between the holders of
Common Stock and preferred stock in proportion to the total dividends paid to
each class during the taxable year, or otherwise as required by applicable
law. Capital gain dividends (including the additional categories of capital
gains discussed above) will similarly be allocated between the two classes in
proportion to the total dividends paid to each class during the taxable year,
or otherwise as required by applicable law. When capital gain or other taxable
income is allocated to holders of preferred stock pursuant to the allocation
rules described above, the terms of the preferred stock may require the Fund
to make an additional distribution to or otherwise compensate such holders for
the tax liability resulting from such allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
32
<PAGE>
August 7, 1986. Private activity bonds are bonds that, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and that benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" that could subject certain investors
in such bonds, including shareholders of the Fund, to an increased alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after its taxable year-end the
portion of its dividends declared during the year that constitutes an item of
tax preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay an alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. Upon any
failure to meet the asset coverage requirements of the 1940 Act, the Fund, in
its sole discretion, may redeem shares of preferred stock in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to qualify as a RIC. There can be no
assurance, however, that any such action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred stock that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such preferred stock
are "preferential" under the Code and, therefore, not eligible for the
dividends paid deduction. The Fund intends to issue preferred stock that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the Service to that effect. If the Fund
ultimately relies solely on a legal opinion when it issues such preferred
stock, there is no assurance that the Service would agree that dividends on
the preferred stock are not preferential. If the Service successfully
disallowed the dividends paid deduction for dividends on the preferred stock,
the Fund could be disqualified as a RIC. In this case, dividends on the Common
Stock would not be exempt from Federal income taxes. Additionally, the Fund
would be subject to the alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the
Fund's shares) could be viewed as a taxable distribution. If the discount is
viewed as a taxable distribution, it is also possible that the
33
<PAGE>
taxable character of this discount would be allocable to all of the
shareholders, including shareholders who do not participate in the dividend
reinvestment plan. Thus, shareholders who do not participate in the dividend
reinvestment plan might be required to report as ordinary income a portion of
their distributions equal to their allocable share of the discount.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to
the Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and 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.
34
<PAGE>
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of Common Stock otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by State Street Bank and
Trust Company ("State Street"), as agent for shareholders in administering the
Plan (the "Plan Agent"), in additional shares of Common Stock of the Fund.
Holders of Common Stock who elect not to participate in the Plan will receive
all distributions in cash paid by check mailed directly to the shareholder of
record (or, if the shares are held in street or other nominee name, then to
such nominee) by State Street, as dividend paying agent. Such participants may
elect not to participate in the Plan and to receive all distributions of
dividends and capital gains in cash by sending written instructions to State
Street, as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise,
such termination or resumption will be effective with respect to any
subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively, referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares of Common
Stock. The shares will be acquired by the Plan Agent for the participant's
account, depending upon the circumstances described below, either (i) through
receipt of additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market ("open-market purchases") on the New York
Stock Exchange or elsewhere. If on the payment date for the dividend, the net
asset value per share of the Common Stock is equal to or less than the market
price per share of the Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be credited
to the participant's account will be determined by dividing the dollar amount
of the dividend by the net asset value per share on the date the shares are
issued, provided that the maximum discount from the then current market price
per share on the date of issuance may not exceed 5%. If on the dividend
payment date the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Plan Agent
will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, participants in the
Plan will receive any dividends in newly issued shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common
35
<PAGE>
Stock exceeds the net asset value per share, the average per share purchase
prices paid by the Plan Agent may exceed the net asset value of the Fund's
shares, resulting in the acquisition of fewer shares than if the dividend had
been paid in newly issued shares on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan provides
that if the Plan Agent is unable to invest the full dividend amount in open-
market purchases during the purchase period or if the market discount shifts
to a market premium during the purchase period, the Plan Agent will cease
making open-market purchases and will invest the uninvested portion of the
dividend amount in newly issued shares at the close of business on the last
purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 225 Franklin Street, Boston, Massachusetts 02110.
36
<PAGE>
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of Common Stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares (the "Original Shares")
in Class D initial sales charge shares of certain Merrill Lynch-sponsored
open-end mutual funds ("Eligible Class D Shares") at their net asset value,
without the imposition of the initial sales charge, if the conditions set
forth below are satisfied. First, the sale of the Original Shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class D Shares. Second, the Original Shares must have
been either acquired in this offering or be shares representing reinvested
dividends from shares of Common Stock acquired in this offering. Third, the
Original Shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class D shares of the mutual funds are
subject to an account maintenance fee at an annual rate of up to 0.25% of the
average daily net asset value of such mutual fund. The Eligible Class D Shares
may be redeemed at any time at the next determined net asset value, subject in
certain cases to a redemption fee. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, the distributor for the
mutual funds will advise Merrill Lynch Financial Consultants as to those
mutual funds that offer the investment option described above.
NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
p.m., New York time) on the last business day in each week. For purposes of
determining the net asset value of a share of Common Stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The New York Municipal Bonds and Municipal Bonds in which the Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value, the Fund utilizes the valuations of portfolio securities furnished by a
pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. 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 the Fund under the general
supervision of the Board of Directors. The Board of Directors has determined
in good faith that the use of a pricing service is a fair method of
determining the valuation of portfolio securities. Positions in futures
contracts are valued at closing prices for such contracts established by the
exchange on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Board of Directors.
The Fund determines and makes available for publication the net asset value
of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify or
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption. Within approximately three months after completion of the offering
of the Common Stock described herein, the Fund intends to reclassify an amount
of unissued Common Stock as preferred stock and at that time to offer shares
of preferred stock representing approximately 40% of the Fund's capital
immediately after the issuance of such preferred stock. There is no assurance
that such preferred stock will be issued.
COMMON STOCK
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred stock are outstanding, holders
of Common Stock will not be entitled to receive any net income of or other
distributions from the Fund unless all accumulated dividends on preferred
stock have been paid and unless asset coverage (as defined in the 1940 Act)
with respect to preferred stock would be at least 200% after giving effect to
such distributions. See "Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 shares of Common Stock of the Fund for $100,005. As of the
date of this Prospectus, the Investment Adviser owned 100% of the outstanding
shares of Common Stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
PREFERRED STOCK
It is anticipated that the Fund's shares of preferred stock will be issued
in one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of Common
Stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of Common Stock have no preemptive right to purchase any
shares of preferred stock that might be issued. It is anticipated that the net
asset value per share of the preferred stock will equal its original purchase
price per share plus accumulated dividends per share.
The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of Common Stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
stock is likely to achieve the benefits to the holders of Common Stock
described in the Prospectus. Although the terms of the preferred stock,
including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Directors (subject to
applicable law
38
<PAGE>
and the Fund's Articles of Incorporation), the initial series of preferred
stock will be structured to carry either a relatively short-term dividend
rate, in which case periodic redetermination of the dividend rate will be made
at relatively short intervals (generally seven or 28 days), or a medium-term
dividend rate, in which case periodic redetermination of the dividend rate
will be made at intervals of up to five years. In either case, such
redetermination of the dividend rate will be made through an auction or
remarketing procedure. Additionally, under certain circumstances, when the
Fund is required to allocate taxable income to holders of the preferred stock,
it is anticipated that the terms of the preferred stock will require the Fund
to make an Additional Distribution (as defined in "Special Leverage
Considerations and Risks--Effects of Leverage") to such holders. The Board
also has indicated that it is likely that the liquidation preference, voting
rights and redemption provisions of the preferred stock will be as stated
below. The Fund's Articles of Incorporation, as amended, together with any
Articles Supplementary, is referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of Common Stock. After payment of
the full amount of the liquidating distribution to which they are entitled,
the preferred stockholders will not be entitled to any further participation
in any distribution of assets by the Fund. A consolidation or merger of the
Fund with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Fund will not be deemed to be a
liquidation, dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this Prospectus and except
as otherwise required by applicable law, holders of shares of preferred stock
will have equal voting rights with holders of shares of Common Stock (one vote
per share) and will vote together with holders of Common Stock as a single
class.
In connection with the election of the Fund's directors, holders of shares
of preferred stock, voting as a separate class, will be entitled to elect two
of the Fund's directors, and the remaining directors will be elected by all
holders of capital stock, voting as a single class. So long as any preferred
stock is outstanding, the Fund will have not less than five directors. If at
any time dividends on shares of the Fund's preferred stock shall be unpaid in
an amount equal to two full years' dividends thereon, the holders of all
outstanding shares of preferred stock, voting as a separate class, will be
entitled to elect a majority of the Fund's directors until all dividends in
default have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.
Redemption Provisions. It is anticipated that shares of preferred stock will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal
to their liquidation preference plus accumulated but unpaid dividends to the
date of redemption upon the occurrence of certain specified events, such as
the failure of the Fund to maintain asset coverage requirements for the
preferred stock specified by the rating agencies that issue ratings on the
preferred stock.
39
<PAGE>
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A director may be removed
from office with or without cause, but only by vote of the holders of at least
66 2/3% of the votes entitled to be voted on the matter. A director elected by
all the holders of capital stock may be removed only by action of such
holders, and a director elected by the holders of preferred stock may be
removed only by action of such holders.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 66 2/3% of the Fund's shares of capital stock then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations,
(ii) 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
(iii) a liquidation or dissolution of the Fund, unless such action has
been approved, adopted or authorized by the affirmative vote of two-thirds
of the total number of Directors fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's shares of
capital stock is required. Following the proposed issuance of the preferred
stock, it is anticipated that the approval, adoption or authorization of
the foregoing would also require the favorable vote of a majority of the
Fund's shares of preferred stock then entitled to be voted, voting as a
separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by two-thirds of the total number
of Directors fixed in accordance with the by-laws), and, assuming preferred
stock is issued, the affirmative vote of a majority of outstanding shares of
preferred stock of the Fund, voting as a separate class. Such a vote also
would satisfy a separate requirement in the 1940 Act that the change be
approved by the shareholders. Shareholders of an open-end investment company
may require the company to redeem their shares of common stock at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and the
Common Stock would no longer be listed on a stock exchange.
Conversion to an open-end investment company would also require redemption
of all outstanding shares of preferred stock and would require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the issuance of senior securities, the borrowing of money and the
purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of
40
<PAGE>
shareholders generally. Reference should be made to the Charter on file with
the Securities and Exchange Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 6,700,000 shares of Common Stock
from the Fund. The Underwriter is committed to purchase all of such shares if
any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of Common Stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of Common Stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $ per share on
sales by such dealers. After the initial public offering, the public offering
price and other selling terms may be changed. Investors must pay for shares of
Common Stock purchased in the offering on or before September , 1998.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 1,005,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
Common Stock.
If the Underwriter creates a short position in the shares of Common Stock in
connection with the offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriter may
reduce that short position by purchasing shares of Common Stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of Common Stock
in the open market to reduce the Underwriter's short position or to stabilize
the price of the shares of Common Stock, it may reclaim the amount of the
selling concession from the selling group members who sold those shares of
Common Stock as part of the offering.
41
<PAGE>
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of Common Stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for the shares of
the Common Stock. Application has been made to list the Fund's Common Stock on
the New York Stock Exchange. However, during an initial period which is not
expected to exceed two weeks from the date of this Prospectus, the Fund's
Common Stock will not be listed on any securities exchange. Additionally,
during such period, the Underwriter does not intend to make a market in the
Fund's Common Stock, although a limited market may develop. Consequently, it
is anticipated that an investment in the Fund will be illiquid during such
period. In order to meet the requirements for listing, the Underwriter has
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-
term, tax-exempt securities subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of Common Stock of the Fund will be State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts, 02110.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New
York, New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund included in this
Prospectus has been so included in reliance on the report of ,
independent auditors, and on their authority as experts in auditing and
accounting. The selection of independent auditors is subject to ratification
by shareholders of the Fund.
42
<PAGE>
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Commission.
Any such reports, proxy statements and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Regional Office, at Seven World
Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office,
at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and
Midwest Regional Office, at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can
be obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Fund, that file electronically with the Commission. Reports, proxy
statements and other information concerning the Fund can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
Additional information regarding the Fund and the shares of Common Stock is
contained in the Registration Statement on Form N-2, including amendments,
exhibits and schedules thereto, relating to such shares filed by the Fund with
the Commission in Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the
Fund and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be
adversely affected if the computer systems used by the Investment Adviser or
other Fund service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser has established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the Investment Adviser does not
anticipate that the transition to the 21st Century will have any material
impact on its ability to continue to service the Fund at current levels. In
addition, the Investment Adviser has sought assurances from the Fund's other
service providers that they are taking all necessary steps to ensure that
their computer systems will accurately reflect the Year 2000, and the
Investment Adviser will continue to monitor the situation. At this time,
however, no assurance can be given that the Fund's other service providers
have anticipated every step necessary to avoid any adverse effect on the Fund
attributable to the Year 2000 Problem.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder,
MuniHoldings New York Insured Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings New York Insured Fund II, Inc. as of , 1998. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniHoldings New
York Insured Fund II, Inc. as of , 1998 in conformity with generally
accepted accounting principles.
44
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AUGUST , 1998
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Offering Costs (Note 1).............................................
--------
Deferred organization costs (Note 1)................................
--------
Total assets......................................................
--------
LIABILITIES
Liabilities and accrued expenses (Note 1)...........................
--------
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Stock, par value $.10 per share; shares authorized; 6,667
shares issued and outstanding (Note 1)............................. $ 667
Paid-in Capital in excess of par.................................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per share of
Common Stock (Note 1).............................................. $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on June 8,
1998 as a closed-end, non-diversified management investment company and has
had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 6,667 shares of Common Stock for
$100,005 on , 1998. The General Partner of the Investment Adviser is an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a period not exceeding five years beginning with the commencement of
operations of the Fund. Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares. In
accordance with Statement of Position 98-5, unamortized organization costs
existing at June 1, 1999 (start of the Fund's new fiscal year), will be
charged to expense at that date. At the present time, management believes this
change will not have any material impact to the operations of the Fund.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.55 of 1% of
the average weekly net assets of the Fund, including proceeds from the sale of
preferred stock. The Investment Adviser or an affiliate will pay Merrill
Lynch, Pierce, Fenner & Smith Incorporated a commission in the amount of % of
the price to the public per share in connection with the initial public
offering of the Fund's common stock.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
45
<PAGE>
APPENDIX I
ECONOMIC 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") and does not purport to be a complete description of such factors.
Other factors will affect issuers. The summary is based primarily upon one or
more of the most recent publicly available offering statements relating to
debt offerings of State issuers, however, it has not been updated nor will it
be updated during the year. 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 noticeable improvements in the City's
economy during calendar years 1997 and 1998, economic growth will slow, with
local employment increasing modestly through fiscal year 2002.
For each of the 1981 through 1997 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating
results as reported in accordance with generally accepted accounting
principles ("GAAP"), after discretionary 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 reductions in City services or entitlement programs or
tax or other revenue increases that could adversely affect the City's economic
base.
The most recent quarterly modification to the City's financial plan for the
1998 fiscal year (July 1, 1997 through June 30, 1998) submitted to the New
York State Financial Control Board (the "Control Board") on June 23, 1998 (the
"1998 Modification"), projects a balanced budget in accordance with GAAP for
the 1998 fiscal year.
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
1999 through 2002 fiscal years (the "1999-2002 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.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets.
The City's financing program for fiscal years 1999 through 2002 contemplates
the issuance of $5.2 billion of general obligation bonds and $5.4 billion of
bonds to be issued by the New York City Transitional Finance Authority (the
"Transitional Finance Authority") to finance City capital projects. In 1997,
the State enacted the New York City Transitional Finance Authority Act (the
"Finance Authority Act"), which created the Transitional Finance Authority, to
assist the City in keeping the City's
46
<PAGE>
indebtedness within the forecast level of the constitutional restrictions on
the amount of debt the City is authorized to incur. In a challenge to the
constitutionality of the Finance Authority Act, the State trial court, by
summary judgment on November 25, 1997, held the Finance Authority Act to be
constitutional. On July 30, 1998, the State Appellate Division affirmed the
trial court's decision. Plaintiffs have filed a notice of appeal with the
State's Court of Appeals. In addition, the City issues revenue notes and tax
anticipation notes to finance its seasonal working capital requirements. 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 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, and the Water
Authority and Transitional Finance Authority bonds.
1999-2002 Financial Plan. On June 26, 1998 the City released the City
Financial Plan for the 1999 through 2002 fiscal years, which relates to the
City and certain entities which receive funds from the City. The City Financial
Plan reflects changes as a result of the City's expense and capital budgets for
the 1999 fiscal year, which were adopted in June 1998, and changes subsequent
to the adopted budget. The City Financial Plan projects revenues and
expenditures for the 1999 fiscal year balanced in accordance with GAAP, and
projects gaps of $1.9 billion, $2.7 billion and $2.3 billion for the 2000
through 2002 fiscal years, respectively, after implementation of a gap-closing
program to reduce agency expenditures by approximately $380 million in each of
fiscal years 2000 through 2002.
In connection with the Financial Plan, the City has outlined a gap-closing
program for fiscal years 2000, 2001 and 2002 to eliminate the respective
projected remaining budget gaps for such fiscal years. This program, which is
not specified in detail, assumes for the 2000, 2001 and 2002 fiscal years,
respectively, additional agency programs to reduce expenditures or increase
revenues; savings from privatization initiatives and asset sales; additional
Federal and State aid; additional entitlement cost containment initiatives; and
the availability of funds in the City's General Reserve.
The 1998 Modification and the 1999-2002 Financial Plan include proposed
discretionary transfers in the 1998 fiscal year of approximately $2.0 billion
to pay certain debt service costs and subsidies due in the 1999 fiscal year,
and a proposed discretionary transfer in the 1999 fiscal year of $465 million
to pay debt service due in fiscal year 2000. In addition, the Financial Plan
reflects enacted and proposed tax reduction programs totaling $975 million,
$1.172 billion and $1.259 billion in fiscal years 2000 through 2002,
respectively, including the elimination of the City sales tax on all clothing
as of December 1, 1999, the expiration of the 12.5% personal income tax
surcharge on December 31, 1998, the extension of current tax reductions for
owners of cooperative and condominium apartments starting in fiscal year 2000
and a personal income tax credit for child care and for resident holders of
Subchapter S corporations starting in fiscal year 2000, which are subject to
State legislative approval, and reduction of the commercial rent tax commencing
in fiscal year 2000.
Assumptions. The 1999-2002 Financial Plan is based on numerous assumptions,
including the condition of the City's and the region's economy and a modest
employment recovery and the concomitant receipt of economically sensitive tax
revenues in the amounts projected. The 1999-2002 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 2002 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
47
<PAGE>
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; the ability of the City to implement cost reduction
initiatives; 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.
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; (ii) collection of the projected
rent payments for the City's airports, 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 actions; and (iii) State and Federal
approval of the State and Federal gap-closing actions proposed by the City in
the Financial Plan. 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 93% 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, as reflected in the Financial Plan, would total
$459 million and $1.2 billion in the 1998 and 1999 fiscal years, respectively,
and exceed $2 billion in every fiscal year after the 1999 fiscal year. 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 currently 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 December 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 critical computer systems in
48
<PAGE>
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.
As of August 13, 1998, the City has completed work on approximately 36% of
its mission-critical and high priority systems. 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, 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.
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 July 22, 1998, the City Comptroller issued a report on the City Financial
Plan. With respect to the 1999 fiscal year, the report identified a possible
surplus of between $657 million and $1.0 billion, assuming the City's gap-
closing measures are successfully implemented. Potential risks identified in
the report for the 1999 fiscal year include between $70 and $75 million of
greater overtime spending and a write-down of outstanding education aid
receivables that are ten years past due, which are estimated to be
approximately $39 million in the 1999 fiscal year. With respect to fiscal
years 2000 through 2002, the report identified baseline risks of between $444
million and $626 million, $215 million and $1.2 billion, and $403 million and
$2.0 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. The report also noted that the Financial Plan
contains a number of additional uncertainties, including the continuation of
securities industry profits, international developments, such as worsening
conditions in Asia and Russia, and the growth of the City's operating and debt
service expenditures, which have substantially exceeded local inflation.
Finally, the report noted that the Financial Plan does not include the revenue
and debt service expenses attributable to the Transitional Finance Authority,
which will have incurred approximately $7.5 billion of debt to finance the
City's capital projects between fiscal years 1998 and 2001, resulting in total
debt service costs of approximately $1.5 billion by the end of fiscal year
2002. The report notes, that as a result of the exclusion of Transitional
Finance Authority debt service, debt service as a percentage of tax revenues
drops by 2.6% to 16.5% in fiscal year 2002. It is expected that the City
Comptroller will report that the City's capital investment needs substantially
exceed currently projected capital spending.
49
<PAGE>
On July 22, 1998, the OSDC issued a report on the City Financial Plan. The
report concluded that the City is likely to end fiscal years 1998 and 1999
with a substantial surplus, before discretionary transfers. With respect to
fiscal years 2000 through 2002, the report noted that the City has not made
much progress in reducing the imbalance between recurring revenues and
spending and concluded that the budget gaps for such years could be even
larger than those projected by the City, totaling $3.0 billion, $3.5 billion
and $3.1 billion in fiscal years 2000 through 2002, respectively.
In the report the OSDC identified several concerns. The report noted that
the City Financial Plan does not make any provision for an economic downturn,
which could reduce revenues and increase City pension contributions and public
assistance caseloads. The report identified as a risk assumed payments from
the Port Authority relating to the City's claim for back rentals, which are
the subject of arbitration, and the potential need for the City to provide
funding to HHC for wage increases, and to BOE for Project Read and teachers'
supplemental salaries which were previously funded by the State. With respect
to property taxes, the report noted that the City is supporting legislation
that, if not enacted, could result in the City's liability in tax certiorari
cases increasing substantially over current estimates.
With respect to welfare reform, the report expressed concern that the City
Financial Plan does not reflect the full impact of implementing Federal
welfare reform and other changes in State public assistance programs,
including compliance with the Federal work requirements, and the financial
impact of welfare recipients who will have passed the five-year lifetime cap
on Federal welfare benefits which could cost the City $45 million in fiscal
year 2000 and up to $120 million annually thereafter. Moreover, the report
noted that providing child care for the children of parents who make the
transition from welfare to work could cost between $83 million and $140
million in the 1999 fiscal year, in addition to $208 million to provide
services to all 31,000 children already waiting for services. The report also
expressed concern about the City's growing debt burden, which will reach 19%
of tax revenues by fiscal year 2002. With respect to the year 2000 problem,
the report noted that an additional $100 million may be required from the
City's operating budget for consulting contracts.
On August 5, 1998 the OSDC released a report on HHC. The report noted that
HHC will face increasing pressure in the near future when the State begins
requiring most Medicaid recipients to enroll in managed care plans, which will
stress outpatient and preventive services and result in providers being paid a
fixed annual amount for each enrollee regardless of the level of care
provided. The report noted that the shift to managed care is expected to
reduce HHC's traditional Medicaid fee-for-service revenues by $600 million
over the next four years. HHC hopes to make up all but $100 million of this
loss through a four-fold increase in managed care revenues. Moreover, the
report noted that HHC is at a competitive disadvantage because of its unique
mandate to provide medical care to the indigent, the growing number of
uninsured that already comprises one-third of its outpatient clientele and the
competition for its traditional patient base (i.e., Medicaid recipients).
On July 20, 1998, the staff of the Control Board issued a report reviewing
the City Financial Plan. The report noted that the City is likely to end the
1999 fiscal year in balance, and that the dispute between the Mayor and the
City Council over specific details of the budget will not affect the prospects
for balance in the 1999 fiscal year. The report, however, noted that gap-
closing actions assumed in the City Financial Plan totaling $402 million for
fiscal year 1999 have not yet been specified by the City. The report noted
that the City's total debt service is expected to increase from 9% of total
revenues and 15.8% of tax revenue in the 1999 fiscal year to 11.8% of total
revenues and 19.6% of tax revenues in fiscal year 2002 due to decades of
deferred debt service maintenance. The report further noted that because of
the sensitivity of the City's tax base to the health of the financial services
sector, the City needs to be cautious about the outlook of the securities
industry.
50
<PAGE>
On May 15, 1998, the IBO released a report on the City's Executive Budget
for the 1999 fiscal year. In its report, the IBO estimated a balanced budget
for the 1998 fiscal year, a surplus in the 1999 fiscal year and a gap of $1.6
billion for fiscal year 2000, after taking into account prepayments of debt
service in the 1999 fiscal year. With respect to fiscal years 2001 and 2002,
the report estimated gaps of $2.2 billion and $1.8 billion, respectively. The
report noted that, while the strength of the local economy is helping the City
in the near term, large projected gaps for fiscal years 2001 and 2002, at this
point in the business cycle, could be an omen of difficult times ahead.
Moreover, the report noted the April Financial Plan removes the debt service
of the Transitional Finance Authority and the personal income tax revenues
dedicated to paying such debt service from the Financial Plan. The report
notes that if Transitional Finance Authority debt service were included in
City projected debt service, City debt service would increase from
approximately 16% of tax revenues in the 1998 fiscal year to approximately 19%
in fiscal year 2002.
On October 31, 1996, the IBO released a report assessing the costs that
could be incurred by the City in response to the 1996 Welfare Act. The report
noted that if the requirement that all recipients work after two years of
receiving benefits is enforced, these additional costs could be substantial
starting in 1999, reflecting costs for worker training and supervision of new
workers and increased child care costs. The report noted that decisions to be
made by the State which will have a significant impact on the City budget
include the allocation of block grant funds between the State and New York
local governments such as the City and the division between the State and its
local governments of welfare costs not funded by the Federal government.
Finally, the report noted that the new welfare law's most significant fiscal
impact is likely to occur in the years 2002 and beyond, reflecting the full
impact of the lifetime limit on welfare participation which only begins to be
felt in 2002 when the first recipients reach the five-year limit and are
assumed to be covered by Home Relief, which has recently been replaced by the
Safety Net Assistance program. In a subsequent report, the IBO noted that the
State had enacted the Welfare Reform Act of 1997 which, among other things,
requires the City to achieve work quotas and other work requirements and
requires all able-bodied recipients to work after receiving assistance for two
years.
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 Financial Plan currently
provides for $850 million of seasonal financing in fiscal year 1999. 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 August 13, 1998, Moody's Investors Service, Inc. ("Moody's")
rated the City's outstanding general obligation bonds A3, Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") rated such
bonds A- and Fitch IBCA, Inc. ("Fitch") rated such bonds A-. On July 10, 1995,
Standard & Poor's revised downwards 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. 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.
51
<PAGE>
Outstanding Indebtedness. As of June 30, 1998, the City and the Municipal
Assistance Corporation for the City of New York had respectively approximately
$25.9 and $3.1 billion of outstanding net long-term debt. As of March 25,
1998, the Water Authority had approximately $8.1 billion of aggregate
principal amount of outstanding bonds, inclusive of subordinate second
resolution bonds, and $600 million aggregate principal amount of outstanding
commercial paper notes.
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 are 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.
Such an expenditure could cause significant increases in City water and sewer
charges.
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
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. As of June 30, 1997, the City estimated
its potential future liability on account of outstanding claims to be
approximately $3.5 billion.
NEW YORK STATE
Current Economic Outlook. The national economy strengthened during 1997 and
accelerated its rate of expansion as 1998 began. Growth in the first quarter
of 1998 was a robust 5.4 percent, but recent data suggests that the expansion
weakened substantially during the second quarter. The State economy has also
continued to expand, but growth remains somewhat slower than in the nation.
The State's forecast of the State's economy shows continued expansion during
the 1998 and 1999 calendar years.
Employment growth in the State has been hindered during recent years by
significant cutbacks in the computer and instrument manufacturing, utility,
defense and banking industries. Government downsizing has also moderated these
job gains. With the exception of government and manufacturing, every sector
recorded employment gains for the first six months of 1998, with the service
and trade sectors accounting for most of the increase. Much of the service
sector increase occurred in business services. According to data through June
1998, since December 1994, total employment has risen 286,000, with private
employment up by 330,000 and government employment down by 44,000. The
unemployment rate was 5.5 percent in June 1998, down from a peak of 8.9
percent in July 1992.
52
<PAGE>
Overall, employment growth in 1998 is expected to be faster than in 1997,
with growth in the second half of the year somewhat slower than in the first;
banking and hospital employment are expected to continue to
shrink, and government employment is expected to stabilize after several years
of significant declines. Employment in the first quarter of 1999 is projected
to be about 100,000 above the level of a year earlier. The State Division of
the Budget's forecast of the New York economy calls for employment growth to
continue throughout 1999, adding some 85,000 jobs on an annual average basis.
On an average annual basis, the employment growth in the State was 1.5 percent
for 1997 and is projected to be 1.9 percent and 1.0 percent for 1998 and 1999,
respectively. On the national level, employment growth was 2.3 percent for
1997 and is projected to be 2.5 percent and 1.6 percent for 1998 and 1999,
respectively.
On an average annual basis, the State unemployment rate is expected to drop
through 1998 and 1999 reaching 5.7 percent for 1999 as compared to the 6.4
percent level of 1997. For the nation as a whole, the unemployment rate was
5.0 percent for 1997, is projected to be 4.7 percent in 1998 and even with the
anticipated economic slowdown, is expected to remain below 5.0 percent in
1999.
Personal income in the State is expected to record moderate gains in 1998
(4.8 percent)--down from the 5.7 and 5.8 percent levels achieved by the State
and the nation, respectively, for 1997. This level is below the 5.4 percent
projected national personal income growth for 1998. Personal income growth in
the State is expected to decline to 4.2 percent for 1999, below the 4.5
percent level as projected for the nation.
The 1998-1999 Fiscal Year. The State's current fiscal year commenced on
April 1, 1998 and ends on March 31, 1999. On January 20, 1998 the Governor
presented his 1998-1999 Executive Budget (the "Executive Budget") to the
Legislature. The State's budget for the 1998-1999 fiscal year was not adopted
by the April 1 statutory deadline. Prior to adoption of the budget, the
Legislature enacted necessary appropriations for state-supported debt service.
On April 18, 1998, the State Legislature passed a State budget for the State's
1998-1999 fiscal year, and on April 25, 1998 the Governor vetoed certain of
the increased spending initiatives in the budget passed by the State
Legislature.
The State's financial plan for the 1998-1999 fiscal year (the "1998-1999
Financial Plan") is projected to be balanced on a cash basis in the General
Fund. (The General Fund is the principal operating fund of the State. It is
the State's largest fund and receives almost all State taxes. In the State's
1998-1999 fiscal year, the General Fund is expected to account for
approximately 70.1 percent of total State Funds disbursements.) Previously,
the 1997-1998 Financial Plan had projected a potential budget imbalance of up
to $1.68 billion for the 1998-1999 fiscal year. Total General Fund receipts,
including transfers from other funds, are projected to be $37.81 billion, an
increase of over $3 billion from the $34.55 billion recorded in the 1997-1998
fiscal year. Total General Fund disbursements, including transfers to support
capital projects, debt service and other funds, are estimated at $36.78
billion. This represents an increase of $2.43 billion or 7.1 percent from
1997-1998, or an average annual increase of only 2.3 percent since 1994-1995.
The State Division of the Budget estimates that the 1998-1999 Financial Plan
includes approximately $64 million in non-recurring resources or savings.
In terms of receipts, the transfer of a portion of the budget surplus
recorded in 1997-1998 to 1998-1999 exaggerates the "real" growth in State
receipts from year to year by depressing reported 1997-1998 figures and
inflating 1998-1999 projections. Conversely, the incremental cost of tax
reductions newly effective in 1998-1999
53
<PAGE>
and the impact of statutes earmarking certain tax receipts to other funds work
to depress apparent growth below the underlying growth in receipts
attributable to expansion of the State economy.
Net personal income tax collections are projected to reach $21.41 billion,
$3.65 billion above the reported 1997-1998 collection total with $2.4 billion
of the increase reflecting the net impact of the transfer of the surplus from
State fiscal year 1997-1998 to the current fiscal year. This tax continues to
account for over half of the State's General Fund receipts base. User tax
collections are projected to reach $7.21 billion in fiscal year 1998-1999, an
increase of $173 million over the 1997-1998 fiscal year.
Business tax receipts are estimated to be $4.95 billion for State fiscal
year 1998-1999. This represents an almost 2.0 percent decline from the 1997-
1998 results. The year-over-year decline in projected receipts in this
category is largely due to statutory changes resulting in diversion of General
Fund petroleum business and utility tax receipts. Additionally, the State's
economic forecast has profit growth slowing significantly in 1998.
The 1998-1999 Financial Plan as of June 1998 projected General Fund receipts
to be received from the following sources in the approximate following
proportions: i) personal income tax: 56.6 percent, ii) user taxes and fees:
19.0 percent, iii) business taxes: 13.2 percent, iv) other taxes: 2.7 percent
(includes estate and gift taxes), and v) miscellaneous receipts: 8.5 percent
(includes investment income, medical provider assessments and minor federal
grants).
In terms of disbursements, the 1998-1999 Financial Plan as of June 1998
projected General Fund disbursements to be allocated to the following
categories in the approximate following proportions: i) grants to local
government: 68.4 percent, ii) state operations: 18.2 percent, iii) debt
service: 6.0 percent, iv) general State charges: 6.0 percent (includes
contributions to pension systems and health insurance for State employees)
and, v) capital/other: 1.4 percent.
The 1998-1999 Financial Plan projects spending of $25.14 billion for grants
to local government, an increase of $1.88 billion or 8.1 percent over the
prior year. The largest annual increases are for educational programs,
Medicaid, other health and social welfare programs, and community project
grants. State operations spending is projected at $6.70 billion, an increase
of $511 million or 8.3 percent from the prior year.
Future Fiscal Years. The Executive Budget projected budget gaps of
approximately $1.75 billion in 1999-2000 growing to approximately $3.75
billion in 2000-2001. These gaps were projected after assuming unspecified
savings actions totaling $600 million in 1999-2000 and $800 million in 2000-
2001. Moreover, the State's projections for 1999-2000 also assume $250 million
in additional receipts from the settlement of State claims against the tobacco
industry. As a result of the budget passed by the State Legislature and the
vetoes of the Governor of certain increased spending in the State budget
passed by the Legislature, the potential imbalance in the 1999-2000 fiscal
year is expected to be roughly $1.3 billion, or about $400 million less than
previously projected. Consistent with past practice, the projections do not
include any costs associated with new collective bargaining agreements after
the expiration of the current round of contracts at the end of the 1998-1999
fiscal year.
The STAR program, which dedicates a portion of personal income tax receipts
to fund school tax reductions, has a significant impact on General Fund
receipts. STAR is projected to reduce personal income tax revenues available
to the General Fund by an estimated $1.3 billion in the 2000-2001 fiscal year.
Measured from the 1998-1999 base, scheduled reductions to estate and gift,
sales and other taxes, reflecting tax cuts enacted in
54
<PAGE>
the 1997-1998 and 1998-1999 fiscal years, will lower General Fund taxes and
fees by an estimated $1.8 billion in the 2000-2001 fiscal year. The fiscal
effects of tax reductions adopted in the last several fiscal years (including
1998-1999) are projected to grow more substantially beyond the 1998-1999
fiscal year, with the incremental
annual cost of all currently enacted tax reductions estimated at over $4
billion by the time they are fully effective in State fiscal year 2002-2003.
Disbursement projections for the out years currently assume additional outlays
for i) school aid, ii) Medicaid, iii) welfare reform, iv) mental health
community reinvestment, and v) other multi-year spending commitments in law.
Special Considerations. On February 3, 1998, the New York State Comptroller
issued a report which noted that a significant cause for concern is the budget
gaps in the 1999-2000 and 2000-2001 fiscal years, which the State Comptroller
projected at $2.6 billion and $4.8 billion, respectively, reflecting
uncertainty concerning the receipt by the State of $250 million of funds from
the tobacco settlement assumed for each of such fiscal years, as well as the
unspecified actions assumed in the State's projections. The State Comptroller
also stated that if the economy slows, the size of the gaps would increase.
According to the State Division of the Budget, uncertainties with regard to
the economy present the largest potential risk to budget balance in New York
State. The Executive Budget identifies various risks, including either a
financial market or broader economic correction during the State's financial
plan period, which risks are heightened by the relatively lengthy expansion
currently underway, and the financial turmoil in Asia. In addition, the
Executive Budget notes that a normal forecast error of one percentage point in
the expected growth rate could raise or lower receipts by over $1 billion by
the last year of the projection period, and that funding is not included for
any costs associated with new collective bargaining agreements after the
expiration of the current contracts at the end of the 1998-1999 fiscal year.
Furthermore, the securities industry is more important to the New York economy
than the national economy, and a significant deterioration in stock market
performance could ultimately produce adverse changes in wage and employment
levels.
The State's financial plans and the Executive Budget are 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. Many uncertainties exist in forecasts of
both the national and State economies, including consumer attitudes toward
spending, Federal financial and monetary policies, the availability of credit
and the condition of the world economy, any of which could have an adverse
effect on the State. There can be no assurance that the State economy will not
experience worse-than-predicted results in the remainder of the 1998-1999
fiscal year and subsequent fiscal years, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.
An additional risk to the State Financial Plan arises from the potential
impact of federal disallowances pending against the State, which could
adversely affect the State's projections of receipts. The State Financial Plan
assumes no federal disallowance or other federal actions that could affect
State finances, but has reserves in the event of such an action.
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 have helped to
create projected structural budget gaps for the State. To address a potential
imbalance in a 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.
55
<PAGE>
Owing to these and other factors, the State may face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending
required to maintain State programs at mandated levels. Any such recurring
imbalance would be exacerbated by the use by the State of nonrecurring
resources to achieve budgetary balance in a particular fiscal year. To correct
any recurring budgetary imbalance, the State would need to take significant
actions to align recurring receipts and disbursements in future fiscal years.
Year 2000 Computer Matters. New York State is currently addressing "Year
2000" data processing compliance issues. In 1996, the State created the Office
of Technology (the "OFT") to help address statewide technology issues,
including the Year 2000 issue. OFT has estimated that investments of at least
$140 million will be required to bring approximately 350 State mission-
critical and high-priority computer systems not otherwise scheduled for
replacement into Year 2000 compliance, and the State is planning to spend $100
million in the 1998-1999 fiscal year for this purpose. As of June 26, 1998,
work had been completed on roughly 20 percent of these mission-critical and
high-priority systems. All remaining unfinished mission-critical and high-
priority systems have at least 40 percent or more of the work completed.
Contingency planning is underway for those systems which may be non-compliant
prior to failure dates.
Prior Fiscal Years. 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.
The State ended its 1995-1996 fiscal year in balance, with a reported 1995-
1996 General Fund cash surplus of $445 million. General Fund receipts and
transfers from other funds totaled $32.81 billion, a decrease of 1.1 percent
from the 1994-1995 levels. General Fund disbursements and transfers to other
funds totaled $32.68 billion for the 1995-1996 fiscal year, a decrease of 2.2
percent from the 1994-1995 levels. Prior to adoption of the State's 1995-1996
fiscal year budget, the State had projected a potential budget gap of
approximately $5 billion, which was closed primarily through spending
reductions, cost containment measures, State agency actions and local
assistance reforms.
The State ended its 1994-1995 fiscal year with the General Fund in balance.
General Fund receipts and transfers from other funds totaled $33.16 billion,
an increase of 2.9 percent from the 1993-1994 levels. General
56
<PAGE>
Fund disbursements and transfers to other funds totaled $33.40 billion, an
increase of 4.7 percent from the 1993-1994 levels.
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. 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 is that the State is able to meet
its cash flow needs without relying on short-term seasonal borrowing.
Provisions prohibiting the State from returning to a reliance upon cash flow
manipulation to balance its budget will remain in bond covenants until the
LGAC bonds are retired.
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.
As of March 31, 1998, the total amount of outstanding general obligation
debt was approximately $5.033 billion, including $293.6 million in Bond
Anticipation Notes. The total amount of moral obligation debt was
approximately $1.390 billion (down from $3.272 as of March 31, 1997), and
$24.015 billion of bonds issued primarily in connection with lease-purchase
and contractual-obligation financing of State capital programs were
outstanding.
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, 1997, 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 $84 billion, up from
$75.4 billion as of September 30, 1996. 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 in
their respective obligations.
Ratings. As of July 10, 1998, Moody's and Standard & Poor's rate 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
57
<PAGE>
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
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, 1997, the State reported its estimated liability for awarded
and anticipated unfavorable judgments at $364 million.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1998-1999 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1998-1999 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers
Board") by the State in 1984. The Yonkers Board is charged with oversight of
the fiscal affairs of Yonkers. Future actions taken by the Governor or the
State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
58
<PAGE>
APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
59
<PAGE>
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, MIG 3/VMIG 3, and MIG 4/VMIG 4; 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"; MIG 4/VMIG 4 instruments are of "adequate
quality. . . [p]rotection commonly regarded as required of an investment
security is present . . . there is specific risk."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on circumstances.
60
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest rated issues only in small
degree. The Obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation. While
CC such debt will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.
Debt rated "D" is in payment default. The "D" rating category is used
D 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."
61
<PAGE>
A-3
Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP- Strong capacity to pay principal and interest. An issue determined to
1 possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP- Satisfactory capacity to pay principal and interest with some
2 vulnerability to adverse financial and economic changes over the term of
the notes.
SP- Speculative capacity to pay principal and interest.
3
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.
62
<PAGE>
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR
Indicates that Fitch does not rate the specific issue.
Conditional
A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended
A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn
A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
63
<PAGE>
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC
Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC
Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds are in imminent default in payment of interest or
principal.
DDD 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.
64
<PAGE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
65
<PAGE>
APPENDIX III
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured 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 premiums, 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-
66
<PAGE>
paying ability rating of Aaa carry the smallest degree of credit risk and,
while the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair the company's
fundamentally strong position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can
only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet nonpolicy
obligations (i.e., debt contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings.
The likelihood of a timely flow of funds from the insurer to the trustee for
the bondholders is a key element in the rating determination for such debt
issues.
67
<PAGE>
APPENDIX IV
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF
-----------------------------------
TAXABLE INCOME 1998 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
- ---------------------------- NEW YORK
SINGLE 1998 FEDERAL STATE TAX IS EQUAL TO A NEW YORK STATE
RETURN/2/ JOINT RETURN/2/ TAX BRACKET BRACKET/3/ TAXABLE YIELD OF
- --------- ----------------- ------------ ---------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20,001-
$ 25,351 $ 40,001-$ 42,350 15.0% 6.85% 6.31 6.95 7.58 8.21 8.84 9.47
$ 25,351
-
$ 61,400 $ 42,351-$102,300 28.0% 6.85% 7.46 8.20 8.95 9.69 10.44 11.18
$ 61,401-
$128,100 $102,301-$155,950 31.0% 6.85% 7.78 8.56 9.34 10.11 10.89 11.67
$128,101-
$278,450 $155,951-$278,450 36.0% 6.85% 8.39 9.23 10.06 10.90 11.74 12.58
Over
$278,450 Over $278,450 39.6% 6.85% 8.89 9.78 10.66 11.55 12.44 13.33
</TABLE>
TAXABLE EQUIVALENT YIELDS FOR 1998/1/
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF
-----------------------------------
TAXABLE INCOME 1998 1998 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
------------------------------------- NEW YORK NEW YORK
1998 FEDERAL STATE TAX CITY TAX IS EQUAL TO A NEW YORK STATE
SINGLE RETURN/2/ JOINT RETURN/2/ TAX BRACKET BRACKET/3/ BRACKET/4/ TAXABLE YIELD OF
----------------- ----------------- ------------ ---------- ---------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,351-$ 50,000 -- 28.0% 6.85% 4.40% 7.83 8.61 9.39 10.18 10.96 11.74
-- $ 42,351-$ 45,500 28.0% 6.85% 4.39% 7.83 8.61 9.39 10.17 10.96 11.74
-- $ 45,001-$ 90,000 28.0% 6.85% 4.46% 7.83 8.61 9.39 10.18 10.96 11.74
$ 50,001-$ 61,400 -- 28.0% 6.85% 4.46% 7.83 8.62 9.40 10.18 10.97 11.75
-- $ 90,001-$102,300 28.0% 6.85% 4.46% 7.83 8.62 9.40 10.18 10.97 11.75
$ 61,401-$128,100 $102,301-$155,950 31.0% 6.85% 4.46% 8.17 8.99 9.81 10.62 11.44 12.26
$128,101-$278,450 $155,951-$278,450 36.0% 6.85% 4.46% 8.81 9.69 10.57 11.45 12.34 13.22
Over $278,450 Over $278,450 39.6% 6.85% 4.46% 9.34 10.27 11.20 12.14 13.07 14.00
</TABLE>
- --------
/1An/investor's marginal tax rates may exceed the rates shown in the above
tables if such investor does not itemize deductions for Federal income tax
purposes or due to the reduction or possible elimination of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. For investors who pay alternative minimum tax, tax-free
yields may be equivalent to lower taxable yields than those shown above. As
for shareholders who are subject to income taxation by states other than New
York and cities other than New York City (including shareholders who pay
non-resident income taxes), tax free yields may be equivalent to lower
taxable yields than those shown above. The above tables do not apply to
corporate investors. The tax characteristics of the Fund are described more
fully elsewhere in this Prospectus. Consult your tax adviser for further
details. These charts are for illustrative purposes only and cannot be taken
as an indication of anticipated Fund performance.
/2The/above tables are based on the Federal taxable income brackets which are
adjusted annually for inflation.
/3A/supplemental tax will also apply to filers with adjusted gross income
between $/1//0//0/,/0//0//0/ and $/1//5//0/,/0//0//0/ which phases out the
benefit of the lower marginal brackets. This adjustment is not reflected in
the table above.
/4This/is the highest New York City effective marginal rate that applies to
any income level in the range listed on the left of this Chart. Nominally
the top marginal rate is 3.4% for net taxable income over $90,000 for joint
filers and net taxable income over $50,000 for single filers. A rate of
3.35% applies to income between $45,000 and $90,000 for joint filers and
between $25,000 and $50,000 for single filers and a rate of 3.3% applies to
income between $21,600 and $45,000 for joint filers and between $12,000 and
$25,000 for single filers. A .51% temporary tax surcharge for income over
$14,400 for joint filers and $8,400 for single filers (.55% for income
between $27,000 and $45,000 for joint filers and between $15,000 and $25,000
for single filers) applies until the end of 1998. An additional tax
surcharge equal to 14% of the sum of the New York City personal income tax
and the temporary tax surcharge applies for 1998.
68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
STATE OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER
WOULD BE UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 7
Fee Table.................................................................. 9
The Fund................................................................... 10
Use of Proceeds............................................................ 10
Investment Objective and Policies.......................................... 10
Risks and Special Considerations of Leverage............................... 21
Investment Restrictions.................................................... 24
Directors and Officers..................................................... 25
Investment Advisory and Management Arrangements............................ 27
Portfolio Transactions..................................................... 29
Dividends and Distributions................................................ 30
Taxes...................................................................... 31
Automatic Dividend Reinvestment Plan....................................... 35
Mutual Fund Investment Option.............................................. 37
Net Asset Value............................................................ 37
Description of Capital Stock............................................... 38
Custodian.................................................................. 41
Underwriting............................................................... 41
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 42
Legal Opinions............................................................. 42
Experts.................................................................... 42
Additional Information..................................................... 43
Independent Auditors' Report............................................... 44
Statement of Assets, Liabilities and Capital............................... 45
Appendix I................................................................. 46
Appendix II................................................................ 59
Appendix III............................................................... 66
Appendix IV................................................................ 68
</TABLE>
---------------
UNTIL DECEMBER , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,700,000 SHARES
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
SEPTEMBER , 1998
CODE 19029-0998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets, Liabilities and Capital as of , 1998
(2) Exhibits:
(a)--Articles of Incorporation(a)
(b)--By-Laws(a)
(c)--Not applicable
(d)(1)--Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(b)
(d)(2)--Form of specimen certificate for shares of Common Stock of the
Registrant
(e)--Form of Dividend Reinvestment Plan
(f)--Not applicable
(g)--Form of Investment Advisory Agreement between the Fund and the
Investment Adviser
(h)(1)--Form of Purchase Agreement
(h)(2)--Merrill Lynch Standard Dealer Agreement
(i)--Not applicable
(j)--Form of Custodian Contract between the Fund and State Street Bank
and Trust Company
(k)--Form of Registrar, Transfer Agency and Service Agreement between
the Fund and State Street Bank and Trust Company
(l)--Opinion and Consent of Brown & Wood LLP*
(m)--Not applicable
(n)--Consent of , independent auditors for the Fund*
(o)--Not applicable
(p)--Certificate of Fund Asset Management, L.P.*
(q)--Not applicable
(r)--Not applicable
- --------
(a) Filed on June 12, 1998 as an Exhibit to the Registrant's Registration
Statement on Form N-2 (File No. 333-56719).
(b) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit (a)
to this Registration Statement; and to Article II, Article III (sections
1, 2, 3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to this
Registration Statement.
* To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
C-1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees...................................................... $ *
New York Stock Exchange listing fee.................................... *
Printing (other than stock certificates)............................... *
Engraving and printing stock certificates.............................. *
Legal fees and expenses................................................ *
Accounting fees and expenses........................................... *
NASD fees.............................................................. *
Miscellaneous.......................................................... *
----
Total................................................................ $ *
====
</TABLE>
- --------
* To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the caption "Investment Advisory and
Management Arrangements" and in Note 1 to the Statement of Assets, Liabilities
and Capital is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which is filed as Exhibit (g)(1) to this
Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to directors, officers
and controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Fund of expenses incurred or paid by a director, officer or controlling
person of the Fund in connection with any successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of MLAM
acts as investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
C-2
<PAGE>
Fund, The Corporate Fund Accumulation Program, Inc., Financial Institutions
Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc., and for the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc.,
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies
Fund III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida
Insured Fund II, MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Florida Fund, MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured
Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured
Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc. and
Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Government Bond Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-
Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill
Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
MLAM also acts as subadviser to Merrill Lynch World Strategy Portfolio and
Merrill Lynch Basic Value Equity Portfolio, two investment portfolios of EQ
Advisors Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646.
The address of the Investment Adviser, MLAM, Princeton Funds Distributor, Inc.
("PFD"), Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. also is P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch
C-3
<PAGE>
& Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281-1201.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of all or substantially all of the investment companies
described in the preceding paragraphs and also hold the same positions with
all or substantially all of the investment companies advised by MLAM as they
do with those advised by the Investment Adviser. Messrs. Giordano, Harvey,
Kirstein and Monagle are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
ML & Co. ....... Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton General Partner General Partner of MLAM
Services.......
Arthur Zeikel... Chairman Chairman of MLAM; President of the Investment
Adviser and MLAM (from 1977 to 1997); Chairman and
Director of Princeton Services; President of
Princeton Services (from 1993 to 1997); Executive
Vice President of ML & Co.
Jeffrey M. Peek. President President of MLAM; President and Director of
Princeton Services; Executive Vice President of ML
& Co.; Managing Director and Co-Head of the
Investment Banking Division of Merrill Lynch (in
1997); Senior Vice President and Director of the
Global Securities and Economics Division of
Merrill Lynch (from 1995 to 1997).
Terry K. Glenn.. Executive Vice President Executive Vice President of MLAM; Executive Vice
President and Director of Princeton Services;
President and Director of PFD; Director of MLFDS;
President of Princeton Administrators, L.P.
Linda L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Federici....... President of Princeton Services
Vincent R. Senior Vice President Senior Vice President of MLAM; Senior Vice
Giordano....... President of Princeton Services
Elizabeth A. Senior Vice President Senior Vice President of MLAM; Senior Vice
Griffin........ President of Princeton Services
Norman R. Senior Vice President Senior Vice President of MLAM; Senior Vice
Harvey......... President of Princeton Services
Michael J. Senior Vice President Senior Vice President of MLAM; Senior Vice
Hennewinkel.... President of the MLAM International Group
Philip L. Senior Vice President, Senior Vice President, General Counsel and
Kirstein....... General Counsel and Secretary of MLAM; Senior Vice President, General
Secretary Counsel, Director and Secretary of Princeton
Services
Ronald M. Kloss. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra Landsman- Senior Vice President Senior Vice President of MLAM; Senior Vice
Yaros.......... President of Princeton Services; Vice President of
PFD
Stephen M. M. Senior Vice President Executive Vice President of Princeton
Miller......... Administrators, L.P.; Senior Vice President of
Princeton Services
Joseph T. Senior Vice President Senior Vice President of MLAM; Senior Vice
Monagle, Jr. .. President of Princeton Services
Michael L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Quinn.......... President of Princeton Services; Managing Director
and First Vice President of Merrill Lynch from
1989 to 1995
Richard L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Reller......... President of Princeton Services; Director of PFD
Gerald M. Senior Vice President Senior Vice President and Treasurer of MLAM;
Richard........ and Treasurer Senior Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of PFD
Gregory D. Upah. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Welburn........ President of Princeton Services
</TABLE>
C-4
<PAGE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10% from its net asset
value per share of Common Stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of Common Stock increases to
an amount greater than its net proceeds as stated in the Prospectus contained
herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and the State of New
Jersey, on the 19th day of August, 1998.
MuniHoldings New York Insured Fund II, Inc.
(Registrant)
/s/ Arthur Zeikel
By:________________________________________
(ARTHUR ZEIKEL, PRESIDENT)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn or Gerald M. Richard or any of them, as attorney-in-fact, to
sign on his behalf, individually and in each capacity stated below, any
amendment to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURES TITLE DATE
/s/ Arthur Zeikel President (Principal August 19, 1998
- ------------------------------------- Executive Officer)
and Director
(ARTHUR ZEIKEL)
/s/ Gerald M. Richard Treasurer (Principal August 19, 1998
- ------------------------------------- Financial and
Accounting Officer)
(GERALD M. RICHARD)
/s/ James H. Bodurtha Director August 19, 1998
- -------------------------------------
(JAMES H. BODURTHA)
/s/ Herbert I. London Director August 19, 1998
- -------------------------------------
(HERBERT I. LONDON)
/s/ Robert R. Martin Director August 19, 1998
- -------------------------------------
(ROBERT R. MARTIN)
/s/ Joseph L. May Director August 19, 1998
- -------------------------------------
(JOSEPH L. MAY)
/s/ Andre F. Perold Director August 19, 1998
- -------------------------------------
(ANDRE F. PEROLD)
C-6
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER
--------------
(d)(2)Form of specimen certificate for shares of Common Stock of the Registrant
(e)Form of Dividend Reinvestment Plan
(g)Form of Investment Advisory Agreement between the Fund and the Investment
Adviser
(h)(1)Form of Purchase Agreement
(h)(2)Merrill Lynch Standard Dealer Agreement
(j)Form of Custodian Contract between the Fund and State Street Bank and Trust
Company
(k) Form of Registrar, Transfer Agency and Service Agreement between the Fund
and State Street Bank and Trust Company
<PAGE>
Exhibit (d)(2)
COMMON STOCK COMMON STOCK
PAR VALUE $.10 PAR VALUE $.10
CUSIP
See Reverse For Certain Definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF MuniHoldings
New York Insured Fund II, Inc. transferable on the books of the Corporation by
the holder in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be subject to all of the provisions of the Articles
of Incorporation and of the By-Laws of the Corporation, and of all the
amendments from time to time made thereto. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
President Secretary
Countersigned and Registered:
THE BANK OF NEW YORK
Transfer Agent and Registrar
Authorized Signature
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
The Corporation has the authority to issue stock of more than one class. A
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class of stock
which the Corporation is authorized to issue and the differences in the relative
rights and preferences between the shares of each class to the extent that they
have been set, and the authority of the Board of Directors to set the relative
rights and preferences of subsequent classes and series, will be furnished by
the Corporation to any stockholder, without charge, upon request to the
Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM--as tenants in common UNIF GIFT MIN ACT_______Custodian_______
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to Minors Act_________
(State)
JT TEN --as joint tenants with right
of survivorship and not as
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
_______________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
_________________________________________________________________________
__________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
________________________________________________________________________________
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
2
<PAGE>
Dated:__________________
Signature:___________________________________
NOTICE: The signature to this assignment must correspond with the
name as written upon the face of the certificate, in every particular,
without alteration or enlargement, or any change whatever.
Signature Guaranteed:____________________________________
Signatures must be guaranteed by an "eligible guarantor
institution" as such term is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934.
3
<PAGE>
Exhibit e
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, __________, will act as Agent for me, and
--------------------
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present shares of common stock, par value $.10 per share
("Common Stock"), of MuniHoldings New York Insured Fund II, Inc. (the "Fund")
are registered, and will automatically put into effect for me the dividend
reinvestment option of the Plan as of the first record date for a dividend or
capital gains distribution (collectively referred to herein as a "dividend"),
payable at the election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan
---------------------------------
constitutes an election by me to receive dividends in shares of Common Stock
whenever the Fund declares a dividend. In such event, the dividend amount shall
automatically be made payable to me entirely in shares of Common Stock which
shall be acquired by the Agent for my account, depending upon the circumstances
described in paragraph 3, either (i) through receipt of additional shares of
unissued but authorized shares of Common Stock from the Fund ("newly-issued
shares") as described in paragraph 6 or (ii) by purchase of outstanding shares
of Common Stock on the open market ("open-market purchases") as described in
paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open-Market Purchases.
---------------------------------------------------------------------
If on the payment date for the dividend (the "valuation date"), the net asset
value per share of the Common Stock, as defined in paragraph 8, is equal to or
less than the market price per share of the Common Stock, as defined in
paragraph 8, plus estimated brokerage commissions (such condition being referred
to herein as "market premium"), the Agent shall invest the dividend amount in
newly-issued shares on my behalf as described in paragraph 6. If on the
valuation date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Agent shall
invest the dividend amount in shares acquired on my behalf in open-market
purchases as described in paragraph 7.
4. Purchase Period for Open-Market Purchases. In the event of a market
-----------------------------------------
discount on the valuation date, the Agent shall have until the last business day
before the next ex-dividend date with respect to the shares of Common Stock or
in no event more than 30 days after the valuation date (the "last purchase
date") to invest the dividend amount in shares acquired in open-market purchases
except where temporary curtailment or suspension of purchases is necessary to
comply with applicable provisions of federal securities laws.
5. Failure to Complete Open-Market Purchases During Purchase Period. If
----------------------------------------------------------------
the Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period because the market discount has shifted to a market
premium or otherwise, the Agent will invest the uninvested portion of the
dividend amount in newly-issued shares at the close of business on the last
purchase date as described in paragraph 4; except that the Agent may not acquire
newly-issued shares after the valuation date under the foregoing circumstances
unless it has received a legal opinion that registration of such shares is not
required under the Securities Act of 1933, as amended, or unless the shares to
be issued are registered under such Act.
<PAGE>
6. Acquisition of Newly-Issued Shares. In the event that all or part of
----------------------------------
the dividend amount is to be invested in newly-issued shares, you shall
automatically receive such newly-issued shares of Common Stock, including
fractions, for my account, and the number of additional newly-issued shares of
Common Stock to be credited to my account shall be determined by dividing the
dollar amount of the dividend on my shares to be invested in newly-issued shares
by the net asset value per share of Common Stock on the date the shares are
issued (the valuation date in the case of an initial market premium or the last
purchase date in case the Agent is unable to complete open-market purchases
during the purchase period); provided, that the maximum discount from the then
current market price per share on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the dividend
--------------------------------------
amount is to be invested in shares of Common Stock acquired in open-market
purchases, you shall apply the amount of such dividend on my shares (less my pro
rata share of brokerage commissions incurred with respect to your open-market
purchases) to the purchase on the open-market of shares of the Common Stock for
my account. Open-market purchases may be made on any securities exchange where
the Common Stock is traded, in the over-the-counter market or in negotiated
transactions and may be on such terms as to price, delivery and otherwise as you
shall determine. My funds held by you uninvested will not bear interest, and it
is understood that, in any event, you shall have no liability in connection with
any inability to purchase shares within 30 days after the initial date of such
purchase as herein provided, or with the timing of any purchases affected. You
shall have no responsibility as to the value of the Common Stock acquired for my
account. For the purposes of cash investments you may commingle my funds with
those of other shareholders of the Fund for whom you similarly act as Agent, and
the average price (including brokerage commissions) of all shares purchased by
you as Agent in the open market shall be the price per share allocable to me in
connection with open-market purchases.
8. Meaning of Market Price and Net Asset Value. For all purposes of the
-------------------------------------------
Plan: (a) the market price of the Common Stock on a particular date shall be the
last sales price on the New York Stock Exchange (the "Exchange") on that date,
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such stock on the Exchange on such date and
(b) net asset value per share of the Common Stock on a particular date shall be
as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold my
----------------------------------------------------
shares of Common Stock acquired pursuant to the Plan, together with the shares
of other shareholders of the Fund acquired pursuant to the Plan, in
noncertificated form in your name or that of your nominee. You will forward to
me any proxy solicitation material and will vote any shares so held for me only
in accordance with the proxy returned by me to the Fund. Upon my written
request, you will deliver to me, without charge, a certificate or certificates
for the full shares held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my
-------------
account as soon as practicable but not later than 60 days after the date
thereof.
2
<PAGE>
11. Fractional Interests. Although I may from time to time have an
--------------------
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
12. Stock Dividends or Share Purchase Rights. Any stock dividends or
----------------------------------------
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains
-----------
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan by
----------------------
notifying you in writing. Such termination will be effective immediately if my
notice is received by you not less than ten days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first trading day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be terminated
by you or the Fund upon notice in writing mailed to me at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any termination you will cause a certificate or certificates for the full
shares held for me under the Plan and cash adjustment for any fraction to be
delivered to me without charge. If I elect by notice to you in writing in
advance of such termination to have you sell part or all of my shares and remit
the proceeds to me, you are authorized to deduct brokerage commissions for this
transaction from the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or
-----------------
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date, thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
my account, all dividends and distributions payable on Common Stock of the Fund
held in my name or under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
16. Extent of Responsibility of Agent. You shall at all times act in good
---------------------------------
faith and agree to use your best efforts within reasonable limits to insure the
accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall
3
<PAGE>
not be liable for loss or damage due to errors unless such error is caused by
your negligence, bad faith, or willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the
-------------
laws of the State of New York without regard to its conflicts of laws
provisions.
4
<PAGE>
Exhibit g
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the _____ day of ______, 1998, by and between
MUNIHOLDINGS NEW YORK INSURED FUND II, INC., a Maryland corporation (the
"Fund"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (the
"Investment Adviser").
W I T N E S S E T H:
----------------------------
WHEREAS, the Fund is engaged in business as a closed-end, non-diversified,
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE>
ARTICLE I
---------
Duties of the Investment Adviser
--------------------------------
The Fund hereby employs the Investment Adviser to act as a manager and
investment adviser of the Fund and to furnish, or arrange for its affiliates to
furnish, the management and investment advisory services described below,
subject to the policies of, review by and overall control of the Board of
Directors of the Fund, for the period and on the terms and conditions set forth
in this Agreement. The Investment Adviser hereby accepts such employment and
agrees during such period, at its own expense, to render, or arrange for the
rendering of, such services and to assume the obligations herein set forth for
the compensation provided for herein. The Investment Adviser and its affiliates
for all purposes herein shall be deemed to be independent contractors and,
unless otherwise expressly provided or authorized, shall have no authority to
act for or represent the Fund in any way or otherwise be deemed agents of the
Fund.
(a) Management and Administrative Services. The Investment Adviser shall
--------------------------------------
perform, or arrange for its affiliates to perform, the management and
administrative services necessary for the operation of the Fund, including
administering shareholder accounts and handling shareholder relations. The
Investment Adviser shall provide the Fund with office space, facilities,
equipment and necessary personnel and such other services as the Investment
Adviser, subject to review by the Board of Directors, from time to time shall
determine to be necessary or useful to perform its obligations under this
Agreement. The Investment Adviser, also on behalf of the Fund, shall conduct
relations with custodians, depositories, transfer agents, pricing agents,
dividend disbursing agents, other shareholder servicing agents, accountants,
attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers,
banks and such other persons in any such other capacity deemed to be necessary
or desirable. The Investment Adviser generally shall monitor the Fund's
compliance with investment policies and restrictions as set forth in
2
<PAGE>
filings made by the Fund under the Federal securities laws. The Investment
Adviser shall make reports to the Board of Directors of its performance of
obligations hereunder and furnish advice and recommendations with respect to
such other aspects of the business and affairs of the Fund as it shall determine
to be desirable.
(b) Investment Advisory Services. The Investment Adviser shall provide,
----------------------------
or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the latter from time to time may consider
necessary for the proper supervision of the assets of the Fund, shall furnish
continuously an investment program for the Fund and shall determine from time to
time which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash, subject always to the
restrictions of the Articles of Incorporation and the By-Laws of the Fund, as
amended from time to time, the provisions of the Investment Company Act and the
statements relating to the Fund's investment objective, investment policies and
investment restrictions as the same are set forth in filings made by the Fund
under the Federal securities laws. The Investment Adviser shall make decisions
for the Fund as to the manner in which voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's portfolio
securities shall be exercised. Should the Board of Directors at any time,
however, make any definite determination as to investment policy and notify the
Investment Adviser thereof in writing, the Investment Adviser shall be bound by
such determination for the period, if any, specified in such notice or until
similarly notified that such determination has been revoked. The Investment
Adviser shall take, on behalf of the Fund, all actions which it deems necessary
to implement the investment policies determined as provided above, and in
particular to place all orders for the purchase or sale of portfolio securities
for the
3
<PAGE>
Fund's account with brokers or dealers selected by it, and to that end,
the Investment Adviser is authorized as the agent of the Fund to give
instructions to the custodian of the Fund as to deliveries of securities and
payments of cash for the account of the Fund. In connection with the selection
of such brokers or dealers and the placing of such orders with respect to assets
of the Fund, the Investment Adviser is directed at all times to seek to obtain
execution and prices within the policy guidelines determined by the Board of
Directors and set forth in filings made by the Fund under the Federal securities
laws. Subject to this requirement and the provisions of the Investment Company
Act, the Securities Exchange Act of 1934, as amended, and other applicable
provisions of law, the Investment Adviser may select brokers or dealers with
which it or the Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
--------------------------------------------------------
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Investment Adviser. The Investment Adviser shall provide the
----------------------
staff and personnel necessary to perform its obligations under this Agreement,
shall assume and pay or cause to be paid all expenses incurred in connection
with the maintenance of such staff and personnel, and, at its own expense, shall
provide the office space, facilities, equipment and necessary personnel which it
is obligated to provide under Article I hereof, and shall pay all compensation
of officers of the Fund and all Directors of the Fund who are affiliated persons
of the Investment Adviser.
4
<PAGE>
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
--------
other expenses of the Fund including, without limitation: taxes, expenses for
legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses, charges of the custodian, any sub-
custodian and transfer agent, charges of any auction agent and broker dealers in
connection with preferred stock of the Fund, expenses of portfolio transactions,
Securities and Exchange Commission fees, expenses of registering the shares of
common stock and preferred stock under Federal, state and foreign laws, fees and
actual out-of-pocket expenses of Directors who are not affiliated persons of the
Investment Adviser, accounting and pricing costs (including the daily
calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. It also is understood that the Fund will
reimburse the Investment Adviser for its costs incurred in providing accounting
services to the Fund.
ARTICLE III
-----------
Compensation of the Investment Adviser
--------------------------------------
(a) Investment Advisory Fee. For the services rendered, the facilities
-----------------------
furnished and the expenses assumed by the Investment Adviser, the Fund shall pay
to the Investment Adviser at the end of each calendar month a fee based upon the
average weekly value of the net assets of the Fund at the annual rate of 0.55 of
1.0% (0.55%) of the average weekly net assets of the Fund (i.e., the average
weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund and accumulated dividends on shares of outstanding
preferred stock), commencing on the day following effectiveness hereof. For
purposes of this calculation, average weekly net assets are determined at the
end of each month on the basis of the average net assets of the Fund for each
week during the month. The assets for each weekly period are determined by
averaging
5
<PAGE>
the net assets at the last business day of a week with the net assets at the
last business day of the prior week. It is understood that the liquidation
preference of any outstanding preferred stock (other than accumulated dividends)
is not considered a liability in determining the Fund's average weekly net
assets. If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fee as set forth above. Subject to the
provisions of subsection (b) hereof, payment of the Investment Adviser's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated by subsection (b) hereof. During any
period when the determination of net asset value is suspended by the Board of
Directors, the average net asset value of a share for the last week prior to
such suspension shall for this purpose be deemed to be the net asset value at
the close of each succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the Fund,
-------------------
including amounts payable to the Investment Adviser pursuant to subsection (a)
hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its management and investment advisory fee by the extent of such excess and, if
required pursuant to any such laws or regulations, will reimburse the Fund in
the amount of such excess; provided, however, to the extent permitted by law,
-------- -------
there shall be excluded from such expenses the amount of any interest, taxes,
distribution fees, brokerage fees and commissions and extraordinary expenses
(including but not limited to legal claims and liabilities and litigation costs
and any indemnification related thereto) paid or payable by the Fund. Whenever
the expenses of the
6
<PAGE>
Fund exceed a pro rata portion of the applicable annual expense limitations, the
estimated amount of reimbursement under such limitations shall be applicable as
an offset against the monthly payment of the fee due to the Investment Adviser.
Should two or more such expense limitations be applicable as at the end of the
last business day of the month, that expense limitation which results in the
largest reduction in the Investment Adviser's fee shall be applicable.
ARTICLE IV
----------
Limitation of Liability of the Investment Adviser
-------------------------------------------------
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
---------
Activities of the Investment Adviser
------------------------------------
The services of the Investment Adviser to the Fund are not to be deemed to
be exclusive; the Investment Adviser and any person controlled by or under
common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") are free to render services to others. It is
understood that Directors, officers, employees and shareholders of the Fund are
or may become interested in the Investment Adviser and its affiliates, as
directors, officers,
7
<PAGE>
employees, partners and shareholders or otherwise, and that directors, officers,
employees, partners and shareholders of the Investment Adviser and of its
affiliates are or may become similarly interested in the Fund, and that the
Investment Adviser and directors, officers, employees, partners and shareholders
of its affiliates may become interested in the Fund as shareholders or
otherwise.
ARTICLE VI
----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until , 2000, and thereafter, but only so
long as such continuance specifically is approved at least annually by (i) the
Board of Directors of the Fund, or by the vote of a majority of the outstanding
voting securities of the Fund, and (ii) by the vote of a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Board of Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Investment Adviser, on sixty (60) days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment.
ARTICLE VII
-----------
Amendment of this Agreement
---------------------------
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
8
<PAGE>
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
----------
Governing Law
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York and the applicable provisions of the Investment
Company Act. To the extent that the applicable laws of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MUNIHOLDINGS NEW YORK INSURED
FUND II, INC.
By: ______________________________
Authorized Signatory
ATTEST:
_____________________________
Secretary
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
ATTEST:
_____________________________
Secretary
10
<PAGE>
EXHIBIT (h)(1)
____________ Shares
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
(a Maryland corporation)
Common Stock
(Par Value $0.10 Per Share)
PURCHASE AGREEMENT
------------------
, 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1201
Dear Sirs and Mesdames:
MuniHoldings New York Insured Fund II, Inc., a Maryland corporation (the
"Fund"), and Fund Asset Management, L.P., a Delaware limited partnership (the
"Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the
sale by the Fund and the purchase by the Underwriter of __________ shares of
common stock, par value $.10 per share, of the Fund (the "Common Stock"), and,
with respect to the grant by the Fund to the Underwriter of the option described
in Section 2 hereof to purchase all or any part of _________ additional shares
of Common Stock to cover over-allotments. The aforesaid __________ shares (the
"Initial Shares"), together with all or any part of the _________ additional
shares of Common Stock subject to the option described in Section 2 hereof (the
"Option Shares"), hereinafter are referred to collectively as the "Shares."
Prior to the purchase and public offering of the Shares by the Underwriter,
the Fund and the Underwriter shall enter into an agreement substantially in the
form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may
take the form of an exchange of any standard form of written telecommunication
between the Fund and the Underwriter and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Shares
will be governed by this Agreement, as supplemented by the Pricing Agreement.
From and after the date of the execution and delivery of the Pricing Agreement,
this Agreement shall be deemed to incorporate the Pricing Agreement.
<PAGE>
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No.
_________) and a related preliminary prospectus for the registration of the
Shares under the Securities Act of 1933, as amended (the "1933 Act"), the
Investment Company Act, and the rules and regulations of the Commission under
the 1933 Act and the Investment Company Act (together, the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such amended preliminary prospectuses as may have been
required to the date hereof. The Fund will prepare and file such additional
amendments thereto and such amended prospectuses as hereafter may be required.
Such registration statement (as amended at the time it becomes effective, if
applicable) and the prospectus constituting a part thereof (including in each
case the information, if any, deemed to be a part thereof pursuant to Rule
430A(b) or Rule 434 of the Rules and Regulations), as from time to time amended
or supplemented pursuant to the 1933 Act, are referred to hereinafter as the
"Registration Statement" and the "Prospectus," respectively; except that if any
revised prospectus shall be provided to the Underwriter by the Fund for use in
connection with the offering of the Shares which differs from the Prospectus on
file at the Commission at the time the Registration Statement becomes effective
(whether such revised prospectus is required to be filed by the Fund pursuant to
Rule 497(c) or Rule 497(h) of the Rules and Regulations), the term "Prospectus"
shall refer to each such revised prospectus from and after the time it is first
provided to the Underwriter for such use. If the Fund elects to rely on Rule
434 under the Rules and Regulations, all references to the Prospectus shall be
deemed to include, without limitation, the form of prospectus and the term
sheet, taken together, provided to the Underwriter by the Fund in reliance on
Rule 434 under the 1933 Act (the "Rule 434 Prospectus"). If the Fund files a
registration statement to register a portion of the Shares and relies on Rule
462(b) for such registration statement to become effective upon filing with the
Commission (the "Rule 462 Registration Statement"), then any reference to
"Registration Statement" herein shall be deemed to include both the registration
statement referred to above (No. _________) and the Rule 462 Registration
Statement, as each such registration statement may be amended pursuant to the
1933 Act.
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after the
Registration Statement becomes effective and the Pricing Agreement has been
executed and delivered.
1. Representations and Warranties. (a) The Fund and the Adviser each
severally represents and warrants to the Underwriter as of the date hereof and
as of the date of the Pricing Agreement (such later date hereinafter being
referred to as the "Representation Date") as follows:
(i) At the time the Registration Statement becomes effective and at the
Representation Date, the Registration Statement will comply in all material
respects with the requirements of the 1933 Act, the Investment Company Act
and the Rules and Regulations and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
2
<PAGE>
misleading. At the time the Registration Statement becomes effective, at
the Representation Date and at Closing Time referred to in Section 2, the
Prospectus (unless the term "Prospectus" refers to a prospectus which has
been provided to the Underwriter by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file with the
Commission at the time the Registration Statement becomes effective, in
which case at the time such prospectus first is provided to the Underwriter
for such use) will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Fund in writing by the
Underwriter expressly for use in the Registration Statement or in the
Prospectus.
(ii) The accountants who certified the statement of assets, liabilities
and capital included in the Registration Statement are independent public
accountants as required by the 1933 Act and the Rules and Regulations.
(iii) The statement of assets, liabilities and capital included in the
Registration Statement presents fairly the financial position of the Fund
as of the date indicated and said statement has been prepared in conformity
with generally accepted accounting principles.
(iv) Since the respective dates as of which information is given in the
Registration Statement and in the Prospectus, except as otherwise stated
therein (A) there has been no material adverse change in the condition,
financial or otherwise, of the Fund, or in the earnings, business affairs
or business prospects of the Fund, whether or not arising in the ordinary
course of business, (B) there have been no transactions entered into by the
Fund which are material to the Fund other than those in the ordinary course
of business and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Fund on any class of its capital stock.
(v) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland with
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement; the Fund
is duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is required;
and the Fund has no subsidiaries.
(vi) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified, management investment
company, and no order of suspension or revocation of such registration has
been issued or proceedings therefor initiated or threatened by the
Commission.
(vii) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Stock;" the Shares have been duly authorized for issuance and sale to the
Underwriter pursuant to this Agreement
3
<PAGE>
and, when issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in the Pricing Agreement,
will be validly issued and fully paid and nonassessable; the Shares conform
in all material respects to all statements relating thereto contained in
the Registration Statement; and the issuance of the Shares to be purchased
by the Underwriter is not subject to preemptive rights.
(viii) The Fund is not in violation of its articles of incorporation,
as amended (the "Charter"), or its by-laws, as amended (the "By-Laws"), or
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which it is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement, the Pricing Agreement and the
Investment Advisory Agreement and the Custody Agreement referred to in the
Registration Statement (as used herein, the "Advisory Agreement" and the
"Custody Agreement," respectively) and the consummation of the transactions
contemplated herein and therein have been duly authorized by all necessary
corporate action and will not conflict with or constitute a breach of, or a
default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Fund pursuant to any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Fund is a party or by which it may be bound
or to which any of the property or assets of the Fund is subject, nor will
such action result in any violation of the provisions of the Charter or the
By-Laws of the Fund, or, to the best knowledge of the Fund and the Adviser,
any law, administrative regulation or administrative or court decree; and
no consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Fund of the
transactions contemplated by this Agreement, the Pricing Agreement, the
Advisory Agreement and the Custody Agreement, except such as has been
obtained under the Investment Company Act or as may be required under the
1933 Act or state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriter.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in
the Prospectus and the Fund has not received any notice of proceedings
relating to the revocation or modification of any such licenses, permits,
covenants, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Fund, threatened against or affecting, the Fund, which
might result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Fund, or might
materially and adversely affect the properties or assets of the Fund; and
there are no material contracts or documents of the Fund which are required
to be filed as exhibits to the Registration Statement by the 1933 Act, the
Investment Company Act or the Rules and Regulations which have not been so
filed.
4
<PAGE>
(xi) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required.
(xii) The Fund owns or possesses, or can acquire on reasonable terms,
adequate trademarks, service marks and trade names necessary to conduct its
business as described in the Registration Statement, and the Fund has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, service marks or trade names which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the conduct of the
business, operations, financial condition or income of the Fund.
(b) The Adviser represents and warrants to the Underwriter as of the date
hereof and as of the Representation Date as follows:
(i) The Adviser has been duly organized as a limited partnership under
the laws of the State of Delaware, with power and authority to conduct its
business as described in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Investment Advisers
Act"), and is not prohibited by the Investment Advisers Act or the
Investment Company Act, or the rules and regulations under such acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement has been duly authorized, executed and delivered by
the Adviser; the Advisory Agreement has been duly authorized, executed and
delivered by the Adviser and constitutes a valid and binding obligation of
the Adviser, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization or other laws
relating to or affecting creditors' rights and to general equitable
principles; and neither the execution and delivery of this Agreement or the
Advisory Agreement, nor the performance by the Adviser of its obligations
hereunder or thereunder will conflict with, or result in a breach of any of
the terms and provisions of, or constitute, with or without the giving of
notice or the lapse of time or both, a default under, any agreement or
instrument to which the Adviser is a party or by which it is bound, or any
law, order, rule or regulation applicable to it of any jurisdiction, court,
Federal or state regulatory body, administrative agency or other
governmental body, stock exchange or securities association having
jurisdiction over the Adviser or its respective properties or operations.
(iv) The Adviser has the financial resources available to it necessary
for the performance of its services and obligations as contemplated in the
Prospectus.
(v) Any advertisement approved by the Adviser for use in the public
offering of the Shares pursuant to Rule 482 under the Rules and Regulations
(an "Omitting Prospectus") complies with the requirements of such Rule 482.
5
<PAGE>
(c) Any certificate signed by any officer of the Fund or the Adviser and
delivered to the Underwriter or to counsel to the Fund and the Underwriter
shall be deemed a representation and warranty by the Fund or the Adviser,
as the case may be, to the Underwriter, as to the matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, the Fund agrees
to sell the Initial Shares to the Underwriter and the Underwriter agrees to
purchase the Initial Shares from the Fund, at the price per share set forth
in the Pricing Agreement.
(i) If the Fund has elected not to rely upon Rule 430A under the
Rules and Regulations, the initial public offering prices and the purchase
price per share to be paid by the Underwriter for the Shares have been
determined and set forth in the Pricing Agreement, dated the date hereof,
and an amendment to the Registration Statement and the Prospectus will be
filed before the Registration Statement becomes effective.
(ii) If the Fund has elected to rely upon Rule 430A under the Rules
and Regulations, the purchase price per share to be paid by the Underwriter
for the Shares shall be an amount equal to the applicable initial public
offering price, less an amount per share to be determined by agreement
between the Underwriter and the Fund. The initial public offering price per
share shall be a fixed price based upon the number of Shares purchased in a
single transaction to be determined by agreement between the Underwriter
and the Fund. The initial public offering price and the purchase price,
when so determined, shall be set forth in the Pricing Agreement. In the
event that such prices have not been agreed upon and the Pricing Agreement
has not been executed and delivered by all parties thereto by the close of
business on the fourth business day following the date of this Agreement,
this Agreement shall terminate forthwith, without liability of any party to
any other party, except as provided in Section 4, unless otherwise agreed
to by the Fund, the Adviser and the Underwriter.
In addition, on the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the Fund
hereby grants an option to the Underwriter to purchase all or any part of the
Option Shares at the price per share set forth above. The option hereby granted
will expire 45 days after the date hereof (or, if the Fund has elected to rely
upon Rule 430A under the Rules and Regulations, 45 days after the execution of
the Pricing Agreement) and may be exercised only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Shares upon notice by the Underwriter to the Fund
setting forth the number of Option Shares as to which the Underwriter is then
exercising the option and the time, date and place of payment and delivery for
such Option Shares. Any such time and date of delivery (a "Date of Delivery")
shall be determined by the Underwriter but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to
Closing Time, as hereinafter defined, unless otherwise agreed upon by the
Underwriter and the Fund.
6
<PAGE>
(b) Payment of the purchase price for, and delivery of certificates for,
the Initial Shares shall be made at the office of Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557, or at such other place as shall be
agreed upon by the Underwriter and the Fund, at 9:00 A.M. on the third business
day following the date the Registration Statement becomes effective or, if the
Fund has elected to rely upon Rule 430A under the Rules and Regulations, the
third business day after execution of the Pricing Agreement (or, if pricing
takes place after 4:30 P.M. on either the date the Registration Statement
becomes effective or the date of execution of the Pricing Agreement, as
applicable, the fourth business day after such applicable date), or such other
time not later than ten business days after such date as shall be agreed upon by
the Underwriter and the Fund (such time and date of payment and delivery herein
being referred to as "Closing Time"). In addition, in the event that any or all
of the Option Shares are purchased by the Underwriter, payment of the purchase
price for, and delivery of certificates for, such Option Shares shall be made at
the above-mentioned office of Brown & Wood LLP, or at such other place as shall
be agreed upon mutually by the Fund and the Underwriter, on each Date of
Delivery as specified in the notice from the Underwriter to the Fund. Payment
shall be made to the Fund by a Federal Funds check or checks or similar same-day
funds payable to the order of the Fund, against delivery to the Underwriter of
certificates for the Shares to be purchased by it. Certificates for the Initial
Shares and Option Shares shall be in such denominations and registered in such
names as the Underwriter may request in writing at least two business days
before Closing Time or the Date of Delivery, as the case may be. The
certificates for the Initial Shares and the Option Shares will be made available
by the Fund for examination by the Underwriter not later than 10:00 A.M. on the
last business day prior to Closing Time or the Date of Delivery, as the case may
be.
SECTION 3. Covenants of the Fund. The Fund covenants with the
Underwriter as follows:
(a) The Fund will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and will advise the
Underwriter promptly as to the time at which the Registration Statement and any
amendments thereto (including any post-effective amendment) becomes so effective
and (ii) if required, to cause the issuance of any orders exempting the Fund
from any provisions of the Investment Company Act, and the Fund will advise the
Underwriter promptly as to the time at which any such orders are granted.
(b) The Fund will notify the Underwriter immediately, and will
confirm the notice in writing (i) of the effectiveness of the Registration
Statement and any amendments thereto (including any post-effective amendment),
(ii) of the receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose,
and (v) of the issuance by the Commission of an order of suspension or
revocation of the notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act or the initiation of any
proceeding for that purpose. The Fund will make every reasonable effort to
prevent the issuance of any stop order described in subsection (iv) hereunder or
any order of suspension or revocation described in subsection (v) hereunder and,
if any such stop order or order of suspension or revocation is issued, to obtain
the lifting thereof at the earliest possible
7
<PAGE>
moment. If the Fund elects to rely on Rule 434 under the Rules and Regulations,
the Fund will prepare a term sheet that complies with the requirements of Rule
434 under the Rules and Regulations and the Fund will provide the Underwriter
with copies of the form of Rule 434 Prospectus, in such number as the
Underwriter may reasonably request by the close of business in New York on the
business day immediately succeeding the date of the Pricing Agreement.
(c) The Fund will give the Underwriter notice of its intention to file
any amendment to the Registration Statement (including any post-effective
amendment) or any amendment or supplement to the Prospectus (including any
revised prospectus which the Fund proposes for use by the Underwriter in
connection with the offering of the Shares, which differs from the prospectus on
file at the Commission at the time the Registration Statement becomes effective,
whether such revised prospectus is required to be filed pursuant to Rule 497(c)
or Rule 497(h) of the Rules and Regulations or any term sheet prepared in
reliance on Rule 434 of the Rules and Regulations), whether pursuant to the
Investment Company Act, the 1933 Act, or otherwise, and will furnish the
Underwriter with copies of any such amendment or supplement a reasonable amount
of time prior to such proposed filing or use, as the case may be, and will not
file any such amendment or supplement to which the Underwriter reasonably shall
object.
(d) The Fund will deliver to the Underwriter, as soon as practicable, two
signed copies of the notification of registration and registration statement as
originally filed and of each amendment thereto, in each case with two sets of
the exhibits filed therewith, and also will deliver to the Underwriter a
conformed copy of the registration statement as originally filed and of each
amendment thereto (but without exhibits to the registration statement or any
such amendment) for the Underwriter.
(e) The Fund will furnish to the Underwriter, from time to time during
the period when the Prospectus is required to be delivered under the 1933 Act,
such number of copies of the Prospectus (as amended or supplemented) as the
Underwriter reasonably may request for the purposes contemplated by the 1933
Act, or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in the
of counsel to the Fund and the Underwriter, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the Fund
forthwith will amend or supplement the Prospectus by preparing and furnishing to
the Underwriter a reasonable number of copies of an amendment or amendments of
or a supplement or supplements to, the Prospectus (in form and substance
satisfactory to counsel to the Fund and the Underwriter), so that, as so amended
or supplemented, the Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading.
(g) The Fund will endeavor, in cooperation with the Underwriter, to
qualify the Shares for offering and sale under the applicable securities laws of
such states and other jurisdictions of the United States as the Underwriter may
designate, and will maintain such qualifications in effect for a period of not
less than one year after the date hereof. The Fund will file such statements and
reports as may be required by the laws of each jurisdiction in which the Shares
have been qualified as above provided.
8
<PAGE>
(h) The Fund will make generally available to its security holders as
soon as practicable, but no later than 60 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the Rules and Regulations) covering a twelve-month period beginning
not later than the first day of the Fund's fiscal quarter next following the
"effective" date (as defined in said Rule 158) of the Registration Statement.
(i) Between the date of this Agreement and the termination of any trading
restrictions or Closing Time, whichever is later, the Fund will not, without
your prior consent, offer or sell, or enter into any agreement to sell, any
equity or equity related securities of the Fund other than the Shares and shares
of Common Stock issued in reinvestment of dividends or distributions.
(j) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule 430A of
the Rules and Regulations, then immediately following the execution of the
Pricing Agreement, the Fund will prepare, and file or transmit for filing with
the Commission in accordance with such Rule 430A and Rule 497(h) of the Rules
and Regulations, copies of the amended Prospectus, or, if required by such Rule
430A, a post-effective amendment to the Registration Statement (including an
amended Prospectus), containing all information so omitted.
(k) The Fund will use its best efforts to effect the listing of the
Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than four weeks from the date of the Prospectus.
SECTION 4. Payment of Expenses. The Fund will pay all expenses incident
to the performance of its obligations under this Agreement, including, but not
limited to, expenses relating to (i) the printing and filing of the registration
statement as originally filed and of each amendment thereto, (ii) the printing
of this Agreement and the Pricing Agreement, (iii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriter, (iv) the fees
and disbursements of the Fund's counsel and accountants, (v) the qualification
of the Shares under securities laws in accordance with the provisions of Section
3(g) of this Agreement, including filing fees and any reasonable fees or
disbursements of counsel in connection therewith and in connection with the
preparation of the Blue Sky Survey, (vi) the printing and delivery to the
Underwriter of copies of the registration statement as originally filed and of
each amendment thereto, of the preliminary prospectus, and of the Prospectus and
any amendments or supplements thereto, (vii) the printing and delivery to the
Underwriter of copies of the Blue Sky Survey, (viii) the fees and expenses
incurred with respect to the filing with the National Association of Securities
Dealers, Inc. and (ix) the fees and expenses incurred with respect to the
listing of the Shares on the New York Stock Exchange.
If this Agreement is terminated by the Underwriter in accordance with the
provisions of Section 5 or Section 9(a)(i), the Fund or the Adviser shall
reimburse the Underwriter for all of its reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of counsel to the Fund and the
Underwriter. In the event the transactions contemplated hereunder are not
consummated, the Adviser agrees to pay all of the costs and expenses set forth
in the first paragraph of this Section 4 which the Fund would have paid if such
transactions had been consummated.
9
<PAGE>
SECTION 5. Conditions of Underwriter's Obligations. The obligations of the
Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser herein contained, to the performance by
the Fund and the Adviser of their respective obligations hereunder, and to the
following further conditions:
(a) The Registration Statement shall have become effective not later than
5:30 p.m., on the date of this Agreement, or at a later time and date not later,
however, than 5:30 p.m. on the first business day following the date hereof, or
at such later time and date as may be approved by the Underwriter, and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission. If the Fund has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any price-
related information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 497(h) of the Rules and Regulations within the
prescribed time period, and prior to Closing Time the Fund shall have provided
evidence satisfactory to the Underwriter of such timely filing, or a post-
effective amendment providing such information shall have been filed promptly
and declared effective in accordance with the requirements of Rule 430A of the
Rules and Regulations.
(b) At Closing Time, the Underwriter shall have received:
(1) The favorable opinion, dated as of Closing Time, of Brown & Wood
LLP, counsel to the Fund and the Underwriter, to the effect that:
(i) The Fund has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Maryland.
(ii) The Fund has corporate power and authority to own, lease
and operate its properties and conduct its business as described in the
Registration Statement and in the Prospectus.
(iii) The Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required.
(iv) The Shares have been duly authorized for issuance and sale
to the Underwriter pursuant to this Agreement and, when issued and
delivered by the Fund pursuant to this Agreement against payment of the
consideration set forth in the Pricing Agreement, will be validly issued
and fully paid and nonassessable; the issuance of the Shares is not subject
to preemptive rights; and the authorized capital stock conforms as to legal
matters in all material respects to the description thereof in the
Registration Statement under the caption "Description of Capital Stock."
(v) This Agreement and the Pricing Agreement have each been duly
authorized, executed and delivered by the Fund and each complies with all
applicable provisions of the Investment Company Act.
10
<PAGE>
(vi) The Registration Statement is effective under the 1933 Act
and, to the best of their knowledge and information, no stop order
suspending the effectiveness of the Registration Statement has been issued
under the 1933 Act or proceedings therefor initiated or threatened by the
Commission.
(vii) At the time the Registration Statement became effective and
at the Representation Date, the Registration Statement (other than the
financial statements included therein, as to which no opinion need be
rendered) complied as to form in all material respects with the
requirements of the 1933 Act and the Investment Company Act and the Rules
and Regulations. The Rule 434 Prospectus conforms to the requirements of
Rule 434 in all material respects.
(viii) To the best of their knowledge and information, there are no
legal or governmental proceedings pending or threatened against the Fund
which are required to be disclosed in the Registration Statement, other
than those disclosed therein.
(ix) To the best of their knowledge and information, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments of the Fund required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed as exhibits thereto, the
descriptions thereof are correct in all material respects, references
thereto are correct, and no default exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease
or other instrument so described, referred to or filed.
(x) No consent, approval, authorization or order of any court or
governmental authority or agency is required in connection with the sale of
the Shares to the Underwriter, except such as has been obtained under the
1933 Act, the Investment Company Act or the Rules and Regulations or such
as may be required under state securities laws; and to the best of their
knowledge and information, the execution and delivery of this Agreement,
the Pricing Agreement, the Advisory Agreement and the Custody Agreement and
the consummation of the transactions contemplated herein and therein will
not conflict with or constitute a breach of, or a default under, or result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Fund pursuant to, any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the Fund
is a party or by which it may be bound or to which any of the property or
assets of the Fund is subject, nor will such action result in any violation
of the provisions of the Charter or the By-Laws of the Fund, or any law or
administrative regulation, or, to the best of their knowledge and
information, administrative or court decree.
(xi) The Advisory Agreement and the Custody Agreement have each
been duly authorized and approved by the Fund and comply as to form in all
11
<PAGE>
material respects with all applicable provisions of the Investment Company
Act, and each has been duly executed by the Fund.
(xii) The Fund is registered with the Commission under the
Investment Company Act as a closed-end, non-diversified management
investment company, and all required action has been taken by the Fund
under the 1933 Act, the Investment Company Act and the Rules and
Regulations to make the public offering and consummate the sale of the
Shares pursuant to this Agreement; the provisions of the Charter and the
By-Laws of the Fund comply as to form in all material respects with the
requirements of the Investment Company Act; and, to the best of their
knowledge and information, no order of suspension or revocation of such
registration under the Investment Company Act, pursuant to Section 8(e) of
the Investment Company Act, has been issued or proceedings therefor
initiated or threatened by the Commission.
(xiii) The information in the Prospectus under the caption "Taxes,"
to the extent that it constitutes matters of law or legal conclusions, has
been reviewed by them and is correct in all material respects.
(2) The favorable opinion, dated as of Closing Time, of Philip L. Kirstein,
Esq., General Counsel to the Adviser, in form and substance satisfactory to
counsel to the Underwriter, to the effect that:
(i) The Adviser has been duly organized as a limited partnership under
the laws of the State of Delaware, with power and authority to conduct its
business as described in the Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers
Act or the Investment Company Act, or the rules and regulations under such
Acts, from acting under the Advisory Agreement for the Fund as contemplated
by the Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the Advisory
Agreement constitutes a valid and binding obligation of the Adviser,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization or other laws relating to or
affecting creditors' rights and to general equity principles; and, to the
best of his knowledge and information, neither the execution and delivery
of this Agreement or the Advisory Agreement nor the performance by the
Adviser of its obligations hereunder or thereunder will conflict with, or
result in a breach of, any of the terms and provisions of, or constitute,
with or without the giving of notice or the lapse of time or both, a
default under, any agreement or instrument to which the Adviser is a party
or by which the Adviser is bound, or any law, order, rule or regulation
applicable to the Adviser of any jurisdiction, court, Federal or state
regulatory body, administrative
12
<PAGE>
agency or other governmental body, stock exchange or securities association
having jurisdiction over the Adviser or its properties or operations.
(iv) To the best of his knowledge and information, the description of
the Adviser in the Registration Statement and in the Prospectus does not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(3) In giving their opinion required by subsection (b)(1) of this Section,
Brown & Wood LLP additionally shall state that nothing has come to their
attention that would lead them to believe that the Registration Statement
(other than the financial statements included therein, as to which no opinion
need be rendered), at the time it became effective or at the Representation
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (other than the
financial statements included therein, as to which no opinion need be
rendered), at the Representation Date (unless the term "Prospectus" refers to
a prospectus which has been provided to the Underwriter by the Fund for use in
connection with the offering of the Shares which differs from the Prospectus
on file at the Commission at the time the Registration Statement becomes
effective, in which case at the time it first is provided to the Underwriter
for such use) or at Closing Time, included an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. In giving their opinion, Brown & Wood LLP may rely as to
matters of fact, upon certificates and written statements of officers and
employees of and accountants for the Fund and the Adviser and of public
officials.
(c) At Closing Time (i) the Registration Statement and the Prospectus shall
contain all statements which are required to be stated therein in accordance
with the 1933 Act, the Investment Company Act and the Rules and Regulations and
in all material respects shall conform to the requirements of the 1933 Act, the
Investment Company Act and the Rules and Regulations, and neither the
Registration Statement nor the Prospectus shall 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, and no action, suit or proceeding at law or in equity
shall be pending or, to the knowledge of the Fund or the Adviser, threatened
against the Fund or the Adviser which would be required to be set forth in the
Prospectus other than as set forth therein, (ii) there shall not have been,
since the date as of which information is given in the Prospectus, any material
adverse change in the condition, financial or otherwise, of the Fund or in its
earnings, business affairs or business prospects, whether or not arising in the
ordinary course of business, from that set forth in the Prospectus, (iii) the
Adviser shall have the financial resources available to it necessary for the
performance of its services and obligations as contemplated in the Prospectus,
and (iv) no proceedings shall be pending or, to the knowledge of the Fund or the
Adviser, threatened against the Fund or the Adviser before or by any Federal,
state or other commission, board or administrative agency wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, financial condition or income of either the Fund or the Adviser other
than as set forth in the Prospectus, and the Underwriter shall have received, at
Closing Time, a certificate
13
<PAGE>
of the President or the Treasurer of the Fund and of the President or a Vice
President of the Adviser dated as of Closing Time, evidencing compliance with
the appropriate provisions of this subsection (c).
(d) At Closing Time the Underwriter shall have received certificates, dated
as of Closing Time (i) of the President or the Treasurer of the Fund to the
effect that the representations and warranties of the Fund contained in Section
1(a) are true and correct with the same force and effect as though expressly
made at and as of Closing Time and, (ii) of the President or a Vice President of
the Adviser to the effect that the representations and warranties of the Adviser
contained in Sections 1(a) and (b) are true and correct with the same force and
effect as though expressly made at and as of Closing Time.
(e) At the time of execution of this Agreement, the Underwriter shall have
received from Ernst & Young LLP a letter, dated such date in form and substance
satisfactory to the Underwriter, to the effect that:
(i) they are independent accountants with respect to the Fund within
the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the statement of assets, liabilities and capital
examined by them and included in the Registration Statement complies as to
form in all material respects with the applicable accounting requirements
of the 1933 Act and the Investment Company Act and the Rules and
Regulations; and
(iii) they have performed specified procedures, not constituting an
audit, including a reading of the latest available interim financial
statements of the Fund, a reading of the minute books of the Fund,
inquiries of officials of the Fund responsible for financial accounting
matters and such other inquiries and procedures as may be specified in such
letter, and on the basis of such inquiries and procedures nothing came to
their attention that caused them to believe that at the date of the latest
available statement of assets, liabilities and capital read by such
accountants, or at a subsequent specified date not more than three days
prior to the date of this Agreement, there was any change in the capital
stock or net assets of the Fund as compared with amounts shown on the
statement of assets, liabilities and capital included in the Prospectus.
(f) At Closing Time, the Underwriter shall have received from
---------
a letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the "specified date" referred to shall be a date not more
than three days prior to Closing Time.
(g) At Closing Time, counsel to the Underwriter shall have been furnished
with such documents and opinions as they may reasonably require for the purpose
of enabling them to pass upon the issuance and sale of the Shares as herein
contemplated and to pass upon related proceedings, or in order to evidence the
accuracy of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the Fund and
the Adviser in connection with the organization and registration of the Fund
under the
14
<PAGE>
Investment Company Act and the issuance and sale of the Shares as herein and
therein contemplated shall be satisfactory in form and substance to the
Underwriter.
(h) In the event the Underwriter exercises its option provided in Section 2
hereof to purchase all or any portion of the Option Shares, the representations
and warranties of the Fund and the Adviser contained herein and the statements
in any certificate furnished by the Fund and the Adviser hereunder shall be true
and correct as of each Date of Delivery, and the Underwriter shall have
received:
(i) Certificates, dated the Date of Delivery, of the President or the
Treasurer of the Fund and of the President or a Vice President of the
Adviser confirming that the information contained in the certificate
delivered by each of them at Closing Time pursuant to Section 5(c) or 5(d),
as the case may be, remains true as of such Date of Delivery.
(ii) The favorable opinions of Brown & Wood LLP, counsel to the Fund and
the Underwriter and Philip L. Kirstein, Esq., General Counsel of the
Adviser, each in form and substance satisfactory to the Underwriter, dated
such Date of Delivery, relating to the Option Shares and otherwise to the
same effect as the opinions required by Sections 5(b)(1) and (2),
respectively.
(iii) A letter from , in form and substance satisfactory to the
------
Underwriter and dated such Date of Delivery, substantially the same in
scope and substance as the letter furnished to the Underwriter pursuant to
Section 5(e), except that the "specified date" in the letter furnished
pursuant to this Section 5(h) shall be a date not more than three days
prior to such Date of Delivery.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Underwriter by notice to the Fund at any time at or prior to Closing Time, and
such termination shall be without liability of any party to any other party
except as provided in Section 4.
SECTION 6. Indemnification. (a) The Fund and the Adviser jointly and
severally agree to indemnify and hold harmless the Underwriter and each person,
if any, who controls the Underwriter within the meaning of Section 15 of the
1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the information deemed to be part of
the Registration Statement pursuant to Rule 430A or Rule 434 of the Rules
and Regulations, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
15
<PAGE>
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever (including the fees and
disbursements of counsel chosen by the Underwriter) reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the information deemed to be part of the Registration
Statement pursuant to Rule 430A or Rule 434 of the Rules and Regulations, or any
preliminary prospectus or in the Prospectus (or any amendment or supplement
thereto).
Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director, officer or controlling
person of the Fund, such indemnity agreement is subject to the undertaking of
the Fund in the Registration Statement.
(b) The Underwriter agrees to indemnify and hold harmless the Fund and the
Adviser, their respective directors, each of the Fund's officers who signed the
Registration Statement, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act, against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or in any preliminary
prospectus or in the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), including the information deemed to be part of the
Registration Statement pursuant to Rule 430A or Rule 434 of the Rules and
Regulations, or any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto) in reliance upon and in conformity with written
information furnished to the Fund by the Underwriter expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it
in respect of which indemnity may be sought hereunder, but failure to so
notify an indemnifying party shall not relieve such
16
<PAGE>
indemnifying party from any liability hereunder to the extent it is not
materially prejudicial as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying parties be
liable for the fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6 (a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses incurred by such indemnified party, as incurred (i) in such proportion
as is appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the offering
of the Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares pursuant
to this Agreement (before deducting expenses) received by the Fund, less the
total underwriting commission received by the Underwriter, and the total
underwriting commission received by the Underwriter, in each case as set forth
on the cover of
17
<PAGE>
the Prospectus, or, if Rule 434 is used, the corresponding location on the term
sheet, bear to the aggregate initial public offering price of the Shares as set
forth on such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriter were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each officer or director of the
Fund and the Adviser, respectively, each director of the Fund who signed the
Registration Statement, and each person, if any, who controls the Fund and the
Adviser within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Fund.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
the Pricing Agreement, or contained in certificates of officers of the Fund or
of the Adviser submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriter or controlling person, or by or on behalf of the Fund or the Adviser
and shall survive delivery of the Shares to the Underwriter.
SECTION 9. TERMINATION OF AGREEMENT. (a) The Underwriter, may terminate
this Agreement by written notice to the fund, at any time at or prior to Closing
Time (i) if there has
18
<PAGE>
been, since the time of execution of this agreement or since the respective
dates as of which information is given in the prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the fund or the adviser, whether or not arising
in the ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the united states, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the underwriter impracticable to market
the shares or enforce contracts for the sale of the shares, or (iii) if trading
in the common stock has been suspended or materially limited by the commission
or if trading generally on either the new york stock exchange or the american
stock exchange or in the nasdaq national market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices for securities have been required, by any of said exchanges or
by such system or by order of the commission, the national association of
securities dealers, inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by federal or new york authorities. as used
in this subsection (a), the term "prospectus" means the prospectus in the form
first used to confirm sales of the shares.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8
shall survive such termination and remain in full force and effect.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of written telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated at Merrill Lynch World Headquarters, World Financial
Center, North Tower, New York, New York 10281-1201, Attention: Richard Bruce,
Vice President; notices to the Fund or to the Adviser shall be directed to each
of them at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attention:
Arthur Zeikel, President.
SECTION 11. Parties. This Agreement and the Pricing Agreement shall inure
to the benefit of and be binding upon the Underwriter, the Fund, the Adviser and
their respective successors. Nothing expressed or mentioned in this Agreement or
in the Pricing Agreement is intended or shall be construed to give any person,
firm or corporation, other than the parties hereto and their respective
successors and the controlling persons and officers and directors referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and the Pricing Agreement and all
conditions and provisions hereof are intended to be for the sole and exclusive
benefit of the parties hereto and thereto and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation. No
purchaser of Shares from the Underwriter shall be deemed to be a successor
merely by reason of such purchase.
19
<PAGE>
SECTION 12. Governing Law and Time. This agreement and the Pricing Agreement
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.
specified times of day refer to New York City time.
20
<PAGE>
If the foregoing is in accordance with your understanding of our Agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a single binding agreement between the
Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
MUNIHOLDINGS NEW YORK INSURED
FUND II, INC.
By:
-------------------------
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By:
-------------------------
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ____________________________________
Authorized Signatory
21
<PAGE>
Exhibit A
_________Shares
MuniHoldings New York Insured Fund II, Inc.
(a Maryland corporation)
Common Stock
(Par Value $.10 Per Share)
PRICING AGREEMENT
-----------------
, 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Dear Sirs and Mesdames:
Reference is made to the Purchase Agreement, dated , 1998 (the "Purchase
Agreement"), relating to the purchase by Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter") of the above shares of
common stock, par value $.10 per share (the "Initial Shares"), of MuniHoldings
New York Insured Fund II, Inc. (the "Fund") and relating to the option granted
to the Underwriter to purchase up to an additional __________ shares of common
stock, par value $.10 per share, of the Fund to cover over-allotments in
connection with the sale of the Initial Shares (the "Option Shares"). The
Initial Shares and all or any part of the Option Shares collectively are
referred to herein as the "Shares."
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with the
Underwriter as follows:
1. The initial public offering price per share for the Shares,
determined as provided in said Section 2, and the purchase price per
share for the Shares to be paid by the Underwriter, shall be $15.00.
2. Fund Asset Management, L.P. will pay, or arrange for an affiliate
to pay, a commission to the Underwriter in the amount of $ per
share for the Shares purchased by the Underwriter.
A-1
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund in accordance with its terms.
Very truly yours,
MUNIHOLDINGS NEW YORK INSURED
FUND II, INC.
By:__________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: __________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ______________________________________
Authorized Officer
A-2
<PAGE>
EXHIBIT (h)(2)
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
-------------------------
Dear Sirs:
In connection with public offerings of securities underwritten by us, or by
a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute your
reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD"). Upon our request, you will advise us
of the identity of any dealer to whom you allow such a discount and any
Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
2. You represent that you are a dealer actually engaged in the investment
banking or securities business and that you are either (i) a member in good
standing of the NASD or (ii) a dealer with its principal place of business
located outside the United States, its territories or possessions and not
registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its
<PAGE>
territories or its possessions or to persons who are nationals thereof or
residents therein. Non-member foreign dealers and banks agree, in making any
sales, to comply with the NASD's interpretation with respect to free-riding and
withholding. In accepting a selling concession where we are acting as
Representative of the Underwriters, in accepting a reallowance from us whether
or not we are acting as such Representative, and in allowing a discount to any
other person, you agree to comply with the provisions of Rule 2740 of the
Conduct Rules of the NASD, and, in addition, if you are a non-member foreign
dealer or bank, you agree to comply, as though you were a member of the NASD,
with the provisions of Rules 2730 and 2750 of of such Conduct Rules and to
comply with Rule 2420 thereof as that Rule applies to a non-member foreign
dealer or bank. You represent that you are fully familiar with the above
provisions of the Conduct Rules of the NASD.
3. If the securities have been registered under the Securities Act of 1933
(the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities of
an issuer that is not required to file reports under the Securities Exchange Act
of 1934 (the "1934 Act"), you agree that you will not sell any of the securities
to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such other place
as we may advise), at the offering price less the concession allowed to you, on
such date as we may advise, by certified or official bank check in New York
Clearing House funds (or such other funds as we may advise), payable to our
order, against delivery of the securities to be purchased by you. We shall have
authority to make appropriate arrangements for payment for and/or delivery
through the facility of The Depository Trust Company or any such other
depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of securities
covered by this Agreement you will, upon our request as Representative of the
Underwriters, report to us the amount of securities purchased by you which then
remains unsold and will, upon our request, sell to us for the account of one or
more of the Underwriters such amount of such unsold
2
<PAGE>
securities as we may designate, at the offering price less an amount to be
determined by us not in excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered by
this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
11. Any notice from us shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunications to you at the
above address or at such other address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this Agreement,
the price restrictions contained in Paragraph 1 hereof and the provisions of
Paragraphs 6 and 7 hereof shall terminate as to such offering at the close of
business on the 45th day after the securities are released for sale or, as to
any or all such provisions, at such earlier time as we may advise. All other
provisions of this Agreement shall remain operative and in full force and effect
with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New York.
3
<PAGE>
Please confirm your agreement hereto by signing the enclosed duplicate copy
hereof in the place provided below and returning such signed duplicate copy to
us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
--------------------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
- ----------------------------------
Name of Dealer
- ----------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
4
<PAGE>
EXHIBIT J
CUSTODIAN CONTRACT
Between
DEBT STRATEGIES FUND III, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
------
1. Employment of Custodian and Property to be Held By
It......................................................... 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States 1
2.1 Holding Securities................................... 1
2.2 Delivery of Securities............................... 2
2.3 Registration of Securities........................... 4
2.4 Bank Accounts........................................ 4
2.5 Availability of Federal Funds........................ 4
2.6 Collection of Income................................. 4
2.7 Payment of Fund Monies............................... 5
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased...................... 6
2.9 Appointment of Agents................................ 6
2.10 Deposit of Fund Assets in Securities System.......... 6
2.10A Fund Assets Held in the Custodian's Direct
Paper System......................................... 7
2.11 Segregated Account................................... 8
2.12 Ownership Certificates for Tax Purposes.............. 9
2.13 Proxies.............................................. 9
2.14 Communications Relating to Portfolio Securities...... 9
2.15 Reports to Fund by Independent Public Accountants.... 9
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States 9
3.1 Appointment of Foreign Sub-Custodians................ 9
3.2 Assets to be Held.................................... 10
3.3 Foreign Securities Systems........................... 10
3.4 Agreements with Foreign Banking Institutions......... 10
3.5 Access of Independent Accountants of the Fund........ 10
3.6 Reports by Custodian................................. 10
3.7 Transactions in Foreign Custody Account.............. 11
3.8 Liability of Foreign Sub-Custodians.................. 11
3.9 Liability of Custodian............................... 11
3.10 Reimbursement for Advances........................... 12
3.11 Monitoring Responsibilities.......................... 12
3.12 Branches of U.S. Banks............................... 12
3.13 Tax Law.............................................. 12
<PAGE>
4. Proper Instructions..................................................... 13
5. Actions Permitted Without Express Authority............................. 13
6. Evidence of Authority................................................... 13
7. Duties of Custodian With Respect to the Books of Account and Calculation
of Net Asset Value and Net Income....................................... 14
8. Records................................................................. 14
9. Opinion of Fund's Independent Accountants............................... 14
10. Compensation of Custodian............................................... 15
11. Responsibility of Custodian............................................. 15
12. Effective Period, Termination and Amendment............................. 16
13. Successor Custodian..................................................... 16
14. Interpretive and Additional Provisions.................................. 17
15. Massachusetts Law to Apply.............................................. 17
16. Prior Contracts......................................................... 17
17. Shareholder Communications Election..................................... 18
<PAGE>
This Contract between MuniHoldings New York Insured Fund II, Inc., a
corporation organized and existing under the laws of Maryland, having its
principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey
08536 hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian", in consideration of the mutual covenants and agreements hereinafter
contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets of the
Fund, including securities which the Fund desires to be held in places within
the United States ("domestic securities") and securities it desires to be held
outside the United States ("foreign securities") pursuant to the provisions of
the Articles of Incorporation. For purposes of this Contract, "domestic
securities" and "foreign securities" each shall include agreements representing
corporate loans and interests therein. The Fund agrees to deliver to the
Custodian all securities and cash of the Fund, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock of the Fund
("Shares") as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of the Fund held or received by the Fund and not
delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 4),
the Custodian shall on behalf of the Fund from time to time employ one or more
sub-custodians, located in the United States but only in accordance with an
applicable vote by the Board of Directors of the Fund. The Custodian covenants
with the Fund that each agreement whereby the Custodian employs any such sub-
custodian shall provide that the sub-custodian will be liable to the Custodian
for losses and liabilities caused by the negligence, misfeasance, or willful
misconduct of the sub-custodian. The Fund agrees that, so long as the Custodian
has complied with its obligation set forth in the preceding sentence, the
Custodian shall have no more or less responsibility or liability to the Fund on
account of any actions or omissions of any U.S. sub-custodian employed by it on
behalf of the Fund than any such sub-custodian has to the Custodian. The
Custodian may employ as sub-custodian for the Fund's foreign securities the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
------------------------------------------------------------------------
Custodian in the United States
------------------------------
2.1 Holding Securities. The Custodian shall hold and physically segregate for
------------------
the account of the Fund all non-cash property, to be held by it in the
United States including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury (collectively
referred to herein as "Securities System") and (b) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian (the "Direct Paper System") pursuant
to Section 2.10A.
<PAGE>
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
----------------------
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Fund, which may be continuing instructions
when deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name
of the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee name of any sub-
custodian appointed pursuant to Article 1; or for exchange for a
different number of bonds, certificates or other evidence representing
the same aggregate face amount or number of units; provided that, in
--------
any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim
2
<PAGE>
receipts or temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
--- ----
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any
loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or responsible for
the delivery of securities owned by the Fund prior to the receipt of
such collateral except as may arise from the Custodian's own
negligence or willful misconduct;
11) For delivery as security in connection with any borrowings by the Fund
requiring a pledge of assets by the Fund, but only against receipt of
--- ----
amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any contract
market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund; and
14) For any other proper corporate purpose, but only upon receipt of, in
--- ----
addition to Proper Instructions from the Fund, a certified copy of a
resolution of the Board of Directors or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of the Fund to be
delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities shall
be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
--------------------------
(other than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
------
the Fund has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to
3
<PAGE>
Article 1. All securities accepted by the Custodian on behalf of the Fund
under the terms of this Contract shall be in "street name" or other good
delivery form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize all reasonable
efforts to timely collect income due the Fund on such securities and to
notify the Fund of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established
and used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for the Fund may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
--------
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
-----------------------------
the Custodian, the Custodian shall, upon the receipt of Proper Instructions
from the Fund, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
--------------------
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which the
Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such Fund's
custodian account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other income
items requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2(10) shall be
the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to exercise reasonable
care in providing the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Fund is properly entitled.
4
<PAGE>
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund,
----------------------
which may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out monies of the Fund in the following
cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the Fund but only (a) against the
delivery of such securities or evidence of title to such options,
futures contracts or options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment Company Act
of 1940, as amended, to act as a custodian and has been designated by
the Custodian as its agent for this purpose) registered in the name of
the Fund or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the case of
a purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.10 hereof; (c) in the case of a
purchase involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A hereof; (d) in the case of
repurchase agreements entered into between the Fund and the Custodian,
or another bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form or
through an entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to receipt of
a confirmation from a broker and/or the applicable bank pursuant to
Proper Instructions as defined in Article 4;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account of
the Fund: interest, taxes, management, accounting, transfer agent and
legal fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred
expenses;
4) For the payment of any dividends on Shares of the Fund declared
pursuant to the governing documents of the Fund;
5) For payment of the amount of dividends received in respect of
securities sold short;
6) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions from the Fund, a certified copy of a resolution of
the Board of Directors or of the Executive Committee of the Fund
signed by an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made, declaring
5
<PAGE>
such purpose to be a proper purpose, and naming the person or persons
to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
--------------------------------------------------------- ---------
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of
the Fund is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund to
so pay in advance, the Custodian shall be absolutely liable to the Fund for
such securities to the same extent as if the securities had been received
by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
--------
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
--------------------------------------------
and/or maintain securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep securities of the Fund in a Securities System
provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-
entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the account of
the Fund upon (i) receipt of advice from the Securities System that
such securities have been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon (i) receipt
of advice from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and payment
for the account of the Fund. Copies of all advices from the Securities
System of transfers of securities for the account of the Fund shall
identify the Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the Custodian shall
furnish the
6
<PAGE>
Fund confirmation of each transfer to or from the account of the Fund
in the form of a written advice or notice and shall furnish to the
Fund copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the Securities System;
5) The Custodian shall have received from the Fund the initial or annual
certificate, as the case may be, required by Article 12 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their officers or employees or from failure
of the Custodian or any such agent to enforce effectively such rights
as it may have against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities System or
any other person which the Custodian may have as a consequence of any
such loss or damage if and to the extent that the Fund has not been
made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
-------------------------------------------------------
may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by book
entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities sold for the account
of the Fund upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for the
account of the Fund;
7
<PAGE>
5) The Custodian shall furnish the Fund confirmation of each transfer to
or from the Fund, in the form of a written advice or notice, of Direct
Paper on the next business day following such transfer and shall
furnish to the Fund copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account of the
Fund;
6) The Custodian shall provide the Fund with any report on its system of
internal accounting control as the Fund may reasonably request from
time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions from the Fund establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or accounts may
be transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Fund, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund, (iii)
for the purposes of compliance by the Fund with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or
releases of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment companies and
(iv) for other proper corporate purposes, but only, in the case of clause
--- ----
(iv), upon receipt of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Board of Directors or of the
Executive Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes
of such segregated account and declaring such purposes to be proper
corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
---------------------------------------
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
-------
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver to
the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Portfolio Securities. Subject to the provisions
-----------------------------------------------
of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including,
8
<PAGE>
without limitation, pendency of calls and maturities of domestic securities
and expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the Custodian from
issuers of the securities being held for the Fund. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian shall
-------------------------------------------------
provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including securities
deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports, shall
be of sufficient scope and in sufficient detail, as may reasonably be
required by the Fund to provide reasonable assurance that any material
inadequacies would be disclosed by such examination, and, if there are no
such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
-------------------------------------------------------------------------
of the United States
--------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
-------------------------------------
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 4 of this Contract, together with a
certified resolution of the Fund's Board of Directors, the Custodian and
the Fund may agree to amend Schedule A hereto from time to time to
designate additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper Instructions,
the Fund may instruct the Custodian to cease the employment of any one or
more such sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
-----------------
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
-------------------------------
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions
9
<PAGE>
serving as sub-custodians pursuant to the terms hereof. Where possible,
such arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
--------------------------------------------
foreign banking institution shall be substantially in the form set forth in
Exhibit 1 hereto and shall provide that: (a) the assets of the Fund will
not be subject to any right, charge, security interest, lien or claim of
any kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership for the assets of the Fund will be freely
transferable without the payment of money or value other than for custody
or administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Custodian;
and (e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund,
---------------------------------------------
the Custodian will use all reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a foreign sub-
custodian insofar as such books and records relate to the performance of
such foreign banking institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to
--------------------
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian indicating, as to securities acquired
for the Fund, the identity of the entity having physical possession of such
securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise provided
---------------------------------------
in paragraph (b) of this Section 3.7, the provision of Sections 2.2 and 2.7
of this Contract shall apply, mutatis mutandis to the foreign securities of
------- --------
the Fund held outside the United States by foreign sub-custodians; (b)
notwithstanding any provision of this Contract to the contrary, settlement
and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer; and (c) Securities maintained in the custody of a
foreign sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this Contract,
and the Fund agrees to hold any such nominee harmless from any liability as
a holder of record of such securities.
10
<PAGE>
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
-----------------------------------
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
----------------------
omissions of a foreign banking institution to the same extent if such acts
or omissions were those of the Custodian directly, provided that,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S.
bank as contemplated by paragraph 3.12 hereof, the Custodian shall not be
liable for any loss, damage, cost, expense, liability or claim resulting
from nationalization, expropriation, currency restrictions, or acts of war
or terrorism, acts of God, or other occurrences beyond the sub-custodian's
reasonable control. Notwithstanding the foregoing provisions of this
paragraph 3.9, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance
--------------------------
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that
the Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall
be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund's assets to the extent necessary to obtain
reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the
---------------------------
Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform
the Fund in the event that the Custodian learns of a material adverse
change in the financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund or in the case of any foreign
11
<PAGE>
sub-custodian not the subject of an exemptive order from the Securities and
Exchange Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent thereof) or that
its shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
----------------------
Contract, the provisions hereof shall not apply where the custody of the
Fund's assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment Company
Act of 1940 meeting the qualification set forth in Section 26(a) of said
Act. The appointment of any such branch as a sub-custodian shall be
governed by paragraph 1 of this Contract. (b) Cash held for the Fund in
the United Kingdom shall be maintained in an interest bearing account
established for the Fund with the Custodian's London branch, which account
shall be subject to the direction of the Custodian, State Street London
Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for any
-------
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof except for liabilities arising from
the Custodian's failure to exercise reasonable care in the execution of any
instructions received from the Fund with respect to withholding or payment
of taxes. It shall be the responsibility of the Fund to notify the
Custodian of the obligations imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of jurisdictions other than those
mentioned in the above sentence, including responsibility for withholding
and other taxes, assessments or other governmental charges, certifications
and governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist the
Fund with respect to any claim for exemption or refund under the tax law of
jurisdictions for which the Fund has provided such information.
4. Proper Instructions
-------------------
Proper Instructions as used throughout this Contract means a writing signed
or initialed by one or more person or persons as the Board of Directors shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Directors of the
Fund accompanied by a detailed description of procedures approved by the Board
of Directors, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Directors and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
5. Actions Permitted without Express Authority
-------------------------------------------
12
<PAGE>
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
--------
the Fund and provided that the Fund shall not object to such payments;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection checks, drafts and other negotiable
instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors of the Fund.
6. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Directors of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors pursuant to the Articles of Incorporation
as described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
7. Duties of Custodian with Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income
------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of the
outstanding Shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate weekly the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent weekly of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the weekly income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
8. Records
-------
13
<PAGE>
The Custodian shall with respect to the Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, as amended, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by the Fund and held by the Custodian and shall, when requested
to do so by the Fund and for such compensation as shall be agreed upon between
the Fund and the Custodian, include certificate numbers in such tabulations.
9. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-2, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
10. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
11. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence, misfeasance or willful
misconduct. It shall be entitled to rely on and may act upon advice of counsel
(who may be counsel for the Fund) on all matters, and shall be without liability
for any action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 as
provided in Section 3.9 hereof and, regardless of whether assets are maintained
in the custody of a foreign banking institution, a foreign securities depository
or a branch of a U.S. bank as contemplated by paragraph 3.12 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from, or caused by nationalization, expropriation, currency
restrictions, or acts of war or terrorism, acts of God, or other occurrences
beyond the Custodian's or sub-custodian's reasonable control.
14
<PAGE>
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) for
the benefit of the Fund including the purchase or sale of foreign exchange or of
contracts for foreign exchange or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the account of the
Fund shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund's assets to the extent necessary to obtain reimbursement.
12. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
--------
Custodian shall not act under Section 2.10 hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary of the Fund
that the Board of Directors of the Fund has approved the initial use of a
particular Securities System by the Fund, as required by Rule 17f-4 under the
Investment Company Act of 1940, as amended, and that the Custodian shall not act
under Section 2.10A hereof in the absence of receipt of an initial certificate
of the Secretary or an Assistant Secretary of the Fund that the Board of
Directors of the Fund has approved the initial use of the Direct Paper System by
the Fund; provided further, however, that the Fund shall not amend or terminate
-------- -------
this Contract in contravention of any applicable federal or state regulations,
or any provision of the Articles of Incorporation, and further provided, that
the Fund may at any time by action of its Board of Directors (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
13. Successor Custodian
-------------------
15
<PAGE>
If a successor custodian for the Fund shall be appointed by the Board of
Directors of the Fund, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian, duly endorsed and in the
form for transfer, all securities of the Fund then held by it hereunder and
shall transfer to an account of the successor custodian all of the securities of
the Fund held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors of the Fund shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, as amended, doing business in Boston, Massachusetts, of its own selection,
having an aggregate capital, surplus, and undivided profits, as shown by its
last published report, of not less than $25,000,000, all securities, funds and
other properties held by the Custodian on behalf of the Fund and all instruments
held by the Custodian relative thereto and all other property held by it under
this Contract on behalf of the Fund and to transfer to an account of such
successor custodian all of the securities of each the Fund held in any
Securities System. Thereafter, such bank or trust company shall be the
successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors of the Fund to appoint a successor custodian, the
Custodian shall be entitled to fair compensation for its services during such
period as the Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
14. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
--------
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
15. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
16
<PAGE>
16. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
17
<PAGE>
17. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, this rule
prohibits the requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate below whether the
Fund consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
18
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed as of the_____________day of______________,
1998.
ATTEST MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
- ------------------ By:
Name: _____________________________________________
Name:
Title:
ATTEST STATE STREET BANK AND TRUST COMPANY
- ------------------ By:
Name: _____________________________________________
Ronald E. Logue
Executive Vice President
<PAGE>
ADDENDUM TO CUSTODIAN CONTRACT
------------------------------
WHEREAS, the Board of Directors (the "Board") of MuniHoldings New York Insured
Fund II, Inc. (the "Fund") has adopted a resolution appointing the Custodian as
Foreign Custody Manager of the Fund pursuant to the Rule 17f-5 Procedures and
Guidelines previously adopted by the Board (the "Procedures and Guidelines"), a
copy of which is attached hereto as Exhibit A, MuniHoldings New York Insured
Fund II, Inc. (the "Fund") and State Street Bank and Trust Company (the
"Custodian") hereby enter into this Addendum to the Custody Contract dated
______________, 1998 between the Fund and the Custodian (the "Contract");
WHEREAS, each party wishes to enter into this Addendum to the Contract;
NOW, THEREFORE, for such good and valuable consideration as is recited in the
Contract, the Fund and the Custodian agree that:
Article III of the Contract is hereby amended, revised and superceded to the
extent that such Article is inconsistent with the Procedures and Guidelines.
Each of the Fund and the Custodian acknowledge that they are currently
developing further mutually agreeable contract procedures and provisions
pursuant to the Procedures and Guidelines.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and on its behalf by its duly authorized representative as
of the ___________ day of ___________, 1998 .
ATTEST MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
_____________________ By:___________________________
Name: Name:_____________________
Title:____________________
ATTEST STATE STREET BANK AND TRUST COMPANY
___________________________ By:______________________________
Name: Marc L. Parsons Ronald E. Logue
Title: Associate Counsel Executive Vice President
<PAGE>
EXHIBIT K
================================================================================
REGISTRAR,
TRANSFER AGENCY AND SERVICE AGREEMENT
between
MUNIHOLDINGS NEW JERSEY INSURED
FUND II, INC.
and
STATE STREET BANK AND TRUST COMPANY
closed/trust
2B193
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK 3
ARTICLE 2 FEES AND EXPENSES 5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK 5
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND 6
ARTICLE 5 DATA ACCESS AND PROPRIETARY INFORMATION 6
ARTICLE 6 INDEMNIFICATION 9
ARTICLE 7 STANDARD OF CARE 10
ARTICLE 8 COVENANTS OF THE FUND AND THE BANK 10
ARTICLE 9 TERMINATION OF AGREEMENT 11
ARTICLE 10 ASSIGNMENT 12
ARTICLE 11 AMENDMENT 12
ARTICLE 12 MASSACHUSETTS LAW TO APPLY 12
ARTICLE 13 FORCE MAJEURE 13
ARTICLE 14 CONSEQUENTIAL DAMAGES 13
ARTICLE 15 MERGER OF AGREEMENT 13
ARTICLE 16 SURVIVAL 13
ARTICLE 17 SEVERABILITY 13
ARTICLE 18 COUNTERPARTS 14
2
<PAGE>
REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT
------------------------------------------------
AGREEMENT made as of the ____ day of ___, 1998, by and between
MuniHoldings New York Insured Fund II, Inc. a Maryland corporation, having its
principal office and place of business at 800 Scudders Mill Road, Plainsboro, NJ
08536 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts
trust company having its principal office and place of business at 225 Franklin
Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its registrar,
transfer agent, dividend disbursing agent and agent in connection with certain
other activities and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK
1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints the Bank to act as, and the Bank agrees to
act as registrar, transfer agent for the Fund's authorized and issued shares of
its common stock ("Shares"), dividend disbursing agent and agent in connection
with any dividend reinvestment plan as set out in the prospectus of the Fund,
corresponding to the date of this Agreement.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and the Bank, the Bank shall:
(i) Issue and record the appropriate number of Shares as
authorized and hold such Shares in the appropriate Shareholder
account;
<PAGE>
(ii) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate documentation;
(iii) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(iv) Act as agent for Shareholders pursuant to the dividend
reinvestment and cash purchase plan as amended from time to time
in accordance with the terms of the agreement to be entered into
between the Shareholders and the Bank in substantially the form
attached as Exhibit A hereto;
(v) Issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon receipt by
the Bank of indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank at its option, may
issue replacement certificates in place of mutilated stock
certificates upon presentation thereof and without such
indemnity.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: (i) perform all
of the customary services of a registrar, transfer agent, dividend disbursing
agent and agent of the dividend reinvestment and cash purchase plan as described
in Article 1 consistent with those requirements in effect as of the date of this
Agreement. The detailed definition, frequency, limitations and associated costs
(if any) set out in the attached fee schedule, include but are not limited to:
maintaining all Shareholder accounts, preparing Shareholder meeting lists,
mailing proxies, and mailing Shareholder reports to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts where
applicable, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all registered Shareholders.
(c) The Bank shall provide additional services on behalf of the Fund
(i.e., escheatment services) which may be agreed upon in writing between the
Fund and the Bank.
<PAGE>
ARTICLE 2 FEES AND EXPENSES
2.01 For the performance by the Bank pursuant to this Agreement, the
Fund agrees to pay the Bank an annual maintenance fee as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the Fund
agrees to reimburse the Bank for out-of-pocket expenses, including but not
limited to confirmation production, postage, forms, telephone, microfilm,
microfiche, tabulating proxies, records storage, or advances incurred by the
Bank for the items set out in the fee schedule attached hereto. In addition,
any other expenses incurred by the Bank at the request or with the consent of
the Fund, will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within
five days following the receipt of the respective billing notice. Postage and
the cost of materials for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to the Bank by the Fund
at least seven (7) days prior to the mailing date of such materials.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
<PAGE>
3.05 It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Bank that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is a closed-end, diversified investment company registered
under the Investment Company Act of 1940, as amended.
4.05 To the extent required by federal securities laws a
registration statement under the Securities Act of 1933, as amended is currently
effective and appropriate state securities law filings have been made with
respect to all Shares of the Fund being offered for sale; information to the
contrary will result in immediate notification to the Bank.
4.06 It shall make all required filings under federal and state
securities laws.
ARTICLE 5 DATA ACCESS AND PROPRIETARY INFORMATION
5.01 The Fund acknowledges that the data bases, computer programs,
screen formats, report formats, interactive design techniques, and other
information furnished to the Fund by the Bank are provided solely in connection
with the services rendered under this Agreement and constitute copyrighted trade
secrets or proprietary information of substantial value to the Bank. Such
databases, programs, formats, designs, techniques and other information are
collectively referred to below as "Proprietary Information." The Fund agrees
that it shall treat all Proprietary Information as proprietary to the Bank and
further agrees that it shall not divulge any
<PAGE>
Proprietary Information to any person or organization except as expressly
permitted hereunder. The Fund agrees for itself and its employees and agents:
(a) to use such programs and databases (i) solely on the Fund
computers, or (ii) solely from equipment at the locations agreed to
between the Fund and the Bank and (iii) in accordance with the Bank's
applicable user documentation;
(b) to refrain from copying or duplicating in any way (other than in
the normal course of performing processing on the Funds' computers)
any part of any Proprietary Information;
(c) to refrain from obtaining unauthorized access to any programs,
data or other information not owned by the Fund, and if such access
is accidentally obtained, to respect and safeguard the same
Proprietary Information;
(d) to refrain from causing or allowing information transmitted from
the Bank's computer to the Funds' terminal to be retransmitted to any
other computer terminal or other device except as expressly permitted
by the Bank (such permission not to be unreasonably withheld);
(e) that the Fund shall have access only to those authorized
transactions as agreed to between the Fund and the Bank; and
(f) to honor reasonable written requests made by the Bank to protect
at the Bank's expense the rights of the Bank in Proprietary
Information at common law and under applicable statutes.
5.02 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder information
or other information, then in such event the Bank shall be entitled to rely on
the validity and authenticity of such instruction without undertaking any
further inquiry as long as such instruction is undertaken in conformity with
security procedures established by the Bank from time to time.
<PAGE>
Article 6 Indemnification
6.01 The Bank shall not be responsible for, and the Fund shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors required
to be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful misconduct
which arise out of the breach of any representation or warranty of the Fund
hereunder.
(c) The reliance on or use by the Bank or its agents or subcontractors
of information, records, documents or services which (i) are received by the
Bank or its agents or subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf of the Fund
including but not limited to any previous transfer agent registrar.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or regulations
of any state that such Shares be registered in such state or in violation of any
stop order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such Shares in such state.
6.02 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. The Bank,
its agents and subcontractors shall be protected and indemnified in acting
<PAGE>
upon any paper or document furnished by or on behalf of the Fund, reasonably
believed to be genuine and to have been signed by the proper person or persons,
or upon any instruction, information, data, records or documents provided the
Bank or its agents or subcontractors by telephone, in person, machine readable
input, telex, CRT data entry or other similar means authorized by the Fund, and
shall not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or former registrar, or of a
co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained in this
Article 6 shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Bank, the Bank shall promptly notify the Fund in
writing of such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option to
participate with the Bank in the defense of such claim or to defend against said
claim in its own name or in the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's prior written consent.
ARTICLE 7 STANDARD OF CARE
7.01 The Bank shall at all times act in good faith and agrees to use
its best efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall not be
liable for loss or damage due to errors unless said errors are caused by its
negligence, bad faith, or willful misconduct of that of its employees.
ARTICLE 8 COVENANTS OF THE FUND AND THE BANK
8.01 The Fund shall promptly furnish to the Bank the following:
<PAGE>
(a) A certified copy of the resolution of the Board of Directors of
the Fund authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of the Fund
and all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
8.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be requested by a governmental entity or as
may be required by law.
8.05 In cases of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
ARTICLE 9 TERMINATION OF AGREEMENT
9.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days' written notice to the other.
<PAGE>
9.02 Should the Fund exercise its right to terminate, all out-of-
pocket expenses associated with the movement of records and material will be
borne by the Fund. Additionally, the Bank reserves the right to charge for any
other reasonable expenses associated with such termination and/or a charge
equivalent to the average of three (3) months' fees.
ARTICLE 10 ASSIGNMENT
10.01 Except as provided in Section 10.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
10.03 The Bank may, without further consent on the part of the
Fund, subcontract for the performance hereof with (i) Boston EquiServe Limited
Partnership, a Massachusetts limited partnership ("Boston EquiServe"), which is
duly registered as a transfer agent pursuant to Section 17A(c)(2) of the
Securities Exchange Act of 1934 ("Section 17A(c)(2)"), or (ii) a Boston
EquiServe affiliate duly registered as a transfer agent pursuant to Section
17A(c)(2), provided, however, that the Bank shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is for its own acts
and omissions.
ARTICLE 11 AMENDMENT
11.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
ARTICLE 12 MASSACHUSETTS LAW TO APPLY
12.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
<PAGE>
ARTICLE 13 FORCE MAJEURE
13.01 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
ARTICLE 14 CONSEQUENTIAL DAMAGES
14.01 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
ARTICLE 15 MERGER OF AGREEMENT
15.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
ARTICLE 16 SURVIVAL
16.01 All provisions regarding indemnification, warranty, liability
and limits thereon, and confidentiality and/or protection of proprietary rights
and trade secrets shall survive the termination of this Agreement.
ARTICLE 17 SEVERABILITY
17.01 If any provision or provisions of this Agreement shall be
held to be invalid, unlawful, or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
ARTICLE 18 COUNTERPARTS
18.01 This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
BY:__________________________________________
ATTEST:
________________________________________
State Street Bank and Trust Company
BY:___________________________________________
ATTEST:
______________________________________
