<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1998
SECURITIES ACT FILE NO. 333-
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
[_] PRE-EFFECTIVE AMENDMENT NO.
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 2
(CHECK APPROPRIATE BOX OR BOXES)
--------------
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- NEW YORK, NEW YORK 10048-0557
9011
--------------
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 statement 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. [X]
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF BEING OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT(1) PRICE(1) FEE(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auction Market Preferred Stock................ 40 shares $25,000 $1,000,000 $295
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
--------------------- ---------------------
<C> <S> <C>
Part A--INFORMATION REQUIRED IN A
PROSPECTUS
1. Outside Front Cover Page.......... Outside Front Cover Page
2. Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages...................... Pages; Underwriting
3. Fee Table and Synopsis............ Not Applicable
4. Financial Highlights.............. Not Applicable
5. Plan of Distribution.............. Underwriting
6. Selling Shareholders.............. Not Applicable
7. Use of Proceeds................... Use of Proceeds
8. General Description of the Prospectus Summary; The Fund;
Registrant....................... Investment Objective and Policies
9. Management........................ Directors and Officers; Investment
Advisory and Management Arrangements
10. Capital Stock, Long-Term Debt and Description of AMPS; Description of
Other Securities................. Capital Stock
11. Defaults and Arrears on Senior
Securities....................... Not Applicable
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 Prospectus Summary; Investment
Policies......................... Objective and Policies; Other
Investment 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; Experts
21. Brokerage Allocation and Other
Practices........................ Portfolio Transactions
22. Tax Status........................ Taxes
23. Financial Statements.............. Report of Independent Auditors;
Statement of Assets, Liabilities and
Capital; Financial Statements
Part C--OTHER INFORMATION
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
i
<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
PRELIMINARY PROSPECTUS DATED SEPTEMBER 18, 1998
PROSPECTUS
$
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
AUCTION MARKET PREFERRED STOCK ["AMPS(R)"]
SHARES, SERIES A
SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------
MuniHoldings New York Insured Fund II, Inc. (the "Fund") is a recently
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.
(Continued on next page)
-----------
The Broker-Dealers (as defined herein) intend to maintain a secondary trading
market in the AMPS outside of Auctions; however, they have no obligation to do
so, and there can be no assurance that a secondary market for the AMPS will
develop or, if it does develop, that it will provide holders with a liquid
trading market (i.e., trading will depend on the presence of willing buyers and
sellers and the trading price is subject to variables to be determined at the
time of the trade by the Broker-Dealers). The AMPS will not be registered on
any stock exchange or on any automated quotation system. An increase in the
level of interest rates, particularly during any Long Term Dividend Period,
likely will have an adverse effect on the secondary market price of the AMPS,
and a selling shareholder may sell AMPS between Auctions at a price per share
of less than $25,000.
-----------
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 PROCEEDS TO
PUBLIC SALES LOAD(1)(2) FUND(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $25,000 $ $
- --------------------------------------------------------------------------------
Total.................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) Offering expenses payable by the Fund, estimated at $ , will be
reimbursed by the Underwriter. See "Underwriting."
-----------
The shares of AMPS 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
one certificate for each series of the AMPS will be delivered to the nominee of
The Depository Trust Company on or about October , 1998.
- -----
(R)Registered trademark of Merrill Lynch & Co., Inc.
-----------
MERRILL LYNCH & CO.
-----------
The date of this Prospectus is October , 1998.
<PAGE>
(Continued from previous page)
Dividends on the shares of Auction Market Preferred Stock(R) ("AMPS(R)"),
Series A ("Series A AMPS(R)") and Series B ("Series B AMPS(R)") of the Fund
offered hereby will be cumulative from the Date of Original Issue and payable
commencing on , 1998 in the case of Series A AMPS and , 1998 in
the case of Series B AMPS (each, as applicable, an "Initial Dividend Payment
Date") and, generally, on each succeeding in the case of Series A AMPS
and each succeeding in the case of Series B AMPS, subject to certain
exceptions.
The cash dividend rate (the "Applicable Rate") on the shares of Series A
AMPS for the Initial Dividend Period ending , 1998 will be % per annum
and the cash dividend rate on the shares of Series B AMPS for the Initial
Dividend Period ending , 1998 will be % per annum. The Applicable Rate
on the shares of AMPS of each series for each Subsequent Dividend Period will
be determined pursuant to periodic auctions conducted in accordance with the
procedures described in Appendix D hereto (an "Auction"). Except as otherwise
provided herein, each Subsequent Dividend Period for each series of AMPS will
be a 7-Day Dividend Period; provided, however, that prior to any Auction, the
Fund may elect, subject to certain limitations described herein, with respect
to each series of AMPS, upon giving notice to holders thereof, a Special
Dividend Period. See "Description of AMPS--Dividends."
The Applicable Rate on the shares of AMPS of each series for each Subsequent
Dividend Period will be reset on the basis of Bids, Hold Orders and Sell
Orders placed by Existing Holders and Potential Holders in the Auction
conducted on the Business Day next preceding the commencement of such Dividend
Period. The Applicable Rate that results from an Auction for any Dividend
Period will not be greater than the Maximum Applicable Rate (as defined
herein). See "Description of AMPS--The Auction--Orders by Beneficial Owners,
Potential Beneficial Owners, Existing Holders and Potential Holders."
The Fund currently is required to allocate net capital gains and other
taxable income, if any, proportionately among shares of Common Stock and
shares of the two series of AMPS. The Fund will give notice of the amount of
any taxable income to be included in a dividend on shares of AMPS in the
related Auction, as described herein, or, in limited circumstances, include
such income in a dividend on shares of AMPS without giving advance notice
thereof if it increases the dividend by an additional amount to offset
substantially the tax effect thereof. The amount of taxable income allocable
to shares of AMPS will depend upon the amount of such income realized by the
Fund and other factors but generally is not expected to be significant. See
"Taxes."
Each prospective purchaser should review carefully the detailed information
regarding the Auction Procedures which appears in this Prospectus, including
the Appendices, and should note that (i) an Order constitutes an irrevocable
commitment to hold, purchase or sell AMPS based upon the results of the
related Auction, (ii) the Auctions will be conducted through telephone
communications, (iii) settlement for purchases and sales will be on the
Business Day following the Auction and (iv) ownership of AMPS will be
maintained in book-entry form by or through the Securities Depository. Under
certain circumstances, holders of AMPS may be unable to sell their shares of
AMPS in an Auction and thus may lack liquidity of investment. Shares of AMPS
only may be transferred pursuant to a Bid or a Sell Order placed in an Auction
through a Broker-Dealer to the Auction Agent or in the secondary market, if
any.
The shares of AMPS are redeemable, in whole or in part, at the option of the
Fund, on any Dividend Payment Date (except during the Initial Dividend Period
or a Non-Call Period) at the Optional Redemption Price per share and will be
subject to mandatory redemption on dates fixed by the Board of Directors,
under certain circumstances, at the Mandatory Redemption Price per share.
If the Fund fails to pay on any Dividend Payment Date (or within the
applicable grace period) the full amount of any dividend or the redemption
price of shares of AMPS called for redemption, the Applicable Rate will not be
based on the results of an Auction but instead will be equal to the Non-
Payment Period Rate until such failure to pay is cured. See "Description of
AMPS--Dividends--Non-Payment Period; Late Charge."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus. Certain of the
capitalized terms used herein are defined in the Glossary that appears at the
end of this Prospectus.
THE FUND MuniHoldings New York Insured Fund II, Inc. (the "Fund") is a
recently organized, non-diversified, closed-end management
investment company. See "The Fund."
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 will seek
POLICIES 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 taxes 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 taxes, 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
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. See "Investment Objective
and Policies."
INVESTMENT Fund Asset Management, L.P. is the Fund's investment adviser (the
ADVISER "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
other registered management investment companies and offers
portfolio management and portfolio analysis services to
individuals and institutional accounts. As of August 1998, the
Asset Management Group had a total of approximately $473 billion
in investment company and other portfolio assets under management
(approximately $38 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."
THE The Fund is offering an aggregate of shares of Series A AMPS
OFFERING and shares of Series B AMPS, each at a purchase price of
$25,000 per share plus accumulated dividends, if any, from the
Date of Original Issue. The shares of AMPS are being offered
3
<PAGE>
by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch" or the "Underwriter"). See "Underwriting."
The AMPS of each series will be shares of Preferred Stock of the
Fund that entitle their holders to receive cash dividends at a
rate per annum that may vary for the successive Dividend Periods
for each such series. In general, except as described below, each
Dividend Period for each series of AMPS subsequent to the Initial
Dividend Period will be seven days in length. The Applicable Rate
for a particular Dividend Period will be determined by an Auction
conducted on the Business Day next preceding the start of such
Dividend Period.
Through their Broker-Dealers, Beneficial Owners and Potential
Beneficial Owners of shares of AMPS of each series may
participate in Auctions therefor, although, except in the case of
a Special Dividend Period, Beneficial Owners desiring to continue
to hold all of their shares of AMPS regardless of the Applicable
Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the
Applicable Rate, see "Description of AMPS--The Auction."
Except as described herein, investors in AMPS will not receive
certificates representing ownership of their shares. Ownership of
AMPS will be maintained in book-entry form by the Securities
Depository or its nominee for the account of the investor's Agent
Member. The investor's Agent Member, in turn, will maintain
records of such investor's beneficial ownership of AMPS.
Accordingly, references herein to an investor's investment in or
purchase, sale or ownership of AMPS are to purchases, sales or
ownership of those shares by Beneficial Owners.
DIVIDENDS After the Initial Dividend Period, each Subsequent Dividend
AND Period for each series of AMPS will generally consist of seven
DIVIDEND days (a "7-Day Dividend Period"); provided, however, that prior
PERIODS to any Auction, the Fund may elect, subject to certain
limitations described herein, with respect to each series of
AMPS, upon giving notice to holders thereof, a Special Dividend
Period. A Special Dividend Period is a Dividend Period consisting
of a specified number of days (other than seven), evenly
divisible by seven and not fewer than seven nor more than 364 (a
"Short Term Dividend Period") or a Dividend Period consisting of
a specified period of one whole year or more but not greater than
five years (a "Long Term Dividend Period"). Dividends on the AMPS
offered hereby are cumulative from the Date of Original Issue and
are payable when, as and if declared by the Board of Directors of
the Fund, out of funds legally available therefor, commencing on
the Initial Dividend Payment Date and, in the case of Dividend
Periods that are not Special Dividend Periods, dividends will be
payable generally on each succeeding in the case of Series A
AMPS and each succeeding in the case of Series B AMPS,
subject to certain exceptions.
Dividends for each series of AMPS will be paid through the
Securities Depository (The Depository Trust Company or a
successor securities depository) on each Dividend Payment Date
for such series. The Securities Depository's normal procedures
provide for it to distribute dividends in same-day funds to Agent
Members, who are in turn expected to distribute such dividends to
the person for whom they are acting as agent in accordance with
the instructions of such person. See "Description of AMPS--
Dividends."
For each Subsequent Dividend Period, the cash dividend rate on
the shares of each series of AMPS will be the Applicable Rate for
such series that the Auction Agent (IBJ Schroder Bank & Trust
Company or any successor) advises the Fund has resulted from an
Auction relating to such series. See "Description of AMPS--
Dividends." The first Auction for each series of AMPS is
scheduled to be held on the ending date for the Initial Dividend
Period for such series of AMPS as set forth above.
4
<PAGE>
The Articles Supplementary provide that until the Fund gives a
Request for Special Dividend Period and the related Notice of
Special Dividend Period with respect to a series of AMPS, only 7-
Day Dividend Periods will be applicable to each series of AMPS.
While the Fund does not currently intend to give a Request for
Special Dividend Period with respect to the AMPS, it may so elect
in the future subject to, and on, the conditions discussed under
"Description of the AMPS--Dividends--Notification of Dividend
Period."
A Special Dividend Period will not be effective for a series of
the AMPS unless Sufficient Clearing Bids exist at the Auction in
respect of such Special Dividend Period. If Sufficient Clearing
Bids do not exist at such Auction for a series of the AMPS, the
Dividend Period commencing on the Business Day succeeding such
Auction will be a 7-Day Dividend Period, and the holders of the
AMPS of such series outstanding prior to such Auction will be
required to continue to hold such shares for such Dividend
Period. In addition, the Fund may not give a Notice of Special
Dividend Period with respect to a series of AMPS, or if the Fund
has given a Notice of Special Dividend Period for a series of
AMPS, the Fund will be required to give a Notice of Revocation in
respect thereof if (i) either the 1940 Act AMPS Asset Coverage is
not satisfied or the Fund fails to maintain S&P Eligible Assets
and Moody's Eligible Assets each with an aggregate Discounted
Value at least equal to the AMPS Basic Maintenance Amount, in
each case on each of the two Valuation Dates immediately
preceding the Business Day prior to the related Auction Date for
the AMPS, (ii) sufficient funds for the payment of dividends
payable on the immediately succeeding Dividend Payment Date have
not been irrevocably deposited with the Auction Agent by the
close of business on the third Business Day preceding the related
Auction Date, or (iii) the Broker-Dealers have given the Fund
notice that it is not advisable to hold an Auction in respect of
a Special Dividend Period. In such event, the next succeeding
Dividend Period will be a 7-Day Dividend Period.
ADVANCE Dividends paid by the Fund, to the extent paid from tax-exempt
NOTICE OF income earned on municipal obligations, will be exempt from
ALLOCATION Federal income taxes and New York State and New York City
OF TAXABLE personal income taxes, subject to the possible application of the
INCOME; alternative minimum tax. However, the Fund is required to
INCLUSION allocate net capital gains (including new categories of capital
OF TAXABLE gains, as discussed under "Taxes") and other income subject to
INCOME IN regular Federal income taxes, if any, proportionately between
DIVIDENDS shares of Common Stock and shares of AMPS in accordance with the
current position of the Internal Revenue Service (the "IRS")
described herein. The Fund will notify the Auction Agent of the
amount of any net capital gains (including new categories of
capital gains, as discussed under "Taxes") or other taxable
income to be included in any dividend on shares of AMPS prior to
the Auction establishing the Applicable Rate for such dividend.
The Auction Agent in turn will notify each Broker-Dealer whenever
it receives any such notice from the Fund, and each Broker-Dealer
will notify its Beneficial Owners and Potential Beneficial
Owners, as provided in its Broker-Dealer Agreement. In limited
circumstances, the Fund also may include such income in a
dividend on shares of AMPS without giving advance notice thereof
if it increases the dividend by an additional amount to offset
the tax effect thereof. The amount of taxable income allocable to
shares of AMPS will depend upon the amount of such income
realized by the Fund and other factors, but generally is not
expected to be significant. See "Taxes" and "Description of
AMPS--The Auction--Auction Date; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividends."
ADDITIONAL If the Fund retroactively allocates any net capital gains
DIVIDENDS (including new categories of capital gains, as discussed under
"Taxes") or other income subject to regular Federal income taxes
to shares of AMPS without having given advance notice thereof as
described above, which
5
<PAGE>
may only happen when such allocation is made as a result of the
redemption of all or a portion of the outstanding shares of AMPS
or the liquidation of the Fund, the Fund will make certain
payments to holders of shares of AMPS to which such allocation
was made to offset substantially the tax effect thereof. In no
other instances will the Fund be required to make payments to
holders of shares of AMPS to offset the tax effect of any
reallocation of net capital gains or other taxable income. See
"Description of AMPS--Dividends--Additional Dividends" and
"Taxes."
DETERMINATION Except during a Non-Payment Period, the Applicable Rate for any
OF MAXIMUM Dividend Period for shares of AMPS of each series will not be
APPLICABLE more than the Maximum Applicable Rate applicable to such shares.
RATES The Maximum Applicable Rate for shares of AMPS will depend on the
credit rating assigned to such shares and on the duration of the
Dividend Period. The Maximum Applicable Rate will be the
Applicable Percentage of the Reference Rate. The Reference Rate
is (i) with respect to any Dividend Period or any Short Term
Dividend Period having 28 or fewer days, the higher of the
applicable "AA" Composite Commercial Paper Rate and the Taxable
Equivalent of the Short-Term Municipal Bond Rate, (ii) with
respect to any Short Term Dividend Period having more than 28 but
fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S.
Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate. The
Applicable Percentage will be determined based on (i) the lower
of the credit rating or ratings assigned on such date to the AMPS
by Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P")
(or, if Moody's or S&P or both shall not make such rating
available, the equivalent of either or both of such ratings by a
Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such
rating) and (ii) whether the Fund has provided notification to
the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other
taxable income will be included in such dividend on shares of
AMPS as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
CREDIT RATINGS PERCENTAGE PERCENTAGE
------------------------------ OF REFERENCE RATE OF REFERENCE RATE
MOODY'S S&P --NO NOTIFICATION --NOTIFICATION
---------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend
Period.
The Applicable Rate for any Dividend Period commencing during any
Non-Payment Period, and the rate used to calculate the late
charge described under "Description of AMPS--Dividends--Non-
Payment Period; Late Charge," initially will be 200% of the
Reference Rate (or 275% of such rate if the Fund has provided
notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net
capital gains or other taxable income will be included in such
dividend on shares of AMPS).
AUCTION Separate Auctions will be conducted for each series of AMPS. As
PROCEDURES used in the following description of the Auction Procedures,
unless the context otherwise requires, "AMPS" means the series of
AMPS subject to the related Auction, and "Beneficial Owners,"
"Potential Beneficial Owners," "Existing Holders" and "Potential
Holders" means Beneficial Owners of such series, Potential
Beneficial Owners of such series, Existing Holders of such series
and Potential Holders of such series, respectively.
6
<PAGE>
Unless otherwise permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners of AMPS may only participate in
Auctions through their Broker-Dealers. Broker-Dealers will submit
the Orders of their respective customers who are Beneficial
Owners and Potential Beneficial Owners to the Auction Agent,
designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of shares
subject to Orders submitted to them by Potential Beneficial
Owners. On or prior to each Auction Date for each series of AMPS
(the Business Day next preceding the first day of each Dividend
Period), each Beneficial Owner may submit Orders to its Broker-
Dealer as follows:
-- Hold Order--indicating its desire to hold shares of AMPS
without regard to the Applicable Rate for the next Dividend
Period for such shares.
-- Bid--indicating its desire to hold shares of AMPS, provided
that the Applicable Rate for the next Dividend Period for such
shares is not less than the rate per annum specified in such
Bid.
-- Sell Order--indicating its desire to sell shares of AMPS
without regard to the Applicable Rate for the next Dividend
Period for such shares.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of AMPS then held by such
Beneficial Owner, provided that the total number of shares of
AMPS covered by such Orders does not exceed the number of shares
of AMPS held by such Beneficial Owner. If, however, a Beneficial
Owner offers through its Broker-Dealer to purchase additional
shares of AMPS in such Auction, such Beneficial Owner, for
purposes of such offer to purchase additional shares, will be
treated as a Potential Beneficial Owner as described below. Bids
by Beneficial Owners through their Broker-Dealers with rates per
annum higher than the Maximum Applicable Rate will be treated as
Sell Orders. A Hold Order (in the case of an Auction relating to
a Dividend Period which is not a Special Dividend Period) and a
Sell Order (in the case of an Auction relating to a Special
Dividend Period) shall be deemed to have been submitted on behalf
of a Beneficial Owner if an Order with respect to shares of AMPS
then held by such Beneficial Owner is not submitted on behalf of
such Beneficial Owner for any reason, including the failure of a
Broker-Dealer to submit such Beneficial Owner's Order to the
Auction Agent.
Potential Beneficial Owners of shares of AMPS may submit Bids
through their Broker-Dealers in which they offer to purchase
shares of AMPS, provided that the Applicable Rate for the next
Dividend Period for such shares is not less than the rate per
annum specified in such Bid. A Bid by a Potential Beneficial
Owner with a rate per annum higher than the Maximum Applicable
Rate will not be considered.
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with any of the foregoing.
A Broker-Dealer also may hold AMPS for its own account as a
Beneficial Owner. A Broker-Dealer thus may submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial
Owner and therefore participate in an Auction as an Existing
Holder or Potential Holder on behalf of both itself and its
customers. An Order placed with the Auction Agent by a Broker-
Dealer as an Existing Holder or a Potential Holder as or on
behalf of a Beneficial Owner or a Potential Beneficial Owner, as
the case may be, will be treated in the same manner as an Order
placed with a Broker-Dealer by a Beneficial Owner or a Potential
7
<PAGE>
Beneficial Owner. Similarly, any failure by a Broker-Dealer to
submit to the Auction Agent an Order in respect of any AMPS held
by it or its customers who are Beneficial Owners will be treated
in the same manner as a Beneficial Owner's failure to submit to
its Broker-Dealer an Order in respect of AMPS held by it, as
described above. Inasmuch as a Broker-Dealer participates in an
Auction as an Existing Holder or a Potential Holder only to
represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be a customer or itself, all
discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the
underlying beneficial ownership interests represented thereby.
If Sufficient Clearing Bids exist in an Auction (that is, in
general, the number of shares of AMPS subject to Bids by
Potential Holders with rates equal to or lower than the Maximum
Applicable Rate is at least equal to the number of shares of AMPS
subject to Sell Orders by Existing Holders), the Applicable Rate
will be the lowest rate per annum specified in the Submitted Bids
which, taking into account such rate per annum and all lower
rates per annum bid by Existing Holders and Potential Holders,
would result in Existing Holders and Potential Holders owning all
of the shares of AMPS available for purchase in the Auction. If
Sufficient Clearing Bids do not exist, the Dividend Period next
following the Auction automatically will be a 7-Day Dividend
Period and the Applicable Rate will be the Maximum Applicable
Rate, and in such event, Existing Holders that have submitted
Sell Orders will not be able to sell in the Auction all, and may
not be able to sell any, shares of AMPS subject to such Sell
Orders. Thus, under certain circumstances, Existing Holders and,
thus, the Beneficial Owners they represent may not have liquidity
of investment. If all Existing Holders submit (or are deemed to
have submitted) Hold Orders in an Auction, the Dividend Period
next following the Auction automatically shall be the same length
as the immediately preceding Dividend Period, and the Applicable
Rate will be 40% of the Reference Rate (as defined under
"Determination of Maximum Applicable Rates" above) in effect on
the date of the Auction (or 60% of such rate if the Fund has
provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net
capital gains or other taxable income will be included in such
dividend on shares of AMPS).
The Auction Procedures include a pro rata allocation of shares
for purchase and sale, which may result in an Existing Holder
selling or holding, or a Potential Holder purchasing, a number of
shares of AMPS that is less than the number of shares of AMPS
specified in its Order. To the extent the allocation has this
result, a Broker-Dealer will be required to make appropriate pro
rata allocations among its customers and itself.
A Sell Order by an Existing Holder will constitute an irrevocable
offer to sell the shares of AMPS subject thereto, and a Bid
placed by an Existing Holder also will constitute an irrevocable
offer to sell the shares of AMPS subject thereto if the rate per
annum specified in the Bid is higher than the Applicable Rate
determined in the Auction, in each case at a price per share
equal to $25,000. A Bid placed by a Potential Holder will
constitute an irrevocable offer to purchase the shares of AMPS
subject thereto if the rate per annum specified in such Bid is
less than or equal to the Applicable Rate determined in the
Auction. Settlement of purchases and sales will be made on the
next Business Day (also a Dividend Payment Date) after the
Auction Date through the Securities Depository. Purchasers will
make payment through their Agent Members in same-day funds to the
Securities Depository against delivery by book-entry to their
Agent Members. The Securities Depository will make payment to the
sellers' Agent Members in accordance with the Securities
Depository's
8
<PAGE>
normal procedures, which now provide for payment in same-day
funds. See "Description of AMPS--The Auction."
ASSET Under the Articles Supplementary, the Fund must maintain (i) S&P
MAINTENANCE Eligible Assets and Moody's Eligible Assets each having in the
aggregate a Discounted Value at least equal to the AMPS Basic
Maintenance Amount and (ii) 1940 Act AMPS Asset Coverage of at
least 200%. See "Description of AMPS--Asset Maintenance."
The Fund estimates that, based on the composition of its
portfolio at September , 1998, 1940 Act AMPS Asset Coverage
with respect to shares of AMPS would be approximately %
immediately after the issuance of the shares of AMPS offered
hereby in an amount representing approximately % of the Fund's
capital.
The Discount Factors and guidelines for calculating the
Discounted Value of the Fund's portfolio for purposes of
determining whether the AMPS Basic Maintenance Amount has been
satisfied have been established by Moody's and S&P in connection
with the Fund's receipt of ratings on the shares of AMPS on their
Date of Original Issue of "aaa" from Moody's and AAA from S&P.
See "Investment Objective and Policies--Rating Agency
Guidelines."
MANDATORY If the AMPS Basic Maintenance Amount or the 1940 Act AMPS Asset
REDEMPTION Coverage is not maintained or restored as specified herein,
shares of AMPS will be subject to mandatory redemption, out of
funds legally available therefor, at the Mandatory Redemption
Price of $25,000 per share plus an amount equal to dividends
thereon (whether or not earned or declared) accumulated but
unpaid to the date fixed for redemption. In addition, holders of
AMPS may be entitled to receive Additional Dividends in the event
of redemption of such AMPS to the extent provided herein. See
"Description of AMPS--Dividends--Additional Dividends." Any such
redemption will be limited to the minimum number of shares of
AMPS necessary to restore the AMPS Basic Maintenance Amount or
the 1940 Act AMPS Asset Coverage, as the case may be. The Fund's
ability to make such a mandatory redemption may be restricted by
the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act"). See "Description of AMPS--Redemption--Mandatory
Redemption."
OPTIONAL The shares of AMPS of each series are redeemable at the option of
REDEMPTION the Fund, as a whole or in part, on any Dividend Payment Date
(except during the Initial Dividend Period or a Non-Call Period)
at the Optional Redemption Price of $25,000 per share, plus an
amount equal to dividends thereon (whether or not earned or
declared) accumulated but unpaid to the date fixed for redemption
plus the premium, if any, resulting from the designation of a
Premium Call Period. See "Description of AMPS--Redemption--
Optional Redemption." In addition, holders of shares of AMPS may
be entitled to receive Additional Dividends in the event of
redemption of such shares of AMPS to the extent provided herein.
See "Description of AMPS--Dividends--Additional Dividends."
LIQUIDATION The liquidation preference of each share of AMPS will be $25,000,
PREFERENCE plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared). See "Description of AMPS--Liquidation
Rights." In addition, holders of AMPS may be entitled to receive
Additional Dividends in the event of the liquidation of the Fund
as provided herein. See "Description of AMPS--Dividends--
Additional Dividends."
9
<PAGE>
RATINGS It is a condition to their issuance that the AMPS be issued with
a rating of "aaa" from Moody's and AAA from S&P. See "Investment
Objective and Policies--Rating Agency Guidelines."
VOTING The 1940 Act requires that the holders of AMPS and any other
RIGHTS Preferred Stock, voting as a separate class, have the right to
elect at least two directors at all times and to elect a majority
of the directors at any time when two years' dividends on the
AMPS or any other Preferred Stock are unpaid. The holders of AMPS
and any other Preferred Stock will vote as a separate class on
certain other matters as required under the Fund's Charter and
the 1940 Act. See "Description of AMPS--Voting Rights" and
"Description of Capital Stock--Certain Provisions of the
Charter."
10
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 A, "Economic 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 total 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 S&P, Moody's or Fitch Investors Service,
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 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. 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.
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 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
leveraging of the Fund's portfolio; however, certain derivative investments
will not be taken into account as senior securities (as defined in the 1940
Act) 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
11
<PAGE>
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."
For so long as any shares of AMPS are rated by Moody's, the Fund will not buy
or sell financial futures contracts, write, purchase or sell call options on
financial futures contracts or purchase put options on financial futures
contracts or write call options (except covered call options) on portfolio
securities unless it receives written confirmation from Moody's that engaging
in such transactions would not impair the ratings then assigned to the shares
of AMPS by Moody's, except that the Fund may engage in Moody's Hedging
Transactions subject to the limitations described herein. For so long as any
shares of AMPS are rated by S&P, the Fund will not purchase or sell financial
futures contracts, write, purchase or sell options on financial futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not
impair the ratings then assigned to the shares of AMPS by S&P, except that the
Fund may engage in S&P Hedging Transactions subject to the limitations
described herein. See "Investment Objective and Policies--Rating Agency
Guidelines" and "--Options and Futures Transactions."
There are a number of specific factors investors in AMPS should consider.
-- The credit ratings of the AMPS could be reduced while an investor holds
the AMPS.
-- Neither Broker-Dealers nor the Fund are obligated to purchase shares of
AMPS in an Auction or otherwise nor is the Fund required to redeem
shares of AMPS in the event of a failed Auction.
-- If in an Auction for the AMPS Sufficient Clearing Bids do not exist, the
Applicable Rate will be the Maximum Applicable Rate, and in such event,
Beneficial Owners that have submitted Sell Orders will not be able to
sell in the Auction all, and may not be able to sell any, shares of AMPS
subject to such Sell Orders. Thus, under certain circumstances,
Beneficial Owners may not have liquidity of investment.
The Broker-Dealers intend to maintain a secondary trading market in the AMPS
outside of Auctions; however, they have no obligation to do so and there can be
no assurance that a secondary market for the AMPS will develop or, if it does
develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The AMPS will not be registered on any stock exchange
or on any automated quotation system. An increase in the level of interest
rates, particularly during any Long Term Dividend Period, likely will have an
adverse effect on the secondary market price of the AMPS, and a selling
shareholder may sell AMPS between Auctions at a price per share of less than
$25,000.
The Fund's Charter includes provisions that could have the effect of limiting
the ability of other entities or persons to acquire control of the Fund or to
change the composition of its Board of Directors and could have the effect of
depriving Common Stock 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 Charter."
12
<PAGE>
THE FUND
MuniHoldings New York Insured Fund II, Inc. (the "Fund") is a recently
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 commenced operations on September , 1998 upon the closing of an
initial public offering of shares of its Common Stock. The proceeds of
such offering were approximately $ after the payment of organizational
and offering expenses. In connection with the initial public offering of the
Fund's Common Stock, the underwriter was granted an option to purchase up to
an additional shares to cover over-allotments.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $ after the payment
of offering expenses (estimated to be $ ) and the sales load and the payment
to the Fund by the Underwriter to cover certain expenses. See "Underwriting."
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies during a period estimated not to
exceed three months from the offer and sale of such shares of AMPS depending
on market conditions and the availability of appropriate securities. Pending
such investment, it is anticipated that the proceeds will be invested in
short-term tax-exempt securities. See "Investment Objective and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of September , 1998 and as adjusted to give effect to the issuance of the
shares of AMPS offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Shareholders' equity:
Capital Stock (200,000,000 shares authorized)
Preferred Stock, par value $.10 per share (no shares
issued; shares of AMPS issued and outstanding, as
adjusted, at $25,000 per share liquidation preference)... -- $
Common Stock, par value $.10 per share ( shares
issued and outstanding).................................. $
Capital in excess of par value attributable to Common
Stock....................................................
Undistributed investment income--net......................
Unrealized appreciation on investments--net...............
------ ------
Net assets................................................ $ $
====== ======
</TABLE>
13
<PAGE>
PORTFOLIO COMPOSITION
As of September , 1998, approximately % of the market value of the Fund's
portfolio was invested in long-term municipal obligations and approximately
% of the market value of the Fund's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of the Fund's investment portfolio as of September
, 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
$ %
--- ------ ---
Total . . . . . . . . .
. . . $ %
=== ====== ===
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's ratings on the Fund's
municipal obligations. See "Schedule of Investments." S&P rating categories
may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and
C ratings. Moody's rating categories may be modified further by a 1, 2 or 3
in Aa, A, Baa, Ba and B ratings.
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
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 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. 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.
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
other states, territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities paying interest that,
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 ("Municipal
Bonds"). 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.
14
<PAGE>
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in 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 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.
The investment grade New York Municipal Bonds and Municipal Bonds in which
the Fund will invest are those New York Municipal Bonds and Municipal Bonds
that are rated at the date of purchase in the four highest rating categories
of S&P, Moody's or Fitch or, if unrated, are considered to be of comparable
quality by 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-l+ 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-l+ 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 B to this
Prospectus for a description of S&P's, Moody's and Fitch's ratings of New York
Municipal Bonds and 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 Municipal Bonds are entitled and the
creditworthiness of the insurance company or financial institution that
provided such insurance or credit enhancement. 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 characteristic
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
15
<PAGE>
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 tax.
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) insurance under an
insurance policy obtained by the issuer thereof or any other party. The Fund
will seek to limit its investments to municipal obligations insured under
insurance policies issued by insurance carriers that have total admitted
assets (unaudited) of at least $75,000,000 and capital and surplus (unaudited)
of at least $50,000,000 and insurance claims-paying ability ratings of AAA
from S&P or Fitch or Aaa from Moody's. There can be no assurance that
insurance from insurance carriers meeting these criteria will be available.
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 which 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 and 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.
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<PAGE>
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.
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 Policies 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 .25 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. 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 which are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternative 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 will be unable to
manage the portfolio 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 of the kind 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 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 and 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 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
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<PAGE>
York City personal income tax, even though such bonds may be IDBs or "private
activity bonds" as discussed below. Also, for purposes of this Prospectus,
Non-Municipal Tax-Exempt securities as discussed above will be considered 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 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.
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
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<PAGE>
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 A,
"Economic 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
"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 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 in the
secondary market 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, as an illustration, in market interest rates at a rate
that is a multiple (typically two) of the rate at which fixed-rate, long-term,
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities generally will be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit
the volatility of these securities, the Fund may
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<PAGE>
purchase inverse floating obligations with shorter-term maturities or which
contain 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 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.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this Prospectus.
The Fund intends that, so long as shares of AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's
and S&P in connection with the Fund's receipt of a rating for such shares on
or prior to their Date of Original Issue of at least "aaa" from Moody's and
AAA from S&P. Moody's and S&P, which are nationally recognized statistical
rating organizations, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The guidelines described below
have been developed by Moody's and S&P in connection with issuances of asset-
backed and similar securities, including debt obligations and variable rate
preferred stock, generally on a case-by-case basis through discussions with
the issuers of these securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred stock will be varied
sufficiently and will be of sufficient quality and amount to justify
investment-grade ratings. The guidelines do not have the force of law but have
been adopted by the Fund in order to satisfy current requirements necessary
for Moody's and S&P to issue the above-described ratings for shares of AMPS,
which ratings generally are relied upon by institutional investors in
purchasing such securities. The guidelines provide a set of tests for
portfolio composition and asset coverage that supplement (and in some cases
are more restrictive than) the applicable requirements under the 1940 Act. See
"Description of AMPS--Asset Maintenance."
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has
established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined
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<PAGE>
by such rating agency). The Moody's and S&P guidelines do not impose any
limitations on the percentage of Fund assets that may be invested in holdings
not eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value
at least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date, thereby incurring additional transaction costs
and possible losses and/or gains on dispositions of portfolio securities. To
the extent any such failure is not cured in a timely manner, shares of AMPS
will be subject to redemption. See "Description of AMPS--Asset Maintenance"
and "Description of AMPS--Redemption." The AMPS Basic Maintenance Amount
includes the sum of (i) the aggregate liquidation value of AMPS then
outstanding and (ii) certain accrued and projected payment obligations of the
Fund. See "Description of AMPS--Asset Maintenance."
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of AMPS, at any time, may change or
withdraw any such rating. As set forth in the Articles Supplementary, the
Board of Directors, without shareholder approval, may modify certain
definitions or restrictions that have been adopted by the Fund pursuant to the
rating agency guidelines, provided the Board of Directors has obtained written
confirmation from Moody's and S&P that any such change would not impair the
ratings then assigned by Moody's and S&P to the AMPS.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines described above address the likelihood that a holder of shares of
AMPS will be able to sell such shares in an Auction. The ratings are based on
current information furnished to Moody's and S&P by the Fund and the
Investment Adviser and information obtained from other sources. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Common Stock has not been rated by a
nationally recognized statistical rating organization.
S&P AAA Rating Guidelines. The Discounted Value of the Fund's S&P Eligible
Assets is calculated on each Valuation Date. See "Description of AMPS--Asset
Maintenance--AMPS Basic Maintenance Amount." S&P Eligible Assets include cash,
Receivables for New York Municipal Bonds Sold (as defined below) and New York
Municipal Bonds or Municipal Bonds eligible for consideration under S&P's
current guidelines. For purposes of calculating the Discounted Value of the
Fund's portfolio under current S&P guidelines, the fair market value of New
York Municipal Bonds or Municipal Bonds eligible for consideration under such
guidelines must be discounted by the applicable S&P Discount Factor set forth
in the table below. The Discounted Value of a New York Municipal Bond or
Municipal Bond eligible for consideration under S&P guidelines is the fair
market value thereof divided by the S&P Discount Factor. The S&P Discount
Factor used to discount a particular New York Municipal Bond or Municipal Bond
will be determined by reference to (a)(i) the rating by S&P, Moody's or Fitch
on such Bond or (ii) in the event the New York Municipal Bond is insured under
a Policy and the terms of the Policy permit the Fund, at its option, to obtain
other permanent insurance guaranteeing the timely payment of interest on such
New York Municipal Bond and principal thereof to maturity, the S&P insurance
claims-paying ability rating of the issuer of the Policy or (iii) in the event
the New York Municipal Bond is insured under an insurance policy which
guarantees the timely payment of interest on such New York Municipal Bond and
principal thereof to maturity, the S&P insurance claims-paying ability rating
of the issuer of the insurance policy and (b) the S&P Exposure Period. The S&P
Exposure Period is the maximum period of time following a Valuation Date,
including the Valuation Date and the AMPS Basic Maintenance Cure Date, that
the Fund has to cure any failure to maintain, as of such Valuation Date, a
Discounted Value for its portfolio at least equal to the AMPS Basic
Maintenance Amount.
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S&P Discount Factors applicable to New York Municipal Bonds for a range of
S&P Exposure Periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS RATING CATEGORY
------------------------------------------
EXPOSURE PERIOD AAA AA A BBB
--------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
40 Business Days................. 210% 215% 230% 270%
22 Business Days................. 190 195 210 250
10 Business Days................. 175 180 195 235
7 Business Days................. 170 175 190 230
3 Business Days................. 150 155 170 210
</TABLE>
Since the S&P Exposure Period currently applicable to the Fund is seven
Business Days, the S&P Discount Factors currently applicable to Municipal
Bonds eligible for consideration under S&P guidelines will be determined by
reference to the factors set forth opposite the exposure period line entitled
"7 Business Days." Notwithstanding the foregoing, (i) the S&P Discount Factor
for short-term New York Municipal Bonds will be 115%, so long as such New York
Municipal Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand
feature exercisable in 30 days or less or 120% so long as such New York
Municipal Bonds are rated A-1 or SP-1 by S&P and mature or have a demand
feature exercisable in 30 days or less, or 125% if such New York Municipal
Bonds are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's or F-
1+ by Fitch; provided, however, such short-term New York Municipal Bonds rated
by Moody's or Fitch but not rated by S&P having a demand feature exercisable
in 30 days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution having a short-term
rating of at least A-1+ from S&P; and further provided that such short-term
New York Municipal Bonds rated by Moody's or Fitch but not rated by S&P may
comprise no more than 50% of short-term New York Municipal Bonds that qualify
as S&P Eligible Assets, (ii) the S&P Discount Factor for Receivables for New
York Municipal Bonds Sold that are due in more than five Business Days from
such Valuation Date will be the S&P Discount Factor applicable to the New York
Municipal Bonds sold, and (iii) no S&P Discount Factor will be applied to cash
or to Receivables for New York Municipal Bonds Sold if such receivables are
due within five Business Days of such Valuation Date. "Receivables for New
York Municipal Bonds Sold," for purposes of calculating S&P Eligible Assets as
of any Valuation Date, means the book value of receivables for New York
Municipal Bonds sold as of or prior to such Valuation Date. The Fund may adopt
S&P Discount Factors for Municipal Bonds other than New York Municipal Bonds
provided that S&P advises the Fund in writing that such action will not
adversely affect its then current rating on the AMPS. For purposes of the
foregoing, Anticipation Notes rated SP-1 or, if not rated by S&P, rated VMIG-1
by Moody's or F-1+ by Fitch, which do not mature or have a demand feature
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term New York Municipal Bonds.
The S&P guidelines require certain minimum issue size and geographical
diversification and impose other requirements for purposes of determining S&P
Eligible Assets. In order to be considered S&P Eligible Assets, New York
Municipal Bonds must:
(i) be interest bearing and pay interest at least semi-annually;
(ii) be payable with respect to principal and interest in U.S. dollars;
(iii) be publicly rated BBB or higher by S&P or, except in the case of
Anticipation Notes that are grant anticipation notes or bond anticipation
notes, which must be rated by S&P to be included in S&P Eligible Assets, if
not rated by S&P but rated by Moody's or Fitch, be rated at least A by
Moody's or Fitch, (provided that such Moody's-rated or Fitch-rated New York
Municipal Bonds will be included in S&P Eligible Assets only to the extent
the fair market value of such New York Municipal Bonds does not exceed 50%
of the aggregate fair market value of the S&P Eligible Assets. For purposes
of determining the S&P Discount Factors applicable to any such Moody's-
rated or Fitch-rated New York Municipal Bonds, such New York Municipal
Bonds will be deemed to have an S&P rating that is one full rating category
lower than its Moody's rating or Fitch rating);
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<PAGE>
(iv) not be subject to a covered call or covered put option written by
the Fund;
(v) except for inverse floaters, not be part of a private placement of
Municipal Bonds; and
(vi) except for inverse floaters, be part of an issue with an original
issue size of at least $20 million or, if of an issue with an original
issue size below $20 million (but in no event below $10 million), be issued
by an issuer with a total of at least $50 million of securities
outstanding.
Notwithstanding the foregoing:
(i) New York Municipal Bonds of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the fair market value of such Bonds does not exceed 10% of the aggregate
fair market value of the S&P Eligible Assets, provided that 2% is added to
the applicable S&P Discount Factor for every 1% by which the fair market
value of such New York Municipal Bonds exceeds 5% of the aggregate fair
market value of the S&P Eligible Assets;
(ii) New York Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent
the market value of such New York Municipal Bonds does not exceed 25% of
the aggregate market value of S&P Eligible Assets, except that New York
Municipal Bonds falling within the utility issue type category will be
broken down into three sub-categories (as described below) and such New
York Municipal Bonds will be considered S&P Eligible Assets to the extent
the market value of such New York Municipal Bonds in each such sub-category
does not exceed 25% of the aggregate market value of S&P Eligible Assets
and except that New York Municipal Bonds falling within the general
obligation issue type category will be considered S&P Eligible Assets to
the extent the market value of such New York Municipal Bonds does not
exceed 50% of the aggregate market value of S&P Eligible Assets. For
purposes of the issue type category requirement described above, New York
Municipal Bonds will be classified within one of the following categories:
health care issues, housing issues, educational facilities issues, student
loan issues, transportation issues, industrial development bond issues,
utility issues, general obligation issues, lease obligations, escrowed
bonds and other issues not falling within one of the aforementioned
categories. The general obligation issue type category includes any issuer
that is directly or indirectly guaranteed by the State of New York or its
political subdivisions. Utility issuers are included in the general
obligation issue type category if the issuer is directly or indirectly
guaranteed by the State of New York or its political subdivisions. For
purposes of the issue type category requirement described above, New York
Municipal Bonds in the utility issue type category will be classified
within one of the three following sub-categories: (i) electric, gas and
combination issues (if the combination issue includes an electric issue),
(ii) water and sewer utilities and combination issues (if the combination
issue does not include an electric issue), and (iii) irrigation, resource
recovery, solid waste and other utilities, provided that New York Municipal
Bonds included in this sub-category (iii) must be rated by S&P in order to
be included in S&P Eligible Assets; and
(iii) New York Municipal Bonds which are escrow bonds or defeased bonds
may compose up to 100% of the aggregate market value of S&P Eligible Assets
if such New York Municipal Bonds initially are assigned a rating by S&P in
accordance with S&P's legal defeasance criteria or rerated by S&P as
economic defeased escrow bonds and assigned an AAA rating. New York
Municipal Bonds may be rated as escrow bonds by another nationally
recognized rating agency or rerated as an escrow bond and assigned the
equivalent of an S&P AAA rating, provided that such equivalent rated New
York Municipal Bonds are limited to 50% of the aggregate market value of
S&P Eligible Assets and are deemed to have an AA S&P rating for purposes of
determining the S&P Discount Factor applicable to such New York Municipal
Bonds. The limitations on New York Municipal Bonds of any one issuer in
clause (1) above is not applicable to escrow bonds, however, economically
defeased bonds that are either initially rate or rerated by S&P or another
nationally recognized rating agency and assigned the same rating level as
the issuer of the New York Municipal Bonds will remain in its original
issue type category set forth in clause (2) above. New York Municipal Bonds
that are legally defeased and secured by securities issued or guaranteed by
the United States Government are not required to meet the minimum issuance
size requirement set forth above.
23
<PAGE>
The Fund may include Municipal Bonds other than New York Municipal Bonds as
S&P Eligible Assets pursuant to guidelines and restrictions to be established
by S&P, provided that S&P advises the Fund in writing that such action will
not adversely affect its then-current rating on the AMPS.
As discussed herein, the Fund may engage in options or futures transactions.
For so long as any shares of AMPS are rated by S&P, the Fund will not purchase
or sell financial futures contracts, write, purchase or sell options on
financial futures contracts or write put options (except covered put options)
or call options (except covered call options) on portfolio securities unless
it receives written confirmation from S&P that engaging in such transactions
will not impair the ratings then assigned to the shares of AMPS by S&P, except
that the Fund may purchase or sell financial futures contracts based on the
Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and
call options on such contracts (collectively "S&P Hedging Transactions"),
subject to the following limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions that terminate a financial futures
contract or option held by the Fund by the Fund's taking an opposite
position thereto ("Closing Transactions")), that would cause the Fund at
the time of such transaction to own or have sold the least of (A) more than
1,000 outstanding financial futures contracts based on the Municipal Index,
(B) outstanding financial futures contracts based on the Municipal Index
exceeding in number 25% of the quotient of the fair market value of the
Fund's total assets divided by $1,000 or (C) outstanding financial futures
contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded financial futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold the lesser of (A)
outstanding financial futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the fair market
value of the Fund's total assets divided by $100,000 ($200,000 in the case
of the two-year United States Treasury Note) or (B) outstanding financial
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded financial futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract that the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (A) the Fund
does not have S&P Eligible Assets with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Fund is required to pay Variation Margin on the
second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract or option thereon in the month prior
to the delivery month under the terms of such financial futures contract or
option thereon unless the Fund holds the securities deliverable under such
terms; and
(v) when the Fund writes a financial futures contract or an option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P) fixed-income securities in a
segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in
the account of or on behalf of the Fund's broker with respect to such
financial futures contract or option equals the fair market value of the
financial futures contract or option, or, in the event the Fund writes a
financial futures contract or option thereon that requires delivery of an
underlying security, it shall hold such underlying security in its
portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin
or Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the
aggregate settlement value, as marked to market, of any outstanding financial
futures contracts based on the Municipal Index that are owned by the Fund plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding financial futures contracts based on Treasury Bonds which
contracts are owned by the Fund.
24
<PAGE>
Moody's "aaa" Rating Guidelines. The Discounted Value of the Fund's Moody's
Eligible Assets is calculated on each Valuation Date. See "Description of
AMPS--Asset Maintenance--AMPS Basic Maintenance Amount." Moody's Eligible
Assets include cash, Receivables for New York Municipal Bonds or Municipal
Bonds (as defined below), and New York Municipal Bonds or Municipal Bonds
eligible for consideration under Moody's guidelines. For purposes of
calculating the Discounted Value of the Fund's portfolio under current Moody's
guidelines, the fair market value of Municipal Bonds eligible for
consideration under such guidelines must be discounted by the applicable
Moody's Discount Factor set forth in the table below. The Discounted Value of
a Municipal Bond eligible for consideration under Moody's guidelines is the
lower of par and the quotient of the fair market value thereof divided by the
Moody's Discount Factor. The Moody's Discount Factor used to discount a
particular New York Municipal Bond or Municipal Bond will be determined by
reference to (a) (i) the rating by Moody's or S&P on such Bond or (ii) in the
event the Moody's Eligible Asset is insured under a Policy and the terms of
the Policy permit the Fund, at its option, to obtain other insurance
guaranteeing the timely payment of interest on such Moody's Eligible Asset and
principal thereof to maturity, the Moody's insurance claims-paying ability
rating of the issuer of the Policy or (iii) in the event the Moody's Eligible
Asset is insured under an insurance policy which guarantees the timely payment
of interest on such Moody's Eligible Assets and principal thereof to maturity,
the Moody's insurance claims-paying ability rating of the issuer of the
insurance policy (provided that for purposes of clauses (ii) and (iii) if the
insurance claims-paying ability of an issuer of a Policy or insurance policy
is not rated by Moody's but is rated by S&P, such issuer shall be deemed to
have a Moody's insurance claims-paying ability rating which is two full
categories lower than the S&P insurance claims-paying ability rating) and (b)
the Moody's Exposure Period. Moody's Discount Factors for a range of Moody's
Exposure Periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
-----------------------------------------------------
MOODY'S EXPOSURE PERIOD AAA(1) AA(1) A(1) BAA(1) OTHER(2) VMIG-1(3) SP-1+(3)
----------------------- ------ ----- ---- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less......... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven
weeks.................. 154 164 173 205 235 137 149
9 weeks or less but
greater than eight
weeks.................. 158 169 179 209 242 138 150
</TABLE>
- --------
(1) Moody's rating.
(2) New York Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) New York Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1
or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not
mature or have a demand feature at par exercisable within the Moody's
Exposure Period and which do not have a long-term rating. For the purposes
of the definition of Moody's Eligible Assets, these securities will have
an assumed rating of A by Moody's.
; provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-
paying ability rating in accordance with clause (a)(ii) or (a)(iii), such
Moody's Discount Factor shall be increased by an amount equal to 50% of the
difference between (a) the percentage set forth in the foregoing table under
the applicable rating category and (b) the percentage set forth in the
foregoing table under the rating category which is one category lower than the
applicable rating category.
Since the Moody's Exposure Period currently is 49 days, the Moody's Discount
Factors currently applicable to Municipal Bonds eligible for consideration
under Moody's guidelines will be determined by reference to the factors set
forth opposite the exposure period line entitled "7 weeks or less."
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be applied
to short-term New York Municipal Bonds and short-term Municipal Bonds, so long
as such New York Municipal Bonds and Municipal Bonds are rated at least MIG-1,
VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Bonds will be 125% if such Bonds are not rated by Moody's but
are rated A-1+, SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for New York Municipal Bonds
or Municipal Bonds Sold. "Receivables for Municipal Bonds Sold," for purposes
of calculating Moody's Eligible Assets as of any Valuation Date, means no more
than the
25
<PAGE>
aggregate of the following: (i) the book value of receivables for New York
Municipal Bonds or Municipal Bonds sold as of or prior to such Valuation Date
if such receivables are due within five Business Days of such Valuation Date,
and if the trades which generated such receivables are (A) settled through
clearing house firms with respect to which the Fund has received prior written
authorization from Moody's or (B) with counterparties having a Moody's long-
term debt rating of at least Baa3; and (ii) the Moody's Discounted Value of
New York Municipal Bonds or Municipal Bonds sold as of or prior to such
Valuation Date that generated receivables, if such receivables are due within
five Business Days of such Valuation Date but do not comply with either of
conditions (A) or (B) of the preceding clause (i).
The Moody's guidelines impose certain requirements as to minimum issue size,
issuer diversification and geographical concentration, as well as other
requirements for purposes of determining whether New York Municipal Bonds or
Municipal Bonds constitute Moody's Eligible Assets, as set forth in the table
below:
<TABLE>
<CAPTION>
MAXIMUM MAXIMUM MAXIMUM STATE
MINIMUM MAXIMUM ISSUE TYPE COUNTY OR TERRITORY
ISSUE SIZE UNDERLYING CONCENTRATION CONCENTRATION CONCENTRATION
RATING ($ MILLIONS) OBLIGOR (%)(1) (%)(1)(3) (%)(1)(4) (%)(1)(5)
------ ------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Aaa..................... 10 100 100 100 100
Aa...................... 10 20 60 60 60
A....................... 10 10 40 40 40
Baa..................... 10 6 20 20 20
Other (2)............... 10 4 12 12 12
</TABLE>
- --------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) New York Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to New York Municipal Bonds. Territorial bonds (other than
those issued by Puerto Rico and counted collectively) are each limited to
10% of Moody's Eligible Assets. For diversification purposes, Puerto Rico
will be treated as a state.
For purposes of the maximum underlying obligor requirement described above,
any New York Municipal Bond or Municipal Bond backed by the guaranty, letter
of credit or insurance issued by a third party will be deemed to be issued by
such third party if the issuance of such third party credit is the sole
determinant of the rating on such Bond. For purposes of the issue type
concentration requirement described above, New York Municipal Bonds and
Municipal Bonds will be classified within one of the following categories:
health care issues (teaching and non-teaching hospitals, public and private),
housing issues (single- and multi-family), educational facilities issues
(public and private schools), student loan issues, resource recovery issues,
transportation issues (mass transit, airport and highway bonds), industrial
revenue/pollution control bond issues, utility issues (including water, sewer
and electricity), general obligation issues, lease obligations/certificates of
participation, escrowed bonds and other issues ("Other Issues") not falling
within one of the aforementioned categories (includes special obligations to
crossover, excise and sales tax revenue, recreation revenue, special
assessment and telephone revenue bonds). In no event shall (a) more than 10%
of Moody's Eligible Assets consist of student loan issues, (b) more than 10%
of Moody's Eligible Assets consist of resource recovery issues or (c) more
than 10% of Moody's Eligible Assets consist of Other Issues.
Current Moody's guidelines also require that New York Municipal Bond or
Municipal Bonds constituting Moody's Eligible Assets pay interest in cash, be
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated
by S&P, that they be rated at least BBB by S&P, not have suspended ratings by
Moody's and be part of an issue of New York Municipal Bonds or Municipal Bonds
of at least $10,000,000. For purposes of determining the Moody's Discount
Factors applicable to any such S&P-rated New York Municipal Bond or S&P-rated
Municipal Bonds, such New York Municipal Bond or Municipal Bonds (excluding
any short-term Municipal Bonds) will be deemed to have a Moody's rating that
is one full rating category lower than its S&P
26
<PAGE>
rating. When the Fund sells a New York Municipal Bond or Municipal Bond and
agrees to repurchase it at a future date, the Discounted Value of such
Municipal Bond will constitute a Moody's Eligible Asset and the amount the
Fund is required to pay upon repurchase of such bond will count as a liability
for purposes of calculating the AMPS Basic Maintenance Amount. When the Fund
purchases a New York Municipal Bond or Municipal Bond and agrees to sell it at
a future date to another party, cash receivable by the Fund thereby will
constitute a Moody's Eligible Asset if the long-term debt of such other party
is rated at least A2 by Moody's and such agreement has a term of 30 days or
less; otherwise the Discounted Value of such Bond will constitute a Moody's
Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Fund for the payment of
dividends or redemption.
For so long as shares of AMPS are rated by Moody's, in managing the Fund's
portfolio, the Investment Adviser will not alter the composition of the Fund's
portfolio if, in the reasonable belief of the Investment Adviser, the effect
of any such alteration would be to cause the Fund to have Moody's Eligible
Assets with an aggregate Discounted Value, as of the immediately preceding
Valuation Date, less than the AMPS Basic Maintenance Amount as of such
Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of
Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount by five
percent or less, the Investment Adviser will not alter the composition of the
Fund's portfolio in a manner reasonably expected to reduce the aggregate
Discounted Value of Moody's Eligible Assets unless the Fund shall have
confirmed that, after giving effect to such alteration, the aggregate
Discounted Value of Moody's Eligible Assets would exceed the AMPS Basic
Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
buy or sell financial futures contracts, write, purchase or sell call options
on financial futures contracts or purchase put options on financial futures
contracts or write call options (except covered call options) on portfolio
securities unless it receives written confirmation from Moody's that engaging
in such transactions would not impair the ratings then assigned to the shares
of AMPS by Moody's, except that the Fund may purchase or sell exchange-traded
financial futures contracts based on the Municipal Index or Treasury Bonds,
and purchase, write or sell exchange-traded put options on such financial
futures contracts, and purchase, write or sell exchange-traded call options on
such financial futures contracts (collectively "Moody's Hedging
Transactions"), subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction based on
the Municipal Index (other than Closing Transactions) that would cause the
Fund at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded financial futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal or (B)
outstanding financial futures contracts based on the Municipal Index having
a market value exceeding 50% of the market value of all Municipal Bonds
constituting Moody's Eligible Assets owned by the Fund (other than Moody's
Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on Treasury Bonds having an aggregate
market value exceeding 20% of the aggregate market value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated
by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding financial
futures contracts based on Treasury Bonds having an aggregate fair market
value exceeding 80% of the aggregate fair market value of all Municipal
Bonds constituting Moody's Eligible Assets owned by the Fund (other than
Moody's Eligible Assets already subject to a Moody's Hedging Transaction)
and rated Baa or A by Moody's (or, if not rated by Moody's but rated by
S&P, rated A or AA by S&P) (for purposes of the foregoing clauses (i) and
(ii), the Fund shall be deemed to own the number of financial futures
contracts that underlie any outstanding options written by the Fund);
27
<PAGE>
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
Street Journal is less than 5,000;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a financial
futures contract by no later than the first Business Day of the month in
which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only with
respect to financial futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Fund will not engage in options and futures transactions for
leveraging or speculative purposes and will not write any call options or
sell any financial futures contracts for the purpose of hedging the
anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the
Fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Fund that are either exchange-traded and "readily reversible"
or that expire within 49 days after the date as of which such valuation is
made shall be valued at the lesser of (A) Discounted Value and (B) the
exercise price of the call option written by the Fund; (ii) assets subject to
call options written by the Fund not meeting the requirements of clause (i) of
this sentence shall have no value; (iii) assets subject to put options written
by the Fund shall be valued at the lesser of (A) the exercise price and (B)
the Discounted Value of the subject security; (iv) futures contracts shall be
valued at the lesser of (A) settlement price and (B) the Discounted Value of
the subject security, provided that, if a contract matures within 49 days
after the date as of which such valuation is made, where the Fund is the
seller the contract may be valued at the settlement price and where the Fund
is the buyer the contract may be valued at the Discounted Value of the subject
securities; and (v) where delivery may be made to the Fund with any security
of a class of securities, the Fund shall assume that it will take delivery of
the security with the lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(i) 10% of the exercise price of a written call option; (ii) the exercise
price of any written put option; (iii) where the Fund is the seller under a
financial futures contract, 10% of the settlement price of the financial
futures contract; (iv) where the Fund is the purchaser under a financial
futures contract, the settlement price of assets purchased under such
financial futures contract; (v) the settlement price of the underlying
financial futures contract if the Fund writes put options on a financial
futures contract; and (vi) 105% of the fair market value of the underlying
financial futures contracts if the Fund writes call options on a financial
futures contract and does not own the underlying contract.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions), except that the Fund may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short term, fixed-income securities rated P-1,
MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a fair market value that equals or exceeds the amount of
the Fund's
28
<PAGE>
obligations under any Forward Commitments to which it is from time to time
a party or long-term, fixed income securities with a Discounted Value that
equals or exceeds the amount of the Fund's obligations under any Forward
Commitment to which it is from time to time a party, and
(ii) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which
the Fund is a party and of all securities deliverable to the Fund pursuant to
such Forward Commitments shall be zero.
For so long as shares of AMPS are rated by S&P or Moody's, the Fund, unless
it has received written confirmation from S&P and/or Moody's, as the case may
be, that such action would not impair the ratings then assigned to the AMPS by
S&P and/or Moody's, as the case may be, will not (i) borrow money except for
the purpose of clearing transactions in portfolio securities (which borrowings
under any circumstances shall be limited to the lesser of $10 million and an
amount equal to 5% of the fair market value of the Fund's assets at the time
of such borrowings and which borrowings shall be repaid within 60 days and not
be extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of stock ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Fund, (v) reissue any AMPS previously purchased or redeemed by the Fund, (vi)
merge or consolidate into or with any other corporation or entity, (vii)
change the Fund's pricing service or (vii) engage in reverse repurchase
agreements.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts and options thereon. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of 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.
For so long as the AMPS are rated by Moody's and S&P, the Fund's use of
options and financial futures contracts will be subject to the limitations
described under "Investment Objective and Policies--Rating Agency Guidelines."
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 derived from transactions in options and
futures contracts and distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to
shareholders. See "Taxes--Tax Treatment of Options and Futures Transactions."
In addition, in order to obtain ratings of the Preferred Stock from one or
more nationally recognized statistical rating organizations, the Fund may be
required to limit its use of hedging techniques in accordance with the
specified guidelines of such rating 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
29
<PAGE>
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.
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 hedging against increases in the
cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract
or, in the case of index-based financial futures contracts, to make and accept
a cash settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or
in part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be purchased because
such appreciation may be offset, in whole or in part, by an increase in the
value of the position in the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or
received. Instead, an amount of cash or securities acceptable to the broker
equal to approximately 5% of the contract amount must be deposited with the
broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the
price of the financial futures contract fluctuates making the long and short
positions in the financial futures contract more or less valuable.
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 which 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.
30
<PAGE>
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 option transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security which 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 which 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 which have a disparate
impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission (the "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.
See "Taxes--Tax Treatment of Options and Futures Transactions."
31
<PAGE>
The volume of trading in the exchange markets with respect to New York
Municipal Bonds or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past reached or exceeded the daily limit on a number of
consecutive trading days.
If it is not possible to close a financial futures position entered into by
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 engaging in hedging transactions
when movements in interest rates occur.
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the back of this Prospectus.
The AMPS of each series will be shares of Preferred Stock that entitle their
holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods for each such series. After the
Initial Dividend Period, each Subsequent Dividend Period for each series of
AMPS generally will be a 7-Day Dividend Period; provided, however, that prior
to any Auction, the Fund may elect, subject to certain limitations described
herein, upon giving notice to holders thereof, a Special Dividend Period. The
Applicable Rate for a particular Dividend Period will be determined by an
Auction conducted on the Business Day before the start of such Dividend
Period. Beneficial Owners and Potential Beneficial Owners of shares of AMPS
may participate in Auctions therefor, although, except in the case of a
Special Dividend Period, Beneficial Owners desiring to continue to hold all of
their shares of AMPS regardless of the Applicable Rate resulting from Auctions
need not participate. For an explanation of Auctions and the method of
determining the Applicable Rate, see "Description of AMPS--The Auction."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of AMPS of each series will be represented
by one or more certificates registered in the name of the nominee of the
Securities Depository (initially expected to be Cede), and no person acquiring
shares of AMPS will be
32
<PAGE>
entitled to receive a certificate representing such shares. See Appendix D
(Auction Procedures). As a result, the nominee of the Securities Depository is
expected to be the sole holder of record of the shares of AMPS. Accordingly,
each purchaser of AMPS must rely on (i) the procedures of the Securities
Depository and, if such purchaser is not a member of the Securities
Depository, such purchaser's Agent Member, to receive dividends, distributions
and notices and to exercise voting rights (if and when applicable) and (ii)
the records of the Securities Depository and, if such purchaser is not a
member of the Securities Depository, such purchaser's Agent Member, to
evidence its beneficial ownership of shares of AMPS.
When issued and sold, the shares of AMPS will have a liquidation preference
of $25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) and will be fully paid and non-assessable.
See "Description of AMPS--Liquidation Rights." The shares of AMPS will not be
convertible into shares of Common Stock or other capital stock of the Fund,
and the holders thereof will have no preemptive rights. The shares of AMPS of
each series will not be subject to any sinking fund but will be subject to
redemption at the option of the Fund at the Optional Redemption Price on any
Dividend Payment Date for such series (except during the Initial Dividend
Period and during a Non-Call Period) and, under certain circumstances, will be
subject to mandatory redemption by the Fund at the Mandatory Redemption Price
stated herein. See "Description of AMPS--Redemption."
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, IBJ Schroder Bank & Trust Company will be the
transfer agent, registrar, dividend disbursing agent and redemption agent for
the shares of AMPS. The Auction Agent, however, will serve merely as the agent
of the Fund, acting in accordance with the Fund's instructions, and will not
be responsible for any evaluation or verification of any matters certified to
it.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any shares of AMPS so long
as the Fund is current in the payment of dividends on AMPS and on any other
capital stock of the Fund ranking on a parity with the AMPS with respect to
the payment of dividends or upon liquidation.
The following is a brief description of the terms of the shares of AMPS.
This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the Fund's Charter and Articles
Supplementary, including the provisions thereof establishing the AMPS. The
Fund's Charter and the form of Articles Supplementary establishing the terms
of the AMPS have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
THE AUCTION
General. Holders of the shares of AMPS of each series will be entitled to
receive cumulative cash dividends on their shares when, as and if declared by
the Board of Directors of the Fund, out of funds legally available therefor,
on the Initial Dividend Payment Date with respect to the Initial Dividend
Period and, thereafter, on each Dividend Payment Date with respect to a
Subsequent Dividend Period (generally a period of seven days subject to
certain exceptions set forth under "Description of AMPS--Dividends--General")
at the rate per annum equal to the Applicable Rate for each such Dividend
Period.
The provisions of the Articles Supplementary establishing the terms of the
shares of AMPS offered hereby will provide that the Applicable Rate for each
series of AMPS for each Dividend Period after the Initial Dividend Period
therefor will be equal to the rate per annum that the Auction Agent advises
has resulted on the Business Day preceding the first day of such Dividend
Period due to implementation of the auction procedures set forth in the
Articles Supplementary (the "Auction Procedures") in which persons determine
to hold or offer to purchase or sell shares of AMPS of such series. The
Auction Procedures are attached as Appendix D to this Prospectus. Each
periodic operation of such procedures with respect to the shares of AMPS is
referred to hereinafter as an "Auction." If, however, the Fund should fail to
pay or duly provide for the full amount of any dividend on
33
<PAGE>
shares of AMPS of any series or the redemption price of shares of AMPS of such
series called for redemption, the Applicable Rate for shares of AMPS will be
determined as set forth under "Description of AMPS--Dividends--Determination
of Dividend Rate."
Auction Agent Agreement. The Fund will enter into an agreement (the "Auction
Agent Agreement") with IBJ Schroder Bank & Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with this Fund, the "Auction Agent"), which provides, among other
things, that the Auction Agent will follow the Auction Procedures for the
purpose of determining the Applicable Rate for the AMPS. The Fund will pay the
Auction Agent compensation for its services under the Auction Agent Agreement.
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the
Auction Agent Agreement, and will not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in
ascertaining the pertinent facts. Pursuant to the Auction Agent Agreement, the
Fund is required to indemnify the Auction Agent for certain losses and
liabilities incurred by the Auction Agent without negligence or bad faith on
its part in connection with the performance of its duties under such
agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to
the Fund, which termination may be no earlier than 60 days following delivery
of such notice. If the Auction Agent resigns, the Fund will use its best
efforts to enter into an agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction Agent Agreement.
The Fund may terminate the Auction Agent Agreement, provided that prior to
such termination the Fund shall have entered into such an agreement with
respect thereto with a successor Auction Agent.
Broker-Dealer Agreements. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into agreements with Merrill
Lynch, Goldman, Sachs & Co., Lehman Government Securities Incorporated and
Smith Barney Inc. and may enter into similar agreements (collectively, the
"Broker-Dealer Agreements") with one or more other broker-dealers
(collectively, the "Broker-Dealers") selected by the Fund, which provide for
the participation of such Broker-Dealers in Auctions. Merrill Lynch is an
affiliate of the Investment Adviser in that they share a common parent, ML &
Co. A Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with Merrill Lynch may not be terminated without the
prior written consent of the Fund, which consent may not be unreasonably
withheld.
Securities Depository. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the shares of
AMPS of each series. One or more registered certificates for all of the shares
of each series of AMPS initially will be registered in the name of Cede, as
nominee of the Securities Depository. The certificate will bear a legend to
the effect that such certificate is issued subject to the provisions
restricting transfers of shares of AMPS of the series to which it relates
contained in the Articles Supplementary. Cede initially will be the holder of
record of all shares of AMPS, and Beneficial Owners will not be entitled to
receive certificates representing their ownership interest in such shares. See
Appendix D (Auction Procedures). The Securities Depository will maintain lists
of its participants and will maintain the positions (ownership interests) of
shares of AMPS held by each Agent Member, whether as the Beneficial Owner
thereof for its own account or as nominee for the Beneficial Owner thereof.
Payments made by the Fund to holders of AMPS will be duly made by making
payments to the nominee of the Securities Depository.
Auction Procedures. The following is a brief summary of the procedures to be
used in conducting Auctions. Separate auctions will be conducted for each
series of AMPS. Accordingly, as used in the following brief summary, unless
the context otherwise requires, "AMPS" means the series of AMPS subject to the
related Auction and "Beneficial Owners," "Potential Beneficial Owners,"
"Existing Holders" and "Potential Holders" mean Beneficial Owners, Potential
Beneficial Owners, Existing Holders and Potential Holders of such series,
respectively. This summary is qualified by reference to the Auction procedures
set forth in Appendix D hereto. The Settlement Procedures to be used with
respect to Auctions are set forth in Appendix C hereto.
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<PAGE>
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends. An Auction to determine the Applicable Rate for
each series of AMPS offered hereby for each Dividend Period for such series
(other than the Initial Dividend Period therefor) will be held on the first
Business Day (as hereinafter defined) preceding the first day of such Dividend
Period, which first day is also the Dividend Payment Date for the preceding
Dividend Period (the date of each Auction being referred to herein as an
"Auction Date"). "Business Day" means a day on which the New York Stock
Exchange is open for trading and which is not a Saturday, Sunday or other day
on which banks in The City of New York are authorized or obligated by law to
close. Auctions for shares of Series A AMPS for Dividend Periods after the
Initial Dividend Period normally will be held every after the preceding
Dividend Payment Date, and each subsequent Dividend Period normally will begin
on the following (also a Dividend Payment Date). Auctions for shares of
Series B AMPS for Dividend Periods after the Initial Dividend Period normally
will be held every after the preceding Dividend Payment Date, and each
subsequent Dividend Period normally will begin on the following (also a
Dividend Payment Date). The Auction Date and the first day of the related
Dividend Period (both of which must be Business Days) need not be consecutive
calendar days. For example, in most cases, if the that normally would be
an Auction Date for Series A AMPS is not a Business Day, then such Auction
Date will be the preceding and the first day of the related Dividend
Period will continue to be the following . See "Description of AMPS--
Dividends" for information concerning the circumstances under which a Dividend
Payment Date may fall on a date other than the days specified above, which may
affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net capital
gains or other income subject to regular Federal income taxes in any dividend
on shares of AMPS, the Fund will notify the Auction Agent of the amount to be
so included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, in turn it will notify each Broker-
Dealer, who, on or prior to such Auction Date, in accordance with its Broker-
Dealer Agreement, will notify its customers who are Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order
in the Auction to be held on such Auction Date. The Fund also may include such
income in a dividend on shares of AMPS without giving advance notice thereof
if it increases the dividend by an additional amount calculated as if such
income were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend; provided that the Fund will notify the Auction Agent of
the additional amounts to be included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. See "Description of AMPS--
Dividends--Additional Dividends."
Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) Hold Order--indicating the number of outstanding shares, if any,
of AMPS that such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for the next Dividend Period for such
shares;
(ii) Bid--indicating the number of outstanding shares, if any, of
AMPS that such Beneficial Owner desires to continue to hold, provided
that the Applicable Rate for the next Dividend Period for such shares
is not less than the rate per annum then specified by such Beneficial
Owner; and/or
(iii) Sell Order--indicating the number of outstanding shares, if
any, of AMPS that such Beneficial Owner offers to sell without regard
to the Applicable Rate for the next Dividend Period for such shares;
and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of shares of AMPS to determine whether such Potential Beneficial
Owners desire to submit Bids indicating the number of shares of AMPS which
they offer to purchase provided that the Applicable Rate for the next
Dividend Period for such shares is not less than the rates per annum
specified in such Bids.
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<PAGE>
The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted
by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or
by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on
any Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to shares of AMPS then held by such Beneficial Owner, as well as Bids
for additional shares of AMPS. For information concerning the priority given
to different types of Orders placed by Beneficial Owners, see "Submission of
Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent.
The Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) and (ii)
whether the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS as follows:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
CREDIT RATINGS PERCENTAGE OF PERCENTAGE OF
----------------------------------- REFERENCE RATE-- REFERENCE RATE--
MOODY'S S&P NO NOTIFICATION NOTIFICATION
---------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend Period.
The Fund will take all reasonable action necessary to enable S&P and Moody's
to provide a rating for the AMPS. If either S&P or Moody's shall not make such
a rating available, or neither S&P nor Moody's shall make such a rating
available, the Underwriter or its affiliates and successors, after
consultation with the Fund, will select another nationally recognized
statistical rating organization (a "Substitute Rating Agency") or two other
nationally recognized statistical rating organizations ("Substitute Rating
Agencies") to act as a Substitute Rating Agency or Substitute Rating Agencies,
as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
Neither the Fund nor the Auction Agent will be responsible for a Broker-
Dealer's failure to comply with the foregoing.
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<PAGE>
A Broker-Dealer also may hold AMPS in its own account as a Beneficial Owner.
A Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial
Owner or a Potential Beneficial Owner and therefore participate in an Auction
as an Existing Holder or Potential Holder on behalf of both itself and its
customers. Any Order placed with the Auction Agent by a Broker-Dealer as or on
behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated
in the same manner as an Order placed with a Broker-Dealer by a Beneficial
Owner or a Potential Beneficial Owner. Similarly, any failure by a Broker-
Dealer to submit to the Auction Agent an Order in respect of any AMPS held by
it or its customers who are Beneficial Owners will be treated in the same
manner as a Beneficial Owner's failure to submit to its Broker-Dealer an Order
in respect of AMPS held by it, as described in the next paragraph. Inasmuch as
a Broker-Dealer participates in an Auction as an Existing Holder or a
Potential Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the
priority given to different types of Orders placed by Existing Holders, see
"Submission of Orders by Broker-Dealers to Auction Agent." Each purchase or
sale in an Auction will be settled on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding
shares of AMPS held by a Beneficial Owner are not submitted to the Auction
Agent prior to the Submission Deadline, either because a Broker-Dealer failed
to contact such Beneficial Owner or otherwise, the Auction Agent shall deem a
Hold Order (in the case of an Auction relating to a Dividend Period which is
not Special Dividend Period) and a Sell Order (in the case of an Auction
relating to a Special Dividend Period) to have been submitted on behalf of
such Beneficial Owner covering the number of outstanding shares of AMPS held
by such Beneficial Owner and not subject to Orders submitted to the Auction
Agent.
If all of the outstanding shares of AMPS are subject to Submitted Hold
Orders, the Dividend Period next succeeding the Auction automatically shall be
the same length as the immediately preceding Dividend Period, and the
Applicable Rate for the next Dividend Period for all shares of AMPS will be
40% of the Reference Rate on the date of the applicable Auction (or 60% of
such rate if the Fund has provided notification to the Auction Agent prior to
the Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS).
For the purposes of an Auction, shares of AMPS for which the Fund shall have
given notice of redemption and deposited moneys therefor with the Auction
Agent in trust or segregated in an account at the Fund's custodian bank for
the benefit of the Auction Agent, as set forth under "Description of AMPS--
Redemption," will not be considered as outstanding and will not be included in
such Auction. Pursuant to the Articles Supplementary of the Fund, the Fund
will be prohibited from reissuing and its affiliates (other than the
Underwriter) will be prohibited from transferring (other than to the Fund) any
shares of AMPS they may acquire. Neither the Fund nor any affiliate of the
Fund (other than the Underwriter) may submit an Order in any Auction, except
that an affiliate of the Fund that is a Broker-Dealer may submit an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00 p.m.,
New York City time, on each Auction Date, or such other time on the Auction
Date as may be specified by the Auction Agent (the "Submission Deadline"),
each Broker-Dealer will submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Fund) as the Existing
Holder or Potential Holder in respect of the shares of AMPS subject to such
Orders. Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (.001) of 1%.
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If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the
number of outstanding shares of AMPS held by such Existing Holder, provided
that if more than one Hold Order is submitted by such Existing Holder and
the number of shares of AMPS subject to such Hold Orders exceeds the number
of outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders will be reduced pro rata
so that such Hold Orders, in the aggregate, will cover exactly the number
of outstanding shares of AMPS held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the number of
outstanding shares of AMPS subject to any Hold Order referred to in clause
(i) above (and if more than one Bid submitted by such Existing Holder
specifies the same rate per annum and together they cover more than the
remaining number of shares that can be the subject of valid Bids after
application of clause (i) above and of the foregoing portion of this clause
(ii) to any Bid or Bids specifying a lower rate or rates per annum, the
number of shares subject to each of such Bids will be reduced pro rata so
that such Bids, in the aggregate, cover exactly such remaining number of
outstanding shares); and the number of outstanding shares, if any, subject
to Bids not valid under this clause (ii) shall be treated as the subject of
a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the sum of the number of shares of AMPS subject to Hold Orders
referred to in clause (i) above and the number of shares of AMPS subject to
valid Bids by such Existing Holder referred to in clause (ii) above;
provided that, if more than one Sell Order is submitted by any Existing
Holder and the number of shares of AMPS subject to such Sell Orders is
greater than such excess, the number of shares of AMPS subject to each of
such Sell Orders will be reduced pro rata so that such Sell Orders, in the
aggregate, will cover exactly the number of shares of AMPS equal to such
excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of AMPS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding shares of AMPS over the number of outstanding shares of
AMPS subject to Submitted Hold Orders (such excess being referred to as the
"Available AMPS") and whether Sufficient Clearing Bids have been made in such
Auction. Sufficient Clearing Bids will have been made if the number of
outstanding shares of AMPS that are the subject of Submitted Bids of Potential
Holders with rates per annum not higher than the Maximum Applicable Rate
equals or exceeds the number of outstanding shares that are the subject of
Submitted Sell Orders (including the number of shares subject to Bids of
Existing Holders specifying rates per annum higher than the Maximum Applicable
Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will determine
the lowest rate per annum specified in the Submitted Bids (the "Winning Bid
Rate") which would result in the number of shares subject to Submitted Bids
specifying such rate per annum or a lower rate per annum being at least equal
to the Available AMPS. If Sufficient Clearing Bids have been made, the Winning
Bid Rate will be the Applicable Rate for the next Dividend Period for all
shares of AMPS then outstanding.
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If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 7-Day
Dividend Period, and the Applicable Rate for such Dividend Period will be
equal to the Maximum Applicable Rate. If Sufficient Clearing Bids have not
been made, Beneficial Owners that have Submitted Sell Orders will not be able
to sell in the Auction all, and may not be able to sell any, shares of AMPS
subject to such Submitted Sell Orders. See "Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocation of Shares." Thus,
under some circumstances, Beneficial Owners may not have liquidity of
investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected
in the order of priority set forth in the Auction Procedures with the result
that Existing Holders and Potential Holders of AMPS will sell, continue to
hold and/or purchase shares of AMPS as set forth below. Existing Holders that
submit or are deemed to have submitted Hold Orders will continue to hold the
shares of AMPS subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Winning Bid Rate or a Submitted Sell Order will
sell the outstanding shares of AMPS subject to such Submitted Bid or
Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will purchase the number of
shares of AMPS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bids, unless the
number of outstanding shares of AMPS subject to all such Submitted Bids of
Existing Holders is greater than the excess of the Available AMPS over the
number of shares of AMPS accounted for in clauses (b) and (c) above, in
which event each Existing Holder with such a Submitted Bid will sell a
number of outstanding shares of AMPS determined on a pro rata basis based
on the number of outstanding shares of AMPS subject to all such Submitted
Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will purchase any Available AMPS
not accounted for in clause (b), (c) or (d) above on a pro rata basis based
on the shares of AMPS subject to all such Submitted Bids of Potential
Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will continue
to hold the outstanding shares of AMPS subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will purchase
the number of shares of AMPS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Maximum Applicable Rate or a Submitted Sell Order
will sell a number of outstanding shares of AMPS determined on a pro rata
basis based on the outstanding shares of AMPS subject to all such Submitted
Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing Holder
would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the
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Auction Agent, in such manner as, in its sole discretion, it shall determine,
will round up or down the number of shares of AMPS being sold or purchased on
such Auction Date so that each share sold or purchased by each Existing Holder
or Potential Holder will be a whole share of AMPS. If any Potential Holder
would be entitled or required to purchase less than a whole share of AMPS, the
Auction Agent, in such manner as, in its sole discretion, it shall determine,
will allocate shares of AMPS for purchase among Potential Holders so that only
whole shares of AMPS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related shares of AMPS by
telephone at approximately 3:00 P.M., New York City time, on the Auction Date
for such Auction. Each such Broker-Dealer that submitted an Order for the
account of a customer then will advise such customer whether such Bid or Sell
Order was accepted or rejected, will confirm purchases and sales with each
customer purchasing or selling shares of AMPS as a result of the Auction and
will advise each customer purchasing or selling shares of AMPS to give
instructions to its Agent Member of the Securities Depository to pay the
purchase price against delivery of such shares or to deliver such shares
against payment therefor as appropriate. If a customer selling shares of AMPS
as a result of an Auction shall fail to instruct its Agent Member to deliver
such shares, the Broker-Dealer that submitted such customer's Bid or Sell
Order will instruct such Agent Member to deliver such shares against payment
therefor. Each Broker-Dealer that submitted a Hold Order in an Auction on
behalf of a customer also will advise such customer of the Applicable Rate for
the next Dividend Period for the AMPS. The Auction Agent will record each
transfer of shares of AMPS on the record book of Existing Holders to be
maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the day
after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of shares of AMPS as determined in such
Auction. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment in same-day funds. If the
procedures of the Securities Depository applicable to AMPS shall be changed to
provide for payment in next-day funds, then purchasers may be required to make
payment in next-day funds. If the certificates for shares of AMPS are not held
by the Securities Depository or its nominee, payment will be made in same-day
funds to the Auction Agent against delivery of such certificates.
If any Existing Holder selling shares of AMPS in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased shares
of AMPS in such Auction may deliver to such person a number of whole shares of
AMPS that is less than the number of shares that otherwise was to be purchased
by such person. In such event, the number of shares of AMPS to be so delivered
will be determined by such Broker-Dealer. Delivery of such lesser number of
shares will constitute good delivery. Each Broker-Dealer Agreement also will
provide that neither the Fund nor the Auction Agent will have responsibility
or liability with respect to the failure of a Potential Beneficial Owner,
Beneficial Owner or their respective Agent Members to deliver shares of AMPS
or to pay for shares of AMPS purchased or sold pursuant to an Auction or
otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Fund to each Broker-Dealer on the basis of the purchase price
of shares of AMPS placed by such Broker-Dealer at such Auction. The service
charge (i) for any 7-Day Dividend Period shall be payable at the annual rate
of 0.25% of the purchase price of the shares of AMPS placed by such Broker-
Dealer in any such Auction and (ii) for any Special Dividend Period shall be
determined by mutual consent of the Fund and any such Broker-Dealer or Broker-
Dealers and shall be based upon a selling concession that would be applicable
to an underwriting of fixed or variable rate preferred shares with a similar
final maturity or variable rate dividend period, respectively, at the
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commencement of the Dividend Period with respect to such Auction. For the
purposes of the preceding sentence, shares of AMPS will be placed by a Broker-
Dealer if such shares were (i) the subject of Hold Orders deemed to have been
made by Beneficial Owners that were acquired by such Beneficial Owners through
such Broker-Dealer or (ii) the subject of the following Orders submitted by
such Broker-Dealer: (A) a Submitted Bid of a Beneficial Owner that resulted in
such Beneficial Owner continuing to hold such shares as a result of the
Auction, (B) a Submitted Bid of a Potential Beneficial Owner that resulted in
such Potential Beneficial Owner purchasing such shares as a result of the
Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders
in Auctions for its own account, unless the Fund notifies all Broker-Dealers
that they no longer may do so; provided that Broker-Dealers may continue to
submit Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for
its own account in any Auction of any series of AMPS, it may have knowledge of
Orders placed through it in that Auction and therefore have an advantage over
other Bidders, but such Broker-Dealer would not have knowledge of Orders
submitted by other Broker-Dealers in that Auction.
The Broker-Dealers intend to maintain a secondary trading market in the AMPS
outside of Auctions; however, they have no obligation to do so and there can
be no assurance that a secondary market for the AMPS will develop or, if it
does develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the
trade by the Broker-Dealers). The AMPS will not be registered on any stock
exchange or on any automated quotation system. An increase in the level of
interest rates, particularly during any Long-Term Dividend Period, likely will
have an adverse effect on the secondary market price of the AMPS, and a
selling shareholder may sell AMPS between Auctions at a price per share of
less than $25,000.
DIVIDENDS
General. The holders of shares of each series of AMPS will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund, out
of funds legally available therefor, cumulative cash dividends on their
shares, at the Applicable Rate determined as set forth below under
"Determination of Dividend Rate," payable on the respective dates set forth
below. Dividends on the shares of AMPS so declared and payable shall be paid
(i) in preference to and in priority over any dividends so declared and
payable on the Common Stock, and (ii) to the extent permitted under the Code
and to the extent available, out of net tax-exempt income earned on the Fund's
investments. Generally, dividends on shares of AMPS, to the extent that they
are derived from interest paid on Municipal Bonds, will be exempt from Federal
income taxes, subject to possible application of the alternative minimum tax.
See "Taxes."
Dividends on the shares of AMPS will accumulate from the date on which the
Fund originally issues the shares of AMPS (the "Date of Original Issue") and
will be payable on each series of AMPS on the dates described below. Dividends
on shares of each series of AMPS with respect to the Initial Dividend Period
shall be payable on the Initial Dividend Payment Date with respect to each
series of AMPS. Following the Initial Dividend Payment Date for each series of
AMPS, dividends on each series of AMPS will be payable, at the option of the
Fund, either (i) with respect to any 7-Day Dividend Period and any Short Term
Dividend Period of 35 or fewer days, on the day next succeeding the last day
thereof or (ii) with respect to any Short Term Dividend Period of more than 35
days and with respect to any Long Term Dividend Period, monthly on the first
Business Day of each calendar month during such Short Term Dividend Period or
Long Term Dividend Period and on the day next succeeding the last day thereof
(each such date referred to in clause (i) or (ii) being referred to herein as
a "Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, (i) the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date if such Normal
Dividend Payment Date is a Monday, Tuesday, Wednesday or Thursday, or (ii) the
Dividend Payment Date shall be the first Business Day next preceding such
Normal Dividend Payment Date if such Normal Dividend Payment Date is a Friday.
Thus, following the Initial Dividend Payment Date for each series of AMPS,
dividends generally will be payable (in the case of Dividend Periods which are
not Special Dividend Periods) on each succeeding in the case of Series A
AMPS and on each succeeding
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in the case of Series B AMPS. Although any particular Dividend Payment
Date may not occur on the originally scheduled date because of the exceptions
discussed above, the next succeeding Dividend Payment Date, subject to such
exceptions, will occur on the next following originally scheduled date. If for
any reason a Dividend Payment Date cannot be fixed as described above, then
the Board of Directors shall fix the Dividend Payment Date. The Board of
Directors by resolution may change a Dividend Payment Date if such change does
not adversely affect the contract rights of the holders of shares of AMPS set
forth in the Charter. The Initial Dividend Period, 7-Day Dividend Periods and
Special Dividend Periods are hereinafter sometimes referred to as "Dividend
Periods." Each dividend payment date determined as provided above is
hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which holder is
expected to be the nominee of the Securities Depository. See "Description of
AMPS--The Auction--Securities Depository." The Securities Depository will
credit the accounts of the Agent Members of the Existing Holders in accordance
with the Securities Depository's normal procedures which provide for payment
in same-day funds. The Agent Member of an Existing Holder will be responsible
for holding or disbursing such payments on the applicable Dividend Payment
Date to such Existing Holder in accordance with the instructions of such
Existing Holder. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend
Payment Date, to the nominee of the Securities Depository. Any dividend
payment made on shares of AMPS first shall be credited against the earliest
declared but unpaid dividends accumulated with respect to such series.
Holders of shares of AMPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described under "Additional Dividends" and "Non-Payment Period; Late
Charge" below. No interest will be payable in respect of any dividend payment
or payments on the shares of AMPS which may be in arrears.
The amount of cash dividends per share of any series of AMPS payable (if
declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period and
each Dividend Payment Date of each Short Term Dividend Period shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and for which dividends
are payable on such Dividend Payment Date and the denominator of which will be
365, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of cash dividends per share of AMPS payable (if declared) on any Dividend
Payment Date shall be computed by multiplying the Applicable Rate for such
Dividend Period by a fraction, the numerator of which will be such number of
days in such part of such Dividend Period that such share was outstanding and
for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
Notification of Dividend Period. With respect to each Dividend Period that
is a Special Dividend Period, the Fund, at its sole option and to the extent
permitted by law, by telephonic and written notice (a "Request for Special
Dividend Period") to the Auction Agent and to each Broker-Dealer, may request
that the next succeeding Dividend Period for a series of AMPS will be a number
of days (other than seven), evenly divisible by seven, and not fewer than
seven nor more than 364 in the case of a Short Term Dividend Period or one
whole year or more but not greater than five years in the case of a Long Term
Dividend Period, specified in such notice, provided that the Fund may not give
a Request for Special Dividend Period (and any such request shall be null and
void) unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends, any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend
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Period, in the case of a Short Term Dividend Period, shall be given on or
prior to the second Business Day but not more than seven Business Days prior
to an Auction Date for the AMPS and, in the case of a Long Term Dividend
Period, shall be given on or prior to the second Business Day but not more
than 28 days prior to an Auction Date for the AMPS. Upon receiving such
Request for Special Dividend Period, the Broker-Dealers jointly shall
determine whether, given the factors set forth below, it is advisable that the
Fund issue a Notice of Special Dividend Period for a series of AMPS as
contemplated by such Request for Special Dividend Period and the Optional
Redemption Price of the AMPS during such Special Dividend Period and the
Specific Redemption Provisions and shall give the Fund and the Auction Agent
written notice (a "Response") of such determination by no later than the
second Business Day prior to such Auction Date. In making such determination,
the Broker-Dealers will consider (i) existing short-term and long-term market
rates and indices of such short-term and long-term rates, (ii) existing market
supply and demand for short-term and long-term securities, (iii) existing
yield curves for short-term and long-term securities comparable to the AMPS,
(iv) industry and financial conditions which may affect the AMPS, (v) the
investment objective of the Fund and (vi) the Dividend Periods and dividend
rates at which current and potential beneficial holders of the AMPS would
remain or become beneficial holders. If the Broker-Dealers shall not give the
Fund and the Auction Agent a Response by such second Business Day or if the
Response states that given the factors set forth above it is not advisable
that the Fund give a Notice of Special Dividend Period for the AMPS, the Fund
may not give a Notice of Special Dividend Period in respect of such Request
for Special Dividend Period. In the event the Response indicates that it is
advisable that the Fund give a Notice of Special Dividend Period for the AMPS,
the Fund, by no later than the second Business Day prior to such Auction Date,
may give a notice (a "Notice of Special Dividend Period") to the Auction
Agent, the Securities Depository and each Broker-Dealer, which notice will
specify (i) the duration of the Special Dividend Period, (ii) the Optional
Redemption Price as specified in the related Response and (iii) the Specific
Redemption Provisions, if any, as specified in the related Response. The Fund
also shall provide a copy of such Notice of Special Dividend Period to Moody's
and S&P. The Fund shall not give a Notice of Special Dividend Period, and, if
such Notice of Special Dividend Period shall have been given already, shall
give telephonic and written notice of its revocation (a "Notice of
Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction Date
if (x) either the 1940 Act AMPS Asset Coverage is not satisfied or the Fund
shall fail to maintain S&P Eligible Assets and Moody's Eligible Assets each
with an aggregate Discounted Value at least equal to the AMPS Basic
Maintenance Amount, in each case on each of the two Valuation Dates
immediately preceding the Business Day prior to the relevant Auction Date on
an actual basis and on a pro forma basis giving effect to the proposed Special
Dividend Period (using as a pro forma dividend rate with respect to such
Special Dividend Period the dividend rate which the Broker-Dealers shall
advise the Fund is an approximately equal rate for securities similar to the
AMPS with an equal dividend period), provided that, in calculating the
aggregate Discounted Value of Moody's Eligible Assets for this purpose, the
Moody's Exposure Period shall be deemed to be one week longer, (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction
Agent by the close of business on the third Business Day preceding the related
Auction Date or (z) the Broker-Dealers jointly advise the Fund that, after
consideration of the factors listed above, they have concluded that it is
advisable to give a Notice of Revocation. The Fund also shall provide a copy
of such Notice of Revocation to Moody's and S&P. If the Fund is prohibited
from giving a Notice of Special Dividend Period as a result of the factors
enumerated in clause (x), (y) or (z) above or if the Fund gives a Notice of
Revocation with respect to a Notice of Special Dividend Period, the next
succeeding Dividend Period for that series will be a 7-Day Dividend Period. In
addition, in the event Sufficient Clearing Bids are not made in any Auction or
an Auction is not held for any reason, the next succeeding Dividend Period
will be a 7-Day Dividend Period, and the Fund may not again give a Notice of
Special Dividend Period (and any such attempted notice shall be null and void)
until Sufficient Clearing Bids have been made in an Auction with respect to a
7-Day Dividend Period.
Determination of Dividend Rate. The dividend rate on shares of each series
of AMPS during the period from and including the Date of Original Issue for
each series of AMPS to but excluding the Initial Dividend Payment Date for
each series of AMPS (the "Initial Dividend Period") will be the rate per annum
set forth on the inside cover page hereof. Commencing on the Initial Dividend
Payment Date for each series of AMPS, the
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Applicable Rate on the shares of such series of AMPS for each Subsequent
Dividend Period, which Subsequent Dividend Period shall be a period commencing
on and including a Dividend Payment Date and ending on and including the
calendar day prior to the next Dividend Payment Date (or last Dividend Payment
Date in a Dividend Period if there is more than one Dividend Payment Date),
shall be equal to the rate per annum that results from the Auction with
respect to such Subsequent Dividend Period. The Initial Dividend Period and
Subsequent Dividend Period for each series of AMPS is referred to herein as a
"Dividend Period." Cash dividends shall be calculated as set forth above under
"Dividends--General."
Non-Payment Period; Late Charge. A Non-Payment Period will commence if the
Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
New York City time, on the Business Day preceding such Dividend Payment Date,
the full amount of any dividend on shares of AMPS payable on such Dividend
Payment Date or (ii) deposit, irrevocably in trust, in same-day funds, with
the Auction Agent by 12:00 noon, New York City time, (A) on such Dividend
Payment Date the full amount of any cash dividend on such shares (if declared)
payable on such Dividend Payment Date or (B) on any redemption date for shares
of AMPS called for redemption, the Mandatory Redemption Price per share of
such AMPS or, in the case of an optional redemption, the Optional Redemption
Price per share. Such Non-Payment Period will consist of the period commencing
on and including the aforementioned Dividend Payment Date or redemption date,
as the case may be, and ending on and including the Business Day on which, by
12:00 noon, New York City time, all unpaid cash dividends and unpaid
redemption prices shall have been so deposited or otherwise shall have been
made available to the applicable holders in same-day funds, provided that a
Non-Payment Period for any series of AMPS will not end unless the Fund shall
have given at least five days' but no more than 30 days' written notice of
such deposit or availability to the Auction Agent, the Securities Depository
and all holders of shares of AMPS of such series. Notwithstanding the
foregoing, the failure by the Fund to deposit funds as provided for by clauses
(ii) (A) or (ii) (B) above within three Business Days after any Dividend
Payment Date or redemption date, as the case may be, in each case to the
extent contemplated below, shall not constitute a "Non-Payment Period." The
Applicable Rate for each Dividend Period for shares of AMPS of any series,
commencing during a Non-Payment Period, will be equal to the Non-Payment
Period Rate; and each Dividend Period commencing after the first day of, and
during, a Non-Payment Period shall be a 7-Day Dividend Period. Any dividend on
shares of AMPS due on any Dividend Payment Date for such shares (if, prior to
the close of business on the second Business Day preceding such Dividend
Payment Date, the Fund has declared such dividend payable on such Dividend
Payment Date to the persons who held such shares as of 12:00 noon, New York
City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to such shares not paid to such persons when due
may be paid to such persons in the same form of funds by 12:00 noon, New York
City time, on any of the first three Business Days after such Dividend Payment
Date or due date, as the case may be, provided that such amount is accompanied
by a late charge calculated for such period of non-payment at the Non-Payment
Period Rate applied to the amount of such non-payment based on the actual
number of days comprising such period divided by 365. In the case of a willful
failure of the Fund to pay a dividend on a Dividend Payment Date or to redeem
any shares of AMPS on the date set for such redemption, the preceding sentence
shall not apply and the Applicable Rate for the Dividend Period commencing
during the Non-Payment Period resulting from such failure shall be the Non-
Payment Period Rate. For the purposes of the foregoing, payment to a person in
same-day funds on any Business Day at any time will be considered equivalent
to payment to that person in New York Clearing House (next-day) funds at the
same time on the preceding Business Day, and any payment made after 12:00
noon, New York City time, on any Business Day shall be considered to have been
made instead in the same form of funds and to the same person before 12:00
noon, New York City time, on the next Business Day. The Non-Payment Period
Rate initially will be 200% of the applicable Reference Rate (or 275% of such
rate if the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS), provided that the Board of Directors of the Fund shall have the
authority to adjust, modify, alter or change from time to time the initial
Non-Payment Period Rate if the Board of Directors of the Fund determines and
Moody's and S&P (and any Substitute Rating Agency in lieu of Moody's or S&P in
the event either of such parties shall not
44
<PAGE>
rate the AMPS) advise the Fund in writing that such adjustment, modification,
alteration or change will not adversely affect their then-current ratings on
the AMPS.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on shares of Common
Stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, as applicable (and after giving effect thereto),
asset coverage (as defined in the 1940 Act) with respect to the outstanding
shares of AMPS would be less than 200% (or such other percentage as in the
future may be required by law). The Fund estimates that, based on the
composition of its portfolio at September , 1998, asset coverage with respect
to shares of AMPS would be approximately % immediately after the issuance
of the shares of AMPS offered hereby. Under the Code, the Fund, among other
things, must distribute at least 90% of its investment company taxable income
each year in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases under certain circumstances may impair the Fund's
ability to maintain such qualification. See "Taxes."
Upon any failure to pay dividends on shares of AMPS for two years or more,
the holders of the shares of AMPS will acquire certain additional voting
rights. See "Voting Rights" below. Such rights shall be the exclusive remedy
of the holders of shares of AMPS upon any failure to pay dividends on shares
of the Fund.
For so long as any shares of AMPS are outstanding, the Fund will not
declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, Common Stock or other stock, if any,
ranking junior to shares of AMPS as to dividends or upon liquidation) in
respect of Common Stock or any other stock of the Fund ranking junior to or on
a parity with shares of AMPS as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any shares
of Common Stock or any other such junior stock (except by conversion into or
exchange for stock of the Fund ranking junior to AMPS as to dividends and upon
liquidation) or any such parity stock (except by conversion into or exchange
for stock of the Fund ranking junior to or on a parity with AMPS as to
dividends and upon liquidation), unless (A) immediately after such
transaction, the Fund would have S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount, and the 1940 Act AMPS Asset Coverage (see
"Asset Maintenance" and "Redemption" below) would be satisfied, (B) full
cumulative dividends on shares of AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid on or before the date of such
declaration or payment has been paid and (D) the Fund has redeemed the full
number of shares of AMPS required to be redeemed by any provision for
mandatory redemption contained in the Articles Supplementary.
Additional Dividends. If the Fund retroactively allocates any capital gains
or other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
above under "The Auction--Auction Date; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividends," which may only
happen when such allocation is made as a result of the redemption of all or a
portion of the outstanding shares of AMPS or the liquidation of the Fund (the
amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Fund, within 90 days (and generally within 60 days) after
the end of the Fund's fiscal year for which a Retroactive Taxable Allocation
is made, will provide notice thereof to the Auction Agent and to each holder
of shares (initially Cede as nominee of the Securities Depository) during such
fiscal year at such holder's address as the same appears or last appeared on
the stock books of the Fund. The Fund, within 30 days after such notice is
given to the Auction Agent, will pay to the Auction Agent (who then will
distribute to such holders of shares of AMPS), out of funds legally available
therefor, an amount equal to the aggregate Additional Dividend (as defined
below) with respect to all Retroactive Taxable Allocations made to such
holders during the fiscal year in question. See "Taxes."
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal, New
45
<PAGE>
York State and New York City income tax consequences) from the aggregate of
both the Retroactive Taxable Allocations and the Additional Dividend to be
equal to the dollar amount of the dividends which would have been received by
such holder if the amount of the aggregate Retroactive Taxable Allocations had
been excludable from the gross income of such holder. Such Additional Dividend
shall be calculated (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of AMPS is subject to the
Federal alternative minimum tax with respect to dividends received from the
Fund; and (iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each holder of shares of AMPS at the greater of: (a)
the maximum combined marginal regular Federal, New York State and New York
City individual income tax rate applicable to ordinary income or capital gains
depending on the taxable character of the distribution (including any surtax);
or (b) the maximum combined marginal regular Federal, New York State and New
York City corporate income tax rate applicable to ordinary income or capital
gains depending on the taxable character of the distribution (taking into
account in both (a) and (b) the Federal income tax deductibility of state
taxes paid or incurred but not any phase out of, or provision limiting,
personal exemptions, itemized deductions, or the benefit of lower tax brackets
and assuming the taxability of Federally tax-exempt dividends for corporations
for New York State and New York City income tax purposes). Although the Fund
generally intends to designate any Additional Dividend as an exempt-interest
dividend to the extent permitted by applicable law, it is possible that all or
a portion of any Additional Dividend will be taxable to the recipient thereof.
See "Taxes--Tax Treatment of Additional Dividends." The Fund will not pay a
further Additional Dividend with respect to any taxable portion of an
Additional Dividend.
If the Fund does not give advance notice of the amount of taxable income to
be included in a dividend on shares of AMPS in the related Auction, as
described above under "The Auction--Auction Date; Advance Notice of Allocation
of Taxable Income; Inclusion of Taxable Income in Dividends," the Fund may
include such taxable income in a dividend on shares of AMPS if it increases
the dividend by an additional amount calculated as if such income were a
Retroactive Taxable Allocation and the additional amount were an Additional
Dividend and notifies the Auction Agent of such inclusion at least five days
prior to the applicable Dividend Payment Date.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
1940 Act AMPS Asset Coverage. The Fund will be required under the Articles
Supplementary to maintain, with respect to shares of AMPS, as of the last
Business Day of each month in which any shares of AMPS are outstanding, asset
coverage of at least 200% with respect to senior securities which are stock,
including the shares of AMPS (or such other asset coverage as in the future
may be specified in or under the 1940 Act as the minimum asset coverage for
senior securities which are stock of a closed-end investment company as a
condition of paying dividends on its common stock) ("1940 Act AMPS Asset
Coverage"). If the Fund fails to maintain 1940 Act AMPS Asset Coverage and
such failure is not cured as of the last Business Day of the following month
(the "1940 Act Cure Date"), the Fund will be required under certain
circumstances to redeem certain of the shares of AMPS. See "Redemption" below.
The 1940 Act AMPS Asset Coverage immediately following the issuance of AMPS
offered hereby (after giving effect to the deduction of the sales load and
offering expenses for the shares of AMPS) will be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets less
liabilities not constituting
senior securities $
= = %
---------------------------- ------------
Senior securities $
representing indebtedness
plus liquidation value
of the shares of AMPS
</TABLE>
46
<PAGE>
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
each Business Day (a "Valuation Date") S&P Eligible Assets and Moody's
Eligible Assets each having in the aggregate a Discounted Value at least equal
to the AMPS Basic Maintenance Amount. If the Fund fails to meet such
requirement as of any Valuation Date and such failure is not cured on or
before the sixth Business Day after such Valuation Date (the "AMPS Basic
Maintenance Cure Date"), the Fund will be required under certain circumstances
to redeem certain of the shares of AMPS. Upon any failure to maintain the
required Discounted Value, the Fund will use its best efforts to alter the
composition of its portfolio to reattain a Discounted Value at least equal to
the AMPS Basic Maintenance Amount on or prior to the AMPS Basic Maintenance
Cure Date. See "Redemption."
The AMPS Basic Maintenance Amount as of any Valuation Date is defined as the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS outstanding on such Valuation Date multiplied by the sum of $25,000
and any applicable redemption premium attributable to the designation of a
Premium Call Period; (B) the aggregate amount of cash dividends (whether or
not earned or declared) that will have accumulated for each share of AMPS
outstanding to (but not including) the end of the current Dividend Period that
follows such Valuation Date in the event the then-current Dividend Period will
end within 49 calendar days of such Valuation Date or through the 49th day
after such Valuation Date in the event the then-current Dividend Period for
each series of AMPS will not end within 49 calendar days of such Valuation
Date; (C) in the event the then-current Dividend Period will end within 49
calendar days of such Valuation Date, the aggregate amount of cash dividends
that would accumulate at the Maximum Applicable Rate applicable to a Dividend
Period of 28 or fewer days on any shares of AMPS outstanding from the end of
such Dividend Period through the 49th day after such Valuation Date,
multiplied by the larger of the Moody's Volatility Factor and the S&P
Volatility Factor determined from time to time by Moody's and S&P,
respectively (except that if such Valuation Date occurs during a Non-Payment
Period, the cash dividend for purposes of calculation would accumulate at the
then-current Non-Payment Period Rate); (D) the amount of anticipated Fund
expenses for the 90 days subsequent to such Valuation Date (including any
premiums payable with respect to a Policy); (E) the amount of the Fund's
Maximum Potential Additional Dividend Liability as of such Valuation Date; and
(F) any current liabilities as of such Valuation Date to the extent not
reflected in any of (i) (A) through (i) (E) (including, without limitation,
and immediately upon determination, any amounts due and payable by the Fund
pursuant to repurchase agreements, any amounts payable for New York Municipal
Bonds or Municipal Bonds purchased as of such Valuation Date) less (ii) either
(A) the Discounted Value of any Fund assets, or (B) the face value of any of
the Fund's assets if such assets mature prior to or on the date of redemption
of AMPS or payment of a liability and are either securities issued or
guaranteed by the United States Government or Deposit Securities, in both
cases irrevocably deposited by the Fund for the payment of the amount needed
to redeem shares of AMPS subject to redemption or to satisfy any of (i) (B)
through (i) (F). For Moody's and S&P, the Fund shall include as a liability an
amount calculated semi-annually equal to 150% of the estimated cost of
obtaining other insurance guaranteeing the timely payment of interest on a
Moody's Eligible Asset and S&P Eligible Asset and principal thereof to
maturity with respect to Moody's Eligible Assets and S&P Eligible Assets that
(i) are covered by a Policy which provides the Fund with the option to obtain
such other insurance and (ii) are discounted by a Moody's Discount Factor or
S&P Discount Factor, as the case may be, determined by reference to the
insurance claims-paying ability rating of the issuer of such Policy. For
purposes of the foregoing, "Maximum Potential Additional Dividend Liability,"
as of any Valuation Date, means the aggregate amount of Additional Dividends
that would be due if the Fund were to make Retroactive Taxable Allocations,
with respect to any fiscal year, estimated based upon dividends paid and the
amount of undistributed realized net capital gains and other taxable income
earned by the Fund, as of the end of the calendar month immediately preceding
such Valuation Date and assuming such Additional Dividends are fully taxable.
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings have been based on criteria established in
connection with rating the AMPS. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of
a debt obligation, the higher the related discount factor) and the frequency
with which the relevant asset is marked
47
<PAGE>
to market. In no event shall the Discounted Value of any asset of the Fund
exceed its unpaid principal balance or face amount as of the date of
calculation. The Discount Factor relating to any asset of the Fund and the
AMPS Basic Maintenance Amount, the assets eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio and certain
definitions and methods of calculation relating thereto may be changed from
time to time by the Fund, without shareholder approval, but only in the event
the Fund receives written confirmation from S&P, Moody's and any Substitute
Rating Agency that any such changes would not impair the ratings then assigned
to the shares of AMPS by S&P or Moody's or any Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which the Fund
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount, the Fund is required to deliver to the Auction Agent, Moody's and S&P
a report with respect to the calculation of the AMPS Basic Maintenance Amount
and the value of its portfolio holdings as of the date of such failure (an
"AMPS Basic Maintenance Report"). Additionally, on or before the third
Business Day after the first day of a Special Dividend Period, the Fund will
deliver an AMPS Basic Maintenance Report to S&P and the Auction Agent. The
Fund also will deliver an AMPS Basic Maintenance Report as of the twenty-first
day of the last month of each fiscal quarter of the Fund (or, if such day is
not a Business Day, the next succeeding Business Day) on or before the third
Business Day after such day. Within ten Business Days after delivery of such
report relating to the twenty-first day of the last month of each fiscal
quarter of the Fund, the Fund will deliver a letter prepared by the Fund's
independent accountants regarding the accuracy of the calculations made by the
Fund in its most recent AMPS Basic Maintenance Report. Also, on or before 5:00
p.m., New York City time, on the first Business Day after shares of Common
Stock are repurchased by the Fund, the Fund will complete and deliver to S&P
and Moody's an AMPS Basic Maintenance Report as of the close of business on
such date that Common Stock is repurchased. If any such letter prepared by the
Fund's independent accountants shows that an error was made in the most recent
AMPS Basic Maintenance Report, the calculation or determination made by the
Fund's independent accountants will be conclusive and binding on the Fund.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided below, the Fund,
at its option, may redeem shares of AMPS of any series, in whole or in part,
out of funds legally available therefor, at the Optional Redemption Price per
share on any Dividend Payment Date; provided that no share of AMPS may be
redeemed at the option of the Fund during (a) the Initial Dividend Period with
respect to a series of shares or (b) a Non-Call Period to which such share is
subject. "Optional Redemption Price" means $25,000 per share of AMPS plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed for redemption plus any applicable redemption
premium, if any, attributable to the designation of a Premium Call Period. In
addition, holders of AMPS may be entitled to receive Additional Dividends in
the event of redemption of such AMPS to the extent provided herein. See
"Description of AMPS--Dividends--Additional Dividends." The Fund has the
authority to redeem the AMPS for any reason and may redeem all or part of the
outstanding shares of AMPS if it anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to holders of Common Stock for
any significant period of time than that obtainable if the Common Stock were
unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share,
shares of AMPS to the extent permitted under the 1940 Act and Maryland law, on
a date fixed by the Board of Directors, if the Fund fails to maintain S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or to satisfy
the 1940 Act AMPS Asset Coverage and such failure is not cured on or before
the AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. "Mandatory
Redemption Price" means $25,000 per share of AMPS plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption. In addition, holders of AMPS may be entitled to
receive Additional Dividends in the event of redemption of such AMPS to the
extent provided herein. See "Description of AMPS--Dividends--Additional
Dividends."
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<PAGE>
The number of shares of AMPS to be redeemed will be equal to the lesser of (a)
the minimum number of shares of AMPS the redemption of which, if deemed to
have occurred immediately prior to the opening of business on the Cure Date,
together with all other shares of the Preferred Stock subject to redemption or
retirement, would result in the Fund having S&P Eligible Assets and Moody's
Eligible Assets each with an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount or satisfaction of the 1940 Act AMPS
Asset Coverage, as the case may be, on such Cure Date (provided that, if there
is no such minimum number of shares the redemption of which would have such
result, all shares of AMPS then outstanding will be redeemed), and (b) the
maximum number of shares of AMPS, together with all other shares of Preferred
Stock subject to redemption or retirement, that can be redeemed out of funds
expected to be legally available therefor on such redemption date. In
determining the number of shares of AMPS required to be redeemed in accordance
with the foregoing, the Fund shall allocate the number required to be redeemed
which would result in the Fund having S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount or satisfaction of the 1940 Act AMPS Asset
Coverage, as the case may be, pro rata among shares of AMPS and other
Preferred Stock subject to redemption pursuant to provisions similar to those
set forth below; provided that, shares of AMPS which may not be redeemed at
the option of the Fund due to the designation of a Non-Call Period applicable
to such shares (A) will be subject to mandatory redemption only to the extent
that other shares are not available to satisfy the number of shares required
to be redeemed and (B) will be selected for redemption in an ascending order
of outstanding number of days in the Non-Call Period (with shares with the
lowest number of days to be redeemed first) and by lot in the event of shares
having an equal number of days in such Non-Call Period. The Fund is required
to effect such a mandatory redemption not later than 35 days after such Cure
Date, except that if the Fund does not have funds legally available for the
redemption of all of the required number of shares of AMPS which are subject
to mandatory redemption or the Fund otherwise is unable to effect such
redemption on or prior to 35 days after such Cure Date, the Fund will redeem
those shares of AMPS which it was unable to redeem on the earliest practicable
date on which it is able to effect such redemption.
General. If shares of AMPS of any series are to be redeemed, a notice of
redemption will be mailed to each record holder of such shares of AMPS
(initially Cede as nominee of the Securities Depository) and to the Auction
Agent not less than 17 nor more than 30 days prior to the date fixed for the
redemption thereof. Each notice of redemption will include a statement setting
forth: (i) the redemption date, (ii) the aggregate number of shares of AMPS of
such series to be redeemed, (iii) the redemption price, (iv) the place or
places where shares of AMPS of such series are to be surrendered for payment
of the redemption price, (v) a statement that dividends on the shares to be
redeemed will cease to accumulate on such redemption date (except that holders
may be entitled to Additional Dividends) and (vi) the provision of the
Articles Supplementary pursuant to which such shares are being redeemed. The
notice also will be published in The Wall Street Journal. No defect in the
notice of redemption or in the mailing or publication thereof will affect the
validity of the redemption proceedings, except as required by applicable law.
In the event that less than all of the outstanding shares of any series of
AMPS are to be redeemed, the shares to be redeemed will be selected by lot or
such other method as the Fund shall deem fair and equitable, and the results
thereof will be communicated to the Auction Agent. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder
of all shares of AMPS, and the Securities Depository will determine the number
of shares to be redeemed from the account of the Agent Member of each Existing
Holder. Each Agent Member will determine the number of shares to be redeemed
from the account of each Existing Holder for which it acts as agent. An Agent
Member may select for redemption shares from the accounts of some Existing
Holders without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares of such
series, the particular shares to be redeemed shall be selected by the Fund by
lot or by such other method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Fund's custodian bank for the benefit of the Auction Agent, Deposit
49
<PAGE>
Securities (with a right of substitution) having an aggregate Discounted Value
(utilizing in the case of S&P and S&P Exposure Period of 22 Business Days)
equal to the redemption payment for the shares of AMPS as to which notice of
redemption has been given, with irrevocable instructions and authority to pay
the redemption price to the record holders thereof, then upon the date of such
deposit or, if no such deposit is made, upon such date fixed for redemption
(unless the Fund shall default in making payment of the redemption price), all
rights of the holders of such shares called for redemption will cease and
terminate, except the right of such holders to receive the redemption price
thereof and any Additional Dividends, but without interest, and such shares no
longer will be deemed to be outstanding. The Fund will be entitled to receive,
from time to time, the interest, if any, earned on such Deposit Securities
deposited with the Auction Agent, and the holders of any shares so redeemed
will have no claim to any such interest. Any funds so deposited which are
unclaimed at the end of one year from such redemption date will be repaid,
upon demand, to the Fund, after which the holders of the shares of AMPS of
such series so called for redemption may look only to the Fund for payment
thereof.
So long as any shares of AMPS are held of record by the nominee of the
Securities Depository (initially Cede), the redemption price for such shares
will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it
to distribute the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for whom they are
acting as agent.
Notwithstanding the provisions for redemption described above, no shares of
AMPS shall be subject to optional redemption (i) unless all dividends in
arrears on the outstanding shares of AMPS, and all capital stock of the Fund
ranking on a parity with the AMPS with respect to the payment of dividends or
upon liquidation, have been or are being contemporaneously paid or declared
and set aside for payment and (ii) if redemption thereof would result in the
Fund's failure to maintain Moody's Eligible Assets or S&P Eligible Assets with
an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of all series of AMPS will be
entitled to receive, out of the assets of the Fund available for distribution
to shareholders, before any distribution or payment is made upon any shares of
Common Stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount
of any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the date of distribution, and after such payment the holders of
AMPS will be entitled to no other payments except for any Additional
Dividends. If such assets of the Fund shall be insufficient to make the full
liquidation payment on each outstanding series of AMPS and liquidation
payments on any other outstanding class or series of Preferred Stock of the
Fund ranking on a parity with the AMPS as to payment upon liquidation, then
such assets will be distributed among the holders of each such series of AMPS
and the holders of shares of such other class or series ratably in proportion
to the respective preferential amounts to which they are entitled. After
payment of the full amount of liquidation distribution to which they are
entitled, the holders of AMPS will not be entitled to any further
participation in any distribution of assets by the Fund except for any
Additional Dividends. A consolidation, merger or share exchange of the Fund
with or into any other entity or entities or a sale, whether for cash, shares
of stock, securities or properties, of all or substantially all or any part of
the assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of shares of AMPS will be entitled to one
vote per share on each matter submitted to a vote of stockholders and will
vote together with holders of shares of Common Stock as a single class.
In connection with the election of the Fund's directors, holders of shares
of AMPS and any other Preferred Stock, voting as a separate class, shall be
entitled at all times to elect two of the Fund's directors, and the
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<PAGE>
remaining directors will be elected by holders of shares of Common Stock and
shares of AMPS and any other Preferred Stock, voting together as a single
class. In addition, if at any time dividends on outstanding shares of AMPS
shall be unpaid in an amount equal to at least two full years' dividends
thereon or if at any time holders of any shares of Preferred Stock are
entitled, together with the holders of AMPS, to elect a majority of the
directors of the Fund under the 1940 Act, then the number of directors
constituting the Board of Directors automatically shall be increased by the
smallest number that, when added to the two directors elected exclusively by
the holders of shares of AMPS and any other Preferred Stock as described
above, would constitute a majority of the Board of Directors as so increased
by such smallest number, and at a special meeting of shareholders which will
be called and held as soon as practicable, and at all subsequent meetings at
which directors are to be elected, the holders of shares of AMPS and any other
Preferred Stock, voting as a separate class, will be entitled to elect the
smallest number of additional directors that, together with the two directors
which such holders in any event will be entitled to elect, constitutes a
majority of the total number of directors of the Fund as so increased. The
terms of office of the persons who are directors at the time of that election
will continue. If the Fund thereafter shall pay, or declare and set apart for
payment in full, all dividends payable on all outstanding shares of AMPS and
any other Preferred Stock for all past Dividend Periods, the additional voting
rights of the holders of shares of AMPS and any other Preferred Stock as
described above shall cease, and the terms of office of all of the additional
directors elected by the holders of shares of AMPS and any other Preferred
Stock (but not of the directors with respect to whose election the holders of
Common Stock were entitled to vote or the two directors the holders of shares
of AMPS and any other Preferred Stock have the right to elect in any event)
will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of AMPS and any other Preferred Stock, voting as
a separate class, will be required to (i) authorize, create or issue any class
or series of stock ranking prior to the AMPS or any other series of Preferred
Stock with respect to the payment of dividends or the distribution of assets
on liquidation, or (ii) amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to adversely affect any
of the contract rights expressly set forth in the Charter of holders of shares
of AMPS or any other Preferred Stock. To the extent permitted under the 1940
Act, in the event shares of more than one series of AMPS are outstanding, the
Fund shall not approve any of the actions set forth in clause (i) or (ii)
which adversely affects the contract rights expressly set forth in the Charter
of a holder of shares of a series of AMPS differently than those of a holder
of shares of any other series of AMPS without the affirmative vote of at least
a majority of votes entitled to be cast by holders of the shares of AMPS of
each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The Board of
Directors, however, without shareholder approval, may amend, alter or repeal
any or all of the various rating agency guidelines described herein in the
event the Fund receives confirmation from the rating agencies that any such
amendment, alteration or repeal would not impair the ratings then assigned to
shares of AMPS. Unless a higher percentage is provided for under "Description
of Capital Stock--Certain Provisions in the Charter," the affirmative vote of
a majority of the votes entitled to be cast by holders of outstanding shares
of AMPS and any other Preferred Stock, voting as a separate class, will be
required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act including, among other
things, changes in the Fund's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Objective and Policies." The class vote of holders of shares of AMPS and any
other Preferred Stock described above in each case will be in addition to a
separate vote of the requisite percentage of shares of Common Stock and shares
of AMPS and any other Preferred Stock, voting together as a single class,
necessary to authorize the action in question.
The foregoing voting provisions will not apply to any series of AMPS if, at
or prior to the time when the act with respect to which such vote otherwise
would be required shall be effected, such shares shall have been (i) redeemed
or (ii) called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
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<PAGE>
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares of Common Stock and outstanding shares of AMPS and any
other Preferred Stock, voting as a single class, and the majority of the
outstanding shares of AMPS and any other Preferred Stock, voting as a separate
class (which for this purpose and under the 1940 Act means the lesser of (i)
67% of the shares of each class of capital stock represented at a meeting at
which more than 50% of the outstanding shares of each class of capital stock
are represented or (ii) more than 50% of the outstanding shares of each class
of capital stock). The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies that invest in real estate or 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 in
accordance with is investment objective, policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on 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.
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<PAGE>
For so long as shares of AMPS are rated by Moody's, the Fund will not change
these additional investment restrictions unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of AMPS by Moody's.
The Fund has no intention to file a voluntary application for relief under
Federal bankruptcy law or any similar application under state law for so long
as the Fund is solvent and does not foresee becoming insolvent.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. Because of the affiliation of the Underwriter with the
Fund, the Fund is prohibited from engaging in certain transactions involving
the Underwriter 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 the Underwriter 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 the Underwriter 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 the Underwriter, 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, and Director thereof since 1993, President of Princeton
Services 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, 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.
53
<PAGE>
Terry K. Glenn (58)--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 (54)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
Donald C. Burke (38)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Kenneth A. Jacob (47)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997, Vice President of the
Investment Adviser since 19874. .
Robert A. DiMella, CFA (32)--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.
Roberto W. Roffo (32)--Vice President and Portfolio Manager (1)(2)--Vice
President of MLAM since 1996 and a Portfolio Manager with MLAM since 1992.
Gerald M. Richard (49)--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.
Alice A. Pellegrino (38)--Secretary (1)(2)--Attorney with MLAM since 1997;
Associate with Kirkpatrick & Lockhart LLP from 1992 to 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 connection with the election of the Fund's Directors, holders of shares
of AMPS and other Preferred Stock, voting as a separate class, are entitled to
elect two of the Fund's Directors, and the remaining Directors will be elected
by holders of Common Stock and Preferred Stock voting together as a single
class. Messrs. May and Perold have been designated as the Directors to be
elected by holders of the Preferred Stock. 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 (23 registered investment
companies consisting of 41 portfolios); Mr. London (23 registered
investment companies consisting of 41 portfolios); Mr. Martin (23
registered investment companies consisting of 41 portfolios); Mr. May (23
registered investment companies consisting of 41 portfolios); and Mr.
Perold (23 registered investment companies consisting of 41 portfolios).
54
<PAGE>
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 August 1998, the Asset Management Group had a
total of approximately $473 billion in investment company and other portfolio
assets under management (approximately $38 billion of which was invested in
municipal securities). This amount 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 direction 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 issuance of
shares of Preferred Stock, minus the sum of accrued liabilities of the Fund
and accumulated dividends on the shares of Preferred Stock). For purposes of
this calculation, average weekly net assets are determined at the end of each
month on the basis of the average net assets of the Fund for each week during
the month. The assets for each weekly period are determined by averaging the
net assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, 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 (the "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
55
<PAGE>
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 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 affiliate 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 which provided supplemental
investment research to the Investment Adviser, including the Underwriter, 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 transactions with dealers acting as principal for their
own account, the Fund will not deal with affiliated persons, including the
Underwriter 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 the
56
<PAGE>
Underwriter 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 instruments in individually negotiated
transactions with the issuer. 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.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income
and 90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The IRS, in a revenue ruling, held that certain auction rate preferred stock
would be treated as stock for Federal income tax purposes. The terms of the
AMPS are substantially similar, but not identical, to the auction rate
preferred stock discussed in the revenue ruling, and in the opinion of Brown &
Wood LLP, counsel to the Fund, the shares of AMPS will constitute stock of the
Fund and distributions with respect to shares of AMPS (other than
distributions in redemption of shares of AMPS subject to Section 302(b) of the
Code) will constitute dividends to the extent of the Fund's current and
accumulated earnings and profits as calculated for Federal income tax
purposes. Nevertheless, it is possible that the IRS might take a contrary
position, asserting, for example, that the shares of AMPS constitute debt of
the Fund. If this position were upheld, the discussion of the treatment of
distributions below would not apply. Instead, distributions by the Fund to
holders of shares of AMPS would constitute interest, whether or not they
exceeded the earnings and profits of the Fund, would be included in full in
the income of the recipient and would be taxed as ordinary income. Counsel
believes that such a position, if asserted by the IRS, would be unlikely to
prevail.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
57
<PAGE>
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 which
are attributable to interest on tax-exempt obligations and designated by the
Fund as exempt-interest dividends in a written notice mailed to the Fund's
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 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/or by cities other than
New York City will realize a lower after-tax rate of return than New York
State and/or New York 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 and will be exempt to a lesser degree by other
cities. The Fund will inform shareholders annually as to the portion of the
Fund's distributions that constitutes exempt-interest dividends and the
portion that is exempt from New York State and New York City personal income
tax. 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
or 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 distributions are
considered ordinary income for Federal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares and, for New York State and New York City
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 ordinary income dividends or capital gain dividends as well as the amounts
of capital gain dividends in the different categories of capital gain referred
to above. Distributions by the Fund, whether from exempt-interest 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 which was declared in the previous
October, November or
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<PAGE>
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 IRS has taken the position in a revenue ruling that if a RIC has two or
more classes of shares, it may designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including exempt interest 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. Thus, the Fund is required to
allocate a portion of its net capital gains (including the additional
categories of capital gains, discussed above) and other taxable income to the
shares of AMPS of each series. The Fund generally will notify the Auction
Agent of the amount of any net capital gains and other taxable income to be
included in any dividend on shares of AMPS prior to the Auction establishing
the Applicable Rate for such dividend. Except for the portion of any dividend
that it informs the Auction Agent will be treated as capital gains or other
taxable income, the Fund anticipates that the dividends paid on the shares of
AMPS will constitute exempt-interest dividends. The amount of net capital
gains and ordinary income allocable to shares of AMPS (the "taxable
distribution") will depend upon the amount of such gains and income realized
by the Fund and the total dividends paid by the Fund on shares of Common Stock
and shares of AMPS during a taxable year, but the taxable distribution
generally is not expected to be significant.
In the opinion of Brown & Wood LLP, counsel to the Fund, under current law
the manner in which the Fund intends to allocate items of tax-exempt income,
net capital gains (including additional categories of capital gain) and other
taxable income, if any, among shares of Common Stock and shares of the two
series of AMPS will be respected for Federal income tax purposes. However, the
tax treatment of Additional Dividends may affect the Fund's calculation of
each class' allocable share of capital gains and other taxable income. See
"Tax Treatment of Additional Dividends." In addition, there is currently no
direct guidance from the IRS or other sources specifically addressing whether
the Fund's method for allocating tax-exempt income, net capital gains
(including additional categories of capital gain) and other taxable income
among shares of Common Stock and shares of the two series of AMPS will be
respected for Federal income tax purposes, and it is possible that the IRS
could disagree with counsel's opinion and attempt to reallocate the Fund's net
capital gains or other taxable income. In the event of a reallocation, some of
the dividends identified by the Fund as exempt-interest dividends to holders
of shares of AMPS may be recharacterized as additional capital gains or other
taxable income. In the event of such recharacterization, the Fund would not be
required to make payments to such shareholders to offset the tax effect of
such reallocation. In addition, a reallocation may cause the Fund to be liable
for income tax and excise tax on any reallocated taxable income. Brown & Wood
llp has advised the Fund that, in its opinion, if the IRS were to challenge in
court the Fund's allocations of income and gain, the IRS would be unlikely to
prevail. A holder should be aware, however, that the opinion of Brown & Wood
llp represents only its best legal judgment and is not binding on the IRS or
the courts.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference" which could subject certain investors in such
bonds, including shareholders of the Fund, to an 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 which 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.
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<PAGE>
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 AMPS are outstanding the Fund does not meet
the asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of Common Stock until the asset coverage is
restored. See "Description of AMPS--Restrictions on Dividends and Other
Payments." This may prevent the Fund from distributing at least 90% of its net
income, and may, therefore, jeopardize the Fund's qualification for taxation
as a RIC. Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund, in its sole discretion, may redeem shares of AMPS in order to
maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a RIC.
See "Description of AMPS--Redemption." 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 IRS 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 IRS would agree that dividends on the Preferred Stock
are not preferential. If the IRS successfully disallowed the dividends paid
deduction for dividends on the Preferred Stock, the Fund could lose the
benefit of the special treatment afforded RICs under the Code. In this case,
dividends on the Common Stock would not be exempt from Federal income taxes.
Additionally, the Fund would be subject to the alternative minimum tax.
Under certain Code provisions, some taxpayers may be subject to a 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.
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.
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 ADDITIONAL DIVIDENDS
If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of shares of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS--Dividends--Additional
Dividends." The Federal income tax consequences of Additional Dividends under
existing law are uncertain. The Fund intends to treat a holder as receiving a
dividend distribution in the amount of any Additional Dividend only as and
when such Additional Dividend is paid. An Additional Dividend generally will
be designated by the Fund as an exempt-interest divided except as otherwise
required by applicable
60
<PAGE>
law. However, the IRS may assert that all or part of an Additional Dividend is
a taxable dividend either in the taxable year for which the Retroactive
Taxable Allocation is made or in the taxable year in which the Additional
Dividend is paid.
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 and the Treasury Regulations
promulgated thereunder, and the applicable New York State and New York City
tax laws. The Code, and the Treasury Regulations and New York State and New
York City tax laws are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes.
NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the NYSE (generally, 4:00 p.m. New York time)
on each day during which the NYSE is open for trading. For purposes of
determining the net asset value of a share of Common Stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
AMPS is divided by the total number of shares of Common Stock outstanding at
such time. Expenses, including the fees payable to 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
61
<PAGE>
pricing service is a fair method of determining the valuation of portfolio
securities. Obligations with remaining maturities of 60 days or less are
valued at amortized cost, unless this method no longer produces fair
valuations. Positions in futures contracts are valued at closing prices for
such contracts established by the exchange on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Directors.
The Fund determines and makes available for publication the net asset value
of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares were 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. In this regard, the Board of Directors has reclassified shares
of unissued Common Stock as AMPS. For a description of the shares of AMPS, see
"Description of AMPS."
The following table shows the amount of (i) capital stock authorized, (ii)
capital stock held by the Fund for its own account and (iii) capital stock
outstanding for each class of authorized securities of the Fund as of October
, 1998.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
AMOUNT HELD (EXCLUSIVE OF
BY FUND AMOUNT HELD
AMOUNT FOR ITS OWN BY FUND FOR ITS
TITLE OF CLASS AUTHORIZED ACCOUNT OWN ACCOUNT)
- -------------- ---------- ----------- ---------------
<S> <C> <C> <C>
Common Stock............................. -0-
Auction Market Preferred Stock........... -0- -0-
</TABLE>
COMMON STOCK
Holders of Common Stock are entitled to share equally in dividends declared
by the Board of Directors payable to holders of Common Stock and in the net
assets of the Fund available for distribution to holders of Common Stock after
payment of the preferential amounts payable to holders of any outstanding
Preferred Stock. Neither holders of Common Stock nor holders of Preferred
Stock have pre-emptive or conversion rights and shares of Common Stock are not
redeemable. The outstanding shares of Common Stock are fully paid and non-
assessable.
Holders of Common Stock are entitled to one vote for each share held and
will vote with the holders of any outstanding shares of AMPS or other
Preferred Stock on each matter submitted to a vote of holders of Common Stock,
except as described under "Description of AMPS--Voting Rights."
Shareholders are entitled to one vote for each share held. The shares of
Common Stock, AMPS and any other Preferred Stock do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of Common
Stock, AMPS and any other Preferred Stock voting for the election of Directors
can elect all of the Directors standing for election by such holders, and, in
such event, the holders of the remaining shares of Common Stock, AMPS and any
other Preferred Stock will not be able to elect any of such Directors.
So long as any shares of AMPS or any other Preferred Stock are outstanding,
holders of Common Stock will not be entitled to receive any dividends of or
other distributions from the Fund unless all accumulated
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<PAGE>
dividends on outstanding shares of AMPS and any other Preferred Stock have
been paid, and unless asset coverage (as defined in the 1940 Act) with respect
to such AMPS and any other Preferred Stock would be at least 200% after giving
effect to such distributions. See "Description of AMPS--Restrictions on
Dividends and Other Payments."
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The shares of Common Stock commenced trading on the NYSE on September ,
1998. At , 1998, the net asset value per share of Common Stock was $ ,
and the closing price per share of Common Stock on the NYSE was $ .
PREFERRED STOCK
Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of shares of AMPS. See "Description of AMPS." Under the 1940
Act, the Fund is permitted to have outstanding more than one series of
Preferred Stock as long as no single series has priority over another series
as to the distribution of assets of the Fund or the payment of dividends.
Neither holders of Common Stock nor holders of Preferred Stock have pre-
emptive rights to purchase any shares of AMPS or any other Preferred Stock
that might be issued. It is anticipated that the net asset value per share of
the AMPS will equal its original purchase price per share plus accumulated
dividends per share.
CERTAIN PROVISIONS OF THE CHARTER
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving 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 of the
holders of capital stock may be removed only by action of such holders, and a
director elected by the holders of AMPS and any other Preferred Stock may be
removed only by action of AMPS and any other Preferred Stock.
In addition, the Charter requires the favorable vote of the holders of at
least 66 2/3% of the Fund's shares 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 any other corporation,
(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 at least two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by shareholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing would also require the favorable vote of at least a majority of the
Fund's shares of Preferred Stock then entitled to be voted, including the
AMPS, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
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 the AMPS and any other Preferred Stock) entitled to be voted on the
matter, voting as a single class (or a majority of such shares if the
amendment was previously approved, adopted or authorized by at least two-
thirds of the total number of Directors fixed in
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<PAGE>
accordance with the by-laws), and, the affirmative vote of at least a majority
of outstanding shares of Preferred Stock of the Fund (including the AMPS),
voting as a separate class. Such a vote also would satisfy a separate
requirement in the 1940 Act that the change be approved by the 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. Conversion to an open-
end investment company would also require redemption of all outstanding shares
of Preferred Stock (including the AMPS) and would require changes in certain
of the Fund's investment policies and restrictions, such as those relating to
the issuance of senior securities, the borrowing of money and the purchase of
illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Commission
for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custody agreement with State
Street Bank and Trust Company, 225 Franklin St., Boston, Massachusetts, 02110.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of a
Purchase Agreement with the Fund and the Investment Adviser, to purchase from
the Fund all of the shares of AMPS of each series offered hereby. 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 AMPS to the public at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriter may allow, and
such dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. The sales load of $ per share is
equal to % of the initial public offering price. Investors must pay for any
AMPS purchased in the initial public offering on or before October , 1998.
The Underwriter has agreed to pay the Fund an amount to cover expenses
incurred in connection with the issuance and sale of the AMPS offered hereby
(estimated to be $ ) and other expenses.
The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"Description of AMPS--The Auction--General--Broker-Dealer Agreements" and will
be entitled to fees for services as a Broker-Dealer as set forth under
"Description of AMPS--Broker-Dealers." The Underwriter also may provide
information to be used in ascertaining the Reference Rate.
The Fund anticipates that the Underwriter from time to time may act as a
broker in connection with the execution of the Fund's 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.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities including liabilities under the Securities Act of
1933, as amended.
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<PAGE>
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of AMPS will be IBJ Schroder Bank & Trust Company, One State Street, New York,
New York 10004. The transfer agent, dividend disbursing agent and shareholder
servicing agent for the shares of Common Stock is State Street Bank and Trust
Company, 225 Franklin St., Boston, Massachusetts, 02110.
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby will be
passed upon for the Fund and the Underwriter by Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557.
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.
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 AMPS 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
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<PAGE>
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 Year 2000 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.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
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
statement of assets, liabilities and capital is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this
statement of assets, liabilities and capital 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 statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
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.
Princeton, New Jersey
, 1998
67
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 1998
<TABLE>
<S> <C>
ASSETS
Cash............................................................. $100,005
Deferred organization expenses (Note 1)..........................
--------
Total assets...................................................
--------
LIABILITIES
Accrued expenses (Note 1)........................................
--------
NET ASSETS......................................................... $100,005
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares
authorized; 6,667 shares issued and outstanding (Note 1)........ $ 667
Paid in Capital in excess of par................................. 99,338
--------
Total Capital--Equivalent to $15.00 net asset value
per share of common stock (Note 1)............................ $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on 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 five-year period 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.
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GLOSSARY
" "AA' (AA) Composite Commercial Paper Rate," on any Valuation Date, means
(i) the Interest Equivalent of the rate on commercial paper placed on behalf
of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or
the equivalent of such rating by another nationally recognized statistical
rating organization, as such rate is made available on a discount basis or
otherwise by the Federal Reserve Bank of New York for the Business Day
immediately preceding such date, or (ii) in the event that the Federal Reserve
Bank of New York does not make available such a rate, then the arithmetic
average of the Interest Equivalent of the rate on commercial paper placed on
behalf of such issuers, as quoted on a discount basis or otherwise by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on
the Business Day immediately preceding such date. If one of the Commercial
Paper Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7
or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 60-day and
90-day rates on such commercial paper; (iv) 85 or more days but fewer than 99
days, such rate shall be the Interest Equivalent of the 90-day rate on such
commercial paper; (v) 99 or more days but fewer than 120 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 90-day and 120-day
rates on such commercial paper; (vi) 120 or more days but fewer than 141 days,
such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate
on such commercial paper.
"Additional Dividend" has the meaning set forth on page of this
Prospectus.
"Agent Member" means the member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of AMPS or on behalf of
a Potential Beneficial Owner.
"AMPS" means the Auction Market Preferred Stock, Series A and the Auction
Market Preferred Stock, Series B, each with a par value of $.10 per share and
a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared),
of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page of this
Prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page of
this Prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page of this
Prospectus.
"Anticipation Notes" means the following New York Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page of this
Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
"Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of AMPS.
"Auction" means a periodic operation of the Auction Procedures.
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"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Directors of the Fund or a duly
authorized committee thereof enters into an agreement with the Fund to follow
the Auction Procedures for the purpose of determining the Applicable Rate and
to act as transfer agent, registrar, dividend disbursing agent and redemption
agent for the AMPS.
"Auction Agent Agreement" means the agreement entered into between the Fund
and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for the purpose of determining the
Applicable Rate.
"Auction Date" has the meaning set forth on page of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Appendix D to this Prospectus.
"Available AMPS" has the meaning specified in Paragraph 10(d)(i) of the
Auction Procedures.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Bid" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Bidder" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Board of Directors" or "Board" means the Board of Directors of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker-Dealer, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares of
AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including the Articles Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Fund
from time to time may appoint or, in lieu thereof, their respective affiliates
and successors.
"Common Stock" means the Common Stock, par value $.10 per share, of the
Fund.
"Date of Original Issue" means, with respect to each share of AMPS, the date
on which such share first is issued by the Fund.
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"Deposit Securities" means cash and New York Municipal Bonds and Municipal
Bonds rated at least A2 (having a remaining maturity of 12 months or less), P-
1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months
or less), A-1+ or SP-1+ by S&P.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount Factor,
as the case may be.
"Discounted Value" of any asset of the Fund means (i) with respect to an S&P
Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the lower of par and the quotient of the market value thereof divided
by the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page of this
Prospectus.
"Dividend Period" has the meaning set forth on page of this Prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of shares of AMPS
in the records of the Auction Agent.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Forward Commitment" has the meaning set forth on page of this
Prospectus.
"Fund" means MuniHoldings New York Insured Fund II, Inc., a Maryland
corporation that is the issuer of the AMPS.
"Hold Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Initial Dividend Payment Date" has the meaning, with respect to each series
of AMPS, set forth on page of this Prospectus.
"Initial Dividend Period" means, with respect to the AMPS, the period from
and including the Date of Original Issue to but excluding the Initial Dividend
Payment Date for each series of AMPS.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing
security.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page of this
Prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning specified under "Description of
AMPS--The Auction--Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders" in the Prospectus.
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"Maximum Potential Additional Dividend Liability" has the meaning set forth
on page of this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page of this
Prospectus.
"Moody's Eligible Assets" has the meaning set forth on page of this
Prospectus.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and initially shall be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth on page of this
Prospectus.
"Moody's Volatility Factor" means 272% as long as there has been no increase
enacted to the Marginal Tax Rate. If such an increase is enacted but not yet
implemented, the Moody's Volatility Factor shall be as follows:
% CHANGE IN MOODY'S
MARGINAL TAX RATE VOLATILITY FACTOR
----------------- -----------------
greater than or equal 5%................ 292%
greater than 5% but less than or equal 10%............... 313%
greater than 10% but less than or equal 15%.............. 338%
greater than 15% but less than or equal 20%.............. 364%
greater than 20% but less than or equal 25%.............. 396%
greater than 25% but less than or equal 30%.............. 432%
greater than 30% but less than or equal 35%.............. 472%
greater than 35% but less than or equal 40%.............. 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.
"Municipal Bonds" has the meaning set forth on page of this Prospectus.
"Municipal Index" has the meaning set forth on page of this Prospectus.
"New York Municipal Bonds" has the meaning set forth on page of this
Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page of this
Prospectus.
"1940 Act Cure Date" has the meaning set forth on page of this
Prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page of this
Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page of this
Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page of
this Prospectus.
"Optional Redemption Price" has the meaning set forth on page of this
Prospectus.
"Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"Policy" means an insurance policy purchased by the Fund which guarantees
the payment of principal and interest on specified New York Municipal Bonds or
Municipal Bonds during the period in which such New York Municipal Bonds or
Municipal Bonds are owned by the Fund; provided, however, that, as long as the
AMPS are rated by Moody's and S&P, the Fund will not obtain any Policy unless
Moody's and S&P advise the Fund in writing that the purchase of such Policy
will not adversely affect their then-current rating on the AMPS.
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"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other person as may
be permitted by the Fund, including any Existing Holder, who may be interested
in acquiring shares of AMPS (or, in the case of an Existing Holder, additional
shares of AMPS).
"Preferred Stock" means Preferred Stock, par value $.10 per share, of the
Fund.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Receivables for New York Municipal Bonds Sold," for purposes of determining
S&P Eligible Assets, has the meaning set forth on page of this Prospectus.
"Receivables for New York Municipal Bonds or Municipal Bonds Sold," for
purposes of determining Moody's Eligible Assets, has the meaning set forth on
page of this Prospectus.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable
"AA" Composite Commercial Paper Rate and the Taxable Equivalent of the Short
Term Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period,
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on page
of this Prospectus.
"Response" has the meaning set forth on page of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page of
this Prospectus.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
or its successors.
"S&P Discount Factor" has the meaning set forth on page of this
Prospectus.
"S&P Eligible Assets" has the meaning set forth on page of this
Prospectus.
"S&P Exposure Period" means the maximum period of time following a Valuation
Date, including the Valuation Date and the AMPS Basic Maintenance Cure Date,
that the Fund has under the Articles Supplementary to cure any failure to
maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount.
"S&P Hedging Transactions" has the meaning set forth on page of this
Prospectus.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" has the meaning set forth on page of this
Prospectus.
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"Special Dividend Period" has the meaning set forth on page of this
Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Fund, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of AMPS subject
to such Dividend Period shall not be subject to redemption at the option of
the Fund and (ii) a period (a "Premium Call Period"), consisting of a number
of whole years and determined by the Board of Directors of the Fund, after
consultation with the Auction Agent and the Broker-Dealers, during each year
of which the shares of AMPS subject to such Dividend Period shall be
redeemable at the Fund's option at a price per share equal to $25,000 plus
accumulated but unpaid dividends plus a premium expressed as a percentage of
$25,000, as determined by the Board of Directors of the Fund after
consultation with the Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning specified in Subsection 10(a)(x) of
the Auction Procedures.
"Submitted Bid" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Hold Order" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Submitted Order" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
"Submitted Sell Order" has the meaning specified in Subsection 10(d)(i) of
the Auction Procedures.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, or its respective affiliates and
successors, after consultation with the Fund, to act as a substitute rating
agency or substitute rating agencies, as the case may be, to determine the
credit ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning specified in Subsection 10(d)(i)
of the Auction Procedures.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date means
90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index"), or any successor index made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M., New
York City time, on such date by Kenny Information Systems Inc. or any
successor thereto, based upon 30-day yield evaluations at par of bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information
Systems Inc. or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57(a) (5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the Marginal Tax Rate (expressed as a decimal); provided, however, that
if the Kenny Index is not made so available by 8:30 A.M., New York City time,
on such date by Kenny Information Systems Inc. or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of
(A) the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal). The
Fund may not utilize a successor index to the Kenny Index unless Moody's and
S&P provide the Fund with written confirmation that the use of such successor
index will not adversely affect the then-current respective Moody's and S&P
ratings of the AMPS.
"Treasury Bonds" has the meaning set forth on page of this Prospectus.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate
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<PAGE>
is made available on a discount basis or otherwise by the Federal Reserve Bank
of New York in its Composite 3:30 P.M. Quotations for U.S. Government
Securities report for such Business Day, or (ii) if such yield as so
calculated is not available, the Alternate Treasury Bill Rate on such date.
"Alternate Treasury Bill Rate" on any date means the Interest Equivalent of
the yield as calculated by reference to the arithmetic average of the bid
price quotations of the actively traded Treasury Bill with a maturity most
nearly comparable to the length of the related Dividend Period, as determined
by bid price quotations as of any time on the Business Day immediately
preceding such date, obtained from at least three recognized primary U.S.
Government securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of
New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government securities dealers selected by
the Auction Agent.
"Valuation Date" has the meaning set forth on page of this Prospectus.
"Variation Margin" means, in connection with an outstanding financial
futures contract owned or sold by the Fund, the amount of cash or securities
paid to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such financial futures contract fluctuates.
"Winning Bid Rate" has the meaning specified in Subsection 10(d)(i) of the
Auction Procedures.
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APPENDIX A
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 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
A-1
<PAGE>
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 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
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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 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
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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.
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
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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.
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.
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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.
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.
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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 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.
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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 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.
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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.
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
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<PAGE>
$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 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
A-10
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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 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.
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<PAGE>
APPENDIX B
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.
B-1
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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.
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;
B-2
<PAGE>
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest rated issues only in small
degree. The Obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation. While
CC such debt will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition
or the taking of similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
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.
B-3
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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.
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+."
B-4
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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.
Ratings are placed on FitchAlert to notify investors of an
FitchAlert 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-5
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B
Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD DD D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization
of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential
for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
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.
B-6
<PAGE>
APPENDIX C
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix C constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix D hereto, as the case
may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of a Beneficial Owner, the number of shares, if
any, of AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on
behalf of a Potential Beneficial Owner, the number of shares, if any, of
AMPS to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number of shares of AMPS to be purchased
by all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers
(and the name of the Agent Member, if any, of each such Buyer's Broker-
Dealer) acting for one or more purchasers of such excess number of shares
of AMPS and the number of such shares to be purchased from one or more
Beneficial Owners on whose behalf such Broker-Dealer acted by one or more
Potential Beneficial Owners on whose behalf each of such Buyer's Broker-
Dealers acted;
(vi) if the aggregate number of shares of AMPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid exceeds the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order, the name or names of one or more Seller's Broker-Dealers (and
the name of the Agent Member, if any, of each such Seller's Broker-Dealer)
acting for one or more sellers of such excess number of shares of AMPS and
the number of such shares to be sold to one or more Potential Beneficial
Owners on whose behalf such Broker-Dealer acted by one or more Beneficial
Owners on whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the
AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or
its Agent Member) through the Securities Depository the amount necessary to
purchase the number of shares of AMPS to be purchased pursuant to such Bid
against receipt of such shares and advise such Potential Beneficial Owner
of the Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted
a Sell Order that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct such Beneficial Owner's Agent
Member to deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of shares of AMPS to
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<PAGE>
be sold pursuant to such Order against payment therefor and advise any such
Beneficial Owner that will continue to hold shares of AMPS of the
Applicable Rate for the next succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b) (i) above and any shares of AMPS received
by it pursuant to (b) (ii) above among the Potential Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners,
if any, on whose behalf such Broker-Dealer submitted Bids that were accepted
or Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by
the Auction Agent pursuant to (a) (v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall instruct
its Agent Member as provided in (b) (i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to the Agent Member of the Beneficial Owner
delivering shares to such Broker-Dealer pursuant to (b)(ii) above the
amount necessary to purchase such shares against receipt of such shares,
and (B) deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's Broker-
Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a) (vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b)(i) above against receipt of such
shares, and (B) deliver such shares through the Securities Depository to
the Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d) (i) above shall
instruct the Securities Depository to execute the transactions described in
(b) (i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d) (iii)
above, and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling shares of AMPS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of AMPS that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner.
In such event, the number of shares of AMPS to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall
represent any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
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APPENDIX D
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Articles
Supplementary relating to the AMPS, and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. The terms not
defined below are defined in the forepart of this Prospectus. Nothing
contained in this Appendix D constitutes a representation by the Fund that in
each Auction each party referred to herein actually will perform the
procedures described herein to be performed by such party.
PARAGRAPH 10(A) CERTAIN DEFINITIONS.
As used in this Paragraph 10, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned pursuant to this
Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i) below.
(vi) "Hold Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) and (ii)
whether the Fund has provided modification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS as follows:
<TABLE>
<CAPTION>
APPLICABLE
PERCENTAGE OF APPLICABLE
CREDIT RATINGS REFERENCE RATE-- PERCENTAGE OF
------------------------------ NO REFERENCE RATE--
MOODY'S S&P NOTIFICATION NOTIFICATION
---------------- ------------- ---------------- ---------------- --- ---
<S> <C> <C> <C> <C> <C>
"aa3" or higher AA- or Higher 110% 150%
"a3" or "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Fund shall take all reasonable action necessary to enable S&P and
Moody's to provide a rating for the AMPS. If either S&P or Moody's shall not
make such a rating available, or if neither S&P nor Moody's shall make such a
rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after consultation with the Fund, shall select a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating
Agency or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph 10(b)(i) below.
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(ix) "Sell Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(x) "Submission Deadline" shall mean 1:00 p.m., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by the
Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the
Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in Paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in Paragraph
10(d)(i) below.
PARAGRAPH 10(B) ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS,
EXISTING HOLDERS AND POTENTIAL HOLDERS.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and Potential
Beneficial Owners may only participate in Auctions through their Broker-
Dealers. Broker-Dealers will submit the Orders of their respective customers
who are Beneficial Owners and Potential Beneficial Owners to the Auction
Agent, designating themselves as Existing Holders in respect of shares subject
to Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of AMPS in
its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders
to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder
on behalf of both itself and its customers. On or prior to the Submission
Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as
to:
(1) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner desires to continue to
hold, provided that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by
such Beneficial Owner, and/or
(3) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for the next succeeding Dividend Period;
and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that
shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of outstanding shares, if any, of AMPS which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable Rate for
the next succeeding Dividend Period shall not be less than the rate per
annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order"
D-2
<PAGE>
and each Beneficial Owner and each Potential Beneficial Owner placing an
Order, including a Broker-Dealer acting in such capacity for its own account,
is hereinafter referred to as a "Bidder"; an Order containing the information
referred to in clause (A)(1) of this Paragraph 10(b)(i) is hereinafter
referred to as a "Hold Order"; an Order containing the information referred to
in clause (A)(2) or (B) of this Paragraph 10(b)(i) is hereinafter referred to
as a "Bid"; and an Order containing the information referred to in clause
(A)(3) of this Paragraph 10(b)(i) is hereinafter referred to as a "Sell
Order." Inasmuch as a Broker-Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent the interests of a Beneficial
Owner or Potential Beneficial Owner, whether it be its customers or itself,
all discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of outstanding shares of AMPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be less than the rate
per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein; or
(3) a lesser number of outstanding shares of AMPS to be determined as set
forth in Paragraph 10(e)(ii)(C) if such specified rate per annum shall be
higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not
exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding shares of AMPS specified in such Sell
Order, or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(ii)(C) if Sufficient Clearing
Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of outstanding shares of AMPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be higher than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein.
PARAGRAPH 10(C) SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the Broker-
Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding shares of AMPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding shares, if any, of AMPS subject to any
Hold Order placed by such Existing Holder;
(2) the number of outstanding shares, if any, of AMPS subject to any
Bid placed by such Existing Holder and the rate per annum specified in
such Bid; and
D-3
<PAGE>
(3) the number of outstanding shares, if any, of AMPS subject to any
Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares of AMPS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend
Period) and a Sell Order (in the case of an Auction relating to a Special
Dividend Period) to have been submitted on behalf of such Existing Holder
covering the number of outstanding shares of AMPS held by such Existing Holder
and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of outstanding shares of
AMPS held by such Existing Holder; provided that if more than one Hold
Order is submitted on behalf of such Existing Holder and the number of
shares of AMPS subject to such Hold Orders exceeds the number of
outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders shall be reduced pro
rata so that such Hold Orders, in the aggregate, cover exactly the number
of outstanding shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of outstanding shares of AMPS
held by such Existing Holder over the number of shares of AMPS subject to
any Hold Order referred to in Paragraph 10(c)(iv)(A) above (and if more
than one Bid submitted on behalf of such Existing Holder specifies the same
rate per annum and together they cover more than the remaining number of
shares that can be the subject of valid Bids after application of Paragraph
10(c)(iv)(A) above and of the foregoing portion of this Paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this Paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the number of shares of AMPS subject to Hold Orders referred to
in Paragraph 10(c)(iv)(A) and Bids referred to in Paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of AMPS subject to such Sell
Orders is greater than such excess, the number of shares of AMPS subject to
each of such Sell Orders shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of shares of AMPS equal
to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number
of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.
PARAGRAPH 10(D) DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE
AND APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed
D-4
<PAGE>
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of AMPS over the
number of outstanding shares of AMPS that are the subject of Submitted Hold
Orders (such excess being hereinafter referred to as the "Available AMPS");
(B) from the Submitted Orders whether the number of outstanding shares of
AMPS that are the subject of Submitted Bids by Potential Holders specifying
one or more rates per annum equal to or lower than the Maximum Applicable
Rate exceeds or is equal to the sum of:
(1) the number of outstanding shares of AMPS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of outstanding shares of AMPS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other
than because the number of outstanding shares of AMPS in clauses (1)
and (2) above are each zero because all of the outstanding shares of
AMPS are the subject of Submitted Hold Orders), such Submitted Bids by
Potential Holders hereinafter being referred to collectively as
"Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning
Bid Rate and all other submitted Bids from Existing Holders specifying
lower rates per annum were rejected, thus entitling such Existing
Holders to continue to hold the shares of AMPS that are the subject of
such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning
Bid Rate and all other Submitted Bids from Potential Holders specifying
lower rates per annum were accepted, thus entitling the Potential
Holders to purchase the shares of AMPS that are the subject of such
Submitted Bids, would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower rate per
annum being at least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the outstanding shares of AMPS are the subject of Submitted Hold Orders),
that the Applicable Rate for the next succeeding Dividend Period shall be
equal to the Maximum Applicable Rate; or
(C) if all of the outstanding shares of AMPS are the subject of Submitted
Hold Orders, that the Dividend Period next succeeding the Auction
automatically shall be the same length as the immediately preceding
Dividend Period and the Applicable Rate for the next succeeding Dividend
Period shall be equal to 59% of the Reference Rate (or 90% of such rate if
the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares
of AMPS) on the date of the Auction.
PARAGRAPH 10(E) ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF SHARES.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
D-5
<PAGE>
(i) If Sufficient Clearing Bids have been made, subject to the provisions of
Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority
and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and
the Submitted Bid of each of the Existing Holders specifying any rate per
annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the outstanding shares of AMPS
that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holder specifying any rate
per annum that is lower than the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the outstanding
shares of AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the outstanding
shares of AMPS that are the subject of such Submitted Bid, unless the
number of outstanding shares of AMPS subject to all such Submitted Bids
shall be greater than the number of outstanding shares of AMPS ("Remaining
Shares") equal to the excess of the Available AMPS over the number of
outstanding shares of AMPS subject to Submitted Bids described in Paragraph
10(e)(i)(B) and Paragraph 10(e)(i)(C), in which event the Submitted Bids of
each such Existing Holder shall be accepted, and each such Existing Holder
shall be required to sell outstanding shares of AMPS, but only in an amount
equal to the difference between (1) the number of outstanding shares of
AMPS then held by such Existing Holder subject to such Submitted Bid and
(2) the number of shares of AMPS obtained by multiplying (x) the number of
Remaining Shares by (y) a fraction the numerator of which shall be the
number of outstanding shares of AMPS held by such Existing Holder subject
to such Submitted Bid and the denominator of which shall be the sum of the
numbers of outstanding shares of AMPS subject to such Submitted Bids made
by all such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be accepted but only
in an amount equal to the number of outstanding shares of AMPS obtained by
multiplying (x) the difference between the Available AMPS and the number of
outstanding shares of AMPS subject to Submitted Bids described in Paragraph
10(e)(i)(B), Paragraph 10(e)(i)(C) and Paragraph 10(e)(i)(D) by (y) a
fraction the numerator of which shall be the number of outstanding shares
of AMPS subject to such Submitted Bid and the denominator of which shall be
the sum of the number of outstanding shares of AMPS subject to such
Submitted Bids made by all such Potential Holders that specified rates per
annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the outstanding shares of AMPS are subject to Submitted Hold Orders),
subject to the provisions of Paragraph 10(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
outstanding shares of AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the outstanding
shares of AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and
the Submitted Sell Orders of each Existing Holder shall be accepted, in
both cases only in an amount equal to the difference between (1) the number
of outstanding shares of AMPS then held by such Existing Holder subject to
such Submitted Bid or Submitted Sell Order
D-6
<PAGE>
and (2) the number of shares of AMPS obtained by multiplying (x) the
difference between the Available AMPS and the aggregate number of
outstanding shares of AMPS subject to Submitted Bids described in Paragraph
10(e)(ii)(A) and Paragraph 10(e)(ii)(B) by (y) a fraction the numerator of
which shall be the number of outstanding shares of AMPS held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the number of outstanding shares of AMPS
subject to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraph 10(e)(i) or
Paragraph 10(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of AMPS on any Auction Date, the Auction Agent shall, in
such manner as in its sole discretion it shall determine, round up or down the
number of shares of AMPS to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that each outstanding share of AMPS
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph 10(e)(i), any
Potential Holder would be entitled or required to purchase less than a whole
share of AMPS on any Auction Date, the Auction Agent, in such manner as in its
sole discretion it shall determine, shall allocate shares of AMPS for purchase
among Potential Holders so that only whole shares of AMPS are purchased on
such Auction Date by any Potential Holder, even if such allocation results in
one or more of such Potential Holders not purchasing any shares of AMPS on
such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall determine,
with respect to each Broker-Dealer that submitted Bids or Sell Orders on
behalf of Existing Holders or Potential Holders, the aggregate number of the
outstanding shares of AMPS to be purchased and the aggregate number of
outstanding shares of AMPS to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of outstanding shares to
be purchased and such aggregate number of outstanding shares to be sold
differ, the Auction Agent shall determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or
more sellers such Broker-Dealer shall receive, as the case may be, outstanding
shares of AMPS.
PARAGRAPH 10(F) MISCELLANEOUS.
The Fund may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change
or modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid
or Sell Order in accordance with the procedures described in this Paragraph 10
or to or through a Broker-Dealer, provided that in the case of all transfers
other than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the shares of AMPS held by it maintained in book entry form by
the Securities Depository in the account of its Agent Member, which in turn
will maintain records of such Beneficial Owner's beneficial ownership. Neither
the Fund nor any Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall submit an Order in any Auction. Any Beneficial Owner that
is an Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall not sell, transfer or otherwise dispose of shares of AMPS
to any Person other than the Fund. All of the outstanding shares of AMPS of a
Series shall be represented by a single certificate registered in the name of
the nominee of the Securities Depository unless otherwise required by law or
unless there is no Securities Depository. If there is no Securities
Depository, at the Fund's option and upon its receipt of such documents as it
deems appropriate, any shares of AMPS may be registered in the Stock Register
in the name of the Beneficial Owner thereof and such Beneficial Owner
thereupon will be entitled to receive certificates therefor and required to
deliver certificates thereof or upon transfer or exchange thereof.
D-7
<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 REPRESENTATION 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.................................... 11
The Fund................................................................... 13
Use of Proceeds............................................................ 13
Capitalization............................................................. 13
Portfolio Composition...................................................... 14
Investment Objective and Policies.......................................... 14
Description of AMPS........................................................ 32
Investment Restrictions.................................................... 52
Directors and Officers..................................................... 53
Investment Advisory and Management Arrangements............................ 55
Portfolio Transactions..................................................... 56
Taxes...................................................................... 57
Net Asset Value............................................................ 61
Description of Capital Stock............................................... 62
Custodian.................................................................. 64
Underwriting............................................................... 64
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 65
Legal Opinions............................................................. 65
Experts.................................................................... 65
Additional Information..................................................... 65
Independent Auditors' Report............................................... 67
Statement of Assets, Liabilities and Capital............................... 68
Financial Statements (Unaudited)...........................................
Glossary................................................................... 69
Appendix A--Economic Conditions in New York................................ A-1
Appendix B--Ratings of Municipal Bonds..................................... B-1
Appendix C--Settlement Procedures.......................................... C-1
Appendix D--Auction Procedures............................................. D-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
AUCTION MARKET PREFERRED STOCK
["AMPS(R)"]
SHARES, SERIES A
SHARES, SERIES B
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
OCTOBER , 1998
(R)Registered trademark of Merrill Lynch & Co., Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 September , 1998
Schedule of Investments as of September , 1998 (unaudited)
Statement of Assets, Liabilities and Capital as of September , 1998
(unaudited)
(2) Exhibits:
<TABLE>
<C> <C> <S>
(a) (1) -- Articles of Incorporation of the Registrant.(a)
(2) -- Form of Articles Supplementary creating the Series A AMPS and
Series B AMPS.
(b) -- By-Laws of the Registrant.(a)
(c) -- Not applicable.
(d) (1) -- Portions of the Articles of Incorporation, By-Laws and the
Articles Supplementary of the Registrant defining the rights of
holders of shares of the Registrant.(b)
(2) -- Form of specimen certificate for the AMPS of the Registrant.
(e) -- Form of Automatic Dividend Reinvestment Plan.(a)
(f) -- Not applicable.
(g) -- Form of Investment Advisory Agreement between the Registrant
and Fund Asset Management, L.P.(a)
(h) (1) -- Form of Purchase Agreement for the AMPS.
(2) -- Merrill Lynch Standard Dealer Agreement.(a)
(i) -- Not applicable.
(j) -- Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company.(a)
(k) (1) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the Registrant and
State Street Bank and Trust Company.(a)
(2) -- Form of Auction Agent Agreement between the Registrant and IBJ
Schroder Bank & Trust Company.
(3) -- Form of Broker-Dealer Agreement.
(4) -- Form of Letter of Representations.
(l) -- Opinion and Consent of Brown & Wood LLP, counsel to the
Registrant.*
(m) -- Not applicable.
(n) -- Consent of , independent auditors for the Registrant.*
(o) -- Not applicable.
(p) -- Certificate of Fund Asset Management, L.P.(a)
(q) -- Not applicable.
(r) -- Financial Data Schedule.*
</TABLE>
- --------
(a) Incorporated by reference to the Registrant's registration statement on
Form N-2, File No. 333-56719 (the "Common Stock Registration Statement").
(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, previously filed as
Exhibit (a)(1) to the Common Stock Registration Statement; and to Article
II, Article III (sections 1, 2, 3, 5 and 17), Article VI, Article VII,
Article XII, Article XIII and Article XIV of the Registrant's By-Laws,
previously filed as Exhibit (b) to the Common Stock Registration
Statement. Reference is also made to the Form of Articles Supplementary
filed hereto as Exhibit (a)(2).
* 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............................................... $ *
Printing........................................................ *
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Rating Agency fees.............................................. *
Miscellaneous................................................... *
--------
Total......................................................... $ *
========
</TABLE>
- --------
*To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Stock--Common Stock"
and in Note 1 to the Statement of Assets, Liabilities and Capital is
incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AT SEPTEMBER 25, 1998
-------------- ---------------------
<S> <C>
Common Stock, $.10 par value........................ 2
Preferred Stock, $.10 par value..................... 0
</TABLE>
- --------
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Amended and Restated Articles of Incorporation,
filed as Exhibit (a)(2) to the Common Stock Registration Statement, Article VI
of the Registrant's By-Laws, filed as Exhibit (b) to the Common Stock
Registration Statement, and the Investment Advisory Agreement, filed as
Exhibit (g) to the Common Stock Registration Statement, provide for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be provided to directors, officers
and controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in connection with any
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
Reference is made to Section 7 of the Purchase Agreement, a form of which is
filed as Exhibit (h)(1) hereto, for provisions relating to the indemnification
of the underwriter.
C-2
<PAGE>
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of MLAM
acts as investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., Financial Institutions
Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc., and for the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc.,
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies
Fund III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings 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
C-3
<PAGE>
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
& 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. President President of MLAM; President and Director of
Peek........... 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 of MLAM; Senior Vice
Hennewinkel.... Senior Vice President 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. Senior Vice President Senior Vice President of MLAM; Senior Vice
Kloss.......... 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. Senior Vice President Senior Vice President of MLAM; Senior Vice
Upah........... 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 ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained at the offices of the Registrant (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), the Investment Adviser (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and the Registrant's custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
Registrant undertakes:
(1) For the purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a
part of a registration statement in reliance upon Rule 430A under the
Securities Act of 1933 and contained in the form of prospectus filed by the
Registrant pursuant to Rule 497(h) under the Securities Act of 1933 shall
be deemed to be part of the registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, 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 17th day of September, 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 September 17,
- ------------------------------------- Executive Officer) 1998
(ARTHUR ZEIKEL) and Director
/s/ Gerald M. Richard Treasurer (Principal September 17,
- ------------------------------------- Financial and 1998
(GERALD M. RICHARD) Accounting Officer)
/s/ James H. Bodurtha Director September 17,
- ------------------------------------- 1998
(JAMES H. BODURTHA)
/s/ Herbert I. London Director September 17,
- ------------------------------------- 1998
(HERBERT I. LONDON)
/s/ Robert R. Martin Director September 17,
- ------------------------------------- 1998
(ROBERT R. MARTIN)
/s/ Joseph L. May Director September 17,
- ------------------------------------- 1998
(JOSEPH L. MAY)
/s/ Andre F. Perold Director September 17,
- ------------------------------------- 1998
(ANDRE F. PEROLD)
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
-------- ----------- ----
<C> <S> <C>
--Form of Articles Supplementary creating the Series A AMPS
(a)(2) and Series B AMPS
(d)(2) --Form of Specimen Certificate for the AMPS of the Registrant
(h)(1) --Form of Purchase Agreement for the AMPS
(k)(2) --Form of Auction Agent Agreement between the Registrant and
IBJ Schroder Bank & Trust Company
(k)(3) --Form of Broker-Dealer Agreement
(k)(4) --Form of Letter of Representations
</TABLE>
C-7
<PAGE>
EXHIBIT(a)(2)
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
Articles Supplementary creating two series of
Auction Market Preferred Stock(R)
MUNIHOLDINGS NEW YORK INSURED FUND II, INC., a Maryland corporation having
its principal Maryland office in the City of Baltimore (the "Corporation"),
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by article fifth of its Charter, the Board of Directors has
reclassified authorized and unissued shares of common stock of the
-------
Corporation as preferred stock of the Corporation and has authorized the
issuance of two series of preferred stock, par value $.10 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) thereon, to be designated
respectively: Auction Market Preferred Stock, Series A; and Auction Market
Preferred Stock, Series B.
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of each such series of preferred stock are as follows:
DESIGNATION
Series A: A series of shares of preferred stock, par value $.10 per
--------
share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series A." Each share of
Auction Market Preferred Stock, Series A (sometimes
_____________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
referred to herein as "Series A AMPS") shall be issued on a date to be
determined by the Board of Directors of the Corporation or pursuant to their
delegated authority; have an Initial Dividend Rate and an Initial Dividend
Payment Date as shall be determined in advance of the issuance thereof by the
Board of Directors of the Corporation or pursuant to their delegated authority;
and have such other preferences, voting powers, limitations as to dividends,
qualifications and terms and conditions of redemption as are set forth in these
Articles Supplementary. The Auction Market Preferred Stock, Series A shall
constitute a separate series of preferred stock of the Corporation, and each
share of Auction Market Preferred Stock, Series A shall be identical.
Series B: A series of shares of preferred stock, par value $.10 per
--------
share, liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) thereon, is
hereby designated "Auction Market Preferred Stock, Series B." Each share of
Auction Market Preferred Stock, Series B (sometimes referred to herein as
"Series B AMPS") shall be issued on a date to be determined by the Board of
Directors of the Corporation or pursuant to their delegated authority; have an
Initial Dividend Rate and an Initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board of Directors of the
Corporation or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Articles
Supplementary. The Auction Market Preferred Stock, Series B shall constitute a
separate series of preferred stock of the Corporation, and each share of Auction
Market Preferred Stock, Series B shall be identical.
2
<PAGE>
1. Definitions. (a) Unless the context or use indicates another or
-----------
different meaning or intent, in these Articles Supplementary the following terms
have the following meanings, whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's
or the equivalent of such rating by another nationally recognized rating agency,
as such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York for the Business Day immediately preceding such date,
or (ii) in the event that the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the Interest Equivalent of
the rate on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by Merrill Lynch, Pierce, Fenner & Smith
Incorporated or its successors that are Commercial Paper Dealers, to the Auction
Agent for the close of business on the Business Day immediately preceding such
date. If one of the Commercial Paper Dealers does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Corporation to provide such rate or
rates not being supplied by the Commercial Paper Dealer. If the number of
Dividend Period days shall be (i) 7 or more but fewer than 49 days, such rate
shall be the Interest Equivalent of the 30-day rate on such commercial paper;
(ii) 49 or more but fewer than 70 days, such rate shall be the Interest
Equivalent of the 60-day rate on such commercial paper; (iii) 70 or more days
but fewer than 85 days, such rate shall be the arithmetic average of
3
<PAGE>
the Interest Equivalent on the 60-day and 90-day rates on such commercial paper;
(iv) 85 or more days but fewer than 99 days, such rate shall be the Interest
Equivalent of the 90-day rate on such commercial paper; (v) 99 or more days but
fewer than 120 days, such rate shall be the arithmetic average of the Interest
Equivalent of the 90-day and 120-day rates on such commercial paper; (vi) 120 or
more days but fewer than 141 days, such rate shall be the Interest Equivalent of
the 120-day rate on such commercial paper; (vii) 141 or more days but fewer than
162 days, such rate shall be the arithmetic average of the Interest Equivalent
of the 120-day and 180-day rates on such commercial paper; and (viii) 162 or
more days but fewer than 183 days, such rate shall be the Interest Equivalent of
the 180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c) of
these Articles Supplementary.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of these
Articles Supplementary.
"Adviser" means the Corporation's investment adviser which initially shall
be Fund Asset Management, L.P.
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Corporation.
"Agent Member" means a member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more shares of AMPS or a Potential
Beneficial Owner.
"AMPS" means, as the case may be, the Auction Market Preferred Stock,
Series A; or the Auction Market Preferred Stock, Series B.
4
<PAGE>
"AMPS Basic Maintenance Amount," as of any Valuation Date, means the dollar
amount equal to (i) the sum of (A) the product of the number of shares of AMPS
of each series and Other AMPS Outstanding on such Valuation Date multiplied by
the sum of (a) $25,000 and (b) any applicable redemption premium attributable to
the designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
each share of AMPS and Other AMPS Outstanding, in each case, to (but not
including) the end of the current Dividend Period for each series of AMPS that
follows such Valuation Date in the event the then current Dividend Period will
end within 49 calendar days of such Valuation Date or through the 49th day after
such Valuation Date in the event the then current Dividend Period for each
series of AMPS will not end within 49 calendar days of such Valuation Date; (C)
in the event the then current Dividend Period will end within 49 calendar days
of such Valuation Date, the aggregate amount of cash dividends that would
accumulate at the Maximum Applicable Rate applicable to a Dividend Period of 28
or fewer days on any shares of AMPS and Other AMPS Outstanding from the end of
such Dividend Period through the 49th day after such Valuation Date, multiplied
by the larger of the Moody's Volatility Factor and the S&P Volatility Factor,
determined from time to time by Moody's and S&P, respectively (except that if
such Valuation Date occurs during a Non-Payment Period, the cash dividend for
purposes of calculation would accumulate at the then current Non-Payment Period
Rate); (D) the amount of anticipated expenses of the Corporation for the 90 days
subsequent to such Valuation Date (including any premiums payable with respect
to a Policy); (E) the amount of the Corporation's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities as
of such Valuation Date to the extent not reflected in any of (i)(A) through
(i)(E)
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<PAGE>
(including, without limitation, and immediately upon determination, any
amounts due and payable by the Corporation pursuant to repurchase agreements and
any amounts payable for New York Municipal Bonds or Municipal Bonds purchased as
of such Valuation Date) less (ii) either (A) the Discounted Value of any of the
Corporation's assets, or (B) the face value of any of the Corporation's assets
if such assets mature prior to or on the date of redemption of AMPS or payment
of a liability and are either securities issued or guaranteed by the United
States Government or Deposit Securities, in both cases irrevocably deposited by
the Corporation for the payment of the amount needed to redeem shares of AMPS
subject to redemption or to satisfy any of (i)(B) through (i)(F). For Moody's
and S&P, the Corporation shall include as a liability an amount calculated semi-
annually equal to 150% of the estimated cost of obtaining other insurance
guaranteeing the timely payment of interest on a Moody's Eligible Asset or S&P
Eligible Asset and principal thereof to maturity with respect to Moody's
Eligible Assets and S&P Eligible Assets that (i) are covered by a Policy which
provides the Corporation with the option to obtain such other insurance and (ii)
are discounted by a Moody's Discount Factor or a S&P Discount Factor, as the
case may be, determined by reference to the insurance claims-paying ability
rating of the issuer of such Policy.
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance Amount (as required by
paragraph 7(a) of these Articles Supplementary) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Corporation which sets forth,
6
<PAGE>
as of the related Valuation Date, the assets of the Corporation, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the AMPS
Basic Maintenance Amount.
"Anticipation Notes" shall mean the following New York Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue anticipation
notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph 10(a)(vii)
of these Articles Supplementary.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Schroder Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Directors of the Corporation or a duly
authorized committee thereof enters into an agreement with the Corporation to
follow the Auction Procedures for the purpose of determining the Applicable Rate
and to act as transfer agent, registrar, dividend disbursing agent and
redemption agent for the AMPS and Other AMPS.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 10 of these Articles Supplementary.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares of AMPS or a Broker-Dealer that holds AMPS for its own account.
7
<PAGE>
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in paragraph 10 of these
Articles Supplementary, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of these Articles Supplementary.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York are authorized or obligated by law to close.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including these Articles Supplementary), of the Corporation on file in the
State Department of Assessments and Taxation of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the
Corporation may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors.
"Common Stock" means the common stock, par value $.10 per share, of the
Corporation.
"Corporation" means MuniHoldings New York Insured Fund II, Inc., a Maryland
corporation.
"Date of Original Issue" means, with respect to any share of AMPS or Other
AMPS, the date on which the Corporation originally issues such share.
8
<PAGE>
"Deposit Securities" means cash and New York Municipal Bonds and Municipal
Bonds rated at least A2 (having a remaining maturity of 12 months or less), P-1,
VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or
less), A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set forth in
paragraph 2(b)(i) of these Articles Supplementary and, with respect to Other
AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Corporation that is listed as the holder of record of shares of
AMPS in the Stock Books.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of these
Articles Supplementary.
"Holder" means a Person identified as a holder of record of shares of AMPS
in the Stock Register.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Corporation, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
9
<PAGE>
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Directors of the Corporation with respect to each
series of AMPS or other AMPS, as the case may be.
"Initial Dividend Period," with respect to each series of AMPS, has the
meaning set forth in paragraph 2(c)(i) of these Articles Supplementary and, with
respect to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to each series of AMPS, means the
rate per annum applicable to the Initial Dividend Period for such series of AMPS
and, with respect to Other AMPS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"Inverse Floaters" means trust certificates or other instruments evidencing
interests in one or more New York Municipal Bonds that are S&P Eligible Assets
the interest rates on which are adjusted at short term intervals on a basis that
is inverse to the simultaneous readjustment of the interest rates on
corresponding floating rate trust certificates or other instruments issued by
the same issuer, provided that the ratio of the aggregate dollar amount of
floating rate instruments to inverse floating rate instruments issued by the
same issuer does not exceed one to one at their time of original issuance.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
10
<PAGE>
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Corporation shall be the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value portfolio
securities at the quoted bid prices or the mean between the quoted bid and asked
price or the yield equivalent when quotations are not readily available.
Securities for which quotations are not readily available shall be valued at
fair value as determined by the Pricing Service using methods which include
consideration of:
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Corporation from dealers who are
members of the National Association of Securities Dealers, Inc. and who make a
market in the security, at least one of which shall be in writing. Futures
contracts and options are valued at closing prices for such instruments
established by the exchange or board of trade on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Directors.
11
<PAGE>
"Maximum Applicable Rate," with respect to AMPS, has the meaning set forth
in paragraph 10(a)(vii) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be due if
the Corporation were to make Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Corporation, as of the end of the calendar month immediately preceding such
Valuation Date and assuming such Additional Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any New York Municipal Bond or Municipal Bond which constitutes a
Moody's Eligible Asset, the percentage determined by reference to (a)(i) the
rating by Moody's or S&P on such Bond or (ii) in the event the Moody's Eligible
Asset is insured under a Policy and the terms of the Policy permit the
Corporation, at its option, to obtain other insurance guaranteeing the timely
payment of interest on such Moody's Eligible Asset and principal thereof to
maturity, the Moody's insurance claims-paying ability rating of the issuer of
the Policy or (iii) in the event the Moody's Eligible Asset is insured under an
insurance policy which guarantees the timely payment of interest on such Moody's
Eligible Asset and principal thereof to maturity, the Moody's insurance claims-
paying ability rating of the issuer of the insurance policy (provided that for
purposes of clauses (ii) and (iii) if the insurance claims-paying ability of an
issuer of a Policy or insurance policy is not rated by Moody's but is rated by
S&P, such issuer shall be deemed to have a
12
<PAGE>
Moody's insurance claims-paying ability rating which is two full categories
lower than the S&P insurance claims-paying ability rating) and (b) the Moody's
Exposure Period, in accordance with the table set forth below :
13
<PAGE>
<TABLE>
<CAPTION>
Rating Category
------------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
- ----------------------------------- ----- ---- ---- ----- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less.................... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks........... 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks........... 158 169 179 209 242 138 150
</TABLE>
- ------------------------------
* Moody's rating.
** New York Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
*** New York Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-
1 or, if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not
mature or have a demand feature at par exercisable within the Moody's
Exposure Period and which do not have a long-term rating. For the
purposes of the definition of Moody's Eligible Assets, these
securities will have an assumed rating of "A" by Moody's.
; provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the applicable
rating category and (b) the percentage set forth in the foregoing table under
the rating category which is one category lower than the applicable rating
category.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term New York Municipal Bonds and short-term Municipal Bonds,
so long as such New York Municipal Bonds and Municipal Bonds are rated at least
MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and the Moody's Discount Factor
for such Bonds will be 125% if such Bonds are not rated by Moody's but are rated
A-1+ or SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for New York Municipal Bonds or
Municipal Bonds Sold. "Receivables for New York Municipal Bonds or Municipal
Bonds Sold," for
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<PAGE>
purposes of calculating Moody's Eligible Assets as of any Valuation Date, means
no more than the aggregate of the following: (i) the book value of receivables
for New York Municipal Bonds or Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within five Business Days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Corporation has
received prior written authorization from Moody's or (y) with counterparties
having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's
Discounted Value of New York Municipal Bonds or Municipal Bonds sold as of or
prior to such Valuation Date which generated receivables, if such receivables
are due within five Business Days of such Valuation Date but do not comply with
either of conditions (x) or (y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for New York Municipal
Bonds or Municipal Bonds Sold, a New York Municipal Bond or a Municipal Bond
that (i) pays interest in cash, (ii) is publicly rated Baa or higher by Moody's
or, if not rated by Moody's but rated by S&P, is rated at least BBB by S&P
(provided that, for purposes of determining the Moody's Discount Factor
applicable to any such S&P-rated New York Municipal Bond or S&P-rated Municipal
Bond, such New York Municipal Bond or Municipal Bond (excluding any short-term
New York Municipal Bond or Municipal Bond) will be deemed to have a Moody's
rating which is one full rating category lower than its S&P rating), (iii) does
not have its Moody's rating suspended by Moody's; and (iv) is part of an issue
of New York Municipal Bonds or Municipal Bonds of at least $10,000,000. In
addition, New York Municipal Bonds and Municipal Bonds in the Corporation's
portfolio must be within the following diversification requirements in order to
be included within Moody's Eligible Assets:
15
<PAGE>
Maximum
<TABLE>
<CAPTION>
Maximum Maximum Maximum
Minimum Issue Type County State or Territory
Issue Size Underlying Concentration (%) Concentration (%) Concentration (1)
----------------- ----------------- ----------------
Rating ($ Millions) Obligor (%) (1) (1) (3) (1) (4) (5)
- ------ ------------ --------------- ------- ------- ---
<S> <C> <C> <C> <C> <C>
Aaa............. 10 100 100 100 100
Aa.............. 10 20 60 60 60
A............... 10 10 40 40 40
Baa............. 10 6 20 20 20
Other (2)....... 10 4 12 12 12
</TABLE>
- ------------------------------------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) New York Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to New York Municipal Bonds. Territorial bonds (other
than those issued by Puerto Rico and counted collectively) are each
limited to 10% of Moody's Eligible Assets. For diversification purposes,
Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above, any
New York Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Bond. For purposes of the issue type concentration
requirement described above, New York Municipal Bonds and Municipal Bonds will
be classified within one of the following categories: health care issues
(teaching and non-teaching hospitals, public and private), housing issues
(single- and multi-family), educational facilities issues (public and private
schools), student loan issues, resource recovery issues, transportation issues
(mass transit, airport and highway bonds), industrial revenue/pollution control
bond issues, utility issues (including water, sewer and electricity), general
obligation issues, lease obligations/certificates of participation, escrowed
bonds and other issues ("Other Issues") not falling within one of the
aforementioned categories (includes special obligations to crossover, excise and
sales tax revenue, recreation revenue, special assessment and telephone revenue
bonds). In no event shall (a) more than 10% of Moody's Eligible Assets consist
of
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<PAGE>
student loan issues, (b) more than 10% of Moody's Eligible Assets consist of
resource recovery issues or (c) more than 10% of Moody's Eligible Assets consist
of Other Issues.
When the Corporation sells a New York Municipal Bond or Municipal Bond and
agrees to repurchase it at a future date, the Discounted Value of such Bond will
constitute a Moody's Eligible Asset and the amount the Corporation is required
to pay upon repurchase of such Bond will count as a liability for purposes of
calculating the AMPS Basic Maintenance Amount. When the Corporation purchases a
New York Municipal Bond or Municipal Bond and agrees to sell it at a future date
to another party, cash receivable by the Corporation thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Corporation for the payment of dividends or
redemption.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and shall initially be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b)
of these Articles Supplementary.
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<PAGE>
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
% Change in
Marginal Tax Moody's Volatility
Rate Factor
---- ------
Less than but equal to 5% 292%
Greater than 5% but equal to 10% 313%
Greater than 10% but equal to 15% 338%
Greater than 15% but equal to 20% 364%
Greater than 20% but equal to 25% 396%
Greater than 25% but equal to 30% 432%
Greater than 30% but equal to 35% 472%
Greater than 35% but equal to 40% 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such other
potential dividend rate increase factor as Moody's advises the Corporation in
writing is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the Corporation's
Registration Statement on Form N-2 (File No. 333- ) relating to the AMPS on
------
file with the Securities and Exchange Commission, as such Registration Statement
may be amended from time to time, as well as short-term municipal obligations.
"Municipal Index" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Corporation which are stock, including all outstanding shares
of AMPS and Other AMPS (or such other asset coverage as may in the future be
specified in or under the 1940 Act as the minimum asset
18
<PAGE>
coverage for senior securities which are stock of a closed-end investment
company as a condition of paying dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of these
Articles Supplementary) as of the last Business Day of each month, means the
last Business Day of the following month.
"New York Municipal Bonds" means Municipal Bonds issued by or on behalf of
the State of New York, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and New York
income taxes, and includes Inverse Floaters.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Non-Payment Period" means, with respect to each series of AMPS, any period
commencing on and including the day on which the Corporation shall fail to (i)
declare, prior to the close of business on the second Business Day preceding any
Dividend Payment Date, for payment on or (to the extent permitted by paragraph
2(c)(i) of these Articles Supplementary) within three Business Days after such
Dividend Payment Date to the Holders as of 12:00 noon, New York City time, on
the Business Day preceding such Dividend Payment Date, the full amount of any
dividend on shares of AMPS payable on such Dividend Payment Date or (ii)
deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, New York City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on such shares payable (if declared) on such
Dividend Payment Date or (B) on any redemption date for any shares of AMPS
called for redemption, the Mandatory Redemption Price per share of
19
<PAGE>
such AMPS or, in the case of an optional redemption, the Optional Redemption
Price per share, and ending on and including the Business Day on which, by 12:00
noon, New York City time, all unpaid cash dividends and unpaid redemption prices
shall have been so deposited or shall have otherwise been made available to
Holders in same-day funds; provided that, a Non-Payment Period shall not end
unless the Corporation shall have given at least five days' but no more than 30
days' written notice of such deposit or availability to the Auction Agent, all
Existing Holders (at their addresses appearing in the Stock Books) and the
Securities Depository. Notwithstanding the foregoing, the failure by the
Corporation to deposit funds as provided for by clauses (ii)(A) or (ii)(B) above
within three Business Days after any Dividend Payment Date or redemption date,
as the case may be, in each case to the extent contemplated by paragraph 2(c)(i)
of these Articles Supplementary, shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Corporation has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of AMPS), provided that the Board of Directors of the Corporation shall
have the authority to adjust, modify, alter or change from time to time the
initial Non-Payment Period Rate if the Board of Directors of the Corporation
determines and Moody's and S&P (and any Substitute Rating Agency in lieu of
Moody's or S&P in the event either of such parties shall not rate the AMPS)
advise the Corporation in writing that such adjustment, modification, alteration
or change will not adversely affect their then-current ratings on the AMPS.
20
<PAGE>
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of these Articles Supplementary.
"Notice of Redemption" means any notice with respect to the redemption of
shares of AMPS pursuant to paragraph 4 of these Articles Supplementary.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
these Articles Supplementary.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of these Articles Supplementary.
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Other AMPS" means the auction rate preferred stock of the Corporation,
other than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, shares of
AMPS theretofore issued by the Corporation except, without duplication, (A) any
shares of AMPS theretofore cancelled or delivered to the Auction Agent for
cancellation, or redeemed by the Corporation, or as to which a Notice of
Redemption shall have been given and Deposit Securities shall have been
deposited in trust or segregated by the Corporation pursuant to paragraph 4(c)
and (B) any shares of AMPS as to which the Corporation or any Affiliate thereof
shall be a Beneficial Owner, provided that shares of AMPS held by an Affiliate
shall be deemed
21
<PAGE>
outstanding for purposes of calculating the AMPS Basic Maintenance Amount and
(ii) with respect to shares of other Preferred Stock, has the equivalent
meaning.
"Parity Stock" means the AMPS and each other outstanding series of
Preferred Stock the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Policy" means an insurance policy purchased by the Corporation which
guarantees the payment of principal and interest on specified New York Municipal
Bonds or Municipal Bonds during the period in which such New York Municipal
Bonds or Municipal Bonds are owned by the Corporation; provided, however, that,
as long as the AMPS are rated by Moody's and S&P, the Corporation will not
obtain any Policy unless Moody's and S&P advise the Corporation in writing that
the purchase of such Policy will not adversely affect their then-current rating
on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
22
<PAGE>
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Corporation, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
"Preferred Stock" means the preferred stock, par value $.10 per share, of
the Corporation, and includes AMPS and Other AMPS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Pricing Service" means J.J. Kenny or any pricing service designated by the
Board of Directors of the Corporation provided the Corporation obtains written
assurance from S&P and Moody's that such designation will not impair the rating
then assigned by S&P and Moody's to the AMPS.
"Quarterly Valuation Date" means the twenty-first day of the last month of
each fiscal quarter of the Corporation (or, if such day is not a Business Day,
the next succeeding Business Day) in each fiscal year of the Corporation,
commencing , 1998.
"Receivables for New York Municipal Bonds Sold" has the meaning set forth
under the definition of S&P Discount Factor.
"Receivables for New York Municipal Bonds or Municipal Bonds Sold" has the
meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA"
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<PAGE>
Composite Commercial Paper Rate, (iii) with respect to any Short Term Dividend
Period having 183 or more but fewer than 364 days, the applicable U.S. Treasury
Bill Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
"Response" has the meaning set forth in paragraph 2(c)(iii) of these
Articles Supplementary.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.
"Right," with respect to each series of AMPS, has the meaning set forth in
paragraph 2(e) of these Articles Supplementary and, with respect to Other AMPS,
has the equivalent meaning.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, or
its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any New York Municipal Bond which constitutes an S&P Eligible Asset,
the percentage determined by reference to (a)(i) the rating by S&P, Moody's or
Fitch on such Bond or (ii) in the event the New York Municipal Bond is insured
under a Policy and the terms of the Policy permit the Corporation, at its
option, to obtain other permanent insurance guaranteeing the timely payment of
interest on such New York Municipal Bond and principal thereof to maturity, the
S&P insurance claims-paying ability rating of the issuer of the Policy or (iii)
in the event the New York Municipal Bond is insured under an insurance policy
which guarantees the timely payment of interest on such New York Municipal Bond
and principal thereof to maturity, the S&P
24
<PAGE>
insurance claims-paying ability rating of the issuer of the insurance policy and
(b) the S&P Exposure Period, in accordance with the tables set forth below:
<TABLE>
<CAPTION>
For New York Municipal Bonds:
- ----------------------------
Rating Category
S&P Exposure Period AAA* AA* A* BBB*
- ------------------------------------------------- ------------- ------------ -------- -------------
<S> <C> <C> <C> <C>
40 Business Days................................. 210% 215% 230% 270%
22 Business Days................................. 190 195 210 250
10 Business Days................................. 175 180 195 235
7 Business Days................................. 170 175 190 230
3 Business Days................................. 150 155 170 210
</TABLE>
S&P rating.
- ----------
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term New
York Municipal Bonds will be 115% so long as such New York Municipal Bonds are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable in 30
days or less, or 120% so long as such New York Municipal Bonds are rated A-1 or
SP-1 by S&P and mature or have a demand feature exercisable in 30 days or less,
or 125% if such New York Municipal Bonds are not rated by S&P but are rated
VMIG-1, P-1 or MIG-1 by Moody's or F-1+ by Fitch; provided, however, such short-
term New York Municipal Bonds rated by Moody's or Fitch but not rated by S&P
having a demand feature exercisable in 30 days or less must be backed by a
letter of credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-1+ from S&P; and further
provided that such short-term New York Municipal Bonds rated by Moody's or Fitch
but not rated by S&P may comprise no more than 50% of short-term New York
Municipal Bonds that qualify as S&P Eligible Assets , (ii) the S&P Discount
Factor for Receivables for New York Municipal Bonds Sold that are due in more
than five Business Days from such Valuation Date will be the S&P Discount Factor
applicable to the New York Municipal Bonds sold, and (iii) no S&P Discount
Factor will be applied to cash or to
25
<PAGE>
Receivables for New York Municipal Bonds Sold if such receivables are due within
five Business Days of such Valuation Date. "Receivables for New York Municipal
Bonds Sold," for purposes of calculating S&P Eligible Assets as of any Valuation
Date, means the book value of receivables for New York Municipal Bonds sold as
of or prior to such Valuation Date. The Corporation may adopt S&P Discount
Factors for Municipal Bonds other than New York Municipal Bonds provided that
S&P advises the Corporation in writing that such action will not adversely
affect its then current rating on the AMPS. For purposes of the foregoing,
Anticipation Notes rated SP-1 or, if not rated by S&P, rated VMIG-1 by Moody's
or F-1+ by Fitch, which do not mature or have a demand feature exercisable in 30
days and which do not have a long-term rating, shall be considered to be short-
term New York Municipal Bonds.
"S&P Eligible Asset" means cash, Receivables for New York Municipal Bonds
Sold or a New York Municipal Bond that (i) is interest bearing and pays interest
at least semi-annually; (ii) is payable with respect to principal and interest
in United States Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are grant anticipation notes or
bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's or Fitch, is rated at
least A by Moody's or Fitch (provided that such Moody's-rated or Fitch-rated New
York Municipal Bonds will be included in S&P Eligible Assets only to the extent
the Market Value of such New York Municipal Bonds does not exceed 50% of the
aggregate Market Value of the S&P Eligible Assets; and further provided that,
for purposes of determining the S&P Discount Factor applicable to any such
Moody's-rated or Fitch-rated New York Municipal Bond, such New York Municipal
Bond will be deemed to have an S&P rating which is one full rating category
lower
26
<PAGE>
than its Moody's rating); (iv) is not subject to a covered call or covered put
option written by the Corporation; (v) except for Inverse Floaters, is not part
of a private placement of New York Municipal Bonds; and (vi) except for Inverse
Floaters, is part of an issue of New York Municipal Bonds with an original issue
size of at least $20 million or, if of an issue with an original issue size
below $20 million (but in no event below $10 million), is issued by an issuer
with a total of at least $50 million of securities outstanding. Notwithstanding
the foregoing:
(1) New York Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to
the extent the Market Value of such New York Municipal Bonds does not
exceed 10% of the aggregate Market Value of the S&P Eligible Assets,
provided that 2% is added to the applicable S&P Discount Factor for every
1% by which the Market Value of such New York Municipal Bonds exceeds 5% of
the aggregate Market Value of the S&P Eligible Assets; and
(2) New York Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent
the Market Value of such Bonds does not exceed 25% of the aggregate Market
Value of S&P Eligible Assets, except that New York Municipal Bonds falling
within the utility issue type category will be broken down into three sub-
categories (as described below) and such New York Municipal Bonds will be
considered S&P Eligible Assets to the extent the Market Value of such Bonds
in each such sub-category does not exceed 25% of the aggregate Market Value
of S&P Eligible Assets and except that New York Municipal Bonds falling
within the general obligation issue type category will be considered S&P
Eligible Assets to the extent the Market Value of such Bonds does not
exceed 50% of the aggregate Market
27
<PAGE>
Value of S&P Eligible Assets. For purposes of the issue type category
requirement described above, New York Municipal Bonds will be classified
within one of the following categories: health care issues, housing issues,
educational facilities issues, student loan issues, transportation issues,
industrial development bond issues, utility issues, general obligation
issues, lease obligations, escrowed bonds and other issues not falling
within one of the aforementioned categories. The general obligation issue
type category includes any issuer that is directly or indirectly guaranteed
by the State of New York or its political subdivisions. Utility issuers are
included in the general obligation issue type category if the issuer is
directly or indirectly guaranteed by the State of New York or its political
subdivisions. For purposes of the issue type category requirement described
above, New York Municipal Bonds in the utility issue type category will be
classified within one of the three following sub-categories: (i) electric,
gas and combination issues (if the combination issue includes an electric
issue), (ii) water and sewer utilities and combination issues (if the
combination issue does not include an electric issue), and (iii)
irrigation, resource recovery, solid waste and other utilities, provided
that New York Municipal Bonds included in this sub-category (iii) must be
rated by S&P in order to be included in S&P Eligible Assets; and
(3) New York Municipal Bonds which are escrow bonds or defeased bonds
may compose up to 100% of the aggregate Market Value of S&P Eligible Assets
if such Bonds initially are assigned a rating by S&P in accordance with
S&P's legal defeasance criteria or rerated by S&P as economic defeased
escrow bonds and assigned an AAA rating. New York Municipal Bonds may be
rated as escrow bonds by another nationally
28
<PAGE>
recognized rating agency or rerated as an escrow bond and assigned the
equivalent of an S&P AAA rating, provided that such equivalent rated Bonds
are limited to 50% of the aggregate Market Value of S&P Eligible Assets and
are deemed to have an AA S&P rating for purposes of determining the S&P
Discount Factor applicable to such New York Municipal Bonds. The
limitations on New York Municipal Bonds of any one issuer in clause (1)
above are not applicable to escrow bonds, however, economically defeased
bonds that are either initially rated or rerated by S&P or another
nationally recognized rating agency and assigned the same rating level as
the issuer of the Bonds will remain in its original issue type category set
forth in clause (2) above. New York Municipal Bonds that are legally
defeased and secured by securities issued or guaranteed by the United
States Government are not required to meet the minimum issuance size
requirement set forth above.
The Corporation may include Municipal Bonds other than New York Municipal
Bonds as S&P Eligible Assets pursuant to guidelines and restrictions to be
established by S&P provided that S&P advises the Corporation in writing that
such action will not adversely affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Corporation has under these Articles Supplementary to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount (as described in
paragraph 7(a) of these Articles Supplementary).
29
<PAGE>
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
these Articles Supplementary.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Corporation in writing is applicable.
"Securities Depository" means The Depository Trust Company or any successor
company or other entities elected by the Corporation as securities depository
for the shares of AMPS that agrees to follow the procedures required to be
followed by such securities depository in connection with the shares of AMPS.
"Service" means the United States Internal Revenue Service.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than seven), evenly divisible by seven and
not fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than seven), evenly divisible by seven and not
fewer than seven nor more than 364 or (ii) a specified period of one whole year
or more but not greater than five years (in each case subject to adjustment as
provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Corporation, after consultation with
the Auction Agent and the Broker-Dealers, during which the shares of AMPS
subject to such Dividend Period shall not be subject to redemption at the option
of the Corporation and (ii) a period (a "Premium Call Period"),
30
<PAGE>
consisting of a number of whole years and determined by the Board of Directors
of the Corporation, after consultation with the Auction Agent and the Broker-
Dealers, during each year of which the shares of AMPS subject to such Dividend
Period shall be redeemable at the Corporation's option at a price per share
equal to $25,000 plus accumulated but unpaid dividends plus a premium expressed
as a percentage of $25,000, as determined by the Board of Directors of the
Corporation after consultation with the Auction Agent and the Broker-Dealers.
"Stock Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the AMPS.
"Stock Register" means the register of Holders maintained on behalf of the
Corporation by the Auction Agent in its capacity as transfer agent and registrar
for the AMPS.
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or, in
lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Corporation, to act as the substitute rating agency
or substitute rating agencies, as the case may be, to determine the credit
ratings of the shares of AMPS.
31
<PAGE>
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not made
so available by 8:30 A.M., New York City time, on such date by Kenny Information
Systems Inc. or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the Marginal
Tax Rate (expressed as a decimal). The Corporation may not utilize a successor
index to the Kenny Index unless Moody's and S&P provide the Corporation with
written confirmation that the use of such successor index will not adversely
affect the then-current respective Moody's and S&P ratings of the AMPS.
32
<PAGE>
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate"
on any date means the Interest Equivalent of the yield as calculated by
reference to the arithmetic average of the bid price quotations of the actively
traded Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate"
on any date means the yield as calculated by reference to the arithmetic average
of the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related
33
<PAGE>
Dividend Period, as determined by the bid price quotations as of any time on the
Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"Valuation Date" means, for purposes of determining whether the Corporation
is maintaining the AMPS Basic Maintenance Amount, each Business Day commencing
with the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Corporation, the amount of cash or securities paid
to or received from a broker (subsequent to the Initial Margin payment) from
time to time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Market Value, Maximum Potential Additional Dividend Liability, Moody's
Discount Factor, Moody's Eligible Asset, Moody's Exposure Period, Moody's
Hedging Transactions, Moody's Volatility Factor, S&P Discount Factor, S&P
Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P Volatility
Factor, Valuation Date and Variation Margin have been determined by the Board of
Directors of the Corporation in order to obtain a "aaa" rating from Moody's and
a AAA rating from S&P on the AMPS on their Date of Original Issue; and the Board
of Directors of the Corporation shall have the authority, without shareholder
approval, to amend, alter or repeal from time to time the foregoing definitions
and the restrictions and guidelines set forth thereunder if Moody's and S&P or
any Substitute Rating Agency advises the Corporation in
34
<PAGE>
writing that such amendment, alteration or repeal will not adversely affect
their then current ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as
---------
and if declared by the Board of Directors of the Corporation, out of funds
legally available therefor, cumulative dividends each consisting of (i) cash at
the Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
below, and (iii) any additional amounts as set forth in paragraph 2(f) below,
and no more, payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends declared and payable on the Common Stock, and (ii)
to the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Corporation's investments. To the extent
permitted under the Code, dividends on shares of AMPS will be designated as
exempt-interest dividends. For the purposes of this section, the term "net tax-
exempt income" shall exclude capital gains of the Corporation.
(b) (i) Cash dividends on shares of AMPS shall accumulate from the Date
of Original Issue and shall be payable, when, as and if declared by the Board of
Directors, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date with respect to each series of AMPS. Following the
Initial Dividend Payment Date for each series of AMPS, dividends on each series
of AMPS will be payable, at the option of the Corporation, either (i) with
respect to any 7-Day Dividend Period and any Short Term Dividend Period of 35 or
fewer days, on the day next succeeding the last day thereof or (ii) with respect
to any Short Term Dividend Period of more than 35 days and with respect to any
Long Term Dividend Period, monthly on the first Business Day of each calendar
month during such Short Term Dividend
35
<PAGE>
Period or Long Term Dividend Period and on the day next succeeding the last day
thereof (each such date referred to in clause (i) or (ii) being herein referred
to as a "Normal Dividend Payment Date"), except that if such Normal Dividend
Payment Date is not a Business Day, then the Dividend Payment Date shall be the
first Business Day next succeeding such Normal Dividend Payment Date. Although
any particular Dividend Payment Date may not occur on the originally scheduled
date because of the exceptions discussed above, the next succeeding Dividend
Payment Date, subject to such exceptions, will occur on the next following
originally scheduled date. If for any reason a Dividend Payment Date cannot be
fixed as described above, then the Board of Directors shall fix the Dividend
Payment Date. The Board of Directors by resolution may change a Dividend Payment
Date if such change does not adversely affect the contract rights of the Holders
of shares of AMPS set forth in the Charter. The Initial Dividend Period, 7-Day
Dividend Periods and Special Dividend Periods are hereinafter sometimes referred
to as Dividend Periods. Each dividend payment date determined as provided above
is hereinafter referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the Stock
Register as of 12:00 noon, New York City time, on the Business Day preceding the
Dividend Payment Date. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as they appear on the Stock Register on a date, not
exceeding 15 days prior to the payment date therefor, as may be fixed by the
Board of Directors of the Corporation.
(c) (i) During the period from and including the Date of Original Issue
to but excluding the Initial Dividend Payment Date for each series of AMPS (the
"Initial Dividend
36
<PAGE>
Period"), the Applicable Rate shall be the Initial Dividend Rate. Commencing on
the Initial Dividend Payment Date for each series of AMPS, the Applicable Rate
for each subsequent dividend period (hereinafter referred to as a "Subsequent
Dividend Period"), which Subsequent Dividend Period shall commence on and
include a Dividend Payment Date and shall end on and include the calendar day
prior to the next Dividend Payment Date (or last Dividend Payment Date in a
Dividend Period if there is more than one Dividend Payment Date), shall be equal
to the rate per annum that results from implementation of the Auction
Procedures.
The Applicable Rate for each Dividend Period commencing during a Non-
Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend
Period, commencing after the first day of, and during, a Non-Payment Period
shall be a 7-Day Dividend Period in the case of each series of AMPS. Except in
the case of the willful failure of the Corporation to pay a dividend on a
Dividend Payment Date or to redeem any shares of AMPS on the date set for such
redemption, any amount of any dividend due on any Dividend Payment Date (if,
prior to the close of business on the second Business Day preceding such
Dividend Payment Date, the Corporation has declared such dividend payable on
such Dividend Payment Date to the Holders of such shares of AMPS as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date) or redemption price with respect to any shares of AMPS not paid to such
Holders when due may be paid to such Holders in the same form of funds by 12:00
noon, New York City time, on any of the first three Business Days after such
Dividend Payment Date or due date, as the case may be, provided that, such
amount is accompanied by a late charge calculated for such period of non-payment
at the Non-Payment Period Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided
37
<PAGE>
by 365. In the case of a willful failure of the Corporation to pay a dividend on
a Dividend Payment Date or to redeem any shares of AMPS on the date set for such
redemption, the preceding sentence shall not apply and the Applicable Rate for
the Dividend Period commencing during the Non-Payment Period resulting from such
failure shall be the Non-Payment Period Rate. For the purposes of the foregoing,
payment to a person in same-day funds on any Business Day at any time shall be
considered equivalent to payment to such person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day.
(ii) The amount of cash dividends per share of any series of AMPS payable
(if declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period
and each Dividend Payment Date of each Short Term Dividend Period shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of AMPS payable (if declared) on
any Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment Date
and
38
<PAGE>
the denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Corporation may, at its sole option and to the extent permitted by
law, by telephonic and written notice (a "Request for Special Dividend Period")
to the Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for a series of AMPS be a number of days (other than seven),
evenly divisible by seven, and not fewer than seven nor more than 364 in the
case of a Short Term Dividend Period or one whole year or more but not greater
than five years in the case of a Long Term Dividend Period, specified in such
notice, provided that the Corporation may not give a Request for Special
Dividend Period of greater than 28 days (and any such request shall be null and
void) unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the last occurring Auction and unless full cumulative
dividends, any amounts due with respect to redemptions, and any Additional
Dividends payable prior to such date have been paid in full. Such Request for
Special Dividend Period, in the case of a Short Term Dividend Period, shall be
given on or prior to the second Business Day but not more than seven Business
Days prior to an Auction Date for a series of AMPS and, in the case of a Long
Term Dividend Period, shall be given on or prior to the second Business Day but
not more than 28 days prior to an Auction Date for the AMPS. Upon receiving
such Request for Special Dividend Period, the Broker-Dealer(s) shall jointly
determine whether, given the factors set forth below, it is advisable that the
Corporation issue a Notice of Special Dividend Period for the series of AMPS as
contemplated by such Request for Special Dividend Period and the Optional
Redemption Price of the AMPS during such Special Dividend Period
39
<PAGE>
and the Specific Redemption Provisions and shall give the Corporation and the
Auction Agent written notice (a "Response") of such determination by no later
than the second Business Day prior to such Auction Date. In making such
determination the Broker-Dealer(s) will consider (1) existing short-term and
long-term market rates and indices of such short-term and long-term rates, (2)
existing market supply and demand for short-term and long-term securities, (3)
existing yield curves for short-term and long-term securities comparable to the
AMPS, (4) industry and financial conditions which may affect the AMPS, (5) the
investment objective of the Corporation, and (6) the Dividend Periods and
dividend rates at which current and potential beneficial holders of the AMPS
would remain or become beneficial holders. If the Broker-Dealer(s) shall not
give the Corporation and the Auction Agent a Response by such second Business
Day or if the Response states that given the factors set forth above it is not
advisable that the Corporation give a Notice of Special Dividend Period for the
series of AMPS, the Corporation may not give a Notice of Special Dividend Period
in respect of such Request for Special Dividend Period. In the event the
Response indicates that it is advisable that the Corporation give a Notice of
Special Dividend Period for the series of AMPS, the Corporation may by no later
than the second Business Day prior to such Auction Date give a notice (a "Notice
of Special Dividend Period") to the Auction Agent, the Securities Depository and
each Broker-Dealer which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price as specified in the related
Response and (iii) the Specific Redemption Provisions, if any, as specified in
the related Response. The Corporation also shall provide a copy of such Notice
of Special Dividend Period to Moody's and S&P. The Corporation shall not give a
Notice of Special Dividend Period and, if the Corporation has given
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<PAGE>
a Notice of Special Dividend Period, the Corporation is required to give
telephonic and written notice of its revocation (a "Notice of Revocation") to
the Auction Agent, each Broker-Dealer, and the Securities Depository on or prior
to the Business Day prior to the relevant Auction Date if (x) either the 1940
Act AMPS Asset Coverage is not satisfied or the Corporation shall fail to
maintain S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount, in each
case on each of the two Valuation Dates immediately preceding the Business Day
prior to the relevant Auction Date on an actual basis and on a pro forma basis
giving effect to the proposed Special Dividend Period (using as a pro forma
dividend rate with respect to such Special Dividend Period the dividend rate
which the Broker-Dealers shall advise the Corporation is an approximately equal
rate for securities similar to the AMPS with an equal dividend period), provided
that, in calculating the aggregate Discounted Value of Moody's Eligible Assets
for this purpose, the Moody's Exposure Period shall be deemed to be one week
longer, (y) sufficient funds for the payment of dividends payable on the
immediately succeeding Dividend Payment Date have not been irrevocably deposited
with the Auction Agent by the close of business on the third Business Day
preceding the related Auction Date or (z) the Broker-Dealer(s) jointly advise
the Corporation that after consideration of the factors listed above they have
concluded that it is advisable to give a Notice of Revocation. The Corporation
also shall provide a copy of such Notice of Revocation to Moody's and S&P. If
the Corporation is prohibited from giving a Notice of Special Dividend Period as
a result of any of the factors enumerated in clause (x), (y) or (z) above or if
the Corporation gives a Notice of Revocation with respect to a Notice of Special
Dividend Period for any series of AMPS, the next succeeding Dividend Period will
be a 7-Day Dividend Period. In
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addition, in the event Sufficient Clearing Bids are not made in the applicable
Auction or such Auction is not held for any reason, such next succeeding
Dividend Period will be a 7-Day Dividend Period and the Corporation may not
again give a Notice of Special Dividend Period for the AMPS (and any such
attempted notice shall be null and void) until Sufficient Clearing Bids have
been made in an Auction with respect to a 7-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends and
applicable late charges, as herein provided, on the shares of AMPS (except for
Additional Dividends as provided in paragraph 2(e) hereof and additional
payments as provided in paragraph 2(f) hereof). Except for the late charge
payable pursuant to paragraph 2(c)(i) hereof, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment on the
shares of AMPS that may be in arrears.
(ii) For so long as any share of AMPS is Outstanding, the Corporation shall
not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, Common Stock or other stock, if any,
ranking junior to the shares of AMPS as to dividends or upon liquidation) in
respect of the Common Stock or any other stock of the Corporation ranking junior
to or on a parity with the shares of AMPS as to dividends or upon liquidation,
or call for redemption, redeem, purchase or otherwise acquire for consideration
any shares of the Common Stock or any other such junior stock (except by
conversion into or exchange for stock of the Corporation ranking junior to the
shares of AMPS as to dividends and upon liquidation) or any other such Parity
Stock (except by conversion into or exchange for stock of the Corporation
42
<PAGE>
ranking junior to or on a parity with the shares of AMPS as to dividends and
upon liquidation), unless (A) immediately after such transaction, the
Corporation shall have S&P Eligible Assets and Moody's Eligible Assets each with
an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount and the Corporation shall maintain the 1940 Act AMPS Asset
Coverage, (B) full cumulative dividends on shares of AMPS and shares of Other
AMPS due on or prior to the date of the transaction have been declared and paid
or shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent, (C) any Additional Dividend required to be
paid under paragraph 2(e) below on or before the date of such declaration or
payment has been paid and (D) the Corporation has redeemed the full number of
shares of AMPS required to be redeemed by any provision for mandatory redemption
contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii)
an uncertificated right (a "Right") to receive an Additional Dividend (as
defined below), and (iii) any additional amounts as set forth in paragraph 2(f)
below. Each Right shall thereafter be independent of the share or shares of
AMPS on which the dividend was paid. The Corporation shall cause to be
maintained a record of each Right received by the respective Holders. A Right
may not be transferred other than by operation of law. If the Corporation
retroactively allocates any net capital gains or other income subject to regular
Federal income taxes to shares of AMPS without having given advance notice
thereof to the Auction Agent as described in paragraph 2(f) hereof solely by
reason of the fact that such allocation is made as a result of the redemption of
all or a portion of the outstanding shares of AMPS or the liquidation of the
Corporation (the amount of such allocation referred to herein as a "Retroactive
Taxable Allocation"), the Corporation will,
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<PAGE>
within 90 days (and generally within 60 days) after the end of the Corporation's
fiscal year for which a Retroactive Taxable Allocation is made, provide notice
thereof to the Auction Agent and to each holder of a Right applicable to such
shares of AMPS (initially Cede & Co. as nominee of The Depository Trust Company)
during such fiscal year at such holder's address as the same appears or last
appeared on the Stock Books of the Corporation. The Corporation will, within 30
days after such notice is given to the Auction Agent, pay to the Auction Agent
(who will then distribute to such holders of Rights), out of funds legally
available therefor, an amount equal to the aggregate Additional Dividend with
respect to all Retroactive Taxable Allocations made to such holders during the
fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal, New York State and New York City income tax consequences) from the
aggregate of both the Retroactive Taxable Allocations and the Additional
Dividend to be equal to the dollar amount of the dividends which would have been
received by such holder if the amount of the aggregate Retroactive Taxable
Allocations would have been excludable from the gross income of such holder.
Such Additional Dividend shall be calculated (i) without consideration being
given to the time value of money; (ii) assuming that no holder of shares of AMPS
is subject to the Federal alternative minimum tax with respect to dividends
received from the Corporation; and (iii) assuming that each Retroactive Taxable
Allocation would be taxable in the hands of each holder of shares of AMPS at the
greater of: (x) the maximum combined marginal regular Federal, New York State
and New York City
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<PAGE>
individual income tax rate applicable to ordinary income or capital gains
depending on the taxable character of the distribution (including any surtax);
or (y) the maximum combined marginal regular Federal, New York State and New
York City corporate income tax rate applicable to ordinary income or capital
gains depending on the taxable character of the distribution (taking into
account in both (x) and (y) the Federal income tax deductibility of state taxes
paid or incurred but not any phase out of, or provision limiting, personal
exemptions, itemized deductions, or the benefit of lower tax brackets and
assuming the taxability of Federally tax-exempt dividends for corporations for
New York State and New York City income tax purposes).
(f) Except as provided below, whenever the Corporation intends to include
any net capital gains or other income subject to regular Federal income taxes in
any dividend on shares of AMPS, the Corporation will notify the Auction Agent of
the amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established. The
Corporation may also include such income in a dividend on shares of a series of
AMPS without giving advance notice thereof if it increases the dividend by an
additional amount calculated as if such income was a Retroactive Taxable
Allocation and the additional amount was an Additional Dividend, provided that
the Corporation will notify the Auction Agent of the additional amounts to be
included in such dividend at least five Business Days prior to the applicable
Dividend Payment Date.
(g) No fractional shares of AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or winding up
------------------
of the Corporation, whether voluntary or involuntary, the Holders shall be
entitled to receive, out of the
45
<PAGE>
assets of the Corporation available for distribution to shareholders, before
any distribution or payment is made upon any Common Stock or any other capital
stock ranking junior in right of payment upon liquidation to the AMPS, the sum
of $25,000 per share plus accumulated but unpaid dividends (whether or not
earned or declared) thereon to the date of distribution, and after such payment
the Holders will be entitled to no other payments other than Additional
Dividends as provided in paragraph 2(e) hereof. If upon any liquidation,
dissolution or winding up of the Corporation, the amounts payable with respect
to the AMPS and any other Outstanding class or series of Preferred Stock of the
Corporation ranking on a parity with the AMPS as to payment upon liquidation are
not paid in full, the Holders and the holders of such other class or series will
share ratably in any such distribution of assets in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the Holders
will not be entitled to any further participation in any distribution of assets
by the Corporation except for any Additional Dividends. A consolidation, merger
or statutory share exchange of the Corporation with or into any other
corporation or entity or a sale, whether for cash, shares of stock, securities
or properties, of all or substantially all or any part of the assets of the
Corporation shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Corporation.
4. Redemption. (a) Shares of AMPS shall be redeemable by the
----------
Corporation as provided below:
(i) To the extent permitted under the 1940 Act and Maryland law, upon
giving a Notice of Redemption, the Corporation at its option may redeem shares
of AMPS, in whole or in part, out of funds legally available therefor, at the
Optional Redemption Price per
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<PAGE>
share, on any Dividend Payment Date; provided that no share of AMPS may be
redeemed at the option of the Corporation during (A) the Initial Dividend Period
with respect to a series of shares or (B) a Non-Call Period to which such share
is subject. In addition, holders of AMPS which are redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The Corporation may
not give a Notice of Redemption relating to an optional redemption as described
in this paragraph 4(a)(i) unless, at the time of giving such Notice of
Redemption, the Corporation has available Deposit Securities with maturity or
tender dates not later than the day preceding the applicable redemption date and
having a value not less than the amount due to Holders by reason of the
redemption of their shares of AMPS on such redemption date.
(ii) The Corporation shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per share, shares of AMPS to the
extent permitted under the 1940 Act and Maryland law, on a date fixed by the
Board of Directors, if the Corporation fails to maintain S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount as provided in paragraph 7(a) or
to satisfy the 1940 Act AMPS Asset Coverage as provided in paragraph 6 and such
failure is not cured on or before the AMPS Basic Maintenance Cure Date or the
1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the
case may be. In addition, holders of AMPS so redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The number of
shares of AMPS to be redeemed shall be equal to the lesser of (i) the minimum
number of shares of AMPS the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, together with all
shares of other Preferred Stock subject to redemption or retirement, would
result in the Corporation having S&P
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<PAGE>
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or satisfaction
of the 1940 Act AMPS Asset Coverage, as the case may be, on such Cure Date
(provided that, if there is no such minimum number of shares of AMPS and shares
of other Preferred Stock the redemption of which would have such result, all
shares of AMPS and shares of other Preferred Stock then Outstanding shall be
redeemed), and (ii) the maximum number of shares of AMPS, together with all
shares of other Preferred Stock subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of shares of AMPS required to be
redeemed in accordance with the foregoing, the Corporation shall allocate the
number required to be redeemed which would result in the Corporation having S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or satisfaction
of the 1940 Act AMPS Asset Coverage, as the case may be, pro rata among shares
of AMPS of all series, Other AMPS and other Preferred Stock subject to
redemption pursuant to provisions similar to those contained in this paragraph
4(a)(ii); provided that, shares of AMPS which may not be redeemed at the option
of the Corporation due to the designation of a Non-Call Period applicable to
such shares (A) will be subject to mandatory redemption only to the extent that
other shares are not available to satisfy the number of shares required to be
redeemed and (B) will be selected for redemption in an ascending order of
outstanding number of days in the Non-Call Period (with shares with the lowest
number of days to be redeemed first) and by lot in the event of shares having an
equal number of days in such Non-Call Period. The Corporation shall effect such
redemption on a Business Day which is not later than 35 days after such Cure
Date,
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except that if the Corporation does not have funds legally available for
the redemption of all of the required number of shares of AMPS and shares of
other Preferred Stock which are subject to mandatory redemption or the
Corporation otherwise is unable to effect such redemption on or prior to 35 days
after such Cure Date, the Corporation shall redeem those shares of AMPS which it
is unable to redeem on the earliest practicable date on which it is able to
effect such redemption out of funds legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares of
AMPS may be redeemed pursuant to paragraph 4(a)(i) of these Articles
Supplementary (i) unless all dividends in arrears on all remaining outstanding
shares of Parity Stock shall have been or are being contemporaneously paid or
declared and set apart for payment and (ii) if redemption thereof would result
in the Corporation's failure to maintain Moody's Eligible Assets or S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount. In the event that less than all the outstanding
shares of a series of AMPS are to be redeemed and there is more than one Holder,
the shares of that series of AMPS to be redeemed shall be selected by lot or
such other method as the Corporation shall deem fair and equitable.
(c) Whenever shares of AMPS are to be redeemed, the Corporation, not less
than 17 nor more than 30 days prior to the date fixed for redemption, shall mail
a notice ("Notice of Redemption") by first-class mail, postage prepaid, to each
Holder of shares of AMPS to be redeemed and to the Auction Agent. The
Corporation shall cause the Notice of Redemption to also be published in the
eastern and national editions of The Wall Street Journal. The Notice of
-----------------------
Redemption shall set forth (i) the redemption date, (ii) the amount of the
redemption price,
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(iii) the aggregate number of shares of AMPS of such series to be redeemed, (iv)
the place or places where shares of AMPS of such series are to be surrendered
for payment of the redemption price, (v) a statement that dividends on the
shares to be redeemed shall cease to accumulate on such redemption date (except
that holders may be entitled to Additional Dividends) and (vi) the provision of
these Articles Supplementary pursuant to which such shares are being redeemed.
No defect in the Notice of Redemption or in the mailing or publication thereof
shall affect the validity of the redemption proceedings, except as required by
applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Corporation shall have deposited in trust with
the Auction Agent, or segregated in an account at the Corporation's custodian
bank for the benefit of the Auction Agent, Deposit Securities (with a right of
substitution) having an aggregate Discounted Value (utilizing in the case of S&P
an S&P Exposure Period of 22 Business Days) equal to the redemption payment for
the shares of AMPS as to which such Notice of Redemption has been given with
irrevocable instructions and authority to pay the redemption price to the
Holders of such shares, then upon the date of such deposit or, if no such
deposit is made, then upon such date fixed for redemption (unless the
Corporation shall default in making the redemption payment), all rights of the
Holders of such shares as shareholders of the Corporation by reason of the
ownership of such shares will cease and terminate (except their right to receive
the redemption price in respect thereof and any Additional Dividends, but
without interest), and such shares shall no longer be deemed outstanding. The
Corporation shall be entitled to receive, from time to time, from the Auction
Agent the interest, if any, on such Deposit Securities deposited with it and the
Holders of any shares so redeemed shall have no claim to any of such interest.
In case the Holder of any
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<PAGE>
shares so called for redemption shall not claim the redemption payment for his
shares within one year after the date of redemption, the Auction Agent shall,
upon demand, pay over to the Corporation such amount remaining on deposit and
the Auction Agent shall thereupon be relieved of all responsibility to the
Holder of such shares called for redemption and such Holder thereafter shall
look only to the Corporation for the redemption payment.
5. Voting Rights. (a) General. Except as otherwise provided in the
------------- -------
Charter or By-Laws, each Holder of shares of AMPS shall be entitled to one vote
for each share held on each matter submitted to a vote of shareholders of the
Corporation, and the holders of outstanding shares of Preferred Stock, including
AMPS, and of shares of Common Stock shall vote together as a single class;
provided that, at any meeting of the shareholders of the Corporation held for
the election of directors, the holders of outstanding shares of Preferred Stock,
including AMPS, shall be entitled, as a class, to the exclusion of the holders
of all other securities and classes of capital stock of the Corporation, to
elect two directors of the Corporation. Subject to paragraph 5(b) hereof, the
holders of outstanding shares of capital stock of the Corporation, including the
holders of outstanding shares of Preferred Stock, including AMPS, voting as a
single class, shall elect the balance of the directors.
(b) Right to Elect Majority of Board of Directors. During any period in
---------------------------------------------
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically increased by the
smallest number that, when added to the two directors elected exclusively by the
holders of shares of Preferred Stock, would constitute a majority of the Board
of Directors as so increased by such smallest number; and the holders of shares
of Preferred
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Stock shall be entitled, voting separately as one class (to the exclusion of the
holders of all other securities and classes of capital stock of the
Corporation), to elect such smallest number of additional directors, together
with the two directors that such holders are in any event entitled to elect. A
Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of AMPS equal to at least two
full years' dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the payment
of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Stock are
entitled to elect a majority of the directors of the Corporation under the 1940
Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this paragraph 5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as any
---------------------------------------------------
shares of AMPS are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of Preferred Stock
Outstanding at the time, voting separately as one class: (i) authorize, create
or issue any class or series of stock ranking prior to the AMPS or any other
series of Preferred Stock with respect to payment of dividends or the
distribution of assets on liquidation, or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so as
to adversely affect any of the contract rights expressly set forth in the
Charter of holders of shares of AMPS or any other Preferred Stock. To the
extent
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<PAGE>
permitted under the 1940 Act, in the event shares of more than one series of
AMPS are outstanding, the Corporation shall not approve any of the actions set
forth in clause (i) or (ii) which adversely affects the contract rights
expressly set forth in the Charter of a Holder of shares of a series of AMPS
differently than those of a Holder of shares of any other series of AMPS without
the affirmative vote of the holders of at least a majority of the shares of AMPS
of each series adversely affected and outstanding at such time (each such
adversely affected series voting separately as a class). The Corporation shall
notify Moody's and S&P ten Business Days prior to any such vote described in
clause (i) or (ii). Unless a higher percentage is provided for under the
Charter, the affirmative vote of the holders of a majority of the outstanding
shares of Preferred Stock, including AMPS, voting together as a single class,
will be required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act. The class vote of holders
of shares of Preferred Stock, including AMPS, described above will in each case
be in addition to a separate vote of the requisite percentage of shares of
Common Stock and shares of Preferred Stock, including AMPS, voting together as a
single class necessary to authorize the action in question.
(d) Voting Procedures.
-----------------
(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Stock to elect additional directors as described
in paragraph 5(b) above, the Corporation shall call a special meeting of such
holders and instruct the Auction Agent to mail a notice of such special meeting
to such holders, such meeting to be held not less than 10 nor more than 20 days
after the date of mailing of such notice. If the Corporation fails to send such
notice
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<PAGE>
to the Auction Agent or if the Corporation does not call such a special meeting,
it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting held during a Voting Period, such Holders, voting together as a class
(to the exclusion of the holders of all other securities and classes of capital
stock of the Corporation), shall be entitled to elect the number of directors
prescribed in paragraph 5(b) above. At any such meeting or adjournment thereof
in the absence of a quorum, a majority of such holders present in person or by
proxy shall have the power to adjourn the meeting without notice, other than by
an announcement at the meeting, to a date not more than 120 days after the
original record date.
(ii) For purposes of determining any rights of the Holders to vote on
any matter or the number of shares required to constitute a quorum, whether such
right is created by these Articles Supplementary, by the other provisions of the
Charter, by statute or otherwise, a share of AMPS which is not Outstanding shall
not be counted.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of Holders and holders of other
Preferred Stock to elect directors shall continue, notwithstanding the election
at such meeting by the Holders and such other holders of the number of directors
that they are entitled to elect, and the persons so elected by the Holders and
such other holders, together with the two incumbent directors elected by the
Holders and such other holders of Preferred Stock and the remaining incumbent
directors elected by the holders of the Common Stock and Preferred Stock, shall
constitute the duly elected directors of the Corporation.
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(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional directors elected by the Holders and holders of
other Preferred Stock pursuant to paragraph 5(b) above shall terminate, the
remaining directors shall constitute the directors of the Corporation and the
voting rights of the Holders and such other holders to elect additional
directors pursuant to paragraph 5(b) above shall cease, subject to the
provisions of the last sentence of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
----------------
shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
remedy of the Holders shall be the right to vote for directors pursuant to the
provisions of this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders of
-------------------------------
AMPS is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Corporation shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify S&P and Moody's that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and, not later than ten Business Days after the date on which such vote is
taken, notify S&P and Moody's of the result of such vote.
6. 1940 Act AMPS Asset Coverage. The Corporation shall maintain, as of
----------------------------
the last Business Day of each month in which any share of AMPS is outstanding,
the 1940 Act AMPS Asset Coverage.
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<PAGE>
7. AMPS Basic Maintenance Amount. (a) The Corporation shall maintain,
-----------------------------
on each Valuation Date, and shall verify to its satisfaction that it is
maintaining on such Valuation Date, (i) S&P Eligible Assets having an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount and
(ii) Moody's Eligible Assets having an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount. Upon any failure to maintain
the required Discounted Value, the Corporation will use its best efforts to
alter the composition of its portfolio to reattain a Discounted Value at least
equal to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic
Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Corporation fails to satisfy the AMPS Basic
Maintenance Amount, the Corporation shall complete and deliver to the Auction
Agent, and Moody's and S&P, as the case may be, a complete AMPS Basic
Maintenance Report as of the date of such failure, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy or
telecopy, telex or other electronic transcription thereof and on the same day
the Corporation mails to the Auction Agent for delivery on the next Business Day
the complete AMPS Basic Maintenance Report. The Corporation will deliver an
AMPS Basic Maintenance Report to the Auction Agent and Moody's and S&P, as the
case may be, on or before 5:00 p.m., New York City time, on the third Business
Day after a Valuation Date on which the Corporation cures its failure to
maintain Moody's Eligible Assets or S&P Eligible Assets, as the case may be,
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount or on which the Corporation fails to maintain Moody's
Eligible Assets or S&P Eligible Assets, as the case may be, with an aggregate
Discounted Value which exceeds the AMPS Basic
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Maintenance Amount by 5% or more. The Corporation will also deliver an AMPS
Basic Maintenance Report to the Auction Agent, Moody's and S&P as of each
Quarterly Valuation Date on or before the third Business Day after such date.
Additionally, on or before 5:00 p.m., New York City time, on the third Business
Day after the first day of a Special Dividend Period, the Corporation will
deliver an AMPS Basic Maintenance Report to S&P and the Auction Agent. The
Corporation shall also provide Moody's and S&P with an AMPS Basic Maintenance
Report when specifically requested by either Moody's or S&P. A failure by the
Corporation to deliver an AMPS Basic Maintenance Report under this paragraph
7(b) shall be deemed to be delivery of an AMPS Basic Maintenance Report
indicating the Discounted Value for S&P Eligible Assets and Moody's Eligible
Assets of the Corporation is less than the AMPS Basic Maintenance Amount, as of
the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an AMPS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent, S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other AMPS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Corporation during the quarter ending on such Quarterly Valuation Date),
(ii) that, in such Report (and in such randomly selected Report), the
Corporation correctly determined the assets of the Corporation which constitute
S&P Eligible Assets or Moody's Eligible Assets, as the case may be, at such
Quarterly Valuation Date in accordance with these Articles Supplementary, (iii)
that, in such Report (and in such randomly selected Report), the Corporation
determined whether the Corporation had, at such Quarterly Valuation Date (and at
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the Valuation Date addressed in such randomly selected Report) in accordance
with these Articles Supplementary, S&P Eligible Assets of an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount and Moody's
Eligible Assets of an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount, (iv) with respect to the S&P ratings on New York
Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon rate
listed in such Report, that the Independent Accountant has requested that S&P
verify such information and the Independent Accountant shall provide a listing
in its letter of any differences, (v) with respect to the Moody's ratings on New
York Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon
rate listed in such Report, that such information has been verified by Moody's
(in the event such information is not verified by Moody's, the Independent
Accountant will inquire of Moody's what such information is, and provide a
listing in its letter of any differences), (vi) with respect to the bid or mean
price (or such alternative permissible factor used in calculating the Market
Value) provided by the custodian of the Corporation's assets to the Corporation
for purposes of valuing securities in the Corporation's portfolio, the
Independent Accountant has traced the price used in such Report to the bid or
mean price listed in such Report as provided to the Corporation and verified
that such information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
and (vii) with respect to such confirmation to Moody's, that the Corporation has
satisfied the requirements of paragraph 8(b) of these Articles Supplementary
(such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above
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relating to any Valuation Date on which the Corporation failed to maintain S&P
Eligible Assets with an aggregate Discounted Value and Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount, and relating to the AMPS Basic Maintenance Cure Date with
respect to such failure, the Independent Accountant will provide to the Auction
Agent, S&P and Moody's an Accountant's Confirmation as to such AMPS Basic
Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Corporation was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Corporation, and the Corporation shall accordingly amend and deliver the AMPS
Basic Maintenance Report to the Auction Agent, S&P and Moody's promptly
following receipt by the Corporation of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the shares of AMPS, the Corporation will
complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report as of
the close of business on such Date of Original Issue. Within five Business Days
of such Date of Original Issue, the Independent Accountant will confirm in
writing to S&P and Moody's (i) the mathematical accuracy of the calculations
reflected in such Report and (ii) that the aggregate Discounted Value of S&P
Eligible Assets and the aggregate Discounted Value of Moody's Eligible Assets
reflected thereon
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<PAGE>
equals or exceeds the AMPS Basic Maintenance Amount reflected thereon. Also, on
or before 5:00 p.m., New York City time, on the first Business Day after shares
of Common Stock are repurchased by the Corporation, the Corporation will
complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report as of
the close of business on such date that Common Stock is repurchased.
(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the effect
of any such alteration would be to cause the Corporation to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of such
Valuation Date; provided, however, that in the event that, as of the immediately
preceding Valuation Date, the aggregate Discounted Value of Moody's Eligible
Assets exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Adviser will not alter the composition of the Corporation's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of Moody's
Eligible Assets unless the Corporation shall have confirmed that, after giving
effect to such alteration, the aggregate Discounted Value of Moody's Eligible
Assets would exceed the AMPS Basic Maintenance Amount.
8. Certain Other Restrictions and Requirements.
-------------------------------------------
(a) For so long as any shares of AMPS are rated by S&P, the Corporation
will not purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions
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will not impair the ratings then assigned to the shares of AMPS by S&P, except
that the Corporation may purchase or sell futures contracts based on the Bond
Buyer Municipal Bond Index (the "Municipal Index") or United States Treasury
Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and call
options on such contracts (collectively, "S&P Hedging Transactions"), subject to
the following limitations:
(i) the Corporation will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a futures
contract or option held by the Corporation by the Corporation's taking an
opposite position thereto ("Closing Transactions")), which would cause the
Corporation at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding futures contracts based on the Municipal Index, (B)
outstanding futures contracts based on the Municipal Index exceeding in number
25% of the quotient of the Market Value of the Corporation's total assets
divided by $1,000 or (C) outstanding futures contracts based on the Municipal
Index exceeding in number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
-----------------------
(ii) the Corporation will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause the
Corporation at the time of such transaction to own or have sold the lesser of
(A) outstanding futures contracts based on Treasury Bonds and on the Municipal
Index exceeding in number 25% of the quotient of the Market Value of the
Corporation's total assets divided by $100,000 ($200,000 in the case of the two-
year United States Treasury Note) or (B) outstanding futures contracts based on
Treasury Bonds exceeding in number 10% of the average number of daily traded
futures contracts based
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on Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
-----------------------
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract which the Corporation owns or has sold or
any outstanding option thereon owned by the Corporation in the event (A) the
Corporation does not have S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Corporation is required to pay Variation Margin on
the second such Valuation Date;
(iv) the Corporation will engage in a Closing Transaction to close out
any outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon unless
the Corporation holds the securities deliverable under such terms; and
(v) when the Corporation writes a futures contract or option thereon,
it will either maintain an amount of cash, cash equivalents or high grade (rated
A or better by S&P), fixed-income securities in a segregated account with the
Corporation's custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of or on behalf of the
Corporation's broker with respect to such futures contract or option equals the
Market Value of the futures contract or option, or, in the event the Corporation
writes a futures contract or option thereon which requires delivery of an
underlying security, it shall hold such underlying security in its portfolio.
For purposes of determining whether the Corporation has S&P Eligible Assets
with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted
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Value of cash or securities held for the payment of Initial Margin or Variation
Margin shall be zero and the aggregate Discounted Value of S&P Eligible Assets
shall be reduced by an amount equal to (i) 30% of the aggregate settlement
value, as marked to market, of any outstanding futures contracts based on the
Municipal Index which are owned by the Corporation plus (ii) 25% of the
aggregate settlement value, as marked to market, of any outstanding futures
contracts based on Treasury Bonds which contracts are owned by the Corporation.
(b) For so long as any shares of AMPS are rated by Moody's, the Corporation
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the ratings then assigned to the shares of AMPS by Moody's, except that
the Corporation may purchase or sell exchange-traded futures contracts based on
the Municipal Index or Treasury Bonds and purchase, write or sell exchange-
traded put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively, "Moody's
Hedging Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any Moody's Hedging Transaction
based on the Municipal Index (other than Closing Transactions) which would cause
the Corporation at the time of such transaction to own or have sold (A)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal or (B) outstanding futures contracts
-----------------------
based on the Municipal Index having a Market Value exceeding 50% of the Market
Value of all
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Municipal Bonds constituting Moody's Eligible Assets owned by the Corporation
(other than Moody's Eligible Assets already subject to a Moody's Hedging
Transaction);
(ii) the Corporation will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions) which
would cause the Corporation at the time of such transaction to own or have sold
(A) outstanding futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 20% of the aggregate Market Value of Moody's Eligible
Assets owned by the Corporation and rated Aa by Moody's (or, if not rated by
Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding futures contracts
based on Treasury Bonds having an aggregate Market Value exceeding 40% of the
aggregate Market Value of all Municipal Bonds constituting Moody's Eligible
Assets owned by the Corporation (other than Moody's Eligible Assets already
subject to a Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if
not rated by Moody's but rated by S&P, rated A or AA by S&P) (for purposes of
the foregoing clauses (i) and (ii), the Corporation shall be deemed to own the
number of futures contracts that underlie any outstanding options written by the
Corporation);
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index if the amount
of open interest in the Municipal Index as reported by The Wall Street Journal
-----------------------
is less than 5,000;
(iv) the Corporation will engage in a Closing Transaction to close out
any outstanding futures contract by no later than the fifth Business Day of the
month in which such contract expires and will engage in a Closing Transaction to
close out any outstanding option on
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a futures contract by no later than the first Business Day of the month in which
such option expires;
(v) the Corporation will engage in Moody's Hedging Transactions only
with respect to futures contracts or options thereon having the next settlement
date or the settlement date immediately thereafter;
(vi) the Corporation will not engage in options and futures
transactions for leveraging or speculative purposes and will not write any call
options or sell any futures contracts for the purpose of hedging the anticipated
purchase of an asset prior to completion of such purchase; and
(vii) the Corporation will not enter into an option or futures
transaction unless, after giving effect thereto, the Corporation would continue
to have Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets which the
Corporation is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows: (i) assets subject to call
options written by the Corporation which are either exchange-traded and "readily
reversible" or which expire within 49 days after the date as of which such
valuation is made shall be valued at the lesser of (a) Discounted Value and (b)
the exercise price of the call option written by the Corporation; (ii) assets
subject to call options written by the Corporation not meeting the requirements
of clause (i) of this sentence shall have no value; (iii) assets subject to put
options written by the Corporation shall be valued at the lesser of (A) the
exercise price and
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(B) the Discounted Value of the subject security; (iv) futures contracts shall
be valued at the lesser of (A) settlement price and (B) the Discounted Value of
the subject security, provided that, if a contract matures within 49 days after
the date as of which such valuation is made, where the Corporation is the seller
the contract may be valued at the settlement price and where the Corporation is
the buyer the contract may be valued at the Discounted Value of the subject
securities; and (v) where delivery may be made to the Corporation with any
security of a class of securities, the Corporation shall assume that it will
take delivery of the security with the lowest Discounted Value.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the Corporation: (i)
10% of the exercise price of a written call option; (ii) the exercise price of
any written put option; (iii) where the Corporation is the seller under a
futures contract, 10% of the settlement price of the futures contract; (iv)
where the Corporation is the purchaser under a futures contract, the settlement
price of assets purchased under such futures contract; (v) the settlement price
of the underlying futures contract if the Corporation writes put options on a
futures contract; and (vi) 105% of the Market Value of the underlying futures
contracts if the Corporation writes call options on a futures contract and does
not own the underlying contract.
(c) For so long as any shares of AMPS are rated by Moody's, the Corporation
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging
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Transactions that are permitted under paragraph 8(b) of these Articles
Supplementary), except that the Corporation may enter into such contracts to
purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitations:
(i) the Corporation will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities rated P-
1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a Market Value that equals or exceeds the amount of the
Corporation's obligations under any Forward Commitments to which it is from time
to time a party or long-term fixed income securities with a Discounted Value
that equals or exceeds the amount of the Corporation's obligations under any
Forward Commitment to which it is from time to time a party; and
(ii) the Corporation will not enter into a Forward Commitment unless,
after giving effect thereto, the Corporation would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Corporation is a party and of all securities deliverable to the Corporation
pursuant to such Forward Commitments shall be zero.
(d) For so long as shares of AMPS are rated by S&P or Moody's, the
Corporation will not, unless it has received written confirmation from S&P
and/or Moody's, as the case may be, that such action would not impair the
ratings then assigned to shares of AMPS by S&P and/or Moody's, as the case may
be, (i) borrow money except for the purpose of clearing transactions in
portfolio securities (which borrowings shall under any circumstances be
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limited to the lesser of $10 million and an amount equal to 5% of the Market
Value of the Corporation's assets at the time of such borrowings and which
borrowings shall be repaid within 60 days and not be extended or renewed and
shall not cause the aggregate Discounted Value of Moody's Eligible Assets and
S&P Eligible Assets to be less than the AMPS Basic Maintenance Amount), (ii)
engage in short sales of securities, (iii) lend any securities, (iv) issue any
class or series of stock ranking prior to or on a parity with the AMPS with
respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the Corporation, (v) reissue any AMPS
previously purchased or redeemed by the Corporation, (vi) merge or consolidate
into or with any other corporation or entity, (vii) change the Pricing Service
or (viii) engage in reverse repurchase agreements.
9. Notice. All notices or communications, unless otherwise specified in
------
the By-Laws of the Corporation or these Articles Supplementary, shall be
sufficiently given if in writing and delivered in person or mailed by first-
class mail, postage prepaid. Notice shall be deemed given on the earlier of the
date received or the date seven days after which such notice is mailed.
10. Auction Procedures. (a) Certain definitions. As used in this paragraph
------------------ -------------------
10, the following terms shall have the following meanings, unless the context
otherwise requires:
(i) "AMPS" means the shares of AMPS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph 10(d)(i)
below.
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(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such ratings
by a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and (ii) whether the
Corporation has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph 2(f)
hereof that net capital gains or other taxable income will be included in such
dividend on shares of AMPS as follows:
<TABLE>
<CAPTION>
Credit Ratings Applicable Applicable
- ----------------------------------------------- Percentage of Percentage of
Reference Rate - Reference Rate -
Moody's S&P No Notification Notification
------- --- --------------- --------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Corporation shall take all reasonable action necessary to enable S&P
and Moody's to provide a rating for each series of the AMPS. If either S&P or
Moody's shall not make such a rating available, or neither S&P nor Moody's shall
make such a rating available, Merrill Lynch,
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Pierce, Fenner & Smith Incorporated or its affiliates and successors, after
consultation with the Corporation, shall select a nationally recognized
statistical rating organization or two nationally recognized statistical rating
organizations to act as a Substitute Rating Agency or Substitute Rating
Agencies, as the case may be.
(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by the
Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in paragraph
10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
------------------------------------------------------------------
Holders and Potential Holders.
- -----------------------------
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(i) Unless otherwise permitted by the Corporation, Beneficial Owners
and Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners and
as Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of AMPS in
its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders
to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. On or prior to the Submission Deadline
on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information
as to:
(1) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold, provided that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by
such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding Dividend
Period; and
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(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of Outstanding shares, if any, of AMPS which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable Rate for
the next succeeding Dividend Period shall not be less than the rate per
annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a Broker-
Dealer acting for its own account to the Auction Agent, of information referred
to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter referred to as
an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order, including a Broker-Dealer acting in such capacity for its own account,
is hereinafter referred to as a "Bidder"; an Order containing the information
referred to in clause (A)(1) of this paragraph 10(b)(i) is hereinafter referred
to as a "Hold Order"; an Order containing the information referred to in clause
(A)(2) or (B) of this paragraph 10(b)(i) is hereinafter referred to as a "Bid";
and an Order containing the information referred to in clause (A)(3) of this
paragraph 10(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests
represented.
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(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of Outstanding shares of AMPS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of AMPS to be
determined as set forth in paragraph 10(e)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein; or
(3) a lesser number of Outstanding shares of AMPS to be determined as
set forth in paragraph 10(e)(ii)(C) if such specified rate per annum shall
be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do
not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of AMPS specified in such
Sell Order; or
(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 10(e)(ii)(C) if Sufficient
Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of Outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
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(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to the
rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
-------------------------------------------------------
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Corporation);
(B) the aggregate number of Outstanding shares of AMPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of AMPS subject to
any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of AMPS subject to
any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
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(3) the number of Outstanding shares, if any, of AMPS subject to
any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of AMPS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend Period)
and a Sell Order (in the case of an Auction relating to a Special Dividend
Period) to have been submitted on behalf of such Existing Holder covering the
number of Outstanding shares of AMPS held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of Outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of Outstanding shares of
AMPS held by such Existing Holder; provided that if more than one Hold
Order is submitted on behalf of such Existing Holder and the number of
shares of AMPS subject to such Hold Orders
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exceeds the number of Outstanding shares of AMPS held by such Existing
Holder, the number of shares of AMPS subject to each of such Hold Orders
shall be reduced pro rata so that such Hold Orders, in the aggregate, will
cover exactly the number of Outstanding shares of AMPS held by such
Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of Outstanding shares of AMPS
held by such Existing Holder over the number of shares of AMPS subject to
any Hold Order referred to in paragraph 10(c)(iv)(A) above (and if more
than one Bid submitted on behalf of such Existing Holder specifies the same
rate per annum and together they cover more than the remaining number of
shares that can be the subject of valid Bids after application of paragraph
10(c)(iv)(A) above and of the foregoing portion of this paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding shares of AMPS held by such Existing
Holder over the number of shares of AMPS subject to Hold Orders referred to
in paragraph 10(c)(iv)(A) and Bids referred to in paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of AMPS subject
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<PAGE>
to such Sell Orders is greater than such excess, the number of shares of
AMPS subject to each of such Sell Orders shall be reduced pro rata so that
such Sell Orders, in the aggregate, cover exactly the number of shares of
AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number of
shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
---------------------------------------------------------------
Applicable Rate.
- ---------------
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of AMPS over
the number of Outstanding shares of AMPS that are the subject of Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
AMPS");
(B) from the Submitted Orders whether the number of Outstanding shares
of AMPS that are the subject of Submitted Bids by Potential Holders
specifying one or more
77
<PAGE>
rates per annum equal to or lower than the Maximum Applicable Rate exceeds
or is equal to the sum of:
(1) the number of Outstanding shares of AMPS that are the subject
of Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of AMPS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other
than because the number of Outstanding shares of AMPS in clause (1)
above and this clause (2) are each zero because all of the Outstanding
shares of AMPS are the subject of Submitted Hold Orders), such
Submitted Bids by Potential Holders being hereinafter referred to
collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other Submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such
Existing Holders to continue to hold the shares of AMPS that are the
subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the shares of AMPS that are the subject
of such Submitted Bids,
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<PAGE>
would result in the number of shares subject to all Submitted Bids specifying
the Winning Bid Rate or a lower rate per annum being at least equal to the
Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to paragraph 10(d)(i), the Auction Agent shall advise the Corporation of the
Maximum Applicable Rate and, based on such determinations, the Applicable Rate
for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the Outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend Period
shall be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding shares of AMPS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the Auction
shall automatically be the same length as the immediately preceding
Dividend Period and the Applicable Rate for the next succeeding Dividend
Period shall be equal to 40% of the Reference Rate (or 60% of such rate if
the Corporation has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend pursuant to
paragraph 2(f) hereof that net capital gains or other taxable income will
be included in such dividend on shares of AMPS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
--------------------------------------------------------------------
and Allocation of Shares. Based on the determinations made pursuant to
- ------------------------
paragraph 10(d)(i), the
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<PAGE>
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the Outstanding shares of AMPS
that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid,
unless the number of Outstanding shares of AMPS subject to all such
Submitted Bids shall be greater than the number of Outstanding shares of
AMPS ("Remaining Shares") equal to the excess of the Available AMPS over
the number of
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<PAGE>
Outstanding shares of AMPS subject to Submitted Bids described in paragraph
10(e)(i)(B) and paragraph 10(e)(i)(C), in which event the Submitted Bids of
each such Existing Holder shall be accepted, and each such Existing Holder
shall be required to sell Outstanding shares of AMPS, but only in an amount
equal to the difference between (1) the number of Outstanding shares of
AMPS then held by such Existing Holder subject to such Submitted Bid and
(2) the number of shares of AMPS obtained by multiplying (x) the number of
Remaining Shares by (y) a fraction the numerator of which shall be the
number of Outstanding shares of AMPS held by such Existing Holder subject
to such Submitted Bid and the denominator of which shall be the sum of the
number of Outstanding shares of AMPS subject to such Submitted Bids made by
all such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but
only in an amount equal to the number of Outstanding shares of AMPS
obtained by multiplying (x) the difference between the Available AMPS and
the number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph 10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the number of
Outstanding shares of AMPS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding shares
of AMPS subject to such Submitted Bids made by all such Potential Holders
that specified rates per annum equal to the Winning Bid Rate.
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<PAGE>
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the Outstanding shares of AMPS are subject to Submitted Hold Orders), subject
to the provisions of paragraph 10(e)(iii), Submitted Orders shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the Outstanding
shares of AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and
the Submitted Sell Orders of each Existing Holder shall be accepted, in
both cases only in an amount equal to the difference between (1) the number
of Outstanding shares of AMPS then held by such Existing Holder subject to
such Submitted Bid or Submitted Sell Order and (2) the number of shares of
AMPS obtained by multiplying (x) the difference between the Available AMPS
and the aggregate number of Outstanding shares of AMPS subject to Submitted
Bids described in paragraph 10(e)(ii)(A) and paragraph 10(e)(ii)(B) by (y)
a fraction the numerator of which shall be the number of Outstanding shares
of AMPS held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the
82
<PAGE>
denominator of which shall be the number of Outstanding shares of AMPS
subject to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph 10(e)(i) or
paragraph 10(e)(ii), any Existing Holder would be entitled or required to sell,
or any Potential Holder would be entitled or required to purchase, a fraction of
a share of AMPS on any Auction Date, the Auction Agent shall, in such manner as
in its sole discretion it shall determine, round up or down the number of shares
of AMPS to be purchased or sold by any Existing Holder or Potential Holder on
such Auction Date so that each Outstanding share of AMPS purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be a whole
share of AMPS.
(iv) If, as a result of the procedures described in paragraph 10(e)(i), any
Potential Holder would be entitled or required to purchase less than a whole
share of AMPS on any Auction Date, the Auction Agent shall, in such manner as in
its sole discretion it shall determine, allocate shares of AMPS for purchase
among Potential Holders so that only whole shares of AMPS are purchased on such
Auction Date by any Potential Holder, even if such allocation results in one or
more of such Potential Holders not purchasing any shares of AMPS on such Auction
Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of
Outstanding shares of AMPS to be purchased and the aggregate number of the
Outstanding shares of AMPS to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of Outstanding shares to
be purchased and such aggregate number of Outstanding shares to be sold differ,
the Auction Agent
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<PAGE>
shall determine to which other Broker-Dealer or Broker-Dealers acting for one or
more purchasers such Broker-Dealer shall deliver, or from which other Broker-
Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall
receive, as the case may be, Outstanding shares of AMPS.
(f) Miscellaneous. The Corporation may interpret the provisions of this
-------------
paragraph 10 to resolve any inconsistency or ambiguity, remedy any formal defect
or make any other change or modification that does not substantially adversely
affect the rights of Beneficial Owners of AMPS. A Beneficial Owner or an
Existing Holder (A) may sell, transfer or otherwise dispose of shares of AMPS
only pursuant to a Bid or Sell Order in accordance with the procedures described
in this paragraph 10 or to or through a Broker-Dealer, provided that in the case
of all transfers other than pursuant to Auctions such Beneficial Owner or
Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises
the Auction Agent of such transfer and (B) except as otherwise required by law,
shall have the ownership of the shares of AMPS held by it maintained in book
entry form by the Securities Depository in the account of its Agent Member,
which in turn will maintain records of such Beneficial Owner's beneficial
ownership. Neither the Corporation nor any Affiliate shall submit an Order in
any Auction. Any Beneficial Owner that is an Affiliate shall not sell, transfer
or otherwise dispose of shares of AMPS to any Person other than the Corporation.
All of the Outstanding shares of AMPS of a series shall be represented by a
single certificate registered in the name of the nominee of the Securities
Depository unless otherwise required by law or unless there is no Securities
Depository. If there is no Securities Depository, at the Corporation's option
and upon its receipt of such documents as it deems appropriate, any shares of
AMPS may be registered in the Stock Register in the name
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<PAGE>
of the Beneficial Owner thereof and such Beneficial Owner thereupon will be
entitled to receive certificates therefor and required to deliver certificates
therefor upon transfer or exchange thereof.
11. Securities Depository; Stock Certificates. (a) If there is a
-----------------------------------------
Securities Depository, one certificate for all of the shares of AMPS of each
series shall be issued to the Securities Depository and registered in the name
of the Securities Depository or its nominee. Additional certificates may be
issued as necessary to represent shares of AMPS. All such certificates shall
bear a legend to the effect that such certificates are issued subject to the
provisions restricting the transfer of shares of AMPS contained in these
Articles Supplementary. Unless the Corporation shall have elected, during a
Non-Payment Period, to waive this requirement, the Corporation will also issue
stop-transfer instructions to the Auction Agent for the shares of AMPS. Except
as provided in paragraph (b) below, the Securities Depository or its nominee
will be the Holder, and no Beneficial Owner shall receive certificates
representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all shares of AMPS of a series
shall be the Non-Payment Period Rate or there is no Securities Depository, the
Corporation may at its option issue one or more new certificates with respect to
such shares (without the legend referred to in paragraph 11(a)) registered in
the names of the Beneficial Owners or their nominees and rescind the stop-
transfer instructions referred to in paragraph 11(a) with respect to such
shares.
85
<PAGE>
IN WITNESS WHEREOF, MUNIHOLDINGS NEW YORK INSURED FUND II, INC. has caused
these presents to be signed in its name and on its behalf by a duly authorized
officer, and attested by its Secretary, and the said officers of the Corporation
further acknowledge said instrument to be the corporate act of the Corporation,
and state under penalties of perjury that to the best of their knowledge,
information and belief the matters and facts herein set forth with respect to
approval are true in all material respects, all on , 1998.
MUNIHOLDINGS NEW YORK INSURED
FUND II, INC.
By
---------------------------
Name:
Title: Vice President
Attest:
- ---------------------------
Alice A. Pellegrino
Secretary
86
<PAGE>
EXHIBIT (d)(2)
Auction Market Preferred Stock, Series __
NUMBER 1 ____ SHARES
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF MARYLAND CERTAIN DEFINITIONS
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY CUSIP #
THIS CERTIFIES THAT
CEDE & CO.
IS THE OWNER OF
-----------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF AUCTION MARKET PREFERRED STOCK, PAR
VALUE $.10 PER SHARE, LIQUIDATION PREFERENCE $25,000 PER SHARE PLUS AN
AMOUNT EQUAL TO ACCUMULATED BUT UNPAID DIVIDENDS THEREON (WHETHER OR NOT
EARNED OR DECLARED) OF
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
TRANSFERABLE ON THE BOOKS OF SAID CORPORATION IN PERSON OR BY DULY
AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTERED BY THE REGISTRAR.
IN WITNESS WHEREOF, MUNIHOLDINGS NEW YORK INSURED FUND II, INC. HAS CAUSED
ITS CORPORATE SEAL TO BE HERETO AFFIXED AND THIS CERTIFICATE TO BE EXECUTED
IN ITS NAME AND BEHALF BY ITS DULY AUTHORIZED OFFICERS.
Dated: , 1998
__________
Countersigned and Registered:
_______________________
IBJ SCHRODER BANK & TRUST COMPANY Vice President
(New York) Transfer Agent
By:_______________________ _______________________
Authorized Signature Secretary
<PAGE>
THE TRANSFER OF THE SHARES OF AUCTION MARKET PREFERRED STOCK REPRESENTED HEREBY
IS SUBJECT TO THE RESTRICTIONS CONTAINED IN THE CORPORATION'S CHARTER. THE
CORPORATION WILL FURNISH INFORMATION ABOUT SUCH RESTRICTIONS TO ANY STOCKHOLDER,
WITHOUT CHARGE, UPON REQUEST TO THE SECRETARY OF THE CORPORATION.
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
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 and series of stock which the Corporation is authorized to issue and the
differences in the relative rights and preferences between the shares of each
class and series 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 at its
principal office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--______ Custodian_______
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN-- as joint tenants with right under Uniform Gifts to Minors Act_________
of survivorship and not as tenants (State)
in common
Additional abbreviations also may be used though not in the above list.
For value received, _______________________ hereby sell, assign and transfer
unto
Please insert social securities or other identifying number of assignee
- ---------------------------------------------------
| |
- ---------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------- shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
____________________________________________________________________Attorney to
transfer the said stock on the books of the
within named Corporation with full power of substitution in the premises.
Dated:________________________
------------------------------------------------------------
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
whatsoever.Auction Market Preferred Stock, Series B
<PAGE>
Exhibit (H)(1)
$___________
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
(a Maryland corporation)
AUCTION MARKET PREFERRED STOCK(R) ["AMPS"(R)]
Series A Shares
Series B Shares
Liquidation Preference $25,000 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 10281-1305
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 Auction
Market Preferred Stock(R), Series A ("Series A AMPS"), and ___ shares of Auction
Market Preferred Stock(R), Series B ("Series B AMPS"), each with a par value of
$.10 per share and a liquidation preference of $25,000 per share plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared).
The Series A AMPS and Series B AMPS are sometimes herein referred to together as
the "Shares."
_______________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
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.
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"), a registration statement on Form N-2 (No. 333-____),
and a related preliminary prospectus for the registration of the Shares under
the Securities Act of 1933, as amended (the "Securities Act"), the Investment
Company Act, and the rules and regulations of the Commission under the
Securities Act and the Investment Company Act (together, the "Rules and
Regulations"), and the Fund 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 Securities 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 Securities 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. 333-____) and the Rule 462 Registration Statement, as each such
registration statement may be amended pursuant to the Securities 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.
SECTION 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
2
<PAGE>
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 Securities 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 misleading. At the time the
Registration Statement becomes effective, at the Representation Date and at
Closing Time referred to in Section 2 hereof, 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 Securities 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 at
the date indicated and said statement has been prepared in conformity with
generally accepted accounting principles; and the information in the Prospectus
under the headings "Description of Capital Stock" and "Portfolio Composition"
has been fairly presented.
(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) except for regular monthly dividends on the outstanding
shares of common stock, par value $.10 per share (the "Common Shares") of
the Fund, 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
3
<PAGE>
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 outstanding Common Shares have been duly authorized and validly issued and
are fully paid and nonassessable; 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 Common Shares and 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 pre-emptive 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, the
Custody Agreement, the Auction Agent Agreement and the Letter of Representations
referred to in the Registration Statement (as used herein, the "Advisory
Agreement," the "Auction Agreement," the "Custody Agreement" and the "Letter of
Representations," 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, the Custody
Agreement, the Auction Agreement and the Letter of Representations, except such
as has been obtained under the Investment Company Act or as may be required
under the Securities 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
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<PAGE>
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 or the Adviser, 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 Securities Act, the
Investment Company Act or the Rules and Regulations which have not been so
filed.
(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.
(xiii) The Fund intends to, and will, direct the investment of the
proceeds of the offering described in the Registration Statement in such a
manner as to comply with the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended ("Subchapter M of the Code"), and intends to
qualify as a regulated investment company under Subchapter M of the Code.
(xiv) Each of this Agreement, the Advisory Agreement and the Custody
Agreement has been duly authorized, executed and delivered by the Fund, and each
complies with all applicable provisions of the Investment Company Act.
(xv) Each of the Auction Agreement and the Letter of Representations has
been duly authorized for execution and delivery by the Fund and, when executed
and delivered by the Fund, will constitute a valid and binding obligation of the
Fund, 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.
(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 Registration Statement and 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
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<PAGE>
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.
(c) Any certificate signed by any officer of the Fund or the Adviser and
delivered to the Underwriter or to counsel to 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 Shares to the Underwriter, and the Underwriter agrees to purchase the
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
6
<PAGE>
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 5 hereof, unless otherwise agreed to by the Fund, the
Adviser and the Underwriter.
(b) Payment of the purchase price for, and delivery of certificates for,
the 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 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"). Payment shall be made to the Fund by a
Federal Funds wire transfer or similar same-day funds, against delivery to the
Underwriter of the certificates for the Shares to be purchased by it. The
Shares shall be represented by certificates registered in the name of Cede &
Co., as nominee for The Depository Trust Company. The certificates for the
Shares will be made available for examination by the Underwriter not later than
10:00 A.M. on the last business day prior to Closing Time.
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 Securities 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 moment. If the Fund elects to rely
on Rule 434 under the Rules and
7
<PAGE>
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 Securities 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 Securities Act,
such number of copies of the Prospectus (as amended or supplemented) as the
Underwriter reasonably may request for the purposes contemplated by the
Securities Act, or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in the
opinion 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 the
Common Shares 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 maintain its qualification as a
regulated investment company under Subchapter M of the Code.
SECTION 4. Covenants of the Underwriter. The Underwriter covenants and
agrees with the Fund that no later than the second business day succeeding
Closing Time, it will provide the Fund and the Auction Agent (as defined in the
Prospectus) with a list of Existing Holders (as defined in the Prospectus) of
Shares, the number of Shares held by each such Existing Holder and the number of
Shares it is holding as Underwriter as of the date of such notice.
SECTION 5. 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
preparation 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 fees
or disbursements of counsel for the Underwriter 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 and
(viii) the fees charged by rating agencies for the rating of the Shares.
If this Agreement is terminated by the Underwriter in accordance with the
provisions of Section 6 or Section 10(a)(i) hereof, 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
9
<PAGE>
paragraph of this Section 5 which the Fund would have paid if
such transactions had been consummated.
SECTION 6. 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., New York City time, 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 Securities 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 outstanding Common Shares have been duly authorized and
validly issued and are fully paid and nonassessable.
(v) 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 pre-emptive or other similar rights; and the authorized
capital stock conforms as to legal matters in all material respects to
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<PAGE>
the description thereof in the Registration Statement under the
caption "Description of Capital Stock".
(vi) Each of this Agreement and the Pricing Agreement has been
duly authorized, executed and delivered by the Fund and each complies
with all applicable provisions of the Investment Company Act.
(vii) The Registration Statement is effective under the
Securities 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 Securities Act or proceedings therefor
initiated or threatened by the Commission.
(viii) 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 Securities 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.
(ix) 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.
(x) 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.
(xi) 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 Securities 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, the Custody Agreement, the Auction Agreement
and the Letter of Representations 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
11
<PAGE>
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.
(xii) Each of the Advisory Agreement and the Custody Agreement
has been duly authorized and approved by the Fund and complies as to
form in all material respects with all applicable provisions of the
Investment Company Act, and each has been duly executed by the Fund.
(xiii) 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 Securities 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.
(xiv) 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.
(xv) Each of the Auction Agreement and the Letter of
Representations has been duly authorized, executed and delivered by
the Fund, and each constitutes a valid and binding obligation of the
Fund, 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.
(2) The favorable opinion, dated as of Closing Time, of Michael J.
Hennewinkel, Esq., General Counsel to the Adviser, or of a Senior
Attorney of 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.
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<PAGE>
(iii) This Agreement and the Advisory Agreement have been duly
authorized, executed and delivered by the Adviser, and the Advisory
Agreement constitutes a valid and binding obligation of the Adviser,
enforceable in accordance with its terms, subject, as to enforcement,
to bankruptcy, insolvency, reorganization or other laws relating to or
affecting creditors' rights and to general equity principles; and, to
the best of his knowledge and information, neither the execution and
delivery of this Agreement or the Advisory Agreement nor the
performance by the Adviser of its obligations hereunder or thereunder
will conflict with, or result in a breach of, any of the terms and
provisions of, or constitute, with or without the giving of notice or
the lapse of time or both, a default under, any agreement or
instrument to which the Adviser is a party or by which the Adviser is
bound, or any law, order, rule or regulation applicable to the Adviser
of any jurisdiction, court, Federal or state regulatory body,
administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Adviser or its
properties or operations.
(iv) To the best of his knowledge and information, the
description of the Adviser in the Registration Statement and in the
Prospectus does not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(3) In giving their opinion required by subsection (b)(1) of this
Section 6, 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.
(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 Securities Act, the Investment Company Act and the Rules and
Regulations and in all material respects shall conform to the requirements of
the Securities 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
13
<PAGE>
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 Registration Statement and the
Prospectus, (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, (v) Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Services ("S&P") shall
have confirmed that the Shares have been rated "aaa" and AAA, respectively, by
such agencies; and (vi) the Distributor and the Underwriter shall have received,
at Closing Time, a certificate 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),
together with true and correct copies of letters from Moody's and S&P confirming
their rating.
(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) hereof 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) hereof 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 ____ 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 Securities 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 Securities Act and the Investment Company Act and the Rules and
Regulations;
(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 (A) the unaudited
financial statements as of May 1, 1998 included in the Registration
Statement do not comply as to form in all material respects
14
<PAGE>
with the applicable accounting requirements of the Securities Act and of
the Rules and Regulations applicable to unaudited interim financial
statements included in registration statements or are not in conformity
with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement, and (B) during the period from May
1, 1998 to a 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 (other than by reason of the issuance of Common Shares in
connection with the Fund's dividend reinvestment plan, as specified in such
letter) or any increase in the long-term debt of the Fund, as compared with
amounts shown on the unaudited financial statements included in the
Registration Statement, except for changes which the Registration Statement
discloses have occurred or may occur; and
(iv) in addition to the procedures referred to in clause (iii) above, they
have performed other specified procedures, not constituting an audit, with
respect to certain amounts, percentages, numerical data, financial information
and financial statements appearing in the Registration Statement, which
previously have been specified by such accountants and which shall be specified
in such letter, and have compared certain of such items with, and have found
such items to be in agreement with, the accounting and financial records of the
Fund.
(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 6, 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 reasonably may 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 Investment Company Act and the issuance and sale of the Shares as
herein contemplated shall be satisfactory in form and substance to counsel to
the Underwriter and counsel to the Underwriter.
If any condition specified in this Section 6 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 5 hereof and except that Sections 1, 7, 8 and 9
hereof shall survive any such termination and remain in full force and effect.
SECTION 7. 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
Securities 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
15
<PAGE>
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;
(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 7(d) below) any such settlement is effected with the written consent of
the indemnifying party; and
(iii) against any and all expenses 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 a 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).
(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 Securities Act, against any and
all loss, liability, claim, damage and expense described in the indemnity
contained in subsection (a) of this Section 7, as incurred, but only with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or in any amendment or supplement
thereto) or in any preliminary prospectus or in the Prospectus (or in 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 in any amendment or supplement thereto), including
the information deemed to be a 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).
16
<PAGE>
(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 indemnifying party from any liability
hereunder to the extent it is not materially prejudicial as a result thereof and
in no 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 7 or Section
8 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 7 (a)(ii) hereof 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 8. Contribution. If the indemnification provided for in Section 7
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
17
<PAGE>
by the Fund and the total underwriting discount received by the Underwriter, in
each case as set forth on the cover of 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 8 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 8 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 8, 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 Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 8, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Securities 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 Securities Act shall have
the same rights to contribution as the Fund and the Adviser, respectively.
SECTION 9. 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 any
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.
18
<PAGE>
SECTION 10. 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 been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Fund or the Adviser,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or elsewhere, 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.
(b) If this Agreement is terminated pursuant to this Section 10, such
termination shall be without liability of any party to any other party except as
provided in Section 5 hereof, and provided further that Sections 1, 7, 8 and 9
hereof shall survive such termination and remain in full force and effect.
SECTION 11. 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: Shauna Holahan,
Director; 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 12. 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 7 and 8 hereof 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 13. 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
$
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
(a Maryland corporation)
AUCTION MARKET PREFERRED STOCK(R) ["AMPS"(R)]
______ Series A Shares
______ Series B Shares
Liquidation Preference $ 25,000 Per Share
PRICING 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:
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 _____
shares of Auction Market Preferred Stock(R), Series A ("Series A AMPS"), and
______ shares of Auction Market Preferred Stock(R), Series B ("Series B AMPS"),
each with a par value of $.10 per share and a liquidation preference of $25,000
per share plus an amount equal to accumulated but unpaid dividends (whether or
not earned or declared) (collectively, the "Shares") of MuniHoldings New York
Insured Fund II, Inc. (the "Fund").
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with
the Underwriter as follows:
______________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
1. The initial public offering price per share for the Shares, determined
as provided in said Section 2, shall be $25,000 plus accumulated dividends, if
any, from the date of original issue.
2. The purchase price per share for the Shares to be paid by the
Underwriter shall be $______ plus accumulated dividends, if any, from the date
of original issue, being an amount equal to the initial public offering price
set forth above less $___ per share.
3. The dividend rate for the Series A AMPS for the Initial Dividend Period
ending __________, 1998 will be __%, and the dividend rate for the Series B AMPS
for the Initial Dividend Period ending _________, 1998 will be __%.
2
<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 single 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
Confirmed and Accepted,
as of the date
first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ________________________________
Authorized Signatory
3
<PAGE>
EXHIBIT K(2)
================================================================================
AUCTION AGENT AGREEMENT
between
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
and
IBJ SCHRODER BANK & TRUST COMPANY
Dated as of ______, 1998
Relating to
AUCTION MARKET PREFERRED STOCK(R)
("AMPS"(R)),
Series A and B
of
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
================================================================================
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
THIS AUCTION AGENT AGREEMENT, dated as of_______, 1998, is between MUNIHOLDINGS
NEW YORK INSURED FUND II, INC., a Maryland corporation (the "Company"), and IBJ
SCHRODER BANK & TRUST COMPANY, a New York banking corporation.
The Company proposes to duly authorize and issue _____ shares of Auction
Market Preferred Stock(R), Series A ("Series A AMPS"), and _____ shares of
Auction Market Preferred Stock(R), Series B ("Series B AMPS"), each with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends (whether or not earned or
declared), pursuant to the Company's Articles Supplementary (as defined below).
The Series A AMPS and Series B AMPS are sometimes herein referred to together as
the "AMPS." A separate Auction (as defined below) will be conducted for each
series of AMPS. The Company desires that IBJ Schroder Bank & Trust Company
perform certain duties as agent in connection with each Auction of shares of
AMPS (in such capacity, the "Auction Agent"), and as the transfer agent,
registrar, dividend disbursing agent and redemption agent with respect to the
shares of AMPS (in such capacity, the "Paying Agent"), upon the terms and
conditions of this Agreement, and the Company hereby appoints IBJ Schroder Bank
& Trust Company as said Auction Agent and Paying Agent in accordance with those
terms and conditions (hereinafter generally referred to as the "Auction Agent,"
except in Sections 3 and 4 below).
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Company and the Auction Agent agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
-------------------------------------
1.1. Terms Defined by Reference to
Articles Supplementary.
-----------------------------
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary.
(R) Registered trademark of Merrill Lynch & Co., Inc.
2
<PAGE>
1.2. Terms Defined Herein.
--------------------
As used herein and in the Settlement Procedures (as defined below), the
following terms shall have the following meanings, unless the context otherwise
requires:
(a) "Affiliate" shall mean any Person, other than Merrill Lynch,
Pierce, Fenner & Smith Incorporated, made known to the Auction
Agent to be controlled by, in control of, or under common control
with, the Company or its successors.
(b) "Agent Member" of any Person shall mean such Person's agent member
of the Securities Depository that will act on behalf of a Bidder.
(c) "Articles Supplementary" shall mean the Articles Supplementary of
the Company, establishing the powers, preferences and rights of the
AMPS, filed on ______, 1998 with the State Department of
Assessments and Taxation of the State of Maryland.
(d) Auction" shall have the meaning specified in Section 2.1 hereof.
(e) "Auction Procedures" shall mean the Auction Procedures that are set
forth in Paragraph 10 of the Articles Supplementary.
(f) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Trust Officer, and Assistant
Secretary and Assistant Treasurer of the Auction Agent assigned to
its Corporate Trust and Agency Group and every other officer or
employee of the Auction Agent designated as an "Authorized Officer"
for purposes hereof in a communication to the Company.
(g) "Broker-Dealer Agreement" shall mean each agreement between the
Auction Agent and a Broker-Dealer substantially in the form
attached hereto as Exhibit A.
(h) "Company Officer" shall mean the Chairman and Chief Executive
Officer, the President, each Vice President (whether or not
designated by a number or word or words added before or after the
title "Vice President"), the Secretary, the Treasurer, each
Assistant Secretary and each Assistant Treasurer of the Company and
every other officer or employee of the Company designated as a
"Company Officer" for purposes hereof in a notice from the Company
to the Auction Agent.
(i) "Holder" shall be a holder of record of one or more shares of AMPS,
listed as such in the stock register maintained by the Paying Agent
pursuant to Section 4.6 hereof.
(j) "Settlement Procedures" shall mean the Settlement Procedures
attached as Exhibit A to the Broker-Dealer Agreement.
3
<PAGE>
1.3. Rules of Construction.
Unless the context or use indicates another or different meaning or intent,
the following rules shall apply to the construction of this Agreement:
(a) Words importing the singular number shall include the plural number
and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor
shall they affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to New
York City time.
II. THE AUCTION.
-----------
2.1. Purpose; Incorporation by Reference of Auction
Procedures and Settlement Procedures.
----------------------------------------------
(a) The Articles Supplementary provide that the Applicable Rate on
shares of each series of AMPS, as the case may be, for each
Dividend Period therefor after the Initial Dividend Period shall be
the rate per annum that a commercial bank, trust company or other
financial institution appointed by the Company advises results from
implementation of the Auction Procedures. The Board of Directors of
the Company has adopted a resolution appointing IBJ Schroder Bank &
Trust Company as Auction Agent for purposes of the Auction
Procedures. The Auction Agent hereby accepts such appointment and
agrees that, on each Auction Date, it shall follow the procedures
set forth in this Section 2 and the Auction Procedures for the
purpose of determining the Applicable Rate for the AMPS for the
next Dividend Period therefor. Each periodic operation of such
procedures is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and in
the Settlement Procedures are incorporated herein by reference in
their entirety and shall be deemed to be a part hereof to the same
extent as if such provisions were set forth fully herein.
2.2. Preparation for Each Auction; Maintenance
of Registry of Existing Holders.
------------------------------------------
(a) Pursuant to Section 2.5 hereof, the Company shall not designate any
Person to act as a Broker-Dealer without the prior written approval
of the Auction Agent (which approval shall not be withheld
unreasonably). As of the date hereof, the Company shall provide the
Auction Agent with a list of the Broker-
4
<PAGE>
Dealers previously approved by the Auction Agent and shall cause to
be delivered to the Auction Agent for execution by the Auction
Agent a Broker-Dealer Agreement signed by each such Broker-Dealer.
The Auction Agent shall keep such list current and accurate and
shall indicate thereon, or on a separate list, the identity of each
Existing Holder, if any, whose most recent Order was submitted by a
Broker-Dealer on such list and resulted in such Existing Holder
continuing to hold or purchasing shares of AMPS. Not later than
five Business Days prior to any Auction Date for which any change
in such list of Broker-Dealers is to be effective, the Company
shall notify the Auction Agent in writing of such change and, if
any such change is the addition of a Broker-Dealer to such list,
the Company shall cause to be delivered to the Auction Agent for
execution by the Auction Agent a Broker-Dealer Agreement signed by
such Broker-Dealer. The Auction Agent shall have entered into a
Broker-Dealer Agreement with each Broker-Dealer prior to the
participation of any such Broker-Dealer in any Auction.
(b) In the event that the Auction Date for any Auction shall be changed
after the Auction Agent shall have given the notice referred to in
clause (vii) of Paragraph (a) of the Settlement Procedures, the
Auction Agent, by such means as the Auction Agent deems
practicable, shall give notice of such change to the Broker-Dealers
not later than the earlier of 9:15 A.M. on the new Auction Date or
9:15 A.M. on the old Auction Date.
(c) The provisions contained in paragraph 2 of the Articles
Supplementary concerning Special Dividend Periods and the
notification of a Special Dividend Period will be followed by the
Company and, to the extent applicable, the Auction Agent, and the
provisions contained therein are incorporated herein by reference
in their entirety and shall be deemed to be a part of this
Agreement to the same extent as if such provisions were set forth
fully herein.
(d) Except as otherwise provided in paragraph 2(f) of the Articles
Supplementary, whenever the Company intends to include any net
capital gains or other income subject to regular Federal income tax
in any dividend on shares of AMPS, the Company will notify the
Auction Agent of the amount to be so included at least five
Business Days prior to the Auction Date on which the Applicable
Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Company, in turn it will notify
each Broker-Dealer, who, on or prior to such Auction Date, in
accordance with its Broker-Dealer Agreement, will notify its
Beneficial Owners and Potential Beneficial Owners believed to be
interested in submitting an Order in the Auction to be held on such
Auction Date. Whenever the Company includes any additional amounts
in a dividend as provided in paragraph 2(f) of the Articles
Supplementary, the Company will notify the Auction Agent of such
additional amounts to be so included in such dividend at least five
Business Days prior to the applicable Dividend Payment Date.
Whenever the Auction Agent receives such notice from the Company,
in turn it will notify the Securities Depository and each Broker-
5
<PAGE>
Dealer, who, on or prior to the applicable Dividend Payment Date,
in accordance with its Broker-Dealer Agreement, will notify its
Beneficial Owners.
(ii) If the Company makes a Retroactive Taxable Allocation, the
Company, within 90 days (and generally within 60 days) after the end
of its fiscal year for which a Retroactive Taxable Allocation is made,
will provide notice thereof to the Auction Agent and to each Holder
(initially the Securities Depository) during such fiscal year at such
Holder's address as the same appears or last appeared on the stock
books of the Company. The Company, within 30 days after such notice
is given to the Auction Agent, will pay to the Auction Agent (who then
will distribute to such Holders), out of funds legally available
therefor, a cash amount equal to the aggregate Additional Dividend
with respect to all Retroactive Taxable Allocations made to such
Holders during the fiscal year in question.
(e) On each Auction Date, the Auction Agent shall determine the
Reference Rate and the Maximum Applicable Rate. If the Reference
Rate is not quoted on an interest basis but is quoted on a discount
basis, the Auction Agent shall convert the quoted rate to an
Interest Equivalent, as set forth in paragraph 1 of the Articles
Supplementary; or, if the rate obtained by the Auction Agent is not
quoted on an interest or discount basis, the Auction Agent shall
convert the quoted rate to an interest rate after consultation with
the Company as to the method of such conversion. Not later than
9:30 A.M. on each Auction Date, the Auction Agent shall notify the
Company and the Broker-Dealers of the Reference Rate so determined
and of the Maximum Applicable Rate.
(ii) If the Reference Rate is the applicable "AA" Composite
Commercial Paper Rate and such rate is to be based on rates supplied
by Commercial Paper Dealers and one or more of the Commercial Paper
Dealers shall not provide a quotation for the determination of the
applicable "AA" Composite Commercial Paper Rate, the Auction Agent
immediately shall notify the Company so that the Company can determine
whether to select a Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers to provide the quotation or quotations not
being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers. The Company promptly shall advise the Auction Agent of any
such selection. If the Company does not select any such Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers, then
the rates shall be supplied by the remaining Commercial Paper Dealer
or Commercial Paper Dealers.
(iii) If, after the date of this Agreement, there is any change in
the prevailing rating of AMPS by either of the rating agencies (or
substitute or successor rating agencies) referred to in the definition
of the Maximum Applicable Rate, thereby resulting in any change in the
corresponding applicable percentage for the AMPS, as set forth in said
definition (the "Percentage"), the Company shall notify the Auction
Agent in writing of such change in the Percentage prior to 9:00 A.M.
on the Auction Date for AMPS next succeeding such change. The
Percentage for the AMPS on the date of this Agreement is as specified
in paragraph 10(a)(vii) of the Articles Supplementary. The Auction
Agent shall be entitled to rely on the last
6
<PAGE>
Percentage of which it has received notice from the Company (or, in
the absence of such notice, the Percentage set forth in the preceding
sentence) in determining the Maximum Applicable Rate as set forth in
Section 2.2(e)(i) hereof.
(f) The Auction Agent shall maintain a current registry of the Existing
Holders of the shares of each series of AMPS for purposes of each
Auction. The Company shall use its best efforts to provide or cause
to be provided to the Auction Agent within ten Business Days
following the date of the Closing a list of the initial Existing
Holders of each series of AMPS, and the Broker-Dealer of each such
Existing Holder through which such Existing Holder purchased such
shares. The Auction Agent may rely upon, as evidence of the
identities of the Existing Holders, such list, the results of each
Auction and notices from any Existing Holder, the Agent Member of
any Existing Holder or the Broker-Dealer of any Existing Holder
with respect to such Existing Holder's transfer of any shares of
AMPS to another Person.
(ii) In the event of any partial redemption of any series of AMPS,
upon notice by the Company to the Auction Agent of such partial
redemption, the Auction Agent promptly shall request the Securities
Depository to notify the Auction Agent of the identities of the Agent
Members (and the respective numbers of shares) from the accounts of
which shares have been called for redemption and the person or
department at such Agent Member to contact regarding such redemption,
and at least two Business Days prior to the Auction preceding the date
of redemption with respect to shares of the series being partially
redeemed, the Auction Agent shall request each Agent Member so
identified to disclose to the Auction Agent (upon selection by such
Agent Member of the Existing Holders whose shares are to be redeemed)
the number of shares of such series of AMPS of each such Existing
Holder, if any, to be redeemed by the Company, provided that the
Auction Agent has been furnished with the name and telephone number of
a person or department at such Agent Member from which it is to
request such information. In the absence of receiving any such
information with respect to an Existing Holder, from such Existing
Holder's Agent Member or otherwise, the Auction Agent may continue to
treat such Existing Holder as having ownership of the number of shares
of the series of AMPS shown in the Auction Agent's registry of
Existing Holders.
(iii) The Auction Agent shall register a transfer of the ownership
of shares of a series of AMPS from an Existing Holder to another
Existing Holder, or to another Person if permitted by the Company,
only if (A) such transfer is made pursuant to an Auction or (B) if
such transfer is made other than pursuant to an Auction, the Auction
Agent has been notified of such transfer in writing in a notice
substantially in the form of Exhibit C to the Broker-Dealer
Agreements, by such Existing Holder or by the Agent Member of such
Existing Holder. The Auction Agent is not required to accept any
notice of transfer delivered for an Auction unless it is received by
the Auction Agent by 3:00 P.M. on the Business Day next preceding the
applicable Auction Date. The Auction Agent shall rescind a transfer
made on the registry of the Existing Holders of any shares of AMPS if
the
7
<PAGE>
Auction Agent has been notified in writing, in a notice
substantially in the form of Exhibit D to the Broker-Dealer Agreement,
by the Agent Member or the Broker-Dealer of any Person that (i)
purchased any shares of AMPS and the seller failed to deliver such
shares or (ii) sold any shares of AMPS and the purchaser failed to
make payment to such Person upon delivery to the purchaser of such
shares.
(g) The Auction Agent may request that the Broker-Dealers, as set forth
in Section 3.2(c) of the Broker-Dealer Agreements, provide the
Auction Agent with a list of their respective customers that such
Broker-Dealers believe are Beneficial Owners of shares of AMPS. The
Auction Agent shall keep confidential any such information and
shall not disclose any such information so provided to any Person
other than the relevant Broker-Dealer and the Company, provided
that the Auction Agent reserves the right to disclose any such
information if it is advised by its counsel that its failure to do
so would be unlawful.
2.3. Auction Schedule.
----------------
The Auction Agent shall conduct Auctions in accordance with the schedule
set forth below. Such schedule may be changed by the Auction Agent with the
consent of the Company, which consent shall not be withheld unreasonably. The
Auction Agent shall give notice of any such change to each Broker-Dealer. Such
notice shall be received prior to the first Auction Date on which any such
change shall be effective.
Time Event
---- -----
By 9:30 A.M. Auction Agent advises the Company and the Broker-
Dealers of the Reference Rate and the Maximum
Applicable Rate as set forth in Section 2.2(e)(i)
hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated to
it by Broker-Dealers as provided in Paragraph 10(c)(i)
of the Articles Supplementary. Submission deadline is
1:00 P.M.
Not earlier than Auction Agent makes determinations pursuant to
1:00 P.M. Paragraph 10(d)(i) of the Articles Supplementary.
By approximately Auction Agent advises the Company
3:00 P.M. of the results of the Auction as provided in
Paragraph 10(d)(ii) of the Articles Supplementary.
Submitted Bids and Submitted Sell Orders are accepted
and rejected in whole or in part and shares of AMPS
allocated as provided in Paragraph 10(e) of the
Articles Supplementary.
8
<PAGE>
Auction Agent gives notice of
the Auction results as set
forth in Section 2.4 hereof.
2.4. Notice of Auction Results.
-------------------------
On each Auction Date, the Auction Agent shall notify Broker-Dealers of the
results of the Auction held on such date by telephone or through the Auction
Agent's Auction Processing System as set forth in Paragraph (a) of the
Settlement Procedures.
2.5. Broker-Dealers.
--------------
(a) Not later than 12:00 noon on each Auction Date, the Company shall
pay to the Auction Agent in Federal Funds or similar same-day
funds an amount in cash equal to (i) in the case of any Auction
Date immediately preceding a 7-Day Dividend Period or 28-Day
Dividend Period, the product of (A) a fraction the numerator of
which is the number of days in such Dividend Period (calculated by
counting the first day of such Dividend Period but excluding the
last day thereof) and the denominator of which is 360, times (B)
1/4 of 1%, times (C) $25,000 times (D) the sum of the aggregate
number of Outstanding shares of AMPS for which the Auction is
conducted and (ii) in the case of any Special Dividend Period, the
amount determined by mutual consent of the Company and the Broker-
Dealers pursuant to Section 3.5 of the Broker-Dealer Agreements.
The Auction Agent shall apply such moneys as set forth in Section
3.5 of the Broker-Dealer Agreements and shall thereafter remit to
the Company any remaining funds paid to the Auction Agent pursuant
to this Section 2.5(a).
(b) The Company shall not designate any Person to act as a Broker-
Dealer, or permit a Existing Holder or a Potential Beneficial
Owner to participate in Auctions through any Person other than a
Broker-Dealer, without the prior written approval of the Auction
Agent, which approval shall not be withheld unreasonably. The
Company may designate an Affiliate or Merrill Lynch, Pierce,
Fenner & Smith Incorporated to act as a Broker-Dealer.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed by the Company.
(d) Subject to Section 2.5(b) hereof, the Auction Agent from time to
time shall enter into such Broker-Dealer Agreements as the Company
shall request.
(e) The Auction Agent shall maintain a list of Broker-Dealers.
2.6. Ownership of Shares of AMPS and Submission of Bids
by the Company and its Affiliates.
--------------------------------------------------
Neither the Company nor any Affiliate of the Company may submit any Sell
Order or Bid, directly or indirectly, in any Auction, except that an Affiliate
of the Company that is a Broker-Dealer may submit a Sell Order or Bid on behalf
of a Beneficial Owner or a Potential
9
<PAGE>
Beneficial Owner. The Company shall notify the Auction Agent if the Company or,
to the best of the Company's knowledge, any Affiliate of the Company becomes a
Beneficial Owner of any shares of AMPS. Any shares of AMPS redeemed, purchased
or otherwise acquired (i) by the Company shall not be reissued, except in
accordance with the requirements of the Securities Act of 1933, as amended, or
(ii) by its Affiliates shall not be transferred (other than to the Company). The
Auction Agent shall have no duty or liability with respect to enforcement of
this Section 2.6.
2.7. Access to and Maintenance of Auction Records.
--------------------------------------------
The Auction Agent shall afford to the Company, its agents, independent
public accountants and counsel, access at reasonable times during normal
business hours to review and make extracts or copies (at the Company's sole cost
and expense) of all books, records, documents and other information concerning
the conduct and results of Auctions, provided that any such agent, accountant or
counsel shall furnish the Auction Agent with a letter from the Company
requesting that the Auction Agent afford such person access. The Auction Agent
shall maintain records relating to any Auction for a period of two years after
such Auction (unless requested by the Company to maintain such records for such
longer period not in excess of four years, then for such longer period), and
such records, in reasonable detail, shall accurately and fairly reflect the
actions taken by the Auction Agent hereunder. The Company agrees to keep
confidential any information regarding the customers of any Broker-Dealer
received from the Auction Agent in connection with this Agreement or any
Auction, and shall not disclose such information or permit the disclosure of
such information without the prior written consent of the applicable Broker-
Dealer to anyone except such agent, accountant or counsel engaged to audit or
review the results of Auctions as permitted by this Section 2.7, provided that
the Company reserves the right to disclose any such information if it is advised
by its counsel that its failure to do so would (i) be unlawful or (ii) expose it
to liability, unless the Broker-Dealer shall have offered indemnification
satisfactory to the Company. Any such agent, accountant or counsel, before
having access to such information, shall agree to keep such information
confidential and not to disclose such information or permit disclosure of such
information without the prior written consent of the applicable Broker-Dealer,
provided that such agent, accountant or counsel may reserve the right to
disclose any such information if it is advised by its counsel that its failure
to do so would (i) be unlawful or (ii) expose it to liability, unless the
Broker-Dealer shall have offered indemnification satisfactory to such agent,
accountant or counsel.
III. THE AUCTION AGENT AS PAYING AGENT.
---------------------------------
3.1. The Paying Agent.
----------------
The Board of Directors of the Company has adopted a resolution appointing
IBJ Schroder Bank & Trust Company as transfer agent, registrar, dividend
disbursing agent and redemption agent for the Company in connection with any
shares of AMPS (in such capacity, the "Paying Agent"). The Paying Agent hereby
accepts such appointment and agrees to act in accordance with its standard
procedures and the provisions of the Articles Supplementary which are specified
herein with respect to the shares of AMPS and as set forth in this Section 3.
10
<PAGE>
3.2. The Company's Notices to the Paying Agent.
-----------------------------------------
Whenever any shares of AMPS are to be redeemed, the Company promptly shall
deliver to the Paying Agent a Notice of Redemption, which will be mailed by the
Company to each Holder at least five Business Days prior to the date such Notice
of Redemption is required to be mailed pursuant to the Articles Supplementary.
The Paying Agent shall have no responsibility to confirm or verify the accuracy
of any such Notice.
3.3. The Company to Provide Funds for Dividends,
Redemptions and Additional Dividends.
------------------------------------------
(a) Not later than noon on each Dividend Payment Date, the Company
shall deposit with the Paying Agent an aggregate amount of Federal
Funds or similar same-day funds equal to the declared dividends to
be paid to Holders on such Dividend Payment Date, and shall give
the Paying Agent irrevocable instructions to apply such funds to
the payment of such dividends on such Dividend Payment Date.
(b) If the Company shall give a Notice of Redemption, then by noon of
the date fixed for redemption, the Company shall deposit in trust
with the Paying Agent an aggregate amount of Federal Funds or
similar same-day funds sufficient to redeem such shares of AMPS
called for redemption and shall give the Paying Agent irrevocable
instructions and authority to pay the redemption price to the
Holders of shares of AMPS called for redemption upon surrender of
the certificate or certificates therefor.
(c) If the Company provides notice to the Auction Agent of a
Retroactive Taxable Allocation, the Company, within 30 days after
such notice is given and by noon of the date fixed for payment of
an Additional Dividend, shall deposit in trust with the Paying
Agent an aggregate amount of Federal Funds or similar same-day
funds equal to such Additional Dividend and shall give the Paying
Agent irrevocable instructions and authority to pay the Additional
Dividend to Holders (or former Holders) entitled thereto.
3.4. Disbursing Dividends, Redemption Price
and Additional Dividends.
--------------------------------------
After receipt of the Federal Funds or similar same-day funds and
instructions from the Company described in Sections 3.3(a), (b) and (c) above,
the Paying Agent shall pay to the Holders (or former Holders) entitled thereto
(i) on each corresponding Dividend Payment Date, dividends on the shares of
AMPS, (ii) on any date fixed for redemption, the redemption price of any shares
of AMPS called for redemption and (iii) on the date fixed for payment of an
Additional Dividend, such Additional Dividend. The amount of dividends for any
Dividend Period to be paid by the Paying Agent to Holders will be determined by
the Company as set forth in Paragraph 2 of the Articles Supplementary. The
redemption price to be paid by the Paying Agent to the Holders of any shares of
AMPS called for redemption will be determined as set forth in Paragraph 4 of the
Articles Supplementary. The amount of Additional Dividends to be
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<PAGE>
paid by the Paying Agent in the event of a Retroactive Taxable Allocation to
Holders will be determined by the Company pursuant to paragraph 2(e) of the
Articles Supplementary. The Company shall notify the Paying Agent in writing of
a decision to redeem any shares of AMPS on or prior to the date specified in
Section 3.2 above, and such notice by the Company to the Paying Agent shall
contain the information required to be stated in a Notice of Redemption required
to be mailed by the Company to such Holders. The Paying Agent shall have no duty
to determine the redemption price and may rely on the amount thereof set forth
in a Notice of Redemption.
IV. THE PAYING AGENT AS TRANSFER AGENT AND REGISTRAR.
------------------------------------------------
4.1. Original Issue of Stock Certificates.
------------------------------------
On the Date of Original Issue for any share of AMPS, one certificate for
each series of AMPS shall be issued by the Company and registered in the name of
Cede & Co., as nominee of the Securities Depository, and countersigned by the
Paying Agent. The Company will give the Auction Agent prior written notice and
instruction as to the issuance and redemption of AMPS.
4.2. Registration of Transfer or Exchange of Shares.
----------------------------------------------
Except as provided in this Section 4.2, the shares of each series of AMPS
shall be registered solely in the name of the Securities Depository or its
nominee. If the Securities Depository shall give notice of its intention to
resign as such, and if the Company shall not have selected a substitute
Securities Depository acceptable to the Paying Agent prior to such resignation,
then upon such resignation, the shares of each series of AMPS, at the Company's
request, may be registered for transfer or exchange, and new certificates
thereupon shall be issued in the name of the designated transferee or
transferees, upon surrender of the old certificate in form deemed by the Paying
Agent properly endorsed for transfer with (a) all necessary endorsers'
signatures guaranteed in such manner and form as the Paying Agent may require by
a guarantor reasonably believed by the Paying Agent to be responsible, (b) such
assurances as the Paying Agent shall deem necessary or appropriate to evidence
the genuineness and effectiveness of each necessary endorsement and (c)
satisfactory evidence of compliance with all applicable laws relating to the
collection of taxes in connection with any registration of transfer or exchange
or funds necessary for the payment of such taxes. If the certificate or
certificates for shares of AMPS are not held by the Securities Depository or its
nominee, payments upon transfer of shares in an Auction shall be made in Federal
Funds or similar same-day funds to the Auction Agent against delivery of
certificates therefor.
4.3. Removal of Legend.
-----------------
Any request for removal of a legend indicating a restriction on transfer
from a certificate evidencing shares of AMPS shall be accompanied by an opinion
of counsel stating that such legend may be removed and such shares may be
transferred free of the restriction described in such legend, said opinion to be
delivered under cover of a letter from a Company Officer authorizing the Paying
Agent to remove the legend on the basis of said opinion.
12
<PAGE>
4.4. Lost, Stolen or Destroyed Stock Certificates.
--------------------------------------------
The Paying Agent shall issue and register replacement certificates for
certificates represented to have been lost, stolen or destroyed, upon the
fulfillment of such requirements as shall be deemed appropriate by the Company
and by the Paying Agent, subject at all times to provisions of law, the By-Laws
of the Company governing such matters and resolutions adopted by the Company
with respect to lost, stolen or destroyed securities. The Paying Agent may
issue new certificates in exchange for and upon the cancellation of mutilated
certificates. Any request by the Company to the Paying Agent to issue a
replacement or new certificate pursuant to this Section 4.4 shall be deemed to
be a representation and warranty by the Company to the Paying Agent that such
issuance will comply with provisions of applicable law and the By-Laws and
resolutions of the Company.
4.5. Disposition of Canceled Certificates;
Record Retention.
-------------------------------------
The Paying Agent shall retain stock certificates which have been canceled
in transfer or in exchange and accompanying documentation in accordance with
applicable rules and regulations of the Securities and Exchange Commission for
two calendar years from the date of such cancellation. The Paying Agent, upon
written request by the Company, shall afford to the Company, its agents and
counsel access at reasonable times during normal business hours to review and
make extracts or copies (at the Company's sole cost and expense) of such
certificates and accompanying documentation. Upon request by the Company at any
time after the expiration of this two-year period, the Paying Agent shall
deliver to the Company the canceled certificates and accompanying documentation.
The Company, at its expense, shall retain such records for a minimum additional
period of four calendar years from the date of delivery of the records to the
Company and shall make such records available during this period at any time, or
from time to time, for reasonable periodic, special, or other examinations by
representatives of the Securities and Exchange Commission. The Company also
shall undertake to furnish to the Securities and Exchange Commission, upon
demand, either at their principal office or at any regional office, complete,
correct and current hard copies of any and all such records. Thereafter, such
records shall not be destroyed by the Company without the approval of the Paying
Agent, which approval shall not be withheld unreasonably, but will be safely
stored for possible future reference.
4.6. Stock Register.
--------------
The Paying Agent shall maintain the stock register, which shall contain a
list of the Holders, the number of shares held by each Holder and the address of
each Holder. The Paying Agent shall record in the stock register any change of
address of a Holder upon notice by such Holder. In case of any written request
or demand for the inspection of the stock register or any other books of the
Company in the possession of the Paying Agent, the Paying Agent will notify the
Company and secure instructions as to permitting or refusing such inspection.
The Paying Agent reserves the right, however, to exhibit the stock register or
other records to any person in case it is advised by its counsel that its
failure to do so would (i) be unlawful or (ii) expose it to liability, unless
the Company shall have offered indemnification satisfactory to the Paying Agent.
13
<PAGE>
4.7. Return of Funds.
---------------
Any funds deposited with the Paying Agent by the Company for any reason
under this Agreement, including for the payment of dividends or the redemption
of shares of any series of AMPS, that remain with the Paying Agent after 12
months shall be repaid to the Company upon written request by the Company.
V. REPRESENTATIONS AND WARRANTIES.
------------------------------
5.1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to the Auction Agent that:
(i) the Company is duly organized and is validly existing as a
corporation in good standing under the laws of the State of
Maryland, and has full power to execute and deliver this Agreement
and to authorize, create and issue the shares of AMPS;
(ii) the Company is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended,
as a closed-end, non-diversified, management investment company;
(iii) this Agreement has been duly and validly authorized, executed and
delivered by the Company and constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company
in accordance with its terms, subject as to such enforceability to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to
general equitable principles;
(iv) the forms of the certificates evidencing the shares of each series
of AMPS comply with all applicable laws of the State of Maryland;
(v) the shares of each series of AMPS have been duly and validly
authorized by the Company and, upon completion of the initial sale
of the shares of such series of AMPS and receipt of payment
therefor, will be validly issued, fully paid and nonassessable;
(vi) at the time of the offering of the shares of each series of AMPS,
the shares offered will be registered under the Securities Act of
1933, as amended, and no further action by or before any
governmental body or authority of the United States or of any
state thereof is required in connection with the execution and
delivery of this Agreement or will be required in connection with
the issuance of the shares of AMPS, except such action as required
by applicable state securities or insurance laws, all of which
action will have been taken;
(vii) the execution and delivery of this Agreement and the issuance and
delivery of the shares of each series of AMPS do not and will not
conflict with, violate, or result in a breach of, the terms,
conditions or provisions of, or constitute a default under, the
Charter or the By-Laws of the Company, any law or regulation
applicable to the Company, any order or decree of any court or
public authority having jurisdiction over the Company, or
14
<PAGE>
any mortgage, indenture, contract, agreement or undertaking to
which the Company is a party or by which it is bound; and
(viii) no taxes are payable upon or in respect of the execution of this
Agreement or will be payable upon or in respect of the issuance
of the shares of each series of AMPS.
5.2. Representations and Warranties of the Auction Agent.
---------------------------------------------------
The Auction Agent represents and warrants to the Company that the Auction
Agent is duly organized and is validly existing as a banking corporation in good
standing under the laws of the State of New York, and has the corporate power to
enter into and perform its obligations under this Agreement.
VI. THE AUCTION AGENT.
-----------------
6.1. Duties and Responsibilities.
---------------------------
(a) The Auction Agent is acting solely as agent for the Company
hereunder and owes no fiduciary duties to any Person except as
provided by this Agreement.
(b) The Auction Agent undertakes to perform such duties and only such
duties as are set forth specifically in this Agreement, and no
implied covenants or obligations shall be read into this Agreement
against the Auction Agent.
(c) In the absence of bad faith or negligence on its part, the Auction
Agent shall not be liable for any action taken, suffered or
omitted by it or for any error of judgment made by it in the
performance of its duties under this Agreement. The Auction Agent
shall not be liable for any error of judgment made in good faith
unless the Auction Agent shall have been negligent in ascertaining
(or failing to ascertain) the pertinent facts.
6.2. Rights of the Auction Agent.
---------------------------
(a) The Auction Agent may rely upon, and shall be protected in acting
or refraining from acting upon, any communication authorized
hereby and any written instruction, notice, request, direction,
consent, report, certificate, share certificate or other
instrument, paper or document reasonably believed by it to be
genuine. The Auction Agent shall not be liable for acting upon any
telephone communication authorized hereby which the Auction Agent
believes in good faith to have been given by the Company or by a
Broker-Dealer. The Auction Agent may record telephone
communications with the Company or with the Broker-Dealers or with
both.
(b) The Auction Agent may consult with counsel of its choice, and the
written advice of such counsel shall be full and complete
authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon.
15
<PAGE>
(c) The Auction Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder. The Auction
Agent shall be under no liability for interest on any money
received by it hereunder except as otherwise agreed in writing
with the Company.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.
6.3. Auction Agent's Disclaimer.
--------------------------
The Auction Agent makes no representation as to the validity or the
adequacy of this Agreement, the Broker-Dealer Agreements or the AMPS.
6.4. Compensation, Expenses and Indemnification.
-------------------------------------------
(a) The Company shall pay to the Auction Agent from time to time
reasonable compensation for all services rendered by it under this
Agreement and under the Broker-Dealer Agreements as shall be set
forth in a separate writing signed by the Company and the Auction
Agent, subject to adjustments if the AMPS no longer are held of
record by the Securities Depository or its nominee or if there
shall be such other change as shall increase materially the
Auction Agent's obligations hereunder or under the Broker-Dealer
Agreements.
(b) The Company shall reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or
made by the Auction Agent in accordance with any provision of this
Agreement and of the Broker-Dealer Agreements (including the
reasonable compensation, expenses and disbursements of its agents
and counsel), except any expense, disbursement or advance
attributable to its negligence or bad faith.
(c) The Company shall indemnify the Auction Agent for, and hold it
harmless against, any loss, liability or expense incurred without
negligence or bad faith on its part arising out of or in
connection with its agency under this Agreement and under the
Broker-Dealer Agreements, including the costs and expenses of
defending itself against any claim of liability in connection with
its exercise or performance of any of its duties hereunder and
thereunder, except such as may result from its negligence or bad
faith.
VII. MISCELLANEOUS.
-------------
7.1. Term of Agreement.
-----------------
(a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Company may
terminate this Agreement at any time by so notifying the Auction
Agent, provided that if any AMPS remain outstanding the Company
shall have entered into an agreement in substantially the form of
this Agreement with a successor auction agent. The Auction Agent
may
16
<PAGE>
terminate this Agreement upon prior notice to the Company on
the date specified in such notice, which date shall be no earlier
than 60 days after delivery of such notice. If the Auction Agent
resigns while any shares of AMPS remain outstanding, the Company
shall use its best efforts to enter into an agreement with a
successor auction agent containing substantially the same terms and
conditions as this Agreement.
(b) Except as otherwise provided in this Section 7.1(b), the respective
rights and duties of the Company and the Auction Agent under this
Agreement shall cease upon termination of this Agreement. The
Company's representations, warranties, covenants and obligations to
the Auction Agent under Sections 5 and 6.4 hereof shall survive the
termination hereof. Upon termination of this Agreement, the Auction
Agent shall (i) resign as Auction Agent under the Broker-Dealer
Agreements, (ii) at the Company's request, deliver promptly to the
Company copies of all books and records maintained by it in
connection with its duties hereunder, and (iii) at the request of
the Company, transfer promptly to the Company or to any successor
auction agent any funds deposited by the Company with the Auction
Agent (whether in its capacity as Auction Agent or as Paying Agent)
pursuant to this Agreement which have not been distributed
previously by the Auction Agent in accordance with this Agreement.
7.2. Communications.
--------------
Except for (i) communications authorized to be made by telephone pursuant
to this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be given to such
party at its address or telecopier number set forth below:
If to the Company, MuniHoldings New York Insured Fund II, Inc.
addressed to: 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: Treasurer
Telephone No.: (609) 282-2800
Telecopier No.: (609) 282-3472
If to the Auction IBJ Schroder Bank & Trust Company
Agent, addressed to: One State Street
New York, New York 10004
Attention: Auction Window Subcellar 1
Telephone No.: (212) 858-2315
Telecopier No.: (212) 797-1148
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when
17
<PAGE>
delivered at the address specified herein. Communications shall be given on
behalf of the Company by a Company Officer and on behalf of the Auction Agent by
an Authorized Officer.
7.3. Entire Agreement.
----------------
This Agreement contains the entire agreement between the parties relating
to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or inferred,
between the parties relating to the subject matter hereof, except for agreements
relating to the compensation of the Auction Agent.
7.4. Benefits.
--------
Nothing herein, express or implied, shall give to any Person, other than
the Company, the Auction Agent and their respective successors and assigns, any
benefit of any legal or equitable right, remedy or claim hereunder.
7.5. Amendment; Waiver.
-----------------
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except
by a written instrument signed by a duly authorized representative
of the party to be charged. The Company shall notify the Auction
Agent of any change in the Articles Supplementary prior to the
effective date of any such change. If any such change in the
Articles Supplementary materially increases the Auction Agent's
obligations hereunder, the Company shall obtain the written consent
to the Auction Agent prior to the effective date of such change.
(b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall
not constitute a waiver of any such right or remedy with respect to
any subsequent breach.
7.6. Successors and Assigns.
----------------------
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of the
Company and the Auction Agent. This Agreement may not be assigned by either
party hereto absent the prior written consent of the other party, which consent
shall not be withheld unreasonably.
7.7. Severability.
------------
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
7.8. Execution in Counterparts.
-------------------------
This Agreement may be executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument.
18
<PAGE>
7.9. Governing Law.
-------------
This 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.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
MUNIHOLDINGS NEW YORK INSURED
FUND II, INC.
By:
--------------------------------
Name:
Title:
IBJ SCHRODER BANK & TRUST COMPANY
By:
--------------------------------
Name:
Title:
20
<PAGE>
EXHIBIT (K)(3)
================================================================================
BROKER-DEALER AGREEMENT
between
IBJ SCHRODER BANK & TRUST COMPANY
and
[NAME OF BROKER-DEALER]
Dated as of _______, 1998
Relating to
AUCTION MARKET PREFERRED STOCK(R)
("AMPS"(R)),
Series A and B
of
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
================================================================================
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
BROKER-DEALER AGREEMENT dated as of ______, 1998, between IBJ SCHRODER BANK
& TRUST COMPANY, a New York banking corporation (the "Auction Agent") (not in
its individual capacity, but solely as agent of MuniHoldings New York Insured
Fund II, Inc., a Maryland corporation (the "Company"), pursuant to authority
granted to it in the Auction Agent Agreement dated as of ______, 1998, between
the Company and the Auction Agent (the "Auction Agent Agreement")), and [NAME OF
BROKER-DEALER] (together with its successors and assigns, "BD").
The Company proposes to duly authorize and issue _____ shares of Auction
Market Preferred Stock(R), Series A ("Series A AMPS"), and _____ shares of
Auction Market Preferred Stock(R), Series B ("Series B AMPS"), each with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
accumulated but unpaid dividends (whether or not earned or declared), each
pursuant to the Company's Articles Supplementary (as defined below). The Series
A AMPS and Series B AMPS are sometimes herein referred to together as the
"AMPS."
The Company's Articles Supplementary provide that the dividend rate on each
series of AMPS for each Dividend Period therefor after the Initial Dividend
Period shall be the Applicable Rate therefor, which in each case, in general
shall be the rate per annum that a commercial bank, trust company or other
financial institution appointed by the Company advises results from
implementation of the Auction Procedures (as defined below). The Board of
Directors of the Company has adopted a resolution appointing IBJ Schroder Bank &
Trust Company as Auction Agent for purposes of the Auction Procedures, and
pursuant to Section 2.5(d) of the Auction Agent Agreement, the Company has
requested and directed the Auction Agent to execute and deliver this Agreement.
The Auction Procedures require the participation of one or more Broker-
Dealers.
- ----------------
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Auction Agent and BD agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
-------------------------------------
1.1. Terms Defined by Reference to the Articles Supplementary.
------------------------------------------- -------------
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary of the Company.
1.2. Terms Defined Herein. As used herein and in the Settlement
--------------------
Procedures (as defined below), the following terms shall have the following
meanings, unless the context otherwise requires:
(a) "Articles Supplementary" shall mean the Articles Supplementary, as
amended, of the Company, establishing the powers, preferences and rights of the
AMPS filed on ______, 1998 with the State Department of Assessments and Taxation
of Maryland.
(b) "Auction" shall have the meaning specified in Section 3.1 hereof.
(c) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Paragraph 10 of the Articles Supplementary.
(d) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Trust Officer, Assistant Secretary and
Assistant Treasurer of the Auction Agent assigned to its Corporate Trust and
Agency Group and every other officer or employee of the Auction Agent designated
as an "Authorized Officer" for purposes of this Agreement in a communication to
BD.
(e) "BD Officer" shall mean each officer or employee of BD designated
as a "BD Officer" for purposes of this Agreement in a communication to the
Auction Agent.
(f) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.
(g) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit A.
1.3. Rules of Construction. Unless the context or use indicates another
---------------------
or different meaning or intent, the following rules shall apply to the
construction of this Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement, nor shall they
affect its meaning, construction or effect.
2
<PAGE>
(c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to New
York City time.
II. NOTIFICATION OF DIVIDEND PERIOD AND ADVANCE NOTICE OF
ALLOCATION OF TAXABLE INCOME
-----------------------------------------------------
2.1. The provisions contained in paragraph 2 of the Articles Supplementary
concerning the notification of a Special Dividend Period will be followed by the
Auction Agent and BD, and the provisions contained therein are incorporated
herein by reference in their entirety and shall be deemed to be a part of this
Agreement to the same extent as if such provisions were set forth fully herein.
2.2. Except as otherwise provided in paragraph 2(f) of the Articles
Supplementary, whenever the Company intends to include any net capital gains or
other income subject to regular Federal income tax in any dividend on shares of
any series of AMPS, the Company will notify the Auction Agent of the amount to
be so included at least five Business Days prior to the Auction Date on which
the Applicable Rate for such dividend is to be established. Whenever the
Auction Agent receives such notice from the Company, in turn it will notify BD,
who, on or prior to such Auction Date, will notify its Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order in
the Auction to be held on such Auction Date. Whenever the Company intends to
include any additional amounts in a dividend as provided in paragraph 2(f) of
the Articles Supplementary, the Company will notify the Auction Agent of such
additional amounts to be so included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. Whenever the Auction Agent
receives such notice from the Company, in turn it will notify the Securities
Depository and BD, who, on or prior to the applicable Dividend Payment Date,
will notify its Beneficial Owners.
III. THE AUCTION.
-----------
3.1. Purpose; Incorporation by Reference of Auction Procedures and
-------------------------------------------------------------
Settlement Procedures.
- ---------------------
(a) On each Auction Date, the provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of determining the
Applicable Rate for each series of AMPS, for the next Dividend Period therefor.
Each periodic operation of such procedures is hereinafter referred to as an
"Auction."
(b) All of the provisions contained in the Auction Procedures and the
Settlement Procedures are incorporated herein by reference in their entirety and
shall be deemed to be a part of this Agreement to the same extent as if such
provisions were set forth fully herein.
(c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement.
BD understands that other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in
3
<PAGE>
Paragraph 1 of the Articles Supplementary may execute a Broker-Dealer Agreement
and participate as Broker-Dealers in Auctions.
(d) BD and other Broker-Dealers may participate in Auctions for their
own accounts. However, the Company, by notice to BD and all other Broker
Dealers, may prohibit all Broker-Dealers from submitting Bids in Auctions for
their own accounts, provided that Broker-Dealers may continue to submit Hold
Orders and Sell Orders.
3.2. Preparation for Each Auction.
----------------------------
(a) Not later than 9:30 A.M. on each Auction Date for the AMPS, the
Auction Agent shall advise BD by telephone of the Reference Rate and the Maximum
Applicable Rate in effect on such Auction Date.
(b) In the event that the Auction Date for any Auction shall be
changed after the Auction Agent has given the notice referred to in clause (vii)
of paragraph (a) of the Settlement Procedures, the Auction Agent, by such means
as the Auction Agent deems practicable, shall give notice of such change to BD
not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on
the old Auction Date. Thereafter, BD promptly shall notify customers of BD that
BD believes are Beneficial Owners of shares of AMPS of such change in the
Auction Date.
(c) The Auction Agent from time to time may request BD to provide it
with a list of the respective customers BD believes are Beneficial Owners of
shares of each series of AMPS. BD shall comply with any such request, and the
Auction Agent shall keep confidential any such information, including
information received as to the identity of Bidders in any Auction, and shall not
disclose any such information so provided to any Person other than the Company;
and such information shall not be used by the Auction Agent or its officers,
employees, agents or representatives for any purpose other than such purposes as
are described herein. The Auction Agent shall transmit any list of customers BD
believes are Beneficial Owners of shares of each series of AMPS and information
related thereto only to its officers, employees, agents or representatives in
the Corporate Trust and Agency Group who need to know such information for the
purposes of acting in accordance with this Agreement, and the Auction Agent
shall prevent the transmission of such information to others and shall cause its
officers, employees, agents and representatives to abide by the foregoing
confidentiality restrictions; provided, however, that the Auction Agent shall
have no responsibility or liability for the actions of any of its officers,
employees, agents or representatives after they have left the employ of the
Auction Agent.
3.3. Auction Schedule; Method of Submission of Orders.
------------------------------------------------
(a) The Company and the Auction Agent shall conduct Auctions for each
series of AMPS in accordance with the schedule set forth below. Such schedule
may be changed at any time by the Auction Agent with the consent of the Company,
which consent shall not be withheld unreasonably. The Auction Agent shall give
notice of any such change to BD. Such notice shall be received prior to the
first Auction Date on which any such change shall be effective.
4
<PAGE>
Time Event
---- -----
By 9:30 A.M. Auction Agent advises the Company and Broker-
Dealers of the Reference Rate and the Maximum
Applicable Rate as set forth in Section 3.2(a)
hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated
to it by Broker- Dealers as provided in Paragraph
10(c)(i) of the Articles Supplementary. Submission
Deadline is 1:00 P.M.
Not earlier than 1:00 P.M. Auction Agent makes determinations pursuant to
Paragraph 10(d)(i) of the Articles Supplementary.
By approximately 3:00 P.M. Auction Agent advises the Company of the results
of the Auction as provided in Paragraph 10(d)(ii)
of the Articles Supplementary.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part and
shares of AMPS are allocated as provided in
Paragraph 10(e) of the Articles Supplementary.
Auction Agent gives notice of the Auction results
as set forth in Section 3.4(a) hereof.
(b) BD agrees to maintain a list of Potential Beneficial Owners and to
contact the Potential Beneficial Owners on such list on or prior to each Auction
Date for the purposes set forth in Paragraph 10 of the Articles Supplementary.
(c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit B. BD shall submit separate
Orders to the Auction Agent for each Potential Beneficial Owner or Beneficial
Owner on whose behalf BD is submitting an Order and shall not net or aggregate
the Orders of Potential Beneficial Owners or Beneficial Owners on whose behalf
BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit C, of transfers of shares
of any series of AMPS, made through BD by an Existing Holder to another Person
other than pursuant to an Auction, and (ii) a written notice, substantially in
the form attached hereto as Exhibit D, of the failure of shares of any series of
any series of AMPS to be transferred to or by any Person that purchased or sold
shares of any series of AMPS through BD pursuant to an Auction. The Auction
Agent is not required to accept any notice delivered pursuant to the terms of
the foregoing sentence with respect to an Auction unless it is received by the
Auction Agent by 3:00 P.M. on the Business Day next preceding the applicable
Auction Date.
5
<PAGE>
3.4. Notice of Auction Results.
-------------------------
(a) On each Auction Date, the Auction Agent shall notify BD by
telephone as set forth in paragraph (a) of the Settlement Procedures. On the
Business Day next succeeding such Auction Date, the Auction Agent shall notify
BD in writing of the disposition of all Orders submitted by BD in the Auction
held on such Auction Date.
(b) BD shall notify each Beneficial Owner, Potential Beneficial Owner,
Existing Holder or Potential Holder on whose behalf BD has submitted an Order as
set forth in paragraph (b) of the Settlement Procedures, and take such other
action as is required of BD pursuant to the Settlement Procedures.
If any Beneficial Owner or Existing Holder selling shares of AMPS in an
Auction fails to deliver such shares, the BD of any Person that was to have
purchased shares of such series of AMPS in such Auction may deliver to such
Person a number of whole shares of such series of AMPS that is less than the
number of shares that otherwise was to be purchased by such Person. In such
event, the number of shares of such series of AMPS to be so delivered shall be
determined by such BD. Delivery of such lesser number of shares shall
constitute good delivery. Upon the occurrence of any such failure to deliver
shares, such BD shall deliver to the Auction Agent the notice required by
Section 3.3(d)(ii) hereof. Notwithstanding the foregoing terms of this Section
3.4(b), any delivery or non-delivery of shares of any series of AMPS which
represents any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the terms
of Section 3.3(d) hereof. The Auction Agent shall have no duty or liability
with respect to enforcement of this Section 3.4(b).
3.5. Service Charge to Be Paid to BD. On the Business Day next succeeding
-------------------------------
each Auction Date, the Auction Agent shall pay to BD from moneys received from
the Company an amount equal to: (a) in the case of any Auction Date immediately
preceding a 7-Day Dividend Period or 28-Day Dividend Period, the product of (i)
a fraction the numerator of which is the number of days in such Dividend Period
(calculated by counting the first day of such Dividend Period but excluding the
last day thereof) and the denominator of which is 360, times (ii) 1/4 of 1%,
times (iii) $25,000, times (iv) the sum of (A) the aggregate number of AMPS
placed by BD in the applicable Auction that were (x) the subject of a Submitted
Bid of a Beneficial Owner submitted by BD and continued to be held as a result
of such submission and (y) the subject of a Submitted Bid of a Potential
Beneficial Owner submitted by BD and were purchased as a result of such
submission plus (B) the aggregate number of AMPS subject to valid Hold Orders
(determined in accordance with Paragraph 10 of the Articles Supplementary)
submitted to the Auction Agent by BD plus (C) the number of AMPS deemed to be
subject to Hold Orders by Beneficial Owners pursuant to Paragraph 10 of the
Articles Supplementary that were acquired by such Beneficial Owners through BD;
and (b) in the case of any Auction Date immediately preceding a Special Dividend
Period, that amount as mutually agreed upon by the Company and BD, based on the
selling concession that would be applicable to an underwriting of fixed or
variable rate preferred shares with a similar final maturity or variable rate
dividend period, at the commencement of such Special Dividend Period.
6
<PAGE>
For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any
Beneficial Owner who acquired shares of any series of AMPS through BD transfers
those shares to another Person other than pursuant to an Auction, then the
Broker-Dealer for the shares so transferred shall continue to be BD, provided,
however, that if the transfer was effected by, or if the transferee is, a
Broker-Dealer other than BD, then such Broker-Dealer shall be the Broker-Dealer
for such shares.
IV. THE AUCTION AGENT.
-----------------
4.1. Duties and Responsibilities.
---------------------------
(a) The Auction Agent is acting solely as agent for the Company
hereunder and owes no fiduciary duties to any other Person by reason of this
Agreement.
(b) The Auction Agent undertakes to perform such duties and only such
duties as are set forth specifically in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.
(c) In the absence of bad faith or negligence on its part, the Auction
Agent shall not be liable for any action taken, suffered or omitted by it, or
for any error of judgment made by it in the performance of its duties under this
Agreement. The Auction Agent shall not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in ascertaining
(or failing to ascertain) the pertinent facts.
4.2. Rights of the Auction Agent.
---------------------------
(a) The Auction Agent may rely upon, and shall be protected in acting
or refraining from acting upon, any communication authorized by this Agreement
and any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document believed
by it to be genuine. The Auction Agent shall not be liable for acting upon any
telephone communication authorized by this Agreement which the Auction Agent
believes in good faith to have been given by the Company or by BD. The Auction
Agent may record telephone communications with BD.
(b) The Auction Agent may consult with counsel of its own choice, and
the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.
4.3. Auction Agent's Disclaimer. The Auction Agent makes no
--------------------------
representation as to the validity or adequacy of this Agreement or the AMPS.
7
<PAGE>
V. MISCELLANEOUS.
-------------
5.1. Termination. Any party may terminate this Agreement at any time upon
-----------
five days' prior written notice to the other party; provided, however, that if
BD is Merrill Lynch, Pierce, Fenner & Smith Incorporated, neither BD nor the
Auction Agent may terminate this Agreement without first obtaining the prior
written consent of the Company to such termination, which consent shall not be
withheld unreasonably.
5.2. Participant in Securities Depository; Payment of Dividends in Same-Day
----------------------------------------------------------------------
Funds.
- -----
(a) BD is, and shall remain for the term of this Agreement, a member
of, or a participant in, the Securities Depository (or an affiliate of such a
member or participant).
(b) BD represents that it (or if BD does not act as Agent Member, one
of its affiliates) shall make all dividend payments on the AMPS available in
same-day funds on each Dividend Payment Date to customers that use BD (or its
affiliate) as Agent Member.
5.3. Agent Member. At the date hereof, BD is a participant of the
------------
Securities Depository.
5.4. Communications. Except for (i) communications authorized to be made
--------------
by telephone pursuant to this Agreement or the Auction Procedures and (ii)
communications in connection with the Auctions (other than those expressly
required to be in writing), all notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given to such party at its address or telecopier number set forth
below:
If to BD, addressed to: -------------------------------------
-------------------------------------
-------------------------------------
Attention:
Telecopier No.: (212) 449-4321
Telephone No.: (212) 449-6500
If to the Auction Agent,
addressed to: IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
Attention: Auction Window
Subcellar 1
Telecopier No.: (212) 797-1148
Telephone No.: (212) 858-2135
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a
8
<PAGE>
BD Officer and on behalf of the Auction Agent by an Authorized Officer. BD may
record telephone communications with the Auction Agent.
5.5. Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties relating to the subject matter hereof, and there are no
other representations, endorsements, promises, agreements or understandings,
oral, written or inferred, between the parties relating to the subject matter
hereof.
5.6. Benefits. Nothing in this Agreement, express or implied, shall give
--------
to any person, other than the Company, the Auction Agent and BD and their
respective successors and assigns, any benefit of any legal or equitable right,
remedy or claim under this Agreement.
5.7. Amendment; Waiver.
-----------------
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged.
(b) Failure of either party to this Agreement to exercise any right or
remedy hereunder in the event of a breach of this Agreement by the other party
shall not constitute a waiver of any such right or remedy with respect to any
subsequent breach.
5.8. Successors and Assigns. This Agreement shall be binding upon, inure
----------------------
to the benefit of, and be enforceable by, the respective successors and
permitted assigns of each of BD and the Auction Agent. This Agreement may not
be assigned by either party hereto absent the prior written consent of the other
party;
provided, however, that this Agreement may be assigned by the Auction Agent to a
successor Auction Agent selected by the Company without the consent of BD.
5.9. Severability. If any clause, provision or section of this Agreement
------------
shall be ruled invalid or unenforceable by any court of competent jurisdiction,
the invalidity or unenforceability of such clause, provision or section shall
not affect any remaining clause, provision or section hereof.
5.10. Execution in Counterparts. This Agreement may be executed in
-------------------------
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
5.11. Governing Law. This 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.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
IBJ SCHRODER BANK & TRUST COMPANY
---------------------------------
By:
Title:
[NAME OF BROKER-DEALER]
---------------------------------
By:
Title:
10
<PAGE>
EXHIBIT A
---------
SETTLEMENT PROCEDURES
---------------------
[From Prospectus]
<PAGE>
EXHIBIT B
---------
IBJ SCHRODER BANK & TRUST COMPANY
AUCTION BID FORM
---------------------------------
Submit To: IBJ Schroder Bank & Trust Co. Issue: MuniHoldings New York
Securities Transfer Department Insured Fund II, Inc.
One State Street Series: _______________________
New York, New York 10004 Auction Date:__________________
Attention: Auction Window
Telephone: (212) 858-2272
Facsimile: (212) 797-1148
The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:
Name of Bidder:__________________
BENEFICIAL OWNER
Shares now held:_________________ HOLD_________________________
BID at rate of_______________
SELL_________________________
POTENTIAL BENEFICIAL OWNER
# of shares bid______________
BID at rate of_______________
Notes:
(1) If submitting more than one Bid for one Bidder, use additional Auction Bid
Forms.
(2) If one or more Bids covering in the aggregate more than the number of
outstanding shares held by any Beneficial Owner are submitted, such bid
shall be considered valid in the order of priority set forth in the Auction
Procedures on the above issue.
(3) A Hold or Sell Order may be placed only by a Beneficial Owner covering a
number of shares not greater than the number of shares currently held.
(4) Potential Beneficial Owners may make only Bids, each of which must specify
a rate. If more than one Bid is submitted on behalf of any Potential
Beneficial Owner, each Bid submitted shall be a separate Bid with the rate
specified.
(5) Bids may contain no more than three figures to the right of the decimal
point (.001 of 1%). Fractions will not be accepted.
NAME OF BROKER-DEALER_____________________________
Authorized Signature______________________________
<PAGE>
EXHIBIT C
---------
(Note: To be used only for transfers made
other than pursuant to an Auction)
TRANSFER FORM
-------------
Re: MuniHoldings New York Insured Fund II, Inc.
Auction Market Preferred Stock(R),
Series [A][B] ("AMPS"(R))
We are (check one):
[ ] the Existing Holder named below;
[ ] the Broker-Dealer for such Existing Holder; or
[ ] the Agent Member for such Existing Holder.
We hereby notify you that such Beneficial Owner has transferred ____________
shares of AMPS to __________________.
_____________________________
(Name of Existing Holder)
_____________________________
(Name of Broker-Dealer)
_____________________________
(Name of Agent Member)
By___________________________
Printed Name:
Title:
<PAGE>
EXHIBIT D
---------
(Note: To be used only for failures to deliver
AMPS sold pursuant to an Auction)
NOTICE OF A FAILURE TO DELIVER
------------------------------
Complete either I or II
- -----------------------
I. We are a Broker-Dealer for ____________________ (the "Purchaser"),
which purchased ___________ shares of AMPS, Series [A][B], of
MuniHoldings New York Insured Fund II, Inc. in the Auction held on
______________________ from the seller of such shares.
II. We are a Broker-Dealer for _____________________ (the "Seller"),
which sold _______ shares of AMPS, Series [A][B], of MuniHoldings
New York Insured Fund II, Inc. in the Auction held on
______________ to the Purchaser of such shares.
We hereby notify you that (check one):
____________ the Seller failed to deliver such shares to the Purchaser
____________ the Purchaser failed to make payment to the Seller upon delivery of
such shares
Name:______________________________
(Name of Broker-Dealer)
By:________________________________
Printed Name:
Title:
<PAGE>
EXHIBIT K(4)
LOGO
- --------------------------------------------------------------------------------
BOOK-ENTRY-ONLY AUCTION-RATE/MONEY MARKET PREFRRED/AND REMARKETED
PREFERRED SECURITIES
- --------------------------------------------------------------------------------
LETTER OF REPRESENTATIONS
[To be Completed by Issuer and Trust Company]
------------------------------------------------------------
[Name of Issuer]
------------------------------------------------------------
[Name of Trust Company]
Attention: General Counsel's Office ________________
The Depository Trust Company [Date]
55 Water Street; 49th Floor
New York, NY 10041-0099
Re:
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
[Issue Description, including CUSIP number]
Ladies and Gentlemen:
This letter sets forth our understanding with respect to certain matters
relating to the above-referenced issue (the "Securities"). Trust Company will
act as transfer agent, registrar, dividend disbursing agent, and redemption
agent with respect to the Securities. The Securities will be issued pursuant to
a prospectus, private placement memorandum, or other such document authorizing
the issuance of a Securities dated _______________________, 199__ (the
"Document"). _______________________ ["Underwriter"] is distributing the
Securities through the Depositary Trust Company ("DTC").
To induce DTC to accept the Securities as eligible for deposit at DTC, and
to act in accordance with respect to the Securities, Issue and Trust Company
make the following representations to DTC:
1. Prior to closing on the Securities on ____________________, 199__,
there shall be deposited with DTC one Security certificate registered in the
name of DTC's nominee, Cede & Co., which represents the total number of
Securities issued. Said certificate shall remain in DTC's custody as provided
in the Document.
<PAGE>
If however, the aggregate principal amount of the Securities exceed $200
million, one certificate will be issued with respect to each $200 million of
principal amount and an additional certificate will be issued with respect to
any remaining principal amount. Each Security certificate shall bear the
following legend:
Unless this certificate is presented by an authorized representative
of The Depository Trust Company, a New York corporation ("DTC"), to issuer
or its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co., or in such
other name as is requested by an authorized representative of DTC (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGRUL inasmuch as
the registered owner hereof, Cede & Co., has an interest therein.
2. Issuer: (a) understands that DTC has no obligation to, and will not,
communicate to its Participants or to any person having an interest in the
Securities any information contained in the Security certificate(s); and (b)
acknowledges that neither DTC's Participants nor any person having an interest
in the Securities shall be deemed to have notice of the provisions of the
Security certificate(s) by virtue of submission of such certificate(s) to DTC.
3. In the event of any solicitation of consents from or voting by holders
of the Securities, Issuer shall establish a record date for such purposes (with
no provision for revocation of consents or votes by subsequent holders) and
shall send notice of such record date to DTC not less than 15 calendar days in
advance of such record date. Notices to DTC pursuant to this Paragraph by
telecopy shall be sent to DTC's Reorganization Department at (212) 709-6896 or
(212) 709-6897, and receipt of such notices shall be confirmed by telephoning
(212) 709-6870. Notices to DTC pursuant to this Paragraph by mail or by any
other means shall be sent to DTC's Reorganization Department as indicated in
Paragraph 5.
4. In the event of a full or partial redemption of the outstanding
Securities, Issuer or Trust Company shall send a notice to DTC specifying: (a)
the number of Securities to be redeemed; and (b) the date such notice is to be
distributed to Security holders or published (the "Publication Date"). Such
notice shall be sent to DTC by a secure means (e.g., legible telecopy,
registered or certified mail, overnight delivery) in a timely manner designed to
assure that such notice is in DTC's possession no later than the close of
business on the business day before or, if possible, two business days before
the Publication Date. Issuer or Trust Company shall forward such notice either
in a separate secure transmission for each CUSIP number or in a secure
transmission for multiple CUSIP numbers (if applicable) which includes a
manifest or list of each CUSIP number submitted in that transmission. (The
party sending such notice shall have a method to verify subsequently the use of
such means and the timeliness of such notice.) The Publication date shall be
not less than 30 days nor more than 60 days prior to the redemption date.
Notices to DTC pursuant to this Paragraph by telecopy shall be sent to DTC's
Call Notification Department at (516) 227-4039 or (516) 227-4190. If the party
sending the notice does not receive a telecopy receipt from DTC confirming that
the notice has been received, such party shall telephone (516) 227-4070.
Notices to DTC pursuant to this Paragraph by mail or by any other means shall be
sent to:
Manager; Call Notification Department
The Depository Trust Company
711 Stewart Avenue
Garden City, NY 11530-4719
5. In the event of an invitation to tender the Securities (including
mandatory tenders, exchanges, and capital changes), notice by Issuer or Trust
Company to Security holder specifying the terms of the tender and the
Publication Date of such notice shall be sent to DTC by a secure means in the
manner set
2
<PAGE>
forth in the preceding Paragraph. Notices to DTC pursuant to this Paragraph and
notices of other corporate action by telecopy shall be sent to DTC's
Reorganization Department at (212) 709-1093 or (212) 709-1094, and receipt of
such notices shall be confirmed by telephoning (212) 709-6884. Notices to DTC
pursuant to the above by mail or by any other means shall be sent to:
Manager; Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square, 23rd Street
New York, NY 10004-2695
6. All notices and payment advices sent to DTC shall contain the CUSIP
number of the Securities (listed on Schedule A hereto) and the accompanying
description of such Security, which as of the date of this letter is
"________________________________________________________".
7. The Document indicates that the dividend rate for the Securities may
vary from time to time. Absent other existing arrangements with DTC, Issuer or
Trust Company shall give DTC notice of each such change in the dividend rate, on
the same day that the new rate is determined, by telephoning the Supervisor of
DTC's Dividend Announcement Section at (212) 709-1270, or by telecopy sent to
(212) 709-1723. Such verbal or telecopy notice shall be followed by prompt
written confirmation sent by a secure means in the manner set forth in Paragraph
4 to:
Manager; Announcements
Dividend Department
The Depository Trust Company
7 Hanover Square, 22nd Floor
New York, NY 10004-2695
8. The Document indicates that each purchaser must sign a purchaser's
letter which contains provisions restricting transfer of the Securities
purchased. Issuer and Trust Company acknowledge that as long as Cede & Co. is
the sole record owner of the Securities, Cede & Co. shall be entitled to all
voting rights applicable to the Securities and to receive the full amount of all
dividends, liquidation proceeds, and redemption proceeds payable with respect to
the Securities, even if the credits of Securities to the DTC accounts of any DTC
Participant ("Participant") result from transfers or failures to transfer in
violation of the provisions of the purchaser's letter. Issuer and Trust Company
acknowledge that DTC shall treat any Participant having Securities credited to
its DTC accounts as entitled to the full benefits of ownership of such
Securities. Without limiting the generality of the preceding sentence, Issuer
and Trust Company acknowledge that DTC shall treat any Participant having
securities credited to its DTC accounts as entitled to receive dividends,
distributions, and voting rights, if any, in respect of Securities and, subject
to Paragraphs 12 and 13, to receive certificates evidencing Securities if such
certificates are to be issued in accordance with Issuer's certificate of
incorporation. (The Treatment by DTC of the effects of the crediting by it of
Securities to the accounts of Participants described in the preceding two
sentences shall not affect the rights of Issuer, participants in auctions
relating to the Securities, purchasers, sellers, or holders of Securities
against any Participant.) DTC shall not have any responsibility to ascertain
whether any transfer of Securities is made in accordance with the provisions of
the purchaser's letter.
9. Issuer or Trust Company shall provide a written notice of dividend
payment and distribution information to a standard announcement service
subscribed to by DTC as soon as the information is available. In the unlikely
event that no such service exists, Issuer or Trust Company shall provide this
information directly to DTC electronically, as previously arranged by Issuer or
Trust Company and DTC, as soon as the information is available. If electronic
transmission has not been arranged, absent any other
3
<PAGE>
arrangements between Issuer or Trust Company and DTC, such information should be
sent by telecopy to DTC's Dividend Department at (212) 709-1723 or (212) 709-
1686, and receipt of such notices shall be confirmed by telephoning (212) 709-
1270. Notices to DTC pursuant to the above by mail or by any other means shall
be addressed as follows:
Manager; Announcements
Dividend Department
The Depository Trust Company
7 Hanover Square, 22nd Floor
New York, NY 10004-2695
10. Issuer or Trust Company shall provide CUSIP-level detail for dividend
payments and distributions to DTC no later than noon (Eastern Time) on the
payment date.
11. Dividend payments and distributions shall be received by Cede & Co.,
as nominee of DTC, or its registered assignees in same-day funds no later than
2:30 p.m. (Eastern Time) on each payment date. Absent any other arrangements
between Issuer or Trust Company and DTC, such funds shall be wired as follow:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Dividend Deposit Account #066-026776
12. Redemption payments shall be received by Cede & Co., as nominee of
DTC, or its registered assigns in same-day funds no later than 2:30 p.m.
(Eastern Time) on the payment date. Absent any other arrangements between
Issuer or Trust Company and DTC, such funds shall be wired as follows:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Redemption Deposit Account #066-027306
13. Reorganization payments and CUSIP-level detail resulting from
corporate actions (such as tender offers, remarketings, or mergers) hall be
received by Cede & co., as nominee of DTC, or its registered assigns in same-day
funds no later than 2:30 p.m. (Eastern Time) on the first payment date. Absent
any other arrangement between Issuer or Trust Company and DTC, such funds shall
be wired as follows:
The Chase Manhattan Bank
ABA #021 000 21
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Redemption Deposit Account #066-027608
14. DTC may direct Issuer or Trust Company to use any other number or
address as the number or address to which notices, payments of dividends,
distributions, or redemption proceeds may be sent.
4
<PAGE>
15. In the event of a redemption acceleration, or any similar transaction
(e.g., tender made and accepted in response to Issuer's or Trust Company's
invitation) necessitating a reduction in the number of Securities outstanding,
or an advance refunding of part of the Securities outstanding DTC, in its
discretion: (a) may request Issuer or Trust Company to issue and authenticate a
new Security certificate; or (b) may make an appropriate notation on the
Security certificate indicating the date and amount of such reduction in the
number of Securities outstanding, except in the case of final redemption, in
which case the certificate the certificate will be presented to Issuer or Trust
Company prior to payment, if required.
16. In the event that Issuer determines that beneficial owners of
Securities shall be able to obtain certificated Securities, Issuer or Trust
company shall notify DTC of the availability of certificates. In such event,
Issuer or Trust Company shall issue, transfer, and exchange certificates in
appropriate amounts, as required by DTC and others.
17. DTC may discontinue providing its services as securities depository
with respect to the Securities at any time by giving reasonable notice to Issuer
or Trust Company (at which time DTC will confirm with Issuer or Trust Company
the aggregate principal amount of Securities outstanding). Under such
circumstances, at DTC's request Issuer and Trust Company shall cooperate fully
with DTC by taking appropriate action to make available one or more separate
certificates evidencing Securities to any DTC Participant having Securities
credited to its DTC accounts.
18. Issuer hereby authorized DTC to provide to Trust Company security
position listings of Participants with respect to the Securities from time to
time at the request of Trust Company. Issuer also authorizes DTC, in the event
of a partial redemption of Securities, to provide Trust Company, upon request,
with the names of those Participants whose positions in Securities have been
selected for redemption by DTC. DTC will use its best efforts to notify Trust
Company of those Participants whose positions in Securities have been selected
for redemption by DTC. Issuer authorizes and instructs Trust Company to provide
DTC with such signatures, examples of signatures, and authorizations to act as
may be deemed necessary or appropriate by DTC to permit DTC to discharge its
obligations to its Participants and appropriate regulatory authorities. Such
requests for security position listings shall be sent to DTC's Reorganization
Department in the manner set forth in Paragraph 5.
This authorization, unless revoked by Issuer, shall continue with respect
to the Securities while any Securities are on deposit at DTC, until and unless
Trust Company shall no longer be acting. In such event, Issuer shall provide
DTC with similar evidence, satisfactory to DTC, of the authorization of any
successor thereto so to act.
19. Nothing herein shall be deemed to require Trust Company to advance
funds on behalf of Issuer.
20. This Letter of Representations may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all such counterparts together constitute but one and the same instrument.
21. This Letter of Representations is governed by, and shall be construed
in accordance with, the laws of the State of New York.
5
<PAGE>
22. The following riders, attached hereto, are hereby incorporated into
this Letter of Representations:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<S> <C>
NOTES: Very truly yours,
-----
A. If there is a Trust Company (as
defined in this Letter of
Representations), Trust Company as well ----------------------------------------
as Issuer must sign this Letter. If (Issuer)
there is no Trust Company, in signing
this Letter Issuer itself undertakes to By: ____________________________________
perform all of the obligations set forth (Authorized Officer's Signature)
herein.
B. Schedule B contains statements that
DTC believes accurately describe DTC,
the method of effecting book-entry
transfers of securities distributed
through DTC, and certain related matters.
________________________________________
(Trust Company)
By: ____________________________________
(Authorized Officer's Signature)
</TABLE>
Received and Accepted:
THE DEPOSITORY TRUST COMPANY
By: ______________________________
cc: Underwriter
Underwriter's Counsel
7
<PAGE>
SCHEDULE A
----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Describe Issue)
CUSIP Number Share Total Value ($ Amount)
- ------------ ----------- ----------------
8
<PAGE>
RIDER TO THE LETTER OF REPRESENTATIONS
OF
MUNIHOLDINGS NEW YORK INSURED FUND II, INC.
AND
IBJ SCHRODER BANK & TRUST COMPANY
Dated , 1998
1. This Rider supersedes any contradictory language set forth in the
Letter of Representations to which it is appended. Capitalized terms used
and not defined herein have the meaning set forth in the Letter of
Representations to which this Rider is appended.
2. The Prospectus indicates that in the event the Issuer retroactively
allocates any net capital gains or other income subject to regular Federal
income tax to shares of AMPS without having given advance notice thereof to
the Auction Agent as described in the Prospectus solely by reason of the
fact that such allocation is made as a result of the redemption of all or a
portion of the shares of AMPS outstanding or the liquidation of the Issuer
(the amount of such allocation being referred to herein as a "Retroactive
Taxable Allocation"), the Issuer, within 90 days (and generally within 60
days) after the end of the Issuer's fiscal year for which a Retroactive
Taxable Allocation is made, will provide notice thereof to the Auction
Agent and to each holder of shares of AMPS (initially Cede & Co. as nominee
of DTC) during such fiscal year at such holder's address as the same
appears or last appeared on the stock books of the Issuer. The Issuer,
within 30 days after such notice is given to the Auction Agent, will pay to
the Auction Agent (who then will distribute to such holders of AMPS), out
of funds legally available therefor, an amount equal to the aggregate
Additional Dividend with respect to all Retroactive Taxable Allocations
made to such holders during the fiscal year in question.
3. The Issuer will notify DTC, at least 10 Business Days prior to the
payment date for any Additional Dividends, of (i) the record date for
holders of shares of AMPS entitled to receive Additional Dividends, (ii)
the amount of Additional Dividends payable on a per share basis to such
holders and (iii) the CUSIP numbers set forth on the stock certificates
representing such shares of AMPS.
4. The Prospectus indicates that if the Issuer does not give advance
notice of the amount of net capital gains or other income subject to
regular Federal income tax to be included in a dividend on shares of AMPS
in the related Auction, the Issuer may include such taxable income in a
dividend on shares of AMPS if it increases the dividend by an additional
amount calculated as if such income were a Retroactive Taxable Allocation
and the additional amount were an Additional Dividend. The Issuer or the
Auction Agent will notify DTC, at least five Business Days prior to the
applicable Dividend Payment Date, of the amount of such additional amount
to be included in the dividend on a per share basis.
5. The Prospectus indicates that in the event a Response (as defined in
the Prospectus) indicates that it is advisable that the Issuer give a
Notice of Special Dividend
9
<PAGE>
Period (as defined in the Prospectus) for the AMPS, the Issuer, by no later
than the second Business Day prior to the relevant Auction Date (as defined
in the Prospectus), may give a Notice of Special Dividend Period to the
Auction Agent, DTC and each Broker-Dealer (as defined in the Prospectus),
which notice will specify (i) the duration of the Special Dividend Period
(as defined in the Prospectus), (ii) the Optional Redemption Price as
specified in the related Response and (iii) the Specific Redemption
Provisions, if any, as specified in the related Response. The Issuer is
required to give telephonic and written notice (a "Notice of Revocation")
to the Auction Agent, each Broker-Dealer, and DTC (as described in
paragraph 6 hereof) on or prior to the Business Day prior to the relevant
Auction Date under the circumstances specified in the Prospectus.
10
