<PAGE>
As filed with the Securities and Exchange Commission on January 26, 1999
Securities Act File No. 333-68419
Investment Company Act File No. 811-09131
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 2
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 3
(Check appropriate box or boxes)
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MuniHoldings New York Insured Fund III, Inc.
(Exact Name of Registrant as Specified in Charter)
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800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
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(609) 282-2800
(Registrant's Telephone Number, Including Area Code)
--------------
Arthur Zeikel
MuniHoldings New York Insured Fund III, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Copies to:
Michael J. Hennewinkel, Esq. Frank P. Bruno, Esq.
Fund Asset Management, L.P. Brown & Wood LLP
P.O. Box 9011 One World Trade Center
Princeton, New Jersey 08543-9011 New York, New York 10048-0557
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Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
Proposed Proposed
Title of Amount Maximum Maximum Amount of
Securities Being Being Offering Price Aggregate Registration
Registered Registered(1) Per Unit Offering Price Fee(2)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)............... 5,750,000 shares $15.00 $86,250,000 $23,978
</TABLE>
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(1) Includes 750,000 shares subject to the Underwriter's over-allotment option.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$32,130 was previously paid.
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<PAGE>
PROSPECTUS
5,000,000 Shares
MuniHoldings New York Insured Fund III, Inc.
Common Stock
----------------
MuniHoldings New York Insured Fund III, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New York State and New York City personal income taxes. The Fund seeks to
achieve its 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 the Fund's investment adviser to be of comparable quality. Under
normal circumstances, at least 80% of the Fund's assets will be invested in
municipal obligations with remaining maturities of one year or more that are
covered by insurance guaranteeing the timely payment of principal at maturity
and interest.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. The Fund's common stock has been approved for listing on
the New York Stock Exchange under the symbol "MNK." Trading of the Fund's
common stock on the exchange is expected to begin within two weeks of the date
of this prospectus. Before it begins trading, the underwriter does not intend
to make a market in the Fund's shares. Thus, investors may not be able to buy
and sell shares of the Fund during that time.
Within approximately three months after completion of this offering of common
stock, the Fund intends to offer shares of preferred stock representing
approximately 40% of the Fund's capital immediately after the issuance of such
preferred stock. There can be no assurance, however, that preferred stock
representing such percentage of the Fund's capital will actually be issued. The
use of preferred stock to leverage the common stock can create special risks.
----------------
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.
----------------
Investing in the common stock involves certain risks, which are described in
the "Risk Factors and Special Considerations" section beginning on page 7 of
this prospectus.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price.............................. $15.00 $75,000,000
Sales Load......................................... None None
Proceeds, before expenses, to Fund................. $15.00 $75,000,000
</TABLE>
The Fund's investment adviser or an affiliate will pay the underwriter a
commission in the amount of 2.00% of the public offering price per share in
connection with the sale of the common stock.
The underwriter may also purchase up to an additional 750,000 shares at the
public offering price within 45 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
We expect that the shares of common stock will be ready for delivery in New
York, New York on or about January 29, 1999.
----------------
Merrill Lynch & Co.
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The date of this prospectus is January 26, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 7
Fee Table.................................................................. 9
The Fund................................................................... 10
Use of Proceeds............................................................ 10
Investment Objective and Policies.......................................... 10
Risks and Special Considerations of Leverage............................... 21
Investment Restrictions.................................................... 24
Directors and Officers..................................................... 26
Investment Advisory and Management Arrangements............................ 28
Portfolio Transactions..................................................... 30
Dividends and Distributions................................................ 31
Taxes...................................................................... 32
Automatic Dividend Reinvestment Plan....................................... 36
Mutual Fund Investment Option.............................................. 38
Net Asset Value............................................................ 38
Description of Capital Stock............................................... 39
Custodian.................................................................. 42
Underwriting............................................................... 42
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 44
Legal Opinions............................................................. 44
Experts.................................................................... 44
Additional Information..................................................... 44
Report of Independent Auditors............................................. 46
Statement of Assets, Liabilities and Capital............................... 47
Appendix iiI--Economic and Other Conditions in New York.................... 48
Appendix iII--Ratings of Municipal Bonds................................... 62
Appendix III--Portfolio Insurance.......................................... 69
Appendix IV--Taxable Equivalent Yields for 1999........................... 71
</TABLE>
----------------
Information about the Fund can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the
operation of the public reference room. This information is also available on
the SEC's Internet site at http://www.sec.gov and copies may be obtained upon
payment of a duplicating fee by writing the Public Reference Section of the
SEC, Washington, D.C. 20549-6009.
----------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriter has not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus.
The Fund MuniHoldings New York Insured Fund III, Inc. is a newly organized,
non-diversified, closed-end management investment company.
The
Offering The Fund is offering 5,000,000 shares of common stock at an initial
offering price of $15.00 per share. The common stock is being
offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
underwriter. The underwriter may also purchase up to an additional
750,000 shares of common stock within 45 days of the date of this
prospectus to cover over-allotments.
Investment The investment objective of the Fund is to provide shareholders
Objective with current income exempt from Federal income tax and New York
and State and New York City personal income taxes. The Fund seeks to
Policies achieve its objective by investing primarily in a portfolio of
long-term, investment grade municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is exempt from
Federal income tax and New York State and New York City personal
income taxes.
Investment Grade Municipal Bonds. The Fund intends to invest in
municipal bonds that are rated investment grade by one or more
nationally recognized statistical rating agencies or, if unrated,
are considered by the Fund's investment adviser to be of comparable
quality.
New York Municipal Bonds. The Fund will generally invest
substantially all (at least 80%) of its assets in New York
municipal bonds. However, when the Fund's investment adviser
believes that investment grade New York municipal bonds are not
available in sufficient amounts at an appropriate price, the Fund
may invest a lesser amount of its assets in these securities. At
all times, except during periods when the Fund is in the process of
investing its proceeds from a public offering or during temporary
defensive periods, the Fund intends to invest at least 65% of its
assets in New York municipal bonds and at least 80% of its assets
in New York municipal bonds and other long-term municipal bonds.
These other long-term municipal bonds that the Fund may buy will be
exempt from Federal income tax but not New York State and New York
City personal income tax.
The Fund will normally invest at least 80% of its assets in insured
municipal obligations with remaining maturities of one year or
more. Insured municipal obligations are covered by insurance that
guarantees timely interest payments and the repayment of principal
on maturity.
In general, the Fund does not intend its investments to earn a
large amount of income that is not exempt from Federal income tax
and New York State and New York City personal income taxes.
3
<PAGE>
Indexed and Inverse Floating Rate Securities. The Fund may invest
in securities whose potential returns are directly related to
changes in an underlying index or interest rate, known as indexed
securities. The return on indexed securities will rise when the
underlying index or interest rate rises and fall when the index or
interest rate falls. The Fund may also invest in securities whose
return is inversely related to changes in an interest rate (inverse
floaters). In general, income on inverse floaters will decrease
when short term interest rates increase and increase when short
term interest rates decrease. Investments in inverse floaters may
subject the Fund to the risks of reduced or eliminated interest
payments and losses of principal. In addition, certain indexed
securities and inverse floaters may increase or decrease in value
at a greater rate than the underlying interest rate, which
effectively leverages the Fund's investment. As a result, the
market value of such securities will generally be more volatile
than that of fixed rate, tax exempt securities. Both indexed
securities and inverse floaters are derivative securities and can
be considered speculative.
Options and Futures Transactions. The Fund may seek to hedge its
portfolio against changes in interest rates using options and
financial futures contracts. The Fund's hedging transactions are
designed to reduce volatility, but come at some cost. For example,
the Fund may try to limit its risk of loss from a decline in price
of a portfolio security by purchasing a put option. However, the
Fund must pay for the option, and the price of the security may not
in fact drop. In large part, the success of the Fund's hedging
activities depends on its ability to forecast movements in
securities prices and interest rates. The Fund does not, however,
intend to enter into options and futures transactions for
speculative purposes. The Fund is not required to hedge its
portfolio and may not do so.
Leverage
Issuance of Preferred Stock. The Fund intends to offer shares of
preferred stock within three months after completion of this
offering. The preferred stock will represent approximately 40% of
the Fund's capital, including the capital raised by issuing the
preferred stock. There can be no assurance, however, that preferred
stock will actually be issued. Issuing preferred stock will result
in the leveraging of the common stock. Although the Board of
Directors has not yet determined the terms of the preferred stock
offering, the Fund expects that the preferred stock will pay
dividends that will be adjusted over either relatively short-term
periods (generally seven to 28 days) or medium-term periods (up to
five years). The preferred stock dividend rate will be based upon
prevailing interest rates for debt obligations of comparable
maturity. The money raised by the preferred stock offering will be
invested in longer-term obligations in accordance with the Fund's
investment objective. The expenses of the preferred stock, which
will be borne by the Fund, will reduce the net asset value of the
common stock. In addition, at times, when the Fund is required to
allocate taxable income to preferred stockholders, the terms of the
preferred stock may require the Fund to make an additional
distribution to them. The amount of this additional distribution
approximately equals the tax liability resulting from the
allocation (an "Additional Distribution"). During periods when the
Fund has preferred stock outstanding, the Fund will pay fees to the
investment adviser for its services that are higher than if the
Fund did not issue preferred stock because the fees will be
calculated on the basis of the Fund's average weekly net assets,
including proceeds from the sale of preferred stock.
4
<PAGE>
Potential Benefits of Leverage. Under normal market conditions,
longer term obligations produce higher yields than short and medium
term obligations. The Fund's investment adviser believes that the
interest income the Fund receives from its long term investments
will exceed the amount of interest the Fund must pay to the
preferred stockholders. Thus, the Fund's use of preferred stock
should provide common stockholders with a higher yield than they
would receive if the Fund were not leveraged.
Risks. The use of leverage creates certain risks for common
stockholders, including higher volatility of both the net asset
value and the market value of the common stock. Since any decline
in the value of the Fund's investments will affect only the common
stockholders, in a declining market the use of leverage will cause
the Fund's net asset value to decrease more than it would if the
Fund were not leveraged. This decrease in net asset value will
likely also cause a decline in the market price for shares of
common stock. In addition, fluctuations in the dividend rates paid
on, and the amount of taxable income allocable to, the preferred
stock will affect the yield to common stockholders. There can be no
assurance that the Fund will earn a higher net return on its
investments than the then current dividend rate (and any Additional
Distribution) it pays on the preferred stock. Under certain
conditions, the benefits of leverage to common stockholders will be
reduced, and the Fund's leveraged capital structure could result in
a lower rate of return to common stockholders than if the Fund were
not leveraged.
Distributions. When the Fund issues preferred stock, common
stockholders will receive all of the Fund's net income that remains
after it pays dividends (and any Additional Distribution) on the
preferred stock and generally will be entitled to a pro rata share
of net realized capital gains. If the Fund is liquidated, preferred
stockholders will be entitled to receive liquidating distributions
before any distribution is made to common stockholders. These
liquidating distributions are expected to equal the original
purchase price per share of the preferred stock plus any
accumulated and unpaid dividends and Additional Distributions.
Redemption of Preferred Stock. The Fund may redeem the preferred
stock for any reason. For example, the Fund may redeem all or part
of the preferred stock if it believes that the Fund's leveraged
capital structure will cause common stockholders to obtain a lower
return than they would if the common stock were unleveraged for any
significant amount of time.
Voting Rights. Preferred stockholders, voting as a separate class,
will be entitled to elect two of the Fund's Directors. Common and
preferred stockholders, voting together as a single class, will be
entitled to elect the remaining Directors. If the Fund fails to pay
dividends to the preferred stockholders for two full years, the
holders of all outstanding shares of preferred stock, voting as a
separate class, would then be entitled to elect a majority of the
Fund's Directors. The preferred stockholders also will vote
separately on certain other matters as required under the Fund's
Articles of Incorporation, the Investment Company Act of 1940, as
amended, and Maryland law. Otherwise, common and preferred
stockholders will have equal voting rights (one vote per share) and
will vote together as a single class.
5
<PAGE>
Ratings. Before it offers the preferred stock, the Fund intends
to apply to one or more nationally recognized statistical ratings
organizations for ratings on the preferred stock. The Fund
believes that a rating for the preferred stock will make it
easier to market the stock, which should reduce the dividend
rate.
Listing Currently, there is no public market for the Fund's common stock.
However, the Fund's common stock has been approved for listing on
the New York Stock Exchange. Trading of the Fund's common stock
is expected to begin within two weeks of the date of this
prospectus. Before it begins trading, the underwriter does not
intend to make a market in the Fund's shares of common stock.
Thus, investors may not be able to buy and sell shares of the
Fund during that period.
Investment Fund Asset Management, L.P. is the Fund's investment adviser and
Adviser provides investment advisory and management services to the Fund.
For its services, the Fund pays the investment adviser a fee at
the annual rate of 0.55% of the Fund's average weekly net assets,
including assets acquired from the sale of preferred stock.
Dividends The Fund intends to distribute dividends equal to substantially
and all of its net investment income to common stockholders each
Distributions month. Once the Fund issues preferred stock, the monthly
distributions to common stockholders will consist of
substantially all net investment income that remains after the
Fund pays dividends (and any Additional Distribution) on the
preferred stock. The Fund expects to begin paying dividends to
common stockholders within approximately 90 days from the date of
this prospectus. The Fund will distribute net capital gains, if
any, at least annually to common stockholders and, after it
issues the preferred stock, on a pro rata basis to common and
preferred stockholders. When the Fund allocates capital gains or
other taxable income to preferred stockholders, under certain
circumstances, the terms of the preferred stock may require the
Fund to make an Additional Distribution. The Fund may not declare
any cash dividend or other distribution on its common stock
unless the preferred stock has asset coverage of at least 200%.
If the Fund issues preferred stock representing 40% of its total
capital, the preferred stock's asset coverage will be
approximately 250%. If the Fund's ability to make distributions
on its common stock is limited, the Fund may not be able to
qualify for taxation as a regulated investment company. This
would have adverse tax consequences for common stockholders.
Automatic Dividend and capital gains distributions generally are used to
Dividend purchase additional shares of the Fund's common stock. However, an
Reinvestment investor can choose to receive distributions in cash. Since not
Plan all investors can participate in the automatic dividend
reinvestment plan, you should call your broker or nominee to
confirm that you are eligible to participate in the plan.
Mutual Investors who purchase shares in this offering through the
Fund underwriter and later sell their shares have the option, subject
Investment to certain conditions, to purchase Class D shares of certain
Option Merrill Lynch funds with the proceeds from the sale.
6
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity and Market Price of Shares. The Fund is newly organized and has no
operating history or history of public trading. Before the Fund's common stock
is listed on the New York Stock Exchange, an investment in the Fund may be
illiquid.
Shares of closed-end funds that trade in a secondary market frequently trade
at a market price that is below their net asset value. This is commonly
referred to as "trading at a discount." Investors who sell their shares within
a relatively short period after completion of the public offering are more
likely to be exposed to this risk. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.
New York Municipal Bonds. The Fund intends to invest the majority of its
portfolio in New York municipal bonds. As a result, the Fund is more exposed to
risks affecting issuers of New York municipal bonds than is a municipal bond
fund that invests more widely.
Interest Rate and Credit Risk. The Fund invests in municipal bonds, which are
subject to interest rate and credit risk. Interest rate risk is the risk that
prices of municipal bonds generally increase when interest rates decline and
decrease when interest rates increase. Prices of longer term securities
generally change more in response to interest rate changes than prices of
shorter term securities. Credit risk is the risk that the issuer will be unable
to pay the interest or principal when due. The degree of credit risk depends on
both the financial condition of the issuer and the terms of the obligation.
Non-diversification. The Fund is registered as a "non-diversified" investment
company. This means that the Fund may invest a greater percentage of its assets
in a single issuer than a diversified investment company. Even as a non-
diversified fund, the Fund must still meet the diversification requirements of
applicable Federal income tax laws. Since the Fund may invest a relatively high
percentage of its assets in a limited number of issuers, the Fund may be more
exposed to any single economic, political or regulatory occurrence than a more
widely-diversified fund.
Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc.
and Fitch IBCA, Inc. It may also invest in unrated municipal bonds that the
Fund's investment adviser believes are of comparable quality. Obligations rated
in the lowest investment grade category may have certain speculative
characteristics.
Private Activity Bonds. The Fund may invest in certain tax-exempt securities
classified as "private activity bonds." These bonds may subject certain
investors in the Fund to the alternative minimum tax.
Portfolio Insurance and Rating Agencies. The Fund will be subject to certain
investment restrictions imposed by guidelines of the insurance companies that
issue portfolio insurance and to guidelines of one or more nationally
recognized statistical ratings organizations that may issue ratings for the
preferred stock. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the
Investment Company Act of 1940, as amended. The Fund does not expect these
requirements or guidelines to prevent the investment adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies.
7
<PAGE>
Leverage. The Fund plans to offer shares of preferred stock. The preferred
stock will represent approximately 40% of the Fund's capital, including capital
raised by issuing the preferred stock. Leverage creates certain risks for
common stockholders, including higher volatility of both the net asset value
and the market value of the common stock. Leverage also creates the risk that
the investment return on shares of the Fund's common stock will be reduced to
the extent the dividends paid on preferred stock and other expenses of the
preferred stock exceed the income earned by the Fund on its investments. If the
Fund is liquidated, preferred stockholders will be entitled to receive
liquidating distributions before any distribution is made to common
stockholders.
Inverse Floating Obligations. The Fund's investments in "inverse floating
obligations" or "residual interest bonds" provide investment leverage because
their market value increases or decreases in response to market changes at a
greater rate than fixed rate, long term tax exempt securities. The market
values of such securities are more volatile than the market values of fixed
rate, tax exempt securities.
Options and Futures Transactions. The Fund may engage in certain options and
futures transactions to reduce its exposure to interest rate movements. If the
Fund incorrectly forecasts market values, interest rates or other factors, the
Fund's performance could suffer. The Fund also may suffer a loss if the other
party to the transaction fails to meet its obligations. The Fund is not
required to use hedging and may not do so.
Antitakeover Provisions. The Fund's Articles of Incorporation include
provisions that could limit the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors.
Such provisions could limit the ability of shareholders to sell their shares at
a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund.
8
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment Plan Fees....................................... None
Annual Expenses (as a percentage of net assets attributable to Common
Stock):
Investment Advisory Fees(a)(b)........................................ 0.92%
Interest Payments on Borrowed Funds................................... None
Other Expenses(a)(b).................................................. 0.37%
----
Total Annual Expenses(a)(b)......................................... 1.29%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 Year 3 Years 5 Years 10 Years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) total annual expenses of
1.29% (assuming leverage of 40% of
the Fund's total assets) and (2) a 5%
annual return throughout the periods. $13 $41 $71 $156
</TABLE>
- --------
(a) Assumes leverage by issuing preferred stock in an amount of approximately
40% of the Fund's capital at a dividend rate of 3.375%. The Fund intends
to use leverage only if the Investment Adviser believes that it would
result in higher income to shareholders over time. See "Risks and Special
Considerations of Leverage"--page 21. If the Fund does not utilize
leverage, it is estimated that, as a percentage of net assets attributable
to common stock, the Investment Advisory Fees would be 0.55%, Other
Expenses would be 0.16% and Total Annual Expenses would be 0.71%.
(b) See "Investment Advisory and Management Arrangements"--page 28.
The Fee Table is intended to assist investors in understanding the costs and
expenses that a shareholder in the Fund will bear directly or indirectly. The
expenses set forth under "Other Expenses" are based on estimated amounts
through the end of the Fund's first fiscal year. The Example set forth above
assumes reinvestment of all dividends and distributions and uses a 5% annual
rate of return as mandated by the Securities and Exchange Commission
regulations. The Example should not be considered a representation of future
expenses or annual rates of return, and actual expenses or annual rates of
return may be more or less than those assumed for purposes of the Example.
9
<PAGE>
THE FUND
MuniHoldings New York Insured Fund III, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company. The Fund
was incorporated under the laws of the State of Maryland on November 23, 1998,
and has registered under the 1940 Act. The Fund's principal office is located
at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone
number is (609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their securities
at the option of the shareholder, whereas open-end companies issue securities
redeemable at net asset value at any time at the option of the shareholder and
typically engage in a continuous offering of their shares. Accordingly, open-
end investment companies are subject to continuous asset in-flows and out-flows
that can complicate portfolio management. Shares of closed-end investment
companies, however, frequently trade at a discount from their net asset value.
This risk may be greater for investors expecting to sell their shares in a
relatively short period after completion of the public offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $74,765,000 (or
approximately $86,015,000 assuming the Underwriter exercises the over-allotment
option in full) after payment of offering expenses estimated to be
approximately $235,000.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of common stock, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-term,
tax-exempt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with current
income exempt from Federal income tax and New York State and New York City
personal income taxes. The Fund will seek to achieve its objective by investing
primarily in a portfolio of long-term, investment grade municipal obligations
issued by or on behalf of the State of New York, its political subdivisions,
agencies and instrumentalities, and other qualifying issuers, each of which
pays interest which, in the opinion of bond counsel to the issuer, is exempt
from Federal income tax and New York State and New York City personal income
taxes ("New York Municipal Bonds"). The Fund intends to invest substantially
all (at least 80%) of its assets in New York Municipal Bonds, except at times
when the Fund's investment adviser, Fund Asset Management, L.P. (the
"Investment Adviser"), considers that New York Municipal Bonds of sufficient
quality and quantity are unavailable for investment at suitable prices by the
Fund. To the extent the Investment Adviser considers that suitable New York
Municipal Bonds are not available for investment, the Fund may purchase other
long-term municipal obligations exempt from Federal but not New York State and
New York City personal income taxes ("Municipal Bonds"). The Fund will maintain
at least 65% of its assets in New York Municipal Bonds and at least 80% of its
assets in New York Municipal Bonds and Municipal Bonds, except during interim
periods pending investment of the net proceeds of public offerings of the
Fund's securities and during temporary
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defensive periods. Under normal circumstances, at least 80% of the Fund's
assets will be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest. The Fund's investment objective is a
fundamental policy that may not be changed without a vote of a majority of the
Fund's outstanding voting securities, as defined below under "Investment
Restrictions." There can be no assurance that the investment objective of the
Fund will be realized. At times the Fund may seek to hedge its portfolio
through the use of options and futures transactions to reduce volatility in the
net asset value of its common stock.
The Fund ordinarily does not intend to realize significant investment income
that is subject to Federal income tax and New York State and New York City
personal income taxes. The Fund may invest all or a portion of its assets in
certain tax-exempt securities classified as "private activity bonds" (in
general, bonds that benefit non-governmental entities) that may subject certain
investors in the Fund to an alternative minimum tax.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in New York Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term New York Municipal Bonds or Municipal Bonds.
Certain Non-Municipal Tax-Exempt Securities may be characterized as derivative
instruments. Non-Municipal Tax-Exempt Securities are considered "New York
Municipal Bonds" or "Municipal Bonds" for purposes of the Fund's investment
objective and policies.
Investment in shares of the Fund's common stock offers several potential
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal income tax and New York State and New York City personal income
taxes by investing in a professionally managed portfolio comprised primarily of
investment grade insured New York Municipal Bonds. Investment in the Fund also
relieves the investor of the burdensome administrative details involved in
managing a portfolio of New York Municipal Bonds. Additionally, the Investment
Adviser will seek to enhance the yield on the common stock by leveraging the
Fund's capital structure through the issuance of preferred stock. The benefits
are at least partially offset by the expenses involved in operating an
investment company. Such expenses primarily consist of the advisory fee and
operational costs. Additionally, the use of leverage involves certain expenses
and special risk considerations. See "Risks and Special Considerations of
Leverage."
The investment grade New York Municipal Bonds and Municipal Bonds in which
the Fund will primarily invest are those New York Municipal Bonds and Municipal
Bonds rated at the date of purchase in the four highest rating categories of
Standard & Poor's ("S&P"), Moody's Investors Services, Inc. ("Moody's") or
Fitch IBCA, Inc. ("Fitch"), or, if unrated, are considered to be of comparable
quality by the Investment Adviser. In the case of long-term debt, the
investment grade rating categories are AAA through BBB for S&P, Aaa through Baa
for Moody's and AAA through BBB for Fitch. In the case of short-term notes, the
investment grade rating categories are SP-1+ through SP-3 for S&P, MIG-1
through MIG-3 for Moody's and F-1+ through F-3 for Fitch. In the case of tax-
exempt commercial paper, the investment grade rating categories are A-1+
through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+ through F-3
for Fitch.
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Obligations ranked in the lowest investment grade rating category (BBB, SP-3
and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody's; and BBB and F-3 for
Fitch), while considered "investment grade," may have certain speculative
characteristics. There may be sub-categories or gradations indicating relative
standing within the rating categories set forth above. See Appendix II to this
Prospectus for a description of S&P's, Moody's and Fitch's ratings of Municipal
Bonds. In assessing the quality of New York Municipal Bonds and Municipal Bonds
with respect to the foregoing requirements, the Investment Adviser will take
into account the portfolio insurance as well as the nature of any letters of
credit or similar credit enhancements to which particular New York Municipal
Bonds and Municipal Bonds are entitled and the creditworthiness of the
insurance company or the financial institution that provided such insurance or
credit enhancements. Consequently, if New York Municipal Bonds or Municipal
Bonds are covered by insurance policies issued by insurers whose claims-paying
ability is rated AAA by S&P or Fitch or Aaa by Moody's, the Investment Adviser
may consider such municipal obligations to be equivalent to AAA- or Aaa- rated
securities, as the case may be, even though such New York Municipal Bonds or
Municipal Bonds would generally be assigned a lower rating if the rating were
based primarily upon the credit characteristics of the issuers without regard
to the insurance feature. The insured New York Municipal Bonds and Municipal
Bonds must also comply with the standards applied by the insurance carriers in
determining eligibility for portfolio insurance.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations, in the opinion of counsel to the issuer,
that contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short notice
period not to exceed seven days. Participating VRDOs provide the Fund with a
specified undivided interest (up to 100%) in the underlying obligation and the
right to demand payment of the unpaid principal balance plus accrued interest
on the Participating VRDOs from the financial institution on a specified number
of days' notice, not to exceed seven days. There is, however, the possibility
that because of default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. The Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates decline,
the value of a fixed-income portfolio can be expected to rise. Conversely, when
interest rates rise, the value of a fixed-income portfolio can be expected to
decline. Prices of longer-term securities generally fluctuate more in response
to interest rate changes than do short-term or medium-term securities. These
changes in net asset value are likely to be greater in the case of a fund
having a leveraged capital structure, as proposed for the Fund. See "Risks and
Special Considerations of Leverage."
The Fund intends to invest primarily in long-term New York Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term New York Municipal Bonds and Municipal Bonds with a
maturity of between three years and ten years. The Fund may invest in short-
term, tax-exempt securities, short-term U.S. Government securities, repurchase
agreements or cash. Such short-term securities or cash will not exceed 20% of
its total assets except during interim periods pending investment of
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<PAGE>
the net proceeds of public offerings of the Fund's securities or in
anticipation of the repurchase or redemption of the Fund's securities and
temporary periods when, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. The Fund does not ordinarily intend to
realize significant interest income that is subject to Federal income tax and
New York State and New York City personal income taxes.
The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for special tax
treatment afforded regulated investment companies under the Federal tax laws.
See "Taxes." To qualify, among other requirements, the Fund will limit its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities (other than U.S. Government securities) of a single issuer,
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer. A fund
that elects to be classified as "diversified" under the 1940 Act must satisfy
the foregoing 5% requirement with respect to 75% of its total assets. To the
extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's yield may fluctuate to a greater extent than that
of a diversified company as a result of changes in the financial condition or
in the market's assessment of the issuers.
Portfolio Insurance
Under normal circumstances, at least 80% of the Fund's assets will be
invested in New York Municipal Bonds and Municipal Bonds either (i) insured
under an insurance policy purchased by the Fund or (ii) insured under an
insurance policy obtained by the issuer thereof or any other party. The Fund
will seek to limit its investments to municipal bonds insured under insurance
policies issued by insurance carriers that have total admitted assets
(unaudited) of at least $75,000,000 and capital and surplus (unaudited) of at
least $50,000,000 and insurance claims-paying ability ratings of AAA from S&P
or Fitch or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be at all times available. See
Appendix III to this Prospectus for a brief description of S&P's, Fitch's and
Moody's insurance claims-paying ability ratings. Currently, it is anticipated
that a majority of the insured New York Municipal Bonds and Municipal Bonds in
the Fund's portfolio will be insured by the following insurance companies that
satisfy the foregoing criteria: AMBAC Indemnity Corporation, Financial Guaranty
Insurance Company, Financial Security Assurance and Municipal Bond Investors
Assurance Corporation. The Fund also may purchase New York Municipal Bonds and
Municipal Bonds covered by insurance issued by any other insurance company that
satisfies the foregoing criteria. It is anticipated that initially a majority
of insured New York Municipal Bonds and Municipal Bonds held by the Fund will
be insured under policies obtained by parties other than the Fund.
The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible New York Municipal Bonds and Municipal Bonds purchased by the Fund. A
New York Municipal Bond or a Municipal Bond will be eligible for coverage if it
meets certain requirements of the insurance company set forth in a Policy. In
the event interest or principal on an insured New York Municipal Bond and
Municipal Bond is not paid when due, the insurer will be obligated under its
Policy to make such payment not later than 30 days after it has been notified
by, and provided with documentation from, the Fund that such nonpayment has
occurred.
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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 policy are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately .02 of 1% to .15 of 1% of the principal amount of the New York
Municipal Bonds and Municipal Bonds covered by such Policies. The estimate is
based on the expected composition of the Fund's portfolio of New York Municipal
Bonds and Municipal Bonds. Additional information regarding the Policies is set
forth in Appendix III to this Prospectus. In instances in which the Fund
purchases New York Municipal Bonds and Municipal Bonds insured under policies
obtained by parties other than the Fund, the Fund does not pay the premiums for
such policies; rather, the cost of such policies may be reflected in the
purchase price of the New York Municipal Bonds and Municipal Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser's ability to manage
the portfolio may be limited to the extent it holds defaulted securities, which
may limit its ability in certain circumstances to purchase other New York
Municipal Bonds and Municipal Bonds. See "Net Asset Value" below for a more
complete description of the Fund's method of valuing defaulted securities and
securities that have a significant risk of default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Directors determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or may discontinue its policy of maintaining
insurance for all or any of the New York Municipal Bonds and Municipal Bonds
held in the Fund's portfolio. Although the Investment Adviser periodically
reviews the financial condition of each insurer, there can be no assurance that
the insurers will be able to honor their obligations under all circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured New York Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured New York Municipal Bonds or Municipal Bonds are
subject to market risk (i.e., fluctuations in market value as a result of
changes in prevailing interest rates).
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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 New York State and New York City personal
income taxes, even though such bonds may be IDBs or "private activity bonds" as
discussed below. Also, for purposes of this prospectus, Non-Municipal Tax-
Exempt securities as discussed above will be considered New York Municipal
Bonds or Municipal Bonds.
The two principal classifications of New York Municipal Bonds and Municipal
Bonds are "general obligation" bonds and "revenue" bonds, which latter category
includes IDBs and, for bonds issued after August 15, 1986, private activity
bonds. General obligation bonds (other than those of the State of New York
which has limited taxing powers) are secured by the issuer's pledge of faith,
credit and taxing power for the repayment of principal and the payment of
interest. Revenue or special obligation bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as from the user of the facility being financed. IDBs are in most
cases revenue bonds and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The repayment of principal and the
payment of interest on such industrial development bonds depends solely on the
ability of the user of the facility financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such payment. New York Municipal Bonds and Municipal Bonds may
also include "moral obligation" bonds, which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment
but not a legal obligation of the state or municipality in question.
The Fund may purchase New York Municipal Bonds and Municipal Bonds classified
as "private activity bonds" (in general, bonds that benefit non-governmental
entities). Interest received on certain tax-exempt securities that are
classified as "private activity bonds" may subject certain investors in the
Fund to an alternative minimum tax. There is no limitation on the percentage of
the Fund's assets that may be invested in New York Municipal Bonds and
Municipal Bonds that may subject certain investors to an alternative minimum
tax. See "Taxes--General." Also included within the general category of New
York Municipal Bonds and Municipal Bonds are participation certificates issued
by government authorities or entities to finance the acquisition or
construction of equipment, land and/or facilities. The certificates represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations do
not constitute general obligations of the issuer for which the issuer's
unlimited taxing power is pledged, a lease obligation frequently is backed by
the issuer's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses, which provide that the issuer has no obligation to make
lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the
property in the event of foreclosure might prove difficult. These
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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 January 15, 1999, Moody's, S&P and Fitch rated New York City's
general obligation bonds A3, A-, and A-, respectively. As of July 10, 1998,
Moody's and S&P rate New York State's outstanding general obligation bonds A2
and A, respectively. Because the Fund's portfolio will comprise investment
grade securities, the Fund is expected to be insulated from the market and
credit risks that may exist in connection with investments in non-investment
grade New York Municipal Bonds. There is no assurance that a particular rating
will continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. The value of
Municipal Bonds generally may be affected by uncertainties in the municipal
markets as a result of legislation or litigation changing the taxation of
Municipal Bonds or the rights of Municipal Bond holders in the event of a
bankruptcy. Municipal bankruptcies are rare, and certain provisions of the U.S.
Bankruptcy Code governing such bankruptcies are unclear. Further, the
application of state law to Municipal Bond issuers could produce varying
results among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the Municipal
Bonds or the New York Municipal Bonds in which the Fund invests. The Investment
Adviser does not believe that the current economic conditions in New York or
other factors described above will have a significant adverse effect on the
Fund's ability to invest in high quality New York Municipal Bonds. For a
discussion of economic and other conditions in the State of New York, see
Appendix I, "Economic and Other Conditions in New York."
Other Investment Policies
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to finance
the repurchase of its own common stock pursuant to tender offers or otherwise
to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known, as
with the issuance of preferred stock, as "leveraging") create an opportunity
for greater total return since the Fund will not be required to sell portfolio
securities to repurchase or redeem shares but, at the same time, increase
exposure to capital risk. In addition, borrowed funds are subject to interest
costs that may offset or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell New York Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase
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<PAGE>
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 yielding a return 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 synthetically-created inverse
floating rate bonds evidenced by custodial or trust receipts. Generally, income
on inverse floating rate bonds will decrease when short-term interest rates
increase, and will increase when short-term interest rates decrease. Such
securities have the effect of providing a degree of investment leverage, since
they may increase or decrease in value in response to changes, in market
interest rates at a rate that is a multiple (typically two) of the rate at
which fixed-rate, long-term, tax-exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities
generally will be more volatile than the market values of fixed-rate tax-exempt
securities. To seek to limit the volatility of these securities, the Fund may
purchase inverse floating obligations with shorter-term maturities or
limitations on the extent to which the interest rate may vary. The Investment
Adviser believes that indexed and inverse floating obligations represent a
flexible portfolio management instrument for the Fund that allows the
Investment Adviser to vary the degree of investment leverage relatively
efficiently under different market conditions.
Call Rights. The Fund may purchase a New York Municipal Bond or Municipal
Bond issuer's right to call all or a portion of such New York Municipal Bond or
Municipal Bond for mandatory tender for purchase (a "Call Right"). A holder of
a Call Right may exercise such right to require a mandatory tender for the
purchase of related New York Municipal Bonds or Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related New York Municipal Bond or Municipal Bond will expire without
value. The economic effect of holding both the Call Right and the related New
York Municipal Bond or Municipal Bond is identical to holding a New York
Municipal Bond or Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at a
mutually agreed-upon time and price, thereby determining the yield during the
term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the
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Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
Options and Futures Transactions
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common stock, the net asset value of the common stock will fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective. In
addition, because of the anticipated leveraged nature of the common stock,
hedging transactions will result in a larger impact on the net asset value of
the common stock than would be the case if the common stock were not leveraged.
Furthermore, the Fund may only engage in hedging activities from time to time
and may not necessarily be engaging in hedging activities when movements in
interest rates occur. The Fund has no obligation to enter into hedging
transactions and may not do so.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See "Taxes--
Tax Treatment of Options and Futures Transactions." In addition, in order to
obtain ratings of the preferred stock from one or more nationally recognized
statistical ratings organizations ("NRSROs"), the Fund may be required to limit
its use of hedging techniques in accordance with the specified guidelines of
such organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of the Fund are not fundamental policies
and may be modified by the Board of Directors of the Fund without the approval
of the Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to New York Municipal Bonds and Municipal Bonds it owns,
thereby giving the holder of the option the right to buy the underlying
security covered by the option from the Fund at the stated exercise price until
the option expires. The Fund writes only covered call options, which means that
so long as the Fund is obligated as the writer of a call option, it will own
the underlying securities subject to the option. The Fund may not write covered
call options on underlying securities in an amount exceeding 15% of the market
value of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options may serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with its
hedging activities. By buying a put the Fund has a right to sell the underlying
security at the exercise price, thus limiting the Fund's
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<PAGE>
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 to hedge against increases in the cost of
securities it intends to purchase. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract or, in the
case of index-based futures contracts, to make and accept a cash settlement, at
a specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts. A
purchase of financial futures contracts may provide a hedge against an increase
in the cost of securities intended to be purchased because such appreciation
may be offset, in whole or in part, by an increase in the value of the position
in the futures contracts.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately 5%
of the contract amount must be deposited with the broker. This amount is known
as initial margin. Subsequent payments to and from the broker, called variation
margin, are made on a daily basis as the price of the financial futures
contract fluctuates making the long and short positions in the financial
futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging New York Municipal Bonds
and Municipal Bonds that the Fund holds or anticipates purchasing against
adverse changes in interest rates. The Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and sell
put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available, if
the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the New
York Municipal Bonds and Municipal Bonds in which the Fund invests to make such
hedging appropriate.
19
<PAGE>
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated
by the buyer and seller. See "Restrictions on OTC Options" below for
information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million. Certain OTC options and assets used to cover OTC options written by
the Fund may be considered to be illiquid. The illiquidity of such options or
assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the security
that is the subject of the hedge. If the price of the financial futures
contract moves more or less than the price of the security that is the subject
of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and New York
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments that have a disparate impact on
the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, the Fund may purchase and
sell financial futures contracts and options thereon (i) for bona fide hedging
purposes, without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) for non-hedging purposes if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and option premiums entered into for non-hedging
purposes does not exceed 5% of the market value of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses on any such transactions. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that the
amount so segregated plus the amount of initial and variation margin held in
the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Certain risks are involved in options and futures transactions. The
Investment Adviser believes, however, that, because the Fund will engage in
options and futures transactions only for hedging purposes, the Fund's
20
<PAGE>
options and futures portfolio strategies will not subject the Fund to those
risks associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to New York
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures transaction. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with which the Fund has an open position in an option or
financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges that limit the amount of fluctuation in a financial futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
moved beyond the daily limit on a number of consecutive trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
Effects of Leverage
Within approximately three months after the completion of this offering, the
Fund intends to offer shares of preferred stock representing approximately 40%
of the Fund's capital immediately after the issuance of such preferred stock.
There can be no assurance, however, that preferred stock representing such
percentage of the Fund's capital will actually be issued. Issuing the preferred
stock will result in the leveraging of the common stock. Although the Fund's
Board of Directors has not yet determined the terms of the preferred stock
offering, the Fund anticipates that the preferred stock will pay dividends that
will be adjusted over either relatively short-term periods (generally seven to
28 days) or medium-term periods (up to five years). The dividend rate will be
21
<PAGE>
based upon prevailing interest rates for debt obligations of comparable
maturity. The proceeds of the preferred stock offering will be invested in
longer-term obligations in accordance with the Fund's investment objective. The
expenses of the preferred stock, which will be borne by the Fund, will reduce
the net asset value of the common stock. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to holders
of preferred stock, the Fund anticipates that the terms of the preferred stock
will require the Fund to make an additional distribution to such holders in an
amount approximately equal to the tax liability resulting from such allocation
(an "Additional Distribution"). Because under normal market conditions,
obligations with longer maturities produce higher yields than short-term and
medium-term obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term rates (and
any Additional Distribution) paid by the Fund as dividends on the preferred
stock and the longer-term rates received by the Fund may provide holders of
common stock with a potentially higher yield.
The use of leverage, however, involves certain risks to the holders of common
stock. For example, issuance of the preferred stock may result in higher
volatility of the net asset value of the common stock and potentially more
volatility in the market value of the common stock. In addition, changes in the
short-term and medium-term dividend rates on, and the amount of taxable income
allocable to, the preferred stock will affect the yield to holders of common
stock. Leverage will allow holders of common stock to realize a higher current
rate of return than if the Fund were not leveraged as long as the Fund, while
accounting for its costs and operating expenses, is able to realize a higher
net return on its investment portfolio than the then current dividend rate (and
any Additional Distribution) of the preferred stock. Similarly, since a pro
rata portion of the Fund's net realized capital gains are generally payable to
holders of common stock, the effect of leverage will be to increase the amount
of such gains distributed to holders of common stock. However, short-term,
medium-term and long-term interest rates change from time to time as do their
relationships to each other (i.e., the slope of the yield curve) depending upon
such factors as supply and demand forces, monetary and tax policies and
investor expectations. Changes in any or all of such factors could cause the
relationship between short-term, medium-term and long-term rates to change
(i.e., to flatten or to invert the slope of the yield curve) so that short-term
and medium-term rates may substantially increase relative to the long-term
obligations in which the Fund may be invested. To the extent that the current
dividend rate (and any Additional Distribution) on the preferred stock
approaches the net return on the Fund's investment portfolio, the benefit of
leverage to holders of common stock will be decreased. If the current dividend
rate (and any Additional Distribution) on the preferred stock were to exceed
the net return on the Fund's portfolio, holders of common stock would receive a
lower rate of return than if the Fund were not leveraged. Similarly, since both
the cost of issuing the preferred stock and any decline in the value of the
Fund's investments (including investments purchased with the proceeds from any
preferred stock offering) will be borne entirely by holders of common stock,
the effect of leverage in a declining market would result in a greater decrease
in net asset value to holders of common stock than if the Fund were not
leveraged. If the Fund is liquidated, holders of preferred stock will be
entitled to receive liquidating distributions before any distribution is made
to holders of common stock.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the common stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Federal tax laws. See "Taxes." However, the Fund
intends to take all measures necessary to make common stock dividend payments.
If the Fund's current investment income is ever insufficient to meet dividend
payments on either the common stock or the preferred stock, the Fund may have
to liquidate certain of its investments. In addition, the Fund will have the
authority to redeem the preferred stock for any reason and may redeem all or
part of the preferred stock under the following circumstances:
22
<PAGE>
. if the Fund anticipates that the leveraged capital structure will result
in a lower rate of return for any significant amount of time to holders of
common stock than that obtainable if the common stock were not leveraged,
. if the asset coverage for the preferred stock declines below 200% either
as a result of a decline in the value of the Fund's portfolio investments
or as a result of the repurchase of common stock in tender offers, or
. in order to maintain the asset coverage guidelines established by the
NRSROs that have rated the preferred stock.
Redemption of the preferred stock or insufficient investment income to make
dividend payments, may reduce the net asset value of the common stock and
require the Fund to liquidate a portion of its investments at a time when it
may be disadvantageous, in the absence of such extraordinary circumstances, to
do so.
As discussed under "Investment Advisory and Management Arrangements," during
periods when the Fund has preferred stock outstanding, the fees paid the
Investment Adviser for investment advisory and management services will be
higher than if the Fund did not issue preferred stock because the fees paid
will be calculated on the basis of the Fund's average weekly net assets,
including proceeds from the sale of preferred stock.
Assuming the use of leverage by issuing preferred stock (paying dividends at
a rate that generally will be adjusted every 28 days) in an amount representing
approximately 40% of the Fund's capital at an annual dividend rate of 3.375%
payable on such preferred stock based on market rates as of the date of this
prospectus, the annual return that the Fund's portfolio must experience (net of
expenses) in order to cover such dividend payments would be 1.35%.
The following table is designed to illustrate the effect on the return to a
holder of common stock of the leverage obtained by the issuance of preferred
stock representing approximately 40% of the Fund's capital, assuming
hypothetical annual returns on the Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and decreases the return when portfolio
return is negative. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses).................................. (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return................... (19)% (11)% (2)% 6% 14%
</TABLE>
Leveraging the common stock cannot be fully achieved until preferred stock is
issued and the proceeds of such offering have been invested in long-term New
York Municipal Bonds and Municipal Bonds.
Portfolio Management and Other Considerations
If short-term or medium-term rates increase or other changes in market
conditions occur to the point where the Fund's leverage could adversely affect
holders of common stock as noted above (or in anticipation of
23
<PAGE>
such changes), the Fund may attempt to shorten the average maturity of its
investment portfolio in order to offset the negative impact of leverage. The
Fund also may attempt to reduce the degree to which it is leveraged by
redeeming preferred stock pursuant to the Fund's Articles Supplementary, which
establish the rights and preferences of the preferred stock, or otherwise by
purchasing shares of preferred stock. Purchases and redemptions of preferred
stock, whether on the open market or in negotiated transactions, are subject to
limitations under the 1940 Act. In determining whether or not it is in the best
interest of the Fund and its stockholders to redeem or repurchase outstanding
preferred stock, the Board of Directors will take into account a variety of
factors, including the following:
. market conditions,
. the ratio of preferred stock to common stock, and
. the expenses associated with such redemption or repurchase.
If market conditions subsequently change, the Fund may sell previously unissued
shares of preferred stock or shares of preferred stock that the Fund had issued
but later repurchased or redeemed.
The Fund intends to apply for ratings of the preferred stock from one or more
NRSROs. In order to obtain these ratings, the Fund may be required to maintain
portfolio holdings that meet the specified guidelines of such organizations.
These guidelines may impose asset coverage requirements that are more stringent
than those imposed by the 1940 Act. The Fund does not anticipate that these
guidelines will impede the Investment Adviser from managing the Fund's
portfolio in accordance with the Fund's investment objective and policies.
Ratings on preferred stock issued by the Fund should not be confused with
ratings on the obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding
preferred stock (expected to equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid dividends
thereon and any accumulated and unpaid Additional Distribution). In addition,
the Fund is not permitted to declare any cash dividend or other distribution on
its common stock unless, at the time of such declaration, the net asset value
of the Fund's portfolio (determined after deducting the amount of such dividend
or distribution) is at least 200% of the liquidation value of the outstanding
preferred stock. Under the Fund's proposed capital structure, assuming the sale
of shares of preferred stock representing approximately 40% of the Fund's
capital, the net asset value of the Fund's portfolio is expected to be
approximately 250% of the liquidation value of the Fund's preferred stock. To
the extent possible, the Fund intends to purchase or redeem shares of preferred
stock from time to time to maintain coverage of preferred stock of at least
200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred stock, may not be changed without the approval of
the holders of a majority of the Fund's outstanding shares of common stock
(which for this purpose and under the 1940 Act means the lesser of (i) 67% of
the shares of common stock represented at a meeting at which more than 50% of
the outstanding shares of common stock are represented or (ii) more than 50% of
the outstanding shares). Subsequent to the issuance of the preferred
24
<PAGE>
stock, the following investment restrictions may not be changed without the
approval of a majority of the outstanding shares of common stock and of the
outstanding shares of preferred stock, voting together as a class, and the
approval of a majority of the outstanding shares of preferred stock, voting
separately as a class. The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase New
York Municipal Bonds, Municipal Bonds and other debt securities and enter
into repurchase agreements in accordance with its investment objective,
policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed by
the Board of Directors without shareholder approval, provide that the Fund may
not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned 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.
25
<PAGE>
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch & Co.
("ML & Co."). Because of the affiliation of Merrill Lynch with the Investment
Adviser, the Fund is prohibited from engaging in certain transactions involving
Merrill Lynch except pursuant to an exemptive order or otherwise in compliance
with the provisions of the 1940 Act and the rules and regulations thereunder.
Included among such restricted transactions will be purchases from or sales to
Merrill Lynch of securities in transactions in which it acts as principal. An
exemptive order has been obtained that permits the Fund to effect principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities subject to conditions set forth in such order. The Fund may consider
in the future requesting an order permitting other principal transactions with
Merrill Lynch, but there can be no assurance that such application will be made
and, if made, that such order would be granted.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio managers of
the Fund, including their ages and their principal occupations during the last
five years is set forth below. Unless otherwise noted, the address of each
Director, executive officer and portfolio manager is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
Arthur Zeikel (66)--President and Director (1)(2)--Chairman of the Investment
Adviser and MLAM (which terms, as used herein, include their corporate
predecessors) since 1997; President of the Investment Adviser and MLAM from
1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton Services") since
1997, Director since 1993 and President from 1993 to 1997; Executive Vice
President of ML & Co. since 1990.
James H. Bodurtha (54)--Director (2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
Herbert I. London (59)--Director (2)--113-115 University Place, New York, New
York 10003. John M. Olin Professor of Humanities, New York University since
1993 and Professor thereof since 1980; President, 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.
26
<PAGE>
Joseph L. May (69)--Director (2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold (46)--Director (2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
Terry K. Glenn (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.
Kenneth A. Jacob (47)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Investment Adviser since 1984.
Robert A. DiMella, CFA (32)--Vice President and Portfolio Manager (1)(2)--
Vice President of MLAM since 1997; Assistant Vice President of MLAM from 1995
to 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995.
Roberto W. Roffo (33)--Vice President and Portfolio Manager (1)(2)--Vice
President of MLAM since 1996; Portfolio Manager with MLAM since 1992.
Donald C. Burke (38)--Vice President and Treasurer (1)(2)--First Vice
President of MLAM since 1997; Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM since 1990.
Alice A. Pellegrino (38)--Secretary (1)(2)--Attorney with MLAM since 1997;
Associate with Kirkpatrick & Lockhart LLP from 1992 to 1997.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors, and
the remaining Directors will be elected by all holders of capital stock, voting
as a single class. See "Description of Capital Stock."
27
<PAGE>
Compensation of Directors
Pursuant to an Investment Advisory Agreement with the Fund, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors who are affiliated persons of ML & Co. or its
subsidiaries.
The Fund pays each Director not affiliated with the Investment Adviser (each
a "non-affiliated Director") a fee of $2,500 plus $250 per meeting attended,
and pays all Director's out-of-pocket expenses relating to attendance at
meetings. The Fund also pays members of the Board's audit and nominating
committee (the "Committee"), which consists of all the non-affiliated
Directors, an annual fee of $500 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, 1998 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
affiliated Directors.
<TABLE>
<CAPTION>
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 $163,500
Herbert I. London(1)........ $4,500 None $163,500
Robert R. Martin(1)......... $4,500 None $163,500
Joseph L. May(1)............ $4,500 None $163,500
Andre F. Perold(1).......... $4,500 None $163,500
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Bodurtha (25 registered investment
companies consisting of 43 portfolios); Mr. London (25 registered
investment companies consisting of 43 portfolios); Mr. Martin (25
registered investment companies consisting of 43 portfolios); Mr. May (25
registered investment companies consisting of 43 portfolios); and Mr.
Perold (25 registered investment companies consisting of 43 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides
the Fund with investment advisory and management services. The Merrill Lynch
Asset Management Group (which includes the Investment Adviser) acts as the
investment adviser to more than 100 registered investment companies and offers
investment advisory services to individuals and institutional accounts. As of
December 1998, the Asset Management Group had a total of approximately $501
billion in investment company and other portfolio assets under management
(approximately $38 billion of which were invested in municipal securities).
This amount includes assets managed for certain affiliates of the Investment
Adviser. The Investment Adviser is a limited partnership, the partners of
which are ML & Co. and Princeton Services. The principal business address of
the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
The Investment Advisory Agreement provides that, subject to the supervision
of the Board of Directors of the Fund, the Investment Adviser is responsible
for the actual management of the Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Investment Adviser, subject to review by the Board of Directors.
28
<PAGE>
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. Robert A. DiMella and
Roberto W. Roffo are the portfolio managers of the Fund and are 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, if any, stock certificates and shareholder reports, charges of the
custodian and the transfer and dividend disbursing agent and registrar, fees
and expenses with respect to the issuance of preferred stock, Securities and
Exchange Commission fees, fees and expenses of non-interested Directors,
accounting and pricing costs, insurance, interest, brokerage costs, litigation
and other extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940 Act)
of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an
advisory client when other clients are selling the same security. If purchases
or sales of securities by the Investment Adviser for the Fund or other funds
for which it acts as investment adviser or for advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. Transactions effected by the Investment Adviser (or
its affiliates) on behalf of more than one of its clients during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, causing an adverse effect on price.
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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 providing the best price
and execution, securities firms that provide investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Research information provided to the Investment
Adviser by securities firms is supplemental. It does not replace or reduce the
level of services performed by the Investment Adviser and the expenses of the
Investment Adviser will not be reduced because it receives supplemental
research information.
The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with dealers who make markets in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principals for their own accounts, the Fund
does not deal with Merrill Lynch and its affiliates in connection with such
transactions except that, pursuant to exemptive orders obtained by the
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Investment Adviser, the Fund may engage in principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities. See "Investment
Restrictions." However, affiliated persons of the Fund, including Merrill
Lynch, serve as its brokers in certain over-the-counter transactions conducted
on an agency basis.
The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
Portfolio Turnover
The Fund may dispose of securities without regard to the time they have been
held when such action, for defensive or other reasons, appears advisable to the
Investment Adviser. While it is not possible to predict turnover rates with any
certainty, presently it is anticipated that the Fund's annual portfolio
turnover rate, under normal circumstances, should be less than 100%. (The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
A high portfolio turnover rate has certain tax consequences and results in
greater transaction costs, which are borne directly by the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared and paid monthly to holders of
common stock. It is expected that the Fund will commence paying dividends to
holders of common stock within approximately 90 days of the date of this
prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of common stock normally will consist of substantially
all net investment income remaining after the payment of dividends (and any
Additional Distribution) on the preferred stock. All net realized capital
gains, if any, will be distributed pro rata at least annually to holders of
common stock and any preferred stock. While any shares of preferred stock are
outstanding, the Fund may not declare any cash dividend or other distribution
on its common stock, unless at the time of such declaration, (i) all
accumulated preferred stock dividends, including any Additional Distribution,
have been paid, and (ii) the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or other distribution)
is at least 200% of the liquidation value of the outstanding preferred stock
(expected to equal the original purchase price of the outstanding shares of
preferred stock plus any accumulated and unpaid dividends thereon and any
accumulated but unpaid Additional Distribution). If the Fund's ability to make
distributions on its common stock is limited, such limitation could under
certain circumstances impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company, which would have
adverse tax consequences for holders of common stock. See "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of common stock may be
automatically reinvested in shares of common stock of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
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TAXES
General
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by the Fund that are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-
interest dividends in a written notice mailed to the Fund's shareholders within
60 days after the close of its taxable year. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income exempt
from tax under Code Section 103(a) and are properly designated as exempt-
interest dividends, they will be excludable from a shareholder's gross income
for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Each shareholder
is advised to consult a tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if such shareholder
would be treated as a "substantial user" or "related person" under Code Section
147(a) with respect to property financed with the proceeds of an issue of
"industrial development bonds" or "private activity bonds," if any, held by the
Fund.
The portion of exempt-interest dividends paid from interest received by the
Fund from New York Municipal Bonds also will be exempt from New York State and
New York City personal income tax. To the extent distributions from the Fund
are attributable to sources other than interest on New York Municipal Bonds
such distributions will not be exempt from New York State and New York City
personal income tax. However, exempt-interest dividends paid to a corporate
shareholder will be subject to New York State corporation franchise tax and New
York City general corporation tax. Shareholders subject to income taxation by
states other than New York and cities other than New York City will realize a
lower after-tax rate of return than New York State and City shareholders since
the dividends distributed by the Fund generally will not be exempt, to any
significant degree, from income taxation by such other states or cities. The
Fund will inform shareholders annually as to the portion of the Fund's
distributions which constitutes exempt-interest dividends and the portion which
is exempt from New York State and New York City personal income taxes. Interest
on indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal income tax
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purposes or for New York State and New York City personal income tax purposes
to the extent attributable to exempt-interest dividends.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions will
be considered taxable ordinary income for Federal income tax purposes and New
York State and New York City personal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares and, for New York State and New York City
personal income tax purposes, are treated as capital gains which are taxed at
ordinary income tax rates. Certain categories of capital gains are taxable at
different rates for Federal income tax purposes. Generally not later than 60
days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any exempt-
interest dividends, ordinary income dividends or capital gain dividends, as
well as any amount of capital gain dividends in the different categories of
capital gain referred to above. Distributions by the Fund, whether from exempt-
income, ordinary income or capital gains, are not eligible for the dividends
received deduction allowed to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Any loss upon the sale or exchange of Fund shares held for six months or less
will be disallowed to the extent of any exempt-interest dividends received by
the shareholder. In addition, any such loss that is not disallowed under the
rule stated above will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Internal Revenue Service ("Service") has taken the position in a revenue
ruling that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than such
class's proportionate share of particular types of income, including exempt-
interest income and net long-term capital gains. A class's proportionate share
of a particular type of income is determined according to the percentage of
total dividends paid by the RIC during such year that was paid to such class.
Consequently, when common stock and one or more series of preferred stock are
outstanding, the Fund intends to designate distributions made to the classes as
consisting of particular types of income in accordance with each class's
proportionate share of such income. Thus, the Fund will designate dividends
paid as exempt-interest dividends in a manner that allocates such dividends
among the holders of common stock and series of preferred stock in proportion
to the total dividends paid to each class during the taxable year, or otherwise
as required by applicable law. Capital gain dividends will similarly be
allocated among the classes in proportion to the total dividends paid to each
class during the taxable year, or otherwise as required by applicable law. When
capital gain or other taxable income is allocated to holders of preferred stock
pursuant to the allocation rules described above, the terms of the preferred
stock may require the Fund to make an additional distribution to or otherwise
compensate such holders for the tax liability resulting from such allocation.
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The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt, are
used for purposes other than those generally performed by governmental units
and that benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified
as an item of "tax preference" that could subject certain investors in such
bonds, including shareholders of the Fund, to an increased alternative minimum
tax. The Fund intends to purchase such "private activity bonds" and will report
to shareholders within 60 days after calendar year-end the portion of its
dividends declared during the year that constitutes an item of tax preference
for alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay an alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of common stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. If the
Fund were to fail to qualify as a RIC, some or all of the distributions paid by
the Fund would be fully taxable for Federal and New York State and New York
City income tax purposes. Upon any failure to meet the asset coverage
requirements of the 1940 Act, the Fund, in its sole discretion, may redeem
shares of preferred stock in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its shareholders of
failing to qualify as a RIC. There can be no assurance, however, that any such
action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Fund currently contemplates issuing may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code and, therefore, not eligible for the dividends
paid deduction. The Fund intends to issue preferred stock that counsel advises
will not result in the payment of a preferential dividend and may seek a
private letter ruling from the Service to that effect. If the Fund ultimately
relies solely on a legal opinion when it issues such preferred stock, there is
no assurance that the Service would agree that dividends on the preferred stock
are not preferential. If the Service successfully disallowed the dividends paid
deduction for dividends on the preferred stock, the Fund could be disqualified
as a RIC. In this case, dividends on the common stock would not be exempt from
Federal income taxes. Additionally, the Fund would be subject to the
alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market
value than the amount of cash reinvested, it is
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<PAGE>
possible that all or a portion of such discount (which may not exceed 5% of the
fair market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution, it is also
possible that the taxable character of this discount would be allocable to all
of the shareholders, including shareholders who do not participate in the
dividend reinvestment plan. Thus, shareholders who do not participate in the
dividend reinvestment plan, as well as dividend reinvestment plan participants,
might be required to report as ordinary income a portion of their distributions
equal to their allocable share of the discount.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding are those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
Tax Treatment of Options and Futures Transactions
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to the
Fund or an exception applies, such options and financial futures contracts that
are "Section 1256 contracts" will be "marked to market" for Federal income tax
purposes at the end of each taxable year, i.e., each such option or financial
futures contract will be treated as sold for its fair market value on the last
day of the taxable year, and any gain or loss attributable to Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest
rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in financial futures
contracts or the related options.
----------------
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The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New York State and New York
City tax laws presently in effect. For the complete provisions, reference
should be made to the pertinent Code sections, the Treasury Regulations
promulgated thereunder and the applicable tax laws. The Code and the Treasury
Regulations, as well as the New York State and New York City tax laws, are
subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of common stock otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by The Bank of New York,
as agent for shareholders in administering the Plan (the "Plan Agent"), in
additional shares of common stock of the Fund. Holders of common stock who
elect not to participate in the Plan will receive all distributions in cash
paid by check mailed directly to the shareholder of record (or, if the shares
are held in street or other nominee name, then to such nominee) by The Bank of
New York, as dividend paying agent. Such participants may elect not to
participate in the Plan and to receive all distributions of dividends and
capital gains in cash by sending written instructions to The Bank of New York,
as dividend paying agent, at the address set forth below. Participation in the
Plan is completely voluntary and may be terminated or resumed at any time
without penalty by written notice if received by the Plan Agent not less than
ten days prior to any dividend record date; otherwise, such termination or
resumption will be effective with respect to any subsequently declared dividend
or distribution.
Whenever the Fund declares an income dividend or a capital gains distribution
(collectively, referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash, and participants in the Plan
will receive the equivalent in shares of common stock. The shares will be
acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional
unissued but authorized shares of common stock from the Fund ("newly issued
shares") or (ii) by purchase of outstanding shares of common stock on the open
market ("open-market purchases") on the New York Stock Exchange (the "NYSE") or
elsewhere. If on the payment date for the dividend, the net asset value per
share of the common stock is equal to or less than the market price per share
of the common stock plus estimated brokerage commissions (such condition being
referred to herein as "market premium"), the Plan Agent will invest the
dividend amount in newly issued shares on behalf of the participant. The number
of newly issued shares of common stock to be credited to the participant's
account will be determined by dividing the dollar amount of the dividend by the
net asset value per share on the date the shares are issued, provided that the
maximum discount from the then current market price per share on the date of
issuance may not exceed 5%. If on the dividend payment date the net asset value
per share is greater than the market value (such condition being referred to
herein as "market discount"), the Plan Agent will invest the dividend amount in
shares acquired on behalf of the participant in open-market purchases. Prior to
the time the shares of common stock commence trading on the NYSE, participants
in the Plan will receive any dividends in newly issued shares.
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In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that the
Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of common stock exceeds the
net asset value per share, the average per share purchase prices paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in
the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing difficulty
with respect to open-market purchases, the Plan provides that if the Plan Agent
is unable to invest the full dividend amount in open-market purchases during
the purchase period or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will cease making open-market purchases and
will invest the uninvested portion of the dividend amount in newly issued
shares at the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by
the record shareholders as representing the total amount registered in the
record shareholder's name and held for the account of beneficial owners who are
to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable either
in shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
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Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 101 Barclay Street, New York, New York 10286.
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of common stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares (the "Original Shares") in
Class D initial sales charge shares of certain Merrill Lynch-sponsored open-end
mutual funds ("Eligible Class D Shares") at their net asset value, without the
imposition of the initial sales charge, if the conditions set forth below are
satisfied. First, the sale of the Original Shares must be made through Merrill
Lynch, and the net proceeds therefrom must be immediately reinvested in
Eligible Class D Shares. Second, the Original Shares must have been either
acquired in this offering or be shares representing reinvested dividends from
shares of common stock acquired in this offering. Third, the Original Shares
must have been continuously maintained in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option. Class D shares of the mutual funds are subject to an account
maintenance fee at an annual rate of up to 0.25% of the average daily net asset
value of such mutual fund. The Eligible Class D Shares may be redeemed at any
time at the next determined net asset value, subject in certain cases to a
redemption fee. Prior to the time the shares of common stock commence trading
on the NYSE, the distributor for the mutual funds will advise Merrill Lynch
Financial Consultants as to those mutual funds that offer the investment option
described above.
NET ASSET VALUE
Net asset value per share of common stock is determined as of 15 minutes
after the close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on the last business day in each week. For purposes of
determining the net asset value of a share of common stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of common stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The New York Municipal Bonds and Municipal Bonds in which the Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value, the Fund utilizes the valuations of portfolio securities furnished by a
pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. New York Municipal Bonds and Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors. The Board of Directors has determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Positions
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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 are initially classified as common
stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption. Within
approximately three months after completion of the offering of the common stock
described herein, the Fund intends to reclassify an amount of unissued common
stock as preferred stock and at that time to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There is no assurance that such preferred
stock will be issued.
Common Stock
Shares of common stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred stock are outstanding, holders
of common stock will not be entitled to receive any net income of or other
distributions from the Fund unless all accumulated dividends on preferred stock
have been paid and unless asset coverage (as defined in the 1940 Act) with
respect to preferred stock would be at least 200% after giving effect to such
distributions. See "Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 shares of common stock of the Fund for $100,005. As of the
date of this prospectus, the Investment Adviser owned 100% of the outstanding
shares of common stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
Preferred Stock
It is anticipated that the Fund's shares of preferred stock will be issued in
one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of common
stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of common stock have no preemptive right to purchase any
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<PAGE>
shares of preferred stock that might be issued. It is anticipated that the net
asset value per share of the preferred stock will equal its original purchase
price per share plus accumulated dividends per share.
The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of common stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred stock
is likely to achieve the benefits to the holders of common stock described in
the prospectus. Although the terms of the preferred stock, including its
dividend rate, voting rights, liquidation preference and redemption provisions
will be determined by the Board of Directors (subject to applicable law and the
Fund's Articles of Incorporation), the initial series of preferred stock will
be structured to carry either a relatively short-term dividend rate, in which
case periodic redetermination of the dividend rate will be made at relatively
short intervals (generally seven or 28 days), or a medium-term dividend rate,
in which case periodic redetermination of the dividend rate will be made at
intervals of up to five years. In either case, such redetermination of the
dividend rate will be made through an auction or remarketing procedure.
Additionally, under certain circumstances, when the Fund is required to
allocate taxable income to holders of the preferred stock, it is anticipated
that the terms of the preferred stock will require the Fund to make an
Additional Distribution (as defined in "Risks and Special Considerations of
Leverage--Effects of Leverage") to such holders. The Board also has indicated
that it is likely that the liquidation preference, voting rights and redemption
provisions of the preferred stock will be as stated below. The Fund's Articles
of Incorporation, as amended, together with any Articles Supplementary, is
referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of common stock. After payment of the
full amount of the liquidating distribution to which they are entitled, the
preferred stockholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any other corporation or corporations or a sale of all or substantially
all of the assets of the Fund will not be deemed to be a liquidation,
dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this prospectus and except as
otherwise required by applicable law, holders of shares of preferred stock will
have equal voting rights with holders of shares of common stock (one vote per
share) and will vote together with holders of common stock as a single class.
In connection with the election of the Fund's directors, holders of shares of
preferred stock, voting as a separate class, will be entitled to elect two of
the Fund's directors, and the remaining directors will be elected by all
holders of capital stock, voting as a single class. So long as any preferred
stock is outstanding, the Fund will have not less than five directors. If at
any time dividends on shares of the Fund's preferred stock shall be unpaid in
an amount equal to two full years' dividends thereon, the holders of all
outstanding shares of preferred stock, voting as a separate class, will be
entitled to elect a majority of the Fund's directors until all dividends in
default have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to
40
<PAGE>
any series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so as
to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.
Redemption Provisions. It is anticipated that shares of preferred stock will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal
to their liquidation preference plus accumulated but unpaid dividends to the
date of redemption upon the occurrence of certain specified events, such as the
failure of the Fund to maintain asset coverage requirements for the preferred
stock specified by the rating agencies that issue ratings on the preferred
stock.
Certain Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. A director may be removed from
office with or without cause, but only by vote of the holders of at least 66
2/3% of the votes entitled to be voted on the matter. A director elected by all
the holders of capital stock may be removed only by action of such holders, and
a director elected by the holders of preferred stock may be removed only by
action of such holders.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 66 2/3% of the Fund's shares of capital stock then entitled
to be voted, voting as a single class, to approve, adopt or authorize the
following:
. a merger or consolidation or statutory share exchange of the Fund with
other corporations,
. a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities), or
. a liquidation or dissolution of the Fund, unless such action has been
approved, adopted or authorized by the affirmative vote of two-thirds of
the total number of Directors fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's shares of
capital stock is required. Following the proposed issuance of the
preferred stock, it is anticipated that the approval, adoption or
authorization of the foregoing would also require the favorable vote of
a majority of the Fund's shares of preferred stock then entitled to be
voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by two-thirds of the total number of
Directors fixed in accordance with the by-laws), and, assuming preferred stock
is issued, the affirmative vote of a majority of outstanding shares of
preferred stock of the Fund, voting as a separate class. Such a vote also would
satisfy a separate requirement in the 1940 Act that the change be approved by
the shareholders. Shareholders of an open-end
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<PAGE>
investment company may require the company to redeem their shares of common
stock at any time (except in certain circumstances as authorized by or under
the 1940 Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of a redemption. All redemptions will be made in
cash. If the Fund is converted to an open-end investment company, it could be
required to liquidate portfolio securities to meet requests for redemption, and
the common stock would no longer be listed on a stock exchange.
Conversion to an open-end investment company would also require redemption of
all outstanding shares of preferred stock and would require changes in certain
of the Fund's investment policies and restrictions, such as those relating to
the issuance of senior securities, the borrowing of money and the purchase of
illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of shareholders generally.
Reference should be made to the Charter on file with the Securities and
Exchange Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 5,000,000 shares of common stock
from the Fund. The Underwriter is committed to purchase all of such shares if
any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of common stock to the public at the public offering price set forth on
the cover page of this prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of common stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of common stock in the offering in the amount of $.30 per share. Such
payment is equal to 2.00% of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter may
pay a concession to certain dealers not in excess of $.30 per share on sales by
such dealers. After the initial public offering, the public offering price and
other selling terms may be changed. Investors must pay for shares of common
stock purchased in the offering on or before January 29, 1999.
The Fund has granted the Underwriter an option, exercisable for 45 days after
the date hereof, to purchase up to 750,000 additional shares of common stock to
cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
common stock.
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If the Underwriter creates a short position in the shares of common stock in
connection with the offering, i.e., if it sells more shares of common stock
than are set forth on the cover page of this prospectus, the Underwriter may
reduce that short position by purchasing shares of common stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of common stock in
the open market to reduce the Underwriter's short position or to stabilize the
price of the shares of common stock, it may reclaim the amount of the selling
concession from the selling group members who sold those shares of common stock
as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of common stock. In addition, neither
the Fund nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Prior to this offering, there has been no public market for the shares of the
common stock. The Fund's common stock has been approved for listing on the
NYSE. However, during an initial period which is not expected to exceed two
weeks from the date of this prospectus, the Fund's common stock will not be
listed on any securities exchange. Additionally, before it begins trading, the
Underwriter does not intend to make a market in the Fund's common stock,
although a limited market may develop. Thus, it is anticipated that investors
may not be able to buy and sell shares of the Fund during such period. In order
to meet the requirements for listing, the Underwriter has undertaken to sell
lots of 100 or more shares to a minimum of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The Fund
has obtained an exemptive order permitting it to engage in certain principal
transactions with the Underwriter involving high quality, short-term, tax-
exempt securities subject to certain conditions. See "Investment Restrictions"
and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.
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TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares of
common stock of the Fund is The Bank of New York, 101 Barclay Street, New York,
New York 10286.
LEGAL OPINIONS
Certain legal matters in connection with the common stock offered hereby will
be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New York,
New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of January 13,
1999 included in this prospectus and Registration Statement has been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon authority of such firm as experts in accounting and auditing. 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 Securities and
Exchange Commission (the "Commission"). Any such reports, proxy statements and
other information can be inspected and copied at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: Regional Office, at Seven World Trade Center, Suite 1300, New York,
New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A
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copy of the Registration Statement may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of all or any
part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
Year 2000 Issues
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Investment Adviser or other Fund
service providers do not properly address this problem before January 1, 2000.
The Investment Adviser expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Investment Adviser that they
also expect to resolve the Year 2000 Problem, and the Investment Adviser will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected.
The Year 2000 Problem could also have a negative impact on the issuers of
securities in which the Fund invests, and this could hurt the Fund's investment
returns.
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
MuniHoldings New York Insured Fund III, Inc.:
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings New York Insured Fund III, Inc. as of January 13, 1999. 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, the statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings New York Insured Fund III, Inc. at January 13, 1999, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Princeton, New Jersey
January 21, 1999
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MuniHoldings New York Insured Fund III, Inc.
Statement of Assets, Liabilities and Capital
January 13, 1999
<TABLE>
<S> <C>
Assets:
Cash................................................................ $100,005
Offering Costs (Note 1)............................................. 257,000
--------
Total assets.......................................................... 357,005
--------
Liabilities:
Liabilities and accrued expenses (Note 1)............................. 257,000
--------
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 November
23, 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 January 13, 1999. The General Partner of the Investment Adviser is
an indirectly wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The Investment Adviser, on behalf of the Fund, will incur organization costs
estimated at $11,000. Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares.
Note 2. Management Arrangements
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at the annual rate of 0.55 of 1% of the
Fund's average weekly net assets of the Fund, including any proceeds from the
issuance of Preferred Stock. The Investment Adviser or an affiliate will pay
Merrill Lynch, Pierce, Fenner & Smith Incorporated a commission in the amount
of 2.00% of the price to the public in connection with the initial public
offering of the Fund's Common Stock.
Note 3. Federal Income Taxes
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
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APPENDIX I
ECONOMIC AND OTHER CONDITIONS IN NEW YORK
The following information is a brief summary of factors affecting the economy
of New York City (the "City") or New York State (the "State" or "New York").
Other factors will affect issuers. The summary is based primarily upon one or
more of the most recent publicly available offering statements relating to debt
offerings of State issuers, however, it has not been updated. The Fund has not
independently verified this information.
The State, some of its agencies, instrumentalities and public authorities and
certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for or
the market value of the New York Municipal Bonds in which the Fund invests.
New York City
General. More than any other municipality, the fiscal health of the City has
a significant effect on the fiscal health of the State. The City's current
financial plan assumes that after 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 1998 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.
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.
City's Financing Program. 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 filed
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a notice of appeal with the State's Court of Appeals for an appeal as of right
of the Appellate Division order. The appeal as of right was dismissed on
September 22, 1998. Plaintiffs subsequently filed a motion for leave to appeal
with the Court of Appeals, which motion was denied on December 22, 1998. Even
with the capacity of the Transitional Finance Authority, the City may be
required temporarily to delay entering into new contractual commitments at the
end of fiscal year 1999 and, without additional legally authorized borrowing
capacity, under projections (current as of December 18, 1998), would reach the
limit of its capacity to enter into new contractual commitments in fiscal year
2000. In addition, the City issues revenue notes and tax anticipation notes to
finance its seasonal working capital requirements (See "Seasonal Financing
Requirements" within). The success of projected public sales of City bonds and
notes, New York City Municipal Water Finance Authority (the "Water Authority")
bonds and Transitional Finance Authority 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.
1998 Fiscal Year. For the 1998 fiscal year, (July 1, 1997-June 30, 1998) the
City had an operating surplus, before discretionary and other transfers, and
achieved balanced operating results, after discretionary and other transfers,
in accordance with GAAP. The 1998 fiscal year is the eighteenth year that the
City has achieved an operating surplus, before discretionary and other
transfers, and balanced operating results, after discretionary and other
transfers.
1999-2002 Financial Plan. On November 18, 1998, the City released the
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 is a modification to the financial plan submitted to the New York State
Financial Control Board (the "Control Board") on June 26, 1998 (the "June
Financial Plan"). The City Financial Plan projects revenues and expenditures
for the 1999 fiscal year balanced in accordance with GAAP, and project gaps of
$2.2 billion, $2.9 billion and $2.4 billion for the 2000 through 2002 fiscal
years, respectively, after implementation of a gap closing program to reduce
agency expenditures by $200 million in the 1999 fiscal year and approximately
$80 million in each of fiscal years 2000 through 2002.
The City's projected budget gaps for the 2001 and 2002 fiscal years do not
reflect the savings expected to result from the prior years' programs to close
the gaps set forth in the City Financial Plan. Thus, for example, recurring
savings anticipated from the actions which the City proposes to take to balance
the fiscal year 2000 budget are not taken into account in projecting the budget
gaps for the 2001 and 2002 fiscal years.
The 1999-2002 Financial Plan includes a proposed discretionary transfer in
the 1999 fiscal year of $465 million to pay debt service due in the fiscal year
2000. In addition, the Financial Plan reflects enacted and proposed tax
reduction programs totaling $429 million, $604 million and $606 million in
fiscal years 2000 through 2002, respectively, including the elimination of the
City sales tax on all clothing as of December 1, 1999, 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
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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 and which is projected to provide
revenue of $183 million, $524 million, and $544 million in the 2000, 2001 and
2002 fiscal years, respectively; and (ii) collection of the projected rent
payments for the City's airports, totaling $6 million, $365 million, $155
million and $185 million in the 1999 through 2002 fiscal years, respectively, a
substantial portion of which may depend on the successful completion of
negotiations with The Port Authority of New York and New Jersey (the "Port
Authority") or the enforcement of the City's rights under the existing leases
through pending legal actions. In addition, the economic and financial
condition of the City may be affected by various financial, social, economic
and political factors which could have a material effect on the City.
Municipal Unions. The Financial Plan reflects the costs of the settlements
and arbitration awards with certain municipal unions and other bargaining
units, which together represent approximately 98% of the City's workforce, and
assumes that the City will reach agreement with its remaining municipal unions
under terms which are generally consistent with such settlements and
arbitration awards. These contracts are approximately five years in length and
have a total cumulative net increase of 13%. Assuming the City reaches similar
settlements with its remaining municipal unions, the cost of all settlements
for all City-funded employees, as reflected in the Financial Plan, would total
$1.2 billion in the 1999 fiscal year and exceed $2 billion thereafter. The
Financial Plan provides no additional wage increases for City employees after
their contracts expire in fiscal years 2000 and 2001.
Intergovernmental Aid. The City depends on the State for aid both to enable
the City to balance its budget and to meet its cash requirements. There can be
no assurance that there will not be reductions in State aid to the City from
amounts 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 November 1996, the City's Year 2000 Project Office was
established to
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develop a project methodology, coordinate the efforts of City agencies, review
plans and oversee implementation of year 2000 projects. At that time, the City
also evaluated the capabilities of the City's Integrated Financial Management
System and Capital Projects Information System, which are the City's central
accounting, budgeting and payroll systems, identified the potential impact of
the year 2000 on these systems, and developed a plan to replace these systems
with a new system which is expected to be year 2000 compliant prior to December
31, 1999. The City has also performed an assessment of its other mission-
critical and high priority computer systems in connection with making them year
2000 compliant, and the City's agencies have developed and begun to implement
both strategic and operational plans for non-compliant application systems. In
addition, the City Comptroller is conducting audits of the progress of City
agencies in achieving year 2000 compliance. While these efforts may involve
additional costs beyond those assumed in the Financial Plan, the City believes,
based on currently available information, that such additional costs will not
be material.
The Mayor's Office of Operations has stated that work has been completed, and
all or part of the necessary testing has been performed, on approximately 49%
(current as of December 18, 1998) of the mission-critical and high priority
systems of Mayoral agencies. The City's computer systems may not all be year
2000 compliant in a timely manner and there could be an adverse impact on City
operations or revenues as a result. The City is in the process of developing
contingency plans for all mission-critical and high priority systems, if such
systems are not year 2000 compliant by pre-determined dates. The City is also
in the process of contacting its significant third party vendors regarding the
status of their compliance. Such compliance is not within the City's control,
and therefore the City cannot assure that there will not be any adverse effects
on the City resulting from any failure of these third parties.
Certain Reports. The City's financial plans have been the subject of
extensive public comment and criticism. From time to time, the Control Board
staff, the Office of the State Deputy Comptroller (the "OSDC"), the City
Comptroller, the City's Independent Budget Office (the "IBO") and others issue
reports and make public statements regarding the City's financial condition,
commenting on, among other matters, the City's financial plans, projected
revenues and expenditures and actions by the City to eliminate projected
operating deficits. Some of these reports and statements have warned that the
City may have underestimated certain expenditures and overestimated certain
revenues and have suggested that the City may not have adequately provided for
future contingencies. Certain of these reports have analyzed the City's future
economic and social conditions and have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of its
expenditure increases and to provide necessary services.
On December 30, 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 $593 million and $897 million, including $465
million in the budget stabilization account. Potential risks identified in the
report for the 1999 fiscal year include $135 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 $454 million and $636 million, $223
million and $1.2 billion, and $399 million and $1.9 billion, respectively,
depending upon whether the State approves the extension of the 14% personal
income tax surcharge and whether the City incurs additional labor costs as a
result of the expiration of labor contracts starting in fiscal year 2001 which,
if settled at the current forecast level of inflation, would result in
additional costs totaling $487 million in fiscal year 2001 and $987 million in
fiscal year 2002. Additional risks identified in the report for fiscal years
2000 through 2002 include assumed payments from the Port Authority relating to
the City's
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claim for back rentals, which are the subject of arbitration, possible
increased overtime expenditures and the write-down of outstanding education aid
receivables increasing to $109 million in fiscal year 2002. The report noted
that these risks may be partially offset in each of fiscal years 2000 through
2002 by additional resources of between approximately $500 million and $700
million to $950 million, depending on the level of assumed tax revenues, which
would result in projected budget gaps, including the gaps projected in the
Financial Plan, of between $1.9 billion and $2.3 billion, $2.3 billion and $3.7
billion, and $1.9 billion and $3.8 billion in fiscal years 2000 through 2002,
respectively. The report noted that, in the past, the City has relied on
initiatives such as agency expenditure reductions, asset sales and increased
State and Federal aid to close projected budget gaps. The report further noted
that an area of concern is the projected 8.4% growth in the 1999 fiscal year of
operating expenditures (which exclude State and Federal categorical aid and
debt service).
On August 25, 1998, the City Comptroller issued a report reviewing the
current condition of the City's major physical assets and the capital
expenditures required to bring them to a state of good repair. The report's
findings relate only to current infrastructure and do not address future
capacity or technology needs. The report estimated that the expenditure of
approximately $91.83 billion would be required over the next decade to bring
the City's infrastructure to a systematic state of good repair and address new
capital needs already identified. The report stated that the City's current
Ten-Year Capital Strategy, together with funding received from other sources,
is projected to provide approximately $52.08 billion. The report noted that the
City's ability to meet all capital obligations is limited by law, as well as
funding capacity, and that the issue for the City is how best to set priorities
and manage limited resources.
On December 16, 1998, the staff of the OSDC issued a report on the City
Financial Plan. The report concluded that the City is likely to end fiscal year
1999 with a $1 billion surplus. With respect to fiscal years 2000 through 2002,
the report concluded that the budget gaps for such years could be larger than
those projected by the City, totaling $3.1 billion, $3.6 billion and $3.2
billion in fiscal years 2000 through 2002, respectively. The risks identified
in the report include (i) assumed payments from the Port Authority relating to
the City's claim for back rentals, which are the subject of arbitration, (ii)
greater than expected increases in health insurance costs and (iii) 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. The report also noted that potential future liabilities
could result from possible changes in the investment earnings assumption or
other assumptions affecting pension costs. In addition, the report noted that
the City is vulnerable to an economic downturn, which could reduce revenues and
increase City pension contributions and public assistance caseloads and that
the City Financial Plan does not make any provision for (i) wage increases
after the expiration of current contracts which, at projected local inflation
rates, would increase the gaps by $430 million and $940 million in fiscal years
2001 and 2002, respectively, or (ii) the possibility that the 14% personal
income tax surcharge will not be extended.
In the report the OSDC identified several other concerns. With respect to
property taxes, the report noted that the City is supporting legislation that
would prevent certain property owners from using actual sales of real property
as evidence of whether an assessment is unequal, and that, if such legislation
is not enacted, City officials feel that the City's liability in tax certiorari
cases could increase 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.
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The report also expressed concern about the City's growing debt burden, which
will reach 19% of tax revenues by fiscal year 2002, and noted that HHC is
facing significant budget gaps starting in fiscal year 2000
and will face increasing competitive pressures in the near future when the
State begins requiring most Medicaid recipients to enroll in managed care
plans. With respect to the City's program to repair or replace computer systems
to solve the Year 2000 problem, the report noted that an additional $100
million may be required from the operating budget for consulting contracts.
On December 21, 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. However, the report identified risks of
$504 million, $284 million and $619 million for fiscal years 2000 through 2002,
respectively, which when combined with the City's projected gaps, results in
estimated gaps of $2.7 billion, $3.2 billion and $3.0 billion for fiscal years
2000 through 2002, respectively, before making provision for any increased
labor costs which may occur when the current contracts with City employees
expire in calendar year 2000. With respect to subsequent fiscal years, the
principal risks identified in the report include (i) the possibility that the
City may decide to fund the $63 million annual cost of teachers' salary
supplementation for fiscal years 2000 through 2002, which the State failed to
fund in the 1999 fiscal year, and an additional risk of $109 million in fiscal
year 2002 for BOE resulting from the write-down of funds owed to BOE by the
State which have been outstanding for ten years or more; (ii) the receipt of
assumed rental payments from the Port Authority relating to the City's claim
for back rents, which are the subject of arbitration; and (iii) overtime and
health insurance expenditures which could be greater than assumed in the City
Financial Plan. With respect to fiscal year 2000, the report noted that it is
unlikely, given the economic outlook, that the City will approach the $2.1
billion surplus rolled from fiscal year 1998 into fiscal year 1999. The report
further noted that the gaps facing the City are being caused by slowly growing
revenues, reflecting the City's tax reduction programs, as well as expenditure
growth from increased salaries and wages in the City's current collective
bargaining agreements, increased health insurance costs and an expanding debt
service burden.
Seasonal Financing Requirements. The City since 1981 has fully satisfied its
seasonal financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. The City has issued $500
million of short-term obligations in the 1999 fiscal year to finance the City's
projected cash flow needs for the 1999 fiscal year. The City issued $1.075
billion in short-term obligations in fiscal year 1998 to finance the City's
projected cash flow needs for the 1998 fiscal year. The City issued $2.4
billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Ratings. As of January 15, 1999, Moody's rated the City's outstanding general
obligation bonds A3, Standard & Poor's rated such bonds A- and Fitch rated such
bonds A-. In July 1995, Standard & Poor's revised 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.
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Outstanding Indebtedness. As of September 30, 1998, the City and the
Municipal Assistance Corporation for the City of New York had respectively
approximately $26.4 and $3.1 billion of outstanding net long-term
debt. As of October 22, 1998, the Water Authority had approximately $8.4
billion aggregate principal amount of outstanding bonds, inclusive of
subordinate second resolution bonds, and $600 million aggregate principal
amount of outstanding commercial paper notes.
Water, Sewer and Waste. Debt service on Water Authority obligations is
secured by fees and charges collected from the users of the City's water and
sewer system. State and Federal regulations require the City's water supply to
meet certain standards to avoid filtration. The City's water supply now meets
all technical standards and the City has taken the position that increased
regulatory, enforcement and other efforts to protect its water supply, will
prevent the need for filtration. On May 6, 1997, the U.S. Environmental
Protection Agency granted the City a filtration avoidance waiver through April
15, 2002 in response to the City's adoption of certain watershed regulations.
The estimated incremental cost to the City of implementing this Watershed
Memorandum of Agreement, beyond investments in the watershed which 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.
Legislation has been passed by the State which prohibits the disposal of
solid waste in any landfill located within the City after December 31, 2001.
The Financial Plan includes the estimated costs of phasing out the use of
landfills located within the City. A suit has been commenced against the City
by private individuals under the Resource Conservation and Recovery Act seeking
to compel the City to take certain measures or, alternatively, to close the
Fresh Kills landfill. If as a result of such litigation, the City is required
to close the landfill earlier than required by State legislation, the City
could incur additional costs during the Financial Plan period. Pursuant to
court order, the City is currently required to recycle 2,100 tons per day of
solid waste and is required to recycle 3,400 tons per day by July 1999 and
4,250 tons per day by July 2001. The City is currently recycling slightly over
2,100 tons per day of solid waste. The City may seek to obtain amendments to
Local Law No. 19 to modify this requirement. If the City is unable to obtain
such amendments and is required to fully implement Local Law No. 19, the City
may incur substantial costs.
Litigation. The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, routine litigation incidental to
the performance of its governmental and other functions, actions commenced and
claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
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, 1998, the City estimated its
potential future liability on account of outstanding claims amounted to
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. National economic growth in
both 1998 and 1999 is expected to be slower than it was during 1997. The State
Division of the Budget projects real GDP growth of 3.4 percent in 1998, below
the 1997 growth rate of 3.9 percent. In 1999, real GDP growth is expected to
fall further, to 1.6 percent. The State economy has also continued to expand,
but growth remains somewhat slower than in the nation. The State's
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forecast of the State's economy projects continued growth in 1998 and 1999 for
employment, wages, and personal income, although for 1999, a significant
slowdown in the growth rates of personal income and wages are expected.
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 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.
Overall, employment growth is expected to be 2.0 percent in 1998, the
strongest in a decade, but is expected to drop to 1.0 percent in 1999,
reflecting the slowing growth in the national economy, continued spending
restraint in government, less robust profitability in the financial sector and
continued restructuring in the manufacturing, health care and banking sectors.
Employment growth in the State was 1.5 percent for 1997. On the national level,
employment growth was 2.6 percent for 1997 and is projected to be 2.5 percent
and 1.9 percent for 1998 and 1999, respectively.
On an average annual basis, the State unemployment rate is projected to drop
through 1998 and 1999 reaching 5.3 percent for 1999 as compared to the 6.4
percent level of 1997. The State unemployment rate for 1998 is projected to be
5.6 percent. For the nation as a whole, the unemployment rate was 5.0 percent
for 1997, is projected to be 4.5 percent in 1998 and 4.6 percent in 1999.
Personal income growth in both the State and nation is projected to be 5.0
percent for 1998. Personal income growth in 1997 was 4.7 percent and 5.6
percent respectively for the State and nation. Personal income growth in the
State is projected to decline to 3.4 percent for 1999, below the 4.2 percent
level as projected for the nation. Growth in bonus payments is expected to
moderate significantly, a distinct shift from the unusually high increases of
the last few years.
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 State 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 $37.84 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
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$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 $21.44 billion,
nearly $3.70 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 1998-1999 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 $170 million over the 1997-1998 fiscal year.
Business tax receipts are projected to be $4.79 billion for State fiscal year
1998-1999. This represents an approximate 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 program, and community project grants. State
operations spending, which accounts for the costs of running State agencies, is
projected at $6.70 billion, an increase of $511 million or 8.3 percent from the
prior year. General State charges, which accounts primarily for fringe benefits
for State employees, is projected to total $2.22 billion in 1998-1999, a modest
decrease from the 1997-1998 fiscal 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 the 2000-2001 fiscal year. These gaps were projected
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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.
GAAP-Basis Results. On March 31, 1998, the State recorded on a GAAP-basis,
its first-ever accumulated positive balance in its General Fund. This
accumulated surplus was $567 million. This compares to accumulated deficits of
$995 million and $2.928 billion for the fiscal years ended March 31, 1997 and
March 31, 1996, respectively. The improvement in the State's GAAP position, is
attributable, in part, to the cash surplus recorded at the end of the State's
1997-1998 fiscal year. Much of that surplus is reserved for future
requirements, but a portion is being used to meet spending needs in 1998-1999.
Thus, the State expects some deterioration in its GAAP position, but expects to
maintain a positive GAAP balance through the end of the 1998-1999 fiscal year.
The General Fund accumulated surplus is projected to be $27 million at the end
of the 1998-1999 fiscal year.
The State reported a General Fund operating surplus of $1.56 billion for the
1997-1998 fiscal year, as compared to an operating surplus of $1.93 billion for
the 1996-1997 fiscal year. Revenues increased 1.8 percent, and expenditures
increased 0.4 percent from the 1996-1997 fiscal year.
Special Considerations. On July 23, 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 $1.8 billion and $5.5 billion, respectively, after excluding the
uncertain receipt 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
securities industry or economy slows, the size of the gaps would increase.
According to the State Division of the Budget, uncertainties with regard to
the economy present the largest potential risk to budget balance in New York
State. The Executive Budget identified 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
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addition, the Executive Budget noted 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 executive budgets 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, particularly in light of the recent volatility in the
international economy and the domestic financial markets, 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.
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 fact 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
had 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 (Cash Basis). 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
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increase of $1.51 billion, or 4.57 percent over the 1996-1997 fiscal year.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent. The State closed a budget gap
of approximately $2.3 billion for the 1997-1998 fiscal year. Gap-closing
actions included cost containment in State Medicaid, the use of the $1.4
billion 1996-1997 fiscal year budget surplus to finance 1997-1998 fiscal year
spending, control on State agency spending and other actions.
The State ended its 1996-1997 fiscal year balanced on a cash basis, with a
1996-1997 General Fund cash surplus as reported by the State Division of the
Budget of approximately $1.4 billion that was used to finance the 1997-1998
Financial Plan. The surplus resulted primarily from higher-than-expected
revenues and lower-than-expected spending for social service programs. General
Fund receipts and transfers from other funds for the 1996-1997 fiscal year
totaled $33.04 billion, an increase of 0.7 percent from the 1995-1996 fiscal
year (excluding deposits into the tax refund reserve account). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the 1996-
1997 fiscal year, an increase of 0.7 percent from the 1995-1996 fiscal year.
The State ended its 1995-1996 fiscal year in balance, with a reported 1995-
1996 General Fund cash surplus of $445 million. General Fund receipts and
transfers from other funds totaled $32.81 billion, a decrease of 1.1 percent
from the 1994-1995 levels. General Fund disbursements and transfers to other
funds totaled $32.68 billion for the 1995-1996 fiscal year, a decrease of 2.2
percent from the 1994-1995 levels. Prior to adoption of the State's 1995-1996
fiscal year budget, the State had projected a potential budget gap of
approximately $5 billion, which was closed primarily through spending
reductions, cost containment measures, State agency actions and local
assistance reforms.
The State ended its 1994-1995 fiscal year with the General Fund in balance.
General Fund receipts and transfers from other funds totaled $33.16 billion, an
increase of 2.9 percent from the 1993-1994 levels. General 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 billion as of March 31, 1997), and $24.015 billion of
bonds
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issued primarily in connection with lease-purchase and contractual-obligation
financing of State capital programs were outstanding.
For purposes of analyzing the financial condition of the State, debt of the
State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State and lease purchase
and contractual obligations of public authorities (and municipalities) where
debt service is paid from State appropriations (including dedicated tax
sources, and other revenues such as patient charges and dormitory facilities
rentals). In addition, a broader classification, referred to as State-related
debt, includes State-supported debt, as well as certain types of contingent
obligations, including moral obligation financing, certain contingent
contractual-obligation financing arrangements, and State-guaranteed debt, where
debt service is expected to be paid from other sources and State appropriations
are contingent in that they may be made and used only under certain
circumstances.
The total amount of State-supported debt outstanding grew from 3.4 percent of
personal income in the State in the 1988-1989 fiscal year to 6.1 percent for
the 1997-1998 fiscal year while State-related debt outstanding declined from
6.8 percent to 6.6 percent of personal income for the same period. Thus, State-
supported debt grew at a faster rate than personal income while State-related
obligations grew at a slower rate. At the end of the 1997-1998 fiscal year,
there was $37 billion of outstanding State-related debt and $34.25 billion of
outstanding State-supported debt.
Public Authorities. The fiscal stability of the State is related, in part, to
the fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurring of debt which apply
to the State itself, and may issue bonds and notes within the amounts of, and
as otherwise restricted by, their legislative authorization. As of December 31,
1997, there were 17 public authorities that had outstanding debt of $100
million or more, and the aggregate outstanding debt, including refunding bonds,
of all State public authorities was $84 billion, up from $75.4 billion as of
September 30, 1996. The State's access to the public credit markets could be
impaired and the market price of its outstanding debt may be adversely affected
if any of its public authorities were to default in their respective
obligations.
Ratings. As of July 10, 1998, Moody's and Standard & Poor's rated the State's
outstanding general obligation bonds A2 and A, respectively. Standard & Poor's
revised its ratings upward from A- to A on August 28, 1997. Ratings reflect
only the respective views of such organizations, and explanation of the
significance of such ratings must be obtained from the rating agency furnishing
the same. There is no assurance that a particular rating will continue for any
given period of time or that any such rating will not be revised downward or
withdrawn entirely if, in the judgment of the agency originally establishing
the rating, circumstances so warrant. A downward revision or withdrawal of such
ratings may have an effect on the market price of the New York Municipal Bonds
in which the Fund invests.
Litigation. The State is a defendant in numerous legal proceedings including,
but not limited to, claims asserted against the State arising from alleged
torts, alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and Federal laws. State programs are frequently
challenged on State and Federal constitutional grounds. Adverse developments in
legal proceedings or the initiation of new proceedings could affect the ability
of the State to maintain a balanced State Financial Plan in any given fiscal
year. There can be no assurance that an adverse decision in one or more legal
proceedings would not exceed the amount the State reserves for the payment of
judgments or materially impair the State's financial operations. In its
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audited financial statements for the fiscal year ended March 31, 1998, the
State reported its estimated liability for awarded and anticipated unfavorable
judgments at $872 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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APPENDIX II
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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Short-term Notes: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2 and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of short-term promissory obligations. The effects of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes to the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's, a Division of The McGraw-Hill Companies, Inc.
("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on circumstances.
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The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to meet its financial commitment on the obligation is
extremely strong.
AA Debt rated "AA" differs from the highest rated issues only in small
degree. The Obligor's capacity to meet its financial commitment on the
obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation. While
CC such debt will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition
or the taking of similar action if payments on an obligation are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest-quality obligations to "D" for the lowest. These categories are
as follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
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A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Fitch IBCA, Inc.'s ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
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Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory-credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
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FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the basis
D of their ultimate recovery value in liquidation or reorganization
of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential
for recovery.
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Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD," "DD," or "D" categories.
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
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APPENDIX III
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance policies
(the "Policies") that the Fund may obtain from several insurance companies with
respect to insured New York Municipal Bonds and Municipal Bonds held by the
Fund. The Fund has no obligation to obtain any such Policies, and the terms of
any Policies actually obtained may vary significantly from the terms discussed
below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards such
companies normally use in establishing the insurability of new issues of New
York Municipal Bonds and Municipal Bonds and are not necessarily the criteria
that would be used in regard to the purchase of such bonds by the Fund. The
Policies do not insure (i) municipal securities ineligible for insurance and
(ii) municipal securities no longer owned by the Fund.
The Policies do not guarantee the market value of the insured New York
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable to
meet its obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the insurance
company will not have any obligation to insure any issue held by the Fund that
is adversely affected by either of the above described events. In addition to
the payment of premiums, the Policies may require that the Fund notify the
insurance company as to all New York Municipal Bonds and Municipal Bonds in the
Fund's portfolio and permit the insurance company to audit their records. The
insurance premiums will be payable monthly by the Fund in accordance with a
premium schedule to be furnished by the insurance company at the time the
Policies are issued. Premiums are based upon the amounts covered and the
composition of the portfolio.
The fund will seek to utilize insurance companies that have insurance claims-
paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch IBCA,
Inc. ("Fitch") or Aaa from Moody's Investors Service ("Moody's"). There can be
no assurance however, that insurance from insurance carriers meeting these
criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance claims-
paying ability rating of AAA has the highest rating assigned by Fitch. The
ability to pay claims is adjudged by Fitch to be extremely strong for insurance
companies with this highest rating. In the opinion of Fitch, foreseeable
business and economic risk factors should not have any material adverse impact
on the ability of these insurers to pay claims. In Fitch's opinion,
profitability, overall balance sheet strength, capitalization and liquidity are
all at very secure levels and are unlikely to be affected by potential adverse
underwriting, investment or cyclical events. A Moody's insurance claims-paying
ability rating is an opinion of the ability of an insurance company to repay
punctually senior policyholder obligations and claims. An insurer with an
insurance claims-paying ability rating of Aaa is considered by Moody's to be of
the best quality. In the opinion of Moody's, the policy obligations of an
insurance company with an insurance
69
<PAGE>
claims-paying ability rating of Aaa carry the smallest degree of credit risk
and, while the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair the company's
fundamentally strong position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
70
<PAGE>
APPENDIX IV
<TABLE>
<CAPTION>
A Tax-Exempt Yield of
-----------------------------------
Taxable Income 1999 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
------------------------------------- New York
1999 Federal State Tax is equal to a New York State
Single Return/2/ Joint Return/2/ Tax Bracket Bracket/3/ taxable yield of
----------------- ----------------- ------------ ---------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20,001-$ 25,750 $ 40,001-$ 43,050 15.0% 6.85% 6.31 6.95 7.58 8.21 8.84 9.47
$ 25,751-$ 62,450 $ 43,051-$104,050 28.0% 6.85% 7.46 8.20 8.95 9.69 10.44 11.18
$ 62,451-$130,250 $104,051-$158,550 31.0% 6.85% 7.78 8.56 9.34 10.11 10.89 11.67
$130,251-$283,150 $158,551-$283,150 36.0% 6.85% 8.39 9.23 10.06 10.90 11.74 12.58
Over $283,150 Over $283,150 39.6% 6.85% 8.89 9.78 10.66 11.55 12.44 13.33
</TABLE>
TAXABLE EQUIVALENT YIELDS FOR 1999/1/
<TABLE>
<CAPTION>
A Tax-Exempt Yield of
-----------------------------------
Taxable Income 1999 1999 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
------------------------------------- New York New York
1999 Federal State Tax City Tax is equal to a New York State
Single Return/2/ Joint Return/2/ Tax Bracket Bracket/3/ Bracket/4/ taxable yield of
----------------- ----------------- ------------ ---------- ---------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,751-$ 50,000 $ 45,001-$ 90,000 28.0% 6.85% 3.77% 7.77 8.55 9.32 10.10 10.88 11.65
$ 50,001-$ 62,450 $ 90,001-$104,050 28.0% 6.85% 3.83% 7.78 8.55 9.33 10.11 10.89 11.66
$ 62,451-$130,250 $104,051-$158,550 31.0% 6.85% 3.83% 8.11 8.92 9.74 10.55 11.36 12.17
$130,251-$283,150 $158,551-$283,150 36.0% 6.85% 3.83% 8.75 9.62 10.50 11.37 12.24 13.12
Over $283,150 Over $283,150 39.6% 6.85% 3.83% 9.27 10.19 11.12 12.05 12.97 13.90
</TABLE>
- --------
/1/An investor's marginal tax rates may exceed the rates shown in the above
tables if such investor does not itemize deductions for Federal income tax
purposes or due to the reduction or possible elimination of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. For investors who pay alternative minimum tax, tax-free
yields may be equivalent to lower taxable yields than those shown above. As
for shareholders who are subject to income taxation by states other than New
York and cities other than New York City (including shareholders who pay non-
resident income taxes), tax free yields may be equivalent to lower taxable
yields than those shown above. The above tables do not apply to corporate
investors. The tax characteristics of the Fund are described more fully
elsewhere in this prospectus. Consult your tax adviser for further details.
These charts are for illustrative purposes only and cannot be taken as an
indication of anticipated Fund performance.
/2/The above tables are based on the Federal taxable income brackets which are
adjusted annually for inflation and the New York State and City taxable
income brackets.
/3/A supplemental tax will also apply to filers with adjusted gross income
between $/100/,/000/ and $/150/,/000/ which phases out the benefit of the
lower marginal brackets. This adjustment is not reflected in the table above.
/4/This is the highest New York City effective marginal rate that applies to
any income level in the range listed on the left of this Chart. Nominally the
top marginal rate is 3.36 for net taxable income over $90,000 for joint
filers and net taxable income over $50,000 for single filers. A rate of 3.31
applies to income between $45,000 and $90,000 for joint filers and between
$25,000 and $50,000 for single filers and a rate of 3.26% applies to income
between $21,600 and $45,000 for joint filers and between $12,000 and $25,000
for single filers. An additional tax equal to 14% of the New York City
personal income tax applies for 1999.
71
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including April 26, 1999 (the 90th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting underwriters and with respect to their unsold allotments or
subscriptions.
5,000,000 Shares
MuniHoldings New York Insured Fund III, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
January 26, 1999
CODE 19047-0199
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 January 13, 1999
(2) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
(a) --Articles of Incorporation of the Fund(a)
(b) --By-Laws of the Fund(a)
(c) --Not applicable
(d)(1) --Portions of the Articles of Incorporation and By-Laws of the
Fund defining the rights of holders of shares of common stock of
the Fund(c)
(d)(2) --Form of specimen certificate for shares of common stock of the
Fund(b)
(e) --Form of Dividend Reinvestment Plan(b)
(f) --Not applicable
(g) --Form of Investment Advisory Agreement between the Fund and Fund
Asset Management, L.P.(b)
(h)(1) --Form of Purchase Agreement between the Fund and Merrill Lynch,
Pierce, Fenner & Smith Incorporated(b)
(h)(2) --Merrill Lynch Standard Dealer Agreement(b)
(i) --Not applicable
(j) --Form of Custodian Contract between the Fund and The Bank of New
York(b)
(k) --Form of Registrar, Transfer Agency and Service Agreement between
the Fund and The Bank of New York(b)
(l) --Opinion and Consent of Brown & Wood LLP
(m) --Not applicable
(n) --Consent of Ernst & Young LLP, independent auditors for the Fund
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.
(q) --Not applicable
(r) --Not applicable
</TABLE>
- --------
(a) Filed on December 4, 1998 as an Exhibit to the Registrant's Registration
Statement on Form N-2 (File No. 333-68419).
(b) Filed on December 15, 1998 as an Exhibit to the Registrant's Registration
Statement on Form N-2 (File No. 333-68419).
(c) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit (a) to
this Registration Statement; and to Article II, Article III (sections 1, 2,
3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to this
Registration Statement.
Item 25. Marketing Arrangements.
See Exhibits (h)(1) and (2).
C-1
<PAGE>
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees.................................................. $ 23,978
New York Stock Exchange listing fee................................ 81,800
Printing (other than stock certificates)........................... 35,000
Engraving and printing stock certificates.......................... 20,000
Legal fees and expenses............................................ 55,000
Accounting fees and expenses....................................... 7,000
NASD fees.......................................................... 9,125
Miscellaneous...................................................... 3,097
--------
Total............................................................ $235,000
========
</TABLE>
Item 27. Persons Controlled by or Under Common Control with Registrant.
The information in the prospectus under the caption, "Investment Advisory and
Management Arrangements" and "Description of Capital Stock--Common Stock" and
in Note 1 to the Statement of Assets, Liabilities and Capital is incorporated
herein by reference.
Item 28. Number of Holders of Securities.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
Item 29. Indemnification.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which is filed as Exhibit (g)(1) to this
Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
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
C-2
<PAGE>
Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.,
and The Municipal Fund Accumulation Program, Inc., and for the following
closed-end registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II,
Inc., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund II, MuniHoldings Florida Insured III, MuniHoldings Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund II, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York Insured
Fund, Inc., MuniHoldings New York Insured Fund II, 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 Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Government Bond Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-
Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill
Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised
by Hotchkis and Wiley, a division of MLAM); and for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as
subadviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The
address of the Investment Adviser, MLAM, Princeton Funds Distributor, Inc.
("PFD"), Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. also is P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281-1201.
C-3
<PAGE>
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
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 Services...... General Partner General Partner of MLAM
Arthur Zeikel........... Chairman Chairman of MLAM; President of the
Investment Adviser and MLAM from 1977 to
1997; Chairman and Director of Princeton
Services; President of Princeton Services
from 1993 to 1997; Executive Vice President
of ML & Co.
Jeffrey M. Peek......... President President of MLAM; President and Director
of Princeton Services; Executive Vice
President of ML & Co.; Managing Director
and Co-Head of the Investment Banking
Division of Merrill Lynch in 1997; Senior
Vice President and Director of the Global
Securities and Economics Division of
Merrill Lynch from 1995 to 1997.
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of MLFDS; President of Princeton
Administrators, L.P.
Mark A. Desario......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Linda L. Federici....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of MLAM; Senior Vice President of
Secretary Princeton Services
Philip L. Kirstein...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President, General Counsel, Director and
Secretary of Princeton Services
Ronald M. Kloss......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra W. Landsman- Senior Vice President of MLAM; Senior Vice
Yaros.................. Senior Vice President President of Princeton Services; Vice
President of PFD
Stephen M. M. Miller.... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Senior Vice President of MLAM; Senior Vice
Jr. ................... Senior Vice President President of Princeton Services
Brian A. Murdock........ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and Treasurer
of Princeton Services; Vice President and
Treasurer of PFD
Gregory D. Upah......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>
C-4
<PAGE>
Item 31. Location of Account and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(a) Registrant undertakes to suspend the offering of the shares of common
stock covered hereby until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of common stock declines more than 10% from its net asset value
per share of common stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of common stock increases to an
amount greater than its net proceeds as stated in the prospectus contained
herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and State of New Jersey, on the 25th day of
January, 1999.
MuniHoldings New York Insured Fund
III, Inc
(Registrant)
By /s/ Arthur Zeikel
-----------------------------------
(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 or her behalf, individually and in each capacity stated below, any
amendment to this Registration Statement (including post-effective amendments)
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Arthur Zeikel President (Principal January 25,
- ------------------------------------- Executive Officer) 1999
(Arthur Zeikel) and Director
/s/ Donald C. Burke Treasurer (Principal January 25,
- ------------------------------------- Financial and 1999
(Donald C. Burke) Accounting Officer)
/s/ James H. Bodurtha Director January 25,
- ------------------------------------- 1999
(James H. Bodurtha)
/s/ Herbert I. London Director January 25,
- ------------------------------------- 1999
(Herbert I. London)
/s/ Robert R. Martin Director January 25,
- ------------------------------------- 1999
(Robert R. Martin)
/s/ Joseph L. May Director January 25,
- ------------------------------------- 1999
(Joseph L. May)
/s/ Andre F. Perold Director January 25,
- ------------------------------------- 1999
(Andre F. Perold)
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S> <C>
(l) Opinion and Consent of Brown & Wood LLP
(n) Consent of Ernst & Young LLP
(p) Certificate of Fund Asset Management, L.P.
</TABLE>
<PAGE>
Exhibit 99.L
Brown & Wood LLP
One World Trade Center
New York, N.Y. 10048-0557
Telephone: (212) 839-5300
Facsimile: (212) 839-5599
January 26, 1999
MuniHoldings New York Insured Fund III, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
This opinion is being furnished in connection with the registration by
MuniHoldings New York Insured Fund III, Inc., a Maryland corporation (the
"Fund"), of shares of common stock, par value $0.10 per share (the "Shares"),
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
the Fund's registration statement on Form N-2, as amended (the "Registration
Statement"), under the Securities Act, in the amount set forth under "Amount
Being Registered" on the facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund, and such other documents as we
have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement, will
be legally issued, fully paid and non-assessable shares of common stock of the
Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus constituting
a part thereof.
Very truly yours,
/s/ Brown & Wood LLP
<PAGE>
Exhibit 99.N
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 21, 1999, in this Registration Statement on Form
N-2 under the Securities Act of 1933 (File No. 333-68419) and under the
Investment Company Act of 1940 (File No. 811-09131) and related Prospectus of
MuniHoldings New York Insured Fund III, Inc. for the registration of shares of
its Common Stock.
Ernst & Young LLP
Princeton, New Jersey
January 22, 1999
<PAGE>
Exhibit 99.P
CERTIFICATE OF THE SOLE STOCKHOLDER OF
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
Fund Asset Management, L.P. ("FAM"), the holder of 6,667 shares of common
stock, par value $0.10 per share, of MuniHoldings New York Insured Fund III,
Inc. (the "Fund"), a Maryland corporation, does hereby confirm to the Fund its
representation that it purchased such shares for investment purposes, with no
present intention of redeeming or reselling any portion thereof, and further
agrees that if it redeems (by tender offer or otherwise) any portion of such
shares prior to the amortization of the Fund's organizational expenses, the
proceeds thereof will be reduced by the proportionate amount of unamortized
organizational expenses which the number of shares being redeemed bears to the
number of shares initially purchased and outstanding at the time of redemption.
FAM further agrees that, in the event such shares are sold or otherwise
transferred to any other party, prior to such sale or transfer FAM will obtain
on behalf of the Fund an agreement from such other party to comply with the
foregoing as to the reduction of redemption proceeds and to obtain a similar
agreement from any transferee of such party.
FUND ASSET MANAGEMENT, L.P.
By: /s/ Robert Harris
-----------------
Name: Robert Harris
Title: Assistant Secretary
Dated: January 26, 1999
