<PAGE>
This term sheet, taken together with the preliminary prospectus dated
February 5, 1999 (the "Preliminary Prospectus"), pursuant to Rule 434 under
the Securities Act of 1933, as amended, shall be deemed to constitute the
final prospectus for purposes of Section 10(a) of such Act with respect to the
shares of AMPS of MuniHoldings New York Insured Fund III, Inc. offered hereby.
Capitalized terms in this term sheet which are not defined herein will have
the meaning defined in the Preliminary Prospectus.
TERM SHEET
Used pursuant to Rule 434 under the Securities Act of 1933, as amended
(Supplement to preliminary prospectus dated February 5, 1999)
$50,000,000
MuniHoldings New York Insured Fund III, Inc.
Auction Market Preferred Stock ["AMPS(R)"]
2,000 Shares, Series A
Liquidation Preference $25,000 Per Share
----------------
Terms of the Offering
This information appearing on the cover page of the Preliminary Prospectus
is supplemented and restated as follows:
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price............................ $25,000.00 $50,000,000
Sales Load....................................... $187.50 $375,000
Proceeds, before expenses, to Fund............... $24,812.50 $49,625,000
</TABLE>
The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.
----------------
One certificate for the shares of the AMPS will be ready for delivery to the
nominee of The Depository Trust Company on or about February 22, 1999.
----------------
The information appearing in the section captioned "Offering Summary--
Dividends and Dividend Periods" on page 3 of the Preliminary Prospectus is
supplemented and restated as follows:
Dividends on the shares of AMPS will be cumulative from the date the shares
are first issued and payable beginning on March 3, 1999. Thereafter, in the
case of dividend periods that are not special dividend periods, dividends
generally will be payable on each succeeding Wednesday. After the initial
dividend period, each dividend period for the shares of AMPS will generally
consist of seven days; provided, however, that before any auction, the Fund
may decide, subject to certain limitations and only if it gives notice to
holders, to declare a special dividend period of up to five years.
Dividends for the shares of AMPS will be paid through the securities
depository (The Depository Trust Company) on each dividend payment date.
The cash dividend rate on the shares of AMPS for the initial dividend period
ending March 2, 1999 will be 2.50% per year. For each subsequent dividend
period, the auction agent (IBJ Whitehall Bank & Trust Company) will hold an
auction to determine the cash dividend rate on the shares of AMPS.
- --------
(R) Registered trademark of Merrill Lynch & Co. Inc.
----------------
Merrill Lynch & Co.
----------------
The date of this term sheet is February 17, 1999.
<PAGE>
Underwriting
The text of the second paragraph under "Underwriting" on page 32 of the
Preliminary Prospectus is supplemented and restated as follows:
The Underwriter has advised the Fund that it proposes initially to offer the
shares of AMPS to the public at the public offering price set forth on the
cover page of this prospectus, and to certain dealers at such price less a
concession not in excess of $125.00 per share. The Underwriter may allow, and
such dealers may reallow, a discount not in excess of $31.25 per share to
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed. The sales load of $187.50 per share is
equal to .75% of the initial public offering price. Investors must pay for any
AMPS purchased in the initial public offering on or before February 22, 1999.
Statement of Additional Information
The information appearing in the last sentence on the cover page of the
preliminary statement of additional information dated February 5, 1999 is
supplemented and restated as follows:
The date of this statement of additional information is February 17,
1999.
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any State where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 5, 1999
PROSPECTUS
$50,000,000
MuniHoldings New York Insured Fund III, Inc.
Auction Market Preferred Stock ["AMPS(R)"]
2,000 Shares, Series A
Liquidation Preference $25,000 Per Share
------------
MuniHoldings New York Insured Fund III, Inc. (the "Fund") is a recently
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New York State and New York City personal income taxes. The Fund seeks to
achieve its 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.
------------
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. This Fund's statement of additional information contains
further information about the Fund and is incorporated by reference (legally
considered to be part of this prospectus). You may request a free copy by
writing or calling the Fund at (800) 637-3863.
------------
Investing in the AMPS involves certain risks, which are described in the
"Risk Factors and Special Considerations" section beginning on page 5 of this
prospectus.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price...................... $25,000 $50,000,000
Sales Load................................. $ $
Proceeds, before expenses, to Fund......... $ $
</TABLE>
The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offence.
We expect that one certificate for the shares of the AMPS will be ready for
delivery to the nominee of The Depository Trust Company on or about February
, 1999.
- ------
(R) Registered trademark of Merrill Lynch & Co., Inc.
------------
Merrill Lynch & Co.
------------
The date of this prospectus is February , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Offering Summary........................................................... 3
Risk Factors and Special Considerations.................................... 5
The Fund................................................................... 7
Use of Proceeds............................................................ 7
Capitalization............................................................. 7
Portfolio Composition...................................................... 8
Investment Objective and Policies.......................................... 8
Description of AMPS........................................................ 14
The Auction................................................................ 19
Rating Agency Guidelines................................................... 27
Investment Advisory and Management Arrangements............................ 28
Taxes...................................................................... 29
Description of Capital Stock............................................... 30
Custodian.................................................................. 32
Underwriting............................................................... 32
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 33
Legal Opinions............................................................. 33
Experts.................................................................... 33
Year 2000 Issues........................................................... 33
Table of Contents of Statement of Additional Information................... 34
Glossary................................................................... 35
</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>
OFFERING SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus and the statement of additional
information.
The Offering
The Fund is offering a total of 2,000 shares of AMPS at a
purchase price of $25,000 per share plus accumulated dividends,
if any, from the date the shares are first issued. The shares
of AMPS are being offered by Merrill Lynch, Pierce, Fenner &
Smith Incorporated, as underwriter.
The AMPS will be shares of preferred stock of the Fund that
entitle their holders to receive cash dividends at an annual
rate that may vary for the successive dividend periods. In
general, except as described below, each dividend period
following the initial dividend period will be seven days. The
applicable dividend for a particular dividend period will be
determined by an auction conducted on the business day next
preceding the start of that dividend period.
Investors and potential investors in shares of AMPS may
participate in auctions for the AMPS through their broker-
dealers.
Generally, AMPS investors will not receive certificates
representing ownership of their shares. Ownership of AMPS will
be maintained in book-entry form by the securities depository
(The Depository Trust Company) or its nominee for the account
of the investor's agent member (generally the investor's
broker-dealer). The investor's agent member, in turn, will
maintain records of such investor's beneficial ownership of
AMPS.
Dividends and
Dividend Dividends on the shares of AMPS will be cumulative from the
Periods date the shares are first issued and payable beginning on
, 1999. Thereafter, in the case of dividend periods that are
not special dividend periods, dividends generally will be
payable on each succeeding Wednesday. After the initial
dividend period, each dividend period for the shares of AMPS
will generally consist of seven days; provided, however, that
before any auction, the Fund may decide, subject to certain
limitations and only if it gives notice to holders, to declare
a special dividend period of up to five years.
Dividends for the shares of AMPS will be paid through the
securities depository (The Depository Trust Company) on each
dividend payment date.
The cash dividend rate on the shares of AMPS for the initial
dividend period ending , 1999 will be % per year. For
each subsequent dividend period, the auction agent (IBJ
Whitehall Bank & Trust Company) will hold an auction to
determine the cash dividend rate on the shares of AMPS.
Determination
of Maximum Generally, the applicable dividend rate for any dividend period
Dividend for shares of AMPS will be subject to a maximum applicable
Rates rate. The maximum applicable rate for shares of AMPS will
depend on the credit rating assigned to the shares and on the
length of the dividend period. There is no minimum applicable
dividend rate for any dividend period.
3
<PAGE>
Asset Under the Fund's Articles Supplementary creating the AMPS, the
Maintenance Fund must maintain
. asset coverage of the AMPS as required by the rating agencies
rating the AMPS, and
. asset coverage of the AMPS of at least 200% as required by
the Investment Company Act of 1940.
The Fund estimates that, based on the composition of its port-
folio at February 1, 1999, asset coverage of the AMPS as re-
quired by the Investment Company Act of 1940 would be approxi-
mately 249% immediately after the Fund issues the shares of
AMPS offered by this prospectus representing approximately 40%
of the Fund's capital.
Mandatory
Redemption If the required asset coverage is not maintained or, when
necessary, restored, the Fund must redeem shares of AMPS at the
price of $25,000 per share plus accumulated but unpaid
dividends thereon (whether or not earned or declared). The
provisions of the Investment Company Act of 1940 may restrict
the Fund's ability to make such a mandatory redemption.
Optional
Redemption The Fund may, at its option, choose to redeem all or a portion
of the shares of AMPS on any dividend payment date at the price
of $25,000 per share, plus accumulated but unpaid dividends
thereon (whether or not earned or declared) plus any applicable
premium.
Liquidation
Preference The liquidation preference (that is, the amount the Fund must
pay to AMPS shareholders if the Fund is liquidated) of each
share of AMPS will be $25,000, plus an amount equal to
accumulated but unpaid dividends (whether or not earned or
declared).
Ratings The AMPS will be issued with a rating of "aaa" from Moody's
Investors Service, Inc. and AAA from Standard & Poor's.
Voting Rights
The Investment Company Act of 1940 requires that the holders of
AMPS and any other preferred stock, voting as a separate class,
have the right to elect at least two directors at all times and
to elect a majority of the directors at any time when dividends
on the AMPS or any other preferred stock are unpaid for two
full years. The Fund's charter and the Investment Company Act
of 1940 require holders of AMPS and any other preferred stock
to vote as a separate class on certain other matters.
4
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
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. or
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 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. The Fund will be subject to certain restrictions on
investments imposed by guidelines of the insurance companies issuing the
portfolio insurance. The Fund does not expect these guidelines to prevent the
Fund's investment adviser from managing the Fund's portfolio in accordance with
the Fund's investment objective and policies.
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
5
<PAGE>
enter into options and futures transactions for speculative purposes. The Fund
is not required to hedge its portfolio and may not do so.
Antitakeover Provisions. The Fund's charter includes 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
discourage a third party from seeking to obtain control of the Fund.
Investment Considerations. Investors in AMPS should consider the following
factors:
. The credit ratings of the AMPS could be reduced while an investor holds
the AMPS.
. Neither broker-dealers nor the Fund are obligated to purchase shares of
AMPS in an auction or otherwise nor is the Fund required to redeem shares
of AMPS in the event of a failed auction.
. If sufficient bids do not exist in an auction, the applicable dividend
rate will be the maximum applicable dividend rate, and in such event,
owners of AMPS wishing to sell will not be able to sell all, and may not
be able to sell any, AMPS in the auction. As a result, investors may not
have liquidity of investment.
Secondary Market. The broker-dealers intend to maintain a secondary trading
market in the AMPS outside of auctions; however, they have no obligation to do
so and there can be no assurance that a secondary market for the AMPS will
develop or, if it does develop, that it will provide holders with a liquid
trading market. The AMPS will not be registered on any stock exchange or on any
automated quotation system. An increase in the level of interest rates likely
will have an adverse effect on the secondary market price of the AMPS, and a
selling shareholder may have to sell AMPS between auctions at a price per share
of less than $25,000.
6
<PAGE>
THE FUND
MuniHoldings New York Insured Fund III, Inc. (the "Fund") is a recently
organized, non-diversified, closed-end management investment company. The Fund
was incorporated under the laws of the State of Maryland on 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 commenced operations on January 29, 1999 upon the closing of an
initial public offering of 5,000,000 shares of its common stock. The proceeds
of such offering were approximately $74,765,000 after the payment of offering
expenses. In connection with the initial public offering of the Fund's common
stock, the underwriter was granted an option to purchase up to an additional
750,000 shares to cover over-allotments.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $49,479,000 after the
payment of offering expenses (estimated to be $146,000) and the sales load.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies during a period estimated not to
exceed three months from the offer and sale of such shares of AMPS depending on
market conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-term
tax-exempt securities. See "Investment Objective and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as of
February 1, 1999 and as adjusted to give effect to the issuance of the shares
of AMPS offered hereby.
<TABLE>
<CAPTION>
Actual As Adjusted
----------- ------------
<S> <C> <C>
Shareholders' equity:
Capital Stock (200,000,000 shares authorized)
Preferred Stock, par value $.10 per share (no shares
issued; 2,000 shares of AMPS issued and
outstanding, as adjusted, at $25,000 per share
liquidation preference)............................ -- $ 50,000,000
Common Stock, par value $.10 per share (5,006,667
shares issued and outstanding)..................... $ 500,667 500,667
Capital in excess of par value attributable to
Common Stock....................................... 74,373,435 73,852,435
Undistributed investment income--net................ 39,202 39,202
Unrealized appreciation on investments--net......... 326,037 326,037
----------- ------------
Net assets.......................................... $75,239,341 $124,718,341
=========== ============
</TABLE>
7
<PAGE>
PORTFOLIO COMPOSITION
As of February 1, 1999, approximately 98.8% of the market value of the Fund's
portfolio was invested in long-term municipal obligations and approximately
1.2% of the market value of the Fund's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of the Fund's investment portfolio as of February 1,
1999.
<TABLE>
<CAPTION>
Number of Value
S&P* Moody's* Issues (in thousands) Percent
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 18 $74,040 98.8%
A-1 VMIG1 2 900 1.2
--- ------- -----
Total............. 20 $74,940 100.0%
=== ======= =====
</TABLE>
- --------
* Ratings: Using the higher of Standard & Poor's ("S&P") or Moody's Investors
Service, Inc. ("Moody's") ratings on the Fund's municipal obligations. See
"Schedule of Investments." S&P rating categories may be modified further by a
plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B
ratings.
INVESTMENT OBJECTIVE AND POLICIES
The 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 seeks to achieve its investment objective by
investing primarily in a portfolio of long-term, investment grade municipal
obligations issued by or on behalf of the State of New York, its political
subdivisions, agencies and instrumentalities, and 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 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 in the statement of additional information 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 shares of 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
8
<PAGE>
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.
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 that are rated at the date of purchase in the four highest rating
categories of S&P, 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-l+ 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-l+ through F-3 for Fitch. Obligations ranked in the lowest investment
grade rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-3 and Prime-3 for
Moody's; and BBB and F-3 for Fitch), while considered "investment grade," may
have certain speculative characteristics. There may be sub-categories or
gradations indicating relative standing within the rating categories set forth
above. Appendix B to the statement of additional information contains a
description of S&P's, Moody's and Fitch's ratings of New York Municipal Bonds
and Municipal Bonds. In assessing the quality of New York Municipal Bonds and
Municipal Bonds with respect to the foregoing requirements, the Investment
Adviser will take into account the portfolio insurance as well as the nature of
any letters of credit or similar credit enhancement to which particular
Municipal Bonds are entitled and the creditworthiness of the insurance company
or financial institution that provided such insurance or credit enhancement.
Consequently, if New York Municipal Bonds or Municipal Bonds are covered by
insurance policies issued by insurers whose claims-paying ability is rated AAA
by S&P or Fitch or Aaa by Moody's, the Investment Adviser may consider such
municipal obligations to be equivalent to AAA- or Aaa- rated securities, as the
case may be, even though such New York Municipal Bonds or Municipal Bonds would
generally be assigned a lower rating if the rating were based primarily upon
the credit 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
9
<PAGE>
be expected to rise. Conversely, when interest rates rise, the value of a
fixed-income portfolio can be expected to decline. Prices of longer-term
securities generally fluctuate more in response to interest rate changes than
do short-term or medium-term securities. These changes in net asset value are
likely to be greater in the case of a fund having a leveraged capital
structure, such as that used by the Fund.
The Fund intends to invest primarily in long-term New York Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term New York Municipal Bonds and Municipal Bonds with a
maturity of between three years and ten years. The Fund may invest in short-
term, tax-exempt securities, short-term U.S. Government securities, repurchase
agreements or cash. Such short-term securities or cash will not exceed 20% of
its total assets except during interim periods pending investment of the net
proceeds of public offerings of the Fund's securities or in anticipation of the
repurchase or redemption of the Fund's securities and temporary periods when,
in the opinion of the Investment Adviser, prevailing market or economic
conditions warrant. The Fund does not ordinarily intend to realize significant
interest income that is subject to Federal income tax and New York State and
New York City personal income taxes. For a more complete description of New
York Municipal Bonds and Municipal Bonds, see "Investment Objectives and
Policies" in the statement of additional information.
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" herein and in the statement of additional information. 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 obligations insured under
insurance policies issued by insurance carriers that have total admitted assets
(unaudited) of at least $75,000,000 and capital and surplus (unaudited) of at
least $50,000,000 and insurance claims-paying ability ratings of AAA from S&P
or Fitch or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be available. See Appendix C to
the statement of additional information 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
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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 or
Municipal Bond is not paid when due, the insurer will be obligated under its
Policy to make such payment not later than 30 days after it has been notified
by, and provided with documentation from, the Fund that such nonpayment has
occurred.
The Policies will be effective only as to insured New York Municipal Bonds
and Municipal Bonds beneficially owned by 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. In instances in which the Fund purchases New York
Municipal Bonds and Municipal Bonds insured under policies obtained by parties
other than the Fund, the Fund does not pay the premiums for such policies;
rather, the cost of such policies may be reflected in the purchase price of the
New York Municipal Bonds and Municipal Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities which are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternative value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser will be unable to
manage the portfolio to the extent it holds defaulted securities, which may
limit its ability in certain circumstances to purchase other New York Municipal
Bonds and Municipal Bonds. See "Net Asset Value" in the statement of additional
information 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 the 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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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. No assurance can be given that such ratings
will not be lowered in the future. The Investment Adviser does not believe that
the current economic conditions in New York will have a significant adverse
effect on the Fund's ability to invest prudently in New York Municipal Bonds.
For a discussion of economic and other conditions in the State of New York, see
Appendix A, "Economic and Other Conditions in New York" to the statement of
additional information.
Other Investment Policies
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to finance
the repurchase of its own common stock pursuant to tender offers or otherwise
to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known, as
with the issuance of preferred stock, as "leveraging") create an opportunity
for greater total return since the Fund will not be required to sell portfolio
securities to repurchase or redeem shares but, at the same time, increase
exposure to capital risk. In addition, borrowed funds are subject to interest
costs that may offset or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell New York Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms. These
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future. The purchase will be recorded
on the date the Fund enters into the commitment, and the value of the
obligation will thereafter be reflected in the calculation of the Fund's net
asset value. The value of the obligation on the delivery day may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or liquid
securities having a market value at all times at least equal to the amount of
the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in New York
Municipal Bonds and Municipal Bonds 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 in the secondary market
synthetically-created inverse floating rate bonds evidenced by custodial or
trust receipts. Generally, income on inverse floating rate bonds will decrease
when short-term interest rates increase, and will increase when short-term
interest rates decrease. Such securities have the effect of providing a degree
of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
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
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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 New York Municipal Bonds,
Municipal Bonds and U.S. Government securities pursuant to repurchase
agreements. Repurchase agreements may be entered into only with a member bank
of the Federal Reserve System or a primary dealer in U.S. Government securities
or an affiliate thereof. Under such agreements, the seller agrees, upon
entering into the contract, to repurchase the security at a mutually agreed-
upon time and price, thereby determining the yield during the term of the
agreement. The Fund may not invest in repurchase agreements maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. In the event of default
by the seller under a repurchase agreement, the Fund may suffer time delays and
incur costs or possible losses in connection with the disposition of the
underlying securities.
In general, for Federal, New York State and New York City 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. For so
long as the AMPS are rated by Moody's and S&P, the Fund's use of options and
financial futures contracts will be subject to the limitations described under
"Rating Agency Guidelines" herein and in the statement of additional
information. 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 the statement of
additional information. In addition, in order to obtain ratings of the
preferred stock from one or more nationally recognized statistical rating
organizations ("NRSROs"), the Fund may be required to limit its use of hedging
techniques in accordance with the specified guidelines of such rating
organizations.
For 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, see "Investment Objective and Policies--
Options and Futures Transactions" in the statement of additional information.
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.
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DESCRIPTION OF AMPS
General
Certain of the capitalized terms used herein are defined in the Glossary that
appears at the back of this prospectus.
The AMPS will be shares of preferred stock that entitle their holders to
receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor, at a rate per annum that may vary for the
successive Dividend Periods. After the Initial Dividend Period, each Subsequent
Dividend Period for the shares of AMPS generally will be a 7-Day Dividend
Period; provided, however, that prior to any Auction, the Fund may elect,
subject to certain limitations described herein, upon giving notice to holders
thereof, a Special Dividend Period. The Applicable Rate for a particular
Dividend Period will be determined by an Auction conducted on the Business Day
before the start of such Dividend Period. Beneficial Owners and Potential
Beneficial Owners of shares of AMPS may participate in Auctions therefor,
although, except in the case of a Special Dividend Period, Beneficial Owners
desiring to continue to hold all of their shares of AMPS regardless of the
Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
"The Auction" herein and in the statement of additional information.
The following is a brief description of the terms of the shares of AMPS. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the Fund's Articles of Incorporation and Articles
Supplementary, including the provisions thereof establishing the AMPS. The
Fund's Articles of Incorporation and the form of Articles Supplementary
establishing the terms of the AMPS have been filed as exhibits to the
Registration Statement of which this prospectus is a part.
Dividends
General. The holders of shares of AMPS will be entitled to receive, when, as
and if declared by the Board of Directors of the Fund, out of funds legally
available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the shares
of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends so declared and payable on the Common Stock, and
(ii) to the extent permitted under the Code and to the extent available, out of
net tax-exempt income earned on the Fund's investments. Generally, dividends on
shares of AMPS, to the extent that they are derived from interest paid on
Municipal Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax. See "Taxes" in the statement of
additional information.
Dividends on the shares of AMPS will accumulate from the date on which the
Fund originally issues the shares of AMPS (the "Date of Original Issue") and
will be payable on the dates described below. Dividends on shares of AMPS with
respect to the Initial Dividend Period shall be payable on the Initial Dividend
Payment Date. Following the Initial Dividend Payment Date for AMPS, dividends
on AMPS will be payable, at the option of the Fund, either (i) with respect to
any 7-Day Dividend Period and any Short Term Dividend Period of 35 or fewer
days, on the day next succeeding the last day thereof or (ii) with respect to
any Short Term Dividend Period of more than 35 days and with respect to any
Long Term Dividend Period, monthly on the first Business Day of each calendar
month during such Short Term Dividend Period or Long Term Dividend Period and
on the day next succeeding the last day thereof (each such date referred to in
clause (i) or (ii) being referred to herein as a "Normal Dividend Payment
Date"), except that if such Normal Dividend Payment Date is not a Business Day,
the Dividend Payment Date shall be the first Business Day next succeeding such
Normal Dividend Payment Date. Thus, following the Initial Dividend Payment Date
for AMPS, dividends generally will be payable (in the case of Dividend Periods
which are not Special Dividend Periods) on each succeeding Wednesday. Although
any particular Dividend Payment Date may not occur on the originally scheduled
date
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because of the exceptions discussed above, the next succeeding Dividend Payment
Date, subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Board of Directors shall fix the Dividend Payment
Date. The Board of Directors by resolution prior to authorization of a dividend
by the Board of Directors may change a Dividend Payment Date if such change
does not adversely affect the contract rights of the holders of shares of AMPS
set forth in the Charter. The Initial Dividend Period, 7-Day Dividend Periods
and Special Dividend Periods are hereinafter sometimes referred to as "Dividend
Periods." Each dividend payment date determined as provided above is
hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with the
Auction Agent sufficient funds for the payment of declared dividends. The Fund
does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which holder is
expected to be the nominee of the Securities Depository. See "The Auction--
Securities Depository." The Securities Depository will credit the accounts of
the Agent Members of the Existing Holders in accordance with the Securities
Depository's normal procedures which provide for payment in same-day funds. The
Agent Member of an Existing Holder will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
Existing Holder in accordance with the instructions of such Existing Holder.
Dividends in arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to the
nominee of the Securities Depository. Any dividend payment made on shares of
AMPS first shall be credited against the earliest declared but unpaid dividends
accumulated with respect to such shares.
Holders of shares of AMPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described under "Additional Dividends" and "Non-Payment Period; Late
Charge." No interest will be payable in respect of any dividend payment or
payments on the shares of AMPS which may be in arrears.
The amount of cash dividends per share of the AMPS payable (if declared) on
the Initial Dividend Payment Date, each 7-Day Dividend Period and each Dividend
Payment Date of each Short Term Dividend Period shall be computed by
multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be the number of days in such Dividend Period or part
thereof that such share was outstanding and for which dividends are payable on
such Dividend Payment Date and the denominator of which will be 365,
multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of cash dividends per share of AMPS payable (if declared) on any Dividend
Payment Date shall be computed by multiplying the Applicable Rate for such
Dividend Period by a fraction, the numerator of which will be such number of
days in such part of such Dividend Period that such share was outstanding and
for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
Notification of Dividend Period. With respect to each Dividend Period that is
a Special Dividend Period, the Fund, at its sole option and to the extent
permitted by law, by telephonic and written notice (a "Request for Special
Dividend Period") to the Auction Agent and to each Broker-Dealer, may request
that the next succeeding Dividend Period for the AMPS will be a number of days
(other than seven), evenly divisible by seven, and not fewer than seven nor
more than 364 in the case of a Short Term Dividend Period or one whole year or
more but not greater than five years in the case of a Long Term Dividend
Period, specified in such notice, provided that the Fund may not give a Request
for Special Dividend Period (and any such request shall be null and void)
unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends, any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for
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Special Dividend Period, in the case of a Short Term Dividend Period, shall be
given on or prior to the second Business Day but not more than seven Business
Days prior to an Auction Date for the AMPS and, in the case of a Long Term
Dividend Period, shall be given on or prior to the second Business Day but not
more than 28 days prior to an Auction Date for the AMPS. Upon receiving such
Request for Special Dividend Period, the Broker-Dealers jointly shall determine
whether, given the factors set forth below, it is advisable that the Fund issue
a Notice of Special Dividend Period for the AMPS as contemplated by such
Request for Special Dividend Period and the Optional Redemption Price of the
AMPS during such Special Dividend Period and the Specific Redemption Provisions
and shall give the Fund and the Auction Agent written notice (a "Response") of
such determination by no later than the second Business Day prior to such
Auction Date. In the event the Response indicates that it is advisable that the
Fund give a notice of a Special Dividend Period for the AMPS, the Fund, by no
later than the second Business Day prior to such Auction Date may give a notice
(a "Notice of Special Dividend Period") to the Auction Agent, the Securities
Depository and each Broker-Dealer. See "Description of AMPS--Dividends--
Notification of Dividend Period" in the statement of additional information for
a detailed description of these procedures.
Determination of Dividend Rate. The dividend rate on shares of AMPS during
the period from and including the Date of Original Issue to but excluding the
Initial Dividend Payment Date (the "Initial Dividend Period") will be the rate
per annum set forth above under "Offering Summary." Commencing on the Initial
Dividend Payment Date for AMPS, the Applicable Rate on the shares of AMPS for
each Subsequent Dividend Period, which Subsequent Dividend Period shall be a
period commencing on and including a Dividend Payment Date and ending on and
including the calendar day prior to the next Dividend Payment Date (or last
Dividend Payment Date in a Dividend Period if there is more than one Dividend
Payment Date), shall be equal to the rate per annum that results from the
Auction with respect to such Subsequent Dividend Period. The Initial Dividend
Period and Subsequent Dividend Period for AMPS is referred to herein as a
"Dividend Period." Cash dividends shall be calculated as set forth above under
"Dividends--General."
Restrictions on Dividends and Other Payments. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on shares of Common Stock
or purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the outstanding shares of AMPS would
be less than 200% (or such other percentage as in the future may be required by
law). The Fund estimates that, based on the composition of its portfolio at
February 1, 1999, asset coverage with respect to shares of AMPS would be
approximately 249% immediately after the issuance of the shares of AMPS offered
hereby. Under the Code, the Fund, among other things, must distribute at least
90% of its investment company taxable income each year in order to maintain its
qualification for tax treatment as a regulated investment company. The
foregoing limitations on dividends, distributions and purchases under certain
circumstances may impair the Fund's ability to maintain such qualification. See
"Taxes" in the statement of additional information.
Upon any failure to pay dividends on shares of AMPS for two years or more,
the holders of the shares of AMPS will acquire certain additional voting
rights. See "Voting Rights" below. Such rights shall be the exclusive remedy of
the holders of shares of AMPS upon any failure to pay dividends on shares of
the Fund.
Additional Dividends. If the Fund retroactively allocates any net capital
gains or other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
under "The Auction--Auction Date; Advance Notice of Allocation of Taxable
Income; Inclusion of Taxable Income in Dividends" below, which may only happen
when such allocation is made as a result of the redemption of all or a portion
of the outstanding shares of AMPS or the liquidation of the Fund (the amount of
such allocation referred to herein as a "Retroactive Taxable Allocation"), the
Fund, within 90 days (and generally within 60 days) after the end of the Fund's
fiscal year for which a Retroactive Taxable Allocation is made, will provide
notice thereof to the Auction Agent and to each holder of shares (initially
Cede as nominee of the Securities Depository) during such fiscal year at such
holder's address as the same appears or last appeared on the stock books of the
Fund. The Fund, within 30 days after such notice is given to the Auction Agent,
will pay to the Auction Agent (who then will distribute to such holders of
shares of AMPS), out of funds legally available therefor, an amount equal to
the aggregate Additional Dividend (as
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defined below) with respect to all Retroactive Taxable Allocations made to such
holders during the fiscal year in question. See "Taxes" in the statement of
additional information.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal, New York State and New York City income tax consequences) from
the aggregate of both the Retroactive Taxable Allocations and the Additional
Dividend to be equal to the dollar amount of the dividends which would have
been received by such holder if the amount of the aggregate Retroactive Taxable
Allocations had been excludable from the gross income of such holder. Such
Additional Dividend shall be calculated (i) without consideration being given
to the time value of money; (ii) assuming that no holder of shares of AMPS is
subject to the Federal alternative minimum tax with respect to dividends
received from the Fund; and (iii) assuming that each Retroactive Taxable
Allocation would be taxable in the hands of each holder of shares of AMPS at
the greater of: (a) the maximum combined marginal regular Federal, New York
State and New York City individual income tax rate applicable to ordinary
income or capital gains depending on the taxable character of the distribution
(including any surtax); or (b) the maximum combined marginal regular Federal,
New York State and New York City corporate income tax rate applicable to
ordinary income or capital gains depending on the taxable character of the
distribution (taking into account in both (a) and (b) the Federal income tax
deductibility of state taxes paid or incurred but not any phase out of, or
provision limiting, personal exemptions, itemized deductions, or the benefit of
lower tax brackets and assuming the taxability of Federally tax-exempt
dividends for corporations for New York State and New York City income tax
purposes). Although the Fund generally intends to designate any Additional
Dividend as an exempt-interest dividend to the extent permitted by applicable
law, it is possible that all or a portion of any Additional Dividend will be
taxable to the recipient thereof. See "Taxes--Tax Treatment of Additional
Dividends" in the statement of additional information. The Fund will not pay a
further Additional Dividend with respect to any taxable portion of an
Additional Dividend.
If the Fund does not give advance notice of the amount of taxable income to
be included in a dividend on shares of AMPS in the related Auction, the Fund
may include such taxable income in a dividend on shares of AMPS if it increases
the dividend by an additional amount calculated as if such income were a
Retroactive Taxable Allocation and the additional amount were an Additional
Dividend and notifies the Auction Agent of such inclusion at least five days
prior to the applicable Dividend Payment Date. See "The Auction--Auction
Procedures--Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends" below.
Asset Maintenance
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
1940 Act AMPS Asset Coverage. The Fund will be required under the Articles
Supplementary to maintain, with respect to shares of AMPS, as of the last
Business Day of each month in which any shares of AMPS are outstanding, asset
coverage of at least 200% with respect to senior securities which are stock,
including the shares of AMPS (or such other asset coverage as in the future may
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are stock of a closed-end investment company as a condition of
paying dividends on its common stock) ("1940 Act AMPS Asset Coverage"). If the
Fund fails to maintain 1940 Act AMPS Asset Coverage and such failure is not
cured as of the last Business Day of the following month (the "1940 Act Cure
Date"), the Fund will be required under certain circumstances to redeem certain
of the shares of AMPS. See "Redemption" below.
17
<PAGE>
The 1940 Act AMPS Asset Coverage immediately following the issuance of AMPS
offered hereby (after giving effect to the deduction of the sales load and
offering expenses for the shares of AMPS) will be computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Fund assets
less
liabilities not
constituting
senior securities = $124,718,341 = 249%
------------------------ ------------
Senior securities $50,000,000
representing
indebtedness
plus liquidation value
of the
shares of AMPS
</TABLE>
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding, the
Fund will be required under the Articles Supplementary to maintain as of each
Business Day (a "Valuation Date") S&P Eligible Assets and Moody's Eligible
Assets each having in the aggregate a Discounted Value at least equal to the
AMPS Basic Maintenance Amount. The AMPS Basic Maintenance Amount includes the
sum of (i) the aggregate liquidation value of AMPS then outstanding and (ii)
certain accrued and projected payment obligations of the Fund. See "Description
of AMPS--Asset Maintenance--AMPS Basic Maintenance Amount" in the statement of
additional information. If the Fund fails to meet such requirement as of any
Valuation Date and such failure is not cured on or before the sixth Business
Day after such Valuation Date (the "AMPS Basic Maintenance Cure Date"), the
Fund will be required under certain circumstances to redeem certain of the
shares of AMPS. Upon any failure to maintain the required Discounted Value, the
Fund will use its best efforts to alter the composition of its portfolio to
reattain a Discounted Value at least equal to the AMPS Basic Maintenance Amount
on or prior to the AMPS Basic Maintenance Cure Date. See "Redemption" herein
and in the statement of additional information.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided in the statement
of additional information, the Fund, at its option, may redeem shares of AMPS,
in whole or in part, out of funds legally available therefor, at the Optional
Redemption Price per share on any Dividend Payment Date; provided that no share
of AMPS may be redeemed at the option of the Fund during (a) the Initial
Dividend Period with respect to such shares or (b) a Non-Call Period to which
such share is subject. "Optional Redemption Price" means $25,000 per share of
AMPS plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) to the date fixed for redemption plus any applicable
redemption premium, if any, attributable to the designation of a Premium Call
Period. In addition, holders of AMPS may be entitled to receive Additional
Dividends in the event of redemption of such AMPS to the extent provided
herein. See "Dividends--Additional Dividends" above. The Fund has the authority
to redeem the AMPS for any reason and may redeem all or part of the outstanding
shares of AMPS if it anticipates that the Fund's leveraged capital structure
will result in a lower rate of return to holders of common stock for any
significant period of time than that obtainable if the Common Stock were
unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share, shares
of AMPS to the extent permitted under the 1940 Act and Maryland law, on a date
fixed by the Board of Directors, if the Fund fails to maintain S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount or to satisfy the
1940 Act AMPS Asset Coverage and such failure is not cured on or before the
AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein collectively
referred to as a "Cure Date"), as the case may be. "Mandatory Redemption Price"
means $25,000 per share of AMPS plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption.
In addition, holders of AMPS may be entitled to receive Additional Dividends in
the event of redemption of such AMPS to the extent provided herein. See
"Dividends--Additional Dividends" above.
18
<PAGE>
For a discussion of the allocation procedures to be used if fewer than all of
the outstanding AMPS are to be redeemed and for a discussion of other
redemption procedures, see "Description of AMPS--Redemption" in the statement
of additional information.
Liquidation Rights
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of AMPS will be entitled to
receive, out of the assets of the Fund available for distribution to
shareholders, before any distribution or payment is made upon any shares of
common stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount of
any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the date of distribution, and after such payment the holders of AMPS
will be entitled to no other payments except for any Additional Dividends. If
such assets of the Fund shall be insufficient to make the full liquidation
payment on each outstanding series of AMPS and liquidation payments on any
other outstanding class or series of preferred stock of the Fund ranking on a
parity with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of each such series of AMPS and the holders of
shares of such other class or series ratably in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of liquidation distribution to which they are entitled, the holders of
AMPS will not be entitled to any further participation in any distribution of
assets by the Fund except for any Additional Dividends. A consolidation, merger
or share exchange of the Fund with or into any other entity or entities or a
sale, whether for cash, shares of stock, securities or properties, of all or
substantially all or any part of the assets of the Fund shall not be deemed or
construed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights
Except as otherwise indicated in this prospectus and the statement of
additional information and except as otherwise required by applicable law,
holders of shares of AMPS will be entitled to one vote per share on each matter
submitted to a vote of stockholders and will vote together with holders of
shares of common stock as a single class.
The 1940 Act and the Articles Supplementary require that the holders of
preferred stock, including the AMPS, voting as a separate class, have the
rights to elect two of the Fund's Directors at all times and to elect a
majority of the Directors at any time that two full years' dividends on the
AMPS are unpaid. The holders of AMPS will vote as a separate class or classes
on certain other matters as required under the Articles Supplementary, the 1940
Act and Maryland law. See "Description of AMPS--Voting Rights" in the statement
of additional information.
THE AUCTION
General
Holders of the shares of AMPS will be entitled to receive cumulative cash
dividends on their shares when, as and if declared by the Board of Directors of
the Fund, out of funds legally available therefor, on the Initial Dividend
Payment Date with respect to the Initial Dividend Period and, thereafter, on
each Dividend Payment Date with respect to a Subsequent Dividend Period
(generally a period of seven days subject to certain exceptions set forth under
"Description of AMPS--Dividends--General") at the rate per annum equal to the
Applicable Rate for each such Dividend Period.
The provisions of the Articles Supplementary establishing the terms of the
shares of AMPS offered hereby will provide that the Applicable Rate for AMPS
for each Dividend Period after the Initial Dividend Period therefor will be
equal to the rate per annum that the Auction Agent advises has resulted on the
Business Day preceding the first day of such Dividend Period due to
implementation of the auction procedures set forth in the Articles
Supplementary (the "Auction Procedures") in which persons determine to hold or
offer to purchase or sell shares of AMPS. The Auction Procedures are attached
as Appendix E to the statement of additional information.
19
<PAGE>
Each periodic operation of such procedures with respect to the shares of AMPS
is referred to hereinafter as an "Auction." If, however, the Fund should fail
to pay or duly provide for the full amount of any dividend on shares of AMPS or
the redemption price of shares of AMPS called for redemption, the Applicable
Rate for shares of AMPS will be determined as set forth under "Description of
AMPS--Dividends--Non-Payment Period; Late Charge" in the statement of
additional information.
Auction Agent Agreement. The Fund will enter into an agreement (the "Auction
Agent Agreement") with IBJ Whitehall Bank & Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with this Fund, the "Auction Agent"), which provides, among other
things, that the Auction Agent will follow the Auction Procedures for the
purpose of determining the Applicable Rate for the AMPS. The Fund will pay the
Auction Agent compensation for its services under the Auction Agent Agreement.
Broker-Dealer Agreements. The Auction Agent will enter into agreements with
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Goldman,
Sachs & Co., Lehman Government Securities Incorporated and Salomon Smith Barney
Inc. and may enter into similar agreements (collectively, the "Broker-Dealer
Agreements") with one or more other broker-dealers (collectively, the "Broker-
Dealers") selected by the Fund, which provide for the participation of such
Broker-Dealers in Auctions. Merrill Lynch is an affiliate of the Investment
Adviser in that they share a common parent, ML & Co.
Securities Depository. The Depository Trust Company initially will act as the
Securities Depository for the Agent Members with respect to the shares of AMPS.
One or more registered certificates for all of the shares of AMPS initially
will be registered in the name of Cede, as nominee of the Securities
Depository. The certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of shares
of AMPS contained in the Articles Supplementary. Cede initially will be the
holder of record of all shares of AMPS, and Beneficial Owners will not be
entitled to receive certificates representing their ownership interest in such
shares. The Securities Depository will maintain lists of its participants and
will maintain the positions (ownership interests) of shares of AMPS held by
each Agent Member, whether as the Beneficial Owner thereof for its own account
or as nominee for the Beneficial Owner thereof. Payments made by the Fund to
holders of AMPS will be duly made by making payments to the nominee of the
Securities Depository.
Auction Procedures
The following is a brief discussion of the procedures to be used in
conducting Auctions. This summary is qualified by reference to the Auction
Procedures set forth in Appendix E to the statement of additional information.
The Settlement Procedures to be used with respect to Auctions are set forth in
Appendix D to the statement of additional information.
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends. An Auction to determine the Applicable Rate for
the shares of AMPS offered hereby for each Dividend Period (other than the
Initial Dividend Period therefor) will be held on the first Business Day (as
hereinafter defined) preceding the first day of such Dividend Period, which
first day is also the Dividend Payment Date for the preceding Dividend Period
(the date of each Auction being referred to herein as an "Auction Date").
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York are authorized or obligated by law to close. Auctions for
shares of the AMPS for Dividend Periods after the Initial Dividend Period
normally will be held every Tuesday after the preceding Dividend Payment Date,
and each subsequent Dividend Period normally will begin on the following
Wednesday (also a Dividend Payment Date). The Auction Date and the first day of
the related Dividend Period (both of which must be Business Days) need not be
consecutive calendar days. For example, in most cases, if the Tuesday that
normally would be an Auction Date for AMPS is not a Business Day, then such
Auction Date will be the preceding Monday and the first day of the related
Dividend Period will continue to be the following Wednesday. See "Description
of
20
<PAGE>
AMPS--Dividends" for information concerning the circumstances under which a
Dividend Payment Date may fall on a date other than the days specified above,
which may affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net capital
gains or other income subject to regular Federal income taxes in any dividend
on shares of AMPS, the Fund will notify the Auction Agent of the amount to be
so included at least five Business Days prior to the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, in turn it will notify each Broker-
Dealer, who, on or prior to such Auction Date, in accordance with its Broker-
Dealer Agreement, will notify its customers who are Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order in
the Auction to be held on such Auction Date. The Fund also may include such
income in a dividend on shares of AMPS without giving advance notice thereof if
it increases the dividend by an additional amount calculated as if such income
were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend; provided that the Fund will notify the Auction Agent of
the additional amounts to be included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. See "Description of AMPS--
Dividends--Additional Dividends" above.
Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders
and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) Hold Order--indicating the number of outstanding shares, if any,
of AMPS that such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for the next Dividend Period for such
shares;
(ii) Bid--indicating the number of outstanding shares, if any, of
AMPS that such Beneficial Owner desires to continue to hold, provided
that the Applicable Rate for the next Dividend Period for such shares
is not less than the rate per annum then specified by such Beneficial
Owner; and/or
(iii) Sell Order--indicating the number of outstanding shares, if
any, of AMPS that such Beneficial Owner offers to sell without regard
to the Applicable Rate for the next Dividend Period for such shares;
and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of shares of AMPS to determine whether such Potential Beneficial
Owners desire to submit Bids indicating the number of shares of AMPS which
they offer to purchase provided that the Applicable Rate for the next
Dividend Period for such shares is not less than the rates per annum
specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted by
a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by
a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to shares of AMPS then held by such Beneficial Owner, as well as Bids
for additional shares of AMPS. For information concerning the priority given to
different types of Orders placed by Beneficial Owners, see "Submission of
Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being
21
<PAGE>
rounded upwards to the nearest one-thousandth (0.001) of one percent. The
Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage will be
determined based on (i) the lower of the credit rating or ratings assigned on
such date to such shares by Moody's and S&P (or if Moody's or S&P or both shall
not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) and (ii)
whether the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS as follows:
<TABLE>
<CAPTION>
Applicable Applicable
Credit Ratings Percentage of Percentage of
---------------------------------- Reference Rate-- Reference Rate--
Moody's S&P No Notification Notification
---------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
"aa3" or higher AA- or Higher 110% 150%
"a3" or "a1" A- to A 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend Period.
The Fund will take all reasonable action necessary to enable S&P and Moody's
to provide a rating for the AMPS. If either S&P or Moody's, or both, shall not
make such a rating available, the Underwriter or its affiliates and successors,
after consultation with the Fund, will select another nationally recognized
statistical rating organization (a "Substitute Rating Agency") or two other
nationally recognized statistical rating organizations ("Substitute Rating
Agencies") to act as a Substitute Rating Agency or Substitute Rating Agencies,
as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
Neither the Fund nor the Auction Agent will be responsible for a Broker-
Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a Beneficial Owner.
A Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial
Owner or a Potential Beneficial Owner and therefore participate in an Auction
as an Existing Holder or Potential Holder on behalf of both itself and its
customers. Any Order placed with the Auction Agent by a Broker-Dealer as or on
behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated in
the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner
or a Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to
submit to the Auction Agent an Order in respect of any AMPS held by it or its
customers who are Beneficial Owners will be treated in the same manner as a
Beneficial Owner's failure to submit to its Broker-Dealer an Order in respect
of AMPS held by it, as described in the next paragraph. Inasmuch as a Broker-
Dealer participates in an Auction as an Existing Holder or a Potential Holder
only to represent the interests of a Beneficial Owner or Potential Beneficial
Owner, whether it be its customers or itself, all discussion herein relating to
the consequences of an Auction for Existing Holders and Potential Holders also
applies to the underlying beneficial ownership interests represented thereby.
For information concerning the priority given to different types of Orders
placed by Existing Holders, see "Submission of Orders by Broker-Dealers to
Auction Agent." Each purchase or sale in an Auction will be settled on the
Business Day next succeeding the Auction Date at a price per share equal to
$25,000. See "Notification of Results; Settlement" below.
22
<PAGE>
If one or more Orders covering in the aggregate all of the outstanding shares
of AMPS held by a Beneficial Owner are not submitted to the Auction Agent prior
to the Submission Deadline, either because a Broker-Dealer failed to contact
such Beneficial Owner or otherwise, the Auction Agent shall deem a Hold Order
(in the case of an Auction relating to a Dividend Period which is not a Special
Dividend Period of 28 days or more) and a Sell Order (in the case of an Auction
relating to a Special Dividend Period of 28 days or more) to have been
submitted on behalf of such Beneficial Owner covering the number of outstanding
shares of AMPS held by such Beneficial Owner and not subject to Orders
submitted to the Auction Agent.
If all of the outstanding shares of AMPS are subject to Submitted Hold
Orders, the Dividend Period next succeeding the Auction automatically shall be
the same length as the immediately preceding Dividend Period, and the
Applicable Rate for the next Dividend Period for all shares of AMPS will be 40%
of the Reference Rate on the date of the applicable Auction (or 60% of such
rate if the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares of
AMPS).
For the purposes of an Auction, shares of AMPS for which the Fund shall have
given notice of redemption and deposited moneys therefor with the Auction Agent
in trust or segregated in an account at the Fund's custodian bank for the
benefit of the Auction Agent, as set forth under "Description of AMPS--
Redemption" in the statement of additional information, will not be considered
as outstanding and will not be included in such Auction. Pursuant to the
Articles Supplementary of the Fund, the Fund will be prohibited from reissuing
and its affiliates (other than the Underwriter) will be prohibited from
transferring (other than to the Fund) any shares of AMPS they may acquire.
Neither the Fund nor any affiliate of the Fund (other than the Underwriter) may
submit an Order in any Auction, except that an affiliate of the Fund that is a
Broker-Dealer may submit an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00 p.m.,
Eastern time, on each Auction Date, or such other time on the Auction Date as
may be specified by the Auction Agent (the "Submission Deadline"), each Broker-
Dealer will submit to the Auction Agent in writing all Orders obtained by it
for the Auction to be conducted on such Auction Date, designating itself
(unless otherwise permitted by the Fund) as the Existing Holder or Potential
Holder in respect of the shares of AMPS subject to such Orders. Any Order
submitted by a Beneficial Owner or a Potential Beneficial Owner to its Broker-
Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission
Deadline on any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the
number of outstanding shares of AMPS held by such Existing Holder, provided
that if more than one Hold Order is submitted by such Existing Holder and
the number of shares of AMPS subject to such Hold Orders exceeds the number
of outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders will be reduced pro rata
so that such Hold Orders, in the aggregate, will cover exactly the number
of outstanding shares of AMPS held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the number of
outstanding shares of AMPS subject to any Hold Order referred to in clause
(i) above (and if more than one Bid submitted by such Existing Holder
specifies the same rate per annum and together they cover more than the
remaining number of shares that can be the subject of valid Bids after
application of clause (i) above and of the
23
<PAGE>
foregoing portion of this clause (ii) to any Bid or Bids specifying a lower
rate or rates per annum, the number of shares subject to each of such Bids
will be reduced pro rata so that such Bids, in the aggregate, cover exactly
such remaining number of outstanding shares); and the number of outstanding
shares, if any, subject to Bids not valid under this clause (ii) shall be
treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the sum of the number of shares of AMPS subject to Hold Orders
referred to in clause (i) above and the number of shares of AMPS subject to
valid Bids by such Existing Holder referred to in clause (ii) above;
provided that, if more than one Sell Order is submitted by any Existing
Holder and the number of shares of AMPS subject to such Sell Orders is
greater than such excess, the number of shares of AMPS subject to each of
such Sell Orders will be reduced pro rata so that such Sell Orders, in the
aggregate, will cover exactly the number of shares of AMPS equal to such
excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of AMPS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding shares of AMPS over the number of outstanding shares of
AMPS subject to Submitted Hold Orders (such excess being referred to as the
"Available AMPS") and whether Sufficient Clearing Bids have been made in such
Auction. Sufficient Clearing Bids will have been made if the number of
outstanding shares of AMPS that are the subject of Submitted Bids of Potential
Holders with rates per annum not higher than the Maximum Applicable Rate equals
or exceeds the number of outstanding shares that are the subject of Submitted
Sell Orders (including the number of shares subject to Bids of Existing Holders
specifying rates per annum higher than the Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will determine
the lowest rate per annum specified in the Submitted Bids (the "Winning Bid
Rate") which would result in the number of shares subject to Submitted Bids
specifying such rate per annum or a lower rate per annum being at least equal
to the Available AMPS. If Sufficient Clearing Bids have been made, the Winning
Bid Rate will be the Applicable Rate for the next Dividend Period for all
shares of AMPS then outstanding.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 7-Day
Dividend Period, and the Applicable Rate for such Dividend Period will be equal
to the Maximum Applicable Rate. If Sufficient Clearing Bids have not been made,
Beneficial Owners that have Submitted Sell Orders will not be able to sell in
the Auction all, and may not be able to sell any, shares of AMPS subject to
such Submitted Sell Orders. See "Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares." Thus, under some
circumstances, Beneficial Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in
the order of priority set forth in the Auction Procedures with the result that
Existing Holders and Potential Holders of AMPS will sell, continue to hold
and/or purchase shares of AMPS as set forth below. Existing Holders that submit
or are deemed to have submitted Hold Orders will continue to hold the shares of
AMPS subject to such Hold Orders.
24
<PAGE>
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Winning Bid Rate or a Submitted Sell Order will
sell the outstanding shares of AMPS subject to such Submitted Bid or
Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will purchase the number of
shares of AMPS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bids, unless the
number of outstanding shares of AMPS subject to all such Submitted Bids of
Existing Holders is greater than the excess of the Available AMPS over the
number of shares of AMPS accounted for in clauses (b) and (c) above, in
which event each Existing Holder with such a Submitted Bid will sell a
number of outstanding shares of AMPS determined on a pro rata basis based
on the number of outstanding shares of AMPS subject to all such Submitted
Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will purchase any Available AMPS
not accounted for in clause (b), (c) or (d) above on a pro rata basis based
on the shares of AMPS subject to all such Submitted Bids of Potential
Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will continue
to hold the outstanding shares of AMPS subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will purchase
the number of shares of AMPS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Maximum Applicable Rate or a Submitted Sell Order
will sell a number of outstanding shares of AMPS determined on a pro rata
basis based on the outstanding shares of AMPS subject to all such Submitted
Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing Holder
would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will
round up or down the number of shares of AMPS being sold or purchased on such
Auction Date so that each share sold or purchased by each Existing Holder or
Potential Holder will be a whole share of AMPS. If any Potential Holder would
be entitled or required to purchase less than a whole share of AMPS, the
Auction Agent, in such manner as, in its sole discretion, it shall determine,
will allocate shares of AMPS for purchase among Potential Holders so that only
whole shares of AMPS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related shares of AMPS by
telephone at approximately 3:00 P.M., Eastern time, on the Auction Date for
such Auction. Each such Broker-Dealer that submitted an Order for the account
of a customer then will advise such customer whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling shares of AMPS as a result of the Auction and will advise
each customer purchasing or selling shares of AMPS
25
<PAGE>
to give instructions to its Agent Member of the Securities Depository to pay
the purchase price against delivery of such shares or to deliver such shares
against payment therefor as appropriate. If a customer selling shares of AMPS
as a result of an Auction shall fail to instruct its Agent Member to deliver
such shares, the Broker-Dealer that submitted such customer's Bid or Sell Order
will instruct such Agent Member to deliver such shares against payment
therefor. Each Broker-Dealer that submitted a Hold Order in an Auction on
behalf of a customer also will advise such customer of the Applicable Rate for
the next Dividend Period for the AMPS. The Auction Agent will record each
transfer of shares of AMPS on the record book of Existing Holders to be
maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the day
after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of shares of AMPS as determined in such
Auction. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment in same-day funds. If the
procedures of the Securities Depository applicable to AMPS shall be changed to
provide for payment in next-day funds, then purchasers may be required to make
payment in next-day funds. If the certificates for shares of AMPS are not held
by the Securities Depository or its nominee, payment will be made in same-day
funds to the Auction Agent against delivery of such certificates.
If any Existing Holder selling shares of AMPS in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased shares
of AMPS in such Auction may deliver to such person a number of whole shares of
AMPS that is less than the number of shares that otherwise was to be purchased
by such person. In such event, the number of shares of AMPS to be so delivered
will be determined by such Broker-Dealer. Delivery of such lesser number of
shares will constitute good delivery. Each Broker-Dealer Agreement also will
provide that neither the Fund nor the Auction Agent will have responsibility or
liability with respect to the failure of a Potential Beneficial Owner,
Beneficial Owner or their respective Agent Members to deliver shares of AMPS or
to pay for shares of AMPS purchased or sold pursuant to an Auction or
otherwise.
Broker-Dealers
General. The Broker-Dealer Agreements provide that a Broker-Dealer may submit
Orders in Auctions for its own account, unless the Fund notifies all Broker-
Dealers that they no longer may do so; provided that Broker-Dealers may
continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an
Order for its own account in any Auction of any series of AMPS, it may have
knowledge of Orders placed through it in that Auction and therefore have an
advantage over other Bidders, but such Broker-Dealer would not have knowledge
of Orders submitted by other Broker-Dealers in that Auction.
Fees. The Auction Agent after each Auction will pay a service charge from
funds provided by the Fund to each Broker-Dealer on the basis of the purchase
price of shares of AMPS placed by such Broker-Dealer at such Auction. The
service charge (i) for any 7-Day Dividend Period shall be payable at the annual
rate of 0.25% of the purchase price of the shares of AMPS placed by such
Broker-Dealer in any such Auction and (ii) for any Special Dividend Period
shall be determined by mutual consent of the Fund and any such Broker-Dealer or
Broker-Dealers and shall be based upon a selling concession that would be
applicable to an underwriting of fixed or variable rate preferred shares with a
similar final maturity or variable rate dividend period, respectively, at the
commencement of the Dividend Period with respect to such Auction. For the
purposes of the preceding sentence, shares of AMPS will be placed by a Broker-
Dealer if such shares were (i) the subject of Hold Orders deemed to have been
made by Beneficial Owners that were acquired by such Beneficial Owners through
such Broker-Dealer or (ii) the subject of the following Orders submitted by
such Broker-Dealer: (A) a Submitted Bid of a Beneficial Owner that resulted in
such Beneficial Owner continuing to hold such shares as a result of the
Auction, (B) a Submitted Bid of a Potential Beneficial Owner that resulted in
such Potential Beneficial Owner purchasing such shares as a result of the
Auction or (C) a Submitted Hold Order.
26
<PAGE>
Secondary Trading Market. The Broker-Dealers intend to maintain a secondary
trading market in the AMPS outside of Auctions; however, they have no
obligation to do so and there can be no assurance that a secondary market for
the AMPS will develop or, if it does develop, that it will provide holders with
a liquid trading market (i.e., trading will depend on the presence of willing
buyers and sellers and the trading price is subject to variables to be
determined at the time of the trade by the Broker-Dealers). The AMPS will not
be registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long-Term
Dividend Period, likely will have an adverse effect on the secondary market
price of the AMPS, and a selling shareholder may sell AMPS between Auctions at
a price per share of less than $25,000.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary that
appears at the end of this prospectus.
The Fund intends that, so long as shares of AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's and
S&P in connection with the Fund's receipt of a rating for such shares on or
prior to their Date of Original Issue of at least "aaa" from Moody's and AAA
from S&P. Moody's and S&P, which are NRSROs, issue ratings for various
securities reflecting the perceived creditworthiness of such securities. The
guidelines described below have been developed by Moody's and S&P in connection
with issuances of asset-backed and similar securities, including debt
obligations and variable rate preferred stock, generally on a case-by-case
basis through discussions with the issuers of these securities. The guidelines
are designed to ensure that assets underlying outstanding debt or preferred
stock will be varied sufficiently and will be of sufficient quality and amount
to justify investment-grade ratings. The guidelines do not have the force of
law but have been adopted by the Fund in order to satisfy current requirements
necessary for Moody's and S&P to issue the above-described ratings for shares
of AMPS, which ratings generally are relied upon by institutional investors in
purchasing such securities. The guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the 1940 Act. See
"Description of AMPS--Asset Maintenance" herein and in the statement of
additional information.
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and S&P guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value
at least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, shares of AMPS will be
subject to redemption. See "Description of AMPS--Asset Maintenance" and
"Description of AMPS--Redemption" herein and in the statement of additional
information.
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of AMPS, at any time, may change or
withdraw any such rating. As set forth in the Articles Supplementary, the Board
of Directors, without shareholder approval, may modify certain definitions or
restrictions that have been adopted by the Fund pursuant to the rating agency
guidelines, provided the Board of Directors has obtained written confirmation
from Moody's and S&P that any such change would not impair the ratings then
assigned by Moody's and S&P to the AMPS.
27
<PAGE>
As described by Moody's and S&P, a preferred stock rating is an assessment of
the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings on the AMPS are not recommendations to purchase, hold or sell
shares of AMPS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor, nor do the rating agency guidelines
described above address the likelihood that a holder of shares of AMPS will be
able to sell such shares in an Auction. The ratings are based on current
information furnished to Moody's and S&P by the Fund and the Investment Adviser
and information obtained from other sources. The ratings may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of,
such information. The Common Stock has not been rated by a nationally
recognized statistical rating organization.
For additional information concerning the Moody's and S&P ratings guidelines,
see "Rating Agency Guidelines" in the statement of additional information.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by 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 other registered investment companies and
offers investment advisory services to individuals and institutional accounts.
As of December 1998, the Merrill Lynch 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.
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,
28
<PAGE>
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.
TAXES
In general, dividends on the AMPS will be exempt from Federal income tax in
the hands of holders of such AMPS, subject to the possible application of the
Federal alternative minimum tax. However, the Fund is required to allocate net
capital gains and other taxable income, if any, proportionately among the
common stock and AMPS in accordance with the current position of the Internal
Revenue Service ("IRS") described under the heading "Taxes" in the statement of
additional information. The Fund may notify the Auction Agent of the amount of
any net capital gains or other anticipated taxable income to be included in any
dividend on the AMPS prior to the Auction establishing the Applicable Dividend
Rate for such dividend. The Auction Agent will in turn notify holders of the
AMPS and prospective purchasers. The amount of taxable income allocable to AMPS
will depend upon the amount of such income realized by the Fund and cannot be
determined with certainty prior to the end of the Fund's fiscal year, but it is
not generally expected to be significant.
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 taxes. However, exempt-interest dividends paid to
a corporate shareholder subject to New York State corporation franchise tax and
New York City general corporation tax will not be exempt from New York
taxation. Shareholders subject to income taxation by states other than New York
will realize a lower after-tax rate of return than New York shareholders since
the dividends distributed by the Fund generally will not be exempt, to any
significant degree, from income taxation by such other states.
Generally, within 60 days after the end of the Fund's taxable year, the Fund
will tell you the amount of exempt-interest dividends, ordinary income
dividends or capital gain dividends you received that year. Capital gain
dividends are taxable as long-term capital gains to you regardless of how long
you have held your shares. The tax treatment of distributions from the Fund is
the same whether you choose to receive distributions in cash or to have them
reinvested in shares of the Fund.
If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of AMPS who are subject to the Retroactive Taxable
Allocation. See "Description of AMPS--Dividends--Additional Dividends." The
Federal income tax consequences of Additional Dividends under existing law are
uncertain. The Fund intends to treat a holder as receiving a dividend
distribution in the amount of any Additional Dividend only as and when such
Additional Dividend is paid. An Additional Dividend generally will be
designated by the Fund as an exempt-interest dividend except as otherwise
required by applicable law. However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year for which
the Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.
Because the Fund may from time to time invest a substantial portion of its
portfolio in municipal securities bearing income that is taxable under the
Federal alternative minimum tax, the Fund would not ordinarily be a suitable
investment for investors who are subject to the alternative minimum tax.
If at any time when AMPS are outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of common stock until the asset coverage is restored.
See "Description of AMPS--Restrictions on Dividends and Other Payments." This
may prevent the Fund from meeting certain distribution requirements for
qualification as a regulated investment
29
<PAGE>
company ("RIC"). Upon any failure to meet the asset coverage requirements of
the 1940 Act, the Fund, in its sole discretion, may, and under certain
circumstances will be required to, redeem AMPS in order to maintain or restore
the requisite asset coverage and avoid the adverse consequences to the Fund and
its shareholders of failing to qualify as a RIC. See "Description of AMPS--
Redemption." There can be no assurance, however, that any such action would
achieve such objectives.
By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
For more information regarding the tax treatment of an investment in AMPS, see
"Taxes" in the statement of additional information.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares were initially classified as common
stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption. In this
regard, the Board of Directors has reclassified 2,000 shares of unissued common
stock as AMPS. For a description of the shares of AMPS, see "Description of
AMPS" herein and in the statement of additional information.
The following table shows the amount of (i) capital stock authorized, (ii)
capital stock held by the Fund for its own account and (iii) capital stock
outstanding for each class of authorized securities of the Fund as of February
1, 1999.
<TABLE>
<CAPTION>
Amount
Outstanding
Amount held (exclusive of
by Fund amount held
Amount for its own by Fund for its
Title of Class Authorized account own account)
-------------- ----------- ----------- ---------------
<S> <C> <C> <C>
Common Stock........................ 199,998,000 -0- 5,006,667
Auction Market Preferred Stock...... 2,000 -0- -0-
</TABLE>
Common Stock
Holders of common stock are entitled to share equally in dividends declared
by the Board of Directors payable to holders of common stock and in the net
assets of the Fund available for distribution to holders of common stock after
payment of the preferential amounts payable to holders of any outstanding
preferred stock. Neither holders of common stock nor holders of preferred stock
have pre-emptive or conversion rights and shares of common stock are not
redeemable. The outstanding shares of common stock are fully paid and non-
assessable.
Holders of common stock are entitled to one vote for each share held and will
vote with the holders of any outstanding shares of AMPS or other preferred
stock on each matter submitted to a vote of holders of common stock, except as
described under "Description of AMPS--Voting Rights" herein and in the
statement of additional information.
Shareholders are entitled to one vote for each share held. The shares of
common stock, AMPS and any other preferred stock do not have cumulative voting
rights, which means that the holders of more than 50% of
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<PAGE>
the shares of common stock, AMPS and any other preferred stock voting for the
election of Directors can elect all of the Directors standing for election by
such holders, and, in such event, the holders of the remaining shares of
common stock, AMPS and any other preferred stock will not be able to elect any
of such Directors.
So long as any shares of AMPS or any other preferred stock are outstanding,
holders of common stock will not be entitled to receive any dividends of or
other distributions from the Fund unless all accumulated dividends on
outstanding shares of AMPS and any other preferred stock have been paid, and
unless asset coverage (as defined in the 1940 Act) with respect to such AMPS
and any other preferred stock would be at least 200% after giving effect to
such distributions. See "Description of AMPS--Restrictions on Dividends and
Other Payments" herein and in the statement of additional information.
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The shares of common stock will commence trading on the NYSE on February 8,
1999. At February 1, 1999, the net asset value per share of common stock was
$15.03.
Preferred Stock
Under the Articles Supplementary, the Fund is authorized to issue an
aggregate of 2,000 shares of AMPS. See "Description of AMPS." Under the 1940
Act, the Fund is permitted to have outstanding more than one series of
preferred stock as long as no single series has priority over another series
as to the distribution of assets of the Fund or the payment of dividends.
Neither holders of common stock nor holders of preferred stock have pre-
emptive rights to purchase any shares of AMPS or any other preferred stock
that might be issued. It is anticipated that the net asset value per share of
the AMPS will equal its original purchase price per share plus accumulated
dividends per share.
Certain Provisions of the Charter
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A director may be removed from office
with or without cause but only by vote of the holders of at least 66 2/3% of
the votes entitled to be voted on the matter. A director elected by all of the
holders of capital stock may be removed only by action of such holders, and a
director elected by the holders of AMPS and any other preferred stock may be
removed only by action of AMPS and any other preferred stock.
In addition, the Charter requires the favorable vote of the holders of at
least 66 2/3% of the Fund's outstanding shares of capital stock, then entitled
to be voted, voting as a single class, to approve, adopt or authorize the
following:
. a merger or consolidation or statutory share exchange of the Fund with
any other corporation,
. a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities), or
. a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by shareholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing would also require the favorable vote of at least a majority of the
Fund's shares of preferred stock then entitled to be voted, including the
AMPS, voting as a separate class.
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<PAGE>
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
shareholders. Such an amendment would require the favorable vote of the holders
of at least 66 2/3% of the Fund's outstanding shares of capital stock
(including the AMPS and any other preferred stock) entitled to be voted on the
matter, voting as a single class (or a majority of such shares if the amendment
was previously approved, adopted or authorized by at least two-thirds of the
total number of Directors fixed in accordance with the by-laws), and, the
affirmative vote of at least a majority of outstanding shares of preferred
stock of the Fund (including the AMPS), voting as a separate class. Such a vote
also would satisfy a separate requirement in the 1940 Act that the change be
approved by the shareholders. Shareholders of an open-end investment company
may require the company to redeem their shares of common stock at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption. Conversion
to an open-end investment company would also require redemption of all
outstanding shares of preferred stock (including the AMPS) and would require
changes in certain of the Fund's investment policies and restrictions, such as
those relating to the issuance of senior securities, the borrowing of money and
the purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of shareholders generally.
Reference should be made to the Charter on file with the Commission for the
full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custody agreement with 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 from the Fund all of the shares of
AMPS offered hereby. The Underwriter is committed to purchase all of such
shares if any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of AMPS to the public at the public offering price set forth on the
cover page of this prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriter may allow, and such
dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed. The sales load of $ per share is
equal to % of the initial public offering price. Investors must pay for any
AMPS purchased in the initial public offering on or before February , 1999.
The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"The Auction--General--Broker-Dealer Agreements" and will be entitled to fees
for services as a Broker-Dealer as set forth under "The Auction--Broker-
Dealers". The Underwriter also may provide information to be used in
ascertaining the Reference Rate.
The Fund anticipates that the Underwriter from time to time may act as a
broker in connection with the execution of the Fund's portfolio transactions.
The Fund has obtained exemptive orders permitting it to engage
32
<PAGE>
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" in the statement of
additional information.
The Underwriter is an affiliate of the Investment Adviser.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities including liabilities under the Securities Act of
1933, as amended.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares of
AMPS will be IBJ Whitehall Bank & Trust Company, One State Street, New York,
New York 10004. The transfer agent, dividend disbursing agent and shareholder
servicing agent for the shares of Common Stock is The Bank of New York, 101
Barclay Street, New York, New York 10286.
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby will be
passed upon for the Fund and the Underwriter by Brown & Wood LLP, One World
Trade Center, New York, New York 10048-0557.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the statement of
assets, liabilities and capital of the Fund as of January 13, 1999 which is
included in the statement of additional information as set forth in their
report which appears in the statement of additional information. The statement
of assets, liabilities and capital is included in reliance upon their report,
given on their authority as experts in accounting and auditing. The selection
of independent auditors is subject to ratification by shareholders of the Fund.
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.
33
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Investment Objective and Policies........................................... 3
Investment Restrictions..................................................... 7
Description of AMPS......................................................... 9
The Auction................................................................. 16
Rating Agency Guidelines.................................................... 17
Directors and Officers...................................................... 25
Investment Advisory and Management Arrangements............................. 27
Portfolio Transactions...................................................... 28
Taxes....................................................................... 29
Net Asset Value............................................................. 33
Additional Information...................................................... 34
Report of Independent Auditors.............................................. 35
Statement of Assets, Liabilities and Capital................................ 36
Financial Statements (Unaudited)............................................ 37
Appendix A--Economic and Other Conditions in New York....................... A-1
Appendix B--Ratings of Municipal Bonds...................................... B-1
Appendix C--Portfolio Insurance............................................. C-1
Appendix D--Settlement Procedures........................................... D-1
Appendix E--Auction Procedures.............................................. E-1
</TABLE>
34
<PAGE>
GLOSSARY
"AA' (AA) Composite Commercial Paper Rate," on any Valuation Date, means (i)
the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another nationally recognized statistical rating
organization, as such rate is made available on a discount basis or otherwise
by the Federal Reserve Bank of New York for the Business Day immediately
preceding such date, or (ii) in the event that the Federal Reserve Bank of New
York does not make available such a rate, then the arithmetic average of the
Interest Equivalent of the rate on commercial paper placed on behalf of such
issuers, as quoted on a discount basis or otherwise by Merrill Lynch, Pierce,
Fenner & Smith Incorporated or its successors that are Commercial Paper
Dealers, to the Auction Agent for the close of business on the Business Day
immediately preceding such date. If one of the Commercial Paper Dealers does
not quote a rate required to determine the "AA" Composite Commercial Paper
Rate, the "AA" Composite Commercial Paper Rate will be determined on the basis
of the quotation or quotations furnished by any Substitute Commercial Paper
Dealer or Substitute Commercial Paper Dealers selected by the Fund to provide
such rate or rates not being supplied by the Commercial Paper Dealer. If the
number of Dividend Period days shall be (i) 7 or more but fewer than 49 days,
such rate shall be the Interest Equivalent of the 30-day rate on such
commercial paper; (ii) 49 or more but fewer than 70 days, such rate shall be
the Interest Equivalent of the 60-day rate on such commercial paper; (iii) 70
or more days but fewer than 85 days, such rate shall be the arithmetic average
of the Interest Equivalent of the 60-day and 90-day rates on such commercial
paper; (iv) 85 or more days but fewer than 99 days, such rate shall be the
Interest Equivalent of the 90-day rate on such commercial paper; (v) 99 or more
days but fewer than 120 days, such rate shall be the arithmetic average of the
Interest Equivalent of the 90-day and 120-day rates on such commercial paper;
(vi) 120 or more days but fewer than 141 days, such rate shall be the Interest
Equivalent of the 120-day rate on such commercial paper; (vii) 141 or more days
but fewer than 162 days, such rate shall be the arithmetic average of the
Interest Equivalent of the 120-day and 180-day rates on such commercial paper;
and (viii) 162 or more days but fewer than 183 days, such rate shall be the
Interest Equivalent of the 180-day rate on such commercial paper.
"Additional Dividend" has the meaning set forth on page 17 of this
prospectus.
"Agent Member" means the member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more shares of AMPS or on behalf of a
Potential Beneficial Owner.
"AMPS" means the Auction Market Preferred Stock, Series A, with a par value
of $.10 per share and a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared), of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page 18 of this
prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page 18 of
this prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page 13 of the
statement of additional information.
"Anticipation Notes" means the following New York Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page 22 of this
prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
"Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of AMPS.
35
<PAGE>
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Whitehall Bank & Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Directors of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS.
"Auction Agent Agreement" means the agreement entered into between the Fund
and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for the purpose of determining the
Applicable Rate.
"Auction Date" has the meaning set forth on page 20 of this prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Appendix E to the statement of additional information.
"Available AMPS" has the meaning set forth on page 24 of this prospectus.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or if applicable, the Auction Agent) as a holder
of shares of AMPS or a Broker-Dealer that holds AMPS for its own account.
"Bid" has the meaning set forth on page 21 of this prospectus.
"Bidder" has the meaning set forth on page 21 of this prospectus.
"Board of Directors" or "Board" means the Board of Directors of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the Auction
Agent and a Broker-Dealer, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, pursuant to which such Broker-Dealer agrees to follow the Auction
Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares of
AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including the Articles Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the Fund from
time to time may appoint or, in lieu thereof, their respective affiliates and
successors.
"Common stock" means the common stock, par value $.10 per share, of the Fund.
36
<PAGE>
"Date of Original Issue" means, with respect to each share of AMPS, the date
on which such share first is issued by the Fund.
"Deposit Securities" means cash and New York Municipal Bonds and Municipal
Bonds rated at least A2 (having a remaining maturity of 12 months or less), P-
1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or
less), A-1+ or SP-1+ by S&P.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount Factor,
as the case may be.
"Discounted Value" of any asset of the Fund means (i) with respect to an S&P
Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the lower of par and the quotient of the market value thereof divided by
the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 15 of this
prospectus.
"Dividend Period" has the meaning set forth on page 16 of this prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets, as
the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of shares of AMPS
in the records of the Auction Agent.
"Fitch" means Fitch IBCA, Inc. or its successors.
"Forward Commitment" has the meaning set forth on page 24 of the statement of
additional information.
"Fund" means MuniHoldings New York Insured Fund III, Inc., a Maryland
corporation that is the issuer of the AMPS.
"Hold Order" has the meaning set forth on page 21 of this prospectus.
"Initial Dividend Payment Date" means the first Dividend Payment Date for the
AMPS as set forth on page 14 of this prospectus.
"Initial Dividend Period" means the period from and including the Date of
Original Issue to but excluding the Initial Dividend Payment Date.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing
security.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"Long Term Dividend Period" means a dividend period of one year or more but
not greater than five years.
"Mandatory Redemption Price" has the meaning set forth on page 18 of this
prospectus.
37
<PAGE>
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning set forth on page 22 of this
prospectus.
"Maximum Potential Additional Dividend Liability" has the meaning set forth
on page 13 of the statement of additional information.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page 21 of the
statement of additional information.
"Moody's Eligible Assets" has the meaning set forth on page 20 of the
statement of additional information.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and initially shall be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth on page 23 of the
statement of additional information.
"Moody's Volatility Factor" means 272% as long as there has been no increase
enacted to the Marginal Tax Rate. If such an increase is enacted but not yet
implemented, the Moody's Volatility Factor shall be as follows:
<TABLE>
<CAPTION>
% CHANGE IN MOODY'S
MARGINAL TAX RATE VOLATILITY FACTOR
----------------- -----------------
<S> <C>
less than or equal to 5%....................................... 292%
greater than 5% but less than or equal to 10%....................................... 313%
greater than 10% but less than or equal to 15%....................................... 338%
greater than 15% but less than or equal to 20%....................................... 364%
greater than 20% but less than or equal to 25%....................................... 396%
greater than 25% but less than or equal to 30%....................................... 432%
greater than 30% but less than or equal to 35%....................................... 472%
greater than 35% but less than or equal to 40%....................................... 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.
"Municipal Bonds" has the meaning set forth on page 8 of this prospectus.
"Municipal Index" has the meaning set forth on page 20 of the statement of
additional information.
"New York Municipal Bonds" has the meaning set forth on page 8 of this
prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page 17 of this
prospectus.
"1940 Act Cure Date" has the meaning set forth on page 17 of this prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page 11 of the statement of
additional information.
38
<PAGE>
"Non-Payment Period Rate" has the meaning set forth on page 11 of the
statement of additional information.
"Notice of Revocation" has the meaning set forth on page 10 of the statement
of additional information.
"Notice of Special Dividend Period" has the meaning set forth on page 16 of
this prospectus.
"Optional Redemption Price" has the meaning set forth on page 18 of this
prospectus.
"Order" has the meaning set forth on page 21 of this prospectus.
"Policy" means an insurance policy purchased by the Fund which guarantees the
payment of principal and interest on specified New York Municipal Bonds or
Municipal Bonds during the period in which such New York Municipal Bonds or
Municipal Bonds are owned by the Fund; provided, however, that, as long as the
AMPS are rated by Moody's and S&P, the Fund will not obtain any Policy unless
Moody's and S&P advise the Fund in writing that the purchase of such Policy
will not adversely affect their then-current rating on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a Broker-
Dealer that is not a Beneficial Owner of shares of AMPS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other person as may be
permitted by the Fund, including any Existing Holder, who may be interested in
acquiring shares of AMPS (or, in the case of an Existing Holder, additional
shares of AMPS).
"Preferred stock" means preferred stock, par value $.10 per share, of the
Fund.
"Premium Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Receivables for New York Municipal Bonds Sold," for purposes of determining
S&P Eligible Assets, has the meaning set forth on page 18 of the statement of
additional information.
"Receivables for New York Municipal Bonds or Municipal Bonds Sold," for
purposes of determining Moody's Eligible Assets, has the meaning set forth on
page 21 of the statement of additional information.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short Term
Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period,
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth on page 15 of
this prospectus.
"Response" has the meaning set forth on page 16 of this prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page 16 of this
prospectus.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc.,
or its successors.
"S&P Discount Factor" has the meaning set forth on page 17 of the statement
of additional information.
"S&P Eligible Assets" has the meaning set forth on page 17 of the statement
of additional information.
39
<PAGE>
"S&P Exposure Period" means the maximum period of time following a Valuation
Date, including the Valuation Date and the AMPS Basic Maintenance Cure Date,
that the Fund has under the Articles Supplementary to cure any failure to
maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount.
"S&P Hedging Transactions" has the meaning set forth on page 20 of the
statement of additional information.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.
"Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Fund that
agrees to follow the procedures required to be followed by such securities
depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the Auction
Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" means a dividend period the number of days in
which are evenly divisible by seven, and not fewer than seven days nor more
than 364 days.
"Special Dividend Period" has the meaning set forth on page 15 of this
prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Fund, after consultation with the
Auction Agent and the Broker-Dealers, during which the shares of AMPS subject
to such Dividend Period shall not be subject to redemption at the option of the
Fund and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Board of Directors of the Fund, after
consultation with the Auction Agent and the Broker-Dealers, during each year of
which the shares of AMPS subject to such Dividend Period shall be redeemable at
the Fund's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Board of Directors of the Fund after consultation with the
Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning set forth on page 23 of this
prospectus.
"Submitted Bid" has the meaning set forth on page 24 of this prospectus.
"Submitted Hold Order" has the meaning set forth on page 24 of this
prospectus.
"Submitted Order" has the meaning set forth on page 24 of this prospectus.
"Submitted Sell Order" has the meaning set forth on page 24 of this
prospectus.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated, or its respective affiliates and
successors, after consultation with the Fund, to act as a substitute rating
agency or substitute rating agencies, as the case may be, to determine the
credit ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning set forth on page 24 of this
prospectus.
40
<PAGE>
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date means
90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index (the "Kenny
Index"), or any successor index made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., Eastern time, on
such date by Kenny Information Systems Inc. or any successor thereto, based
upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component issuers selected by Kenny Information Systems Inc. or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a) (5) of the Code, or successor provisions, for purposes of
the "alternative minimum tax," divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not
made so available by 8:30 A.M., Eastern time, on such date by Kenny Information
Systems Inc. or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the
Marginal Tax Rate (expressed as a decimal). The Fund may not utilize a
successor index to the Kenny Index unless Moody's and S&P provide the Fund with
written confirmation that the use of such successor index will not adversely
affect the then-current respective Moody's and S&P ratings of the AMPS.
"Treasury Bonds" has the meaning set forth on page 20 of the statement of
additional information.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Bill Rate on such date. "Alternate Treasury
Bill Rate" on any date means the Interest Equivalent of the yield as calculated
by reference to the arithmetic average of the bid price quotations of the
actively traded Treasury Bill with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by bid price quotations as
of any time on the Business Day immediately preceding such date, obtained from
at least three recognized primary U.S. Government securities dealers selected
by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government securities dealers selected by
the Auction Agent.
"Valuation Date" has the meaning set forth on page 18 of this prospectus.
"Variation Margin" means, in connection with an outstanding financial futures
contract owned or sold by the Fund, the amount of cash or securities paid to or
received from a broker (subsequent to the Initial Margin payment) from time to
time as the price of such financial futures contract fluctuates.
"Winning Bid Rate" has the meaning set forth on page 24 of this prospectus.
41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$50,000,000
MuniHoldings New York Insured Fund III, Inc.
Auction Market Preferred Stock(R) ["AMPS(R)"]
2000 Shares, Series A
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
February , 1999
(R) Registered trademarks of Merrill Lynch & Co. Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information contained in this statement of additional information is not +
+complete and may be changed. We may not sell these securities until the +
+registration statement filed with the Securities and Exchange Commission is +
+effective. This statement of additional information is not a prospectus. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY 5, 1999
STATEMENT OF ADDITIONAL INFORMATION
$50,000,000
MuniHoldings New York Insured Fund III, Inc.
Auction Market Preferred Stock ["AMPS(R)"]
2,000 Shares, Series A
Liquidation Preference $25,000 Per Share
------------
MuniHoldings New York Insured Fund III, Inc. (the "Fund") is a recently
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New York State and New York City personal income taxes. The Fund seeks to
achieve its 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. There can be no assurance that the Fund's investment objective
will be realized. For more information on the Fund's investment objective and
policies, see "Investment Objective and Policies."
------------
Certain capitalized terms not otherwise defined in this statement of
additional information have the meaning provided in the Glossary included as
part of the prospectus.
This statement of additional information is not a prospectus, but should be
read in conjunction with the prospectus of the Fund, which has been filed with
the Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling (800) 637-3863. The prospectus is incorporated by
reference into this statement of additional information, and this statement of
additional information is incorporated by reference into the prospectus.
- ------
(R) Registered trademark of Merrill Lynch & Co., Inc.
------------
Merrill Lynch & Co.
------------
The date of this statement of additional information is February , 1999.
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Investment Objective and Policies........................................... 3
Investment Restrictions..................................................... 7
Description of AMPS......................................................... 9
The Auction................................................................. 16
Rating Agency Guidelines.................................................... 17
Directors and Officers...................................................... 25
Investment Advisory and Management Arrangements............................. 27
Portfolio Transactions...................................................... 28
Taxes....................................................................... 29
Net Asset Value............................................................. 33
Additional Information...................................................... 34
Report of Independent Auditors.............................................. 35
Statement of Assets, Liabilities and Capital................................ 36
Financial Statements (Unaudited)............................................ 37
Appendix A--Economic and Other Conditions in New York....................... A-1
Appendix B--Ratings of Municipal Bonds...................................... B-1
Appendix C--Portfolio Insurance............................................. C-1
Appendix D--Settlement Procedures........................................... D-1
Appendix E--Auction Procedures.............................................. E-1
</TABLE>
2
<PAGE>
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 seeks to achieve its investment objective by
investing primarily in a portfolio of long-term, investment grade municipal
obligations issued by or on behalf of the State of New York, its political
subdivisions, agencies and instrumentalities, and 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 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 shares of
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 the 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.
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 statement of
additional information, such obligations are considered Municipal Bonds if the
interest paid thereon is exempt from Federal income tax and as New York
Municipal Bonds if the interest thereon is exempt from Federal income tax and
New York State and New York City personal income taxes, even though such bonds
may be IDBs or "private activity bonds" as discussed below. Also, for purposes
of this statement of additional information, Non-Municipal Tax-Exempt
Securities as discussed above will be considered New York Municipal Bonds or
Municipal Bonds.
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The two principal classifications of New York Municipal Bonds and Municipal
Bonds are "general obligation" bonds and "revenue" bonds, which latter category
includes IDBs and, for bonds issued after August 15, 1986, private activity
bonds. General obligation bonds are secured by the issuer's pledge of faith,
credit and taxing power for the repayment of principal and the payment of
interest. Revenue or special obligation bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as from the user of the facility being financed. IDBs are in most
cases revenue bonds and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The repayment of principal and the
payment of interest on such industrial development bonds depends solely on the
ability of the user of the facility financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such payment. New York Municipal Bonds and Municipal Bonds may
also include "moral obligation" bonds, which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment
but not a legal obligation of the state or municipality in question.
The Fund may purchase New York Municipal Bonds and Municipal Bonds classified
as "private activity bonds" (in general, bonds that benefit non-governmental
entities). Interest received on certain tax-exempt securities that are
classified as "private activity bonds" may subject certain investors in the
Fund to an alternative minimum tax. There is no limitation on the percentage of
the Fund's assets that may be invested in New York Municipal Bonds and
Municipal Bonds that may subject certain investors to an alternative minimum
tax. See "Taxes--General." Also included within the general category of New
York Municipal Bonds and Municipal Bonds are participation certificates issued
by government authorities or entities to finance the acquisition or
construction of equipment, land and/or facilities. The certificates represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations do
not constitute general obligations of the issuer for which the issuer's
unlimited taxing power is pledged, a lease obligation frequently is backed by
the issuer's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses which provide that the issuer has no obligation to make
lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of New York Municipal Bonds and Municipal Bonds for investment
by the Fund.
Options and Futures Transactions
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.
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<PAGE>
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 risk of loss through a
decline in the market value of the security until the put expires. The amount
of any appreciation in the value of the underlying security will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction; profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option
plus the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale of
an identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities that it
intends to purchase. The Fund will not purchase options on securities if, as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for the
purpose of hedging its investments in New York Municipal Bonds and Municipal
Bonds against declines in value and hedging against increases in the cost of
securities it intends to purchase. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract or, in the
case of index-based financial futures contracts, to make and accept a cash
settlement, at a specific future time for a specified price. A sale of
financial futures contracts may provide a hedge against a decline in the value
of portfolio securities because such depreciation may be offset, in whole or in
part, by an increase in the value of the position in the financial futures
contracts. A purchase of financial futures contracts may provide a hedge
against an increase in the cost of securities intended to be purchased because
such appreciation may be offset, in whole or in part, by an increase in the
value of the position in the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker equal to
approximately 5% of the contract amount must be deposited with the broker. This
amount is known as initial margin. Subsequent payments to and from the broker,
called variation margin, are made on a daily basis as the price of the
financial futures contract fluctuates making the long and short positions in
the financial futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging New York Municipal Bonds
and Municipal Bonds which the Fund holds or anticipates purchasing against
adverse changes in interest rates. The Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and sell
put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
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.
5
<PAGE>
Over-the-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets. 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. Over-the-counter options
transactions ("OTC options") 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 which have a disparate impact on
the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission (the "CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell financial futures contracts and options thereon (i) for bona
fide hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes 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 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.
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<PAGE>
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures transaction. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with which the Fund has an open position in an option or
financial futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges that limit the amount of fluctuation in a financial futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
reached or exceeded the daily limit on a number of consecutive trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaging in hedging transactions
when movements in interest rates occur. The Fund is not required to enter into
hedging transactions and may not do so.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may not
be changed without the approval of the holders of a majority of the Fund's
outstanding shares of common stock and outstanding shares of AMPS and any other
preferred stock, voting as a single class, and the majority of the outstanding
shares of AMPS and any other preferred stock, voting as a separate class (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
shares of each class of capital stock represented at a meeting at which more
than 50% of the outstanding shares of each class of capital stock are
represented or (ii) more than 50% of the outstanding shares of each class of
capital stock). The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, 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.
7
<PAGE>
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on New York Municipal Bonds,
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may purchase
and sell Call Rights to require mandatory tender for the purchase of
related New York Municipal Bonds and Municipal Bonds.
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
For so long as shares of AMPS are rated by Moody's, the Fund will not change
these additional investment restrictions unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of AMPS by Moody's.
The Fund has no intention to file a voluntary application for relief under
Federal bankruptcy law or any similar application under state law for so long
as the Fund is solvent and does not foresee becoming insolvent.
The Investment Adviser of the Fund and Merrill Lynch are owned and controlled
by 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.
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<PAGE>
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein are defined in the Glossary that
appears at the back of the prospectus.
The AMPS will be shares of preferred stock that entitle their holders to
receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor, at a rate per year that may vary for the
successive Dividend Periods. After the Initial Dividend Period, each Subsequent
Dividend Period for the AMPS generally will be a 7-Day Dividend Period;
provided, however, that prior to any Auction, the Fund may elect, subject to
certain limitations described herein, upon giving notice to holders thereof, a
Special Dividend Period. The Applicable Rate for a particular Dividend Period
will be determined by an Auction conducted on the Business Day before the start
of such Dividend Period. Beneficial Owners and Potential Beneficial Owners of
shares of AMPS may participate in Auctions therefor, although, except in the
case of a Special Dividend Period, Beneficial Owners desiring to continue to
hold all of their shares of AMPS regardless of the Applicable Rate resulting
from Auctions need not participate. For an explanation of Auctions and the
method of determining the Applicable Rate, see Appendix E--"Auction
Procedures."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of AMPS will be represented by one or more
certificates registered in the name of the nominee of the Securities Depository
(initially expected to be Cede), and no person acquiring shares of AMPS will be
entitled to receive a certificate representing such shares. See Appendix E--
"Auction Procedures." As a result, the nominee of the Securities Depository is
expected to be the sole holder of record of the shares of AMPS. Accordingly,
each purchaser of AMPS must rely on (i) the procedures of the Securities
Depository and, if such purchaser is not a member of the Securities Depository,
such purchaser's Agent Member, to receive dividends, distributions and notices
and to exercise voting rights (if and when applicable) and (ii) the records of
the Securities Depository and, if such purchaser is not a member of the
Securities Depository, such purchaser's Agent Member, to evidence its
beneficial ownership of shares of AMPS.
When issued and sold, the shares of AMPS will have a liquidation preference
of $25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) and will be fully paid and non-assessable.
See "Description of AMPS--Liquidation Rights" in the prospectus. The shares of
AMPS will not be convertible into shares of common stock or other capital stock
of the Fund, and the holders thereof will have no preemptive rights. The AMPS
will not be subject to any sinking fund but will be subject to redemption at
the option of the Fund at the Optional Redemption Price on any Dividend Payment
Date (except during the Initial Dividend Period and during a Non-Call Period)
and, under certain circumstances, will be subject to mandatory redemption by
the Fund at the Mandatory Redemption Price stated in the prospectus. See
"Description of AMPS--Redemption" in the prospectus.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described in the prospectus, IBJ Whitehall Bank & Trust Company will
be the transfer agent, registrar, dividend disbursing agent and redemption
agent for the shares of AMPS. The Auction Agent, however, will serve merely as
the agent of the Fund, acting in accordance with the Fund's instructions, and
will not be responsible for any evaluation or verification of any matters
certified to it.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any shares of AMPS so long
as the Fund is current in the payment of dividends on AMPS and on any other
capital stock of the Fund ranking on a parity with the AMPS with respect to the
payment of dividends or upon liquidation.
The following supplements the description of the terms of the shares of AMPS
set forth in the prospectus. This description does not purport to be complete
and is subject to and qualified in its entirety by reference to the Fund's
Charter and Articles Supplementary, including the provisions thereof
establishing the AMPS. The Fund's Charter and the form of Articles
Supplementary establishing the terms of the AMPS have been filed as exhibits to
the Registration Statement of which this statement of additional information is
a part.
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Dividends
General. The holders of shares of AMPS will be entitled to receive, when, as
and if declared by the Board of Directors of the Fund, out of funds legally
available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the shares
of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends so declared and payable on the common stock, and
(ii) to the extent permitted under the Code and to the extent available, out of
net tax-exempt income earned on the Fund's investments. Generally, dividends on
shares of AMPS, to the extent that they are derived from interest paid on
Municipal Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax. See "Taxes."
Notification of Dividend Period. In determining whether the Fund should issue
a Notice of Special Dividend for the AMPS, the Broker-Dealers will consider (i)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (ii) existing market supply and demand for short-term and
long-term securities, (iii) existing yield curves for short-term and long-term
securities comparable to the AMPS, (iv) industry and financial conditions which
may affect the AMPS, (v) the investment objective of the Fund and (vi) the
Dividend Periods and dividend rates at which current and potential beneficial
holders of the AMPS would remain or become beneficial holders. If the Broker-
Dealers shall not give the Fund and the Auction Agent a Response by such second
Business Day or if the Response states that given the factors set forth above
it is not advisable that the Fund give a Notice of Special Dividend Period for
the AMPS, the Fund may not give a Notice of Special Dividend Period in respect
of such Request for Special Dividend Period. In the event the Response
indicates that it is advisable that the Fund give a Notice of Special Dividend
Period for the AMPS, the Fund, by no later than the second Business Day prior
to such Auction Date, may give a notice (a "Notice of Special Dividend Period")
to the Auction Agent, the Securities Depository and each Broker-Dealer, which
notice will specify (i) the duration of the Special Dividend Period, (ii) the
Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related Response.
The Fund also shall provide a copy of such Notice of Special Dividend Period to
Moody's and S&P. The Fund shall not give a Notice of Special Dividend Period,
and, if such Notice of Special Dividend Period shall have been given already,
shall give telephonic and written notice of its revocation (a "Notice of
Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction Date
if (x) either the 1940 Act AMPS Asset Coverage is not satisfied or the Fund
shall fail to maintain S&P Eligible Assets and Moody's Eligible Assets each
with an aggregate Discounted Value at least equal to the AMPS Basic Maintenance
Amount, in each case on each of the two Valuation Dates immediately preceding
the Business Day prior to the relevant Auction Date on an actual basis and on a
pro forma basis giving effect to the proposed Special Dividend Period (using as
a pro forma dividend rate with respect to such Special Dividend Period the
dividend rate which the Broker-Dealers shall advise the Fund is an
approximately equal rate for securities similar to the AMPS with an equal
dividend period), provided that, in calculating the aggregate Discounted Value
of Moody's Eligible Assets for this purpose, the Moody's Exposure Period shall
be deemed to be one week longer, (y) sufficient funds for the payment of
dividends payable on the immediately succeeding Dividend Payment Date have not
been irrevocably deposited with the Auction Agent by the close of business on
the third Business Day preceding the related Auction Date or (z) the Broker-
Dealers jointly advise the Fund that, after consideration of the factors listed
above, they have concluded that it is advisable to give a Notice of Revocation.
The Fund also shall provide a copy of such Notice of Revocation to Moody's and
S&P. If the Fund is prohibited from giving a Notice of Special Dividend Period
as a result of the factors enumerated in clause (x), (y) or (z) above or if the
Fund gives a Notice of Revocation with respect to a Notice of Special Dividend
Period, the next succeeding Dividend Period for that series will be a 7-Day
Dividend Period. In addition, in the event Sufficient Clearing Bids are not
made in any Auction or an Auction is not held for any reason, the next
succeeding Dividend Period will be a 7-Day Dividend Period, and the Fund may
not again give a Notice of Special Dividend Period (and any such attempted
notice shall be null and void) until Sufficient Clearing Bids have been made in
an Auction with respect to a 7-Day Dividend Period.
Non-Payment Period; Late Charge. A Non-Payment Period will commence if the
Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for
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payment on or (to the extent permitted as described below) within three
Business Days after such Dividend Payment Date to the persons who held such
shares as of 12:00 noon, Eastern time, on the Business Day preceding such
Dividend Payment Date, the full amount of any dividend on shares of AMPS
payable on such Dividend Payment Date or (ii) deposit, irrevocably in trust, in
same-day funds, with the Auction Agent by 12:00 noon, Eastern time, (A) on such
Dividend Payment Date the full amount of any cash dividend on such shares (if
declared) payable on such Dividend Payment Date or (B) on any redemption date
for shares of AMPS called for redemption, the Mandatory Redemption Price per
share of such AMPS or, in the case of an optional redemption, the Optional
Redemption Price per share. Such Non-Payment Period will consist of the period
commencing on and including the aforementioned Dividend Payment Date or
redemption date, as the case may be, and ending on and including the Business
Day on which, by 12:00 noon, Eastern time, all unpaid cash dividends and unpaid
redemption prices shall have been so deposited or otherwise shall have been
made available to the applicable holders in same-day funds, provided that a
Non-Payment Period for the AMPS will not end unless the Fund shall have given
at least five days' but no more than 30 days' written notice of such deposit or
availability to the Auction Agent, the Securities Depository and all holders of
shares of AMPS. Notwithstanding the foregoing, the failure by the Fund to
deposit funds as provided for by clause (ii) (A) or (ii) (B) above within three
Business Days after any Dividend Payment Date or redemption date, as the case
may be, in each case to the extent contemplated below, shall not constitute a
"Non-Payment Period."
The Applicable Rate for each Dividend Period for shares of AMPS, commencing
during a Non-Payment Period, will be equal to the Non-Payment Period Rate; and
each Dividend Period commencing after the first day of, and during, a Non-
Payment Period shall be a 7-Day Dividend Period. Any dividend on shares of AMPS
due on any Dividend Payment Date for such shares (if, prior to the close of
business on the second Business Day preceding such Dividend Payment Date, the
Fund has declared such dividend payable on such Dividend Payment Date to the
persons who held such shares as of 12:00 noon, Eastern time, on the Business
Day preceding such Dividend Payment Date) or redemption price with respect to
such shares not paid to such persons when due may be paid to such persons in
the same form of funds by 12:00 noon, Eastern time, on any of the first three
Business Days after such Dividend Payment Date or due date, as the case may be,
provided that such amount is accompanied by a late charge calculated for such
period of non-payment at the Non-Payment Period Rate applied to the amount of
such non-payment based on the actual number of days comprising such period
divided by 365. In the case of a willful failure of the Fund to pay a dividend
on a Dividend Payment Date or to redeem any shares of AMPS on the date set for
such redemption, the preceding sentence shall not apply and the Applicable Rate
for the Dividend Period commencing during the Non-Payment Period resulting from
such failure shall be the Non-Payment Period Rate. For the purposes of the
foregoing, payment to a person in same-day funds on any Business Day at any
time will be considered equivalent to payment to that person in New York
Clearing House (next-day) funds at the same time on the preceding Business Day,
and any payment made after 12:00 noon, Eastern time, on any Business Day shall
be considered to have been made instead in the same form of funds and to the
same person before 12:00 noon, Eastern time, on the next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable
Reference Rate (or 275% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend that net capital gains or other taxable income will be included in
such dividend on shares of AMPS), provided that the Board of Directors of the
Fund shall have the authority to adjust, modify, alter or change from time to
time the initial Non-Payment Period Rate if the Board of Directors of the Fund
determines and Moody's and S&P (and any Substitute Rating Agency in lieu of
Moody's or S&P in the event either of such parties shall not rate the AMPS)
advise the Fund in writing that such adjustment, modification, alteration or
change will not adversely affect their then-current ratings on the AMPS.
Restrictions on Dividends and Other Payments. For so long as any shares of
AMPS are outstanding, the Fund will not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or options, warrants or rights to subscribe for or purchase,
common stock or other stock, if any, ranking junior to shares of AMPS as to
dividends or upon liquidation) in respect of common stock or any other stock of
the Fund ranking junior to or on a parity with shares of AMPS as to dividends
or
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upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any shares of common stock or any other such junior stock
(except by conversion into or exchange for stock of the Fund ranking junior to
AMPS as to dividends and upon liquidation) or any such parity stock (except by
conversion into or exchange for stock of the Fund ranking junior to or on a
parity with AMPS as to dividends and upon liquidation), unless (A) immediately
after such transaction, the Fund would have S&P Eligible Assets and Moody's
Eligible Assets each with an aggregate Discounted Value equal to or greater
than the AMPS Basic Maintenance Amount, and the 1940 Act AMPS Asset Coverage
(see "Asset Maintenance" and "Redemption" below) would be satisfied, (B) full
cumulative dividends on shares of AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid on or before the date of such
declaration or payment has been paid and (D) the Fund has redeemed the full
number of shares of AMPS required to be redeemed by any provision for mandatory
redemption contained in the Articles Supplementary.
Asset Maintenance
1940 Act AMPS Asset Coverage. The Fund will be required under the Articles
Supplementary to maintain, with respect to shares of AMPS, as of the last
Business Day of each month in which any shares of AMPS are outstanding, asset
coverage of at least 200% with respect to senior securities which are stock,
including the shares of AMPS (or such other asset coverage as in the future may
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are stock of a closed-end investment company as a condition of
paying dividends on its common stock) ("1940 Act AMPS Asset Coverage"). If the
Fund fails to maintain 1940 Act AMPS Asset Coverage and such failure is not
cured as of the last Business Day of the following month (the "1940 Act Cure
Date"), the Fund will be required under certain circumstances to redeem certain
of the shares of AMPS. See "Redemption" in the prospectus and below.
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
each Business Day (a "Valuation Date") S&P Eligible Assets and Moody's Eligible
Assets each having in the aggregate a Discounted Value at least equal to the
AMPS Basic Maintenance Amount. If the Fund fails to meet such requirement as of
any Valuation Date and such failure is not cured on or before the sixth
Business Day after such Valuation Date (the "AMPS Basic Maintenance Cure
Date"), the Fund will be required under certain circumstances to redeem certain
of the shares of AMPS. Upon any failure to maintain the required Discounted
Value, the Fund will use its best efforts to alter the composition of its
portfolio to reattain a Discounted Value at least equal to the AMPS Basic
Maintenance Amount on or prior to the AMPS Basic Maintenance Cure Date. See
"Redemption" in the prospectus and below.
The AMPS Basic Maintenance Amount as of any Valuation Date is defined as the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS outstanding on such Valuation Date multiplied by the sum of $25,000 and
any applicable redemption premium attributable to the designation of a Premium
Call Period; (B) the aggregate amount of cash dividends (whether or not earned
or declared) that will have accumulated for each share of AMPS outstanding to
(but not including) the end of the current Dividend Period that follows such
Valuation Date in the event the then-current Dividend Period will end within 49
calendar days of such Valuation Date or through the 49th day after such
Valuation Date in the event the then-current Dividend Period for the AMPS will
not end within 49 calendar days of such Valuation Date; (C) in the event the
then-current Dividend Period will end within 49 calendar days of such Valuation
Date, the aggregate amount of cash dividends that would accumulate at the
Maximum Applicable Rate applicable to a Dividend Period of 28 or fewer days on
any shares of AMPS outstanding from the end of such Dividend Period through the
49th day after such Valuation Date, multiplied by the larger of the Moody's
Volatility Factor and the S&P Volatility Factor determined from time to time by
Moody's and S&P, respectively (except that if such Valuation Date occurs during
a Non-Payment Period, the cash dividend for purposes of calculation would
accumulate at the then-current Non-Payment Period Rate); (D) the amount of
anticipated Fund expenses for the 90 days subsequent to such Valuation Date
(including any premiums payable with respect to a Policy); (E) the amount of
the Fund's Maximum Potential Additional Dividend Liability as of such Valuation
Date; and (F) any
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<PAGE>
current liabilities as of such Valuation Date to the extent not reflected in
any of (i) (A) through (i) (E) (including, without limitation, and immediately
upon determination, any amounts due and payable by the Fund pursuant to
repurchase agreements, any amounts payable for New York Municipal Bonds or
Municipal Bonds purchased as of such Valuation Date) less (ii) either (A) the
Discounted Value of any Fund assets, or (B) the face value of any of the Fund's
assets if such assets mature prior to or on the date of redemption of AMPS or
payment of a liability and are either securities issued or guaranteed by the
United States Government or Deposit Securities, in both cases irrevocably
deposited by the Fund for the payment of the amount needed to redeem shares of
AMPS subject to redemption or to satisfy any of (i) (B) through (i) (F). For
Moody's and S&P the Fund shall include as a liability an amount calculated
semi-annually equal to 150% of the estimated cost of obtaining other insurance
guaranteeing the timely payment of interest on a Moody's Eligible Asset or S&P
Eligible Asset and principal thereof to maturity with respect to Moody's
Eligible Assets and S&P Eligible Assets that (i) are covered by a Policy which
provides the Fund with the option to obtain such other insurance and (ii) are
discounted by a Moody's Discount Factor or S&P Discount Factor, as the case may
be, determined by reference to the insurance claims-paying ability rating of
the issuer of such Policy. For purposes of the foregoing, "Maximum Potential
Additional Dividend Liability," as of any Valuation Date, means the aggregate
amount of Additional Dividends that would be due if the Fund were to make
Retroactive Taxable Allocations, with respect to any fiscal year, estimated
based upon dividends paid and the amount of undistributed realized net capital
gains and other taxable income earned by the Fund, as of the end of the
calendar month immediately preceding such Valuation Date and assuming such
Additional Dividends are fully taxable.
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings have been based on criteria established in connection
with rating the AMPS. These factors include, but are not limited to, the
sensitivity of the market value of the relevant asset to changes in interest
rates, the liquidity and depth of the market for the relevant asset, the credit
quality of the relevant asset (for example, the lower the rating of a debt
obligation, the higher the related discount factor) and the frequency with
which the relevant asset is marked to market. In no event shall the Discounted
Value of any asset of the Fund exceed its unpaid principal balance or face
amount as of the date of calculation. The Discount Factor relating to any asset
of the Fund and the AMPS Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio
and certain definitions and methods of calculation relating thereto may be
changed from time to time by the Fund, without shareholder approval, but only
in the event the Fund receives written confirmation from S&P, Moody's and any
Substitute Rating Agency that any such changes would not impair the ratings
then assigned to the shares of AMPS by S&P or Moody's or any Substitute Rating
Agency.
On or before the third Business Day after a Valuation Date on which the Fund
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount, the Fund is required to deliver to the Auction Agent, Moody's and S&P a
report with respect to the calculation of the AMPS Basic Maintenance Amount and
the value of its portfolio holdings as of the date of such failure (an "AMPS
Basic Maintenance Report"). Additionally, on or before the third Business Day
after the first day of a Special Dividend Period, the Fund will deliver an AMPS
Basic Maintenance Report to S&P and the Auction Agent. The Fund also will
deliver an AMPS Basic Maintenance Report as of the twenty-first day of the last
month of each fiscal quarter of the Fund (or, if such day is not a Business
Day, the next succeeding Business Day) on or before the third Business Day
after such day. Within ten Business Days after delivery of such report relating
to the twenty-first day of the last month of each fiscal quarter of the Fund,
the Fund will deliver a letter prepared by the Fund's independent accountants
regarding the accuracy of the calculations made by the Fund in its most recent
AMPS Basic Maintenance Report. Also, on or before 5:00 p.m., Eastern time, on
the first Business Day after shares of common stock are repurchased by the
Fund, the Fund will complete and deliver to S&P and Moody's an AMPS Basic
Maintenance Report as of the close of business on such date that common stock
is repurchased. If any such letter prepared by the Fund's independent
accountants shows that an error was made in the most recent AMPS Basic
Maintenance Report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund.
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Redemption
Mandatory Redemption. The number of shares of AMPS to be redeemed will be
equal to the lesser of (a) the minimum number of shares of AMPS the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, together with all other shares of the preferred
stock subject to redemption or retirement, would result in the Fund having S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or
satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, on such
Cure Date (provided that, if there is no such minimum number of shares the
redemption of which would have such result, all shares of AMPS then outstanding
will be redeemed), and (b) the maximum number of shares of AMPS, together with
all other shares of preferred stock subject to redemption or retirement, that
can be redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of shares of AMPS required to be
redeemed in accordance with the foregoing, the Fund shall allocate the number
required to be redeemed which would result in the Fund having S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount or satisfaction of
the 1940 Act AMPS Asset Coverage, as the case may be, pro rata among shares of
AMPS and other preferred stock subject to redemption pursuant to provisions
similar to those set forth below; provided that, shares of AMPS which may not
be redeemed at the option of the Fund due to the designation of a Non-Call
Period applicable to such shares (A) will be subject to mandatory redemption
only to the extent that other shares are not available to satisfy the number of
shares required to be redeemed and (B) will be selected for redemption in an
ascending order of outstanding number of days in the Non-Call Period (with
shares with the lowest number of days to be redeemed first) and by lot in the
event of shares having an equal number of days in such Non-Call Period. The
Fund is required to effect such a mandatory redemption not later than 35 days
after such Cure Date, except that if the Fund does not have funds legally
available for the redemption of all of the required number of shares of AMPS
which are subject to mandatory redemption or the Fund otherwise is unable to
effect such redemption on or prior to 35 days after such Cure Date, the Fund
will redeem those shares of AMPS which it was unable to redeem on the earliest
practicable date on which it is able to effect such redemption.
Notice of Redemption. If shares of AMPS are to be redeemed, a notice of
redemption will be mailed to each record holder of such shares of AMPS
(initially Cede as nominee of the Securities Depository) and to the Auction
Agent not less than 17 nor more than 30 days prior to the date fixed for the
redemption thereof. Each notice of redemption will include a statement setting
forth: (i) the redemption date, (ii) the aggregate number of shares of AMPS to
be redeemed, (iii) the redemption price, (iv) the place or places where shares
of AMPS are to be surrendered for payment of the redemption price, (v) a
statement that dividends on the shares to be redeemed will cease to accumulate
on such redemption date (except that holders may be entitled to Additional
Dividends) and (vi) the provision of the Articles Supplementary pursuant to
which such shares are being redeemed. The notice also will be published in The
Wall Street Journal. No defect in the notice of redemption or in the mailing or
publication thereof will affect the validity of the redemption proceedings,
except as required by applicable law.
In the event that less than all of the outstanding shares of AMPS are to be
redeemed, the shares to be redeemed will be selected by lot or such other
method as the Fund shall deem fair and equitable, and the results thereof will
be communicated to the Auction Agent. The Auction Agent will give notice to the
Securities Depository, whose nominee will be the record holder of all shares of
AMPS, and the Securities Depository will determine the number of shares to be
redeemed from the account of the Agent Member of each Existing Holder. Each
Agent Member will determine the number of shares to be redeemed from the
account of each Existing Holder for which it acts as agent. An Agent Member may
select for redemption shares from the accounts of some Existing Holders without
selecting for redemption any shares from the accounts of other Existing
Holders. Notwithstanding the foregoing, if neither the Securities Depository
nor its nominee is the record holder of all of the shares, the particular
shares to be redeemed shall be selected by the Fund by lot or by such other
method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Fund's custodian bank for the benefit of the Auction Agent, Deposit
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Securities(with a right of substitution) having an aggregate Discounted Value
(utilizing in the case of S&P and S&P Exposure Period of 22 Business Days)
equal to the redemption payment for the shares of AMPS as to which notice of
redemption has been given, with irrevocable instructions and authority to pay
the redemption price to the record holders thereof, then upon the date of such
deposit or, if no such deposit is made, upon such date fixed for redemption
(unless the Fund shall default in making payment of the redemption price), all
rights of the holders of such shares called for redemption will cease and
terminate, except the right of such holders to receive the redemption price
thereof and any Additional Dividends, but without interest, and such shares no
longer will be deemed to be outstanding. The Fund will be entitled to receive,
from time to time, the interest, if any, earned on such Deposit Securities
deposited with the Auction Agent, and the holders of any shares so redeemed
will have no claim to any such interest. Any funds so deposited which are
unclaimed at the end of one year from such redemption date will be repaid, upon
demand, to the Fund, after which the holders of the shares of AMPS so called
for redemption may look only to the Fund for payment thereof.
So long as any shares of AMPS are held of record by the nominee of the
Securities Depository (initially Cede), the redemption price for such shares
will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it to
distribute the amount of the redemption price to Agent Members who, in turn,
are expected to distribute such funds to the persons for whom they are acting
as agent.
Notwithstanding the provisions for redemption described above, no shares of
AMPS shall be subject to optional redemption (i) unless all dividends in
arrears on the outstanding shares of AMPS, and all capital stock of the Fund
ranking on a parity with the AMPS with respect to the payment of dividends or
upon liquidation, have been or are being contemporaneously paid or declared and
set aside for payment and (ii) if redemption thereof would result in the Fund's
failure to maintain Moody's Eligible Assets or S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount.
Voting Rights
In connection with the election of the Fund's directors, holders of shares of
AMPS and any other preferred stock, voting as a separate class, shall be
entitled at all times to elect two of the Fund's directors, and the remaining
directors will be elected by holders of shares of common stock and shares of
AMPS and any other preferred stock, voting together as a single class. In
addition, if at any time dividends on outstanding shares of AMPS shall be
unpaid in an amount equal to at least two full years' dividends thereon or if
at any time holders of any shares of preferred stock are entitled, together
with the holders of AMPS, to elect a majority of the directors of the Fund
under the 1940 Act, then the number of directors constituting the Board of
Directors automatically shall be increased by the smallest number that, when
added to the two directors elected exclusively by the holders of shares of AMPS
and any other preferred stock as described above, would constitute a majority
of the Board of Directors as so increased by such smallest number, and at a
special meeting of shareholders which will be called and held as soon as
practicable, and at all subsequent meetings at which directors are to be
elected, the holders of shares of AMPS and any other preferred stock, voting as
a separate class, will be entitled to elect the smallest number of additional
directors that, together with the two directors which such holders in any event
will be entitled to elect, constitutes a majority of the total number of
directors of the Fund as so increased. The terms of office of the persons who
are directors at the time of that election will continue. If the Fund
thereafter shall pay, or declare and set apart for payment in full, all
dividends payable on all outstanding shares of AMPS and any other preferred
stock for all past Dividend Periods, the additional voting rights of the
holders of shares of AMPS and any other preferred stock as described above
shall cease, and the terms of office of all of the additional directors elected
by the holders of shares of AMPS and any other preferred stock (but not of the
directors with respect to whose election the holders of common stock were
entitled to vote or the two directors the holders of shares of AMPS and any
other preferred stock have the right to elect in any event) will terminate
automatically.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of AMPS and any other preferred stock, voting as
a separate class, will be required to (i) authorize, create or issue
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any class or series of stock ranking prior to the AMPS or any other series of
preferred stock with respect to the payment of dividends or the distribution of
assets on liquidation, or (ii) amend, alter or repeal the provisions of the
Articles of Incorporation, whether by merger, consolidation or otherwise, so as
to adversely affect any of the contract rights expressly set forth in the
Articles of Incorporation of holders of shares of AMPS or any other preferred
stock. To the extent permitted under the 1940 Act, in the event shares of more
than one series of AMPS are outstanding, the Fund shall not approve any of the
actions set forth in clause (i) or (ii) which adversely affects the contract
rights expressly set forth in the Articles of Incorporation of a holder of
shares of a series of AMPS differently than those of a holder of shares of any
other series of AMPS without the affirmative vote of at least a majority of
votes entitled to be cast by holders of the shares of AMPS of each series
adversely affected and outstanding at such time (each such adversely affected
series voting separately as a class). The Board of Directors, however, without
shareholder approval, may amend, alter or repeal any or all of the various
rating agency guidelines described herein in the event the Fund receives
confirmation from the rating agencies that any such amendment, alteration or
repeal would not impair the ratings then assigned to shares of AMPS. Unless a
higher percentage is provided for under "Description of Capital Stock--Certain
Provisions in the Articles of Incorporation" in the prospectus, the affirmative
vote of a majority of the votes entitled to be cast by holders of outstanding
shares of AMPS and any other preferred stock, voting as a separate class, will
be required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act including, among other
things, changes in the Fund's investment objective or changes in the investment
restrictions described as fundamental policies under "Investment Objective and
Policies." The class vote of holders of shares of AMPS and any other preferred
stock described above in each case will be in addition to a separate vote of
the requisite percentage of shares of common stock and shares of AMPS and any
other preferred stock, voting together as a single class, necessary to
authorize the action in question.
The foregoing voting provisions will not apply to shares of AMPS if, at or
prior to the time when the act with respect to which such vote otherwise would
be required shall be effected, such shares shall have been (i) redeemed or (ii)
called for redemption and sufficient funds shall have been deposited in trust
to effect such redemption.
THE AUCTION
Auction Agent Agreement
The Auction Agent will act as agent for the Fund in connection with Auctions.
In the absence of bad faith or negligence on its part, the Auction Agent will
not be liable for any action taken, suffered or omitted, or for any error of
judgment made, by it in the performance of its duties under the Auction Agent
Agreement, and will not be liable for any error of judgment made in good faith
unless the Auction Agent shall have been negligent in ascertaining the
pertinent facts. Pursuant to the Auction Agent Agreement, the Fund is required
to indemnify the Auction Agent for certain losses and liabilities incurred by
the Auction Agent without negligence or bad faith on its part in connection
with the performance of its duties under such agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to
the Fund, which termination may be no earlier than 60 days following delivery
of such notice. If the Auction Agent resigns, the Fund will use its best
efforts to enter into an agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction Agent Agreement. The
Fund may terminate the Auction Agent Agreement, provided that prior to such
termination the Fund shall have entered into such an agreement with respect
thereto with a successor Auction Agent.
Broker-Dealer Agreements
The Auctions require the participation of one or more broker-dealers. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a Broker-
Dealer on five days' notice to the other party, provided that the Broker-Dealer
Agreement with Merrill Lynch may not be terminated without the prior written
consent of the Fund, which consent may not be unreasonably withheld.
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AUCTION PROCEDURES
The Auction Procedures are set forth in Appendix E to this statement of
additional information. The Settlement Procedures to be used with respect to
Auctions are set forth in Appendix D to this statement of additional
information.
RATING AGENCY GUIDELINES
S&P AAA RATING GUIDELINES
The Discounted Value of the Fund's S&P Eligible Assets is calculated on each
Valuation Date. See "Description of AMPS--Asset Maintenance--AMPS Basic
Maintenance Amount." S&P Eligible Assets include cash, Receivables for New York
Municipal Bonds Sold (as defined below) and New York Municipal Bonds or
Municipal Bonds eligible for consideration under S&P's current guidelines. For
purposes of calculating the Discounted Value of the Fund's portfolio under
current S&P guidelines, the fair market value of New York Municipal Bonds or
Municipal Bonds eligible for consideration under such guidelines must be
discounted by the applicable S&P Discount Factor set forth in the table below.
The Discounted Value of a New York Municipal Bond or Municipal Bond eligible
for consideration under S&P guidelines is the fair market value thereof divided
by the S&P Discount Factor. The S&P Discount Factor used to discount a
particular New York Municipal Bond or Municipal Bond will be determined by
reference to (a)(i) the rating by S&P, Moody's or Fitch on such Bond or (ii) in
the event the New York Municipal Bond is insured under a Policy and the terms
of the Policy permit the Fund, at its option, to obtain other permanent
insurance guaranteeing the timely payment of interest on such New York
Municipal Bond and principal thereof to maturity, the S&P insurance claims-
paying ability rating of the issuer of the Policy or (iii) in the event the New
York Municipal Bond is insured under an insurance policy which guarantees the
timely payment of interest on such New York Municipal Bond and principal
thereof to maturity, the S&P insurance claims-paying ability rating of the
issuer of the insurance policy and (b) the S&P Exposure Period. The S&P
Exposure Period is the maximum period of time following a Valuation Date,
including the Valuation Date and the AMPS Basic Maintenance Cure Date, that the
Fund has to cure any failure to maintain, as of such Valuation Date, a
Discounted Value for its portfolio at least equal to the AMPS Basic Maintenance
Amount.
S&P Discount Factors applicable to New York Municipal Bonds for a range of
S&P Exposure Periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT
FACTORS RATING
CATEGORY
------------------
EXPOSURE PERIOD AAA AA A BBB
--------------- --- --- --- ---
<S> <C> <C> <C> <C>
45 Business Days....................................... 210% 215% 230% 270%
25 Business Days....................................... 190 195 210 250
10 Business Days....................................... 175 180 195 235
7 Business Days....................................... 170 175 190 230
3 Business Days....................................... 150 155 170 210
</TABLE>
Since the S&P Exposure Period currently applicable to the Fund is seven
Business Days, the S&P Discount Factors currently applicable to Municipal Bonds
eligible for consideration under S&P guidelines will be determined by reference
to the factors set forth opposite the exposure period line entitled "7 Business
Days." Notwithstanding the foregoing, (i) the S&P Discount Factor for short-
term New York Municipal Bonds will be 115%, so long as such New York Municipal
Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable in 30 days or less, or 120% so long as such New York Municipal
Bonds are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less, or 125% if such New York Municipal Bonds are
not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's or F-1+ by
Fitch; provided, however, such short-term New York Municipal Bonds rated by
Moody's or Fitch but not rated by S&P having a demand feature exercisable in 30
days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution having a short-term rating
of at least A-1+ from S&P; and further provided that such short-term New York
Municipal Bonds rated by Moody's or
17
<PAGE>
Fitch but not rated by S&P may comprise no more than 50% of short-term New York
Municipal Bonds that qualify as S&P Eligible Assets, (ii) the S&P Discount
Factor for Receivables for New York Municipal Bonds Sold that are due in more
than five Business Days from such Valuation Date will be the S&P Discount
Factor applicable to the New York Municipal Bonds sold, and (iii) no S&P
Discount Factor will be applied to cash or to Receivables for New York
Municipal Bonds Sold if such receivables are due within five Business Days of
such Valuation Date. "Receivables for New York Municipal Bonds Sold," for
purposes of calculating S&P Eligible Assets as of any Valuation Date, means the
book value of receivables for New York Municipal Bonds sold as of or prior to
such Valuation Date. The Fund may adopt S&P Discount Factors for Municipal
Bonds other than New York Municipal Bonds provided that S&P advises the Fund in
writing that such action will not adversely affect its then current rating on
the AMPS. For purposes of the foregoing, Anticipation Notes rated SP-1 or, if
not rated by S&P, rated VMIG-1 by Moody's or F-1+ by Fitch, which do not mature
or have a demand feature exercisable in 30 days and which do not have a long-
term rating, shall be considered to be short-term New York Municipal Bonds.
The S&P guidelines require certain minimum issue size and geographical
diversification and impose other requirements for purposes of determining S&P
Eligible Assets. In order to be considered S&P Eligible Assets, New York
Municipal Bonds must:
(i) be interest bearing and pay interest at least semi-annually;
(ii) be payable with respect to principal and interest in U.S. dollars;
(iii) be publicly rated BBB or higher by S&P or, except in the case of
Anticipation Notes that are grant anticipation notes or bond anticipation
notes, which must be rated by S&P to be included in S&P Eligible Assets, if
not rated by S&P but rated by Moody's or Fitch, be rated at least A by
Moody's or Fitch (provided that such Moody's-rated or Fitch-rated New York
Municipal Bonds will be included in S&P Eligible Assets only to the extent
the fair market value of such New York Municipal Bonds does not exceed 50%
of the aggregate fair market value of the S&P Eligible Assets. For purposes
of determining the S&P Discount Factors applicable to any such Moody's-
rated or Fitch-rated New York Municipal Bonds, such New York Municipal
Bonds will be deemed to have an S&P rating that is one full rating category
lower than its Moody's rating or Fitch rating);
(iv) not be subject to a covered call or covered put option written by
the Fund;
(v) except for inverse floating obligations, not be part of a private
placement of Municipal Bonds; and
(vi) except for inverse floating obligations, be part of an issue with an
original issue size of at least $20 million or, if of an issue with an
original issue size below $20 million (but in no event below $10 million),
be issued by an issuer with a total of at least $50 million of securities
outstanding.
Notwithstanding the foregoing:
(i) New York Municipal Bonds of any one issuer or guarantor (excluding
bond insurers) will be considered S&P Eligible Assets only to the extent
the fair market value of such Bonds does not exceed 10% of the aggregate
fair market value of the S&P Eligible Assets, provided that 2% is added to
the applicable S&P Discount Factor for every 1% by which the fair market
value of such New York Municipal Bonds exceeds 5% of the aggregate fair
market value of the S&P Eligible Assets;
(ii) New York Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent
the market value of such New York Municipal Bonds does not exceed 25% of
the aggregate market value of S&P Eligible Assets, except that New York
Municipal Bonds falling within the utility issue type category will be
broken down into three sub-categories (as described below) and such New
York Municipal Bonds will be considered S&P Eligible Assets to the extent
the market value of such New York Municipal Bonds in each such sub-category
does not exceed 25% of the aggregate market value of S&P Eligible Assets,
except that New York Municipal Bonds falling within the transportation
issue type category will be broken down into two sub-categories
18
<PAGE>
(as described below) and such New York Municipal Bonds will be considered
S&P Eligible Assets to the extent the market value of such Bonds in both
sub-categories combined (as described below) does not exceed 40% of the
aggregate market value of S&P Eligible Assets and except that New York
Municipal Bonds falling within the general obligation issue type category
will be considered S&P Eligible Assets to the extent the market value of
such New York Municipal Bonds does not exceed 50% of the aggregate market
value of S&P Eligible Assets. For purposes of the issue type category
requirement described above, New York Municipal Bonds will be classified
within one of the following categories: health care issues, housing issues,
educational facilities issues, student loan issues, transportation issues,
industrial development bond issues, utility issues, general obligation
issues, lease obligations, escrowed bonds and other issues not falling
within one of the aforementioned categories. The general obligation issue
type category includes any issuer that is directly or indirectly guaranteed
by the State of New York or its political subdivisions. Utility issuers are
included in the general obligation issue type category if the issuer is
directly or indirectly guaranteed by the State of New York or its political
subdivisions. For purposes of the issue type category requirement described
above, New York Municipal Bonds in the utility issue type category will be
classified within one of the three following sub-categories: (1) electric,
gas and combination issues (if the combination issue includes an electric
issue), (2) water and sewer utilities and combination issues (if the
combination issue does not include an electric issue), and (3) irrigation,
resource recovery, solid waste and other utilities, provided that New York
Municipal Bonds included in this sub-category (3) must be rated by S&P in
order to be included in S&P Eligible Assets. For purposes of the issue type
category requirement described above, New York Municipal Bonds in the
transportation issue type category will be classified within one of the two
following sub-categories: (1) streets and highways, toll roads, bridges and
tunnels, airports and multi-purpose port authorities (multiple revenue
streams generated by toll roads, airports, real estate, bridges) or (2)
mass transit, parking, seaports and others. Exposure to transportation sub-
category (1) in the preceding sentence is limited to 25% of the aggregate
market value of S&P Eligible Assets, provided, however, exposure to
transportation sub-category (2) in the preceding sentence can exceed the
25% limit to the extent that exposure to transportation sub-category (2) is
reduced, for a total exposure up to and not exceeding 40% of the aggregate
market value of S&P Eligible Assets for the transportation issue type
category; and
(iii) New York Municipal Bonds which are escrow bonds or defeased bonds
may compose up to 100% of the aggregate market value of S&P Eligible Assets
if such New York Municipal Bonds initially are assigned a rating by S&P in
accordance with S&P's legal defeasance criteria or rerated by S&P as
economic defeased escrow bonds and assigned an AAA rating. New York
Municipal Bonds may be rated as escrow bonds by another nationally
recognized rating agency or rerated as an escrow bond and assigned the
equivalent of an S&P AAA rating, provided that such equivalent rated New
York Municipal Bonds are limited to 50% of the aggregate market value of
S&P Eligible Assets and are deemed to have an AA S&P rating for purposes of
determining the S&P Discount Factor applicable to such New York Municipal
Bonds. The limitations on New York Municipal Bonds of any one issuer in
clause (i) above is not applicable to escrow bonds, however, economically
defeased bonds that are either initially rated or rerated by S&P or another
nationally recognized rating agency and assigned the same rating level as
the issuer of the New York Municipal Bonds will remain in its original
issue type category set forth in clause (ii) above. New York Municipal
Bonds that are legally defeased and secured by securities issued or
guaranteed by the United States Government are not required to meet the
minimum issuance size requirement set forth above.
The Fund may include Municipal Bonds other than New York Municipal Bonds as
S&P Eligible Assets pursuant to guidelines and restrictions to be established
by S&P, provided that S&P advises the Fund in writing that such action will not
adversely affect its then-current rating on the AMPS.
As discussed herein, the Fund may engage in options or futures transactions.
For so long as any shares of AMPS are rated by S&P, the Fund will not purchase
or sell financial futures contracts, write, purchase or sell options on
financial futures contracts or write put options (except covered put options)
or call options (except
19
<PAGE>
covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the shares of AMPS by S&P, except that the Fund may
purchase or sell financial futures contracts based on the Bond Buyer Municipal
Bond Index (the "Municipal Index") or United States Treasury Bonds or Notes
("Treasury Bonds") and write, purchase or sell put and call options on such
contracts (collectively "S&P Hedging Transactions"), subject to the following
limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions that terminate a financial futures
contract or option held by the Fund by the Fund's taking an opposite
position thereto ("Closing Transactions")), that would cause the Fund at
the time of such transaction to own or have sold the least of (A) more than
1,000 outstanding financial futures contracts based on the Municipal Index,
(B) outstanding financial futures contracts based on the Municipal Index
exceeding in number 25% of the quotient of the fair market value of the
Fund's total assets divided by $1,000 or (C) outstanding financial futures
contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded financial futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold the lesser of (A)
outstanding financial futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the fair market
value of the Fund's total assets divided by $100,000 ($200,000 in the case
of the two-year United States Treasury Note) or (B) outstanding financial
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded financial futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract that the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (A) the Fund
does not have S&P Eligible Assets with an aggregate Discounted Value equal
to or greater than the AMPS Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Fund is required to pay Variation Margin on the
second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract or option thereon in the month prior
to the delivery month under the terms of such financial futures contract or
option thereon unless the Fund holds the securities deliverable under such
terms; and
(v) when the Fund writes a financial futures contract or an option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P) fixed-income securities in a
segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in
the account of or on behalf of the Fund's broker with respect to such
financial futures contract or option equals the fair market value of the
financial futures contract or option, or, in the event the Fund writes a
financial futures contract or option thereon that requires delivery of an
underlying security, it shall hold such underlying security in its
portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin
or Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets shall be reduced by an amount equal to (i) 30% of the aggregate
settlement value, as marked to market, of any outstanding financial futures
contracts based on the Municipal Index that are owned by the Fund plus (ii) 25%
of the aggregate settlement value, as marked to market, of any outstanding
financial futures contracts based on Treasury Bonds which contracts are owned
by the Fund.
Moody's "aaa" Rating Guidelines
The Discounted Value of the Fund's Moody's Eligible Assets is calculated on
each Valuation Date. See "Description of AMPS--Asset Maintenance--AMPS Basic
Maintenance Amount". Moody's Eligible Assets include cash, Receivables for New
York Municipal Bonds or Municipal Bonds (as defined below), and New
20
<PAGE>
York Municipal Bonds or Municipal Bonds eligible for consideration under
Moody's guidelines. For purposes of calculating the Discounted Value of the
Fund's portfolio under current Moody's guidelines, the fair market value of
Municipal Bonds eligible for consideration under such guidelines must be
discounted by the applicable Moody's Discount Factor set forth in the table
below. The Discounted Value of a Municipal Bond eligible for consideration
under Moody's guidelines is the lower of par and the quotient of the fair
market value thereof divided by the Moody's Discount Factor. The Moody's
Discount Factor used to discount a particular New York Municipal Bond or
Municipal Bond will be determined by reference to (a) (i) the rating by Moody's
or S&P on such Bond or (ii) in the event the Moody's Eligible Asset is insured
under a Policy and the terms of the Policy permit the Fund, at its option, to
obtain other insurance guaranteeing the timely payment of interest on such
Moody's Eligible Asset and principal thereof to maturity, the Moody's insurance
claims-paying ability rating of the issuer of the Policy or (iii) in the event
the Moody's Eligible Asset is insured under an insurance policy which
guarantees the timely payment of interest on such Moody's Eligible Asset and
principal thereof to maturity, the Moody's insurance claims-paying ability
rating of the issuer of the insurance policy (provided that for purposes of
clauses (ii) and (iii) if the insurance claims-paying ability of an issuer of a
Policy or insurance policy is not rated by Moody's but is rated by S&P, such
issuer shall be deemed to have a Moody's insurance claims-paying ability rating
which is two full categories lower than the S&P insurance claims-paying ability
rating) and (b) the Moody's Exposure Period. Moody's Discount Factors for a
range of Moody's Exposure Periods are set forth below:
<TABLE>
<CAPTION>
Moody's Discount Factors Rating Category
-----------------------------------------------------
Moody's Exposure Period Aaa(1) Aa(1) A(1) Baa(1) Other(2) VMIG-1(3) SP-1+(3)
----------------------- ------ ----- ---- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less......... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven
weeks.................. 154 164 173 205 235 137 149
9 weeks or less but
greater than eight
weeks.................. 158 169 179 209 242 138 150
</TABLE>
- --------
(1) Moody's rating.
(2) New York Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
(3) New York Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1 or,
if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature or
have a demand feature at par exercisable within the Moody's Exposure Period
and which do not have a long-term rating. For the purposes of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of A by Moody's.
provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the
applicable rating category and (b) the percentage set forth in the foregoing
table under the rating category which is one category lower than the applicable
rating category.
Since the Moody's Exposure Period currently is 49 days, the Moody's Discount
Factors currently applicable to Municipal Bonds eligible for consideration
under Moody's guidelines will be determined by reference to the factors set
forth opposite the exposure period line entitled "7 weeks or less."
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be applied
to short-term New York Municipal Bonds and short-term Municipal Bonds, so long
as such New York Municipal Bonds and Municipal Bonds are rated at least MIG-1,
VMIG-1 or P-1 by Moody's and mature or have a demand feature at par exercisable
within the Moody's Exposure Period, and the Moody's Discount Factor for such
Bonds will be 125% if such Bonds are not rated by Moody's but are rated A-1+,
SP-1+ or AA by S&P and mature or have a demand feature at par exercisable
within the Moody's Exposure Period, and (ii) no Moody's Discount Factor will be
applied to cash or to Receivables for New York Municipal Bonds or Municipal
Bonds Sold. "Receivables for New York Municipal Bonds or Municipal Bonds Sold,"
for purposes of calculating Moody's Eligible Assets as of any Valuation Date,
means no more than the aggregate of the following: (i) the book value of
receivables for New York Municipal Bonds or Municipal Bonds sold as of or prior
to such Valuation Date if such receivables are due within five Business Days of
such Valuation Date, and if the trades which generated such receivables are (A)
settled through clearing house firms with respect to which the Fund has
received prior written authorization
21
<PAGE>
from Moody's or (B) with counterparties having a Moody's long-term debt rating
of at least Baa3; and (ii) the Moody's Discounted Value of New York Municipal
Bonds or Municipal Bonds sold as of or prior to such Valuation Date that
generated receivables, if such receivables are due within five Business Days of
such Valuation Date but do not comply with either of conditions (A) or (B) of
the preceding clause (i).
The Moody's guidelines impose certain requirements as to minimum issue size,
issuer diversification and geographical concentration, as well as other
requirements for purposes of determining whether New York Municipal Bonds or
Municipal Bonds constitute Moody's Eligible Assets, as set forth in the table
below:
<TABLE>
<CAPTION>
Maximum Maximum State
Minimum Maximum Issue Type Maximum County or Territory
Issue Size Underlying Concentration Concentration Concentration
Rating ($ Millions) Obligor (%)(1) (%)(1)(3) (%)(1)(4) (%)(1)(5)
- ------ ------------ -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Aaa..................... 10 100 100 100 100
Aa...................... 10 20 60 60 60
A....................... 10 10 40 40 40
Baa..................... 10 6 20 20 20
Other(2)................ 10 4 12 12 12
</TABLE>
- --------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) New York Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to New York Municipal Bonds. Territorial bonds (other than
those issued by Puerto Rico and counted collectively) are each limited to
10% of Moody's Eligible Assets. For diversification purposes, Puerto Rico
will be treated as a state.
For purposes of the maximum underlying obligor requirement described above,
any New York Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Bond. For purposes of the issue type concentration
requirement described above, New York Municipal Bonds and Municipal Bonds will
be classified within one of the following categories: health care issues
(teaching and non-teaching hospitals, public and private), housing issues
(single- and multi-family), educational facilities issues (public and private
schools), student loan issues, resource recovery issues, transportation issues
(mass transit, airport and highway bonds), industrial revenue/pollution control
bond issues, utility issues (including water, sewer and electricity), general
obligation issues, lease obligations/certificates of participation, escrowed
bonds and other issues ("Other Issues") not falling within one of the
aforementioned categories (includes special obligations to crossover, excise
and sales tax revenue, recreation revenue, special assessment and telephone
revenue bonds). In no event shall (a) more than 10% of Moody's Eligible Assets
consist of student loan issues, (b) more than 10% of Moody's Eligible Assets
consist of recovery issues or (c) more than 10% of Moody's Eligible Assets
consist of Other Issues.
Current Moody's guidelines also require that New York Municipal Bonds or
Municipal Bonds constituting Moody's Eligible Assets pay interest in cash, be
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated
by S&P, that they be rated at least BBB by S&P, not have suspended ratings by
Moody's and be part of an issue of New York Municipal Bonds or Municipal Bonds
of at least $10,000,000. For purposes of determining the Moody's Discount
Factors applicable to any such S&P-rated New York Municipal Bonds or S&P-rated
Municipal Bonds, such New York Municipal Bonds or Municipal Bonds (excluding
any short-term Municipal Bonds) will be deemed to have a Moody's rating that is
one full rating category lower than its S&P rating. When the Fund sells a New
York Municipal Bond or Municipal Bond and agrees to repurchase it at a future
date, the Discounted Value of such Municipal Bond will constitute a Moody's
Eligible Asset and the amount the Fund is required to pay upon repurchase of
such bond will count as a liability for purposes of calculating the AMPS Basic
Maintenance Amount. When the Fund purchases a New York
22
<PAGE>
Municipal Bond or Municipal Bond and agrees to sell it at a future date to
another party, cash receivable by the Fund thereby will constitute a Moody's
Eligible Asset if the long-term debt of such other party is rated at least A2
by Moody's and such agreement has a term of 30 days or less; otherwise the
Discounted Value of such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Fund for the payment of
dividends or redemption.
For so long as shares of AMPS are rated by Moody's, in managing the Fund's
portfolio, the Investment Adviser will not alter the composition of the Fund's
portfolio if, in the reasonable belief of the Investment Adviser, the effect of
any such alteration would be to cause the Fund to have Moody's Eligible Assets
with an aggregate Discounted Value, as of the immediately preceding Valuation
Date, less than the AMPS Basic Maintenance Amount as of such Valuation Date;
provided, however, that in the event that, as of the immediately preceding
Valuation Date, the aggregate Discounted Value of Moody's Eligible Assets
exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Investment Adviser will not alter the composition of the Fund's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of Moody's
Eligible Assets unless the Fund shall have confirmed that, after giving effect
to such alteration, the aggregate Discounted Value of Moody's Eligible Assets
would exceed the AMPS Basic Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund will not buy
or sell financial futures contracts, write, purchase or sell call options on
financial futures contracts or purchase put options on financial futures
contracts or write call options (except covered call options) on portfolio
securities unless it receives written confirmation from Moody's that engaging
in such transactions would not impair the ratings then assigned to the shares
of AMPS by Moody's, except that the Fund may purchase or sell exchange-traded
financial futures contracts based on the Municipal Index or Treasury Bonds, and
purchase, write or sell exchange-traded put options on such financial futures
contracts, and purchase, write or sell exchange-traded call options on such
financial futures contracts (collectively "Moody's Hedging Transactions"),
subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction based on
the Municipal Index (other than Closing Transactions) that would cause the
Fund at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded financial futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal or (B)
outstanding financial futures contracts based on the Municipal Index having
a Market Value exceeding 50% of the Market Value of all Municipal Bonds
constituting Moody's Eligible Assets owned by the Fund (other than Moody's
Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) that would cause the Fund
at the time of such transaction to own or have sold (A) outstanding
financial futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated
by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding financial
futures contracts based on Treasury Bonds having an aggregate fair market
value exceeding 40% of the aggregate fair market value of all Municipal
Bonds constituting Moody's Eligible Assets owned by the Fund (other than
Moody's Eligible Assets already subject to a Moody's Hedging Transaction)
and rated Baa or A by Moody's (or, if not rated by Moody's but rated by
S&P, rated A or AA by S&P) (for purposes of the foregoing clauses (i) and
(ii), the Fund shall be deemed to own the number of financial futures
contracts that underlie any outstanding options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
Street Journal is less than 5,000;
23
<PAGE>
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a financial
futures contract by no later than the first Business Day of the month in
which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only with
respect to financial futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Fund will not engage in options and futures transactions for
leveraging or speculative purposes and will not write any call options or
sell any financial futures contracts for the purpose of hedging the
anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of Moody's Eligible Assets that the Fund is
obligated to deliver or receive pursuant to an outstanding futures contract or
option shall be as follows: (i) assets subject to call options written by the
Fund that are either exchange-traded and "readily reversible" or that expire
within 49 days after the date as of which such valuation is made shall be
valued at the lesser of (A) Discounted Value and (B) the exercise price of the
call option written by the Fund; (ii) assets subject to call options written by
the Fund not meeting the requirements of clause (i) of this sentence shall have
no value; (iii) assets subject to put options written by the Fund shall be
valued at the lesser of (A) the exercise price and (B) the Discounted Value of
the subject security; (iv) futures contracts shall be valued at the lesser of
(A) settlement price and (B) the Discounted Value of the subject security,
provided that, if a contract matures within 49 days after the date as of which
such valuation is made, where the Fund is the seller the contract may be valued
at the settlement price and where the Fund is the buyer the contract may be
valued at the Discounted Value of the subject securities; and (v) where
delivery may be made to the Fund with any security of a class of securities,
the Fund shall assume that it will take delivery of the security with the
lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the following amounts shall be subtracted from the aggregate Discounted
Value of the Moody's Eligible Assets held by the Fund: 10% of the exercise
price of a written call option; (ii) the exercise price of any written put
option; (iii) where the Fund is the seller under a financial futures contract,
10% of the settlement price of the financial futures contract; (iv) where the
Fund is the purchaser under a financial futures contract, the settlement price
of assets purchased under such financial futures contract; (v) the settlement
price of the underlying financial futures contract if the Fund writes put
options on a financial futures contract; and (vi) 105% of the fair market value
of the underlying financial futures contracts if the Fund writes call options
on a financial futures contract and does not own the underlying contract.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions), except that the Fund may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short term, fixed-income securities rated P-1,
MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a fair market value that equals or exceeds the amount of
the Fund's obligations under any Forward Commitments to which it is from
time to time a party or long-term, fixed income securities with a
Discounted Value that equals or exceeds the amount of the Fund's
obligations under any Forward Commitment to which it is from time to time a
party, and
24
<PAGE>
(ii) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of all Forward Commitments to which the Fund is a
party and of all securities deliverable to the Fund pursuant to such Forward
Commitments shall be zero.
For so long as shares of AMPS are rated by S&P or Moody's, the Fund, unless
it has received written confirmation from S&P and/or Moody's, as the case may
be, that such action would not impair the ratings then assigned to the AMPS by
S&P and/or Moody's, as the case may be, will not (i) borrow money except for
the purpose of clearing transactions in portfolio securities (which borrowings
under any circumstances shall be limited to the lesser of $10 million and an
amount equal to 5% of the fair market value of the Fund's assets at the time of
such borrowings and which borrowings shall be repaid within 60 days and not be
extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of stock ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the Fund,
(v) reissue any AMPS previously purchased or redeemed by the Fund, (vi) merge
or consolidate into or with any other corporation or entity, (vii) change the
Fund's pricing service or (viii) engage in reverse repurchase agreements.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the 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.
25
<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 and a Portfolio Manager with MLAM since 1992.
Donald C. Burke (38)--Vice President and Treasurer (1)(2)--Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; First
Vice President of MLAM from 1997 to 1999; Vice President of MLAM from 1990 to
1997; Director of Taxation of MLAM since 1990.
Alice A. Pellegrino (38)--Secretary (1)(2)--Vice President of MLAM since
1999; 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 connection with the election of the Fund's Directors, holders of shares of
AMPS and other preferred stock, voting as a separate class, are entitled to
elect two of the Fund's Directors, and the remaining Directors will be elected
by holders of common stock and preferred stock voting together as a single
class. Messrs. May and Perold have been designated as the Directors to be
elected by holders of the preferred stock. See "Description of Capital Stock"
in the prospectus.
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 per year plus $250 per meeting
attended, and pays all Director's out-of-pocket expenses relating
26
<PAGE>
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 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 Fund has entered into an Investment Advisory Agreement with the
Investment Adviser. The Fund pays the Investment Adviser 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).
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
27
<PAGE>
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 other advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. Transactions effected by the
Investment Adviser (or its affiliates) on behalf of more than one of its
clients during the same period may increase the demand for securities being
purchased or the supply of securities being sold, causing an adverse effect on
price.
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 service performed by the Investment Adviser and the expenses of the
Investment Adviser will not necessarily 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
Investment Adviser, the Fund may engage in principal transactions with the
Underwriter in high quality, short-term, tax-exempt securities. See "Investment
Restrictions." However, affiliated persons of the Fund, including Merrill
Lynch, may serve as its brokers in certain over-the-counter transactions
conducted on an agency basis.
28
<PAGE>
The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuer. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
Portfolio Turnover
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.
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 Internal Revenue Service (the "IRS"), in a revenue ruling, held that
certain auction rate preferred stock would be treated as stock for Federal
income tax purposes. The terms of the AMPS are substantially similar, but not
identical, to the auction rate preferred stock discussed in the revenue ruling,
and in the opinion of Brown & Wood LLP, counsel to the Fund, the shares of AMPS
will constitute stock of the Fund and distributions with respect to shares of
AMPS (other than distributions in redemption of shares of AMPS subject to
Section 302(b) of the Code) will constitute dividends to the extent of the
Fund's current and accumulated earnings and profits as calculated for Federal
income tax purposes. Nevertheless, it is possible that the IRS might take a
contrary position, asserting, for example, that the shares of AMPS constitute
debt of the Fund. If this position were upheld, the discussion of the treatment
of distributions below would not apply. Instead, distributions by the Fund to
holders of shares of AMPS would constitute interest, whether or not they
exceeded the earnings and profits of the Fund, would be included in full in the
income of the recipient and would be taxed as ordinary income. Counsel believes
that such a position, if asserted by the IRS, would be unlikely to prevail.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the
29
<PAGE>
Fund as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal tax purposes. Exempt-interest dividends
are included, however, in determining the portion, if any, of a person's social
security and railroad retirement benefits subject to Federal income taxes. Each
shareholder is advised to consult a tax adviser with respect to whether exempt-
interest dividends retain the exclusion under Code Section 103(a) if such
shareholder would be treated as a "substantial user" or "related person" under
Code Section 147(a) with respect to property financed with the proceeds of an
issue of "industrial development bonds" or "private activity bonds," if any,
held by the Fund.
The portion of exempt-interest dividends paid from interest received by the
Fund from New York Municipal Bonds also will be exempt from New York State and
New York City personal income tax. However, exempt-interest dividends paid to a
corporate shareholder subject to New York State corporation franchise tax and
New York City general corporation tax. Shareholders subject to income taxation
by states other than New York and/or by cities other than New York City will
realize a lower after-tax rate of return than New York State and/or New York
City shareholders since the dividends distributed by the Fund generally will
not be exempt, to any significant degree, from income taxation by such other
states and/or cities. The Fund will inform shareholders annually as to the
portion of the Fund's distributions which constitutes exempt-interest dividends
and the portion which is exempt from New York State and New York City personal
income taxes. Interest on indebtedness incurred or continued to purchase or
carry Fund shares is not deductible for Federal income tax purposes or 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 are
considered ordinary income for Federal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares and, for New York State and New York City
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. 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-interest income, ordinary income
or capital gains, are not eligible for the dividends received deduction allowed
to corporations under the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Any loss upon the sale or exchange of Fund shares held for six months or less
will be disallowed to the extent of any exempt-interest dividends received by
the shareholder. In addition, any such loss that is not disallowed under the
rule stated above will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two or
more classes of shares, it may designate distributions made to each class in
any year as consisting of no more than such class's proportionate
30
<PAGE>
share of particular types of income, including exempt interest and net long-
term capital gains. A class's proportionate share of a particular type of
income is determined according to the percentage of total dividends paid by the
RIC during such year that was paid to such class. Thus, the Fund is required to
allocate a portion of its net capital gains and other taxable income to the
shares of AMPS of each series. The Fund generally will notify the Auction Agent
of the amount of any net capital gains and other taxable income to be included
in any dividend on shares of AMPS prior to the Auction establishing the
Applicable Rate for such dividend. Except for the portion of any dividend that
it informs the Auction Agent will be treated as capital gains or other taxable
income, the Fund anticipates that the dividends paid on the shares of AMPS will
constitute exempt-interest dividends. The amount of net capital gains and
ordinary income allocable to shares of AMPS (the "taxable distribution") will
depend upon the amount of such gains and income realized by the Fund and the
total dividends paid by the Fund on shares of Common Stock and shares of AMPS
during a taxable year, but the taxable distribution generally is not expected
to be significant.
In the opinion of Brown & Wood LLP, counsel to the Fund, under current law
the manner in which the Fund intends to allocate items of tax-exempt income,
net capital gains and other taxable income, if any, among shares of Common
Stock and shares of AMPS will be respected for Federal income tax purposes.
However, the tax treatment of Additional Dividends may affect the Fund's
calculation of each class' allocable share of capital gains and other taxable
income. See "Tax Treatment of Additional Dividends." In addition, there is
currently no direct guidance from the IRS or other sources specifically
addressing whether the Fund's method for allocating tax-exempt income, net
capital gains and other taxable income among shares of common stock and shares
of AMPS will be respected for Federal income tax purposes, and it is possible
that the IRS could disagree with counsel's opinion and attempt to reallocate
the Fund's net capital gains or other taxable income. In the event of a
reallocation, some of the dividends identified by the Fund as exempt-interest
dividends to holders of shares of AMPS may be recharacterized as additional
capital gains or other taxable income. In the event of such recharacterization,
the Fund would not be required to make payments to such shareholders to offset
the tax effect of such reallocation. In addition, a reallocation may cause the
Fund to be liable for income tax and excise tax on any reallocated taxable
income. Brown & Wood LLP has advised the Fund that, in its opinion, if the IRS
were to challenge in court the Fund's allocations of income and gain, the IRS
would be unlikely to prevail. A holder should be aware, however, that the
opinion of Brown & Wood LLP represents only its best legal judgment and is not
binding on the IRS or the courts.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference" which could subject certain investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund intends to
purchase such "private activity bonds" and will report to shareholders within
60 days after calendar year-end the portion of its dividends declared during
the year which constitutes an item of tax preference for alternative minimum
tax purposes. The Code further provides that corporations are subject to 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.
31
<PAGE>
If at any time when shares of AMPS are outstanding the Fund does not meet the
asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of Common Stock until the asset coverage is
restored. See "Description of AMPS--Dividends--Restrictions on Dividends and
Other Payments." This may prevent the Fund from distributing at least 90% of
its net income, and may, therefore, jeopardize the Fund's qualification for
taxation as a RIC. If the Fund were to fail to qualify as a RIC, some or all of
the distributions paid by the Fund would be fully taxable for Federal 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, and under certain circumstances will be required to, redeem shares of AMPS
in order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its shareholders of failing to qualify as
a RIC. See "Description of AMPS--Redemption." There can be no assurance,
however, that any such action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Fund currently contemplates issuing may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code and therefore not eligible for the dividends paid
deduction. The Fund intends to issue preferred stock that counsel advises will
not result in the payment of a preferential dividend and may seek a private
letter ruling from the IRS to that effect. If the Fund ultimately relies solely
on a legal opinion when it issues such preferred stock, there is no assurance
that the IRS would agree that dividends on the preferred stock are not
preferential. If the IRS successfully disallowed the dividends paid deduction
for dividends on the preferred stock, the Fund could lose the benefit of the
special treatment afforded RICs under the Code. In this case, dividends paid by
the Fund would not be exempt from Federal income taxes. Additionally, the Fund
would be subject to the alternative minimum tax.
Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
Tax Treatment of Additional Dividends
If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of shares of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS--Dividends--Additional Dividends"
in the prospectus. The Federal income tax consequences of Additional Dividends
under existing law are uncertain. The Fund intends to treat a holder as
receiving a dividend distribution in the amount of any Additional Dividend only
as and when such Additional Dividend is paid. An Additional Dividend generally
will be designated by the Fund as an exempt-interest divided except as
otherwise required by applicable law. However, the IRS may assert that all or
part of an Additional Dividend is a taxable dividend either in the taxable year
for which the Retroactive Taxable Allocation is made or in the taxable year in
which the Additional Dividend is paid.
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
32
<PAGE>
such financial futures contracts. In general, unless an election is available
to the Fund or an exception applies, such options and financial futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in financial futures
contracts or the related options.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New York State and New York
City tax laws presently in effect. For the complete provisions, reference
should be made to the pertinent Code sections, the Treasury Regulations
promulgated thereunder and the applicable New York State and New York City 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, foreign, state or local taxes.
NET ASSET VALUE
Net asset value per share of common stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (the "NYSE")
(generally, the NYSE closes at 4:00 p.m. Eastern time) on the last Business Day
of 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 AMPS is divided by the total number of shares of
common stock outstanding at such time. Expenses, including the fees payable to
the Investment Adviser, are accrued daily.
The New York Municipal Bonds and Municipal Bonds in which the Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value, the Fund utilizes the valuations of portfolio securities furnished by a
pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. New York Municipal Bonds and Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors. The Board of Directors has determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Positions in futures contracts are
valued at closing prices for such contracts established by the exchange on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Directors.
The Fund determines and makes available for publication the net asset value
of its common stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
33
<PAGE>
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Commission.
Any such reports, proxy statements and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Regional Office, at Seven World
Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office, at
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest
Regional Office, at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web
site at http://www.sec.gov containing reports, proxy and information statements
and other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund and the shares of AMPS is contained
in the Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the
Commission in Washington, D.C. This statement of additional information and the
prospectus do 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
statement of additional information and the prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
34
<PAGE>
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
35
<PAGE>
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 indirect 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 an annual rate of 0.55 of 1% of the
Fund's average weekly net assets, 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.
36
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
SCHEDULE OF INVESTMENTS (Unaudited)
February 1, 1999
(in Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
- -------------------------------------------------------------------------------
New York - 99.6%
- -------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
NR* Aaa $3,000 Allegany County, New York, IDA, $ 2,991
Civic Facilities Revenue Refunding
Bonds (Alfred University), 5% due
8/01/2028(b)
A-1+ VMIG1++ 400 Long Island Power Authority, New 400
York, Electric System Revenue
Bonds, VRDN, Sub-Series 7, 3.20%
due 4/01/2025(b)(f)
Metropolitan Transportation
Authority, New York:
AAA Aaa 6,250 Commuter Facility Revenue Refunding 6,018
Bonds, Series B, 4.75% due
7/01/2026(c)
AAA Aaa 5,250 Dedicated Tax Fund Revenue Bonds, 5,235
Series A, 5% due 4/01/2023(c)
AAA Aaa 6,250 Transportation Facilities Revenue 6,026
Refunding Bonds, Series A, 4.75%
due 7/01/2024(b)
AAA Aaa 4,000 Nassau County, New York, IDA, Civic 3,847
Facilities Revenue Refunding Bonds
(Hofstra University Project),
4.75% due 7/01/2028(b)
A-1+ VMIG1++ 500 New York City, New York, GO, VRDN, 500
Series B, Sub-Series B-5, 2.20%
due 8/15/2022(b)(f)
New York City, New York, Municipal
Water Finance Authority, Water and
Sewer System Revenue Refunding
Bonds, Series D:
AAA Aaa 5,000 4.75% due 6/15/2025(c) 4,818
AAA Aaa 1,250 4.75% due 6/15/2025(b) 1,204
New York State Dormitory Authority
Revenue Bonds:
AAA Aaa 6,250 Refunding (Hospital for Special 6,146
Surgery), 5% due 2/01/2028(b)(e)
NR* Aaa 1,020 Refunding (Ithaca College), 5% due 1,017
7/01/2026(a)
AAA Aaa 3,000 Refunding (New York and 2,852
Presbyterian Hospitals), 4.75% due
8/01/2027(a)(e)
AAA Aaa 3,750 Refunding (New York Medical 3,608
College), 4.75% due 7/01/2027(b)
AAA Aaa 4,000 Refunding (North Shore University 4,091
Hospital), 5.25% due 11/01/2019(b)
AAA Aaa 3,000 Refunding (State University 2,891
Educational Facilities), Series A,
4.75% due 5/15/2025(b)
AAA Aaa 3,500 (St. Barnabas Hospital), 5.45% due 3,599
8/01/2035(a)(e)
AAA Aaa 4,250 New York State Dormitory Authority, 4,086
Lease Revenue Bonds (Municipal
Health Facilities Improvement
Program), Series 1, 4.75% due
1/15/2029(d)
AAA Aaa 3,800 New York State Energy Research and 3,857
Development Authority, PCR,
Refunding (Niagara Mohawk Power
Project), Series A, 5.15% due
11/01/2025(a)
AAA Aaa 6,250 Port Authority of New York and New 5,638
Jersey, Consolidated Revenue
Bonds, 116th Series, 4.375% due
10/01/2033(c)
AAA NR* 6,000 Triborough Bridge and Tunnel 6,116
Authority, New York, General
Purpose Revenue Bonds, Series B,
5.20% due 1/01/2027(c)
- -------------------------------------------------------------------------------
Total Investments (Cost - $74,614) - 99.6% 74,940
Other Assets Less Liabilities - 0.4% 299
-------
Net Assets - 100.0% $75,239
=======
- -------------------------------------------------------------------------------
</TABLE>
(a) AMBAC Insured.
(b) MBIA Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) FHA Insured.
(f) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at February 1,
1999.
* Not Rated.
++ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
Portfolio Abbreviations
To simplify the listings of MuniHoldings New York Insured Fund III Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated the
names of many of the securities according to the list below.
GO General Obligation Bonds
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
VRDN Variable Rate Demand Notes
37
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of February 1, 1999 (Unaudited)
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (identified cost--$74,614,376) (Note
1a)...................................................... $74,940,413
Cash...................................................... 5,222,746
Receivables:
Interest................................................ $942,247
Investment adviser (Note 2)............................. 1,496 943,743
--------
Other assets.............................................. 19,000
-----------
Total assets.............................................. 81,125,902
-----------
Liabilities:
Payable for securities purchased.......................... 5,640,162
Accrued expenses and other liabilities.................... 246,399
-----------
Total liabilities......................................... 5,886,561
-----------
Net Assets:
Net assets................................................ $75,239,341
===========
Capital:
Capital Stock (200,000,000 shares authorized)(Note 4):
Common Stock, par value $.10 per share (5,006,667 shares
issued and outstanding)................................ $ 500,667
Paid-in capital in excess of par.......................... 74,373,435
Undistributed investment income--net...................... 39,202
Unrealized appreciation on investments--net............... 326,037
-----------
Total capital--Equivalent to $15.03 net asset value per
Common Stock............................................. $75,239,341
===========
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
Notes to Financial Statements (Unaudited)
1. Significant Accounting Policies:
MuniHoldings New York Insured Fund III, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. Prior to commencement of operations on
January 29, 1999, the Fund had no operations other than those relating to
organizational matters and the sale of 6,667 shares of Common Stock on January
13, 1999, to Fund Asset Management, L.P. ("FAM") for $100,005. The Fund
determines and makes available for publication the net asset value of its
Common Stock on a weekly basis. The Fund's Common Stock is listed on the New
York Stock Exchange under the symbol MNK. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked price
(options written) or the last bid price (options purchased). Securities with
remaining maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
. Financial futures contracts--The Fund may purchase or sell financial
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or yield.
Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
. Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written. When
a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent
the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
39
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
Notes to Financial Statements (Unaudited)--(Continued)
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net assets.
For the period ended February 1, 1999, FAM earned fees of $4,540, all of which
was voluntarily waived. FAM also reimbursed the Fund additional expenses of
$1,496.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors
of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases of investments, excluding short-term securities, for the period
ended February 1, 1999 were $73,714,376. There were no long term sales.
Net unrealized gains as of February 1, 1999 were as follows:
<TABLE>
<CAPTION>
Unrealized
Gains
----------
<S> <C>
Long-term investments......................................... $326,037
--------
Total......................................................... $326,037
========
</TABLE>
As of February 1, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $326,037 of which $352,877 related to appreciated
securities and $26,840 related to depreciated securities. The aggregate cost of
investments at February 1, 1999 for Federal income tax purposes was
$74,614,376.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were
initially classified as Common Stock. The Board of Directors is authorized,
however, to reclassify any unissued shares of capital stock without approval of
holders of Common Stock.
40
<PAGE>
MUNIHOLDINGS NEW YORK INSURED FUND III, INC.
Notes to Financial Statements (Unaudited)--(Concluded)
Common Stock
Shares issued and outstanding increased by $5,000,000 as a result of the
initial offering during the period ended February 1, 1999.
5. General:
As of February 1, 1999, the Fund had only four days of investment operations
and had not yet declared dividends (whereas it will ordinarily do so on a
monthly basis). As a result, the Fund believes that more extensive interim
financial statements would not be indicative of the Fund's current and ongoing
operations. The Fund believes that such financial statements may be misleading
to potential investors and, accordingly, believes that inclusion of such
financial statements would be inappropriate. For the period ended February 1,
1999, the Fund had net investment income of $39,202. FAM voluntarily waived all
expenses.
41
<PAGE>
APPENDIX A
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
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
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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
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.
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The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999 and which is projected to provide
revenue of $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 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.
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Certain Reports. The City's financial plans have been the subject of
extensive public comment and criticism. From time to time, the Control Board
staff, the Office of the State Deputy Comptroller (the "OSDC"), the City
Comptroller, the City's Independent Budget Office (the "IBO") and others issue
reports and make public statements regarding the City's financial condition,
commenting on, among other matters, the City's financial plans, projected
revenues and expenditures and actions by the City to eliminate projected
operating deficits. Some of these reports and statements have warned that the
City may have underestimated certain expenditures and overestimated certain
revenues and have suggested that the City may not have adequately provided for
future contingencies. Certain of these reports have analyzed the City's future
economic and social conditions and have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of its
expenditure increases and to provide necessary services.
On 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 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.
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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.
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.
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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.
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
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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 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 $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.
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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 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
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$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 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
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enacts the budget for that year, and, under the State Constitution, the
Governor is required to propose a balanced budget each year.
Owing to these and other factors, the State may face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending required to
maintain State programs at mandated levels. Any such recurring imbalance would
be exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
Year 2000 Computer Matters. New York State is currently addressing "Year
2000" data processing compliance issues. In 1996, the State created the Office
of Technology (the "OFT") to help address statewide technology issues,
including the Year 2000 issue. OFT has estimated that investments of at least
$140 million will be required to bring approximately 350 State mission-critical
and high-priority computer systems not otherwise scheduled for replacement into
Year 2000 compliance, and the State is planning to spend $100 million in the
1998-1999 fiscal year for this purpose. As of June 26, 1998, work had been
completed on roughly 20 percent of these mission-critical and high-priority
systems. All remaining unfinished mission-critical and high-priority systems
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 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.
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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 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.
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Litigation. The State is a defendant in numerous legal proceedings including,
but not limited to, claims asserted against the State arising from alleged
torts, alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and Federal laws. State programs are frequently
challenged on State and Federal constitutional grounds. Adverse developments in
legal proceedings or the initiation of new proceedings could affect the ability
of the State to maintain a balanced State Financial Plan in any given fiscal
year. There can be no assurance that an adverse decision in one or more legal
proceedings would not exceed the amount the State reserves for the payment of
judgments or materially impair the State's financial operations. In its audited
financial statements for the fiscal year ended March 31, 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 B
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
Al, Baal, Bal and B1.
Short-term Notes: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades."
B-1
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Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-l repayment capacity
will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and with established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's, a Division of the McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity of the obligor to meet its financial commitment on
the obligation is extremely strong.
Debt rated "AA" differs from the highest-rated issues only in small
AA degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
B-2
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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.
CC While 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-l"
for the highest quality obligations to "D" for the lowest. These categories are
as follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired
unless Standard & Poor's believes that such payments will be made
during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
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Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Fitch IBCA, Inc.'s ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
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.
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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 "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within three to 12 months.
Ratings An outlook is used to describe the most likely direction of any
Outlook 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
D basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
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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.
B-6
<PAGE>
APPENDIX C
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 aversely affected by either of the above described events. In addition to
the payment of premium, the policies may require that the Fund notify the
insurance company as to all New York Municipal Bonds and Municipal Bonds in the
Fund's portfolio and permit the insurance company to audit their records. The
insurance premiums will be payable monthly by the Fund in accordance with a
premium schedule to be furnished by the insurance company at the time the
Policies are issued. Premiums are based upon the amounts covered and the
composition of the portfolio.
The Fund will seek to utilize insurance companies that have insurance claims-
paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch IBCA,
Inc. ("Fitch") or Aaa from Moody's Investors Service ("Moody's"). There can be
no assurance however, that insurance from insurance carriers meeting these
criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance claims-
paying ability rating of AAA has the highest rating assigned by Fitch. The
ability to pay claims is adjudged by Fitch to be extremely strong for insurance
companies with this highest rating. In the opinion of Fitch, foreseeable
business and economic risk factors should not have any material adverse impact
on the ability of these insurers to pay claims. In Fitch's opinion,
profitability, overall balance sheet strength, capitalization and liquidity are
all at very secure levels and are unlikely to be affected by potential adverse
underwriting, investment or cyclical events. A Moody's insurance claims-paying
ability rating is an opinion of the ability of an insurance company to repay
punctually senior policyholder obligations and claims. An insurer with an
insurance claims-paying ability rating of Aaa is considered by Moody's to be of
the best quality. In the opinion of Moody's, the policy obligations of an
insurance company with an insurance claims-paying ability rating of Aaa carry
the smallest degree of credit risk and, while the financial strength of these
companies is likely to change, such changes as can be visualized are most
unlikely to impair the company's fundamentally strong position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
C-1
<PAGE>
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.
C-2
<PAGE>
APPENDIX D
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix D constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of this Prospectus or Appendix D hereto, as the case
may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of a Beneficial Owner, the number of shares, if
any, of AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on
behalf of a Potential Beneficial Owner, the number of shares, if any, of
AMPS to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number of shares of AMPS to be purchased
by all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers
(and the name of the Agent Member, if any, of each such Buyer's Broker-
Dealer) acting for one or more purchasers of such excess number of shares
of AMPS and the number of such shares to be purchased from one or more
Beneficial Owners on whose behalf such Broker-Dealer acted by one or more
Potential Beneficial Owners on whose behalf each of such Buyer's Broker-
Dealers acted;
(vi) if the aggregate number of shares of AMPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid exceeds the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order, the name or names of one or more Seller's Broker-Dealers (and
the name of the Agent Member, if any, of each such Seller's Broker-Dealer)
acting for one or more sellers of such excess number of shares of AMPS and
the number of such shares to be sold to one or more Potential Beneficial
Owners on whose behalf such Broker-Dealer acted by one or more Beneficial
Owners on whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the
AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or
its Agent Member) through the Securities Depository the amount necessary to
purchase the number of shares of AMPS to be purchased pursuant to such Bid
against receipt of such shares and advise such Potential Beneficial Owner
of the Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted
a Sell Order that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct such Beneficial Owner's Agent
Member to deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of shares of AMPS to be sold pursuant to
such Order against payment therefor and advise any such Beneficial Owner
that will continue to hold shares of AMPS of the Applicable Rate for the
next succeeding Dividend Period;
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<PAGE>
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of AMPS received
by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids that were accepted or
Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall instruct
its Agent Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to the Agent Member of the Beneficial Owner
delivering shares to such Broker-Dealer pursuant to (b)(ii) above the
amount necessary to purchase such shares against receipt of such shares,
and (B) deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's Broker-
Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a)(vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b)(i) above against receipt of such
shares, and (B) deliver such shares through the Securities Depository to
the Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall instruct
the Securities Depository to execute the transactions described in (b)(i)
or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(iii)
above, and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling shares of AMPS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver
to the Potential Beneficial Owner on behalf of which it submitted a Bid
that was accepted a number of whole shares of AMPS that is less than the
number of shares that otherwise was to be purchased by such Potential
Beneficial Owner. In such event, the number of shares of AMPS to be so
delivered shall be determined solely by such Broker-Dealer. Delivery of
such lesser number of shares shall constitute good delivery.
Notwithstanding the foregoing terms of this paragraph (f), any delivery or
non-delivery of shares which shall represent any departure from the results
of an Auction, as determined by the Auction Agent, shall be of no effect
unless and until the Auction Agent shall have been notified of such
delivery or non-delivery in accordance with the provisions of the Auction
Agent Agreement and the Broker-Dealer Agreements.
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<PAGE>
APPENDIX E
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Articles
Supplementary relating to the AMPS, and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. The terms not
defined below are defined in the forepart of this Prospectus. Nothing contained
in this Appendix E constitutes a representation by the Fund that in each
Auction each party referred to herein actually will perform the procedures
described herein to be performed by such party.
Paragraph 10(a) Certain Definitions.
As used in this Paragraph 10, the following terms shall have the following
meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned pursuant to this
Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vi) "Hold Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage will
be determined based on (i) the lower of the credit rating or ratings
assigned on such date to such shares by Moody's and S&P (or if Moody's or
S&P or both shall not make such rating available, the equivalent of either
or both of such ratings by a Substitute Rating Agency or two Substitute
Rating Agencies or, in the event that only one such rating shall be
available, such rating) and (ii) whether the Fund has provided modification
to the Auction Agent prior to the Auction establishing the Applicable Rate
for any dividend that net capital gains or other taxable income will be
included in such dividend on shares of AMPS as follows:
<TABLE>
<CAPTION>
Applicable
Percentage of Applicable
Credit Ratings Reference Rate-- Percentage of
---------------------------------- No Reference Rate--
Moody's S&P Notification Notification
---------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
"aa3" or higher AA- or Higher 110% 150%
"a3" or "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Fund shall take all reasonable action necessary to enable S&P and Moody's
to provide a rating for the AMPS. If either S&P or Moody's shall not make such
a rating available, or if neither S&P nor Moody's shall make such a rating
available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its affiliates
and successors, after consultation with the Fund, shall select a nationally
recognized statistical rating organization or two nationally recognized
statistical rating organizations to act as a Substitute Rating Agency or
Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(ix) "Sell Order" shall have the meaning specified in Paragraph 10(b)(i)
below.
(x) "Submission Deadline" shall mean 1:00 p.m., Eastern time, on any
Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent from time to time as the time by which each Broker-Dealer
must submit to the Auction Agent in writing all Orders obtained by it for
the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in Paragraph
10(d)(i) below.
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(xii) "Submitted Hold Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in Paragraph
10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi) (xvi) "Winning Bid Rate" shall have the meaning specified in
Paragraph 10(d)(i) below.
Paragraph 10(b) Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and Potential
Beneficial Owners may only participate in Auctions through their Broker-
Dealers. Broker-Dealers will submit the Orders of their respective customers
who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent,
designating themselves as Existing Holders in respect of shares subject to
Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of shares subject to Orders submitted to them by
Potential Beneficial Owners. A Broker-Dealer may also hold shares of AMPS in
its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders
to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder
on behalf of both itself and its customers. On or prior to the Submission
Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as
to:
(1) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner desires to continue to
hold, provided that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by
such Beneficial Owner, and/or
(3) the number of outstanding shares, if any, of AMPS held by such
Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for the next succeeding Dividend Period;
and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that
shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of outstanding shares, if any, of AMPS which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable Rate for
the next succeeding Dividend Period shall not be less than the rate per
annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or the communication by a Broker-Dealer
acting for its own account to the Auction Agent, of information referred to in
clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter referred to as an
"Order" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order, including a Broker-Dealer acting in such capacity for its own
account, is hereinafter referred to as a "Bidder"; an Order containing the
information referred to in clause (A)(1) of this Paragraph 10(b)(i) is
hereinafter referred to as a "Hold Order"; an Order containing the information
referred to in clause (A)(2) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as a "Bid"; and an Order containing the information referred to in
clause (A)(3) of this Paragraph 10(b)(i) is hereinafter referred to as a "Sell
Order." Inasmuch as a Broker-Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent the interests of a Beneficial
Owner or Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
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<PAGE>
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer to
sell:
(1) the number of outstanding shares of AMPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be less than the rate
per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein; or
(3) a lesser number of outstanding shares of AMPS to be determined as set
forth in Paragraph 10(e)(ii)(C) if such specified rate per annum shall be
higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not
exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of outstanding shares of AMPS specified in such Sell
Order, or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(ii)(C) if Sufficient Clearing
Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of outstanding shares of AMPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be higher than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein.
Paragraph 10(c) Submission of Orders By Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction Agent's
Auction Processing System to the Auction Agent prior to the Submission Deadline
on each Auction Date all Orders obtained by such Broker-Dealer, designating
itself (unless otherwise permitted by the Fund) as an Existing Holder in
respect of shares subject to Orders submitted or deemed submitted to it by
Beneficial Owners and as a Potential Holder in respect of shares subject to
Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the Broker-
Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding shares of AMPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding shares, if any, of AMPS subject to any
Hold Order placed by such Existing Holder;
(2) the number of outstanding shares, if any, of AMPS subject to any
Bid placed by such Existing Holder and the rate per annum specified in
such Bid; and
(3) the number of outstanding shares, if any, of AMPS subject to any
Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares of AMPS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold
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Order (in the case of an Auction relating to a Dividend Period which is not a
Special Dividend Period of 28 days or more) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period of 28 days or more) to have been
submitted on behalf of such Existing Holder covering the number of outstanding
shares of AMPS held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of outstanding shares of
AMPS held by such Existing Holder; provided that if more than one Hold
Order is submitted on behalf of such Existing Holder and the number of
shares of AMPS subject to such Hold Orders exceeds the number of
outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders shall be reduced pro
rata so that such Hold Orders, in the aggregate, cover exactly the number
of outstanding shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of outstanding shares of AMPS
held by such Existing Holder over the number of shares of AMPS subject to
any Hold Order referred to in Paragraph 10(c)(iv)(A) above (and if more
than one Bid submitted on behalf of such Existing Holder specifies the same
rate per annum and together they cover more than the remaining number of
shares that can be the subject of valid Bids after application of Paragraph
10(c)(iv)(A) above and of the foregoing portion of this Paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this Paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the number of shares of AMPS subject to Hold Orders referred to
in Paragraph 10(c)(iv)(A) and Bids referred to in Paragraph 10(c)(iv)(B);
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of AMPS subject to such Sell
Orders is greater than such excess, the number of shares of AMPS subject to
each of such Sell Orders shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of shares of AMPS equal
to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder, each
Bid submitted shall be a separate Bid with the rate per annum and number of
shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.
Paragraph 10(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of AMPS over the
number of outstanding shares of AMPS that are the subject of Submitted Hold
Orders (such excess being hereinafter referred to as the "Available AMPS");
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<PAGE>
(B) from the Submitted Orders whether the number of outstanding shares of
AMPS that are the subject of Submitted Bids by Potential Holders specifying
one or more rates per annum equal to or lower than the Maximum Applicable
Rate exceeds or is equal to the sum of:
(1) the number of outstanding shares of AMPS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of outstanding shares of AMPS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other
than because the number of outstanding shares of AMPS in clauses (1)
and (2) above are each zero because all of the outstanding shares of
AMPS are the subject of Submitted Hold Orders), such Submitted Bids by
Potential Holders hereinafter being referred to collectively as
"Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning
Bid Rate and all other submitted Bids from Existing Holders specifying
lower rates per annum were rejected, thus entitling such Existing
Holders to continue to hold the shares of AMPS that are the subject of
such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning
Bid Rate and all other Submitted Bids from Potential Holders specifying
lower rates per annum were accepted, thus entitling the Potential
Holders to purchase the shares of AMPS that are the subject of such
Submitted Bids, would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower rate per
annum being at least equal to the Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations pursuant to
Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the outstanding shares of AMPS are the subject of Submitted Hold Orders),
that the Applicable Rate for the next succeeding Dividend Period shall be
equal to the Maximum Applicable Rate; or
(C) if all of the outstanding shares of AMPS are the subject of Submitted
Hold Orders, that the Dividend Period next succeeding the Auction
automatically shall be the same length as the immediately preceding
Dividend Period and the Applicable Rate for the next succeeding Dividend
Period shall be equal to 40% of the Reference Rate (or 60% of such rate if
the Fund has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on shares
of AMPS) on the date of the Auction.
Paragraph 10(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders And Allocation of Shares.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order
of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is higher than the Winning Bid Rate shall be
accepted, thus requiring each such Existing Holder to sell the
outstanding shares of AMPS that are the subject of such Submitted Sell
Order or Submitted Bid;
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(B) the Submitted Bid of each of the Existing Holder specifying any
rate per annum that is lower than the Winning Bid Rate shall be
rejected, thus entitling each such Existing Holder to continue to hold
the outstanding shares of AMPS that are the subject of such Submitted
Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be
accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
outstanding shares of AMPS that are the subject of such Submitted Bid,
unless the number of outstanding shares of AMPS subject to all such
Submitted Bids shall be greater than the number of outstanding shares
of AMPS ("Remaining Shares") equal to the excess of the Available AMPS
over the number of outstanding shares of AMPS subject to Submitted Bids
described in Paragraph 10(e)(i)(B) and Paragraph 10(e)(i)(C), in which
event the Submitted Bids of each such Existing Holder shall be
accepted, and each such Existing Holder shall be required to sell
outstanding shares of AMPS, but only in an amount equal to the
difference between (1) the number of outstanding shares of AMPS then
held by such Existing Holder subject to such Submitted Bid and (2) the
number of shares of AMPS obtained by multiplying (x) the number of
Remaining Shares by (y) a fraction the numerator of which shall be the
number of outstanding shares of AMPS held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall be the
sum of the numbers of outstanding shares of AMPS subject to such
Submitted Bids made by all such Existing Holders that specified a rate
per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted
but only in an amount equal to the number of outstanding shares of AMPS
obtained by multiplying (x) the difference between the Available AMPS
and the number of outstanding shares of AMPS subject to Submitted Bids
described in Paragraph 10(e)(i)(B), Paragraph 10(e)(i)(C) and Paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the
number of outstanding shares of AMPS subject to such Submitted Bid and
the denominator of which shall be the sum of the number of outstanding
shares of AMPS subject to such Submitted Bids made by all such
Potential Holders that specified rates per annum equal to the Winning
Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the outstanding shares of AMPS are subject to Submitted Hold
Orders), subject to the provisions of Paragraph 10(e)(iii), Submitted
Orders shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall
be rejected, thus entitling such Existing Holder to continue to hold
the outstanding shares of AMPS that are the subject of such Submitted
Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate
shall be accepted, thus requiring such Potential Holder to purchase the
outstanding shares of AMPS that are the subject of such Submitted Bid;
and
(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be
accepted and the Submitted Sell Orders of each Existing Holder shall be
accepted, in both cases only in an amount equal to the difference
between (1) the number of outstanding shares of AMPS then held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order
and (2) the number of shares of AMPS obtained by multiplying (x) the
difference between the Available AMPS and the aggregate number of
outstanding shares of AMPS subject to Submitted Bids described in
Paragraph 10(e)(ii)(A) and Paragraph 10(e)(ii)(B) by (y) a fraction the
numerator of which shall be the number of outstanding shares of AMPS
held by such Existing Holder subject to such Submitted Bid or Submitted
Sell Order and the denominator of which shall be the number of
outstanding shares of AMPS subject to all such Submitted Bids and
Submitted Sell Orders.
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<PAGE>
(iii) If, as a result of the procedures described in Paragraph 10(e)(i)
or Paragraph 10(e)(ii), any Existing Holder would be entitled or required
to sell, or any Potential Holder would be entitled or required to purchase,
a fraction of a share of AMPS on any Auction Date, the Auction Agent shall,
in such manner as in its sole discretion it shall determine, round up or
down the number of shares of AMPS to be purchased or sold by any Existing
Holder or Potential Holder on such Auction Date so that each outstanding
share of AMPS purchased or sold by each Existing Holder or Potential Holder
on such Auction Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a
whole share of AMPS on any Auction Date, the Auction Agent, in such manner
as in its sole discretion it shall determine, shall allocate shares of AMPS
for purchase among Potential Holders so that only whole shares of AMPS are
purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
any shares of AMPS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of the outstanding shares of AMPS to be purchased and the aggregate
number of outstanding shares of AMPS to be sold by such Potential Holders
and Existing Holders and, to the extent that such aggregate number of
outstanding shares to be purchased and such aggregate number of outstanding
shares to be sold differ, the Auction Agent shall determine to which other
Broker-Dealer or Broker-Dealers acting for one or more purchasers such
Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-
Dealers acting for one or more sellers such Broker-Dealer shall receive, as
the case may be, outstanding shares of AMPS.
Paragraph 10(f) Miscellaneous.
The Fund may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change
or modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid or
Sell Order in accordance with the procedures described in this Paragraph 10 or
to or through a Broker-Dealer, provided that in the case of all transfers other
than pursuant to Auctions such Beneficial Owner or Existing Holder, its Broker-
Dealer, if applicable, or its Agent Member advises the Auction Agent of such
transfer and (B) except as otherwise required by law, shall have the ownership
of the shares of AMPS held by it maintained in book entry form by the
Securities Depository in the account of its Agent Member, which in turn will
maintain records of such Beneficial Owner's beneficial ownership. Neither the
Fund nor any Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall submit an Order in any Auction. Any Beneficial Owner that
is an Affiliate (other than Merrill Lynch, Pierce, Fenner & Smith Incorporated)
shall not sell, transfer or otherwise dispose of shares of AMPS to any Person
other than the Fund. All of the outstanding shares of AMPS of a Series shall be
represented by a single certificate registered in the name of the nominee of
the Securities Depository unless otherwise required by law or unless there is
no Securities Depository. If there is no Securities Depository, at the Fund's
option and upon its receipt of such documents as it deems appropriate, any
shares of AMPS may be registered in the Stock Register in the name of the
Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled
to receive certificates therefor and required to deliver certificates thereof
or upon transfer or exchange thereof.
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