<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1999
SECURITIES ACT FILE NO. 333-77517
INVESTMENT COMPANY ACT FILE NO. 811-09317
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 1 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
TERRY K. GLENN
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. HENNEWINKEL, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
</TABLE>
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Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
==========================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF BEING OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1)(2) PER UNIT(1) OFFERING PRICE(1) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par value)........... 5,750,000 shares $15.00 $86,250,000 $23,978
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 750,000 shares subject to the underwriter's over-allotment option.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA. $278
was previously paid. $23,700 was transmitted in connection with this filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THE EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
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 MAY 18, 1999
PROSPECTUS
5,000,000 SHARES
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
COMMON STOCK
------------------------
MuniHoldings New York Insured Fund IV, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New York State and New York City personal income taxes. The Fund seeks to
achieve its objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal income tax and New York State
and New York City personal income taxes. The Fund intends to invest in municipal
obligations that are rated investment grade or, if unrated, are considered by
the Fund's investment adviser to be of comparable quality. Under normal
circumstances, at least 80% of the Fund's assets will be invested in municipal
obligations with remaining maturities of one year or more that are covered by
insurance guaranteeing the timely payment of principal at maturity and interest.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. The Fund plans to apply to list its shares on the New York
Stock Exchange or another national securities exchange under the symbol "MNW."
Trading of the Fund's common stock on the exchange is expected to begin within
two weeks of the date of this prospectus. Before it begins trading, the
underwriter does not intend to make a market in the Fund's shares. Thus,
investors may not be able to buy and sell shares of the Fund during that time.
Within approximately three months after completion of this offering of
common stock, the Fund intends to offer shares of preferred stock representing
approximately 40% of the Fund's capital immediately after the issuance of such
preferred stock. There can be no assurance, however, that preferred stock
representing such percentage of the Fund's capital will actually be issued. The
use of preferred stock to leverage the common stock can create special risks.
------------------------
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS, WHICH ARE DESCRIBED
IN THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 8 OF
THIS PROSPECTUS.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price................... $15.00 $ 75,000,000
Sales Load.............................. None None
Proceeds, before expenses, to Fund...... $15.00 $ 75,000,000
</TABLE>
The Fund's investment adviser or an affiliate will pay the underwriter a
commission in the amount of % of the public offering price per share in
connection with the sale of the common stock.
The underwriter may also purchase up to an additional 750,000 shares at the
public offering price within 45 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We expect that the shares of common stock will be ready for delivery in New
York, New York on or about June , 1999.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this prospectus is June , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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Prospectus Summary.......................................... 3
Risk Factors and Special Considerations..................... 8
Fee Table................................................... 10
The Fund.................................................... 11
Use of Proceeds............................................. 11
Investment Objective and Policies........................... 11
Risks and Special Considerations of Leverage................ 23
Investment Restrictions..................................... 26
Directors and Officers...................................... 28
Investment Advisory and Management Arrangements............. 30
Portfolio Transactions...................................... 32
Dividends and Distributions................................. 33
Taxes....................................................... 34
Automatic Dividend Reinvestment Plan........................ 38
Mutual Fund Investment Option............................... 40
Net Asset Value............................................. 40
Description of Capital Stock................................ 41
Custodian................................................... 44
Underwriting................................................ 45
Transfer Agent, Dividend Disbursing Agent and Registrar..... 46
Legal Opinions.............................................. 46
Experts..................................................... 46
Additional Information...................................... 46
Report of Independent Auditors.............................. 48
Statement of Assets, Liabilities and Capital................ 49
Appendix I -- Economic and Other Conditions in New York..... 50
Appendix II -- Ratings of Municipal Bonds................... 67
Appendix III -- Portfolio Insurance......................... 74
Appendix IV -- Taxable Equivalent Yields for 1999........... 76
</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> 4
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus.
THE FUND MuniHoldings New York Insured Fund IV, Inc. is a newly organized,
non-diversified, closed-end management investment company.
THE OFFERING The Fund is offering 5,000,000 shares of common stock at an
initial offering price of $15.00 per share. The common stock is
being offered by Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as underwriter. The underwriter may also purchase
up to an additional 750,000 shares of common stock within 45 days
of the date of this prospectus to cover over-allotments.
INVESTMENT
OBJECTIVE
AND POLICIES The investment objective of the Fund is to provide shareholders
with current income exempt from Federal income tax and New York
State and New York City personal income taxes. The Fund seeks to
achieve its objective by investing primarily in a portfolio of
long-term, investment grade municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is exempt
from Federal income tax and New York State and New York City
personal income taxes.
Investment Grade Municipal Bonds. The Fund intends to invest in
municipal bonds that are rated investment grade by one or more
nationally recognized statistical rating agencies or, if unrated,
are considered by the Fund's investment adviser to be of
comparable quality.
New York Municipal Bonds. The Fund will generally invest
substantially all (at least 80%) of its assets in New York
municipal bonds. However, when the Fund's investment adviser
believes that investment grade New York municipal bonds are not
available in sufficient amounts at an appropriate price, the Fund
may invest a lesser amount of its assets in these securities. At
all times, except during periods when the Fund is in the process
of investing its proceeds from a public offering or during
temporary defensive periods, the Fund intends to invest at least
65% of its assets in New York municipal bonds and at least 80% of
its assets in New York municipal bonds and other long-term
municipal bonds. These other long-term municipal bonds that the
Fund may buy will be exempt from Federal income tax but not New
York State and New York City personal income tax.
The Fund will normally invest at least 80% of its assets in
insured municipal obligations with remaining maturities of one
year or more. Insured municipal obligations are covered by
insurance that guarantees timely interest payments and the
repayment of principal at maturity.
In general, the Fund does not intend its investments to earn a
large amount of income that is not exempt from Federal income tax
and New York State and New York City personal income taxes.
3
<PAGE> 5
Indexed and Inverse Floating Rate Securities. The Fund may
invest in securities whose potential returns are directly related
to changes in an underlying index or interest rate, known as
indexed securities. The return on indexed securities will rise
when the underlying index or interest rate rises and fall when
the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an
interest rate (inverse floaters). In general, income on inverse
floaters will decrease when short-term interest rates increase
and increase when short-term interest rates decrease. Investments
in inverse floaters may subject the Fund to the risks of reduced
or eliminated interest payments and losses of principal. In
addition, certain indexed securities and inverse floaters may
increase or decrease in value at a greater rate than the
underlying interest rate, which effectively leverages the Fund's
investment. As a result, the market value of such securities will
generally be more volatile than that of fixed rate, tax exempt
securities. Both indexed securities and inverse floaters are
derivative securities and can be considered speculative.
Options and Futures Transactions. The Fund may seek to hedge its
portfolio against changes in interest rates using options and
financial futures contracts. The Fund's hedging transactions are
designed to reduce volatility, but come at some cost. For
example, the Fund may try to limit its risk of loss from a
decline in price of a portfolio security by purchasing a put
option. However, the Fund must pay for the option, and the price
of the security may not in fact drop. In large part, the success
of the Fund's hedging activities depends on its ability to
forecast movements in securities prices and interest rates. The
Fund does not, however, intend to enter into options and futures
transactions for speculative purposes. The Fund is not required
to hedge its portfolio and may choose not to do so. The Fund
cannot guarantee that any hedging strategies it uses will work.
LEVERAGE Issuance of Preferred Stock. The Fund intends to offer shares of
preferred stock within three months after completion of this
offering. The preferred stock will represent approximately 40% of
the Fund's capital, including the capital raised by issuing the
preferred stock. There can be no assurance, however, that
preferred stock will actually be issued. Issuing preferred stock
will result in the leveraging of the common stock. Although the
Board of Directors has not yet determined the terms of the
preferred stock offering, the Fund expects that the preferred
stock will pay dividends that will be adjusted over either
relatively short-term periods (generally seven to 28 days) or
medium-term periods (up to five years). The preferred stock
dividend rate will be based upon prevailing interest rates for
debt obligations of comparable maturity. The money raised by the
preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment objective.
The expenses of the preferred stock, which will be borne by the
Fund, will reduce the net asset value of the common stock. In
addition, at times, when the Fund is required to allocate taxable
income to preferred stockholders, the terms of the preferred
stock may require the Fund to make an additional distribution to
them. The amount of this additional distribution
4
<PAGE> 6
approximately equals the tax liability resulting from the
allocation (an "Additional Distribution"). During periods when
the Fund has preferred stock outstanding, the Fund will pay fees
to the investment adviser for its services that are higher than
if the Fund did not issue preferred stock because the fees will
be calculated on the basis of the Fund's average weekly net
assets, including proceeds from the sale of preferred stock.
Potential Benefits of Leverage. Under normal market conditions,
longer-term obligations produce higher yields than short- and
medium-term obligations. The Fund's investment adviser believes
that the interest income the Fund receives from its long-term
investments will exceed the amount of interest the Fund must pay
to the preferred stockholders. Thus, the Fund's use of preferred
stock should provide common stockholders with a higher yield than
they would receive if the Fund were not leveraged.
Risks. The use of leverage creates certain risks for common
stockholders, including higher volatility of both the net asset
value and the market value of the common stock. Since any decline
in the value of the Fund's investments will affect only the
common stockholders, in a declining market the use of leverage
will cause the Fund's net asset value to decrease more than it
would if the Fund were not leveraged. This decrease in net asset
value will likely also cause a decline in the market price for
shares of common stock. In addition, fluctuations in the dividend
rates paid on, and the amount of taxable income allocable to, the
preferred stock will affect the yield to common stockholders.
There can be no assurance that the Fund will earn a higher net
return on its investments than the then current dividend rate
(and any Additional Distribution) it pays on the preferred stock.
Under certain conditions, the benefits of leverage to common
stockholders will be reduced, and the Fund's leveraged capital
structure could result in a lower rate of return to common
stockholders than if the Fund were not leveraged.
Distributions. When the Fund issues preferred stock, common
stockholders will receive all of the Fund's net income that
remains after it pays dividends (and any Additional Distribution)
on the preferred stock and generally will be entitled to a pro
rata share of net realized capital gains. If the Fund is
liquidated, preferred stockholders will be entitled to receive
liquidating distributions before any distribution is made to
common stockholders. These liquidating distributions are expected
to equal the original purchase price per share of the preferred
stock plus any accumulated and unpaid dividends and Additional
Distributions.
Redemption of Preferred Stock. The Fund may redeem the preferred
stock for any reason. For example, the Fund may redeem all or
part of the preferred stock if it believes that the Fund's
leveraged capital structure will cause common stockholders to
obtain a lower return than they would if the common stock were
unleveraged for any significant amount of time.
5
<PAGE> 7
Voting Rights. Preferred stockholders, voting as a separate
class, will be entitled to elect two of the Fund's Directors.
Common and preferred stockholders, voting together as a single
class, will be entitled to elect the remaining Directors. If the
Fund fails to pay dividends to the preferred stockholders for two
full years, the holders of all outstanding shares of preferred
stock, voting as a separate class, would then be entitled to
elect a majority of the Fund's Directors. The preferred
stockholders also will vote separately on certain other matters
as required under the Fund's Articles of Incorporation, the
Investment Company Act of 1940, as amended, and Maryland law.
Otherwise, common and preferred stockholders will have equal
voting rights (one vote per share) and will vote together as a
single class.
Ratings. Before it offers the preferred stock, the Fund intends
to apply to one or more nationally recognized statistical ratings
organizations for ratings on the preferred stock. The Fund
believes that a rating for the preferred stock will make it
easier to market the stock, which should reduce the dividend
rate.
LISTING Currently, there is no public market for the Fund's common stock.
However, the Fund plans to apply to list its shares of common
stock on the New York Stock Exchange or another national
securities exchange. Trading of the Fund's common stock is
expected to begin within two weeks of the date of this
prospectus. Before it begins trading, the underwriter does not
intend to make a market in the Fund's shares of common stock.
Thus, investors may not be able to buy and sell shares of the
Fund during that period.
INVESTMENT
ADVISER Fund Asset Management, L.P. is the Fund's investment adviser and
provides investment advisory and management services to the Fund.
For its services, the Fund pays the investment adviser a fee at
the annual rate of 0.55% of the Fund's average weekly net assets,
including assets acquired from the sale of preferred stock.
DIVIDENDS
AND
DISTRIBUTIONS The Fund intends to distribute dividends of all or a portion of
its net investment income to common stockholders each month. Once
the Fund issues preferred stock, the monthly distributions to
common stockholders will consist of all or a portion of net
investment income that remains after the Fund pays dividends (and
any Additional Distribution) on the preferred stock. At times, in
order to maintain a stable level of monthly dividends to common
stockholders, the Fund may pay out less than all of its net
investment income or pay out accumulated undistributed income in
addition to net investment income. The Fund expects to begin
paying dividends to common stockholders within approximately 90
days from the date of this prospectus. The Fund will distribute
net capital gains, if any, at least annually to common
stockholders and, after it issues the preferred stock, on a pro
rata basis to common and preferred stockholders. When the Fund
allocates capital gains or other taxable income to preferred
stockholders, under certain circumstances, the terms of the
preferred stock may require the Fund to make an Additional
Distribution. The Fund may not declare any cash dividend or other
distribution on its common stock unless the preferred stock has
asset coverage of at least 200%. If
6
<PAGE> 8
the Fund issues preferred stock representing 40% of its total
capital, the preferred stock's asset coverage will be
approximately 250%. If the Fund's ability to make distributions
on its common stock is limited, the Fund may not be able to
qualify for taxation as a regulated investment company. This
would have adverse tax consequences for common stockholders.
AUTOMATIC
DIVIDEND
REINVESTMENT
PLAN Dividend and capital gains distributions generally are used to
purchase additional shares of the Fund's common stock. However,
an investor can choose to receive distributions in cash. Since
not all investors can participate in the automatic dividend
reinvestment plan, you should call your broker or nominee to
confirm that you are eligible to participate in the plan.
MUTUAL FUND
INVESTMENT
OPTION Investors who purchase shares in this offering through the
underwriter and later sell their shares have the option, subject
to certain conditions, to purchase Class D shares of certain
Merrill Lynch funds with the proceeds from the sale.
7
<PAGE> 9
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity and Market Price of Shares. The Fund is newly organized and has
no operating history or history of public trading. Before the Fund's common
stock is listed on the New York Stock Exchange, an investment in the Fund may be
illiquid.
Shares of closed-end funds that trade in a secondary market frequently
trade at a market price that is below their net asset value. This is commonly
referred to as "trading at a discount." Investors who sell their shares within a
relatively short period after completion of the public offering are more likely
to be exposed to this risk. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.
New York Municipal Bonds. The Fund intends to invest the majority of its
portfolio in New York municipal bonds. As a result, the Fund is more exposed to
risks affecting issuers of New York municipal bonds than is a municipal bond
fund that invests more widely.
Interest Rate and Credit Risk. The Fund invests in municipal bonds, which
are subject to interest rate and credit risk. Interest rate risk is the risk
that prices of municipal bonds generally increase when interest rates decline
and decrease when interest rates increase. Prices of longer-term securities
generally change more in response to interest rate changes than prices of
shorter-term securities. Credit risk is the risk that the issuer will be unable
to pay the interest or principal when due. The degree of credit risk depends on
both the financial condition of the issuer and the terms of the obligation.
Non-diversification. The Fund is registered as a "non-diversified"
investment company. This means that the Fund may invest a greater percentage of
its assets in a single issuer than a diversified investment company. Even as a
non-diversified fund, the Fund must still meet the diversification requirements
of applicable Federal income tax laws. Since the Fund may invest a relatively
high percentage of its assets in a limited number of issuers, the Fund may be
more exposed to any single economic, political or regulatory occurrence than a
more widely-diversified fund.
Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc. 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 may have certain speculative characteristics.
Private Activity Bonds. The Fund may invest in certain tax-exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in the Fund to the Federal alternative minimum tax.
Portfolio Insurance and Rating Agencies. The Fund will be subject to
certain investment restrictions imposed by guidelines of the insurance companies
that issue portfolio insurance and to guidelines of one or more nationally
recognized statistical ratings organizations that may issue ratings for the
preferred stock. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the
Investment Company Act of 1940, as amended. The Fund does not expect these
requirements or guidelines to prevent the investment
8
<PAGE> 10
adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
Leverage. The Fund plans to offer shares of preferred stock. The preferred
stock will represent approximately 40% of the Fund's capital, including capital
raised by issuing the preferred stock. Leverage creates certain risks for common
stockholders, including higher volatility of both the net asset value and the
market value of the common stock. Leverage also creates the risk that the
investment return on shares of the Fund's common stock will be reduced to the
extent the dividends paid on preferred stock and other expenses of the preferred
stock exceed the income earned by the Fund on its investments. If the Fund is
liquidated, preferred stockholders will be entitled to receive liquidating
distributions before any distribution is made to common stockholders.
Inverse Floating Obligations. The Fund's investments in "inverse floating
obligations" or "residual interest bonds" provide investment leverage because
their market value increases or decreases in response to market changes at a
greater rate than fixed rate, long term tax exempt securities. The market values
of such securities are more volatile than the market values of fixed rate, tax
exempt securities.
Options and Futures Transactions. The Fund may engage in certain options
and futures transactions to reduce its exposure to interest rate movements. If
the Fund incorrectly forecasts market values, interest rates or other factors,
the Fund's performance could suffer. The Fund also may suffer a loss if the
other party to the transaction fails to meet its obligations. The Fund is not
required to use hedging and may not do so.
Antitakeover Provisions. The Fund's Articles of Incorporation include
provisions that could limit the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors. Such
provisions could limit the ability of shareholders to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund.
9
<PAGE> 11
FEE TABLE
<TABLE>
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SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering
price)................................................ None
Dividend Reinvestment Plan Fees........................ None
ANNUAL EXPENSES (as a percentage of net assets attributable
to Common Stock):
Investment Advisory Fees(a)(b)......................... 0.92%
Interest Payments on Borrowed Funds.................... None
Other Expenses(a)(b)................................... 0.42%
----
Total Annual Expenses(a)(b)....................... 1.34%
====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
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An investor would pay the following expenses on a
$1,000 investment, assuming total annual expenses of
1.34% (assuming leverage of 40% of the Fund's total
assets) and a 5% annual return throughout the
periods............................................. $14 $42 $73 $161
</TABLE>
- ------------
(a) Assumes leverage by issuing preferred stock in an amount of approximately
40% of the Fund's capital at a dividend rate of 3.25%. The Fund intends to
use leverage only if the Investment Adviser believes that it would result in
higher income to shareholders over time. See "Risks and Special
Considerations of Leverage." If the Fund does not use leverage, it is
estimated that, as a percentage of net assets attributable to common stock,
the Investment Advisory Fees would be 0.55%, Other Expenses would be 0.19%
and Total Annual Expenses would be 0.74%.
(b) See "Investment Advisory and Management Arrangements" -- page 30.
The Fee Table is intended to assist investors in understanding the costs
and expenses that a shareholder in the Fund will bear directly or indirectly.
The expenses set forth under "Other Expenses" are based on estimated amounts
through the end of the Fund's first fiscal year. The Example set forth above
assumes reinvestment of all dividends and distributions and uses a 5% annual
rate of return as mandated by the Securities and Exchange Commission
regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
10
<PAGE> 12
THE FUND
MuniHoldings New York Insured Fund IV, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company. The Fund
was incorporated under the laws of the State of Maryland on April 5, 1999, and
has registered under the 1940 Act. The Fund's principal office is located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their securities
at the option of the shareholder, whereas open-end companies issue securities
redeemable at net asset value at any time at the option of the shareholder and
typically engage in a continuous offering of their shares. Accordingly, open-end
investment companies are subject to continuous asset in-flows and out-flows that
can complicate portfolio management. Shares of closed-end investment companies,
however, frequently trade at a discount from their net asset value. This risk
may be greater for investors expecting to sell their shares in a relatively
short period after completion of the public offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment
option in full) after payment of offering expenses estimated to be approximately
$ .
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months after
completion of the offering of common stock, depending on market conditions and
the availability of appropriate securities. Pending such investment, it is
anticipated that the proceeds will be invested in short-term, tax-exempt
securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with current
income exempt from Federal income tax and New York State and New York City
personal income taxes. The Fund will seek to achieve its objective by investing
primarily in a portfolio of long-term, investment grade municipal obligations
issued by or on behalf of the State of New York, its political subdivisions,
agencies and instrumentalities, and other qualifying issuers, each of which pays
interest which, in the opinion of bond counsel to the issuer, is exempt from
Federal income tax and New York State and New York City personal income taxes
("New York Municipal Bonds"). The Fund intends to invest substantially all (at
least 80%) of its assets in New York Municipal Bonds, except at times when the
Fund's investment adviser, Fund Asset Management, L.P. (the "Investment
Adviser"), considers that New York Municipal Bonds of sufficient quality and
quantity are unavailable for investment at suitable prices by the Fund. To the
extent the Investment Adviser considers that suitable New York Municipal Bonds
are not available for investment, the Fund may purchase other long-term
municipal obligations exempt from Federal income tax 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
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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 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), the interest on which is
treated as an item of "tax preference" for purposes of the Federal alternative
minimum tax, which may impact an investor's overall tax liability.
The Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in New York Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term New York Municipal Bonds or Municipal Bonds.
Certain Non-Municipal Tax-Exempt Securities may be characterized as derivative
instruments. Non-Municipal Tax-Exempt Securities are considered "New York
Municipal Bonds" or "Municipal Bonds" for purposes of the Fund's investment
objective and policies.
Investment in shares of the Fund's common stock offers several potential
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal income tax and New York State and New York City personal income
taxes by investing in a professionally managed portfolio comprised primarily of
investment grade insured New York Municipal Bonds. Investment in the Fund also
relieves the investor of the burdensome administrative details involved in
managing a portfolio of New York Municipal Bonds. Additionally, the Investment
Adviser will seek to enhance the yield on the common stock by leveraging the
Fund's capital structure through the issuance of preferred stock. The benefits
are at least partially offset by the expenses involved in operating an
investment company. Such expenses primarily consist of the advisory fee and
operational costs. Additionally, the use of leverage involves certain expenses
and special risk considerations. See "Risks and Special Considerations of
Leverage."
The investment grade New York Municipal Bonds and Municipal Bonds in which
the Fund will primarily invest are those New York Municipal Bonds and Municipal
Bonds rated at the date of purchase in the four highest rating categories of
Standard & Poor's ("S&P"), Moody's Investors Service, Inc. ("Moody's") or Fitch
IBCA, Inc. ("Fitch"), or, if unrated, are considered to be of comparable quality
by the Investment Adviser. In the case of long-term debt, the investment grade
rating categories are AAA through BBB for S&P, Aaa through Baa for Moody's and
AAA through BBB for Fitch. In the case of short-term notes, the investment grade
rating categories are SP-1+ through SP-3 for S&P, MIG-1 through
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<PAGE> 14
MIG-3 for Moody's and F-1+ through F-3 for Fitch. In the case of tax-exempt
commercial paper, the investment grade rating categories are A-1+ through A-3
for S&P, Prime-1 through Prime-3 for Moody's and F-1+ through F-3 for Fitch.
Obligations ranked in the lowest investment grade rating category (BBB,
SP-3 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody's; and BBB and F-3 for
Fitch), while considered "investment grade," may have certain speculative
characteristics. There may be sub-categories or gradations indicating relative
standing within the rating categories set forth above. See Appendix II to this
Prospectus for a description of S&P's, Moody's and Fitch's ratings of Municipal
Bonds. In assessing the quality of New York Municipal Bonds and Municipal Bonds
with respect to the foregoing requirements, the Investment Adviser will take
into account the portfolio insurance as well as the nature of any letters of
credit or similar credit enhancements to which particular New York Municipal
Bonds and Municipal Bonds are entitled and the creditworthiness of the insurance
company or the financial institution that provided such insurance or credit
enhancements. Consequently, if New York Municipal Bonds or Municipal Bonds are
covered by insurance policies issued by insurers whose claims-paying ability is
rated AAA by S&P or Fitch or Aaa by Moody's, the Investment Adviser may consider
such municipal obligations to be equivalent to AAA- or Aaa- rated securities, as
the case may be, even though such New York Municipal Bonds or Municipal Bonds
would generally be assigned a lower rating if the rating were based primarily
upon the credit characteristics of the issuers without regard to the insurance
feature. The insured New York Municipal Bonds and Municipal Bonds must also
comply with the standards applied by the insurance carriers in determining
eligibility for portfolio insurance.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank. The VRDOs in which the Fund may invest are tax-
exempt obligations, in the opinion of counsel to the issuer, that contain a
floating or variable interest rate adjustment formula and a right of demand on
the part of the holder thereof to receive payment of the unpaid principal
balance plus accrued interest on a short notice period not to exceed seven days.
Participating VRDOs provide 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 generally can be expected to
rise. Conversely, when interest rates rise, the value of a fixed-income
portfolio generally can be expected to decline. Prices of longer-term securities
generally fluctuate more in response to interest rate changes than do short-term
or medium-term securities. These changes in net asset value are likely to be
greater in the case of a fund having a leveraged capital structure, as proposed
for the Fund. See "Risks and Special Considerations of Leverage."
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<PAGE> 15
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.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for special tax
treatment afforded regulated investment companies under the Federal tax laws.
See "Taxes." To qualify, among other requirements, the Fund will limit its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested in
the securities (other than U.S. Government securities) of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities
(other than U.S. Government securities) of a single issuer. A fund that elects
to be classified as "diversified" under the 1940 Act must satisfy the foregoing
5% requirement with respect to 75% of its total assets. To the extent that the
Fund assumes large positions in the securities of a small number of issuers, the
Fund's yield may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's assets will be
invested in New York Municipal Bonds and Municipal Bonds either (i) insured
under an insurance policy purchased by the Fund or (ii) insured under an
insurance policy obtained by the issuer thereof or any other party. The Fund
will seek to limit its investments to municipal bonds insured under insurance
policies issued by insurance carriers that have total admitted assets
(unaudited) of at least $75,000,000 and capital and surplus (unaudited) of at
least $50,000,000 and insurance claims-paying ability ratings of AAA from S&P or
Fitch or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be at all times available. See
Appendix III to this Prospectus for a brief description of S&P's, Fitch's and
Moody's insurance claims-paying ability ratings. Currently, it is anticipated
that a majority of the insured New York Municipal Bonds and Municipal Bonds in
the Fund's portfolio will be insured by the following insurance companies that
satisfy the foregoing criteria: AMBAC Indemnity Corporation, Financial Guaranty
Insurance Company, Financial Security Assurance and Municipal Bond Investors
Assurance Corporation. The Fund also may purchase New York Municipal Bonds and
Municipal Bonds covered by insurance issued by any other insurance company that
satisfies the foregoing criteria. It is anticipated that initially a majority of
insured New York Municipal Bonds and Municipal Bonds held by the Fund will be
insured under policies obtained by parties other than the Fund.
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<PAGE> 16
The Fund may purchase, but has no obligation to purchase, separate
insurance policies (the "Policies") from insurance companies meeting the
criteria set forth above that guarantee the payment of principal and interest on
specified eligible New York Municipal Bonds and Municipal Bonds purchased by the
Fund. A New York Municipal Bond or a Municipal Bond will be eligible for
coverage if it meets certain requirements of the insurance company set forth in
a Policy. In the event interest or principal on an insured New York Municipal
Bond and Municipal Bond is not paid when due, the insurer will be obligated
under its Policy to make such payment not later than 30 days after it has been
notified by, and provided with documentation from, the Fund that such nonpayment
has occurred.
The Policies will be effective only as to insured New York Municipal Bonds
and Municipal Bonds beneficially owned by the Fund. In the event of a sale of
any New York Municipal Bonds and Municipal Bonds held by the Fund, the issuer of
the relevant Policy will be liable only for those payments of interest and
principal that are then due and owing. The Policies will not guarantee the
market value of the insured New York Municipal Bonds and Municipal Bonds or the
value of the shares of the Fund.
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities remain
in the Fund's portfolio. In addition, the insurer may not cancel its Policies
for any reason except failure to pay premiums when due. The Board of Directors
of the Fund will reserve the right to terminate any of the Policies if it
determines that the benefits to the Fund of having its portfolio insured under
such policy are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from approximately
.02 of 1% to .15 of 1% of the principal amount of the New York Municipal Bonds
and Municipal Bonds covered by such Policies. The estimate is based on the
expected composition of the Fund's portfolio of New York Municipal Bonds and
Municipal Bonds. Additional information regarding the Policies is set forth in
Appendix III to this Prospectus. In instances in which the Fund purchases New
York Municipal Bonds and Municipal Bonds insured under policies obtained by
parties other than the Fund, the Fund does not pay the premiums for such
policies; rather, the cost of such policies may be reflected in the purchase
price of the New York Municipal Bonds and Municipal Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate value for the insurance, such
as the difference between the market value of the defaulted security and its par
value, is more appropriate. The Investment Adviser's ability to manage the
portfolio may be limited to the extent it holds defaulted securities, which may
limit its ability in certain circumstances to purchase other New York Municipal
Bonds and Municipal Bonds. See "Net Asset Value" below for a more complete
description of the Fund's method of valuing defaulted securities and securities
that have a significant risk of default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Directors determines that such
insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers or
the terms of the insurance, or may
15
<PAGE> 17
discontinue its policy of maintaining insurance for all or any of the New York
Municipal Bonds and Municipal Bonds held in the Fund's portfolio. Although the
Investment Adviser periodically reviews the financial condition of each insurer,
there can be no assurance that the insurers will be able to honor their
obligations under all circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured New York Municipal Bonds or Municipal
Bonds will not receive timely scheduled payments of principal or interest).
However, the insured New York Municipal Bonds or Municipal Bonds are subject to
market risk (i.e., fluctuations in market value as a result of changes in
prevailing interest rates or other market conditions).
DESCRIPTION OF NEW YORK MUNICIPAL BONDS AND MUNICIPAL BONDS
New York Municipal Bonds and Municipal Bonds include debt obligations
issued to obtain funds for various public purposes, including construction of a
wide range of public facilities, refunding of outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of private activity
bonds ("PABs") are issued by or on behalf of public authorities to finance
various privately operated facilities, including among other things airports,
public ports, mass commuting facilities, multifamily housing projects, as well
as facilities for water supply, gas, electricity, sewage or solid waste
disposal. For purposes of this prospectus, such obligations are Municipal Bonds
if the interest paid thereon is exempt from Federal income tax and as New York
Municipal Bonds if the interest thereon is exempt from Federal income tax and
exempt from New York State and New York City personal income taxes, even though
such bonds may be PABs as discussed below. Also, for purposes of this
prospectus, Non-Municipal Tax-Exempt securities as discussed above will be
considered New York Municipal Bonds or Municipal Bonds.
The two principal classifications of New York Municipal Bonds and Municipal
Bonds are "general obligation" bonds and "revenue" bonds, which latter category
includes PABs and, for bonds issued on or before August 15, 1986, industrial
development bonds or "IDBs". General obligation bonds (other than those of the
State of New York which has limited taxing powers) are secured by the issuer's
pledge of faith, credit and taxing power for the repayment of principal and the
payment of interest. Revenue or special obligation bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as from the user of the facility being financed. PABs are in most
cases revenue bonds and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The repayment of principal and the
payment of interest on revenue 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 PABs. Interest received on certain PABs is treated as an item of
"tax preference" for purposes of the Federal alternative minimum tax and may
impact the overall tax liability of investors in the Fund. There is no
limitation on the percentage of the Fund's assets that may be invested in New
York Municipal Bonds and Municipal Bonds the interest on which is treated as an
item of "tax preference" for purposes of the
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Federal alternative minimum tax. See "Taxes-General." Also included within the
general category of New York Municipal Bonds and Municipal Bonds are
certificates of participation ("COPs") executed and delivered for the benefit of
government authorities or entities to finance the acquisition or construction of
equipment, land and/or facilities. COPs represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively referred to as "lease obligations") relating to such equipment,
land or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the issuer's unlimited taxing power is
pledged, a lease obligation frequently is backed by the issuer's covenant to
budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses, which
provide that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
lease property, disposition of the property in the event of foreclosure might
prove difficult.
Federal tax legislation has limited and may continue to limit the types and
volume of bonds the interest on which qualifies for a Federal income tax
exemption. As a result, this legislation and such legislation that may be
enacted in the future may affect the availability of New York Municipal Bonds
and Municipal Bonds for investment by the Fund.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL BONDS
The Fund ordinarily will invest at least 80% of its total assets in New
York Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of New York Municipal Bonds than is a municipal bond mutual
fund that is not concentrated in issuers of New York Municipal Bonds to this
degree. As of April 14, 1999, Moody's, S&P and Fitch rated New York City's
general obligation bonds A3, A-, and A, respectively. As of March 9, 1999,
Moody's and S&P rate New York State's outstanding general obligation bonds A2
and A, respectively. Because the Fund's portfolio will comprise investment grade
securities, the Fund is expected to be insulated from the market and credit
risks that may exist in connection with investments in non-investment grade New
York Municipal Bonds. There is no assurance that a particular rating will
continue for any given period of time or that any such rating will not be
revised downward or withdrawn entirely if, in the judgment of the agency
originally establishing the rating, circumstances so warrant. The value of
Municipal Bonds generally may be affected by uncertainties in the municipal
markets as a result of legislation or litigation changing the taxation of
Municipal Bonds or the rights of Municipal Bond holders in the event of a
bankruptcy. Municipal bankruptcies are rare, and certain provisions of the U.S.
Bankruptcy Code governing such bankruptcies are unclear. Further, the
application of state law to Municipal Bond issuers could produce varying results
among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the Municipal
Bonds or the New York Municipal Bonds in which the Fund invests. The Investment
Adviser does not believe that the current economic conditions in New York or
other factors described above will have a significant adverse effect on the
Fund's ability to invest in high quality New York Municipal Bonds. For a
discussion of economic and other conditions in the State of New York, see
Appendix I, "Economic and Other Conditions in New York."
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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 synthetically-created inverse floating rate bonds
evidenced by custodial or trust receipts. Generally, income on inverse floating
rate bonds will decrease when short-term interest rates increase, and will
increase when short-term interest rates decrease. Such securities have the
effect of providing a degree of investment leverage, since they may increase or
decrease in value in response to changes, in market interest rates at a rate
that is a multiple (typically two) of the rate at which fixed-rate, long-term,
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities generally will be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or limitations on the extent to which
the interest rate may vary. The Investment Adviser believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund that allows the Investment Adviser to vary the degree of
investment leverage relatively efficiently under different market conditions.
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Call Rights. The Fund may purchase a New York Municipal Bond or Municipal
Bond issuer's right to call all or a portion of such New York Municipal Bond or
Municipal Bond for mandatory tender for purchase (a "Call Right"). A holder of a
Call Right may exercise such right to require a mandatory tender for the
purchase of related New York Municipal Bonds or Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related New York Municipal Bond or Municipal Bond will expire without value.
The economic effect of holding both the Call Right and the related New York
Municipal Bond or Municipal Bond is identical to holding a New York Municipal
Bond or Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract, to repurchase the security at a mutually
agreed-upon time and price, thereby determining the yield during the term of the
agreement. The Fund may not invest in repurchase agreements maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. In the event of default
by the seller under a repurchase agreement, the Fund may suffer time delays and
incur costs or possible losses in connection with the disposition of the
underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common stock, the net asset value of the common stock will fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective. In
addition, because of the anticipated leveraged nature of the common stock,
hedging transactions will result in a larger impact on the net asset value of
the common stock than would be the case if the common stock were not leveraged.
Furthermore, the Fund may only engage in hedging activities from time to time
and may not necessarily be engaging in hedging activities when movements in
interest rates occur. The Fund has no obligation to enter into hedging
transactions and may not do so.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See
"Taxes-Tax Treatment of Options and Futures Transactions." In addition, in order
to obtain ratings of the preferred stock from one or more nationally recognized
statistical ratings organizations ("NRSROs"), the Fund may be required to limit
its use of hedging techniques in accordance with the specified guidelines of
such organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The
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investment policies with respect to the hedging transactions of the Fund are not
fundamental policies and may be modified by the Board of Directors of the Fund
without the approval of the Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to New York Municipal Bonds and Municipal Bonds it owns,
thereby giving the holder of the option the right to buy the underlying security
covered by the option from the Fund at the stated exercise price until the
option expires. The Fund writes only covered call options, which means that so
long as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option. The Fund may not write covered call
options on underlying securities in an amount exceeding 15% of the market value
of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as a writer continues. Covered call options may serve as a partial
hedge against a decline in the price of the underlying security. The Fund may
engage in closing transactions in order to terminate outstanding options that it
has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put expires. The
amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be sold in
a closing sale transaction; profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option
plus the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale of
an identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities that it
intends to purchase. The Fund will not purchase options on securities if, as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Financial Futures Contracts and Options. The Fund is authorized to
purchase and sell certain financial futures contracts and options thereon solely
for the purpose of hedging its investments in New York Municipal Bonds and
Municipal Bonds against declines in value and to hedge against increases in the
cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract to
take delivery of the type of financial instrument covered by the contract or, in
the case of index-based futures contracts, to make and accept a cash settlement,
at a specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts. A
purchase of financial futures contracts may provide a hedge against an increase
in the cost of securities intended to be purchased because such appreciation may
be offset, in whole or in part, by an increase in the value of the position in
the futures contracts.
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<PAGE> 22
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately 5%
of the contract amount must be deposited with the broker. This amount is known
as initial margin. Subsequent payments to and from the broker, called variation
margin, are made on a daily basis as the price of the financial futures contract
fluctuates making the long and short positions in the financial futures contract
more or less valuable.
The Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of
40 large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging New York Municipal Bonds
and Municipal Bonds that the Fund holds or anticipates purchasing against
adverse changes in interest rates. The Fund also may purchase and sell financial
futures contracts on U.S. Government securities and purchase and sell put and
call options on such financial futures contracts for such hedging purposes. With
respect to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA
Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available, if
the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the New
York Municipal Bonds and Municipal Bonds in which the Fund invests to make such
hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with prices and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million. Certain OTC options and assets used to cover OTC options written by the
Fund may be considered to be illiquid. The illiquidity of such options or assets
may prevent a successful sale of such options or assets, result in a delay of
sale, or reduce the amount of proceeds that might otherwise be realized.
Risk Factors in Options and Futures Transactions. Use of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the security
that is the subject of the hedge. If the price of the financial futures contract
moves more or less than the price of the security that is the subject of the
hedge, 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
21
<PAGE> 23
options on such financial futures contracts, the anticipated correlation of
price movements between the U.S. Government securities underlying the futures or
options and New York Municipal Bonds and Municipal Bonds may be adversely
affected by economic, political, legislative or other developments that have a
disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, the Fund may purchase and
sell financial futures contracts and options thereon (i) for bona fide hedging
purposes, without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) for non-hedging purposes if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and option premiums entered into for non-hedging
purposes does not exceed 5% of the market value of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses on any such transactions. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of cash,
cash equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that the
amount so segregated plus the amount of initial and variation margin held in the
account of its broker equals the market value of the financial futures contract,
thereby ensuring that the use of such financial futures contract is unleveraged.
Certain risks are involved in options and futures transactions. The
Investment Adviser believes, however, that, because the Fund will engage in
options and futures transactions only for hedging purposes, the Fund's options
and futures portfolio strategies will not subject the Fund to those risks
associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to New York
Municipal Bond or Municipal Bond options may be limited, and it is impossible to
predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures transaction. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with which the Fund has an open position in an option or financial
futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges that limit the amount of fluctuation in a financial futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
moved beyond the daily limit on a number of consecutive trading days.
22
<PAGE> 24
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize a
loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions from
time to time and may not necessarily be engaged in hedging transactions when
movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately three months after the completion of this offering,
the Fund intends to offer shares of preferred stock representing approximately
40% of the Fund's capital immediately after the issuance of such preferred
stock. There can be no assurance, however, that preferred stock representing
such percentage of the Fund's capital will actually be issued. Issuing the
preferred stock will result in the leveraging of the common stock. Although the
Fund's Board of Directors has not yet determined the terms of the preferred
stock offering, the Fund anticipates that the preferred stock will pay dividends
that will be adjusted over either relatively short-term periods (generally seven
to 28 days) or medium-term periods (up to five years). The dividend rate will be
based upon prevailing interest rates for debt obligations of comparable
maturity. The proceeds of the preferred stock offering will be invested in
longer-term obligations in accordance with the Fund's investment objective. The
expenses of the preferred stock, which will be borne by the Fund, will reduce
the net asset value of the common stock. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to holders
of preferred stock, the Fund anticipates that the terms of the preferred stock
will require the Fund to make an additional distribution to such holders in an
amount approximately equal to the tax liability resulting from such allocation
(an "Additional Distribution"). Because under normal market conditions,
obligations with longer maturities produce higher yields than short-term and
medium-term obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term rates (and any
Additional Distribution) paid by the Fund as dividends on the preferred stock
and the longer-term rates received by the Fund may provide holders of common
stock with a potentially higher yield.
The use of leverage, however, involves certain risks to the holders of
common stock. For example, issuance of the preferred stock may result in higher
volatility of the net asset value of the common stock and potentially more
volatility in the market value of the common stock. In addition, changes in the
short-term and medium-term dividend rates on, and the amount of taxable income
allocable to, the preferred stock will affect the yield to holders of common
stock. Leverage will allow holders of common stock to realize a higher current
rate of return than if the Fund were not leveraged as long as the Fund, while
accounting for its costs and operating expenses, is able to realize a higher net
return on its investment
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<PAGE> 25
portfolio than the then current dividend rate (and any Additional Distribution)
paid on the preferred stock. Similarly, since a pro rata portion of the Fund's
net realized capital gains are generally payable to holders of common stock, the
use of leverage will increase the amount of such gains distributed to holders of
common stock. However, short-term, medium-term and long-term interest rates
change from time to time as do their relationships to each other (i.e., the
slope of the yield curve) depending upon such factors as supply and demand
forces, monetary and tax policies and investor expectations. Changes in any or
all of such factors could cause the relationship between short-term, medium-term
and long-term rates to change (i.e., to flatten or to invert the slope of the
yield curve) so that short-term and medium-term rates may substantially increase
relative to the long-term obligations in which the Fund may be invested. To the
extent that the current dividend rate (and any Additional Distribution) on the
preferred stock approaches the net return on the Fund's investment portfolio,
the benefit of leverage to holders of common stock will be decreased. If the
current dividend rate (and any Additional Distribution) on the preferred stock
were to exceed the net return on the Fund's portfolio, holders of common stock
would receive a lower rate of return than if the Fund were not leveraged.
Similarly, since both the cost of issuing the preferred stock and any decline in
the value of the Fund's investments (including investments purchased with the
proceeds from any preferred stock offering) will be borne entirely by holders of
common stock, the effect of leverage in a declining market would result in a
greater decrease in net asset value to holders of common stock than if the Fund
were not leveraged. If the Fund is liquidated, holders of preferred stock will
be entitled to receive liquidating distributions before any distribution is made
to holders of common stock.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the common stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Federal tax laws. See "Taxes." However, the Fund
intends to take all measures necessary to make common stock dividend payments.
If the Fund's current investment income is ever insufficient to meet dividend
payments on either the common stock or the preferred stock, the Fund may have to
liquidate certain of its investments. In addition, the Fund will have the
authority to redeem the preferred stock for any reason and may redeem all or
part of the preferred stock under the following circumstances:
- if the Fund anticipates that the leveraged capital structure will result
in a lower rate of return for any significant amount of time to holders
of common stock than it can obtain if the common stock were not
leveraged,
- if the asset coverage for the preferred stock declines below 200% either
as a result of a decline in the value of the Fund's portfolio investments
or as a result of the repurchase of common stock in tender offers, or
- in order to maintain the asset coverage guidelines established by the
NRSROs that have rated the preferred stock.
Redemption of the preferred stock or insufficient investment income to make
dividend payments may reduce the net asset value of the common stock and require
the Fund to liquidate a portion of its investments at a time when it may be
disadvantageous to do so.
As discussed under "Investment Advisory and Management Arrangements,"
during periods when the Fund has preferred stock outstanding, the fees paid to
the Investment Adviser for investment advisory and management services will be
higher than if the Fund did not issue preferred stock because the fees paid
24
<PAGE> 26
will be calculated on the basis of the Fund's average weekly net assets,
including proceeds from the sale of preferred stock.
Assuming the use of leverage by issuing preferred stock (paying dividends
at a rate that generally will be adjusted every 28 days) in an amount
representing approximately 40% of the Fund's capital at an annual dividend rate
of 3.25% payable on such preferred stock based on market rates as of the date of
this prospectus, the annual return that the Fund's portfolio must experience
(net of expenses) in order to cover such dividend payments would be 1.30%.
The following table is designed to illustrate the effect on the return to a
holder of common stock of the leverage obtained by the issuance of preferred
stock representing approximately 40% of the Fund's capital, assuming
hypothetical annual returns on the Fund's portfolio of minus 10% to plus 10%. As
the table shows, leverage generally increases the return to stockholders when
portfolio return is positive and decreases the return when portfolio return is
negative. The figures appearing in the table are hypothetical and actual returns
may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of expenses)............. (10)% (5)% 0% 5% 10%
Corresponding Common Stock Return...................... (19)% (11)% (2)% 6% 15%
</TABLE>
Leveraging the common stock cannot be fully achieved until preferred stock
is issued and the proceeds of such offering have been invested in long-term New
York Municipal Bonds and Municipal Bonds.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
If short-term or medium-term rates increase or other changes in market
conditions occur to the point where the Fund's leverage could adversely affect
holders of common stock as noted above (or in anticipation of such changes), the
Fund may attempt to shorten the average maturity of its investment portfolio in
order to offset the negative impact of leverage. The Fund also may attempt to
reduce the degree to which it is leveraged by redeeming preferred stock pursuant
to the Fund's Articles Supplementary, which establish the rights and preferences
of the preferred stock, or otherwise by purchasing shares of preferred stock.
Purchases and redemptions of preferred stock, whether on the open market or in
negotiated transactions, are subject to limitations under the 1940 Act. In
determining whether or not it is in the best interest of the Fund and its
stockholders to redeem or repurchase outstanding preferred stock, the Board of
Directors will take into account a variety of factors, including the following:
- market conditions,
- the ratio of preferred stock to common stock, and
- the expenses associated with such redemption or repurchase.
If market conditions subsequently change, the Fund may sell previously unissued
shares of preferred stock or shares of preferred stock that the Fund had issued
but later repurchased or redeemed.
The Fund intends to apply for ratings of the preferred stock from one or
more NRSROs. In order to obtain these ratings, the Fund may be required to
maintain portfolio holdings that meet the specified guidelines of such
organizations. These guidelines may impose asset coverage requirements that are
more
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<PAGE> 27
stringent than those imposed by the 1940 Act. The Fund does not anticipate that
these guidelines will impede the Investment Adviser from managing the Fund's
portfolio in accordance with the Fund's investment objective and policies.
Ratings on preferred stock issued by the Fund should not be confused with
ratings on the obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
stock (expected to equal the original purchase price of the outstanding shares
of preferred stock plus any accumulated and unpaid dividends thereon and any
accumulated and unpaid Additional Distribution). In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its common stock
unless, at the time of such declaration, the net asset value of the Fund's
portfolio (determined after deducting the amount of such dividend or
distribution) is at least 200% of the liquidation value of the outstanding
preferred stock. Under the Fund's proposed capital structure, assuming the sale
of shares of preferred stock representing approximately 40% of the Fund's
capital, the net asset value of the Fund's portfolio is expected to be
approximately 250% of the liquidation value of the Fund's preferred stock. To
the extent possible, the Fund intends to purchase or redeem shares of preferred
stock from time to time to maintain coverage of preferred stock of at least
200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and,
prior to issuance of the preferred stock, may not be changed without the
approval of the holders of a majority of the Fund's outstanding shares of common
stock (which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the shares of common stock represented at a meeting at which more than 50% of
the outstanding shares of common stock are represented or (ii) more than 50% of
the outstanding shares). Subsequent to the issuance of the preferred stock, the
following investment restrictions may not be changed without the approval of a
majority of the outstanding shares of common stock and of the outstanding shares
of preferred stock, voting together as a class, and the approval of a majority
of the outstanding shares of preferred stock, voting separately as a class. The
Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by
Section 18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase New
York Municipal Bonds, Municipal Bonds and other debt securities and enter
into repurchase agreements in accordance with its investment objective,
policies and limitations.
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<PAGE> 28
6. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed by
the Board of Directors without shareholder approval, provide that the Fund may
not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings mentioned in investment
restriction (3) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on New York Municipal Bonds,
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may purchase
and sell Call Rights to require mandatory tender for the purchase of
related New York Municipal Bonds and Municipal Bonds.
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch &
Co. ("ML & Co."). Because of the affiliation of Merrill Lynch with the
Investment Adviser, the Fund is prohibited from engaging in certain transactions
involving Merrill Lynch except pursuant to an exemptive order or otherwise in
compliance with the provisions of the 1940 Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases from
or sales to Merrill Lynch of securities in transactions in which it acts as
principal. An exemptive order has been obtained that permits the Fund to effect
principal transactions with Merrill Lynch in high quality, short-term,
tax-exempt securities subject to conditions set forth in such order. The Fund
may consider in the future requesting an order permitting other principal
27
<PAGE> 29
transactions with Merrill Lynch, but there can be no assurance that such
application will be made and, if made, that such order would be granted.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio managers
of the Fund, including their ages and their principal occupations during the
last five years is set forth below. Unless otherwise noted, the address of each
Director, executive officer and portfolio manager is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
TERRY K. GLENN (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Merrill Lynch Asset Management, L.P.
("MLAM") (which terms as used herein include their corporate predecessors) since
1983; Executive Vice President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of Princeton Funds Distributor,
Inc. ("PFD") since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
JAMES H. BODURTHA (55) -- 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 (60) -- 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 (72) -- Director(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries,
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (69) -- Director(2) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The
May Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
ANDRE F. PEROLD (47) -- 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.
ARTHUR ZEIKEL (66) -- Director(1)(2) -- Chairman of the Investment Adviser
and MLAM from 1997 to 1999; President of the Investment Adviser and MLAM from
1977 to 1997; Chairman of Princeton
28
<PAGE> 30
Services from 1997 to 1999, Director thereof from 1993 to 1999 and President
thereof from 1993 to 1997; Executive Vice President of ML & Co. from 1990 to
1999.
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 (48) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Investment Adviser since 1984.
ROBERT A. DIMELLA, CFA (32) -- Vice President and Portfolio
Manager(1)(2) -- Vice President of MLAM since 1997; Assistant Vice President of
MLAM from 1995 to 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995.
ROBERTO W. ROFFO (33) -- Vice President and Portfolio Manager(1)(2) -- Vice
President of MLAM since 1996; Portfolio Manager with MLAM since 1992.
DONALD C. BURKE (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President of
PFD since 1999; First Vice President of MLAM from 1997 to 1999; Vice President
of MLAM from 1990 to 1997; Director of Taxation of MLAM since 1990.
ALICE A. PELLEGRINO(38) -- Secretary(1)(2) -- Vice President of MLAM since
1999; Attorney associated with MLAM since 1997; Associate with Kirkpatrick &
Lockhart LLP from 1992 to 1997.
- ------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors, and
the remaining Directors will be elected by all holders of capital stock, voting
as a single class. See "Description of Capital Stock."
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 $ plus $ per meeting
attended, and pays all Director's out-of-pocket expenses relating to attendance
at meetings. The Fund also pays members of the Board's audit and nominating
committee (the "Committee"), which consists of all the non-affiliated Directors,
an annual fee of $
per year plus $ 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,
29
<PAGE> 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
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
AGGREGATE BENEFITS FAM/MLAM
COMPENSATION ACCRUED AS PART OF ADVISED FUNDS PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSE TO DIRECTORS
- ---------------- ------------ ------------------ ------------------
<S> <C> <C> <C>
James H. Bodurtha(1)......................... $ None $163,500
Herbert I. London(1)......................... $ None $163,500
Robert R. Martin(1).......................... $ None $163,500
Joseph L. May(1)............................. $ None $163,500
Andre F. Perold(1)........................... $ 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 (28 registered investment companies
consisting of 46 portfolios); Mr. London (28 registered investment companies
consisting of 46 portfolios); Mr. Martin (28 registered investment companies
consisting of 46 portfolios); Mr. May (28 registered investment companies
consisting of 46 portfolios); and Mr. Perold (28 registered investment
companies consisting of 46 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides the
Fund with investment advisory and management services. The Asset Management
Group of ML & Co. (which includes the Investment Adviser) acts as the investment
adviser to more than 100 registered investment companies and offers investment
advisory services to individuals and institutional accounts. As of April 1999,
the Asset Management Group had a total of approximately $523 billion in
investment company and other portfolio assets under management (approximately
$40 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.
30
<PAGE> 32
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55 of
1% of the Fund's average weekly net assets (i.e., the average weekly value of
the total assets of the Fund, including proceeds from the issuance of shares of
preferred stock, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the shares of preferred stock). For purposes of this
calculation, average weekly net assets are determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing fees,
if any, stock certificates and shareholder reports, charges of the custodian and
the transfer and dividend disbursing agent and registrar, fees and expenses with
respect to the issuance of preferred stock, Securities and Exchange Commission
fees, fees and expenses of non-interested Directors, accounting and pricing
costs, insurance, interest, brokerage costs, litigation and other extraordinary
or non-recurring expenses, mailing and other expenses properly payable by the
Fund. Accounting services are provided to the Fund by the Investment Adviser,
and the Fund reimburses the Investment Adviser for its costs in connection with
such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940 Act)
of any such party. Such contract is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an advisory
client when other clients are selling the same security. If purchases or sales
of securities by the Investment Adviser for the Fund or other funds for which it
acts as investment adviser or for advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. Transactions effected by the Investment Adviser (or its affiliates) on
behalf of more than one of its clients during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
causing an adverse effect on price.
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
31
<PAGE> 33
Codes significantly restrict the personal investing activities of all employees
of the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on Fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S. Government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading
securities. In addition, no employee may purchase or sell any security that at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" that prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to providing the best
price and execution, securities firms that provide investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for transactions
by the Fund. Research information provided to the Investment Adviser by
securities firms is supplemental. It does not replace or reduce the level of
services performed by the Investment Adviser and the expenses of the Investment
Adviser will not be reduced because it receives supplemental research
information.
The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with dealers who make markets in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principals for their own accounts, the Fund
does not deal with Merrill Lynch and its affiliates in connection with such
transactions except that, pursuant to exemptive orders obtained by the
Investment Adviser, the Fund may engage in principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities. See "Investment
Restrictions." However, affiliated persons of the Fund, including Merrill Lynch,
serve as its brokers in certain over-the-counter transactions conducted on an
agency basis.
32
<PAGE> 34
The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
PORTFOLIO TURNOVER
The Fund may dispose of securities without regard to the time they have
been held when such action, for defensive or other reasons, appears advisable to
the Investment Adviser. While it is not possible to predict turnover rates with
any certainty, presently it is anticipated that the Fund's annual portfolio
turnover rate, under normal circumstances, should be less than 100%. (The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
A high portfolio turnover rate results in greater transaction costs, which are
borne directly by the Fund, and also has certain tax consequences for
stockholders.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute dividends of all or a portion of its net
investment income monthly to holders of common stock. It is expected that the
Fund will commence paying dividends to holders of common stock within
approximately 90 days of the date of this prospectus. From and after issuance of
the preferred stock, monthly distributions to holders of common stock normally
will consist of all or a portion of its net investment income remaining after
the payment of dividends (and any Additional Distribution) on the preferred
stock. The Fund may at times pay out less than the entire amount of net
investment income earned in any particular period and may at times pay out such
accumulated undistributed income in addition to net investment income earned in
other periods in order to permit the Fund to maintain a more stable level of
dividends to holders of common stock. As a result, the dividend paid by the Fund
to holders of common stock for any particular period may be more or less than
the amount of net investment income earned by the Fund during such period. For
Federal tax purposes, the Fund is required to distribute substantially all of
its net investment income for each calendar year. All net realized capital
gains, if any, will be distributed pro rata at least annually to holders of
common stock and any preferred stock. While any shares of preferred stock are
outstanding, the Fund may not declare any cash dividend or other distribution on
its common stock, unless at the time of such declaration, (i) all accumulated
preferred stock dividends, including any Additional Distribution, have been
paid, and (ii) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
the liquidation value of the outstanding preferred stock (expected to equal the
original purchase price of the outstanding shares of preferred stock plus any
accumulated and unpaid dividends thereon and any accumulated but unpaid
Additional Distribution). If the Fund's ability to make distributions on its
common stock is limited, such limitation could under certain circumstances
impair the ability of the Fund to maintain its qualification for taxation as a
regulated investment company, which would have adverse tax consequences for
holders of common stock. See "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of common stock may be
automatically reinvested in shares of
33
<PAGE> 35
common stock of the Fund. Dividends and distributions may be taxable to
shareholders under certain circumstances as discussed below, whether they are
reinvested in shares of the Fund or received in cash.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, in any taxable
year in which it distributes at least 90% of its taxable net income and 90% of
its tax-exempt net income (see below), the Fund (but not its shareholders) will
not be subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Fund intends to distribute
substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest dividends" as defined
in Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations the interest on which is excludable from gross income
for Federal income tax purposes ("tax-exempt obligations") under Section 103(a)
of the Code (relating generally to obligations of a state or local governmental
unit), the Fund shall be qualified to pay exempt-interest dividends to its
shareholders. Exempt-interest dividends are dividends or any part thereof paid
by the Fund that are attributable to interest on tax-exempt obligations and
designated by the Fund as exempt-interest dividends in a written notice mailed
to the Fund's shareholders within 60 days after the close of its taxable year.
To the extent that the dividends distributed to the Fund's shareholders are
derived from interest income excludable from gross income for Federal income tax
purposes under Code Section 103(a) and are properly designated as
exempt-interest dividends, they will be excludable from a shareholder's gross
income for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Each shareholder
is advised to consult a tax adviser with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if such shareholder
would be treated as a "substantial user" or "related person" under Code Section
147(a) with respect to property financed with the proceeds of an issue of PABs
or IDBs, 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 taxes. To the extent distributions from the Fund
are attributable to sources other than interest on New York Municipal Bonds such
distributions will not be exempt from New York State and New York City personal
income taxes. However, exempt-interest dividends (whether or not attributable to
interest on New York Municipal Bonds) paid to a corporate shareholder will be
subject to New York State corporation franchise tax and New York City general
corporation tax. Shareholders subject to income taxation by states other than
New York and cities other than New York City will realize a lower after-tax rate
of return than New
34
<PAGE> 36
York State and 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 or cities. The Fund will inform shareholders
annually as to the portion of the Fund's distributions that constitutes
exempt-interest dividends and the portion that is exempt from New York State and
New York City personal income taxes. Interest on indebtedness incurred or
continued to purchase or carry Fund shares is not deductible for Federal income
tax purposes or for New York State and New York City personal income tax
purposes to the extent attributable to exempt-interest dividends.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
will be considered taxable ordinary income for Federal income tax purposes and
New York State and New York City personal income tax purposes. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares and, for New York State and New York City
personal income tax purposes, are treated as capital gains which are taxed at
ordinary income tax rates. Certain categories of capital gains are taxable at
different rates for Federal income tax purposes. Generally not later than 60
days after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any exempt-interest dividends
or capital gain dividends, as well as any amount of capital gain dividends in
the different categories of capital gain referred to above. Distributions by the
Fund, whether from exempt-income, ordinary income and capital gains, are not
eligible for the dividends received deduction allowed to corporations under the
Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If the Fund
pays a dividend in January that was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Internal Revenue Service (the "Service") has taken the position in a
revenue ruling that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than such
class's proportionate share of particular types of income, including
exempt-interest income and net long-term capital gains. A class's proportionate
share of a particular type of income is determined according to the percentage
of total dividends paid by the RIC during such year that was paid to such class.
Consequently, when common stock and one or more series of preferred stock are
outstanding, the Fund intends to designate distributions made to the classes as
consisting of particular types of income in accordance with each class's
proportionate share of such income. Thus, the Fund will
35
<PAGE> 37
designate dividends paid as exempt-interest dividends in a manner that allocates
such dividends among the holders of common stock and series of preferred stock
in proportion to the total dividends paid to each class during the taxable year,
or otherwise as required by applicable law. Capital gain dividends will
similarly be allocated among the classes in proportion to the total dividends
paid to each class during the taxable year, or otherwise as required by
applicable law. When capital gain or other taxable income is allocated to
holders of preferred stock pursuant to the allocation rules described above, the
terms of the preferred stock may require the Fund to make an additional
distribution to or otherwise compensate such holders for the tax liability
resulting from such allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The Federal alternative minimum
tax applies to interest received on certain "private activity bonds" issued
after August 7, 1986. Private activity bonds are bonds that, although
tax-exempt, are used for purposes other than those performed by governmental
units and that benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference," which could subject certain investors
in such bonds, including shareholders of the Fund, to an increased Federal
alternative minimum tax. The Fund intends to purchase such "private activity
bonds" and will report to shareholders within 60 days after calendar year-end
the portion of its dividends declared during the year that constitutes an item
of tax preference for Federal alternative minimum tax purposes. The Code further
provides that corporations are subject to a Federal alternative minimum tax
based, in part, on certain differences between taxable income as adjusted for
other tax preferences and the corporation's "adjusted current earnings," which
more closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay a Federal alternative minimum tax
on exempt-interest dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of common stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. If the
Fund were to fail to qualify as a RIC, some or all of the distributions paid by
the Fund would be fully taxable for Federal and New York State and New York City
income tax purposes. Upon any failure to meet the asset coverage requirements of
the 1940 Act, the Fund, in its sole discretion, may redeem shares of preferred
stock in order to maintain or restore the requisite asset coverage and avoid the
adverse consequences to the Fund and its shareholders of failing to qualify as a
RIC. There can be no assurance, however, that any such action would achieve such
objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Fund currently contemplates issuing may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code
36
<PAGE> 38
and, therefore, not eligible for the dividends paid deduction. The Fund intends
to issue preferred stock that counsel advises will not result in the payment of
a preferential dividend and may seek a private letter ruling from the Service to
that effect. If the Fund ultimately relies solely on a legal opinion when it
issues such preferred stock, there is no assurance that the Service would agree
that dividends on the preferred stock are not preferential. If the Service
successfully disallowed the dividends paid deduction for dividends on the
preferred stock, the Fund could be disqualified as a RIC. In this case,
dividends on the common stock would not be exempt from Federal income taxes.
Additionally, the Fund would be subject to the Federal alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market value
than the amount of cash reinvested, it is possible that all or a portion of such
discount (which may not exceed 5% of the fair market value of the Fund's shares)
could be viewed as a taxable distribution. If the discount is viewed as a
taxable distribution, it is also possible that the taxable character of this
discount would be allocable to all of the shareholders, including shareholders
who do not participate in the dividend reinvestment plan. Thus, shareholders who
do not participate in the dividend reinvestment plan, as well as dividend
reinvestment plan participants, might be required to report as ordinary income a
portion of their distributions equal to their allocable share of the discount.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding are those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to the
Fund or an exception applies, such options and financial futures contracts that
are "Section 1256 contracts" will be
37
<PAGE> 39
"marked to market" for Federal income tax purposes at the end of each taxable
year, i.e., each such option or financial futures contract will be treated as
sold for its fair market value on the last day of the taxable year, and any gain
or loss attributable to Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of distributions
to shareholders. The mark-to-market rules outlined above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the risk
of changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New York State and New York
City tax laws presently in effect. For the complete provisions, reference should
be made to the pertinent Code sections, the Treasury Regulations promulgated
thereunder and the applicable tax laws. The Code and the Treasury Regulations,
as well as the New York State and New York City tax laws, are subject to change
by legislative, judicial or administrative action either prospectively or
retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of common stock otherwise elects, all dividend and capital gains
distributions will be automatically reinvested by , as agent for
shareholders in administering the Plan (the "Plan Agent"), in additional shares
of common stock of the Fund. Holders of common stock who elect not to
participate in the Plan will receive all distributions in cash paid by check
mailed directly to the shareholder of record (or, if the shares are held in
street or other nominee name, then to such nominee) by , as dividend
paying agent. Such participants may elect not to participate in the Plan and to
receive all distributions of dividends and capital gains in cash by sending
written instructions to , as dividend paying agent, at the address set
forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if received
by the Plan Agent not less than ten days prior to any dividend record date;
otherwise, such termination or resumption will be effective with respect to any
subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively, referred to as "dividends") payable either in shares
or in cash, non-participants in the Plan will receive cash, and participants in
the Plan will receive the equivalent in shares of common stock. The shares will
be acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional unissued
but authorized shares of common stock from the Fund ("newly issued shares") or
(ii) by purchase of outstanding shares of common stock on the open market
("open-
38
<PAGE> 40
market purchases") on the New York Stock Exchange (the "NYSE") or elsewhere. If
on the payment date for the dividend, the net asset value per share of the
common stock is equal to or less than the market price per share of the common
stock plus estimated brokerage commissions (such condition being referred to
herein as "market premium"), the Plan Agent will invest the dividend amount in
newly issued shares on behalf of the participant. The number of newly issued
shares of common stock to be credited to the participant's account will be
determined by dividing the dollar amount of the dividend by the net asset value
per share on the date the shares are issued, provided that the maximum discount
from the then current market price per share on the date of issuance may not
exceed 5%. If on the dividend payment date the net asset value per share is
greater than the market value (such condition being referred to herein as
"market discount"), the Plan Agent will invest the dividend amount in shares
acquired on behalf of the participant in open-market purchases. Prior to the
time the shares of common stock commence trading on the NYSE, participants in
the Plan will receive any dividends in newly issued shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that the
Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of common stock exceeds the
net asset value per share, the average per share purchase prices paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly
by the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata share
of brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
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<PAGE> 41
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available
to shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at .
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of common stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to reinvest
the net proceeds from a sale of such shares (the "Original Shares") in Class D
initial sales charge shares of certain Merrill Lynch-sponsored open-end mutual
funds ("Eligible Class D Shares") at their net asset value, without the
imposition of the initial sales charge, if the conditions set forth below are
satisfied. First, the sale of the Original Shares must be made through Merrill
Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible
Class D Shares. Second, the Original Shares must have been either acquired in
this offering or be shares representing reinvested dividends from shares of
common stock acquired in this offering. Third, the Original Shares must have
been continuously maintained in a Merrill Lynch securities account. Fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option. Class D shares of the mutual funds are subject to an account maintenance
fee at an annual rate of up to 0.25% of the average daily net asset value of
such mutual fund. The Eligible Class D Shares may be redeemed at any time at the
next determined net asset value, subject in certain cases to a redemption fee.
Prior to the time the shares of common stock commence trading on the NYSE, the
distributor for the mutual funds will advise Merrill Lynch Financial Consultants
as to those mutual funds that offer the investment option described above.
NET ASSET VALUE
Net asset value per share of common stock is determined as of 15 minutes
after the close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on the last business day in each
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<PAGE> 42
week. For purposes of determining the net asset value of a share of common
stock, the value of the securities held by the Fund plus any cash or other
assets (including interest accrued but not yet received) minus all liabilities
(including accrued expenses) and the aggregate liquidation value of the
outstanding shares of preferred stock is divided by the total number of shares
of common stock outstanding at such time. Expenses, including the fees payable
to the Investment Adviser, are accrued daily.
The New York Municipal Bonds and Municipal Bonds in which the Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value, the Fund utilizes the valuations of portfolio securities furnished by a
pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. New York Municipal Bonds and Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors. The Board of Directors has determined in
good faith that the use of a pricing service is a fair method of determining the
valuation of portfolio securities. Positions in futures contracts are valued at
closing prices for such contracts established by the exchange on which they are
traded, or if market quotations are not readily available, are valued at fair
value on a consistent basis using methods determined in good faith by the Board
of Directors.
The Fund determines and makes available for publication the net asset value
of its common stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities are
published in Barron's, the Monday edition of The Wall Street Journal, and the
Monday and Saturday editions of The New York Times.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as common
stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption. Within
approximately three months after completion of the offering of the common stock
described herein, the Fund intends to reclassify an amount of unissued common
stock as preferred stock and at that time to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There is no assurance that such preferred
stock will be issued.
COMMON STOCK
Shares of common stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred stock are outstanding,
holders of common stock will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on preferred
stock have been paid and unless asset coverage (as defined in the 1940 Act) with
41
<PAGE> 43
respect to preferred stock would be at least 200% after giving effect to such
distributions. See "Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 shares of common stock of the Fund for $100,005. As of the date
of this prospectus, the Investment Adviser owned 100% of the outstanding shares
of common stock of the Fund. The Investment Adviser may be deemed to control the
Fund until such time as it owns less than 25% of the outstanding shares of the
Fund.
PREFERRED STOCK
It is anticipated that the Fund's shares of preferred stock will be issued
in one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of common
stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of common stock have no preemptive right to purchase any
shares of preferred stock that might be issued. It is anticipated that the net
asset value per share of the preferred stock will equal its original purchase
price per share plus accumulated dividends per share.
The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of common stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred stock
is likely to achieve the benefits to the holders of common stock described in
the prospectus. Although the terms of the preferred stock, including its
dividend rate, voting rights, liquidation preference and redemption provisions
will be determined by the Board of Directors (subject to applicable law and the
Fund's Articles of Incorporation), the initial series of preferred stock will be
structured to carry either a relatively short-term dividend rate, in which case
periodic redetermination of the dividend rate will be made at relatively short
intervals (generally seven or 28 days), or a medium-term dividend rate, in which
case periodic redetermination of the dividend rate will be made at intervals of
up to five years. In either case, such redetermination of the dividend rate will
be made through an auction or remarketing procedure. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to holders
of the preferred stock, it is anticipated that the terms of the preferred stock
will require the Fund to make an Additional Distribution (as defined in "Risks
and Special Considerations of Leverage -- Effects of Leverage") to such holders.
The Board also has indicated that it is likely that the liquidation preference,
voting rights and redemption provisions of the preferred stock will be as stated
below. The Fund's Articles of Incorporation, as amended, together with any
Articles Supplementary, is referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid
42
<PAGE> 44
Additional Distribution) before any distribution of assets is made to holders of
common stock. After payment of the full amount of the liquidating distribution
to which they are entitled, the preferred stockholders will not be entitled to
any further participation in any distribution of assets by the Fund. A
consolidation or merger of the Fund with or into any other corporation or
corporations or a sale of all or substantially all of the assets of the Fund
will not be deemed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this prospectus and except
as otherwise required by applicable law, holders of shares of preferred stock
will have equal voting rights with holders of shares of common stock (one vote
per share) and will vote together with holders of common stock as a single
class.
In connection with the election of the Fund's directors, holders of shares
of preferred stock, voting as a separate class, will be entitled to elect two of
the Fund's directors, and the remaining directors will be elected by all holders
of capital stock, voting as a single class. So long as any preferred stock is
outstanding, the Fund will have not less than five directors. If at any time
dividends on shares of the Fund's preferred stock shall be unpaid in an amount
equal to two full years' dividends thereon, the holders of all outstanding
shares of preferred stock, voting as a separate class, will be entitled to elect
a majority of the Fund's directors until all dividends in default have been paid
or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so as
to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.
Redemption Provisions. It is anticipated that shares of preferred stock
will generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal to
their liquidation preference plus accumulated but unpaid dividends to the date
of redemption upon the occurrence of certain specified events, such as the
failure of the Fund to maintain asset coverage requirements for the preferred
stock specified by the rating agencies that issue ratings on the preferred
stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A director may be removed from office
with or without cause, but only by vote of the holders of at least 66 2/3% of
the votes entitled to be voted on the matter. A director elected by all the
holders of capital stock may be removed only by action of such holders, and a
director elected by the holders of preferred stock may be removed only by action
of such holders.
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<PAGE> 45
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66 2/3% of the Fund's shares of capital stock then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
- a merger or consolidation or statutory share exchange of the Fund with
other corporations,
- a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities), or
- a liquidation or dissolution of the Fund, unless such action has been
approved, adopted or authorized by the affirmative vote of two-thirds of
the total number of Directors fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's shares of
capital stock is required. Following the proposed issuance of the
preferred stock, it is anticipated that the approval, adoption or
authorization of the foregoing would also require the favorable vote of a
majority of the Fund's shares of preferred stock then entitled to be
voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter, voting
as a single class (or a majority of such shares if the amendment was previously
approved, adopted or authorized by two-thirds of the total number of Directors
fixed in accordance with the by-laws), and, assuming preferred stock is issued,
the affirmative vote of a majority of outstanding shares of preferred stock of
the Fund, voting as a separate class. Such a vote also would satisfy a separate
requirement in the 1940 Act that the change be approved by the shareholders.
Shareholders of an open-end investment company may require the company to redeem
their shares of common stock at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption.
All redemptions will be made in cash. If the Fund is converted to an open-end
investment company, it could be required to liquidate portfolio securities to
meet requests for redemption, and the common stock would no longer be listed on
a stock exchange.
Conversion to an open-end investment company would also require redemption
of all outstanding shares of preferred stock and would require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the issuance of senior securities, the borrowing of money and the
purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of shareholders generally.
Reference should be made to the Charter on file with the Securities and Exchange
Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
.
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<PAGE> 46
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 5,000,000 shares of common stock
from the Fund. The Underwriter is committed to purchase all of such shares if
any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of common stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of common stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter may
pay a concession to certain dealers not in excess of $ per share on sales by
such dealers. After the initial public offering, the public offering price and
other selling terms may be changed. Investors must pay for shares of common
stock purchased in the offering on or before June , 1999.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 750,000 additional shares of common
stock to cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
common stock.
If the Underwriter creates a short position in the shares of common stock
in connection with the offering, i.e., if it sells more shares of common stock
than are set forth on the cover page of this prospectus, the Underwriter may
reduce that short position by purchasing shares of common stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of common stock in
the open market to reduce the Underwriter's short position or to stabilize the
price of the shares of common stock, it may reclaim the amount of the selling
concession from the selling group members who sold those shares of common stock
as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of common stock. In addition, neither
the Fund nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
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<PAGE> 47
Prior to this offering, there has been no public market for the shares of
the common stock. The Fund plans to apply to list its shares of common stock on
the NYSE or another national securities exchange. However, during an initial
period which is not expected to exceed two weeks from the date of this
prospectus, the Fund's common stock will not be listed on any securities
exchange. Additionally, before it begins trading, the Underwriter does not
intend to make a market in the Fund's common stock, although a limited market
may develop. Thus, it is anticipated that investors may not be able to buy and
sell shares of the Fund during such period. In order to meet the requirements
for listing, the Underwriter has undertaken to sell lots of 100 or more shares
to a minimum of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The Fund
has obtained an exemptive order permitting it to engage in certain principal
transactions with the Underwriter involving high quality, short-term, tax-exempt
securities subject to certain conditions. See "Investment Restrictions" and
"Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of common stock of the Fund is .
LEGAL OPINIONS
Certain legal matters in connection with the common stock offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New
York, New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of June ,
1999 included in this prospectus and Registration Statement has been audited by
, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon authority of such firm as experts in accounting and auditing. The selection
of independent auditors is subject to ratification by shareholders of the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Any such reports, proxy statements and
other information can be inspected and copied at the public reference facilities
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
Regional Office, at Seven World Trade Center, Suite 1300,
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<PAGE> 48
New York, New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
hereby, reference is made to the Registration Statement. Statements contained in
this prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Investment Adviser or other Fund
service providers do not properly address this problem before January 1, 2000.
The Investment Adviser expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Investment Adviser that they
also expect to resolve the Year 2000 Problem, and the Investment Adviser will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the issuers of securities
in which the Fund invests, and this could hurt the Fund's investment returns.
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<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
MuniHoldings New York Insured Fund IV, Inc.:
We have audited the accompanying statement of assets, liabilities and capital of
MuniHoldings New York Insured Fund IV, Inc. as of June , 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 IV, Inc. at June , 1999, in conformity with
generally accepted accounting principles.
Princeton, New Jersey
June , 1999
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<PAGE> 50
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
JUNE , 1999
<TABLE>
<S> <C>
ASSETS:
Cash................................................... $100,005
Offering Costs (Note 1)................................
--------
Total assets......................................
--------
LIABILITIES:
Liabilities and accrued expenses (Note 1)..............
--------
NET ASSETS.................................................. $100,005
========
CAPITAL:
Common Stock, par value $.10 per share; 200,000,000
shares authorized; 6,667 shares issued and outstanding
(Note 1).............................................. $ 667
Paid-in Capital in excess of par....................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per
share of Common Stock (Note 1)........................ $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on April
5, 1999 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 June , 1999. The General Partner of the Investment Adviser is
an indirectly wholly-owned subsidiary of Merrill Lynch & Co., Inc.
The Investment Adviser, on behalf of the Fund, will incur organization
costs estimated at $ . Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at the annual rate of 0.55 of 1% of the
Fund's average weekly net assets of the Fund, including any proceeds from the
issuance of Preferred Stock. The Investment Adviser or an affiliate will pay
Merrill Lynch, Pierce, Fenner & Smith Incorporated a commission in the amount of
% of the price to the public in connection with the initial public offering
of the Fund's Common Stock.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.
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<PAGE> 51
APPENDIX I
ECONOMIC AND OTHER CONDITIONS IN NEW YORK
The following information is a brief summary of factors affecting the
economy of New York City (the "City") or New York State (the "State" or "New
York"). Other factors will affect issuers. The summary is based primarily upon
one or more of the most recent publicly available offering statements relating
to debt offerings of State issuers, however, it has not been updated. The Fund
has not independently verified this information.
The State, some of its agencies, instrumentalities and public authorities
and certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for or
the market value of the New York Municipal Bonds in which the Fund invests.
NEW YORK CITY
General. More than any other municipality, the fiscal health of the City
has a significant effect on the fiscal health of the State. The City's current
financial plan assumes that, after strong growth in 1998-1999, moderate economic
growth will exist through calendar year 2003, with moderate job growth and wage
increases.
For each of the 1981 through 1998 fiscal years, the City had an operating
surplus, before discretionary and other transfers, and achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"), after discretionary and other transfers. The City has been
required to close substantial gaps between forecast revenues and forecast
expenditures in order to maintain balanced operating results. There can be no
assurance that the City will continue to maintain balanced operating results as
required by State law without 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 2003 fiscal years (the "1999-2003 Financial Plan", "Financial Plan"
or "City Financial Plan"). The City's projections set forth in the City
Financial Plan are based on various assumptions and contingencies that are
uncertain and may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
City's Financing Program. Implementation of the City Financial Plan is
also dependent upon the City's ability to market its securities successfully.
The City's program for financing capital projects for fiscal years 1999 through
2003 contemplates the issuance of $7.3 billion of general obligation bonds, $5.4
billion of bonds to be issued by the New York City Transitional Finance
Authority (the "Transitional Finance Authority") and $2.5 billion of bonds to be
issued by the Tobacco Settlement Asset Securitization Corporation ("TSASC") and
paid from revenues received pursuant to a settlement of litigation with the four
leading cigarette companies. The Transitional Finance Authority and TSASC were
created to assist the City in financing its capital program while keeping City
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. In 1997, the State enacted the
New York City Transitional Finance Authority Act (the "Finance Authority Act"),
which created the Transitional Finance Authority. In a challenge to the
constitutionality of the Finance Authority Act, the
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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. In March 1999,
plaintiffs filed a petition for a writ of certioari to the United States Supreme
Court.
Without additional borrowing capacity, under current projections the City
would reach the limit of its capacity to enter into new contractual commitments
in fiscal year 2000. If TSASC is not able to issue $2.5 billion of bonds, the
City will need to find another source of financing or substantially curtail or
halt its capital program. Even with the ability to issue $2.5 billion in bonds
by TSASC, the City expects that it will be required to postpone a substantial
part of its capital program from the latter part of fiscal year 2001 to fiscal
year 2002. In addition, the City issues revenue notes and tax anticipation notes
to finance its seasonal working capital requirements (See "Seasonal Financing
Requirements" within). The success of projected public sales of City bonds and
notes, New York City Municipal Water Finance Authority (the "Water Authority")
bonds and Transitional Finance Authority and other bonds will be subject to
prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation bonds and
notes, as well as Water Authority, Transitional Finance Authority and TSASC
bonds.
1998 Fiscal Year. For the 1998 fiscal year, (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.
1999-2003 Financial Plan. On January 28, 1999, the City released the
Financial Plan for the 1999 through 2003 fiscal years, which relates to the City
and certain entities which receive funds from the City. The Financial Plan is a
modification to the financial plan submitted to the Control Board on June 26,
1998 (the "June Financial Plan"), as modified in November 1998. The Financial
Plan projects revenues and expenditures for the 1999 and 2000 fiscal years
balanced in accordance with GAAP, and project gaps of $1.4 billion, $1.6 billion
and $1.2 billion for the 2001 through 2003 fiscal years, respectively.
The 1999-2003 Financial Plan includes a proposed discretionary transfer in
the 1999 fiscal year of $1.6 billion to pay debt service due in fiscal year
2000, for budget stabilization purposes, and a proposed discretionary transfer
in fiscal year 2000 to pay debt service due in fiscal year 2001 totaling $345
million.
In addition, the Financial Plan sets forth gap-closing actions to eliminate
a previously projected gap for the 2000 fiscal year and to reduce projected gaps
for fiscal year 2001 through 2003 which include additional City agency, Federal
and State The Financial Plan also reflects a proposed tax reduction program
totaling $338 million, $410 million, $461 million and $473 million in fiscal
year 2000 through 2003, respectively, including the elimination of the City's
sales tax on all clothing as of December 1, 1999 and the extension of current
tax reduction for owners of cooperatives and condominium apartments starting in
fiscal year 2000, which are subject to State legislative approval, reduction of
the commercial rent tax commencing in fiscal year 2000, and a $100 million
annual tax reduction program, to be based on the advice of a tax reform task
force, starting in fiscal year 2000.
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Assumptions. The 1999-2003 Financial Plan is based on numerous
assumptions, including the condition of the City's and the region's economies
and modest employment growth and the concomitant receipt of economically
sensitive tax revenues in the amounts projected. The 1999-2003 Financial Plan is
subject to various other uncertainties and contingencies relating to, among
other factors, the extent, if any, to which wage increases for City employees
exceed the annual wage costs assumed for the 1999 through 2003 fiscal years;
continuation of projected interest earnings assumptions for pension fund assets
and current assumptions with respect to wages for City employees affecting the
City's required pension fund contributions; the willingness and ability of the
State to provide the aid contemplated by the Financial Plan and to take various
other actions to assist the City; the ability of Health and Hospitals
Corporation (the "HHC"), the Board of Education (the "BOE") and other such
agencies to maintain balanced budgets; the willingness of the Federal government
to provide the amount of Federal aid contemplated in the Financial Plan; the
impact on City revenues and expenditures of Federal and State welfare reform and
any future legislation affecting Medicare or other entitlement programs;
adoption of the City's budgets by the City Council in substantially the forms
submitted by the Mayor; the ability of the City to implement cost reduction
initiatives, and the success with which the City controls expenditures; the
impact of conditions in the real estate market on real estate tax revenues; and
unanticipated expenditures that may be incurred as a result of the need to
maintain the City's infrastructure. Certain of these assumptions have been
questioned by the City Comptroller and other public officials.
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 $175 million, $536 million, $540 million and $548 million in the 2000
through 2003 fiscal years, respectively; (ii) collection of projected rent
payments for the City's airports, totaling $365 million, $185 million and $155
million in the 2001 through 2003 fiscal years, respectively, a substantial
portion of which may depend on the successful completion of negotiations with
The Port Authority of New York and New Jersey (the "Port Authority") or the
enforcement of the City's rights under the existing leases through pending legal
action; (iii) State and Federal approval of the State and Federal gap-closing
actions proposed by the City in the Financial Plan; and (iv) receipt of the
tobacco settlement funds providing revenues of expenditure offsets in annual
amounts ranging between $250 million and $300 million. It can be expected that
the Financial Plan will engender public debate which will continue through the
time the budget is scheduled to be adopted in June 1999, and that there will be
proposals to increase spending and reject Medicaid cost containment proposals in
the Financial Plan. Accordingly, the Financial Plan may be changed by the time
the budget for fiscal year 2000 is adopted. The Financial Plan provides no
additional wage increases for City employees after their contracts expire in
fiscal year 2000 and 2001. 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
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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
54% (current as of April 14, 1999) of the mission-critical and high priority
systems of Mayoral agencies. The City's computer systems may not all be year
2000 compliant in a timely manner and there could be an adverse impact on City
operations or revenues as a result. The City is in the process of developing
contingency plans for all mission-critical and high priority systems of Mayoral
agencies, if such systems are not year 2000 compliant by pre-determined dates.
The City is also in the process of contacting its significant third party
vendors regarding the status of their compliance. Such compliance is not within
the City's control, and therefore the City cannot assure that there will not be
any adverse effects on the City resulting from any failure of these third
parties.
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
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generate sufficient revenues in the future to meet the costs of its expenditure
increases and to provide necessary services.
On February 25, 1999, the City Comptroller issued a report on the Financial
Plan. With respect to the 1999 fiscal year, the report identified a possible
surplus of between $1.67 billion and $1.75 billion, including $1.58 billion in
the budget stabilization account. With respect to fiscal year 2000 through 2003,
the report identified baseline risks of between $948 million and $1.1 billion,
$931 million and $1.8 billion, $901 million and $2.2 billion, and $859 million
and $2.6 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 $375 million in fiscal year
2001, $807 million in fiscal year 2002 and $1.3 billion in fiscal year 2003.
Additional risks identified in the report for fiscal year 2000 through 2003
include assumed payments from the Port Authority relating to the City's claim
for back rentals, which are the subject of arbitration, State and Federal
gap-closing actions proposed in the Financial Plan, possible increased overtime
expenditures, the sale of the New York City Coliseum in fiscal year 2000 and the
write-down of outstanding education aid receivables, exceeding $100 million in
each of fiscal years 2002 and 2003. The report noted that these risks may be
partially offset in each of fiscal years 2000 through 2003 by additional
resources of between $643 million and $793 million, $558 million and $620
million, $526 million and $571 million and $358 million and $430 million in
fiscal years 2000 through 2003, respectively, depending on the level of assumed
tax revenues, which would result in a projected surplus of $190 million or a
projected gap of $157 million in fiscal year 2000, including $345 million in the
budget stabilization account, and projected budget gaps, including the gaps
projected in the Financial Plan, of between $1.8 billion and $2.7 billion, $2.0
billion and $3.3 billion, and $1.6 billion and $3.5 billion in fiscal year 2001
through 2003, respectively. The report further noted that an area of concern is
the projected growth in fiscal year 2000 of operating expenditures (which
exclude State and Federal categorical aid and debt service) at twice the local
inflation rate, and that the City is vulnerable to an economic downturn. In
addition, the report noted that the City has not included any funding for new
wage increases starting in fiscal year 2001 and that wage increases given to
unionized employees at the rate of local inflation assumed in the Financial Plan
would cost the City approximately $375 million in fiscal year 2001, $807 million
in fiscal year 2002 and $1.251 billion in fiscal year 2003. With respect to HHC,
the report noted that the Governor's Executive Budget contains proposals,
including the elimination of the trend factor and reduction of hospital and
outpatient reimbursement rates, which, according to HHC, could negatively effect
its revenue by about $400 million annually.
On August 25, 1998, the City Comptroller issued a report reviewing the
current condition of the City's major physical assets and the capital
expenditures required to bring them to a state of good repair. The report's
findings relate only to current infrastructure and do not address future
capacity or technology needs. The report estimated that the expenditure of
approximately $91.83 billion would be required over the next decade to bring the
City's infrastructure to a systematic state of good repair and address new
capital needs already identified. The report stated that the City's current
Ten-Year Capital Strategy, together with funding received from other sources, is
projected to provide approximately $52.08 billion. The report noted that the
City's ability to meet all capital obligations is limited by law, as well as
funding capacity, and that the issue for the City is how best to set priorities
and manage limited resources.
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On February 24, 1999, the staff of the OSDC issued a report on the
Financial Plan. The report concluded that the City is likely to end fiscal year
1999 with a $161 million surplus, reflecting revenues which could exceed
projections in the Financial Plan, in addition to the nearly $1.6 billion
surplus forecast in the financial Plan and reflected in the Budget Stabilization
Account. With respect to fiscal years 2000 through 2003, the report estimated
budget gaps totaling $509 million, $2.3 billion, $2.6 billion and $2.0 billion,
respectively. The principal risks identified in the report include (i) Federal
and State gap-closing actions assumed in the Financial Plan; (ii) assumed
payments from the Port Authority relating to the City's claim for back rentals,
starting in the 2001 fiscal year, which are the subject of arbitration; (iii)
greater than expected increases in health insurance costs; (iv) overtime costs
exceeding those assumed in the Financial Plan by $50 million in fiscal year 1999
and $70 million in each of fiscal year 2000 through 2003, respectively; and (v)
State education aid owed from prior years, which exceeds $100 million in each of
fiscal years 2000 and 2003. 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
significantly reduce revenues and increase City pension contributions and public
assistance case loads, and that the 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 $300 million, $685
million and $1.1 billion in fiscal years 2001 through 2003, respectively, (ii)
the possibility that the 14% personal income tax surcharge will not be extended,
or (iii) the possibility that projected resources from the settlement of the
tobacco litigation will not be realized due to the Federal government's threat
to claim a portion of the tobacco settlement, a reduction in the settlement if
tobacco use declines, pressure to use more of the funds for other purposes, and
the future solvency of some of the tobacco companies involved in the settlement.
In the report, the staff identified several adverse trends, including (i)
increased staffing levels since June, 1997, primarily in the Police Department
and BOE; (ii) increased debt service costs, which are projected to equal 19% of
tax revenues in fiscal year 2002; (iii) projected spending which will increase
at a rate which is greater than the inflation rate; and (iv) large budget gaps
in fiscal year 2001 through 2003. The report also 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. The report also noted that HHC is facing reductions in
Medicare and Medicaid and increased costs of providing health care to the
uninsured, and will face increasing competitive pressures in the near future
when the State begins requiring most Medicaid recipients to enroll in managed
care plans. Finally, 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 and that the
City is behind schedule in its year 2000 capital commitments.
On March 16, 1999, the staff of the Control Board issued a report reviewing
the Financial Plan. The report noted that the City will end the 1999 fiscal year
in balance. However, the report identified risks of $711 million, $858 million,
$928 million and $796 million for fiscal year 2000 through 2003, respectively,
which, when combined with the City's projected gaps, results in estimated gaps
of $711 million, $2.3 billion, $2.6 billion and $2.0 billion for fiscal years
2000 through 2003, respectively, before making provision for any increased labor
costs which may occur when the current contracts with City employees
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expire beginning calendar year 2000. With respect to the 1999 fiscal year, the
report noted the possibility that taxes could be $230 million greater than
forecast in the Financial Plan, but that overtime expenditures could be $66
million greater than assumed in the forecast in the Financial Plan. With respect
to the 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 year 2000 through
2003, which the State failed to fund in the 1999 fiscal year, and an additional
risk of approximately $100 million in each of fiscal years 2002 and 2003 for BOE
resulting from the write-down of funds owed to BOE by the State which have been
outstanding for ten or more years; (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; (iii) overtime expenditures which could be greater
than assumed in the Financial Plan and (iv) Federal and State gap-closing
actions assumed in the Financial Plan. The report noted that if the economy
falters, the City would have to adjust its spending plans to account for falling
revenues, in addition to the already existing structural budget gaps, and that
the recent State labor settlement, which provides for raises of 11.46% over a
four-year period, would, if applied to the City's work force, eventually raise
the City's labor costs by over $1.7 billion annually. Finally, the report noted
that since June 1996 (i) the strong economy has allowed the City to reduce
taxes, (ii) increased revenue estimates and lower interest rates have had a
positive impact on the City's debt service expenditures, (iii) substantial
savings have been generated by increased pension investment earnings, and (iv)
there has been a modest increase in City-funded spending, compared to revenue
growth, primarily in the areas of public safety and education.
On March 23, 1999, the IBO released a report providing its analysis of the
Financial Plan. The report estimated potential gaps of $15 million, $2.3
billion, $2.9 billion and $2.9 billion for fiscal years 2000 through 2003,
respectively, which reflect, among other things, tax revenue and expenditure
forecasts which exceed those in the Financial Plan, including salary increases
for City employees totaling $235 million, $614 million and $1.0 billion in
fiscal years 2001 through 2003, respectively. The report noted that, in the
event of an economic downturn, spending needs would increase at a time when
revenues would be decreasing, which would make future budget gaps even larger.
Seasonal Financing Requirements. The City since 1981 has fully satisfied
its seasonal financing needs in the public credit markets, repaying all
short-term obligations within their fiscal year of issuance. The City has issued
$500 million of short-term obligations in the 1999 fiscal year to finance the
City's projected cash flow needs for the 1999 fiscal year. The City issued
$1.075 billion in short-term obligations in fiscal year 1998 to finance the
City's projected cash flow needs for the 1998 fiscal year. The City issued $2.4
billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Ratings. As of April 14, 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. On
March 8, 1999, Fitch revised its rating of City bonds upward to A. Such ratings
reflect only the view of Moody's, Standard & Poor's and Fitch, from which an
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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 December 31, 1998, the City and the
Municipal Assistance Corporation for the City of New York had respectively
approximately $26.3 and $3.2 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 were planned
independently, is approximately $400 million. The City has estimated that if
filtration of the upstate water supply system is ultimately required, the
construction expenditures required could be between $4 billion and $5 billion.
Legislation has been passed by the State which prohibits the disposal of
solid waste in any landfill located within the City after December 31, 2001. The
Financial Plan includes the estimated costs of phasing out the use of landfills
located within the City. A suit has been commenced against the City by private
individuals under the Resource Conservation and Recovery Act seeking to compel
the City to take certain measures or, alternatively, to close the Fresh Kills
landfill. If as a result of such litigation, the City is required to close the
landfill earlier than required by State legislation, the City could incur
additional costs during the Financial Plan period. Pursuant to court order, the
City 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.
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NEW YORK STATE
Current Economic Outlook. The State's 1999-2000 Executive Budget
(discussed below) contains forecasts of the national and State economies which
are summarized as follows. Economic growth for the nation during both 1999 and
2000 is expected to be slower than it was during 1998. The State Division of the
Budget projects real Gross Domestic Product ("GDP") growth of 2.4 percent in
1999, below the 1998 growth rate of 3.7 percent. In 2000, real GDP growth is
expected to continue at a similar pace, increasing by 2.3 percent. For the State
economy, continued growth is projected in 1999 and 2000 for employment, wages
and personal income, although the growth is expected to moderate from the 1998
pace. However, a continuation of international financial and economic turmoil
may result in a sharper slowdown than projected.
Overall employment growth in the State is anticipated to continue at a
modest rate, reflecting the slowing growth in the national economy, continued
spending restraint in government, and restructuring in the manufacturing, health
care, social service, and banking sectors.
Overall employment growth is projected to have been 1.9 percent in 1998,
but is expected to drop to 1.2 percent in 1999 and to 1.0 percent in 2000. On
the national level, employment growth is projected to have been 2.6 percent for
1998 and is projected to be 2.0 percent and 1.5 percent for 1999 and 2000,
respectively.
On an average annual basis, the State unemployment rate is projected to
drop from 5.7 percent in 1998 to 5.5 percent for each of 1999 and 2000. For the
nation as a whole, the unemployment rate is projected to have been 4.5 percent
for 1998, and is projected to be 4.7 percent in 1999 and 4.9 percent in 2000.
Personal income in the State is estimated to have grown by 4.9 percent in
1998, fueled in part by a continued large increase in financial sector bonus
payments at the beginning of the year, and is projected to grow by 4.2 percent
in 1999 and 4.0 percent in 2000. For the nation, person income is estimated to
have grown by 5.0 percent in 1998, and is projected to grow by 4.5 percent and
4.3 percent, respectively, for 1999 and 2000. Increases in bonus payments in
1999 and 2000 are projected to be modest, a distinct shift from the rate of the
last few years.
Consensus Economic and Revenue Forecasting Process. On March 10, 1999, the
State Legislature and the Governor conducted a consensus economic and revenue
forecasting process as required under State law. The forecast for income growth
in 1999-2000 was increased modestly to 3.3 percent, consistent with an economic
outlook of continued but slower growth in the State's economy and moderate
inflation. The higher growth rates for the nation and State in the revised
outlook are expected to result in short- and long-term interest rates at
somewhat higher levels than had been anticipated previously. The State Division
of the Budget revised its estimate of receipts for the 1999-2000 fiscal year to
include an additional $150 million in receipts.
The 1999-2000 Fiscal Year (Executive Budget Forecast). The State as of its
May 10, 1999 Annual Information Statement Supplement has not yet adopted a
budget for the 1999-2000 fiscal year. The State, however, has enacted debt
service appropriations for State-supported, contingent contractual, and certain
other obligations for the entire 1999-2000 fiscal year. Legislation extending
certain revenue-raising authority on an interim basis and making interim
appropriations for State personal service costs, various
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grants to local governments, and certain other items was submitted by the
Governor and enacted by the State Legislature through May 23, 1999. In prior
years, the State has enacted interim appropriations to continue its operations
until a budget was enacted by the Legislature.
The Governor presented his 1999-2000 Executive Budget to the Legislature on
January 27, 1999, which was subsequently amended by the Governor on February 12,
1999 (the "Executive Budget") . The Executive Budget contains financial
projections for the State's 1998-1999 through 2001-2002 fiscal years, and a
proposed Capital Program and Financing Plan for the 1999-2000 through 2003-2004
fiscal year. There can be no assurance that the Legislature will enact into law
the Executive Budget as proposed by the Governor, or that the State's adopted
budget projections will not differ materially and adversely from the projections
set forth in the Executive Budget.
The proposed 1999-2000 State Financial Plan, which reflects the Executive
Budget, is projected to have receipts in excess of disbursements on a cash basis
in the General Fund, after accounting for the transfer of available receipts
from the 1998-1999 fiscal year to the 1999-2000 fiscal year. General Fund
receipts, including transfers from other funds, are projected to be $38.81
billion, an increase of approximately $2 billion (5.5%) over estimated receipts
in the 1998-1999 fiscal year. General Fund disbursements, including transfers to
other funds, are projected to grow by 1.4 percent to approximately $37.14
billion, an increase of approximately $528 million over the 1998-1999 fiscal
year. The State is projected to close the 1999-2000 fiscal year with a balance
in the General Fund of approximately $2.47 billion.
Receipts. The forecast of General Fund receipts in fiscal year 1999-2000
reflects the next stage of the School Tax Relief (STAR) property tax reduction
program, as well as the continuing impact of earlier tax reductions. In
addition, the Executive Budget reflects several new tax reduction proposals that
are projected to have only a modest impact on receipts in 1999-2000 and
2000-2001, but are expected to reduce receipts by approximately $1 billion
annually when fully phased in at the end of the 2003-2004 fiscal year.
The largest new tax cut proposals call for further reductions in the
personal income tax to benefit middle income taxpayers. These proposals concern
increasing the income threshold where the top tax rate applies and increasing
the value of the dependent exemption. In addition the Executive Budget includes
several other targeted tax cut proposals, including: reducing certain energy
taxes; lowering the alternative minimum tax on corporations; extending the
business tax rate reductions previously enacted for general corporations to
banks and insurance companies as well as other proposals.
Personal income tax collections for the 1999-2000 fiscal year are projected
to reach approximately $22.88 billion, an increase of approximately 13.8 percent
over 1998-1999. This increase is due in part to refund reserve transactions
which serve to increase reported 1999-2000 personal income tax receipts. Growth
in 1999-2000 personal income tax receipts is partially offset by the diversion
of such receipts into the School Tax Relief Fund, which finances the STAR tax
reduction program.
User tax and fees are projected at $7.17 billion in 1999-2000, a decrease
of approximately one percent from the 1998-1999 fiscal year. The decline in this
category reflects the incremental impact of already-enacted tax reductions, and
the diversion of additional motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.
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Business tax receipts are expected to total approximately $4.56 billion in
1999-2000, approximately five percent below 1998-1999 results. The impact of tax
reductions scheduled in law, as well as slower growth in the underlying tax
base, explain this decline.
Receipts from other taxes, which are comprised primarily of receipts from
estate and gift taxes and pari-mutuel taxes on wagering, are expected to decline
to $990 million, approximately 11.9 percent in 1999-2000. The ongoing effect of
tax cuts already in law is the main reason for the decline.
Miscellaneous receipts are expected to total approximately $1.28 billion in
the 1999-2000 fiscal year, a decline of approximately 17.3 percent from the
1998-1999 fiscal year. Miscellaneous receipts include license revenues, income
from fees and fines, abandoned property proceeds, investment income, and a
portion of the assessments levied on medical providers.
Non-recurring Resources. The State Division of the Budget projects that
the proposed 1999-2000 Financial Plan contains only $33 million in non-recurring
resources, or less than one-tenth of one percent of General Fund disbursements.
Disbursements. Grants to Local Governments constitute approximately 67
percent of all General Fund spending, and include payments to local governments,
non-profit providers and entitlement benefits to individuals. It is projected to
be approximately $24.84 billion for the 1999-2000 fiscal year, a decrease of
approximately 0.2 percent from the level for the 1998-1999 fiscal year. Since
1994-1995, State spending on welfare has fallen approximately 32 percent, driven
by significant welfare changes initiated at the State and federal levels and a
large, steady decline in the number of people receiving benefits. Several trends
have contributed to falling caseloads, including the State's strong economic
performance over the past three years; State, federal and local welfare-to-work
initiatives that have expanded training and support services to assist
recipients in becoming self-sufficient; tightened eligibility review for
applicants; and aggressive fraud prevention measures.
State Operations reflects the costs of running the Executive, Legislative
and Judicial branches of government. It is projected to be approximately $6.89
billion for the 1999-2000 fiscal year. Spending in this category is projected to
increase approximately 3.7 percent above 1998-1999 and reflects the annualized
costs of 1998-1999 collective bargaining agreements, the decline in federal
receipts that offset General Fund spending for mental hygiene programs, the
costs of staffing a new State prison, and growth in the Legislative and
Judiciary budgets. The State's overall workforce is projected to remain stable
at approximately 191,200 persons.
General State Charges accounts primarily for the costs of providing fringe
benefits for State employees, including contributions to pension systems, the
employer's share of social security contributions, employer contributions toward
the cost of health insurance, and the costs of providing worker's compensation
and unemployment insurance benefits. This category also reflects certain fixed
costs such as payments in lieu of taxes and payments of judgments against the
State or its public officials. It is projected to be approximately $2.32 billion
for the 1999-2000 fiscal year, an increase of 1.4 percent over the level for the
1998-1999 fiscal year.
Transfers to Other Funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from
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other sources. This is projected to be approximately $3.08 billion for the
1999-2000 fiscal year, an increase of 10.8 percent over the level for the
1998-1999 fiscal year.
The 1998-1999 Fiscal Year (unaudited results). The State ended its
1998-1999 fiscal year on March 31, 1999 in balance on a cash basis, with a
reported General Fund cash balance of $892 million. Previously the State had
projected a potential budget imbalance of up to $1.68 billion for the 1998-1999
fiscal year. (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 have accounted for
approximately seventy percent of total State Funds disbursements.) The closing
General Fund balance does not include $2.31 billion that the State deposited
into the tax refund reserve at the close of the 1998-1999 fiscal year to pay for
tax refunds in the 1999-2000 fiscal year. The refund reserve transaction has the
effect of decreasing reported personal income tax receipts in the 1998-1999
fiscal year, while increasing reported receipts in the 1999-2000 fiscal year.
The proposed 1999-2000 State Financial Plan assumes that $1.79 billion of the
moneys made available through this transaction will not be used to support
operations in the 1999-2000 fiscal year, but instead be reserved for use in
2000-2001 and 2001-2002 to offset the incremental loss of tax receipts from
already-enacted tax cuts that will take effect in those years.
General Fund receipts and transfers from other funds for the 1998-1999
fiscal year totaled $36.74 billion, an increase of 6.34 percent from 1997-1998
levels. General Fund disbursements and transfers to other funds totaled $36.49
billion for the 1998-1999 fiscal year, an increase of 6.23 percent from the
1997-1998 levels. Disbursements in All Governmental Funds for the 1998-1999
fiscal year totaled $70.62 billion, or 6.94 percent above the 1997-1998 fiscal
year.
Future Fiscal Years. The State Division of the Budget projects budget gaps
of approximately $1.14 billion in the 2000-2001 fiscal year and $2.07 billion in
the 2001-2002 fiscal year. These gaps were projected after assuming that the
State Legislature will enact the 1999-2000 Executive Budget and accompanying
legislation in its entirety. Both houses of the State Legislature have adopted
budget resolutions which provide an outline of their intended spending and
revenue changes to the Executive Budget. The State's Division of the Budget's
analysis of these resolutions indicates that, if enacted, they would increase
the size of the State's future budget gaps. Each gap is projected after also
assuming $500 million in unspecified annual spending efficiencies, which is
comparable to the Governor's Executive Budget assumptions in previous fiscal
years. The proposed 1999-2000 Financial Plan also assumes the use of $1.79
billion in reserves to offset the incremental loss in tax receipts resulting
from previously enacted and proposed tax reductions. The proposed 1999-2000
Financial Plan currently assumes that $589 million of the reserve will be
applied in the 2000-2001 fiscal year, with the remaining $1.2 billion used in
the 2001-2002 fiscal year.
The Civil Service Employees Association (CSEA) failed to ratify a tentative
agreement with the State on a new four-year labor contract. While the proposed
1999-2000 Financial Plan has reserved $100 million for possible collective
bargaining costs, no similar reserves are contained in the current out-year
projections of receipts and disbursements to cover the recurring costs of any
possible new agreements. The State is continuing negotiations with CSEA and
other unions representing State employees.
Future Financial Plans are also likely to count on savings from
efficiencies, workforce management efforts, aggressive efforts to maximize
federal and other non-General Fund resources, and other efforts to
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control State spending. Nearly all the actions proposed by the Governor to
balance the proposed 1999-2000 Financial Plan recur and grow in value in future
years. The State Division of the Budget projects that, if the projected budget
gap for 2000-2001 is closed with recurring actions, the 2001-2002 budget gap
would be reduced to $963 million under projections current as of February 9,
1999. The Governor is required by law to propose a balanced budget each year and
will propose steps necessary to address any potential remaining budget gaps in
subsequent budgets.
General Fund receipts are projected to fall to approximately $35.99 billion
in 2000-2001 reflecting the incremental impact of already enacted tax
reductions, the impact of prior tax refund reserve transactions and the
earmarking of receipts for dedicated highway purposes. Receipts are projected to
grow modestly to approximately $36.20 billion in the 2001-2002 fiscal year,
again reflecting the impact of enacted tax cuts on normal receipts growth, as
well as the incremental impact of tax reductions recommended with the Executive
Budget.
The State currently projects spending to grow by approximately $1.09
billion (2.9 percent) in 2000- 2001 and an approximately additional $1.8 billion
(4.7 percent) in 2001-2002. General Fund spending increases at a higher rate in
2001-2002 than in 2000-2001, driven primarily by higher growth rates for
Medicaid, welfare, Children and Families Services, and Mental Retardation, as
well as the loss of federal money that offsets General Fund spending. Local
assistance spending accounts for most of the projected growth in General Fund
spending in the outyears, increasing by approximately $1.04 billion in 2000-2001
and approximately $1.46 billion in 2001-2002. School aid, which accounts for the
largest share of General Fund spending, is projected to grow by approximately
$612 million (6.1 percent) in 2000-2001 and $578 million (5.5 percent) in
2001-2002.
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 State's GAAP projections indicate that the
State will have accumulated positive General Fund balances of $1.019 billion and
$616 million, respectively, for the fiscal year ended March 31, 1999 and the
fiscal year ending March 31, 2000.
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. The General Fund operating surplus is projected
to decline to $452 million for the fiscal year ended March 31, 1999. A General
fund operating deficit of $507 million is projected for the fiscal year ending
March 31, 2000.
Special Considerations. According to the State Division of the Budget,
over the long-term uncertainties with regard to the economy present the largest
potential risk to budget balance in New York State. For example, a downturn in
the financial markets or the wider economy is possible, a risk that is
heightened by the lengthy expansion underway. The securities industry is more
important to the New York economy than the national economy, potentially
amplifying the impact of an economic downturn. A large change in stock market
performance during the forecast horizon could result in wage and unemployment
levels that are significantly different from those embodied in the State's
forecast. Merging and downsizing by firms, as a consequence of deregulation or
continued foreign competition, may also have more significant adverse effects on
employment than expected. Finally a "forecast error" of one percentage point in
the growth of receipts could cumulatively raise or lower results by over $1
billion by 2002.
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The fiscal effects of tax reductions adopted in the last several fiscal
years and those proposed by the Governor in the Executive Budget are projected
to grow more substantially beyond the 1999-2000 fiscal year. The incremental
annual cost of enacted or proposed tax reductions is estimated to peak at $2.1
billion in 2000-2001, then gradually decline to about $1 billion in 2003-2004.
Owing to these and other factors, the State may fact substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending required to
maintain State programs at mandated levels. Any such recurring imbalance would
be exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
Year 2000 Computer Matters. New York State is currently addressing "Year
2000" ("Y2K") data processing compliance issues. Since its inception, the
computer industry has used a two-digit date convention to represent the year. In
the year 2000, the date field will contain "00" and, as a result, many computer
systems and equipment may not be able to process dates properly or may fail
since they may not be able to distinguish between the years 1900 and 2000. The
Y2K issue not only affects computer programs, but also the hardware, software
and networks on which they operate. In addition, any system or equipment that is
dependent on an embedded chip, such as telecommunication equipment and security
systems, may also be adversely affected.
In April 1999 the State Comptroller released an audit on the State's Y2K
compliance. The audit, which reviewed the State's Y2K compliance activities
through October 1998, found that the State had made progress in achieving Y2K
compliance, but needed to improve its activities in several areas, including
data interchanges and contingency planning.
The Office for Technology ("OFT") will continue monitoring compliance
progress for the State's mission-critical and high-priority systems and is
reporting compliance progress to the Governor's office on a quarterly basis.
Mission-critical systems are those that may impact the public health, safety and
welfare of the State and its citizens, and for which failure could have a
material and adverse impact on State operations. High-priority systems are
critical for a State agency to fulfill its mission or deliver services. OFT
reported that as of March 31, 1999, the State had completed 97 percent of
overall compliance efforts for its mission-critical systems; 38 systems are now
Y2K compliant. As of March 31, 1999, the State had completed 80 percent of
overall compliance efforts on the high-priority systems; 208 systems are now Y2K
compliant. Compliance testing is expected to be completed by the end of calendar
year 1999. The State is also procuring independent validation and verification
services from a qualified vendor to perform an automated review of corrected
programming code and a testing process review for all mission-critical systems.
The State is also addressing a number of other issues related to bringing
its mission-critical systems into compliance, including: testing throughout 1999
of over 800 data exchange interfaces with federal, State, local and private data
partners; completing an inventory of priority equipment and systems that may
depend on embedded chips and may therefore need remediation in 1999; and
contacting critical vendors and supply partners to obtain Y2K compliance status
information and assurances. Since problems could be identified during the
compliance testing phase that could produce compliance delays, the State
agencies were required to complete contingency plans for priority systems and
business processes by the first quarter
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of calendar year 1999. OFT, as of the second quarter of calendar year 1999, has
been reviewing the status of agency contingency planning during the first
quarter. The agency plans will be tested throughout the second quarter of
calendar year 1999 and integrated into the State Emergency Response Plan and
coordinated by the State Emergency Management Office. In addition, the State
Public Service Commission has ordered that all State-regulated utilities
complete Y2K activities for mission-critical systems, including contingency
plans, by July 1, 1999 and is requiring utilities to provide monthly progress
reports. The State has also been working with local governments since December
1996 to raise awareness, promote action and provide assistance with Y2K
compliance.
While the State is taking what it believes to be appropriate action to
address Y2K compliance, there can be no guarantee that all of the State's
systems and equipment will be Y2K compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Y2K
compliance by outside parties is beyond the State's control to remediate, the
failure of outside parties to achieve Y2K compliance could have an adverse
impact on State operations or finances as well.
Prior Fiscal Years (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.
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General Fund disbursements and transfers to other funds totaled $33.40 billion,
an increase of 4.7 percent from the 1993-1994 levels.
Local Government Assistance Corporation. In 1990, as part of a State
fiscal reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. As of June
1995, LGAC had issued bonds to provide net proceeds of $4.7 billion completing
the program. The impact of LGAC's borrowing is that the State is able to meet
its cash flow needs without relying on short-term seasonal borrowing. Provisions
prohibiting the State from returning to a reliance upon cash flow manipulation
to balance its budget will remain in bond covenants until the LGAC bonds are
retired.
Financing Activities. State financing activities include general
obligation debt of the State and State-guaranteed debt, to which the full faith
and credit of the State has been pledged, as well as lease-purchase and
contractual-obligation financings, moral obligation financings and other
financings through public authorities and municipalities, where the State's
obligation to make payments for debt service is generally subject to annual
appropriation by the State Legislature.
As of March 31, 1998, the total amount of outstanding general obligation
debt was approximately $5.033 billion, including $293.6 million in bond
anticipation notes. The total amount of moral obligation debt was approximately
$1.390 billion (down from $3.272 billion as of March 31, 1997), and $24.015
billion of bonds 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
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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 March 9, 1999, Moody's and Standard & Poor's rated the
State's outstanding general obligation bonds A2 and A, respectively. Standard &
Poor's revised its ratings upward from A- to A on August 28, 1997. Ratings
reflect only the respective views of such organizations, and explanation of the
significance of such ratings must be obtained from the rating agency furnishing
the same. There is no assurance that a particular rating will continue for any
given period of time or that any such rating will not be revised downward or
withdrawn entirely if, in the judgment of the agency originally establishing the
rating, circumstances so warrant. A downward revision or withdrawal of such
ratings may have an effect on the market price of the New York Municipal Bonds
in which the Fund invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and Federal laws. State programs are frequently
challenged on State and Federal constitutional grounds. Adverse developments in
legal proceedings or the initiation of new proceedings could affect the ability
of the State to maintain a balanced State Financial Plan in any given fiscal
year. There can be no assurance that an adverse decision in one or more legal
proceedings would not exceed the amount the 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. On June 30, 1998, Yonkers satisfied the statutory
conditions for ending the supervision of its finances by the Yonkers Board.
Pursuant to State law, the control board's powers over Yonkers' finances lapsed
after the satisfaction of these conditions, on December 31, 1998.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking
or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
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Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes: The three ratings of Moody's for short-term notes are
MIG 1/VMIG 1, MIG 2/VMIG 2 and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
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<PAGE> 70
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to meet its financial commitment on the
obligation is extremely strong.
AA Debt rated "AA" differs from the highest rated issues only in
small degree. The Obligor's capacity to meet its financial
commitment on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still
strong.
BBB Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation.
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
69
<PAGE> 71
categories, ranging from "A-1" for the highest-quality obligations to "D" for
the lowest. These categories are as follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have an adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired
unless Standard & Poor's believes that such payments will be made
during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
-- Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
70
<PAGE> 72
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated "AAA." Because bonds rated in the "AAA" and "AA" categories
are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated
"F-1+."
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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<PAGE> 73
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 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
72
<PAGE> 74
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the basis
D of their ultimate recovery value in liquidation or reorganization
of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential
for recovery.
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.
73
<PAGE> 75
APPENDIX III
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured New York Municipal Bonds and Municipal Bonds
held by the Fund. The Fund has no obligation to obtain any such Policies, and
the terms of any Policies actually obtained may vary significantly from the
terms discussed below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards such
companies normally use in establishing the insurability of new issues of New
York Municipal Bonds and Municipal Bonds and are not necessarily the criteria
that would be used in regard to the purchase of such bonds by the Fund. The
Policies do not insure (i) municipal securities ineligible for insurance and
(ii) municipal securities no longer owned by the Fund.
The Policies do not guarantee the market value of the insured New York
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable to
meet its obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the insurance
company will not have any obligation to insure any issue held by the Fund that
is adversely affected by either of the above described events. In addition to
the payment of premiums, the Policies may require that the Fund notify the
insurance company as to all New York Municipal Bonds and Municipal Bonds in the
Fund's portfolio and permit the insurance company to audit their records. The
insurance premiums will be payable monthly by the Fund in accordance with a
premium schedule to be furnished by the insurance company at the time the
Policies are issued. Premiums are based upon the amounts covered and the
composition of the portfolio.
The fund will seek to utilize insurance companies that have insurance
claims-paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch
IBCA, Inc. ("Fitch") or Aaa from Moody's Investors Service ("Moody's"). There
can be no assurance however, that insurance from insurance carriers meeting
these criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by Fitch.
The ability to pay claims is adjudged by Fitch to be extremely strong for
insurance companies with this highest rating. In the opinion of Fitch,
foreseeable business and economic risk factors should not have any material
adverse impact on the ability of these insurers to pay claims. In Fitch's
opinion, profitability, overall balance sheet strength, capitalization and
liquidity are all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment or cyclical events. A Moody's
insurance claims-paying ability rating is an opinion of the ability of an
insurance
74
<PAGE> 76
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is considered by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or 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.
75
<PAGE> 77
APPENDIX IV
TAXABLE EQUIVALENT YIELDS FOR 1999(1)
<TABLE>
<CAPTION>
1999
NEW YORK
TAXABLE INCOME STATE A TAX-EXEMPT YIELD OF
- ------------------------------------ 1999 FEDERAL TAX ---------------------------------------------
SINGLE RETURN(2) JOINT RETURN(2) TAX BRACKET BRACKET(3) 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
- ----------------- ----------------- ------------ ---------- ----- ----- ----- ----- ----- -----
IS EQUAL TO A NEW YORK STATE TAXABLE YIELD OF
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20,001-$ 25,750 $ 40,001-$ 43,050 15.0% 6.85% 6.31 6.95 7.58 8.21 8.84 9.47
$ 25,751-$ 62,450 $ 43,051-$104,050 28.0% 6.85% 7.46 8.20 8.95 9.69 10.44 11.18
$ 62,451-$130,250 $104,051-$158,550 31.0% 6.85% 7.78 8.56 9.34 10.11 10.89 11.67
$130,251-$283,150 $158,551-$283,150 36.0% 6.85% 8.39 9.23 10.06 10.90 11.74 12.58
Over $283,150 Over $283,150 39.6% 6.85% 8.89 9.78 10.66 11.55 12.44 13.33
</TABLE>
<TABLE>
<CAPTION>
1999 1999
NEW YORK NEW YORK
TAXABLE INCOME STATE CITY A TAX-EXEMPT YIELD OF
- ------------------------------------ 1999 FEDERAL TAX TAX ---------------------------------------------
SINGLE RETURN(2) JOINT RETURN(2) TAX BRACKET BRACKET(3) BRACKET(4) 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
- ----------------- ----------------- ------------ ---------- ---------- ----- ----- ----- ----- ----- -----
IS EQUAL TO A NEW YORK STATE TAXABLE YIELD OF
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,751-$ 50,000 $ 45,001-$ 90,000 28.0% 6.85% 3.77% 7.77 8.55 9.32 10.10 10.88 11.65
$ 50,001-$ 62,450 $ 90,001-$104,050 28.0% 6.85% 3.83% 7.78 8.55 9.33 10.11 10.89 11.66
$ 62,451-$130,250 $104,051-$158,550 31.0% 6.85% 3.83% 8.11 8.92 9.74 10.55 11.36 12.17
$130,251-$283,150 $158,551-$283,150 36.0% 6.85% 3.83% 8.75 9.62 10.50 11.37 12.24 13.12
Over $283,150 Over $283,150 39.6% 6.85% 3.83% 9.27 10.19 11.12 12.05 12.97 13.90
</TABLE>
- ------------
(1) An investor's marginal tax rates may exceed the rates shown in the above
tables if such investor does not itemize deductions for Federal income tax
purposes or due to the reduction or possible elimination of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. For investors who pay alternative minimum tax, tax-free
yields may be equivalent to lower taxable yields than those shown above. As
for shareholders who are subject to income taxation by states other than New
York and cities other than New York City (including shareholders who pay
non-resident income taxes), tax-free yields may be equivalent to lower
taxable yields than those shown above. The above tables do not apply to
corporate investors. The tax characteristics of the Fund are described more
fully elsewhere in this prospectus. Consult your tax adviser for further
details. These charts are for illustrative purposes only and cannot be taken
as an indication of anticipated Fund performance.
(2) The above tables are based on the Federal taxable income brackets which are
adjusted annually for inflation and the New York State and City taxable
income brackets.
(3) A supplemental tax will also apply to filers with adjusted gross income
between $100,000 and $150,000 which phases out the benefit of the lower
marginal brackets. This adjustment is not reflected in the table above.
(4) This is the highest New York City effective marginal rate that applies to
any income level in the range listed on the left of this Chart. Nominally
the top marginal rate is 3.36 for net taxable income over $90,000 for joint
filers and net taxable income over $50,000 for single filers. A rate of 3.31
applies to income between $45,000 and $90,000 for joint filers and between
$25,000 and $50,000 for single filers and a rate of 3.26% applies to income
between $21,600 and $45,000 for joint filers and between $12,000 and $25,000
for single filers. An additional tax equal to 14% of the New York City
personal income tax applies for 1999.
76
<PAGE> 78
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets, Liabilities and Capital as of June , 1999
(2) Exhibits:
<TABLE>
<S> <C> <C>
(a) -- Articles of Incorporation of the Fund.(a)
(b) -- By-Laws of the Fund.(a)
(c) -- Not applicable.
(d)(1) -- Portions of the Articles of Incorporation and By-Laws of the
Fund defining the rights of holders of shares of common
stock of the Fund.(b)
(d)(2) -- Form of specimen certificate for shares of common stock of
the Fund.
(e) -- Form of Dividend Reinvestment Plan.
(f) -- Not applicable.
(g) -- Form of Investment Advisory Agreement between the Fund and
Fund Asset Management, L.P.
(h)(1) -- Form of Purchase Agreement between the Fund and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
(h)(2) -- Merrill Lynch Standard Dealer Agreement.
(i) -- Not applicable.
(j) -- Form of Custodian Contract between the Fund and
.*
(k) -- Form of Registrar, Transfer Agency and Service Agreement
between the Fund and .*
(l) -- Opinion and Consent of Brown & Wood LLP.*
(m) -- Not applicable.
(n) -- Consent of , independent auditors for the Fund.*
(o) -- Not applicable.
(p) -- Certificate of Fund Asset Management, L.P.*
(q) -- Not applicable.
(r) -- Not applicable.
</TABLE>
-----------------------
<TABLE>
<S> <C>
(a) Filed on April 30, 1999 as an exhibit to the Registrant's
Registration Statement on Form N-2 (File No. 333-77517).
(b) Reference is made to Article V, Article VI (sections 2, 3,
4, 5 and 6), Article VII, Article VIII, Article X, Article
XI, Article XII and Article XIII of the Registrant's
Articles of Incorporation, filed as Exhibit (a) to this
Registration Statement; and to Article II, Article III
(sections 1, 2, 3, 5 and 17), Article VI, Article VII,
Article XII, Article XIII and Article XIV of the
Registrant's By-Laws, filed as Exhibit (b) to this
Registration Statement.
* To be provided by amendment.
</TABLE>
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibits (h)(1) and (2).
C-1
<PAGE> 79
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees........................................... $ *
New York Stock Exchange listing fee......................... *
Printing (other than stock certificates).................... *
Engraving and printing stock certificates................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
NASD fees................................................... *
Miscellaneous............................................... *
--------
Total.................................................. $ *
========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the prospectus under the caption, "Investment Advisory
and Management Arrangements" and "Description of Capital Stock-Common Stock" and
in Note 1 to the Statement of Assets, Liabilities and Capital is incorporated
herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment Advisory
Agreement, a form of which is filed as Exhibit (g)(1) to this Registration
Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value
C-2
<PAGE> 80
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc., and for the
following closed-end registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II,
Inc., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida
Insured III, MuniHoldings Florida Insured Fund IV, MuniHoldings Insured Fund,
Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Michigan Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund II, Inc., MuniHoldings New York Insured Fund
III, Inc., MuniHoldings Pennsylvania Insured Fund, MuniInsured Fund, Inc.,
MuniVest Florida Fund, MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield
Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income
Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Government Bond Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/ Africa Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as subadviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Intermediate Government Bond Fund is
One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The address
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<PAGE> 81
of the Investment Adviser, MLAM, Princeton Funds Distributor, Inc. ("PFD"),
Princeton Services, Inc. ("Princeton Services") and Princeton Administrators,
L.P. also is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill
Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281-1201.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged for
the past two years for his or her or its own account or in the capacity of
director, officer, employee, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Vice President and Treasurer of all or substantially
all of the investment companies described in the preceding paragraphs and also
hold the same positions with all or substantially all of the investment
companies advised by MLAM as they do with those advised by the Investment
Adviser. Messrs. Giordano and Monagle are officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ -----------------------------------
<S> <C> <C>
ML & Co............................ Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services................. General Partner General Partner of MLAM
Jeffrey M. Peek.................... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-Head
of the Investment Banking Division
of Merrill Lynch in 1997; Senior
Vice President and Director of the
Global Securities and Economics
Division of Merrill Lynch from 1995
to 1997.
Terry K. Glenn..................... Executive Vice Executive Vice President of MLAM;
President Executive Vice President and
Director of Princeton Services;
President and Director of PFD;
Director of FDS; President of
Princeton Administrators, L.P.
Donald C. Burke.................... Senior Vice Senior Vice President and Treasurer
President, of FAM; Senior Vice President and
Treasurer and Treasurer of Princeton Services;
Director of Vice President of PFD; First Vice
Taxation President of the Investment Adviser
from 1997 to 1999; Vice President
of the Investment Adviser from 1990
to 1997
Michael G. Clark................... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services; Treasurer and Director of
PFD; First Vice President of the
Investment Adviser from 1997 to
1999; Vice President of the
Investment Adviser from 1996 to
1997
Linda L. Federici.................. Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
</TABLE>
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<PAGE> 82
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ -----------------------------------
<S> <C> <C>
Vincent R. Giordano................ Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Michael J. Hennewinkel............. Senior Vice Senior Vice President, General
President, General Counsel and Secretary of MLAM;
Counsel and Senior Vice President of Princeton
Secretary Services
Philip L. Kirstein................. Senior Vice Senior Vice President of MLAM;
President Senior Vice President, General
Counsel, Director and Secretary of
Princeton Services
Ronald M. Kloss.................... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Debra W. Landsman-Yaros............ Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services; Vice President of PFD
Stephen M. M. Miller............... Senior Vice Executive Vice President of
President Princeton Administrators, L.P.;
Senior Vice President of Princeton
Services
Joseph T. Monagle, Jr.............. Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Brian A. Murdock................... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
Gregory D. Upah.................... Senior Vice Senior Vice President of MLAM;
President Senior Vice President of Princeton
Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of common
stock covered hereby until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of common stock declines more than 10% from its net asset value
per share of common stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of
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<PAGE> 83
common stock increases to an amount greater than its net proceeds as stated in
the prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 497(h) under the 1933 Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
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<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Plainsboro, and State of New Jersey, on the 18th
day of May 1999.
MUNIHOLDINGS NEW YORK INSURED FUND IV,
INC.
(Registrant)
By: /s/ ALICE A. PELLEGRINO
------------------------------------
(Alice A. Pellegrino, President)
Each person whose signature appears below hereby authorizes Alice A.
Pellegrino, William E. Zitelli, Jr. or Lori A. Martin, or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendment to this Registration Statement (including
post-effective amendments) and to file the same, with all exhibits thereto, with
the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ ALICE A. PELLEGRINO President and Director May 18, 1999
- --------------------------------------------------- (Principal Executive
(Alice A. Pellegrino) Officer)
/s/ WILLIAM E. ZITELLI, JR. Treasurer and Director May 18, 1999
- --------------------------------------------------- (Principal Financial and
(William E. Zitelli, Jr.) Accounting Officer)
/s/ LORI A. MARTIN Secretary and Director May 18, 1999
- ---------------------------------------------------
(Lori A. Martin)
</TABLE>
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<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
(d)(2) Form of Specimen Certificate for shares of Common Stock of
the Registrant
(e) Form of Dividend Reinvestment Plan
(g) Form of Investment Advisory Agreement between the Fund and
Fund Asset Management, L.P.
(h)(1) Form of Purchase Agreement between the Fund and Merrill
Lynch, Pierce, Fenner & Smith Incorporated
(h)(2) Merrill Lynch Standard Dealer Agreement
</TABLE>
<PAGE> 1
COMMON STOCK COMMON STOCK
PAR VALUE $.10 PAR VALUE $.10
CUSIP
See Reverse For Certain
Definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF MuniHoldings
New York Insured Fund IV, Inc. transferable on the books of the Corporation by
the holder in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be subject to all of the provisions of the Articles
of Incorporation and of the By-Laws of the Corporation, and of all the
amendments from time to time made thereto. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
President Secretary
Countersigned and Registered:
THE BANK OF NEW YORK
Transfer Agent and Registrar
Authorized Signature
<PAGE> 2
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
The Corporation has the authority to issue stock of more than one
class. A full statement of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of each
class of stock which the Corporation is authorized to issue and the differences
in the relative rights and preferences between the shares of each class to the
extent that they have been set, and the authority of the Board of Directors to
set the relative rights and preferences of subsequent classes and series, will
be furnished by the Corporation to any stockholder, without charge, upon request
to the Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT-_______Custodian_______
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to Minors Act ______
(State)
JT TEN --as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
_________________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint ________________________________________________________________________
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated:__________________
Signature:_________________________
2
<PAGE> 3
NOTICE: The signature to this assignment must correspond with
the name as written upon the face of the certificate, in every
particular, without alteration or enlargement, or any change
whatever.
Signature Guaranteed:____________________________________
Signatures must be guaranteed by an "eligible guarantor institution" as
such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934.
3
<PAGE> 1
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, __________, will act as Agent for me, and
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present shares of common stock, par value $.10 per share
("Common Stock"), of MUNIHOLDINGS NEW YORK INSURED FUND IV, INC. (the "Fund")
are registered, and will automatically put into effect for me the dividend
reinvestment option of the Plan as of the first record date for a dividend or
capital gains distribution (collectively referred to herein as a "dividend"),
payable at the election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan
constitutes an election by me to receive dividends in shares of Common Stock
whenever the Fund declares a dividend. In such event, the dividend amount shall
automatically be made payable to me entirely in shares of Common Stock which
shall be acquired by the Agent for my account, depending upon the circumstances
described in paragraph 3, either (i) through receipt of additional shares of
unissued but authorized shares of Common Stock from the Fund ("newly-issued
shares") as described in paragraph 6 or (ii) by purchase of outstanding shares
of Common Stock on the open market ("open-market purchases") as described in
paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open-Market
Purchases. If on the payment date for the dividend (the "valuation date"), the
net asset value per share of the Common Stock, as defined in paragraph 8, is
equal to or less than the market price per share of the Common Stock, as defined
in paragraph 8, plus estimated brokerage commissions (such condition being
referred to herein as "market premium"), the Agent shall invest the dividend
amount in newly-issued shares on my behalf as described in paragraph 6. If on
the valuation date, the net asset value per share is greater than the market
value (such condition being referred to herein as "market discount"), the Agent
shall invest the dividend amount in shares acquired on my behalf in open-market
purchases as described in paragraph 7.
4. Purchase Period for Open-Market Purchases. In the event of a market
discount on the valuation date, the Agent shall have until the last business day
before the next ex-dividend date with respect to the shares of Common Stock or
in no event more than 30 days after the valuation date (the "last purchase
date") to invest the dividend amount in shares acquired in open-market purchases
except where temporary curtailment or suspension of purchases is necessary to
comply with applicable provisions of federal securities laws.
5. Failure to Complete Open-Market Purchases During Purchase Period. If
the Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period because the market discount has shifted to a market
premium or otherwise, the Agent will invest the uninvested portion of the
dividend amount in newly-issued shares at the close of business on the last
purchase date as described in paragraph 4; except that the Agent may not acquire
newly-issued shares after the valuation date under the foregoing circumstances
unless it has received a legal opinion that registration of such shares is not
required under the Securities Act of 1933, as amended, or unless the shares to
be issued are registered under such Act.
<PAGE> 2
6. Acquisition of Newly-Issued Shares. In the event that all or part of
the dividend amount is to be invested in newly-issued shares, you shall
automatically receive such newly-issued shares of Common Stock, including
fractions, for my account, and the number of additional newly-issued shares of
Common Stock to be credited to my account shall be determined by dividing the
dollar amount of the dividend on my shares to be invested in newly-issued shares
by the net asset value per share of Common Stock on the date the shares are
issued (the valuation date in the case of an initial market premium or the last
purchase date in case the Agent is unable to complete open-market purchases
during the purchase period); provided, that the maximum discount from the then
current market price per share on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the
dividend amount is to be invested in shares of Common Stock acquired in
open-market purchases, you shall apply the amount of such dividend on my shares
(less my pro rata share of brokerage commissions incurred with respect to your
open-market purchases) to the purchase on the open-market of shares of the
Common Stock for my account. Open-market purchases may be made on any securities
exchange where the Common Stock is traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as you shall determine. My funds held by you uninvested will not bear
interest, and it is understood that, in any event, you shall have no liability
in connection with any inability to purchase shares within 30 days after the
initial date of such purchase as herein provided, or with the timing of any
purchases affected. You shall have no responsibility as to the value of the
Common Stock acquired for my account. For the purposes of cash investments you
may commingle my funds with those of other shareholders of the Fund for whom you
similarly act as Agent, and the average price (including brokerage commissions)
of all shares purchased by you as Agent in the open market shall be the price
per share allocable to me in connection with open-market purchases.
8. Meaning of Market Price and Net Asset Value. For all purposes of the
Plan: (a) the market price of the Common Stock on a particular date shall be the
last sales price on the New York Stock Exchange (the "Exchange") on that date,
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such stock on the Exchange on such date and
(b) net asset value per share of the Common Stock on a particular date shall be
as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold
my shares of Common Stock acquired pursuant to the Plan, together with the
shares of other shareholders of the Fund acquired pursuant to the Plan, in
noncertificated form in your name or that of your nominee. You will forward to
me any proxy solicitation material and will vote any shares so held for me only
in accordance with the proxy returned by me to the Fund. Upon my written
request, you will deliver to me, without charge, a certificate or certificates
for the full shares held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my
account as soon as practicable but not later than 60 days after the date
thereof.
2
<PAGE> 3
11. Fractional Interests. Although I may from time to time have an
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
12. Stock Dividends or Share Purchase Rights. Any stock dividends or
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan
by notifying you in writing. Such termination will be effective immediately if
my notice is received by you not less than ten days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first trading day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be terminated
by you or the Fund upon notice in writing mailed to me at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any termination you will cause a certificate or certificates for the full
shares held for me under the Plan and cash adjustment for any fraction to be
delivered to me without charge. If I elect by notice to you in writing in
advance of such termination to have you sell part or all of my shares and remit
the proceeds to me, you are authorized to deduct brokerage commissions for this
transaction from the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date, thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
my account, all dividends and distributions payable on Common Stock of the Fund
held in my name or under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
16. Extent of Responsibility of Agent. You shall at all times act in
good faith and agree to use your best efforts within reasonable limits to insure
the accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall
3
<PAGE> 4
not be liable for loss or damage due to errors unless such error is caused by
your negligence, bad faith, or willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the
laws of the State of New York without regard to its conflicts of laws
provisions.
4
<PAGE> 1
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the ___ day of ___________, 1999 by and between
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC., a Maryland corporation (the
"Fund"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (the
"Investment Adviser").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as a closed-end,
non-diversified, management investment company registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE> 2
ARTICLE I
Duties of the Investment Adviser
The Fund hereby employs the Investment Adviser to act as a manager and
investment adviser of the Fund and to furnish, or arrange for its affiliates to
furnish, the management and investment advisory services described below,
subject to the policies of, review by and overall control of the Board of
Directors of the Fund, for the period and on the terms and conditions set forth
in this Agreement. The Investment Adviser hereby accepts such employment and
agrees during such period, at its own expense, to render, or arrange for the
rendering of, such services and to assume the obligations herein set forth for
the compensation provided for herein. The Investment Adviser and its affiliates
for all purposes herein shall be deemed to be independent contractors and,
unless otherwise expressly provided or authorized, shall have no authority to
act for or represent the Fund in any way or otherwise be deemed agents of the
Fund.
(a) Management and Administrative Services. The Investment Adviser shall
perform, or arrange for its affiliates to perform, the management and
administrative services necessary for the operation of the Fund, including
administering shareholder accounts and handling shareholder relations. The
Investment Adviser shall provide the Fund with office space, facilities,
equipment and necessary personnel and such other services as the Investment
Adviser, subject to review by the Board of Directors, from time to time shall
determine to be necessary or useful to perform its obligations under this
Agreement. The Investment Adviser, also on behalf of the Fund, shall conduct
relations with custodians, depositories, transfer agents, pricing agents,
dividend disbursing agents, other shareholder servicing agents, accountants,
attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers,
banks and such other persons in any such other capacity deemed to be necessary
or desirable. The Investment Adviser generally shall monitor the Fund's
compliance with investment policies and restrictions as set forth in
2
<PAGE> 3
filings made by the Fund under the Federal securities laws. The Investment
Adviser shall make reports to the Board of Directors of its performance of
obligations hereunder and furnish advice and recommendations with respect to
such other aspects of the business and affairs of the Fund as it shall determine
to be desirable.
(b) Investment Advisory Services. The Investment Adviser shall provide, or
arrange for its affiliates to provide, the Fund with such investment research,
advice and supervision as the latter from time to time may consider necessary
for the proper supervision of the assets of the Fund, shall furnish continuously
an investment program for the Fund and shall determine from time to time which
securities shall be purchased, sold or exchanged and what portion of the assets
of the Fund shall be held in the various securities in which the Fund invests,
options, futures, options on futures or cash, subject always to the restrictions
of the Articles of Incorporation and the By-Laws of the Fund, as amended from
time to time, the provisions of the Investment Company Act and the statements
relating to the Fund's investment objective, investment policies and investment
restrictions as the same are set forth in filings made by the Fund under the
Federal securities laws. The Investment Adviser shall make decisions for the
Fund as to the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the Fund's portfolio securities shall
be exercised. Should the Board of Directors at any time, however, make any
definite determination as to investment policy and notify the Investment Adviser
thereof in writing, the Investment Adviser shall be bound by such determination
for the period, if any, specified in such notice or until similarly notified
that such determination has been revoked. The Investment Adviser shall take, on
behalf of the Fund, all actions which it deems necessary to implement the
investment policies determined as provided above, and in particular to place all
orders for the purchase or sale of portfolio securities for the
3
<PAGE> 4
Fund's account with brokers or dealers selected by it, and to that end, the
Investment Adviser is authorized as the agent of the Fund to give instructions
to the custodian of the Fund as to deliveries of securities and payments of cash
for the account of the Fund. In connection with the selection of such brokers or
dealers and the placing of such orders with respect to assets of the Fund, the
Investment Adviser is directed at all times to seek to obtain execution and
prices within the policy guidelines determined by the Board of Directors and set
forth in filings made by the Fund under the Federal securities laws. Subject to
this requirement and the provisions of the Investment Company Act, the
Securities Exchange Act of 1934, as amended, and other applicable provisions of
law, the Investment Adviser may select brokers or dealers with which it or the
Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
ARTICLE II
Allocation of Charges and Expenses
(a) The Investment Adviser. The Investment Adviser shall provide the staff
and personnel necessary to perform its obligations under this Agreement, shall
assume and pay or cause to be paid all expenses incurred in connection with the
maintenance of such staff and personnel, and, at its own expense, shall provide
the office space, facilities, equipment and necessary personnel which it is
obligated to provide under Article I hereof, and shall pay all compensation of
officers of the Fund and all Directors of the Fund who are affiliated persons of
the Investment Adviser.
4
<PAGE> 5
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
other expenses of the Fund including, without limitation: taxes, expenses for
legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses, charges of the custodian, any
sub-custodian and transfer agent, charges of any auction agent and broker
dealers in connection with preferred stock of the Fund, expenses of portfolio
transactions, Securities and Exchange Commission fees, expenses of registering
the shares of common stock and preferred stock under Federal, state and foreign
laws, fees and actual out-of-pocket expenses of Directors who are not affiliated
persons of the Investment Adviser, accounting and pricing costs (including the
calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. It also is understood that the Fund will reimburse
the Investment Adviser for its costs incurred in providing accounting services
to the Fund.
ARTICLE III
Compensation of the Investment Adviser
(a) Investment Advisory Fee. For the services rendered, the facilities
furnished and the expenses assumed by the Investment Adviser, the Fund shall pay
to the Investment Adviser at the end of each calendar month a fee based upon the
average weekly value of the net assets of the Fund at the annual rate of 0.55 of
1.0% (0.55%) of the average weekly net assets of the Fund (i.e., the average
weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund and accumulated dividends on shares of outstanding
preferred stock), commencing on the day following effectiveness hereof. For
purposes of this calculation, average weekly net assets are determined at the
end of each month on the basis of the average net assets of the Fund for each
week during the month. The assets for each weekly period are determined by
averaging
5
<PAGE> 6
the net assets at the last business day of a week with the net assets at the
last business day of the prior week. It is understood that the liquidation
preference of any outstanding preferred stock (other than accumulated dividends)
is not considered a liability in determining the Fund's average weekly net
assets. If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fee as set forth above. Subject to the
provisions of subsection (b) hereof, payment of the Investment Adviser's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated by subsection (b) hereof. During any
period when the determination of net asset value is suspended by the Board of
Directors, the average net asset value of a share for the last week prior to
such suspension shall for this purpose be deemed to be the net asset value at
the close of each succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the Fund,
including amounts payable to the Investment Adviser pursuant to subsection (a)
hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its management and investment advisory fee by the extent of such excess and, if
required pursuant to any such laws or regulations, will reimburse the Fund in
the amount of such excess; provided, however, to the extent permitted by law,
there shall be excluded from such expenses the amount of any interest, taxes,
distribution fees, brokerage fees and commissions and extraordinary expenses
(including but not limited to legal claims and liabilities and litigation costs
and any indemnification related thereto) paid or payable by the Fund. Whenever
the expenses of the
6
<PAGE> 7
Fund exceed a pro rata portion of the applicable annual expense limitations, the
estimated amount of reimbursement under such limitations shall be applicable as
an offset against the monthly payment of the fee due to the Investment Adviser.
Should two or more such expense limitations be applicable as at the end of the
last business day of the month, that expense limitation which results in the
largest reduction in the Investment Adviser's fee shall be applicable.
ARTICLE IV
Limitation of Liability of the Investment Adviser
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
Activities of the Investment Adviser
The services of the Investment Adviser to the Fund are not to be deemed to
be exclusive; the Investment Adviser and any person controlled by or under
common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") are free to render services to others. It is
understood that Directors, officers, employees and shareholders of the Fund are
or may become interested in the Investment Adviser and its affiliates, as
directors, officers, employees, partners and shareholders or otherwise, and that
directors, officers,
7
<PAGE> 8
employees, partners and shareholders of the Investment Adviser and of its
affiliates are or may become similarly interested in the Fund, and that the
Investment Adviser and directors, officers, employees, partners and shareholders
of its affiliates may become interested in the Fund as shareholders or
otherwise.
ARTICLE VI
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above written
and shall remain in force until ___________, 2001 and thereafter, but only so
long as such continuance specifically is approved at least annually by (i) the
Board of Directors of the Fund, or by the vote of a majority of the outstanding
voting securities of the Fund, and (ii) by the vote of a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Board of Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Investment Adviser, on sixty (60) days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment.
ARTICLE VII
Amendment of this Agreement
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
8
<PAGE> 9
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York and the applicable provisions of the Investment
Company Act. To the extent that the applicable laws of the State of New York, or
any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MUNIHOLDINGS NEW YORK INSURED
FUND IV, INC.
By: _________________________________
Authorized Signatory
FUND ASSET MANAGEMENT, L.P.
By: __________________________________
Authorized Signatory
10
<PAGE> 1
EXHIBIT (h)(1)
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
(a Maryland corporation)
Shares of Common Stock
PURCHASE AGREEMENT
Dated: , 1999
<PAGE> 2
Table of Contents
Page
SECTION 1. Representations and Warranties. 2
(a) Representations and Warranties by the Fund and the Adviser. 2
(b) Additional Representations of the Adviser. 7
(c) Officer's Certificates. 7
SECTION 2. Sale and Delivery to the Underwriter; Closing. 7
(a) Initial Shares. 7
(b) Option Shares. 8
(c) Payment. 8
(d) Denominations; Registration. 8
SECTION 3. Covenants of the Fund. 9
(a) Compliance with Securities Regulations and Commission
Requests. 9
(b) Filing of Amendments. 9
(c) Delivery of Registration Statements. 9
(d) Delivery of Prospectus. 10
(e) Continued Compliance with Securities Laws. 10
(f) Blue Sky Qualifications. 10
(g) Rule 158. 10
(h) Use of Proceeds. 11
(i) Subchapter M. 11
(j) Listing. 11
(k) Restrictions on Sale of Shares. 11
SECTION 4. Payment of Expenses. 11
(a) Expenses. 11
(b) Termination of Agreement. 12
SECTION 5. Conditions of Underwriter's Obligations. 12
(a) Effectiveness of Registration Statement. 12
(b) Opinion of Counsel for the Fund and the Underwriter. 12
(c) Opinion of General Counsel of the Adviser. 12
(d) Officers' Certificates. 12
(e) Accountant's Comfort Letter. 13
(f) Bring-down Comfort Letter. 13
(g) Approval of Listing. 13
(h) No Objection. 13
(i) Conditions to Purchase Option Shares. 13
(j) Additional Documents. 14
(k) Termination of Agreement. 14
i
<PAGE> 3
SECTION 6. Indemnification. 14
(a) Indemnification of the Underwriter. 14
(b) Indemnification of Fund, Adviser, Directors, General
Partner and Officers. 15
(c) Actions against Parties, Notification. 15
(d) Settlement without Consent if Failure to Reimburse. 16
SECTION 7. Contribution. 16
SECTION 8. Representations, Warranties and Agreements to Survive Delivery. 17
SECTION 9. Termination of Agreement. 18
(a) Termination; General. 18
(b) Liabilities. 18
SECTION 10. Notices. 18
SECTION 11. Parties. 18
SECTION 12. GOVERNING LAW AND TIME. 19
SECTION 13. Effect of Headings. 19
SCHEDULE A. 21
EXHIBITS
Exhibit A - Form of Opinion of Fund's Counsel
Exhibit B - Form of Opinion of General Counsel of the Investment Adviser
Exhibit C - Form of Accountant's Comfort Letter
ii
<PAGE> 4
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
(a Maryland corporation)
_________ Shares of Common Stock
(Par Value $.10 Per Share)
PURCHASE AGREEMENT
__________, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1201
Ladies and Gentlemen:
MuniHoldings New York Insured Fund IV, Inc., a Maryland corporation (the
"Fund"), and Fund Asset Management, L.P., a Delaware limited partnership (the
"Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the
issue and sale by the Fund and the purchase by the Underwriter of shares
of common stock, par value $.10 per share, of the Fund (the "Common Stock"),
and, with respect to the grant by the Fund to the Underwriter of the option
described in Section 2(b) hereof to purchase all or any part of additional
shares of Common Stock to cover over-allotments, if any. The aforesaid
shares of Common Stock (the "Initial Shares") to be purchased by the Underwriter
and all or any part of the shares of Common Stock subject to the option
described in Section 2(b) hereof (the "Option Shares"), are hereinafter called,
collectively, the "Shares."
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after this
Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No.
333-77517), including the related preliminary prospectus, for the registration
of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), the
Investment Company Act, and the rules and regulations of the Commission under
the 1933 Act and the Investment Company Act (together, the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such
<PAGE> 5
amended preliminary prospectuses as may have been required to the date hereof.
Promptly after execution and delivery of this Agreement, the Fund will either
(i) prepare and file a prospectus in accordance with the provisions of paragraph
(c) of Rule 497 ("Rule 497(c)") of the rules and regulations of the Commission
under the 1933 Act (the "1933 Act Regulations") or a certificate in accordance
with the provisions of paragraph (j) of Rule 497 ("Rule 497(j)") of the 1933 Act
Regulations, (ii) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the 1933 Act Regulations and paragraph
(h) of Rule 497 ("Rule 497(h)") of the 1933 Act Regulations, or (iii) if the
Fund has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations,
prepare and file a term sheet (a "Term Sheet") in accordance with the provisions
of Rule 434 and Rule 497(h). The information included in any such prospectus or
in any such Term Sheet, as the case may be, that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective (a) pursuant
to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information."
Each prospectus used before such registration statement became effective, and
any prospectus that omitted, as applicable, the Rule 430A Information or the
Rule 434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto, if any, at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus in the form first furnished to the Underwriter for use in connection
with the offering of the Shares is herein called the "Prospectus." If Rule 434
is relied on, the term "Prospectus" shall refer to the preliminary prospectus
dated April 30, 1999, together with the applicable Term Sheet and all references
in this Agreement to the date of such Prospectus shall mean the date of the
applicable Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus, or any Term
Sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Fund and the Adviser. The Fund
and the Adviser each severally represents and warrants to the Underwriter as of
the date hereof, as of the Closing Time referred to in Section 2(c) hereof and
as of the Date of Delivery (if any) referred to in Section 2(b) hereof, and
agrees with the Underwriter, as follows:
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<PAGE> 6
(i) Compliance with Registration Requirements. The Fund meets the
requirements for use of Form N-2 under the 1933 Act. Each of the Registration
Statement and any Rule 462(b) Registration Statement has become effective under
the 1933 Act and no stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement has been issued under the
1933 Act and no proceedings for that purpose have been instituted or are pending
or, to the knowledge of the Fund, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with. If required, the Fund has received any orders exempting the Fund
from any provisions of the Investment Company Act.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Shares are purchased, at
the Date of Delivery) the Registration Statement, the Rule 462(b) Registration
Statement and any amendments or supplements thereto complied and will comply in
all material respects with the requirements of the 1933 Act, the Investment
Company Act and the Rules and Regulations and did not and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
Neither the Prospectus, nor any amendments or supplements thereto, at the time
the Prospectus or any amendments or supplements thereto were issued and at the
Closing Time (and, if any Option Shares are purchased, at the Date of Delivery)
included or will include an untrue statement of a material fact or omitted or
will omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties in this subsection shall not
apply to statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information furnished to
the Fund in writing by the Underwriter expressly for use in the Registration
Statement or in the Prospectus. If Rule 434 is used, the Fund will comply with
the requirements of Rule 434.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 497(c) or Rule 497(h) under the 1933 Act, complied
when so filed in all material respects with the Rules and Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriter for use
in connection with this offering was identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the financial
statements and supporting schedules, if any, included in the Registration
Statement are independent public accountants as required by the 1933 Act and the
Rules and Regulations.
(iii) Financial Statements. The financial statements, included in the
Registration Statement and Prospectus, together with the related schedules and
notes, present fairly the financial position of the Fund at the date indicated
and said statements
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<PAGE> 7
have been prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the period involved. The
supporting schedules, if any, included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated therein.
(iv) No Material Adverse Change in Business. Since the respective dates as
of which information is given in the Registration Statement and in the
Prospectus, except as otherwise stated therein, (A) there has been no material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Fund, whether or not arising in
the ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Fund, other than those in the ordinary
course of business, which are material with respect to the Fund and (C) there
has been no dividend or distribution of any kind declared, paid or made by the
Fund on any class of its capital stock.
(v) Good Standing of the Fund. The Fund has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Maryland and has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement; and the Fund is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect.
(vi) Subsidiaries. The Fund has no subsidiaries.
(vii) Capitalization. The authorized, issued and outstanding capital stock
of the Fund is as set forth in the Prospectus under the caption "Description of
Capital Stock."
(viii) Investment Company Act. The Fund is registered with the Commission
under the Investment Company Act as a closed-end, non-diversified, management
investment company, and no order of suspension or revocation of such
registration has been issued or proceedings therefor initiated or threatened by
the Commission.
(ix) Authorization of Agreement. This Agreement been duly authorized,
executed and delivered by the Fund.
(x) Authorization and Description of Shares. The Shares to be purchased by
the Underwriter from the Fund have been duly authorized for issuance and sale to
the Underwriter pursuant to this Agreement, and, when issued and delivered by
the Fund pursuant to this Agreement against payment of the consideration set
forth in this Agreement will be validly issued, fully paid and non-assessable;
the Shares conform to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Shares will be subject to
personal liability by reason of being such a holder; and the issuance of the
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<PAGE> 8
Shares is not subject to the preemptive or other similar rights of any
securityholder of the Fund.
(xi) Absence of Defaults and Conflicts. The Fund is not in violation of its
charter or by-laws or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any material contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or
other agreement or instrument to which the Fund is a party or by which it or its
properties may be bound, or to which any of the property or assets of the Fund
is subject (collectively, "Agreements and Instruments"), except for such
defaults that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement, the Investment Advisory Agreement
and the Custody Agreement referred to in the Registration Statement (as used
herein, the "Advisory Agreement" and the "Custody Agreement," respectively) and
the consummation of the transactions contemplated in this Agreement and in the
Registration Statement (including the issuance and sale of the Shares and the
use of the proceeds from the sale of the Shares as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Fund with its
obligations under this Agreement have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach of, or a
default or Repayment Event (as defined below) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Fund pursuant to the Agreements and Instruments (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not result in
a Material Adverse Effect), nor will such action result in any violation of the
provisions of the charter or the by-laws of the Fund, or any applicable law,
statute, rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having jurisdiction
over the Fund or any of its assets, properties or operations. As used herein, a
"Repayment Event" means any event or condition which gives the holder of any
note, debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness by the Fund.
(xii) Absence of Proceedings. There is no action, suit, proceeding, inquiry
or investigation before or brought by any court or governmental agency or body,
domestic or foreign, now pending, or, to the knowledge of the Fund, threatened
against or affecting, the Fund, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which might
reasonably be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in this
Agreement or the performance by the Fund of its obligations hereunder; the
aggregate of all pending legal or governmental proceedings to which the Fund is
a party or of which any of its respective property or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, could not reasonably be expected
to result in a Material Adverse Effect.
5
<PAGE> 9
(xiii) Subchapter M Compliance. The Fund intends to, and will, direct the
investment of proceeds of the offering described in the Registration Statement
in such a manner as to comply with the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended ("Subchapter M of the Code"), and
intends to qualify as a regulated investment company under Subchapter M of the
Code.
(xiv) Accuracy of Exhibits. There are no contracts or documents which are
required to be described in the Registration Statement or the Prospectus or to
be filed as exhibits thereto which have not been so described and filed as
required.
(xv) Possession of Intellectual Property. The Fund owns or possesses, or
can acquire on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other intellectual
property (collectively, "Intellectual Property") necessary to carry on the
business now operated by it, and the Fund has not received any notice or is
otherwise aware of any infringement or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or circumstances which
would render any Intellectual Property invalid or inadequate to protect the
interest of the Fund therein, and which infringement or conflict (if the subject
of any unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or authorization,
approval, consent, license, order, registration, qualification or decree of, any
court or governmental authority or agency is necessary or required for the
performance by the Fund of its obligations hereunder, in connection with the
offering, issuance or sale of the Shares under this Agreement or the
consummation of the transactions contemplated by this Agreement, except such as
have been already obtained or as may be required under the 1933 Act or the 1940
Act or the Rules and Regulations and foreign or state securities or blue sky
laws.
(xvii) Possession of Licenses and Permits. The Fund possesses such permits,
licenses, approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state, local or
foreign regulatory agencies or bodies necessary to conduct the business now
operated by it; the Fund is in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when the
invalidity of such Governmental Licenses or the failure of such Governmental
Licenses to be in full force and effect would not have a Material Adverse
Effect; and the Fund has not received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.
6
<PAGE> 10
(b) Additional Representations of the Adviser. The Adviser represents and
warrants to the Underwriter as of the date hereof and as of the Representation
Date as follows:
(i) Organization and Authority of Adviser. The Adviser has been duly
organized as a limited partnership under the laws of the State of Delaware,
with power and authority to conduct its business as described in the
Registration Statement and the Prospectus.
(ii) Investment Advisers Act. The Adviser is duly registered as an
investment adviser under the Investment Advisers Act of 1940, as amended
(the "Investment Advisers Act"), and is not prohibited by the Investment
Advisers Act or the Investment Company Act, or the rules and regulations
under such acts, from acting under the Advisory Agreement for the Fund as
contemplated by the Registration Statement and the Prospectus.
(iii) Authorization of Agreements. This Agreement has been duly
authorized, executed and delivered by the Adviser; the Advisory Agreement
has been duly authorized, executed and delivered by the Adviser and
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting
creditors' rights and to general equitable principles; and neither the
execution and delivery of this Agreement or the Advisory Agreement, nor the
performance by the Adviser of its obligations hereunder or thereunder will
conflict with, or result in a breach of any of the terms and provisions of,
or constitute, with or without the giving of notice or the lapse of time or
both, a default under, any agreement or instrument to which the Adviser is
a party or by which it is bound, or any law, order, rule or regulation
applicable to it of any jurisdiction, court, Federal or state regulatory
body, administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Adviser or its
respective properties or operations.
(iv) Financial Resources. The Adviser has the financial resources
available to it necessary for the performance of its services and
obligations as contemplated in the Registration Statement and the
Prospectus.
(v) Rule 482 Compliance. Any advertisement approved by the Adviser for
use in the public offering of the Shares pursuant to Rule 482 under the
1933 Act Regulations (an "Omitting Prospectus") complies with the
requirements of such Rule 482.
(c) Officer's Certificates. Any certificate signed by any officer of the
Fund or any officer of the Adviser delivered to the Underwriter or to counsel
for the Fund and the Underwriter shall be deemed a representation and warranty
by the Fund or the Adviser, as the case may be, to the Underwriter as to the
matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) Initial Shares. On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth, the
Fund agrees to sell to the
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<PAGE> 11
Underwriter and the Underwriter agrees to purchase from the Fund the Initial
Shares at the price per share set forth in Schedule A.
(b) Option Shares. In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Fund hereby grants an option to the Underwriter to purchase up to an
additional shares of Common Stock at the price per share set forth in
Schedule A, less an amount per share equal to any dividends or distributions
declared by the Fund and payable on the Initial Shares but not payable on the
Option Shares. The option hereby granted will expire 45 days after the date
hereof and may be exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial Shares upon notice by the Underwriter
to the Fund setting forth the number of Option Shares as to which the
Underwriter is then exercising the option and the time, date and place of
payment and delivery for such Option Shares. Any such time and date of delivery
for the Option Shares (a "Date of Delivery") shall be determined by the
Underwriter, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to Closing Time, as hereinafter
defined.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Shares shall be made at the offices of Brown &
Wood LLP, One World Trade Center, New York, New York 10048-0557, or at such
other place as shall be agreed upon by the Underwriter and the Fund, at 9:00
A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day following the date hereof, or such
other time not later than ten business days after such date as shall be agreed
upon by the Underwriter and the Fund (such time and date of payment and delivery
herein being referred to as "Closing Time").
In addition, in the event that any or all of the Option Shares are
purchased by the Underwriter, payment of the purchase price for, and delivery of
certificates for, such Option Shares shall be made at the above-mentioned
offices of Brown & Wood LLP, or at such other place as shall be agreed upon by
the Underwriter and the Fund, on each Date of Delivery as specified in the
notice from the Underwriter to the Fund.
Payment shall be made to the Fund by wire transfer of immediately available
funds to a bank account designated by the Fund, against delivery to the
Underwriter of certificates for the Shares to be purchased by it.
(d) Denominations; Registration. Certificates for the Initial Shares and
the Option Shares, if any, shall be in such denominations and registered in such
names as the Underwriter may request in writing at least one full business day
before the Closing Time or the relevant Date of Delivery, as the case may be.
The certificates for the Initial Shares and the Option Shares will be made
available by the Fund for examination by the Underwriter not later than 10:00
A.M. on the last business day prior to Closing Time or the Date of Delivery, as
the case may be.
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<PAGE> 12
SECTION 3. Covenants of the Fund. The Fund covenants with the Underwriter
as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Fund, subject to Section 3(b), will comply with the requirements of Rule 430A or
Rule 434, as applicable, and will notify the Underwriter immediately, and
confirm the notice in writing, (i) if any post-effective amendment to the
Registration Statement shall have become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes, and (v) of the issuance by the Commission
of an order of suspension or revocation of the notification on Form N-8A of
registration of the Fund as an investment company under the Investment Company
Act or the initiation of any proceeding for that purpose. The Fund will make
every reasonable effort to prevent the issuance of any stop order described in
subsection (iv) hereunder or any order of suspension or revocation described in
subsection (v) hereunder and, if any such stop order or order of suspension or
revocation is issued, to obtain the lifting thereof at the earliest possible
moment. The Fund will promptly effect the filings necessary pursuant to Rule
497(c), Rule 497(j) or Rule 497(h) and will take such steps as it deems
necessary to ascertain promptly whether the certificate transmitted for filing
under Rule 497(j) or the form of prospectus transmitted for filing under Rule
497(c) or Rule 497(h) was received for filing by the Commission and, in the
event that it was not, it will promptly file such certificate or prospectus.
(b) Filing of Amendments. The Fund will give the Underwriter notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment or filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus included
in the Registration Statement at the time it became effective or to the
Prospectus, whether pursuant to the Investment Company Act, the 1933 Act, or
otherwise, and will furnish the Underwriter with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Underwriter or
counsel to the Underwriter and the Fund shall object.
(c) Delivery of Registration Statements. The Fund has furnished or will
deliver to the Underwriter and counsel to the Underwriter and the Fund, without
charge, signed copies of the notification of registration on Form N-8A and
Registration Statement as originally filed and of each amendment thereto,
(including exhibits filed therewith, or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Underwriter a conformed copy, without charge, of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for the Underwriter. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriter will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
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<PAGE> 13
(d) Delivery of Prospectus. The Fund has delivered to the Underwriter,
without charge, as many copies of each preliminary prospectus as the Underwriter
reasonably requested, and the Fund hereby consents to the use of such copies for
purposes permitted by the 1933 Act. The Fund will furnish to the Underwriter,
without charge, during the period when the Prospectus is required to be
delivered under the 1933 Act, such number of copies of the Prospectus (as
amended or supplemented) as the Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriter will be identical to the electronically transmitted copies thereof
field with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Fund will comply with
the 1933 Act, the Investment Company Act and the Rules and Regulations so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is required by
the 1933 Act to be delivered in connection with sales of the Shares, any event
shall occur or condition shall exist as a result of which it is necessary, in
the opinion of counsel to the Underwriter and the Fund, to amend the
Registration Statement or amend or supplement any Prospectus in order that the
Prospectus will not include any untrue statements of material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Fund will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Fund will
furnish to the Underwriter such number of copies of such amendment or supplement
as the Underwriter may reasonably request.
(f) Blue Sky Qualifications. The Fund will use its best efforts, in
cooperation with the Underwriter, to qualify the Shares for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Underwriter may designate and to maintain such qualifications in effect for
a period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Fund shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the Shares have been
so qualified, the Fund will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Fund will timely file such reports pursuant to the
Investment Company Act as are necessary in order to make generally available to
its securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
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<PAGE> 14
(h) Use of Proceeds. The Fund will use the net proceeds received by it from
the sale of the Shares in the manner specified in the Prospectus under "Use of
Proceeds."
(i) Subchapter M. The Fund will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the Code.
(j) Listing. The Fund will use its best efforts to effect the listing of
the Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than two weeks from the date of the Prospectus.
(k) Restrictions on Sale of Shares. During a period of 180 days from the
date of the Prospectus, the Fund will not, without your prior written consent,
directly or indirectly offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any share of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or file any registration statement under the 1933 Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock of such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder or (B) any shares or Common Stock issued pursuant to any dividend
reinvestment plan.
SECTION 4. Payment of Expenses.
(a) Expenses. The Fund will pay all expenses incident to the performance of
its obligations under this Agreement, including (i) the preparation, printing
and filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriter of this Agreement and such
other documents as may be required in connection with the offering, purchase,
sale issuance or delivery of the Shares, (iii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriter, including any
stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Shares to the Underwriter, (iv) the fees and
disbursements of the Fund's counsel, accountants and other advisors, (v) the
qualification of the Shares under the securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel to the Underwriter and the Fund in connection
therewith and in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriter of copies
of each preliminary prospectus, any Term Sheets and of the Prospectus and any
amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriter of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the Shares
and (ix) the filing fees incident to, and the reasonable fees and disbursements
of counsel to the Underwriter and the Fund in connection with the review by the
National Association of Securities Dealers, Inc. (the "NASD") of the terms of
the sale of the Shares and (x) the fees and expenses incurred in connection with
the listing of the Shares on the New York Stock Exchange.
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<PAGE> 15
(b) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Fund or the Adviser shall reimburse the Underwriter for all of its
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel to the Fund and the Underwriter. In the event the transactions
contemplated hereunder are not consummated, the Adviser agrees to pay all of the
costs and expenses set forth in paragraph (a) of this Section 4 which the Fund
would have paid if such transactions had been consummated.
SECTION 5. Conditions of Underwriter's Obligations. The obligations of the
Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser contained in Section 1 hereof, or in the
certificates of any officer of the Fund and the Adviser delivered pursuant to
the provisions hereof, to the performance by the Fund and the Adviser of their
respective covenants and obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement
including any Rule 462(b) Registration Statement has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriter and the Fund. Either (i) a
certificate has been filed with the Commission in accordance with Rule 497(j) or
a prospectus has been filed with the Commission in accordance with Rule 497(c),
or (ii) a prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 497(h) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Fund has
elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 497(h).
(b) Opinion of Counsel for the Fund and the Underwriter. At Closing Time,
the Underwriter shall have received the favorable opinion, dated as of Closing
Time, of Brown & Wood LLP, counsel to the Fund and the Underwriter, to the
effect set forth in Exhibit A hereto.
(c) Opinion of General Counsel of the Adviser. At Closing Time, the
Underwriter shall have received the favorable opinion, dated as of Closing Time,
of Michael J. Hennewinkel, Esq., General Counsel to the Adviser, or a senior
attorney of the Adviser, in form and substance satisfactory to counsel to the
Underwriter, to the effect set forth in Exhibit B hereto and to such further
effect as counsel to the Underwriter may reasonably request.
(d) Officers' Certificates. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Fund, whether or not arising in the ordinary course of business, and the
Underwriter shall have received (A) a certificate of the President or a Vice
President of the Fund, dated as of Closing Time, to the effect that (i) there
has been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time,
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<PAGE> 16
(iii) the Fund has complied with all agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are pending
or are contemplated by the Commission and (B) a certificate of the President or
a Vice President of the Adviser, dated as of Closing Time, to the effect that
(i) the representations and warranties in Sections 1(a) and 1(b) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, and (ii) the Adviser has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior to
Closing Time.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Underwriter shall have received from a letter, dated such
date, in form and substance satisfactory to the Underwriter containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus, to the effect set forth in Exhibit C hereto and to such further
effect as counsel to the Underwriter may reasonably request.
(f) Bring-down Comfort Letter. At Closing Time, the Underwriter shall have
received from Ernst & Young LLP a letter, dated as of Closing Time, to the
effect that they reaffirm the statements made in the letter, furnished pursuant
to subsection (e) of this Section, except that the "specified date" referred to
shall be a date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Shares shall have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Conditions to Purchase Option Shares. In the event that the Underwriter
exercises its option provided in Section 2(b) hereof to purchase all or any
portion of the Option Shares, the representations and warranties of the Fund and
the Adviser contained herein and the statements in any certificates furnished by
the Fund and the Adviser hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the Underwriter shall have
received:
(i) Officers' Certificates. Certificates, dated such Date of Delivery,
of the President or a Vice President of the Fund and of the President or a
Vice President of the Adviser confirming that the respective certificates
delivered at the Closing Time pursuant to Section 5(d) hereof remains true
and correct as of such Date of Delivery.
(ii) Opinions of Counsel. The favorable opinions of Brown & Wood LLP,
counsel to the Fund and the Underwriter, and of Michael J. Hennewinkel,
Esq., General Counsel of the Adviser, or a senior attorney of the Adviser,
each in form and substance satisfactory to the counsel for the Underwriter,
dated such Date of Delivery, relating to
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<PAGE> 17
the Option Shares to be purchased on such Date of Delivery and otherwise to
the same effect as the opinions required by Sections 5(b) and 5(c) hereof,
respectively.
(iii) Bring-down Comfort Letter. A letter from in form and
substance satisfactory to the Underwriter and dated such Date of Delivery,
substantially the same in form and substance as the letter furnished to the
Underwriter pursuant to Section 5(e), except that the "specified date" in
the letter furnished pursuant to this paragraph shall be a date not more
than five days prior to such Date of Delivery.
(j) Additional Documents. At Closing Time and at each Date of Delivery,
counsel to the Fund and the Underwriter shall have been furnished with such
documents and opinions as it may require for the purpose of enabling it to pass
upon the issuance and sale of the Shares as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Fund in connection with the issuance and sale of the Shares as
herein contemplated shall be satisfactory in form and substance to the
Underwriter and counsel to the Fund and the Underwriter.
(k) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Shares on
a Date of Delivery which is after the Closing Time, the obligations of the
Underwriter to purchase the relevant Option Shares, may be terminated by the
Underwriter by notice to the Fund at any time at or prior to Closing Time or
such Date of Delivery, as the case may be, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 6, 7 and 8 shall survive any such termination and remain
in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of the Underwriter. (1) The Fund and the Adviser
jointly and severally agree to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter within the meaning of Section
15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus, any Omitting Prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
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<PAGE> 18
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by the Underwriter) reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus, any Omitting Prospectus or the
Prospectus (or any amendment or supplement thereto).
(2) Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director or officer of the Fund or
controls the Fund within the meaning of Section 15 of the 1933 Act, such
indemnity agreement is subject to the undertaking of the Fund in the
Registration Statement under Item 29 thereof.
(b) Indemnification of Fund, Adviser, Directors, General Partner and
Officers. The Underwriter agrees to indemnify and hold harmless the Fund, the
Adviser, the directors of the Fund, the general partner of the Adviser, each of
the Fund's officers who signed the Registration Statement, and each person, if
any, who controls the Fund or the Adviser within the meaning of Section 15 of
the 1933 Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto) including the Rule 430A Information and the Rule 434
Information, if applicable, or in any preliminary prospectus, any Omitting
Prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), or any preliminary prospectus, any Omitting Prospectus or
the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties, Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an
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<PAGE> 19
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. In the case of parties indemnified
pursuant to Section 6(a) above, counsel to the indemnified parties shall be
selected by the Underwriter, and, in the case of parties indemnified pursuant to
Section 6(b) above, counsel to the indemnified parties shall be selected by the
Fund and the Adviser. An indemnifying party may participate at its own expense
in the defense of any such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to the indemnified party. In no event shall the indemnifying
parties be liable for the fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6 (a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Fund and the
Adviser on the one hand and the Underwriter on the other hand from the offering
of the Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Adviser on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
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<PAGE> 20
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares pursuant
to this Agreement (before deducting expenses) received by the Fund, and the
total underwriting commission received by the Underwriter, in each case as set
forth or otherwise indicated on the cover of the Prospectus, or, if Rule 434 is
used, the corresponding location on the Term Sheet, bear to the sum of the
aggregate initial public offering price of the Shares and the total underwriting
commission received by the Underwriter as set forth or otherwise indicated on
such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each director of the Fund and the
Adviser, respectively, each officer of the Fund who signed the Registration
Statement and each person, if any, who controls the Fund and the Adviser within
the meaning of Section 15 of the 1933 Act, shall have the same rights to
contribution as the Fund and the Adviser.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Fund or of the Adviser submitted pursuant
hereto, shall remain operative and in
17
<PAGE> 21
full force and effect, regardless of any investigation made by or on behalf of
the Underwriter or controlling person, or by or on behalf of the Fund or the
Adviser and shall survive delivery of the Shares to the Underwriter.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Underwriter may terminate this Agreement by
notice to the Fund, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Fund or the Adviser, whether or not arising
in the ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Underwriter, impracticable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) if trading in any securities of
the Fund has been suspended or materially limited by the Commission or the New
York Stock Exchange, or if trading generally on the American Stock Exchange or
the New York Stock Exchange or in the Nasdaq National Market has been suspended
or materially limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices for securities have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated at North Tower, World Financial Center, New
York, New York 10281-1201, Attention: Richard Bruce, Vice President; notices to
the Fund or to the Adviser shall be directed to each of them at 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, Attention: Terry K. Glenn, President.
SECTION 11. Parties. This Agreement shall inure to the benefit of and be
binding upon the Underwriter, the Fund, the Adviser and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriter, the Fund, the Adviser and their respective successors and the
controlling persons and officers, directors and general partner referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the
18
<PAGE> 22
Underwriter, the Fund and the Adviser and their respective successors, and said
controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation. No
purchaser of Shares from the Underwriter shall be deemed to be a successor
merely by reason of such purchase.
SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.
SECTION 13. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
19
<PAGE> 23
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
By: _____________________________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: _____________________________________________
Authorized Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ______________________________________________
Authorized Signatory
20
<PAGE> 24
SCHEDULE A
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
(a Maryland corporation)
_________ Shares of Common Stock
(Par Value $.10 Per Share)
1. The initial public offering price per share for the Shares, determined
as provided in Section 2 hereof, and the purchase price per share for the Shares
to be paid by the Underwriter, shall be $15.00.
2. The Adviser will pay, or arrange for an affiliate to pay, a commission
to the Underwriter in the amount of $ per share for the Shares purchased
by the Underwriter.
21
<PAGE> 25
Exhibit A
FORM OF OPINION OF FUND'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
(ii) The Fund has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under the Purchase Agreement.
(iii) The Fund is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary course of
business (a "Material Adverse Effect").
(iv) The authorized, issued and outstanding capital stock of the Fund is as
set forth in the Prospectus under the caption "Description of Capital Stock."
(v) The Shares to be purchased by the Underwriter from the Fund have been
duly authorized for issuance and sale to the Underwriter pursuant to the
Purchase Agreement and, when issued and delivered by the Fund pursuant to the
Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Shares is or will be subject to personal liability by reason of
being such a holder.
(vi) The issuance of the Shares is not subject to the preemptive or other
similar rights of any securityholder of the Fund.
(vii) To the best of our knowledge, the Fund does not have any
subsidiaries.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Fund and complies with all applicable provisions of the
Investment Company Act.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the certificate pursuant to Rule 497(j) or the Prospectus pursuant to Rule
497(c) or Rule 497(h), as the case may be, has been made in the manner and
within the time period required by Rule 497(j), Rule 497(c) or Rule 497(h), as
the case may be; and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been
A-1
<PAGE> 26
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or omitted therefrom, as to which we need express no opinion) complied as to
form in all material respects with the requirements of the 1933 Act, the
Investment Company Act and the Rules and Regulations.
(xi) The form of certificate used to evidence the Common Stock complies in
all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Fund and the
requirements of the New York Stock Exchange.
(xii) To the best of our knowledge, there is not pending or threatened any
action, suit, proceeding, inquiry or investigation, to which the Fund is a
party, or to which the property of the Fund is subject, before or brought by any
court or governmental agency or body, domestic or foreign, which might
reasonably be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in the
Purchase Agreement or the performance by the Fund of its obligations thereunder,
other than those disclosed in the Prospectus.
(xiii) The information in the Prospectus under "Description of Capital
Stock" and "Taxes" and in the Registration Statement under Item 29, to the
extent that it constitutes matters of law, summaries of legal matters, the
Fund's charter and bylaws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects.
(xiv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described as
required.
(xv) All descriptions in the Prospectus of contracts and other documents to
which the Fund is a party are accurate in all material respects; to the best of
our knowledge, there are no franchises, contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments of the Fund required to be
described or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to therein or filed or
incorporated by reference as exhibits thereto, and the descriptions thereof or
references thereto are correct in all material respects.
(xvi) To the best of our knowledge, the Fund is not in violation of its
charter or by-laws and no default by the Fund exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by reference
as an exhibit to the Registration Statement.
A-2
<PAGE> 27
(xvii) No filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any court or governmental authority or
agency, domestic or foreign (other than under the 1933 Act, the Investment
Company Act and the Rules and Regulations, which have been obtained, or as may
be required under the securities or blue sky laws of the various states, as to
which we need express no opinion) is necessary or required in connection with
the due authorization, execution and delivery of the Purchase Agreement, the
Advisory Agreement and the Custody Agreement or for the offering, issuance, sale
or delivery of the Shares.
(xviii) The Advisory Agreement and the Custody Agreement have each been
duly authorized and approved by the Fund and comply as to form in all material
respects with all applicable provisions of the Investment Company Act, and each
has been duly executed by the Fund.
(xix) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified management investment company, and
all required action has been taken by the Fund under the 1933 Act, the
Investment Company Act and the Rules and Regulations to make the public offering
and consummate the sale of the Shares pursuant to the Purchase Agreement; the
provisions of the charter and the by-laws of the Fund comply as to form in all
material respects with the requirements of the Investment Company Act; and, to
the best of their knowledge and information, no order of suspension or
revocation of such registration under the Investment Company Act, pursuant to
Section 8(e) of the Investment Company Act, has been issued or proceedings
therefor initiated or threatened by the Commission.
(xx) The execution, delivery and performance of the Purchase Agreement and
the consummation of the transactions contemplated in the Purchase Agreement and
in the Registration Statement (including the issuance and sale of the Shares,
and the use of the proceeds from the sale of the Shares as described in the
Prospectus under the caption "Use of Proceeds") and compliance by the Fund with
its obligations under the Purchase Agreement do not and will not, whether with
or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(xi) of the Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Fund pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known to us,
to which the Fund is a party or by which it may be bound, or to which any of the
property or assets of the Fund is subject (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter or by-laws of the Fund, or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any government,
government instrumentality or court, domestic or foreign, having jurisdiction
over the Fund or any of its properties, assets or operations.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need
A-3
<PAGE> 28
make no statement), at the time such Registration Statement or any such
amendment became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto (except for financial statements and schedules
and other financial data included or incorporated by reference therein or
omitted therefrom, as to which we need make no statement), at the time the
Prospectus was issued, at the time any such amended or supplemented prospectus
was issued or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates
and written statements of responsible officers of and accountants for the Fund
and the Adviser and public officials. Such opinion shall not state that it is to
be governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
A-4
<PAGE> 29
Exhibit B
FORM OF OPINION OF GENERAL COUNSEL TO THE
INVESTMENT ADVISER TO BE DELIVERED
PURSUANT TO SECTION 5(c)
(i) The Adviser has been duly organized as a limited partnership under the
laws of the State of Delaware, with power and authority to conduct its business
as described in the Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers Act or
the Investment Company Act, or the rules and regulations under such Acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement and the Advisory Agreement have been duly authorized,
executed and delivered by the Adviser, and the Advisory Agreement constitutes a
valid and binding obligation of the Adviser, enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or
other laws relating to or affecting creditors' rights and to general equity
principles; and, to the best of his knowledge and information, neither the
execution and delivery of this Agreement or the Advisory Agreement nor the
performance by the Adviser of its obligations hereunder or thereunder will
conflict with, or result in a breach of, any of the terms and provisions of, or
constitute, with or without the giving of notice or the lapse of time or both, a
default under, any agreement or instrument to which the Adviser is a party or by
which the Adviser is bound, or any law, order, rule or regulation applicable to
the Adviser of any jurisdiction, court, Federal or state regulatory body,
administrative agency or other governmental body, stock exchange or securities
association having jurisdiction over the Adviser or its properties or
operations.
(iv) To the best of his knowledge and information, the description of the
Adviser in the Registration Statement and in the Prospectus does not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
B-1
<PAGE> 30
Exhibit C
FORM OF ACCOUNTANTS'
COMFORT LETTER PURSUANT TO SECTION 5(e)
(i) We are independent public accountants with respect to the Company
within the meaning of the 1933 Act and the 1933 Act Regulations.
(ii) In our opinion the financial statements audited by us and
included in the Registration Statement and the Prospectus comply as to form
in all material respects with the applicable accounting requirements of the
1933 Act, the Investment Company Act and the Rules and Regulations.
Such accountants shall also state that they have performed specified
procedures, not constituting an audit, including a reading of the latest
available interim financial statements of the Fund, a reading of the minute
books of the Fund, made inquiries of officials of the Fund responsible for
financial accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that at the date of
the latest available financial statements read by such accountants, or at a
subsequent specified date not more than three days prior to the date of the
Purchase Agreement, there was any change in the capital stock or net assets of
the Fund as compared with amounts shown on the financial statements included in
the Registration Statement and the Prospectus.
C-1
<PAGE> 1
EXHIBIT (h)(2)
BROKER-DEALER AGREEMENT
between
IBJ WHITEHALL BANK & TRUST COMPANY
and
[NAME OF BROKER-DEALER]
Dated as of , 1999
Relating to
AUCTION MARKET PREFERRED STOCK(R)
("AMPS"(R)),
Series A and B
of
MUNIHOLDINGS NEW YORK INSURED FUND IV, INC.
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 2
BROKER-DEALER AGREEMENT dated as of __________ __, 1999, between IBJ
WHITEHALL BANK & TRUST COMPANY, a New York banking corporation (the "Auction
Agent") (not in its individual capacity, but solely as agent of MuniHoldings New
York Insured Fund IV, Inc., a Maryland corporation (the "Company"), pursuant to
authority granted to it in the Auction Agent Agreement dated as of ___________
__, 1999, between the Company and the Auction Agent (the "Auction Agent
Agreement")), and [NAME OF BROKER-DEALER] (together with its successors and
assigns, "BD").
The Company proposes to duly authorize and issue _______ shares of
Auction Market Preferred Stock(R), Series A ("Series A AMPS"), and _______
shares of Auction Market Preferred Stock(R), Series B ("Series B AMPS"), each
with a par value of $.10 per share and a liquidation preference of $25,000 per
share plus accumulated but unpaid dividends (whether or not earned or declared),
each pursuant to the Company's Articles Supplementary (as defined below). The
Series A AMPS and Series B AMPS are sometimes herein referred to together as the
"AMPS."
The Company's Articles Supplementary provide that the dividend rate on
each series of AMPS for each Dividend Period therefor after the Initial Dividend
Period shall be the Applicable Rate therefor, which in each case, in general
shall be the rate per annum that a commercial bank, trust company or other
financial institution appointed by the Company advises results from
implementation of the Auction Procedures (as defined below). The Board of
Directors of the Company has adopted a resolution appointing IBJ Whitehall Bank
& Trust Company as Auction Agent for purposes of the Auction Procedures, and
pursuant to Section 2.5(d) of the Auction Agent Agreement, the Company has
requested and directed the Auction Agent to execute and deliver this Agreement.
The Auction Procedures require the participation of one or more
Broker-Dealers.
- ---------------
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE> 3
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the Auction Agent and BD agree as follows:
I. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1. Terms Defined by Reference to the Articles Supplementary.
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary of the Company.
1.2. Terms Defined Herein. As used herein and in the Settlement
Procedures (as defined below), the following terms shall have the following
meanings, unless the context otherwise requires:
(a) "Articles Supplementary" shall mean the Articles
Supplementary, as amended, of the Company, establishing the powers, preferences
and rights of the AMPS filed on _____________ ___, 1999 with the State
Department of Assessments and Taxation of Maryland.
(b) "Auction" shall have the meaning specified in Section 3.1
hereof.
(c) "Auction Procedures" shall mean the Auction Procedures
that are set forth in Paragraph 10 of the Articles Supplementary.
(d) "Authorized Officer" shall mean each Senior Vice
President, Vice President, Assistant Vice President, Trust Officer, Assistant
Secretary and Assistant Treasurer of the Auction Agent assigned to its Corporate
Trust and Agency Group and every other officer or employee of the Auction Agent
designated as an "Authorized Officer" for purposes of this Agreement in a
communication to BD.
(e) "BD Officer" shall mean each officer or employee of BD
designated as a "BD Officer" for purposes of this Agreement in a communication
to the Auction Agent.
(f) "Broker-Dealer Agreement" shall mean this Agreement and
any substantially similar agreement between the Auction Agent and a
Broker-Dealer.
(g) "Settlement Procedures" shall mean the Settlement
Procedures attached hereto as Exhibit A.
1.3. Rules of Construction. Unless the context or use indicates another
or different meaning or intent, the following rules shall apply to the
construction of this Agreement:
(a) Words importing the singular number shall include the
plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of this Agreement, nor
shall they affect its meaning, construction or effect.
2
<PAGE> 4
(c) The words "hereof," "herein," "hereto," and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be
to New York City time.
II. NOTIFICATION OF DIVIDEND PERIOD AND ADVANCE NOTICE OF ALLOCATION OF
TAXABLE INCOME.
2.1. The provisions contained in paragraph 2 of the Articles
Supplementary concerning the notification of a Special Dividend Period will be
followed by the Auction Agent and BD, and the provisions contained therein are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.
2.2. Except as otherwise provided in paragraph 2(f) of the Articles
Supplementary, whenever the Company intends to include any net capital gains or
other income subject to regular Federal income tax in any dividend on shares of
any series of AMPS, the Company will notify the Auction Agent of the amount to
be so included at least five Business Days prior to the Auction Date on which
the Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Company, in turn it will notify BD, who, on
or prior to such Auction Date, will notify its Beneficial Owners and Potential
Beneficial Owners believed to be interested in submitting an Order in the
Auction to be held on such Auction Date. Whenever the Company intends to include
any additional amounts in a dividend as provided in paragraph 2(f) of the
Articles Supplementary, the Company will notify the Auction Agent of such
additional amounts to be so included in such dividend at least five Business
Days prior to the applicable Dividend Payment Date. Whenever the Auction Agent
receives such notice from the Company, in turn it will notify the Securities
Depository and BD, who, on or prior to the applicable Dividend Payment Date,
will notify its Beneficial Owners.
III. THE AUCTION.
3.1. Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) On each Auction Date, the provisions of the Auction
Procedures will be followed by the Auction Agent for the purpose of determining
the Applicable Rate for each series of AMPS, for the next Dividend Period
therefor. Each periodic operation of such procedures is hereinafter referred to
as an "Auction."
(b) All of the provisions contained in the Auction Procedures
and the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part of this Agreement to the same extent
as if such provisions were set forth fully herein.
(c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement.
BD understands that other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in
3
<PAGE> 5
Paragraph 1 of the Articles Supplementary may execute a Broker-Dealer Agreement
and participate as Broker-Dealers in Auctions.
(d) BD and other Broker-Dealers may participate in Auctions
for their own accounts. However, the Company, by notice to BD and all other
Broker Dealers, may prohibit all Broker-Dealers from submitting Bids in Auctions
for their own accounts, provided that Broker-Dealers may continue to submit Hold
Orders and Sell Orders.
3.2. Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for the
AMPS, the Auction Agent shall advise BD by telephone of the Reference Rate and
the Maximum Applicable Rate in effect on such Auction Date.
(b) In the event that the Auction Date for any Auction shall
be changed after the Auction Agent has given the notice referred to in clause
(vii) of paragraph (a) of the Settlement Procedures, the Auction Agent, by such
means as the Auction Agent deems practicable, shall give notice of such change
to BD not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15
A.M. on the old Auction Date. Thereafter, BD promptly shall notify customers of
BD that BD believes are Beneficial Owners of shares of AMPS of such change in
the Auction Date.
(c) The Auction Agent from time to time may request BD to
provide it with a list of the respective customers BD believes are Beneficial
Owners of shares of each series of AMPS. BD shall comply with any such request,
and the Auction Agent shall keep confidential any such information, including
information received as to the identity of Bidders in any Auction, and shall not
disclose any such information so provided to any Person other than the Company;
and such information shall not be used by the Auction Agent or its officers,
employees, agents or representatives for any purpose other than such purposes as
are described herein. The Auction Agent shall transmit any list of customers BD
believes are Beneficial Owners of shares of each series of AMPS and information
related thereto only to its officers, employees, agents or representatives in
the Corporate Trust and Agency Group who need to know such information for the
purposes of acting in accordance with this Agreement, and the Auction Agent
shall prevent the transmission of such information to others and shall cause its
officers, employees, agents and representatives to abide by the foregoing
confidentiality restrictions; provided, however, that the Auction Agent shall
have no responsibility or liability for the actions of any of its officers,
employees, agents or representatives after they have left the employ of the
Auction Agent.
3.3. Auction Schedule; Method of Submission of Orders.
(a) The Company and the Auction Agent shall conduct Auctions
for each series of AMPS in accordance with the schedule set forth below. Such
schedule may be changed at any time by the Auction Agent with the consent of the
Company, which consent shall not be withheld unreasonably. The Auction Agent
shall give notice of any such change to BD. Such notice shall be received prior
to the first Auction Date on which any such change shall be effective.
4
<PAGE> 6
Time Event
By 9:30 A.M. Auction Agent advises the Company and
Broker-Dealers of the Reference Rate and the
Maximum Applicable Rate as set forth in Section
3.2(a) hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated
to it by Broker- Dealers as provided in Paragraph
10(c)(i) of the Articles Supplementary.
Submission Deadline is 1:00 P.M.
Not earlier than 1:00 P.M. Auction Agent makes determinations pursuant to
Paragraph 10(d)(i) of the Articles Supplementary.
By approximately 3:00 P.M. Auction Agent advises the Company of the results
of the Auction as provided in Paragraph 10(d)(ii)
of the Articles Supplementary.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part and
shares of AMPS are allocated as provided in
Paragraph 10(e) of the Articles Supplementary.
Auction Agent gives notice of the Auction results
as set forth in Section 3.4(a) hereof.
(b) BD agrees to maintain a list of Potential Beneficial
Owners and to contact the Potential Beneficial Owners on such list on or prior
to each Auction Date for the purposes set forth in Paragraph 10 of the Articles
Supplementary.
(c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit B. BD shall submit separate
Orders to the Auction Agent for each Potential Beneficial Owner or Beneficial
Owner on whose behalf BD is submitting an Order and shall not net or aggregate
the Orders of Potential Beneficial Owners or Beneficial Owners on whose behalf
BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a written
notice, substantially in the form attached hereto as Exhibit C, of transfers of
shares of any series of AMPS, made through BD by an Existing Holder to another
Person other than pursuant to an Auction, and (ii) a written notice,
substantially in the form attached hereto as Exhibit D, of the failure of shares
of any series of any series of AMPS to be transferred to or by any Person that
purchased or sold shares of any series of AMPS through BD pursuant to an
Auction. The Auction Agent is not required to accept any notice delivered
pursuant to the terms of the foregoing sentence with respect to an Auction
unless it is received by the Auction Agent by 3:00 P.M. on the Business Day next
preceding the applicable Auction Date.
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3.4. Notice of Auction Results.
(a) On each Auction Date, the Auction Agent shall notify BD by
telephone as set forth in paragraph (a) of the Settlement Procedures. On the
Business Day next succeeding such Auction Date, the Auction Agent shall notify
BD in writing of the disposition of all Orders submitted by BD in the Auction
held on such Auction Date.
(b) BD shall notify each Beneficial Owner, Potential
Beneficial Owner, Existing Holder or Potential Holder on whose behalf BD has
submitted an Order as set forth in paragraph (b) of the Settlement Procedures,
and take such other action as is required of BD pursuant to the Settlement
Procedures.
If any Beneficial Owner or Existing Holder selling shares of AMPS in an
Auction fails to deliver such shares, the BD of any Person that was to have
purchased shares of such series of AMPS in such Auction may deliver to such
Person a number of whole shares of such series of AMPS that is less than the
number of shares that otherwise was to be purchased by such Person. In such
event, the number of shares of such series of AMPS to be so delivered shall be
determined by such BD. Delivery of such lesser number of shares shall constitute
good delivery. Upon the occurrence of any such failure to deliver shares, such
BD shall deliver to the Auction Agent the notice required by Section 3.3(d)(ii)
hereof. Notwithstanding the foregoing terms of this Section 3.4(b), any delivery
or non-delivery of shares of any series of AMPS which represents any departure
from the results of an Auction, as determined by the Auction Agent, shall be of
no effect unless and until the Auction Agent shall have been notified of such
delivery or non-delivery in accordance with the terms of Section 3.3(d) hereof.
The Auction Agent shall have no duty or liability with respect to enforcement of
this Section 3.4(b).
3.5. Service Charge to Be Paid to BD. On the Business Day next
succeeding each Auction Date, the Auction Agent shall pay to BD from moneys
received from the Company an amount equal to: (a) in the case of any Auction
Date immediately preceding a 7-Day Dividend Period or 28-Day Dividend Period,
the product of (i) a fraction the numerator of which is the number of days in
such Dividend Period (calculated by counting the first day of such Dividend
Period but excluding the last day thereof) and the denominator of which is 360,
times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the sum of (A) the
aggregate number of AMPS placed by BD in the applicable Auction that were (x)
the subject of a Submitted Bid of a Beneficial Owner submitted by BD and
continued to be held as a result of such submission and (y) the subject of a
Submitted Bid of a Potential Beneficial Owner submitted by BD and were purchased
as a result of such submission plus (B) the aggregate number of AMPS subject to
valid Hold Orders (determined in accordance with Paragraph 10 of the Articles
Supplementary) submitted to the Auction Agent by BD plus (C) the number of AMPS
deemed to be subject to Hold Orders by Beneficial Owners pursuant to Paragraph
10 of the Articles Supplementary that were acquired by such Beneficial Owners
through BD; and (b) in the case of any Auction Date immediately preceding a
Special Dividend Period, that amount as mutually agreed upon by the Company and
BD, based on the selling concession that would be applicable to an underwriting
of fixed or variable rate preferred shares with a similar final maturity or
variable rate dividend period, at the commencement of such Special Dividend
Period.
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<PAGE> 8
For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any
Beneficial Owner who acquired shares of any series of AMPS through BD transfers
those shares to another Person other than pursuant to an Auction, then the
Broker-Dealer for the shares so transferred shall continue to be BD, provided,
however, that if the transfer was effected by, or if the transferee is, a
Broker-Dealer other than BD, then such Broker-Dealer shall be the Broker-Dealer
for such shares.
IV. THE AUCTION AGENT.
4.1. Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the
Company hereunder and owes no fiduciary duties to any other Person by reason of
this Agreement.
(b) The Auction Agent undertakes to perform such duties and
only such duties as are set forth specifically in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the Auction
Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered or omitted by
it, or for any error of judgment made by it in the performance of its duties
under this Agreement. The Auction Agent shall not be liable for any error of
judgment made in good faith unless the Auction Agent shall have been negligent
in ascertaining (or failing to ascertain) the pertinent facts.
4.2. Rights of the Auction Agent.
(a) The Auction Agent may rely upon, and shall be protected in
acting or refraining from acting upon, any communication authorized by this
Agreement and any written instruction, notice, request, direction, consent,
report, certificate, share certificate or other instrument, paper or document
believed by it to be genuine. The Auction Agent shall not be liable for acting
upon any telephone communication authorized by this Agreement which the Auction
Agent believes in good faith to have been given by the Company or by BD. The
Auction Agent may record telephone communications with BD.
(b) The Auction Agent may consult with counsel of its own
choice, and the advice of such counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend
or risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or attorneys.
4.3. Auction Agent's Disclaimer. The Auction Agent makes no
representation as to the validity or adequacy of this Agreement or the AMPS.
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<PAGE> 9
V. MISCELLANEOUS.
5.1. Termination. Any party may terminate this Agreement at any time
upon five days' prior written notice to the other party; provided, however, that
if BD is Merrill Lynch, Pierce, Fenner & Smith Incorporated, neither BD nor the
Auction Agent may terminate this Agreement without first obtaining the prior
written consent of the Company to such termination, which consent shall not be
withheld unreasonably.
5.2. Participant in Securities Depository; Payment of Dividends in
Same-Day Funds.
(a) BD is, and shall remain for the term of this Agreement, a
member of, or a participant in, the Securities Depository (or an affiliate of
such a member or participant).
(b) BD represents that it (or if BD does not act as Agent
Member, one of its affiliates) shall make all dividend payments on the AMPS
available in same-day funds on each Dividend Payment Date to customers that use
BD (or its affiliate) as Agent Member.
5.3. Agent Member. At the date hereof, BD is a participant of the
Securities Depository.
5.4. Communications. Except for (i) communications authorized to be
made by telephone pursuant to this Agreement or the Auction Procedures and (ii)
communications in connection with the Auctions (other than those expressly
required to be in writing), all notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given to such party at its address or telecopier number set forth
below:
If to BD, addressed to:
Attention:
Telecopier No.:
Telephone No.:
If to the Auction Agent, addressed to: IBJ Whitehall Bank & Trust Company
One State Street
New York, New York 10004
Attention: Auction Window
Subcellar 1
Telecopier No.: (212) 797-1148
Telephone No.: (212) 858-2135
or such other address or telecopier number as such party hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a
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<PAGE> 10
BD Officer and on behalf of the Auction Agent by an Authorized Officer. BD may
record telephone communications with the Auction Agent.
5.5. Entire Agreement. This Agreement contains the entire agreement
between the parties relating to the subject matter hereof, and there are no
other representations, endorsements, promises, agreements or understandings,
oral, written or inferred, between the parties relating to the subject matter
hereof.
5.6. Benefits. Nothing in this Agreement, express or implied, shall
give to any person, other than the Company, the Auction Agent and BD and their
respective successors and assigns, any benefit of any legal or equitable right,
remedy or claim under this Agreement.
5.7. Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except by
a written instrument signed by a duly authorized representative of the party to
be charged.
(b) Failure of either party to this Agreement to exercise any
right or remedy hereunder in the event of a breach of this Agreement by the
other party shall not constitute a waiver of any such right or remedy with
respect to any subsequent breach.
5.8. Successors and Assigns. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by, the respective successors and
permitted assigns of each of BD and the Auction Agent. This Agreement may not be
assigned by either party hereto absent the prior written consent of the other
party;
provided, however, that this Agreement may be assigned by the Auction Agent to a
successor Auction Agent selected by the Company without the consent of BD.
5.9. Severability. If any clause, provision or section of this
Agreement shall be ruled invalid or unenforceable by any court of competent
jurisdiction, the invalidity or unenforceability of such clause, provision or
section shall not affect any remaining clause, provision or section hereof.
5.10. Execution in Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
5.11. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be performed in said State.
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
IBJ WHITEHALL BANK & TRUST COMPANY
By:
Title:
[NAME OF BROKER-DEALER]
By:
Title:
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<PAGE> 12
EXHIBIT A
SETTLEMENT PROCEDURES
[From Prospectus]
<PAGE> 13
EXHIBIT B
IBJ WHITEHALL BANK & TRUST COMPANY
AUCTION BID FORM
Submit To: IBJ Whitehall Bank & Trust Co. Issue: MuniHoldings New York
Securities Transfer Department Insured Fund IV, Inc.
One State Street Series: _______________________
New York, New York 10004 Auction Date:__________________
Attention: Auction Window
Telephone: (212) 858-2272
Facsimile: (212) 797-1148
The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:
Name of Bidder: _______________________________
BENEFICIAL OWNER
Shares now held: _______________________________ HOLD _____________________
BID at rate of ___________
SELL _____________________
POTENTIAL BENEFICIAL OWNER
# of shares bid __________
BID at rate of ___________
Notes:
(1) If submitting more than one Bid for one Bidder, use additional Auction
Bid Forms.
(2) If one or more Bids covering in the aggregate more than the number of
outstanding shares held by any Beneficial Owner are submitted, such bid
shall be considered valid in the order of priority set forth in the
Auction Procedures on the above issue.
(3) A Hold or Sell Order may be placed only by a Beneficial Owner covering
a number of shares not greater than the number of shares currently
held.
(4) Potential Beneficial Owners may make only Bids, each of which must
specify a rate. If more than one Bid is submitted on behalf of any
Potential Beneficial Owner, each Bid submitted shall be a separate Bid
with the rate specified.
(5) Bids may contain no more than three figures to the right of the decimal
point (.001 of 1%). Fractions will not be accepted.
NAME OF BROKER-DEALER _____________________________________________
Authorized Signature _____________________________________________
<PAGE> 14
EXHIBIT C
(Note: To be used only for transfers made
other than pursuant to an Auction)
TRANSFER FORM
Re: MuniHoldings New York Insured Fund IV, Inc.
Auction Market Preferred Stock(R),
Series [A][B] ("AMPS"(R))
We are (check one):
|_| the Existing Holder named below;
|_| the Broker-Dealer for such Existing Holder; or
|_| the Agent Member for such Existing Holder.
We hereby notify you that such Beneficial Owner has transferred ____________
shares of AMPS to __________________.
______________________________
(Name of Existing Holder)
______________________________
(Name of Broker-Dealer)
______________________________
(Name of Agent Member)
By _________________________
Printed Name:
Title:
<PAGE> 15
EXHIBIT D
(Note: To be used only for failures to deliver
AMPS sold pursuant to an Auction)
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
I. We are a Broker-Dealer for ____________ (the "Purchaser"), which
purchased ___________ shares of AMPS, Series [A][B], of MuniHoldings
New York Insured Fund IV, Inc. in the Auction held on ____________ from
the seller of such shares.
II. We are a Broker-Dealer for ____________ (the "Seller"), which sold
_______ shares of AMPS, Series [A][B], of MuniHoldings New York Insured
Fund IV, Inc. in the Auction held on ____________ to the Purchaser of
such shares.
We hereby notify you that (check one):
____________ the Seller failed to deliver such shares to the Purchaser
____________ the Purchaser failed to make payment to the Seller upon delivery
of such shares
Name: ______________________________
(Name of Broker-Dealer)
By:_________________________________
Printed Name:
Title:
