<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1997
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-6661
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------
PRE-EFFECTIVE AMENDMENT NO. [_] POST-EFFECTIVE AMENDMENT NO. [_]
(CHECK APPROPRIATE BOX OR BOXES)
--------------
MUNIYIELD NEW YORK INSURED FUND II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
(609) 282-2800
(AREA CODE AND TELEPHONE NUMBER)
--------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
--------------
ARTHUR ZEIKEL
MUNIYIELD NEW YORK INSURED FUND II, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
FRANK P. BRUNO, ESQ. PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER 800 SCUDDERS MILL ROAD
NEW YORK, NEW YORK 10048-0557 PLAINSBORO, NEW JERSEY 08536
--------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED(1) PER UNIT(1) PRICE(1) FEE(3)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par
value) 5,768,301 $15.01 $86,582,198.01 $26,237.03
- ----------------------------------------------------------------------------------
Auction Market Preferred
Stock, Series D 1,200 $25,000(2) $30,000,000 $9,090.91
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Represents the liquidation preference of a share of preferred stock after
the reorganization.
(3) Paid by wire transfer to the designated lockbox of the Securities and
Exchange Commission in Pittsburgh, Pennsylvania.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MUNIYIELD NEW YORK INSURED FUND II, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROXY STATEMENT AND PROSPECTUS CAPTION
--------- --------------------------------------
<C> <S> <C>
PART A
Item 1. Beginning of Registration
Statement and Registration Statement Cover Page;
Outside Front Cover Page of Prospectus Cover Page
Prospectus..................
Item 2. Beginning and Outside Back
Cover Page of Prospectus.... Table of Contents
Item 3. Fee Table, Synopsis The Reorganization--Summary; The
Information and Risk Reorganization--Risk Factors and
Factors..................... Special Considerations
Item 4. Information about the The Reorganization--Summary; The
Transaction................. Reorganization--Agreement and Plan of
Reorganization
Item 5. Information about the Prospectus Cover Page; The
Registrant.................. Reorganization--Summary; The
Reorganization--Comparison of the
Funds; Additional Information
Item 6. Information about the Prospectus Cover Page; The
Company Being Acquired...... Reorganization--Summary; The
Reorganization--Comparison of the
Funds; Additional Information
Item 7. Voting Information.......... The Reorganization--Summary; The
Reorganization--Comparison of the
Funds; Information Concerning the
Meetings; Additional Information
Item 8. Interest of Certain Persons Not Applicable
and Experts.................
Item 9. Additional Information
Required for Reoffering by Not Applicable
Persons Deemed to be
Underwriters................
PART B
Item 10. Cover Page.................. Not Applicable
Item 11. Table of Contents........... Not Applicable
Item 12. Additional Information about The Reorganization--Comparison of the
the Registrant.............. Funds
Item 13. Additional Information about
the Company Being Acquired.. The Reorganization--Comparison of the
Funds
Item 14. Financial Statements........ Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
</TABLE>
<PAGE>
MUNIYIELD NEW YORK INSURED FUND II, INC.
TAURUS MUNINEWYORK HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS OF
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND
SPECIAL MEETING OF STOCKHOLDERS OF TAURUS MUNINEWYORK HOLDINGS, INC.
----------------
TO BE HELD ON OCTOBER 20, 1997
TO THE STOCKHOLDERS OF
MUNIYIELD NEW YORK INSURED FUND II, INC.
TAURUS MUNINEWYORK HOLDINGS, INC.:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of MuniYield
New York Insured Fund II, Inc. ("Insured") and a special meeting of
stockholders of Taurus MuniNewYork Holdings, Inc. ("Taurus") (collectively,
the "Meetings") will be held at the offices of Merrill Lynch Asset Management,
L.P., 800 Scudders Mill Road, Plainsboro, New Jersey on Monday, October 20,
1997 at [10:45 a.m.], New York time (for Insured) and [11:00 a.m.], New York
time (for Taurus) for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan of Reorganization") contemplating the acquisition of
all of the assets of Taurus by Insured, and the assumption of all of the
liabilities of Taurus by Insured, in exchange solely for an equal aggregate
value of newly-issued shares of Common Stock of Insured ("Insured Common
Stock") and shares of a newly-created series of Auction Market Preferred
Stock ("AMPS") of Insured to be designated Series D ("Insured Series D
AMPS") and the distribution of such Insured Common Stock to the holders of
Common Stock of Taurus and such Insured Series D AMPS to the holders of
Taurus AMPS. A vote in favor of this proposal also will constitute a vote
in favor of the liquidation and dissolution of Taurus and the termination
of its registration under the Investment Company Act of 1940;
(2) For the stockholders of Insured only:
(a) To elect a Board of Directors to serve for the ensuing year;
(b) To consider and act upon a proposal to ratify the selection of
Ernst & Young LLP to serve as independent auditors of Insured for its
current fiscal year ending October 31, 1997; and
(3) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
The Boards of Directors of Insured and Taurus have fixed the close of
business on August 25, 1997 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meetings or any
adjournment thereof.
A complete list of the stockholders of each of Insured and Taurus entitled
to vote at the Meetings will be available and open to the examination of any
stockholder of Insured or Taurus, respectively, for any purpose germane to the
Meetings during ordinary business hours from and after October 6, 1997, at the
offices of Insured, 800 Scudders Mill Road, Plainsboro, New Jersey.
<PAGE>
You are cordially invited to attend the Meetings. Stockholders who do not
expect to attend the Meetings in person are requested to complete, date and
sign the enclosed form of proxy applicable to their Fund and return it promptly
in the envelope provided for that purpose. The enclosed proxy is being
solicited on behalf of the Board of Directors of Insured or Taurus, as
applicable.
By Order of the Boards of Directors
Philip M. Mandel
Secretary of MuniYield New York
Insured Fund II, Inc.
Patrick D. Sweeney
Secretary of Taurus MuniNewYork
Holdings, Inc.
Plainsboro, New Jersey
Dated: , 1997
2
<PAGE>
SUBJECT TO COMPLETION
PROXY STATEMENT AND PROSPECTUS DATED AUGUST 15, 1997
MUNIYIELD NEW YORK INSURED FUND II, INC.
TAURUS MUNINEWYORK HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
----------------
ANNUAL MEETING OF STOCKHOLDERS OF
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND
SPECIAL MEETING OF STOCKHOLDERS OF TAURUS MUNINEWYORK HOLDINGS, INC.
----------------
OCTOBER 20, 1997
This Joint Proxy Statement and Prospectus (this "Proxy Statement and
Prospectus") is furnished in connection with the solicitation of proxies on
behalf of the Boards of Directors of MuniYield New York Insured Fund II, Inc.,
a Maryland corporation ("Insured"), and Taurus MuniNewYork Holdings, Inc., a
Maryland corporation ("Taurus"), for use at the annual meeting of stockholders
of Insured ("Insured Annual Meeting") and a special meeting of stockholders of
Taurus (the "Taurus Special Meeting" and collectively with the Insured Annual
Meeting, the "Meetings") called to approve or disapprove the proposed
reorganization whereby (i) Insured will acquire all of the assets, and will
assume all of the liabilities, of Taurus, in exchange solely for an equal
aggregate value of newly-issued shares of Common Stock, par value $.10 per
share, of Insured ("Insured Common Stock") and shares of a newly-created
series of Auction Market Preferred Stock ("AMPS") of Insured, with a
liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared)
to be designated Series D ("Insured Series D AMPS") to be issued by Insured;
and (ii) Taurus will be deregistered and dissolved (collectively, the
"Reorganization"). Insured and Taurus sometimes are referred to herein
collectively as the "Funds" and individually as a "Fund," each as applicable
and each as the context requires. This Proxy Statement and Prospectus also is
being furnished to Stockholders of Insured in connection with the election of
the Board of Directors of Insured and the ratification of the selection of
independent auditors for Insured.
(continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement and Prospectus serves as a prospectus of Insured under
the Securities Act of 1933, as amended (the "Securities Act"), in connection
with the issuance of Insured Common Stock and Insured Series D AMPS in the
Reorganization.
This Proxy Statement and Prospectus sets forth concisely the information
about Insured and Taurus that stockholders of Insured and Taurus should know
before considering the Reorganization and should be retained for future
reference. Insured and Taurus have authorized the solicitation of proxies in
connection with the Reorganization solely on the basis of this Proxy Statement
and Prospectus and the accompanying documents.
The address of the principal executive offices of both Insured and Taurus is
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone number
is (609) 282-2800.
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS , 1997.
<PAGE>
The aggregate net asset value of the Insured Common Stock to be issued to
Taurus and thereafter distributed to the holders of shares of Common Stock,
par value $.10 per share, of Taurus ("Taurus Common Stock") will equal the
aggregate net asset value of the shares of Taurus Common Stock on the date of
the Reorganization. Similarly, it is intended that the aggregate liquidation
preference and value of the Insured Series D AMPS to be issued to Taurus and
thereafter distributed to the holders of shares of Taurus AMPS, with a
liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared)
("Taurus AMPS"), will equal the aggregate liquidation preference and value of
the Taurus AMPS on the date of the Reorganization. As soon as practicable
after the receipt by Insured of all of Taurus' assets and the assumption by
Insured of all of Taurus' liabilities, Taurus will distribute Insured Common
Stock and Insured Series D AMPS to Taurus stockholders as described under "The
Reorganization." Thereafter, Taurus will terminate its registration under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
will liquidate and dissolve in accordance with the laws of the State of
Maryland.
Both Insured and Taurus are non-diversified, leveraged, closed-end
management investment companies with virtually identical investment
objectives. Both Insured and Taurus seek to provide stockholders with as high
a level of current income exempt from Federal income taxes and New York State
and New York City personal income taxes as is consistent with their respective
investment policies and prudent investment management. Insured and Taurus seek
to achieve their respective investment objectives by investing primarily in a
portfolio of long-term investment grade municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income taxes and New York State and New York City personal income taxes
("Municipal Bonds"). There can be no assurance that after the Reorganization
the surviving fund will achieve the investment objective of either Insured or
Taurus.
Insured Common Stock and Taurus Common Stock are listed on the New York
Stock Exchange (the "NYSE") under the symbols "MYT" and "MNY," respectively.
Subsequent to the Reorganization, shares of Insured Common Stock will continue
to be listed on the NYSE under the symbol "MYT." Reports, proxy materials and
other information concerning either Fund may be inspected at the offices of
the NYSE, 11 Wall Street, New York, New York 10005.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.............................................................. 5
THE REORGANIZATION........................................................ 6
SUMMARY................................................................. 6
RISK FACTORS AND SPECIAL CONSIDERATIONS................................. 14
Effects of Leverage................................................... 14
Portfolio Management.................................................. 15
Ratings Considerations................................................ 16
COMPARISON OF THE FUNDS................................................. 17
Financial Highlights.................................................. 17
Investment Objective and Policies..................................... 21
Portfolio Insurance................................................... 23
Description of New York Municipal Bonds and Municipal Bonds........... 24
Special Considerations Relating to New York Municipal Bonds........... 25
Other Investment Policies............................................. 26
Information Regarding Options and Futures Transactions................ 27
Investment Restrictions............................................... 30
Rating Agency Guidelines.............................................. 31
Portfolio Composition................................................. 31
Portfolio Transactions................................................ 33
Portfolio Turnover.................................................... 33
Net Asset Value....................................................... 34
Capital Stock......................................................... 34
Management of the Funds............................................... 36
Voting Rights......................................................... 39
Stockholder Inquiries................................................. 40
Dividends and Distributions........................................... 40
Automatic Dividend Reinvestment Plan.................................. 41
Mutual Fund Investment Option......................................... 43
Liquidation Rights of Holders of AMPS................................. 43
Tax Rules Applicable to Insured, Taurus and their Stockholders........ 43
AGREEMENT AND PLAN OF REORGANIZATION.................................... 47
General............................................................... 47
Procedure............................................................. 47
Terms of the Agreement and Plan of Reorganization..................... 48
Potential Benefits to Insured Common Stockholders and Taurus Common
Stockholders as a Result of the Reorganization....................... 50
Surrender and Exchange of Taurus Stock Certificates................... 51
Tax Consequences of the Reorganization................................ 51
Capitalization........................................................ 53
ELECTION OF DIRECTORS..................................................... 54
Committee and Board Meetings.......................................... 56
Compliance with Section 16(a) of the Securities Exchange Act of 1934.. 56
Interested Persons.................................................... 56
Compensation of Directors............................................. 56
Officers of the Funds................................................. 57
SELECTION OF INDEPENDENT AUDITORS......................................... 58
INFORMATION CONCERNING THE MEETINGS....................................... 58
Date, Time and Place of Meetings...................................... 58
Solicitation, Revocation and Use of Proxies........................... 58
Record Date and Outstanding Shares.................................... 59
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Security Ownership of Certain Beneficial Owners and Management of In-
sured and Taurus.................................................... 59
Voting Rights and Required Vote...................................... 59
ADDITIONAL INFORMATION................................................. 60
CUSTODIAN.............................................................. 61
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR................ 61
LEGAL PROCEEDINGS...................................................... 62
LEGAL OPINIONS......................................................... 62
EXPERTS................................................................ 62
STOCKHOLDER PROPOSALS.................................................. 62
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
EXHIBIT I--AGREEMENT AND PLAN OF REORGANIZATION........................ I-1
EXHIBIT II--ECONOMIC CONDITIONS IN NEW YORK............................ II-1
EXHIBIT III--RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER........... III-1
EXHIBIT IV--PORTFOLIO INSURANCE........................................ IV-1
</TABLE>
4
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of Insured and
Taurus for use at the Meetings to be held at the offices of Merrill Lynch
Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New
Jersey on October 20, 1997, at [10:45 a.m.], New York time (for Insured) and
[11:00 a.m.], New York time (for Taurus). The mailing address for both Insured
and Taurus is P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate
mailing date of this Proxy Statement and Prospectus is , 1997.
Any person giving a proxy may revoke it at any time prior to its exercise by
executing a superseding proxy, by giving written notice of the revocation to
the Secretary of Insured or Taurus, as applicable, at the address indicated
above or by voting in person at the appropriate Meeting. All properly executed
proxies received prior to the Meetings will be voted at the Meetings in
accordance with the instructions marked thereon or otherwise as provided
therein. Unless instructions to the contrary are marked, (a) all proxies will
be voted "FOR" proposal: (1) to approve the Agreement and Plan of
Reorganization between Insured and Taurus (the "Agreement and Plan of
Reorganization"); and (b) for the stockholders of Insured only, all proxies
submitted by Insured stockholders will be voted "FOR" proposals (2)(a) and
(2)(b): (2)(a) to elect a Board of Directors of Insured to serve for the
ensuing year; and (2)(b) to ratify the selection of Ernst & Young LLP as the
independent auditors of Insured for the Fund's current fiscal year ending
October 31, 1997.
With respect to proposal (1), approval of the Agreement and Plan of
Reorganization will require the affirmative vote of stockholders representing
a majority of the outstanding shares of Insured Common Stock and AMPS of
Insured, designated Series A, Series B and Series C, each with a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) (collectively, the
"Insured AMPS"), voting together as a single class, and a majority of the
outstanding shares of Insured AMPS, voting separately as a class, as well as
the affirmative vote of stockholders representing a majority of the
outstanding shares of Taurus Common Stock and Taurus AMPS, voting together as
a single class, and a majority of the outstanding shares of Taurus AMPS,
voting separately as a class.
With respect to proposal (2)(a), holders of shares of Insured AMPS voting
separately as a class are entitled to elect two Directors of Insured and
holders of shares of Insured Common Stock and Insured AMPS, voting together as
a single class, are entitled to elect the remaining Directors of Insured.
Assuming a quorum is present, (x) election of the two Directors of Insured to
be elected by the holders of Insured AMPS, voting separately as a class, will
require the affirmative vote of a majority of the votes cast by the holders of
the Insured AMPS, represented at the Insured Annual Meeting and entitled to
vote; and (y) election of the remaining Directors of Insured will require the
affirmative vote of a majority of the votes cast by the holders of shares of
Insured Common Stock and Insured AMPS, represented at the Insured Annual
Meeting and entitled to vote, voting together as a single class.
With respect to proposal (2)(b), approval of the ratification of the
selection of Ernst & Young LLP as the independent auditors of Insured will
require the affirmative vote of a majority of the votes cast by the holders of
shares of Insured Common Stock and Insured AMPS represented at the Meetings
and entitled to vote, voting together as a single class.
The Boards of Directors of Insured and Taurus have fixed the close of
business on August 25, 1997 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the
Meetings or any adjournment thereof. Stockholders on the Record Date will be
entitled to one vote for each share held, with no shares having cumulative
voting rights. As of the Record Date, there were issued and outstanding
21,195,037 shares of Insured Common Stock, 5,760 shares of Insured AMPS in
three series, 6,714,921 shares of Taurus Common Stock and 1,200 shares of
Taurus AMPS. To the knowledge of the management of each of Insured and Taurus,
no person owned beneficially more than 5% of the respective outstanding shares
of either class of capital stock of Insured or Taurus at the Record Date.
5
<PAGE>
The Boards of Directors of Insured and Taurus know of no business other than
that discussed in proposals (1) and (2) above which will be presented for
consideration at the Meetings. If any other matter is properly presented, it
is the intention of the persons named in the enclosed proxy to vote in
accordance with their best judgment.
THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained herein and in the
Agreement and Plan of Reorganization, attached hereto as Exhibit I.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of all of the assets and the assumption of
all of the liabilities of Taurus by Insured and the subsequent distribution of
Insured Common Stock and Insured Series D AMPS to the holders of Taurus Common
Stock and Taurus AMPS, respectively, and (ii) the subsequent deregistration
and dissolution of Taurus.
At a meeting of the Board of Directors of Insured held on June 20, 1997, and
at a meeting of the Board of Directors of Taurus held on July 7, 1997, the
Boards of Directors of Insured and Taurus unanimously approved a proposal that
Insured acquire all of the assets, and assume all of the liabilities, of
Taurus in exchange solely for Insured Common Stock and Insured Series D AMPS
to be issued to Taurus and thereafter distributed to the stockholders of
Taurus. Subject to obtaining the necessary approvals from the Insured and
Taurus stockholders, the Board of Directors of Taurus deemed advisable the
deregistration of Taurus under the Investment Company Act and its dissolution
under the laws of the State of Maryland.
If the Insured and Taurus stockholders approve the Reorganization, Insured
Common Stock and Insured Series D AMPS will be issued to Taurus in exchange
for the assets of Taurus and thereafter Taurus will distribute these shares to
its stockholders as provided in the Agreement and Plan of Reorganization.
After the Reorganization, Taurus will terminate its registration under the
Investment Company Act and its incorporation under Maryland law.
Insured and Taurus are both non-diversified, leveraged, closed-end
management investment companies registered under the Investment Company Act.
Both Insured and Taurus seek to provide stockholders with as high a level of
current income exempt from Federal income taxes and New York State and New
York City personal income taxes as is consistent with their respective
investment policies and prudent investment management. Both Insured and Taurus
seek to achieve their investment objectives by investing primarily in a
portfolio of New York Municipal Bonds. With respect to Insured, under normal
circumstances, at least 80% of Insured's total 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 ("Insured Municipal Obligations"). As a result of the
Reorganization, Insured may have more than 20% of its assets invested in
uninsured Municipal Bonds; however, Insured will take steps necessary to
ensure that, within 30 days after the Exchange Date, at least 80% of its
assets will be invested in Insured Municipal Obligations. Each Fund will
maintain at least 65% of its assets in New York Municipal Bonds and at least
80% of its assets in New York Municipal Bonds and other long-term municipal
obligations exempt from Federal income taxes, but not from New York State and
New York City personal income taxes.
Based upon their evaluation of all relevant information, the Directors of
Insured and Taurus have determined that the Reorganization will potentially
benefit the holders of Common Stock of both Insured and Taurus. Specifically,
after the Reorganization, Taurus stockholders will remain invested in a
closed-end fund that has an investment objective and policies similar to those
of Taurus and that utilizes many of the same management personnel. In
addition, it is anticipated that both Insured and Taurus common stockholders
will be subject to a reduced overall operating expense ratio based on the
combined assets of the surviving fund after the Reorganization. It is not
anticipated that the Reorganization will directly benefit the holders of
shares of Insured
6
<PAGE>
AMPS or Taurus AMPS; however, the Reorganization will not adversely affect the
holders of shares of AMPS of either Fund and the expenses of the
Reorganization will not be borne by the holders of shares of AMPS of either
Fund.
In deciding to recommend the Reorganization, the Boards of Directors of
Insured and Taurus took into account the investment objective and policies of
both Insured and Taurus, the expenses incurred both due to the Reorganization
and on an ongoing basis by the new and existing stockholders of Insured and
the potential benefits, including economies of scale, to the holders of Common
Stock and AMPS of Insured and Taurus as a result of the Reorganization. The
Boards of Directors of Insured and Taurus, including all of the Directors who
are not "interested persons," as defined in the Investment Company Act, of
Insured or Taurus, have determined that the Reorganization is in the best
interests of each of the Funds and of the holders of Common Stock and AMPS of
Insured and Taurus and that the interests of such stockholders will not be
diluted as a result of effecting the Reorganization.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approval, provided
that the Funds have obtained prior to that time a favorable private letter
ruling from the Internal Revenue Service (the "IRS") concerning the tax
consequences of the Reorganization as set forth in the Agreement and Plan of
Reorganization. Under the Agreement and Plan of Reorganization, however, the
Board of Directors of either Insured or Taurus may cause the Reorganization to
be postponed or abandoned should either Board determine that it is in the best
interests of the stockholders of either Insured or Taurus, respectively, to do
so. The Agreement and Plan of Reorganization may be terminated, and the
Reorganization abandoned, whether before or after approval by the Funds'
stockholders, at any time prior to the Exchange Date (as defined below), (i)
by mutual consent of the Boards of Directors of Insured and Taurus; (ii) by
the Board of Directors of Insured if any condition to Insured's obligations
has not been fulfilled or waived by such Board; or (iii) by the Board of
Directors of Taurus if any condition to Taurus' obligations has not been
fulfilled or waived by such Board.
7
<PAGE>
PRO FORMA FEE TABLE FOR COMMON STOCKHOLDERS OF INSURED, TAURUS
AND THE COMBINED FUND AS OF APRIL 30, 1997 (UNAUDITED) (A)
<TABLE>
<CAPTION>
ACTUAL
----------------- PRO FORMA
INSURED TAURUS COMBINED
------- ------ ---------
<S> <C> <C> <C>
Common Stockholder Transaction Expenses:
Maximum Sales Load
(as a percentage of the offering price)
imposed on purchases of Common Stock.......... 5.50%(b) 5.50%(b) -- (c)
Dividend Reinvestment and Cash Purchase Plan
Fees.......................................... None None None
Annual Fund Operating Expenses (as a percentage
of average net assets attributable to Common
Stock; annualized) (d):
Investment Advisory Fees....................... 0.73% 0.69% 0.72%
Other Expenses
Transfer Agent Fees........................... 0.03% 0.06% 0.03%
Custodian Fee................................. 0.01% 0.01% 0.01%
Miscellaneous................................. 0.23% 0.35% 0.20%
---- ---- ----
Total Other Expenses.......................... 0.27% 0.42% 0.24%
---- ---- ----
Total Annual Operating Expenses................ 1.00% 1.11% 0.96%
==== ==== ====
</TABLE>
- --------
(a) No information is presented with respect to the AMPS because neither
Fund's expenses nor expenses of the Reorganization will be borne by the
holders of AMPS of either Fund. Generally AMPS are sold at a fixed
liquidation preference of $25,000 per share and investment return is set
at an auction.
(b) Sales load charged in the Fund's initial offering, subject to reductions
for bulk purchases. Shares of Common Stock purchased on the secondary
market are not subject to sales loads, but may be subject to brokerage
commissions or other charges.
(c) No sales load will be charged on the issuance of shares in the
Reorganization. Shares of Common Stock are not available for purchase from
the Funds but may be purchased through a broker-dealer subject to
individually negotiated commission rates.
(d) The actual annual fund operating expenses for Taurus were derived from the
Fund's shareholder report dated as of April 30, 1997. The actual fund
operating expenses for Insured are for the three months ended April 30,
1997. The pro forma annual operating expenses for the combined fund are
projections for a 12-month period.
CUMULATIVE EXPENSES PAID ON SHARES OF COMMON STOCK
FOR THE PERIODS INDICATED:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, including the maximum sales load of
$55 and assuming (1) an operating expense ratio of
1.00% for Insured shares, 1.11% for Taurus shares and
0.96% for shares of the combined fund and (2) a 5%
annual return throughout the period:
Insured................................................ $65 $85 $107 $171
Taurus................................................. $66 $88 $113 $183
Combined Fund*......................................... $64 $84 $105 $166
</TABLE>
- --------
* Assumes that the Reorganization had taken place on April 30, 1997.
8
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that an Insured or Taurus common stockholder will bear
directly or indirectly as compared to the costs and expenses that would be
borne by such investors taking into account the Reorganization. The Example
set forth above assumes that shares of Common Stock were purchased in the
initial offerings and the reinvestment of all dividends and distributions and
utilizes a 5% annual rate of return as mandated by Securities and Exchange
Commission (the "Commission") regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR 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. See "The Reorganization--Comparison
of the Funds" and "The Reorganization--Agreement and Plan of Reorganization--
Potential Benefits to Insured Common Stockholders and Taurus Common
Stockholders as a Result of the Reorganization."
BUSINESS OF INSURED............ Insured was incorporated under the laws of
the State of Maryland on May 5, 1992 and
commenced operations on June 26, 1992. Like
Taurus, Insured is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to
provide stockholders with as high a level of
current income exempt from Federal income
taxes and New York State and New York City
personal income taxes as is consistent with
its investment policies and prudent
investment management. Furthermore, like
Taurus, Insured seeks to achieve its
investment objective by investing primarily
in a portfolio of New York Municipal Bonds.
With respect to Insured, under normal
circumstances at least 80% of Insured'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. See "The
Reorganization--Comparison of the Funds--
Investment Objective and Policies."
Like Taurus, Insured has outstanding both
Common Stock and AMPS. As of June 30, 1997,
Insured had net assets of $455,662,905.
BUSINESS OF TAURUS............. Taurus was incorporated under the laws of the
State of Maryland on January 24, 1990 and
commenced operations on February 1, 1990.
Like Insured, Taurus is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to
provide stockholders with as high a level of
current income exempt from Federal income
taxes and New York State and New York City
personal income taxes as is consistent with
its investment policies and prudent
investment management. Furthermore, like
Insured, Taurus seeks to achieve its
investment objective by investing primarily
in a portfolio of New York Municipal Bonds.
Like Insured, Taurus has outstanding both
Common Stock and AMPS. As of June 30, 1997,
Taurus had net assets of $111,021,648.
COMPARISON OF THE FUNDS........
Investment Objective and Policies. Insured
and Taurus have similar investment objectives
and policies. Both Funds seek to pay interest
exempt from Federal income taxes and New York
9
<PAGE>
State and New York City personal income taxes
and seek to maintain as much of their
respective portfolios invested in New York
Municipal Bonds as possible. As of June 30,
1997, 98% of Insured's net assets and 96% of
Taurus' net assets were invested in New York
Municipal Bonds. With respect to Insured,
under normal circumstances at least 80% of
Insured'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 same fundamental investment
restrictions apply to both Insured and
Taurus. See "The Reorganizaton--Comparison of
the Funds--Investment Objective and
Policies."
Capital Stock. Insured and Taurus each has
outstanding both Common Stock and AMPS. Like
Taurus Common Stock, Insured Common Stock is
traded on the NYSE. As of June 30, 1997, the
net asset value per share of Insured Common
Stock was $14.70 and the market price per
share was $14.25, and as of the same date,
the net asset value per share of the Taurus
Common Stock was $12.07 and the market price
per share was $11.875. Insured AMPS and
Taurus AMPS each have a liquidation
preference of $25,000 per share and are sold
principally at auctions. See "The
Reorganization--Comparison of the Funds--
Capital Stock."
Auctions generally have been held and will be
held every seven days in the case of the
Insured Series A AMPS and Series B AMPS and
every 28 days in the case of the Insured
Series C AMPS and Taurus AMPS unless the
applicable Fund elects, subject to certain
limitations, to have a special dividend
period. As of the auction held on June 27,
1997, the dividend rate on the Insured Series
A AMPS was 3.5%; as of the auction held on
June 24, 1997, the dividend rate on the
Insured Series B AMPS was 3.85%; as of the
auction held on June 18, 1997, the dividend
rate on the Insured Series C AMPS was 3.475%;
and as of the auction held on June 10, 1997,
the dividend rate on the Taurus AMPS was
3.676%.
Advisory Fees. The investment adviser for
both Insured and Taurus is Fund Asset
Management, L.P. ("FAM"). FAM is an affiliate
of MLAM, and both FAM and MLAM are owned and
controlled by Merrill Lynch & Co., Inc. ("ML
& Co."). The principal business address of
FAM is 800 Scudders Mill Road, Plainsboro,
New Jersey 08536. MLAM or FAM acts as the
investment adviser for more than 140
registered investment companies. FAM also
offers portfolio management and portfolio
analysis services to individuals and
institutions.
FAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund. Many of
the same personnel are involved in the
management of the portfolios of Insured and
Taurus. The portfolios of Insured and Taurus
are managed by Roberto Roffo.
10
<PAGE>
Pursuant to separate investment advisory
agreements between each Fund and FAM, each
Fund pays FAM a monthly fee at the annual
rate of .50% of such Fund's average weekly
net assets, including proceeds from the
issuance of AMPS. Subsequent to the
Reorganization, FAM will continue to receive
compensation at the rate of .50% of the
average weekly net assets of the surviving
Fund. See "Comparison of the Funds--
Management of the Funds."
Other Significant Fees. State Street Bank and
Trust Company is the custodian, transfer
agent, dividend disbursing agent and
registrar for Insured in connection with its
Common Stock. The Bank of New York is the
custodian, transfer agent, dividend
disbursing agent and registrar for Taurus in
connection with its Common Stock. IBJ
Schroder Bank and Trust Company is the
transfer agent, dividend disbursing agent,
registrar and auction agent for both Insured
and Taurus in connection with their
respective AMPS. The principal business
addresses are as follows: State Street Bank
and Trust Company, One Heritage Drive, P2N,
North Quincy, Massachusetts 02171; The Bank
of New York, 110 Washington Street, New York,
New York 10286; IBJ Schroder Bank and Trust
Company, One State Street, New York, New York
10004. See "The Reorganization--Comparison of
the Funds--Management of the Funds."
Overall Expense Ratio. For the three months
ended April 30, 1997, the overall annualized
operating expense ratio for Insured was
0.75%, based on average net assets of
approximately $450.4 million including
proceeds from the issuance of AMPS, and
1.00%, based on average net assets of
approximately $306.4 million excluding
proceeds from the issuance of AMPS. For the
six months ended April 30, 1997, the overall
annualized operating expense ratio for Taurus
was 0.81%, based on average net assets of
approximately $110.2 million including
proceeds from the issuance of AMPS, and
1.11%, based on average net assets of
approximately $80.2 million excluding
proceeds from the issuance of AMPS. If the
Reorganization had taken place on April 30,
1997, the overall operating expense ratio for
the combined fund on a pro forma basis would
have been 0.66%, based on average net assets
of approximately $560.5 million including
proceeds from the issuance of AMPS, and
0.96%, based on average net assets of
approximately $386.5 million excluding
proceeds from the issuance of AMPS.
Purchases and Sales of Common Stock and
AMPS. Purchase and sale procedures for both
Insured Common Stock and Taurus Common Stock
are identical, and investors typically
purchase and sell shares of Common Stock of
such Funds through a registered broker-dealer
on the NYSE, thereby incurring a brokerage
commission set by the broker-dealer.
Alternatively, investors may purchase or sell
shares of Common Stock of such Funds through
privately negotiated transactions with
existing stockholders.
11
<PAGE>
Purchase and sale procedures for Insured AMPS
and Taurus AMPS also are substantially
identical. Such AMPS generally are purchased
and sold at separate auctions conducted on a
regular basis by IBJ Schroder Bank and Trust
Company, as the auction agent for each Fund's
AMPS (the "Auction Agent"). Unless otherwise
permitted by the Funds, existing and
potential holders of AMPS only may
participate in auctions through their broker-
dealers. Broker-dealers submit the orders of
their respective customers who are existing
and potential holders of AMPS to the Auction
Agent. On or prior to each auction date for
the AMPS (the business day next preceding the
first day of each dividend period), each
holder may submit orders to buy, sell or hold
AMPS to its broker-dealer. Outside of these
auctions, shares of Insured AMPS or Taurus
AMPS may be purchased or sold through broker-
dealers for the AMPS in a secondary trading
market maintained by the broker-dealers.
However, there can be no assurance that a
secondary market actually will be developed
and maintained by the broker-dealers for the
AMPS of either Fund.
Ratings of AMPS. The Insured AMPS and the
Taurus AMPS have each been assigned a rating
of AAA from Standard & Poor's Ratings
Services ("S&P") and "aaa" from Moody's
Investors Service, Inc. ("Moody's"). See "The
Reorganization--Comparison of the Funds--
Rating Agency Guidelines."
Portfolio Insurance. With respect to Insured,
under normal circumstances, at least 80% of
its assets will be invested in Municipal
Bonds either (i) insured under an insurance
policy purchased by Insured or (ii) insured
under an insurance policy obtained by the
issuer thereof or any other party (previously
defined as "Insured Municipal Obligations").
Insured's investment policies provide that no
more than 20% of Insured's portfolio will
consist of uninsured municipal obligations.
As a result of the Reorganization, Insured
may have more than 20% of its assets invested
in uninsured Municipal Bonds; however, within
30 days after the Reorganization, Insured
will take steps necessary to ensure that at
least 80% of its total assets will be
invested in Insured Municipal Obligations.
Insured will achieve compliance with its
investment policy described herein within 30
days. See "The Reorganization--Comparison of
the Funds--Investment Objective and
Policies--Portfolio Insurance."
Portfolio Transactions. The portfolio
transactions in which Insured and Taurus may
engage are substantially similar, as are the
procedures for such transactions. See "The
Reorganization--Comparison of the Funds--
Portfolio Transactions."
Dividends and Distributions. The methods of
dividend payment and distributions are
identical for Insured and Taurus, both with
respect to the Common Stock and the AMPS of
each Fund. See "The Reorganization--
Comparison of the Funds--Dividends and
Distributions."
12
<PAGE>
Net Asset Value. The net asset value per
share of Common Stock of each Fund is
determined as of 15 minutes after the close
of business on the NYSE (generally, 4:00
p.m., New York time) on the last business day
of each week. For purposes of determining the
net asset value of a share of Common Stock of
each Fund, the value of the securities held
by the Fund plus any cash or other assets
(including interest accrued but not yet
received) minus all liabilities (including
accrued expenses) and the aggregate
liquidation value of the outstanding shares
of AMPS of the Fund is divided by the total
number of shares of Common Stock of the Fund
outstanding at such time. Expenses, including
the fees payable to FAM, are accrued daily.
See "The Reorganization--Comparison of the
Funds--Net Asset Value."
Voting Rights. The corresponding voting
rights of the holders of shares of Insured
Common Stock and Taurus Common Stock are
substantially identical. Similarly, the
corresponding voting rights of the holders of
shares of Insured AMPS and Taurus AMPS are
substantially identical. See "The
Reorganization--Comparison of the Funds--
Capital Stock."
Stockholder Services. An automatic dividend
reinvestment plan is available both to the
holders of shares of Insured Common Stock and
the holders of shares of Taurus Common Stock.
The plans are substantially identical for the
two Funds. See "The Reorganization--
Comparison of the Funds--Automatic Dividend
Reinvestment Plan." Other stockholder
services, including the provision of annual
and semi-annual reports, are substantially
the same for the two Funds.
OUTSTANDING SECURITIES OF INSURED AND TAURUS AS OF JULY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
EXCLUSIVE OF
AMOUNT HELD BY AMOUNT
AMOUNT FUND FOR ITS SHOWN IN
TITLE OF CLASS AUTHORIZED OWN ACCOUNT PREVIOUS COLUMN
-------------- ----------- -------------- ------------------
<S> <C> <C> <C>
INSURED
Common Stock................ 199,994,240 0 21,195,037
AMPS
Series A.................. 2,800 0 2,800
Series B.................. 1,960 0 1,960
Series C.................. 1,000 0 1,000
TAURUS
Common Stock.............. 199,998,800 0 6,714,921
AMPS...................... 1,200 0 1,200
</TABLE>
TAX CONSIDERATIONS............. Insured and Taurus have jointly
requested a private letter ruling
from the IRS with respect to the
Reorganization to the effect that,
among other things, neither Insured
nor Taurus will recognize gain or
loss on the transaction and Taurus
stockholders will not recognize gain
or loss on the exchange of their
Taurus shares for shares of Insured
Common Stock (except to the extent
that a Taurus common
13
<PAGE>
stockholder receives cash
representing an interest in less
than a full share of Insured Common
Stock in the Reorganization) or
Insured Series D AMPS. The
consummation of the Reorganization
is subject to the receipt of such
ruling. The Reorganization will not
affect the status of Insured as a
regulated investment company (a
"RIC") under the Internal Revenue
Code of 1986, as amended (the
"Code"). Taurus will liquidate
pursuant to the Reorganization. See
"The Reorganization--Agreement and
Plan of Reorganization--Tax
Consequences of the Reorganization."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since both Insured and Taurus invest primarily in portfolios of New York
Municipal Bonds, any risks inherent in such investments are equally applicable
to both Funds and will be similarly pertinent to the combined fund after the
Reorganization. It is expected that the Reorganization itself will not
adversely affect the rights of holders of shares of Common Stock or AMPS of
either Fund or create additional risks.
EFFECTS OF LEVERAGE
Utilization of leverage, through the issuance of AMPS, involves certain
risks to holders of Insured Common Stock and Taurus Common Stock. For example,
each Fund's issuance of AMPS may result in higher volatility of the net asset
value of its Common Stock and potentially more volatility in the market value
of its Common Stock. In addition, fluctuations in the short-term and medium-
term dividend rates on, and the amount of taxable income allocable to, the
AMPS affect the yield to holders of Common Stock. So long as each Fund, taking
into account the costs associated with its AMPS and the Fund's operating
expenses, is able to realize a higher net return on its investment portfolio
than the then-current dividend rate on the AMPS, the effect of leverage is to
cause holders of the Fund's Common Stock to realize a higher current rate of
return than if the Fund were not leveraged. Similarly, since a pro rata
portion of each Fund's net realized capital gains on its investment assets
generally is payable to holders of the Fund's Common Stock, if increased net
capital gains are realized by the Fund because of increased capital for
investment, the effect of leverage will be to increase the amount of such
gains distributed to holders of the Fund's Common Stock. However, short-term,
medium-term and long-term interest rates change from time to time as does
their relationship to each other (i.e., the slope of the yield curve)
depending upon such factors as supply and demand forces, monetary and tax
policies and investor expectations. Changes in 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 increase substantially relative to the long-
term obligations in which each Fund may be invested. To the extent that the
current dividend rate on the AMPS approaches the net return on a Fund's
investment portfolio, the benefit of leverage to holders of Common Stock is
reduced, and if the current dividend rate on the AMPS were to exceed the net
return on a Fund's portfolio, the Fund's leveraged capital structure would
result in a lower rate of return to holders of Common Stock than if the Fund
were not leveraged. Similarly, since both the costs associated with the
issuance of AMPS and any decline in the value of a Fund's investments
(including investments purchased with the proceeds from any AMPS offering) are
borne entirely by holders of the Fund's 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. Such decrease in
net asset value likely would be reflected in a greater decline in the market
price for shares of Common Stock.
In an extreme case, a decline in net asset value could affect each Fund's
ability to pay dividends on its Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification for the special tax
treatment afforded RICs under the Code. See "The Reorganization--Agreement and
Plan of
14
<PAGE>
Reorganization--Tax Consequences of the Reorganization." Each Fund intends,
however, to take all measures necessary to continue to make Common Stock
dividend payments. If a Fund's current investment income were not sufficient
to meet dividend requirements on either the Common Stock or the AMPS, it could
be necessary for the Fund to liquidate certain of its investments. In
addition, each Fund has the authority to redeem its AMPS for any reason and
may redeem all or part of its AMPS if (i) the Fund anticipates that its
leveraged capital structure will result in a lower rate of return for any
significant amount of time to holders of the Common Stock than that obtainable
if the Common Stock were unleveraged or (ii) the asset coverage (as defined in
the Investment Company Act) for the AMPS declines below 200% or the Fund fails
to satisfy the guidelines specified by Moody's and S&P in connection with
their respective rating of the AMPS. Redemption of the AMPS or insufficient
investment income to make dividend payments may reduce the net asset value of
the Common Stock and require the Fund to liquidate a portion of its
investments at a time when it may be disadvantageous, in the absence of such
extraordinary circumstances, to do so.
The dividend rates on the outstanding AMPS are established through an
auction process. The dividend rates are set every seven days on the Insured
Series A and Series B AMPS. The dividend rates are set every 28 days on the
Insured Series C AMPS and the Taurus AMPS. The dividend rate has fluctuated at
small premiums over and discounts to the 30 day commercial paper rate. At June
30, 1997, the annual dividend rates on the Insured Series A, B and C AMPS were
3.5%, 3.85% and 3.475%, respectively. At June 30, 1997 the annual dividend
rate on the Taurus AMPS was 3.676%. At such rates, the annual return that the
respective portfolio of Insured and Taurus must experience (net of expenses)
in order to cover dividend payments on its AMPS is 0.93% and 0.80%,
respectively.
The following table is designated to illustrate the effect on return to a
holder of each Fund's and the Combined Fund's Common Stock of the leverage
obtained by the issuance of the AMPS, assuming hypothetical annual returns on
the Fund's portfolio of minus 10 to plus 10 percent. As can be seen, leverage
generally increases the return to common stockholders when portfolio return is
positive and decreases return when the portfolio return is negative. Actual
returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
HYPOTHETICAL ANNUAL RETURN
INSURED
Assumed Portfolio Return (net of expenses) ......... (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return(1)............... (14)% (8)% (1)% 5% 12%
TAURUS
Assumed Portfolio Return (net of expenses).......... (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return(1)............... (14)% (7)% (1)% 5% 12%
PRO FORMA FOR COMBINED FUND
Assumed Portfolio Return (net of expenses) ......... (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return(1)............... (14)% (8)% (1)% 5% 12%
</TABLE>
- --------
(1) In order to compute "Corresponding Common Stock Return," the "Assumed
Portfolio Return" is multiplied by the total value of the Fund assets as
of the beginning of the fiscal year (November 1, 1995) to obtain an
assumed return to the Fund. This return is then reduced by the value of
the AMPS dividends that would be paid during the year based on the
dividend rates in effect at the beginning of the fiscal year in order to
determine the return available to holders of the Fund's Common Stock.
Return available to holders of the Fund's Common Stock is then divided by
the total value of the Fund's assets as of the beginning of the fiscal
year to determine "Corresponding Common Stock Return."
PORTFOLIO MANAGEMENT
The portfolio management strategies of Insured and Taurus are the same. In
the event of an increase in short-term or medium-term rates or other change in
market conditions to the point where a Fund's leverage could adversely affect
holders of Common Stock as noted above, or in anticipation of such changes,
each Fund may attempt to shorten the average maturity of its investment
portfolio, which would tend to offset the negative impact of leverage on
holders of its Common Stock. Each Fund also may attempt to reduce the degree
to which
15
<PAGE>
it is leveraged by redeeming AMPS pursuant to the provisions of the respective
Fund's Articles Supplementary establishing the rights and preferences of the
AMPS or otherwise purchasing shares of AMPS. Purchases and sales or
redemptions of AMPS, whether on the open market or in negotiated transactions,
are subject to limitations under the Investment Company Act. If market
conditions subsequently change, each Fund may sell previously unissued shares
of AMPS or shares of AMPS that the Fund previously issued but later
repurchased or redeemed.
RATINGS CONSIDERATIONS
Insured and Taurus have received ratings of their AMPS of AAA from S&P and
"aaa" from Moody's. In order to maintain these ratings, the Funds are required
to maintain portfolio holdings meeting the specified guidelines of such rating
agencies. These guidelines may impose asset coverage requirements that are
more stringent than those imposed by the Investment Company Act.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings of the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines address the likelihood that a holder of AMPS will be able to sell
such shares in an auction. The ratings are based on current information
furnished to Moody's and S&P by the Funds and FAM and information obtained
from other sources. The ratings may be changed, suspended or withdrawn as a
result of changes in, or the unavailability of, such information. Neither the
Insured Common Stock nor the Taurus Common Stock has been rated by a
nationally recognized statistical rating organization.
The Board of Directors of each of Insured and Taurus, as the case may be,
without stockholder approval, may amend, alter or repeal certain definitions
or restrictions that have been adopted by the Fund pursuant to the rating
agency guidelines, in the event the Fund receives confirmation from the rating
agencies that any such amendment, alteration or repeal would not impair the
ratings then assigned to shares of AMPS.
16
<PAGE>
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
Insured
The financial information in the table below, except for the six-month
period ended April 30, 1997, which is unaudited and has been provided by FAM,
has been audited in conjunction with the annual audits of the financial
statements of the Fund by Deloitte & Touche LLP, independent auditors. As of
January 24, 1997, Deloitte & Touche LLP were no longer the independent
auditors of Insured. The following per share data and ratios have been derived
from information provided in the financial statements of the Fund.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS PERIOD
ENDED JUNE 26,
APRIL FOR THE YEAR ENDED OCTOBER 31, 1992+ TO
30, 1997 --------------------------------------- OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992
----------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period...... $ 14.53 $ 14.63 $ 13.13 $ 15.89 $ 13.43 $ 14.18
-------- -------- -------- -------- -------- --------
Investment income--net... .53 1.04 1.07 1.07 1.11 .27
Realized and unrealized
gain (loss) on
investments--net........ (.20) (.09) 1.50 (2.76) 2.46 (.66)
-------- -------- -------- -------- -------- --------
Total from investment
operations.............. .33 .95 2.57 (1.69) 3.57 (.39)
-------- -------- -------- -------- -------- --------
Less dividends and
distributions to Common
Stock shareholders:
Investment income--net.. (.41) (.82) (.84) (.87) (.91) (.18)
Realized gain on
investments--net....... -- -- -- (.01) -- --
-------- -------- -------- -------- -------- --------
Total dividends and
distributions to Common
Stock shareholders...... (.41) (.82) (.84) (.88) (.91) (.18)
-------- -------- -------- -------- -------- --------
Capital charge resulting
from issuance of Common
Stock................... (.02) -- -- -- -- (.03)
-------- -------- -------- -------- -------- --------
Effect of Preferred Stock
activity:++
Dividends and
distributions to
Preferred Stock
shareholders:
Investment income--net. (.11) (.23) (.23) (.19) (.20) (.02)
Realized gain on
investment income--net. -- -- -- -- ## -- --
Capital charge resulting
from issuance of
Preferred Stock........ -- -- -- -- -- (.13)
-------- -------- -------- -------- -------- --------
Total effect of Preferred
Stock activity.......... (.11) (.23) (.23) (.19) (.20) (.15)
-------- -------- -------- -------- -------- --------
Net Asset value, end of
period.................. $ 14.32 $ 14.53 $ 14.63 $ 13.13 $ 15.89 $ 13.43
======== ======== ======== ======== ======== ========
Market price per share,
end of period........... $ 13.50 $ 13.375 $ 13.25 $ 11.00 $ 15.25 $ 13.75
======== ======== ======== ======== ======== ========
<CAPTION>
TOTAL INVESTMENT RETURN:**
<S> <C> <C> <C> <C> <C> <C>
Based on market price per
share.................... 4.08%# 7.28% 28.61% (22.96%) 17.90% (7.17%)#
======== ======== ======== ======== ======== ========
Based on net asset value
per share............... 1.62%# 5.55% 18.96% (11.75%) (25.77%) (4.09%)#
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:***
Expenses, net of
reimbursement........... .69%* .71% .74% .74% .62%++++ .13%++++*
======== ======== ======== ======== ======== ========
Expenses................. .69%* .71% .74% .74% .70% .68%*
======== ======== ======== ======== ======== ========
Investment income--net... 5.10%* 5.00% 5.27% 5.09% 5.25% 5.05%*
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, net of
Preferred Stock, end of
period (in thousands)... $303,617 $161,472 $162,655 $145,977 $176,595 $146,633
======== ======== ======== ======== ======== ========
Preferred Stock
outstanding, end of
period (in thousands)... $144,000 $ 70,000 $ 70,000 $ 70,000 $ 70,000 $ 70,000
======== ======== ======== ======== ======== ========
Portfolio turnover....... 58.18% 118.28% 110.76% 36.79% 3.33% 19.40%
======== ======== ======== ======== ======== ========
</TABLE>
(footnotes on following page)
17
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS PERIOD
ENDED FOR THE YEAR ENDED OCTOBER JUNE 26,
APRIL 31, 1992+ TO
30, 1997 --------------------------- OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992
----------- ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
DIVIDENDS PER SHARE ON
PREFERRED STOCK
OUTSTANDING:+++
Series A--Investment
income--net................ $ 417 $ 913 $ 910 $ 759 $ 809 $ 92
====== ====== ====== ====== ====== ======
Series B--Investment
income--net................ $ 214 -- -- -- -- --
====== ====== ====== ====== ====== ======
Series C--Investment
income--net................ $ 257 -- -- -- -- --
====== ====== ====== ====== ====== ======
LEVERAGE:
Asset coverage per $1,000... $3,108 $3,307 $3,324 $3,085 $3,523 $3,095
====== ====== ====== ====== ====== ======
</TABLE>
- --------
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result in
substantially different returns. Total investment returns exclude the
effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ Insured Series A AMPS were issued on September 16, 1992; Insured Series B
AMPS and Series C AMPS were issued on January 27, 1997.
+++ Dividends per share have been adjusted to reflect a two-for-one stock
split that occurred on December 1, 1994.
++++ For the period June 26, 1992 (commencement of operations) to October 31,
1992, FAM earned fees of $300,109, all of which was voluntarily waived. In
addition, FAM reimbursed Insured $19,695 for additional expenses. For the
fiscal year ended October 31, 1993, FAM earned fees of $1,178,567, of which
$198,990 was voluntarily waived.
# Aggregate total investment return.
## Amount is less than $.01 per share.
18
<PAGE>
Taurus
The financial information in the table below, except for the six-month period
ended April 30, 1997 which is unaudited and has been provided by FAM, has been
audited in conjunction with the annual audits of the financial statements of
Taurus by Ernst & Young LLP, independent auditors. The following per share data
and ratios have been derived from information provided in the financial
statements of Taurus.
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE SIX FEBRUARY 1,
MONTHS ENDED FOR THE YEAR ENDED OCTOBER 31, 1990++ TO
APRIL 30, 1997 ----------------------------------------------- OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990
-------------- ------- ------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 12.03 $ 12.07 $11.18 $13.23 $11.95 $11.64 $10.76 $11.16
------- ------- ------ ------ ------ ------ ------ ------
Investment income--net.. .42 .85 .88 .91 .99 1.05 1.06 .72
Realized and unrealized
gain (loss) on
investments--net....... (.12) .05 .95 (1.76) 1.28 .32 .88 (.30)
------- ------- ------ ------ ------ ------ ------ ------
Total from investment
operations............. .30 .90 1.83 (.85) 2.27 1.37 1.94 .42
------- ------- ------ ------ ------ ------ ------ ------
Less dividends and
distributions to Common
Stock shareholders:
Investment income--net. (.35) (.69) (.71) (.78) (.88) (.90) (.83) (.52)
Realized gain on
investments--net...... (.13) (.08) (.05) (.28) -- -- -- --
------- ------- ------ ------ ------ ------ ------ ------
Total dividends and
distributions to Common
Stock shareholders..... (.48) (.77) (.76) (1.06) (.88) (.90) (.83) (.52)
------- ------- ------ ------ ------ ------ ------ ------
Capital charge resulting
from issuance of Common
Stock.................. -- -- -- -- -- -- -- (.05)
------- ------- ------ ------ ------ ------ ------ ------
Effect of Preferred
Stock activity:
Dividends and
distributions to
Preferred Stock
shareholders:
Investment income--net. (.05) (.15) (.17) (.10) (.11) (.16) (.23) (.12)
Realized gain on
investments--net...... (.03) (.02) (.01) (.04) -- -- -- --
Capital charge
resulting from
issuance of Preferred
Stock................. -- -- -- -- -- -- -- (.13)
------- ------- ------ ------ ------ ------ ------ ------
Total effect of
Preferred Stock
activity............... (.08) (.17) (.18) (.14) (.11) (.16) (.23) (.25)
------- ------- ------ ------ ------ ------ ------ ------
Net asset value, end of
period................. $ 11.77 $ 12.03 $12.07 $11.18 $13.23 $11.95 $11.64 $10.76
======= ======= ====== ====== ====== ====== ====== ======
Market price per share,
end of period.......... $11.375 $10.875 $10.75 $9.875 $14.25 $12.75 $12.00 $10.25
======= ======= ====== ====== ====== ====== ====== ======
</TABLE>
(footnotes on following page)
19
<PAGE>
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE SIX FEBRUARY 1,
MONTHS ENDED FOR THE YEAR ENDED OCTOBER 31, 1990++ TO
APRIL 30, 1997 ----------------------------------------------------- OCTOBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990
-------------- ------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL INVESTMENT
RETURN:**
Based on market price
per share.............. 9.14%# 8.54% 16.98% (24.38)% 19.63% 14.36% 26.04% (10.44)%#
======= ======= ======= ======= ======= ======= ======= =======
Based on net asset value
per share.............. 2.09%# 6.94% 16.01% (7.78)% 18.50% 10.50% 16.46% 1.09%#
======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS***
Expenses, net of
reimbursement.......... .81% .82% .83% .80% .86% .82% .86% .75%*
======= ======= ======= ======= ======= ======= ======= =======
Expenses................ .81%* .82% .83% .80% .86% .82% .86% .88%*
======= ======= ======= ======= ======= ======= ======= =======
Investment income--net.. 5.17%* 5.15% 5.54% 5.40% 5.82% 6.37% 6.70% 6.90%*
======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, net of
Preferred Stock, end of
period (in thousands).. $79,029 $80,769 $81,018 $75,075 $87,553 $77,775 $73,721 $66,711
======= ======= ======= ======= ======= ======= ======= =======
Preferred Stock
outstanding, end of
period (in thousands).. $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover...... 62.33% 193.24% 165.22% 65.74% 34.31% 20.18% 35.80% 59.18%
======= ======= ======= ======= ======= ======= ======= =======
DIVIDENDS PER SHARE ON
PREFERRED STOCK
OUTSTANDING+
Investment income--net.. $ 274 $ 817 $ 949 $ 573 $ 626 $ 839 $ 1,243 $ 630
======= ======= ======= ======= ======= ======= ======= =======
LEVERAGE:
Asset coverage per
$1,000................ $ 3,634 $ 3,692 $ 3,701 $ 3,503 $ 3,916 $ 3,593 $ 3,457 $ 3,224
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Dividends per share have been adjusted to reflect a two-for-one stock
split that occurred on December 1, 1994.
# Aggregate total investment return.
++Commencement of operations.
20
<PAGE>
PER SHARE DATA FOR COMMON STOCK*
TRADED ON THE NEW YORK STOCK EXCHANGE
INSURED
<TABLE>
<CAPTION>
PREMIUM
(DISCOUNT)
TO
NET NET ASSET
MARKET PRICE** ASSET VALUE VALUE
----------------- ------------- --------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ------- -------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1995............... $12.375 $ 10.125 $13.57 $12.21 (4.39)% (20.07)%
April 30, 1995................. 13.00 12.375 14.34 13.58 (5.19) (12.62)
July 31, 1995.................. 13.00 12.375 14.79 13.97 (9.60) (14.71)
October 31, 1995............... 13.25 12.50 14.72 13.95 (7.97) (11.76)
January 31, 1996............... 13.75 13.00 15.24 14.70 (8.25) (14.02)
April 30, 1996................. 13.875 12.75 15.43 14.00 (6.73) (11.99)
July 31, 1996.................. 13.25 12.50 14.33 13.87 (6.09) (10.90)
October 31, 1996............... 13.50 13.125 14.66 14.08 (5.33) (10.04)
January 31, 1997............... 13.375 12.625 14.83 14.31 (8.14) (13.82)
April 30, 1997................. 13.625 13.00 14.85 14.07 (3.16) (12.46)
July 31, 1997.................. 16.0625 14.50 16.07 15.19 1.79 (5.17)
TAURUS
<CAPTION>
PREMIUM
(DISCOUNT)
TO
NET ASSET NET ASSET
MARKET PRICE** VALUE VALUE
----------------- ------------- --------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ------- -------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1995............... $10.75 $ 9.25 $11.30 $10.53 (1.38)% (14.19)%
April 30, 1995................. 10.75 10.125 11.91 11.31 (7.85) (13.94)
July 31, 1995.................. 11.00 10.25 12.24 11.59 (7.09) (17.08)
October 31, 1995............... 10.875 10.375 12.14 11.58 (7.17) (13.44)
January 31, 1996............... 11.38 10.63 12.53 12.12 (7.64) (13.76)
April 30, 1996................. 11.75 10.88 12.55 11.46 (1.77) (11.65)
July 31, 1996.................. 11.375 10.125 11.83 11.37 (1.77) (14.27)
October 31, 1996............... 11.00 10.375 12.09 11.58 (8.26) (12.74)
January 31, 1997............... 11.25 10.75 12.30 11.70 (5.80) (11.38)
April 30, 1997................. 11.75 10.625 12.17 11.57 (1.43) (8.64)
July 31, 1997.................. 12.125 11.00 12.53 11.79 (0.74) (7.64)
</TABLE>
- --------
* Calculations are based upon shares of Common Stock outstanding at the end
of each quarter.
** As reported in the consolidated transaction reporting system.
As indicated in the tables above, since November 1, 1994 the Insured Common
Stock and the Taurus Common Stock have traded at market prices that represent
a discount to net asset value. Since November 1, 1994, shares of Insured
Common Stock have traded at market prices representing a maximum discount of
(20.07%) and shares of Taurus Common Stock have traded at market prices
representing a maximum discount of (14.27%). Although there is no reason to
believe that this pattern should be affected by the Reorganization, it is not
possible to state whether shares of the surviving fund will trade at a premium
or discount to net asset value following the Reorganization, or what the
extent of any such premium or discount might be.
INVESTMENT OBJECTIVE AND POLICIES
The structure, organization and investment policies of Insured and Taurus
are similar. Each Fund seeks as a fundamental investment objective as high a
level of current income exempt from Federal income taxes and New York State
and New York City personal income taxes as is consistent with the Fund's
investment policies and prudent investment management. The investment
objective of each Fund is a fundamental policy that may not be
21
<PAGE>
changed without a vote of a majority of the Fund's outstanding voting
securities. Each Fund seeks to achieve its investment objective by investing
primarily in a portfolio of New York Municipal Bonds. With respect to Insured,
under normal circumstances, at least 80% of each Fund's total 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. Furthermore, each Fund will maintain at
least 65% of its assets in New York Municipal Bonds and at least 80% of its
assets in New York Municipal Bonds and other long-term municipal obligations
exempt from Federal income taxes, but not from New York State and New York
City personal income taxes. At times, each Fund may seek to hedge its
portfolio through the use of futures and options transactions to reduce
volatility in the net asset value of its shares of Common Stock.
Ordinarily, neither Fund intends to realize significant investment income
not exempt from Federal, New York State and New York City income taxes. Each
Fund seeks to invest substantially all of its total assets in New York
Municipal Bonds except at times when, in the judgment of FAM, New York
Municipal Bonds of sufficient quality and quantity are unavailable for
investment by the Fund. Both Funds may also invest in certain tax-exempt
securities classified as "private activity bonds" (in general, bonds that
benefit non-governmental entities) that may subject certain investors in the
Fund to an alternative minimum tax.
The investment grade Municipal Bonds in which each Fund invests are those
Municipal Bonds rated at the date of purchase within the four highest rating
categories of S&P, Moody's or Fitch Investors Service, Inc. ("Fitch") or, if
unrated, considered to be of comparable quality by FAM. In the case of long-
term debt, the investment grade rating categories are AAA through BBB- for
S&P, "Aaa" through "Baa3" for Moody's and AAA through BBB- for Fitch. In the
case of short-term notes, the investment grade rating categories are SP-1
through SP-3 for S&P, "MIG-1" through "MIG-4" for Moody's and F-1+ through F-4
for Fitch. In the case of tax-exempt commercial paper, the investment grade
rating categories are A through A-3 for S&P, "Prime-l" through "Prime-3" for
Moody's and F-l+ through F-4 for Fitch. Obligations ranked in the fourth
highest rating category assigned long-term debt or in an equivalent short-term
rating category (BBB, SP-3 and A-3 for S&P; "Baa," "MIG-4" and "Prime-3" for
Moody's; and BBB, F-3 and F-4 for Fitch), while considered "investment grade,"
may have certain speculative characteristics. In assessing the quality of
Municipal Bonds with respect to the foregoing requirements, FAM takes into
account the nature of any letters of credit or similar credit enhancement to
which particular Municipal Bonds are entitled and the creditworthiness of the
insurance company or other financial institution which provided such credit
enhancement. With respect to Insured, FAM also takes into account the
portfolio insurance in assessing the quality of Municipal Bonds in which
Insured may invest. See Exhibit III--"Ratings of Municipal Bonds and
Commercial Paper" and Exhibit IV--"Portfolio Insurance."
Insured may also invest in 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 Insured 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 an unconditional
right of demand on the part of the holder thereof to receive payment of the
unpaid principal balance plus accrued interest on a short notice period not to
exceed seven days. Participating VRDOs provide Insured with a specified
undivided interest (up to 100%) of 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. Insured has been advised by its
counsel that it should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The average maturity of each Fund's portfolio securities varies based upon
FAM'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 each Fund,
which invests primarily in fixed-income securities, changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of
a fixed-income portfolio can be expected to rise. Conversely, when interest
rates rise, the value of a fixed-income portfolio can be expected to decline.
Prices of longer-term securities generally fluctuate more in response to
interest rate changes than do short-term or medium-
22
<PAGE>
term securities. These changes in net asset value are likely to be greater in
the case of a fund having a leveraged capital structure, such as the Funds.
On a temporary basis, Insured may invest in short-term tax-exempt
securities, short-term U.S. Government securities, repurchase agreements or
cash. Such securities or cash will not exceed 20% of Insured's total assets
except during interim periods pending investment of the net proceeds from
public offerings of Insured's securities and temporary defensive periods when,
in the opinion of FAM, prevailing market or economic conditions warrant.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act
in the proportion of its total assets that it may invest in securities of a
single issuer. However, each Fund's investments are limited so as to qualify
the Fund for the special tax treatment afforded RICs under the Code. See "The
Reorganization--Tax Consequences of the Reorganization." To qualify, among
other requirements, each Fund limits 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 are 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 are 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 Investment Company Act must satisfy the foregoing 5%
requirement with respect to 75% of its total assets. To the extent that
Insured or Taurus 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 Insured's assets will be
invested in 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 insurance policies in either
instance will be issued by insurance carriers that have total admitted assets
(unaudited) of at least $50,000,000 and insurance claims paying ability
ratings of AAA from S&P and "Aaa" from Moody's. See Exhibit IV to this Proxy
Statement and Prospectus for a brief description of S&P's and Moody's
insurance claims-paying ability ratings. Currently, a majority of the insured
Municipal Bonds in Insured's portfolio are insured by the following insurance
companies that satisfy the foregoing requirements: AMBAC Indemnity
Corporation, Capital Guaranty Insurance Company, Financial Guaranty Insurance
Company, Financial Security Assurance and Municipal Bond Investors Assurance
Corporation. Insured also may purchase Municipal Bonds covered by insurance
issued by any other insurance company that satisfies the foregoing
requirements. A majority of insured Municipal Bonds held by Insured will be
insured under policies obtained by parties other than Insured.
Insured may purchase, but has no obligation to purchase, separate mutual
fund insurance policies (the "Policies") from insurance companies meeting the
requirements set forth above that guarantee payment of principal and interest
on specified eligible Municipal Bonds purchased by Insured. 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 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, Insured that such
nonpayment has occurred.
The Policies will be effective only as to insured Municipal Bonds
beneficially owned by Insured. In the event of a sale of any Municipal Bonds
held by Insured, 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 Municipal Bonds or
the value of the shares of Insured.
The insurer will not have the right to withdraw coverage on securities
insured by its Policies and held by Insured so long as such securities remain
in Insured's portfolio. In addition, the insurer may not cancel its
23
<PAGE>
Policies for any reason except failure to pay premiums when due. Insured's
Board of Directors reserves the right to terminate any of the Policies if it
determines that the benefits to Insured of having its portfolio insured under
such Policy are not justified by the expense involved.
The premiums for the Policies are paid by Insured and the yield on Insured's
portfolio is reduced thereby. FAM estimates that the cost of the annual
premiums for the Policies of Insured currently range from approximately .10 of
1% to .25 of 1% of the principal amount of the Municipal Bonds covered by such
Policies. The estimate is based on the expected composition of Insured's
portfolio of Municipal Bonds. Additional information regarding the Policies is
set forth in Exhibit IV to this Proxy Statement and Prospectus. In instances
in which Insured purchases 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 Municipal Bonds.
It is the intention of FAM to retain any insured securities which are in
default or in significant risk of default and to place a value on the
insurance that 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, FAM may determine that an
alternative value for the insurance, such as the difference between the market
value of the defaulted security and its par value, is more appropriate. FAM
will be unable to manage the portfolio of Insured to the extent it holds
defaulted securities, which may limit its ability in certain circumstances to
purchase other Municipal Bonds. See "Net Asset Value" below for a more
complete description of Insured's method of valuing defaulted securities and
securities that have a significant risk of default.
There can be no assurance that insurance of the kind described above will
continue to be available to Insured. In the event the Board of Directors of
Insured determines that such insurance is unavailable or that the cost of such
insurance outweighs the benefits to Insured, Insured may discontinue its
policy of maintaining insurance for all or any of the Municipal Bonds held in
its portfolio. Although FAM 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 Municipal Bonds will not receive
timely scheduled payments of principal or interest). However, the insured
Municipal Bonds are subject to market risk (i.e., fluctuations in market value
as a result of changes in prevailing interest rates).
DESCRIPTION OF NEW YORK MUNICIPAL BONDS AND MUNICIPAL BONDS
New York Municipal Bonds include primarily debt obligations of the State of
New York and its political subdivisions issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other purposes for
which New York Municipal Bonds may be issued include refunding of outstanding
obligations, obtaining funds for general operating expenses, or the obtaining
of funds to lend to public or private institutions for the construction of
facilities such as educational, hospital and housing facilities. In addition,
certain types of bonds may be issued by New York public authorities to finance
privately operated housing facilities and certain local facilities for water
supply, gas, electricity or sewage or solid water disposal. Certain United
States territories or possessions and their public authorities issue debt
obligations which also may qualify as New York Municipal Bonds.
Each Fund may invest a relatively high percentage of its assets in New York
Municipal Bonds of similar issuers that pay their interest obligations from
the revenues derived from similar projects. Economic, political or regulatory
occurrences affecting specifically such types of issuers would therefore have
a more pronounced effect on the Fund than if the issuers were more diverse. As
the similarity in issuers increases, the potential for fluctuation of the net
asset value of shares of Common Stock of the Fund also increases. Therefore,
investors should also be aware of the risks that these investments might
entail.
24
<PAGE>
The two principal classifications of New York Municipal Bonds are "general
obligation" bonds and "revenue" bonds, which include industrial development
bonds. General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal, premium, if any,
and interest; accordingly, the capacity of the issuer of a general obligation
bond as to the timely payment of interest and the repayment of principal and
premium, if any, when due is affected by the issuer's maintenance of its tax
base. Revenue 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 or limited tax or other specific revenue source such as
from the user of the facility being financed; accordingly, the timely payment
of interest and the repayment of principal and premium, if any, in accordance
with the terms of the revenue or special obligation bond is a function of the
economic viability of such facility or such revenue source. Industrial
development bonds are in most cases revenue bonds and generally do not
constitute the pledge of the credit or taxing power of the issuer of the
bonds. The payment of the principal, premium, if any, and interest on such
industrial development bonds depends solely on the ability of the user of the
facility financed by the bond to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment.
Also included within the general category of New York Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"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 is
frequently 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 that 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 leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more
conventional securities.
The above description of New York Municipal Bonds is applicable to Municipal
Bonds; however, the interest paid on Municipal Bonds is exempt from Federal
income taxes but not New York State and New York City personal income taxes.
Insured may also purchase Municipal Bonds classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities that are classified as "private
activity bonds" may subject certain investors in the Fund to an alternative
minimum tax. There is no limitation on the percentage of each Fund's assets
that may be invested in Municipal Bonds which may subject certain investors to
an alternative minimum tax. See "The Reorganization--Summary--Tax
Considerations" and "The Reorganization--Agreement and Plan of
Reorganization--Tax Consequences of the Reorganization."
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Funds.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL BONDS
Each Fund ordinarily will invest at least 65% of its assets in New York
Municipal Bonds and, therefore, is more susceptible to factors adversely
affecting issuers of New York Municipal Bonds than is a municipal bond
investment company that is not concentrated in issuers of New York Municipal
Bonds to this degree. As of July 24, 1997, Moody's, S&P and Fitch rated New
York City's general obligation bonds "Baa1", BBB+ and A-, respectively.
Moody's, S&P and Fitch currently rate New York State's outstanding general
obligation bonds "A2," A- and A+, respectively. Because each Fund's portfolio
will comprise investment grade securities, each 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.
25
<PAGE>
OTHER INVESTMENT POLICIES
Both Insured and Taurus have adopted certain other policies as set forth
below:
Borrowings. Each Fund is authorized to borrow amounts of up to 5% of the
value of its total assets at the time of such borrowings; provided,
however, that each Fund is authorized to borrow money in excess of 5% of
the value of its total assets for the purpose of repurchasing its Common
Stock or redeeming its AMPS. Borrowings by each Fund create an opportunity
for greater total return 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. For so
long as shares of a Fund's AMPS are rated by Moody's or S&P, unless it
receives written confirmation from Moody's or S&P, as the case may be, that
such action would not impair the ratings then assigned to the shares of
AMPS by Moody's or S&P, the issuing Fund will not borrow money except for
the purpose of clearing portfolio securities transactions (which borrowings
under any circumstances shall be limited to the lesser of $10 million and
an amount equal to 5% of the market value of the Fund's assets at the time
of such borrowings and further in the case of Taurus, which borrowings
shall be repaid within 60 days and not be extended or renewed).
When-Issued Securities and Delayed Delivery Transactions. Insured and
Taurus may purchase or sell 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 a Fund with payment and
delivery taking place in the future. The purchase will be recorded on the
date that the Fund enters into the commitment, and the value of the
obligation thereafter will 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. Insured may invest in Municipal
Bonds the return on which is based on a particular index of value or
interest rates. For example, Insured may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other product. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an
index. To the extent Insured invests in these types of Municipal Bonds,
Insured's return on such Municipal Bonds will be subject to risk with
respect to the value of the particular index. Also, Insured may invest in
so-called "inverse floating rate bonds" 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, by a
remarketing agent, or by reference to a short-term tax-exempt interest rate
index). Insured may purchase original issue inverse floating rate bonds in
both the primary and secondary markets and also may purchase in the
secondary market synthetically-created inverse floating rate bonds
evidenced by custodial or trust receipts. Generally, interest rates on
inverse floating rate bonds will decrease when short-term rates increase,
and will increase when short-term rates decrease. Such securities have the
effect of providing a degree of investment leverage, since they may
increase or decrease in value in response to changes, as an illustration,
in market interest rates at a rate which 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, Insured may purchase inverse floating rate bonds with shorter-
term maturities or which contain limitations on the extent to which the
interest rate may vary. FAM believes that indexed and inverse floating
obligations represent a flexible portfolio management instrument for
Insured that allows FAM to vary the degree of investment leverage
relatively efficiently under different market conditions. Taurus has no
similar policy.
Call Rights. Insured may purchase a Municipal Bond issuer's right to call
all or a portion of such Municipal Bond for mandatory tender for purchase
(a "Call Right"). A holder of a Call Right may exercise such right to
require a mandatory tender for the purchase of the related Municipal Bonds,
subject to certain conditions. A Call Right that is not exercised prior to
the maturity of the related Municipal Bond will expire
26
<PAGE>
without value. The economic effect of holding both the Call Right and the
related Municipal Bond is identical to holding a Municipal Bond as a non-
callable security. Taurus has no similar policy.
INFORMATION REGARDING OPTIONS AND FUTURES TRANSACTIONS
Each 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 ("financial futures contracts") and options
thereon. While each Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of its Common Stock, the net asset value of
its Common Stock fluctuates. There can be no assurance that a Fund's hedging
transactions will be effective. In addition, because of the leveraged nature
of each Fund's 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. For so long as a Fund's AMPS are rated by
Moody's or S&P, as the case may be, the Fund's use of options and financial
futures contracts and options thereon will be subject to certain limitations
mandated by the rating agencies. Furthermore, a Fund only will engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in interest rates occur.
Certain Federal income tax requirements may limit a Fund's ability to engage
in hedging transactions. Gains from transactions in financial futures
contracts or options thereon distributed to stockholders are taxable as
ordinary income or, in certain circumstances, as long-term capital gains to
stockholders.
The following is a description of the transactions involving options and
financial futures contracts and options thereon in which each Fund may engage,
limitations on the use of such transactions and risks associated therewith.
The investment policies with respect to the hedging transactions of a Fund are
not fundamental policies and may be modified by the Board of Directors of the
Fund without the approval of the Fund's stockholders.
Writing Covered Call Options. Each Fund is authorized to write (i.e., sell)
covered call options with respect to 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. Each 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. Each Fund receives 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, a Fund limits its opportunity to profit from an increase in the market
value of the underlying security above the exercise price of the option for as
long as the Fund's obligation as a writer continues. Covered call options
serve as a partial hedge against a decline in the price of the underlying
security. Each Fund may engage in closing transactions in order to terminate
outstanding options that it has written.
Purchase of Options. Each Fund is authorized to 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
terminated by entering into the closing sale transaction. 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 which it
intends to purchase. A 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 Thereon. Each Fund is authorized to
purchase and sell certain financial futures contracts and options thereon
solely for the purposes of hedging its investments in Municipal Bonds against
declines in value and hedging against increases in the cost of securities it
intends to purchase. A
27
<PAGE>
financial futures contract obligates the seller of a contract to deliver and
the purchaser of a contract to take delivery of the type of financial
instrument covered by the contract or, in the case of index-based financial
futures contracts, to make and accept a cash settlement, at a specific future
time for a specified price. A sale of financial futures contracts or options
thereon 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 or
options. A purchase of financial futures contracts or options thereon may
provide a hedge against an increase in the cost of securities intended to be
purchased, because such appreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts or
options.
The purchase or sale of a financial futures contract or option thereon
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 or option thereon fluctuates making
the long and short positions in the financial futures contract or option
thereon more or less valuable.
Each 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 Municipal Bonds
that the Fund holds or anticipates purchasing against adverse changes in
interest rates.
Each 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 its Board of Directors, each Fund also may
engage in transactions in other financial futures contracts or options
thereon, such as financial futures contracts or options on other municipal
bond indices that may become available, if FAM should determine that there
normally is sufficient correlation between the prices of such financial
futures contracts or options thereon and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.
Over-The-Counter Options. Each Fund is authorized to engage in transactions
involving financial futures contracts or options thereon 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 price and terms negotiated by the buyer and seller.
Restrictions on OTC Options. Each Fund is authorized to engage in
transactions in OTC options only with member banks of the Federal Reserve
System and primary dealers in U.S. Government securities or with affiliates of
such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50
million. OTC options and assets used to cover OTC options written by the Funds
are considered by the staff of the Commission 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
otherwise might be realized.
Risk Factors in Financial Futures Contracts and Options Thereon. Utilization
of financial futures contracts and options thereon involves the risk of
imperfect correlation in movements in the price of financial futures contracts
and options thereon and movements in the price of the security that is the
subject of the hedge. If the price of the financial futures contract or option
thereon moves more or less than the price of the security that is the subject
of the hedge, a Fund will experience a gain or loss which will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts or options thereon have different maturities, ratings, geographic
compositions or other
28
<PAGE>
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index which serves as a
basis for a financial futures contract or option thereon. Finally, in the case
of financial futures contracts on U.S. Government securities and options on
such financial futures contracts, the anticipated correlation of price
movements between the U.S. Government securities underlying the financial
futures contracts or options and Municipal Bonds may be adversely affected by
economic, political, legislative or other developments which have a disparate
impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a Fund's 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
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
Margin deposits may consist of cash or securities acceptable to the broker and
the relevant contract market.
When a 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
other liquid securities in a segregated account with the Fund's custodian, so
that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the financial
futures contract, thereby ensuring that the use of such financial futures
contract is unleveraged.
Although certain risks are involved in financial futures contracts and
options thereon, FAM believes that, because each Fund will engage in
transactions involving financial futures contracts and options thereon only
for hedging purposes, the options and futures portfolio strategies of a Fund
will not subject the Fund to certain risks frequently associated with
speculation in financial futures contracts and options thereon.
The volume of trading in the exchange markets with respect to 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.
Each Fund intends to enter into financial futures contracts and options
thereon, on an exchange or in the over-the-counter market, only if there
appears to be a liquid secondary market for such financial futures contracts
or options. 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 a
financial futures contract position or the related option. The inability to
close financial futures contract positions or the related options also could
have an adverse impact on a Fund's ability to hedge effectively its portfolio.
There is also the risk of loss by a Fund of margin deposits or collateral in
the event of bankruptcy of a broker with which the Fund has an open position
in a financial futures contract or the related option.
The liquidity of a secondary market in a financial futures contract or
option thereon may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
financial futures contract or option price during a single trading day. Once
the daily limit has been reached in the financial futures contract or option,
no trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open financial futures contract positions or the related
options. Prices in the past have reached or exceeded the daily limit on a
number of consecutive trading days.
If it is not possible to close a financial futures contract position or the
related option entered into by a 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.
29
<PAGE>
The successful use of these transactions also depends on the ability of FAM
to forecast correctly the direction and extent of interest rate movements
within a given time frame. To the extent interest rates remain stable during
the period in which a financial futures contract or option thereon is held by
a Fund or moves in a direction opposite to that anticipated, the Fund may
realize a loss on the hedging transaction which 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.
INVESTMENT RESTRICTIONS
Insured and Taurus have identical investment restrictions. The following are
fundamental investment restrictions of each Fund and may not be changed
without the approval of the holders of a majority of the outstanding shares of
Common Stock and the outstanding shares of AMPS and any other preferred stock,
voting together as a single class, and a majority of the outstanding shares of
AMPS and any other preferred stock, voting separately as a class. (For this
purpose and under the Investment Company Act, "majority" means for each such
class the lesser of (i) 67% of the shares of each class of capital stock
represented at a meeting at which more than 50% of the outstanding shares of
each class of capital stock are represented or (ii) more than 50% of the
outstanding shares of each class of capital stock.) Neither Fund may:
1. Make investments for the purpose of exercising control or management.
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase
in the open market of securities of closed-end investment companies and
only if immediately thereafter not more than 10% of the Fund's total assets
would be invested in such securities.
3. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided, however, that the Fund may
invest in securities secured by real estate or interests therein or issued
by companies that invest in real estate or interests therein, and the Fund
may purchase and sell financial futures contracts and options thereon.
4. Issue senior securities other than preferred stock or borrow amounts in
excess of 5% of its total assets taken at market value; provided, however,
that the Fund is authorized to borrow money in excess of 5% of the value of
its total assets for the purpose of repurchasing shares of Common Stock or
redeeming shares of preferred stock.
5. Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
6. Make loans to other persons, except that the Fund may purchase Municipal
Bonds and other debt securities in accordance with its investment
objective, policies and limitations.
7. Purchase any securities on margin, except that (subject to investment
restriction (4) above) 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).
8. 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 Municipal Bonds, U.S. Government
obligations and related indices or otherwise in connection with bona fide
hedging activities.
9. 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, however, that for purposes of this restriction, states,
municipalities and their political subdivisions are not considered to be
part of any industry.
30
<PAGE>
An additional investment restriction adopted by each Fund, which may be
changed by the Board of Directors, provides that the Fund may not 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 (4) above or
except as may be necessary in connection with transactions in financial
futures contracts and options thereon.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
RATING AGENCY GUIDELINES
Each Fund intends that, so long as shares of its AMPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's
and S&P in connection with the Fund's receipt of a rating for such shares on
their date of original issue of "aaa" from Moody's and AAA from S&P. Moody's
and S&P, which are nationally recognized statistical rating organizations,
issue ratings for various securities reflecting the perceived creditworthiness
of such securities. The guidelines for rating AMPS have been developed by
Moody's and S&P in connection with issuances of asset-backed and similar
securities, including debt obligations and variable rate preferred stocks,
generally on a case-by-case basis through discussions with the issuers of
these securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be varied sufficiently and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law but have been adopted by each Fund in
order to satisfy current requirements necessary for Moody's and S&P to issue
the above-described ratings for shares of AMPS, which ratings generally are
relied upon by institutional investors in purchasing such securities. The
guidelines provide a set of tests for portfolio composition and asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements under the Investment Company Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the shares of AMPS, at any time, may
change or withdraw any such rating. As set forth in the Articles Supplementary
of each Fund, the Board of Directors, without stockholder approval, may modify
certain definitions or restrictions that have been adopted by the Fund
pursuant to the rating agency guidelines, provided the Board of Directors has
obtained written confirmation from Moody's and S&P that any such change would
not impair the ratings then assigned by Moody's and S&P to the AMPS. See "The
Reorganization--Risk Factors and Special Considerations--Ratings
Considerations."
For so long as any shares of a Fund's AMPS are rated by Moody's or S&P, as
the case may be, a Fund's use of options and financial futures contracts and
options thereon will be subject to certain limitations mandated by the rating
agencies.
PORTFOLIO COMPOSITION
The portfolio of Insured consists primarily of investment grade New York
Municipal Bonds that are covered by insurance and the portfolio of Taurus
consists primarily of New York Municipal Bonds that are investment grade but
are not covered by insurance. Insured's investment policies provide that under
normal circumstances, no more than 20% of Insured's portfolio will consist of
uninsured municipal obligations. As a result of the Reorganization, Insured
may have more than 20% of its assets invested in uninsured Municipal Bonds;
however, Insured intends to take the steps necessary to ensure that, within 30
days after the Exchange Date, at least 80% of its total assets is invested in
Insured Municipal Obligations.
Although the investment portfolios of both Funds must satisfy similar
standards of credit quality, the actual securities owned by each Fund are
different, as a result of which there are certain differences in the
composition
31
<PAGE>
of the two investment portfolios. Of the Municipal Bonds owned by Insured as
of June 30, 1997, 86% are rated in the highest grade by Moody's or S&P, 91%
are rated in the highest two grades, 97% are rated in the highest three
grades, 100% are rated in the highest four grades, and 0% are unrated. The
comparable percentages for Taurus are 27% in the highest grade, 52% in the
highest two grades, 67% in the highest three grades, 100% in the highest four
grades and 0% unrated.
Insured and Taurus ordinarily invest substantially all of their total assets
in New York Municipal Bonds and, therefore, they are more susceptible to
factors adversely affecting issuers of New York Municipal Bonds than is a
municipal bond investment company that is not concentrated in issuers of New
York Municipal Bonds to this degree. FAM does not believe that the current
economic conditions in New York will have a significant adverse effect on
either Fund's ability to invest prudently in New York Municipal Bonds. See
Exhibit II--"Economic Conditions in New York."
Insured
As of June 30, 1997, approximately 97% of the market value of Insured's
portfolio was invested in long-term municipal obligations and approximately 3%
of the market value of Insured's portfolio was invested in short-term
municipal obligations. The following table sets forth certain information with
respect to the composition of Insured's long-term municipal obligation
investment portfolio as of June 30, 1997.
<TABLE>
<CAPTION>
NUMBER
OF VALUE (IN
S&P* MOODY'S ISSUES THOUSANDS) PERCENT
---- ------- ------ ---------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 75 $372,194 86%
AA "Aa" 6 20,657 5
A "A" 6 28,234 6
BBB "Baa" 3 13,440 3
--- -------- ---
90 $434,525 100%
=== ======== ===
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations. S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in "Aa," "A," "Baa" and
"B" ratings. See Exhibit III--"Ratings of Municipal Bonds and Commercial
Paper."
Taurus
As of June 30, 1997, approximately 95% of the market value of Taurus'
portfolio was invested in long-term municipal obligations and approximately 5%
of the market value of Taurus' portfolio was invested in short-term municipal
obligations. The following table sets forth certain information with respect
to the composition of Taurus' long-term municipal obligation investment
portfolio as of June 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S ISSUES (IN THOUSANDS) PERCENT
---- ------- --------- ------------- -------
<S> <C> <C> <C> <C>
AAA "Aaa" 16 $ 27,634 27%
AA "Aa" 7 26,266 25
A "A" 7 14,958 15
BBB "Baa" 11 34,297 33
--- -------- ---
41 $103,155 100%
=== ======== ===
</TABLE>
- --------
* Ratings: Using the higher of S&P's or Moody's rating on the Fund's
municipal obligations. S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in "Aa," "A," "Baa," "Ba"
and "B" ratings. See Exhibit III--"Ratings of Municipal Bonds and
Commercial Paper."
32
<PAGE>
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are the same for both
Insured and Taurus. Subject to policies established by the Board of Directors
of each Fund, FAM is primarily responsible for the execution of each Fund's
portfolio transactions. In executing such transactions, FAM seeks to obtain
the best results for each 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 FAM generally
seeks reasonably competitive commission rates, Insured and Taurus do not
necessarily pay the lowest commission or spread available.
Neither Fund has any obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provide supplemental
investment research to FAM, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), may receive orders for transactions by a Fund.
Information so received will be in addition to, and not in lieu of, the
services required to be performed by FAM under its investment advisory
agreements with the Funds, and the expenses of FAM will not necessarily be
reduced as a result of the receipt of such supplemental information.
The securities in which each Fund primarily invests are traded in the over-
the-counter markets, and each Fund normally deals directly with the dealers
who make markets in the securities involved, except in those circumstances
where better prices and execution are available elsewhere. Under the
Investment Company Act, except as permitted by exemptive order, persons
affiliated with a Fund are prohibited from dealing with the Fund as principals
in the purchase and sale of securities. Since transactions in the over-the-
counter markets usually involve transactions with dealers acting as principals
for their own account, a Fund will not deal with affiliated persons, including
Merrill Lynch and its affiliates, in connection with such transactions, except
that pursuant to an exemptive order obtained by FAM, a Fund may engage in
principal transactions with Merrill Lynch in high quality, short-term, tax-
exempt securities. An affiliated person of a Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis.
Insured and Taurus may also purchase tax-exempt instruments in individually
negotiated transactions with the issuer. Because an active trading market may
not exist for such securities, the prices that the Funds may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
The Board of Directors of each Fund has considered the possibility of
recapturing for the benefit of the Fund brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions, by conducting portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by
Merrill Lynch could be offset against the investment advisory fees paid by the
Fund to FAM. After considering all factors deemed relevant, the Directors made
a determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
Periodic auctions are conducted for the Insured AMPS and the Taurus AMPS by
the Auction Agent for the Funds. The auctions require the participation of one
or more broker-dealers, each of whom enters into an agreement with the Auction
Agent. After each auction, the Auction Agent pays a service charge, from funds
provided by the issuing Fund, to each broker-dealer at the annual rate of 1/4
of 1%, calculated on the basis of the purchase price of shares of the relevant
AMPS placed by such broker-dealer at such auction.
PORTFOLIO TURNOVER
Generally, neither Insured nor Taurus purchases securities for short-term
trading profits. However, either Fund may dispose of securities without regard
to the time that they have been held when such action, for defensive or other
reasons, appears advisable to FAM. The turnover rate may vary greatly from
year to year or during periods within a year. (The portfolio turnover rate is
calculated by dividing the lesser of purchases or
33
<PAGE>
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by a 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.) The portfolio turnover rate for each of the years ended October 31,
1996 and 1995 was 118.28% and 110.76%, respectively, for Insured and 193.24%
and 165.22%, respectively, for Taurus. High portfolio turnover involves
certain tax consequences and correspondingly greater transaction costs in the
form of dealer spreads and brokerage commissions, which are borne directly by
the Fund.
NET ASSET VALUE
The net asset value per share of Common Stock of each Fund is determined as
of 15 minutes after the close of business on the NYSE (generally, 4:00 p.m.,
New York time) on the last business day of each week. For purposes of
determining the net asset value of a share of Common Stock of each Fund, the
value of the securities held by the Fund plus any cash or other assets
(including interest accrued but not yet received) minus all liabilities
(including accrued expenses) and the aggregate liquidation value of the
outstanding shares of AMPS of the Fund is divided by the total number of
shares of Common Stock of the Fund outstanding at such time. Expenses,
including the fees payable to FAM, are accrued daily.
The Municipal Bonds in which each Fund invests are traded primarily in the
over-the-counter markets. In determining net asset value, each 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. 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 each Fund under the general supervision of the Board of Directors
of the Fund. The Board of Directors of each Fund has determined in good faith
that the use of a pricing service is a fair method of determining the
valuation of portfolio securities. Obligations with remaining maturities of 60
days or less are valued at amortized cost, unless this method no longer
produces fair valuations. Positions in futures contracts are valued at closing
prices for such contracts established by the exchange on which they are
traded, or if market quotations are not readily available, are valued at fair
value on a consistent basis using methods determined in good faith by the
Board of Directors of each Fund.
CAPITAL STOCK
Insured and Taurus each has outstanding both Common Stock and AMPS. Insured
Common Stock and Taurus Common Stock both are traded on the NYSE. The shares
of Insured Common Stock commenced trading on the NYSE on June 26, 1992. As of
June 30, 1997, the net asset value per share of the Insured Common Stock was
$14.70 and the market price per share was $14.25. The shares of Taurus Common
Stock commenced trading on the NYSE on February 1, 1990. As of June 30, 1997,
the net asset value per share of the Taurus Common Stock was $12.07 and the
market price per share was $11.875.
Each Fund is authorized to issue 200,000,000 shares of capital stock, all of
which shares initially were classified as Common Stock. The Board of Directors
of each Fund is authorized to classify or reclassify any unissued shares of
capital stock by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. In connection with each
Fund's offering of shares of AMPS, Insured reclassified 5,760 shares of
unissued capital stock as AMPS, and Taurus reclassified 1,200 shares of
unissued capital stock as AMPS.
Common Stock
Holders of each Fund's Common Stock are entitled to share equally in
dividends declared by the Fund's Board of Directors payable to holders of the
Common Stock and in the net assets of the Fund available for distribution to
holders of the Common Stock after payment of the preferential amounts payable
to holders of any
34
<PAGE>
outstanding preferred stock. Holders of a Fund's Common Stock do not have
preemptive or conversion rights and shares of a Fund's Common Stock are not
redeemable. The outstanding shares of Common Stock of each Fund are fully paid
and nonassessable.
So long as any shares of a Fund's AMPS or any other preferred stock are
outstanding, holders of the Fund's Common Stock will not be entitled to
receive any dividends of or other distributions from the Fund unless all
accumulated dividends on outstanding shares of the Fund's AMPS and any other
preferred stock have been paid, and unless asset coverage (as defined in the
Investment Company Act) with respect to such AMPS and any other preferred
stock would be at least 200% after giving effect to such distributions.
Preferred Stock
Insured AMPS are structured identically to Taurus AMPS. The AMPS of each
Fund are shares of preferred stock of the Fund that entitle their holders to
receive dividends when, as and if declared by the Board of Directors, out of
funds legally available therefor, at a rate per annum that may vary for the
successive dividend periods. Insured AMPS and Taurus AMPS both have
liquidation preferences of $25,000 per share; neither Fund's AMPS are traded
on any stock exchange or over-the-counter. Each Fund's AMPS can be purchased
at an auction or through broker-dealers who maintain a secondary market in the
AMPS.
Auctions generally have been held and will be held every seven days in the
case of the Insured Series A AMPS and Series B AMPS and every 28 days in the
case of the Insured Series C AMPS unless Insured elects, subject to certain
limitations, to have a special dividend period. As of the auction held on June
27, 1997, the dividend rate on the Insured Series A AMPS was 3.5%; as of the
auction held on June 24, 1997, the dividend rate on the Insured Series B AMPS
was 3.85%; and as of the auction held on June 18, 1997, the dividend rate on
the Insured Series C AMPS was 3.475%. Similarly, auctions generally have been
held and will be held every 28 days in the case of the Taurus AMPS unless
Taurus elects, subject to certain limitations, to have a special dividend
period. As of the auction held on June 10, 1997, the dividend rate on the
Taurus AMPS was 3.676%.
Under the Investment Company Act, each Fund is permitted to have outstanding
more than one series of preferred stock as long as no single series has
priority over another series as to the distribution of assets of the Fund or
the payment of dividends. Holders of a Fund's preferred stock do not have
preemptive rights to purchase any shares of AMPS or any other preferred stock
that might be issued. The net asset value per share of a Fund's AMPS equals
its liquidation preference plus accumulated dividends per share.
Certain Provisions of the Charter
Each Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving stockholders 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 by a vote of the holders of at least 66 2/3% of the
votes entitled to be voted on the matter. A Director elected by the holders of
Common Stock, AMPS and any other preferred stock may be removed only by action
of such holders, and a Director elected by the holders of AMPS and any other
preferred stock may be removed only by action of the holders of AMPS and any
other preferred stock. In addition, the Charter of each Fund requires the
affirmative vote of the holders of at least 66 2/3% of all of the Fund's
shares of capital stock, then entitled to be voted, voting as a single class,
to approve, adopt or authorize the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with any other corporation or entity,
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund,
35
<PAGE>
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the entire Board of Directors, in which case
the affirmative vote of a majority of all of the votes entitled to be cast by
stockholders of the Fund, voting as a single class, is required. Such
approval, adoption or authorization of the foregoing also would require the
favorable vote of the holders of a majority of the shares of preferred stock
entitled to be voted thereon, including the AMPS, voting as a separate class.
In addition, conversion of a 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 stockholders. Such an amendment would require the affirmative
vote of the holders of at least 66 2/3% of the Fund's outstanding shares of
capital stock (including the AMPS and any other preferred stock) entitled to
be voted on the matter, voting as a single class (or a majority of such shares
if the amendment was previously approved, adopted or authorized by at least
two-thirds of the entire Board of Directors) and the affirmative vote of a
majority of votes entitled to be cast by holders of shares of preferred stock
(including the AMPS), voting separately as a class. Such a vote also would
satisfy a separate requirement in the Investment Company Act that the change
be approved by the stockholders. Stockholders 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 Investment
Company 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 no longer would be listed on a stock exchange. Conversion
to an open-end investment company also would require redemption of all
outstanding shares of preferred stock (including the AMPS) and would require
changes in certain of the Fund's investment policies and restrictions, such as
those relating to the issuance of senior securities, the borrowing of money
and the purchase of illiquid securities.
The Board of Directors of each Fund has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the Investment Company Act, are in the best interests of
stockholders generally. Reference should be made to the Charter of each Fund
on file with the Commission for the full text of these provisions.
MANAGEMENT OF THE FUNDS
Directors and Officers. The Boards of Directors of each of Insured and
Taurus currently consist of six persons, five of whom are not "interested
persons," as defined in the Investment Company Act, of the applicable Fund.
The Directors are responsible for the overall supervision of the operations of
Insured and Taurus and perform the various duties imposed on the directors of
investment companies by the Investment Company Act and under applicable
Maryland law. Insured and Taurus have substantially the same officers. For
further information regarding the Directors of Insured and the officers of
each of the Funds, see "Election of Directors."
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<PAGE>
Arthur Zeikel is a Director of both Funds and information about him is set
forth under "Election of Directors." There is otherwise no overlap between the
Boards of the Funds. Certain information concerning the five non-affiliated
Directors of Taurus, including their designated classes, is set forth below:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST DIRECTOR
NAME AND ADDRESS AGE FIVE YEARS AND PUBLIC DIRECTORSHIPS(1) SINCE
---------------- --- -------------------------------------- --------
Elected by Holders of AMPS, Voting Separately as a Single Class
<C> <C> <S> <C>
Ronald W. Forbes(1)(2)........... 56 Professor of Finance, School 1989
1400 Washington Avenue of Business, State University
Albany, New York 12222 of New York at Albany, since
1989.
Richard R. West(1)(2)............ 59 Professor of Finance since 1989
Box 64 1984, Dean from 1984 to 1993,
Genoa, Nevada 89411 and currently Dean Emeritus of
New York University Leonard N.
Stern School Business
Administration; Director of
Bowne & Co., Inc. (financial
printers), Vornado, Inc. (real
estate holding company) and
Alexander's Inc. (real estate
company).
Elected by Holders of Common Stock and AMPS, Voting Together as a Single Class
Cynthia A. Montgomery(1)(2)...... 45 Professor, Harvard Business 1993
Harvard Business School School since 1989; Associate
Soldiers Field Road Professor, J.L. Kellogg
Boston, Massachusetts 02163 Graduate School of Management,
Northwestern University from
1985 to 1989; Assistant
Professor, Graduate School of
Business Administration, The
University of Michigan from
1979 to 1985; Director, UNUM
Corporation since 1990 and
Director of Newell Co. since
1995.
Charles C. Reilly(1)(2).......... 66 Self-employed financial 1990
9 Hampton Harbor Road consultant since 1990;
Hampton Bays, New York 11946 President and Chief Investment
Officer of Verus Capital, Inc.
from 1979 to 1990; Senior Vice
President of Arnhold and S.
Bleichroeder, Inc. from 1973
to 1990; Adjunct Professor,
Columbia University Graduate
School of Business from 1990
to 1991; Adjunct Professor,
Wharton School, The University
of Pennsylvania from 1989 to
1990; Partner, Small Cities
Cable Television since 1986.
Kevin A. Ryan(1)(2).............. 64 Founder and current Director 1992
127 Commonwealth Avenue of The Boston University
Chestnut Hill, Center for the Advancement of
Massachusetts 02167 Ethics and Character;
Professor of Education at
Boston University since 1982;
formerly taught on the
faculties of The University of
Chicago, Stanford University
and Ohio State University.
</TABLE>
- --------
(1) Each of the Directors is a director, trustee or member of an advisory
board of certain other investment companies for which FAM or MLAM acts as
investment adviser. See "Compensation of Taurus Directors" below.
(2) Member of the Audit Committee of the Board of Directors.
Compensation of Taurus Directors. FAM, Taurus' investment adviser, pays all
compensation to all officers of Taurus and all Directors of Taurus who are
affiliated with ML & Co. or its subsidiaries. Taurus pays each Director not
affiliated with FAM (each a "non-affiliated Director") a fee of $1,000 per
year plus $400 per
37
<PAGE>
meeting attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. Taurus also pays each member of its Audit
Committee, which consists of all of the non-affiliated Directors, a fee of
$1,000 per year, together with such Director's out-of-pocket expenses relating
to attendance at meetings. The Chairman of the Audit Committee receives an
additional annual fee of $1,000. These fees and expenses aggregated $19,880
for the fiscal year ended October 31, 1996.
The following table sets forth for the fiscal year ended October 31, 1996
compensation paid by Taurus to the non-affiliated Directors and, for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies advised by FAM and its affiliate, MLAM ("FAM/MLAM Advised
Funds"), to the non-affiliated Directors.
<TABLE>
<CAPTION>
PENSION OR RETIREMENT AGGREGATE COMPENSATION FROM
COMPENSATION BENEFITS ACCRUED AS PART TAURUS AND FAM/MLAM
NAME OF DIRECTOR FROM TAURUS OF FUND EXPENSES ADVISED FUNDS PAID TO DIRECTORS
---------------- ------------ ------------------------ -------------------------------
<S> <C> <C> <C>
Ronald W. Forbes(1)..... $3,600 None $142,500
Cynthia A. Montgom-
ery(1)................. $3,600 None $142,500
Charles C. Reilly(1).... $3,600 None $293,833
Kevin A. Ryan(1)........ $3,600 None $142,500
Richard R. West(1)...... $4,600 None $272,833
</TABLE>
- --------
(1) The Directors serve on the Boards of other FAM/MLAM Advised Funds as
follows: Mr. Forbes (23 registered investment companies consisting of 36
portfolios); Ms. Montgomery (23 registered investment companies consisting
of 36 portfolios); Mr. Reilly (43 registered investment companies consisting
56 portfolios); Mr. Ryan (23 registered investment companies consisting of
36 portfolios); and Mr. West (44 registered investment companies consisting
of 66 portfolios).
Management and Advisory Arrangements. FAM serves as the investment adviser
for both Insured and Taurus pursuant to separate investment advisory
agreements that, except for their termination dates, are identical. FAM is an
affiliate of MLAM, and both FAM and MLAM are owned and controlled by ML & Co.
FAM provides each Fund with the same investment advisory and management
services. FAM or MLAM acts as the investment adviser for more than 140
registered investment companies. FAM also offers portfolio management and
portfolio analysis services to individuals and institutions. As of June 30,
1997, FAM and MLAM had a total of approximately $256.6 billion in investment
company and other portfolio assets under management (approximately $32 billion
of which was invested in municipal securities), including accounts of certain
affiliates of FAM. The principal business address of FAM is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Each Fund's investment advisory agreement with FAM provides that, subject to
the direction of the Board of Directors of the Fund, FAM is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security for each Fund rests with
FAM, subject to review by the Board of Directors of the Fund.
FAM provides the portfolio management for Insured and Taurus. Such portfolio
management considers analyses from various sources (including brokerage firms
with which each Fund does business), makes the necessary investment decisions,
and places orders for transactions accordingly. FAM also is responsible for
the performance of certain administrative and management services for each
Fund.
For the services provided by FAM under each Fund's investment advisory
agreement, the Fund pays a monthly fee at an annual rate of .50 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 AMPS, minus the
sum of accrued liabilities of the Fund and accumulated dividends on its shares
of AMPS). 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.
Each Fund's investment advisory agreement obligates FAM to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with
38
<PAGE>
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 FAM or any of its affiliates. Each Fund pays all other
expenses incurred in the operation of the Fund, including, among other things,
expenses for legal and auditing services, taxes, costs of printing proxies,
listing fees, stock certificates and stockholder reports, charges of the
custodian and the transfer agent, dividend disbursing agent and registrar,
fees and expenses with respect to the issuance of AMPS, commission fees, fees
and expenses of unaffiliated Directors, accounting and pricing costs,
insurance, interest, brokerage costs, litigation and other extraordinary or
non-recurring expenses, mailing and other expenses properly payable by the
Fund. FAM provides accounting services to each Fund, and each Fund reimburses
FAM for its respective costs in connection with such services.
Unless earlier terminated as described below, the investment advisory
agreement between Insured and FAM will continue from year to year if approved
annually (a) by the Board of Directors of Insured or by a majority of the
outstanding shares of Insured Common Stock and Insured AMPS, voting together
as a single class, and (b) by a majority of the Directors of Insured who are
not parties to such contract or "interested persons," as defined in the
Investment Company Act, of any such party. The contract is not assignable and
it may be terminated without penalty on 60 days' written notice at the option
of either party thereto or by the vote of the stockholders of Insured.
Similarly, unless earlier terminated as described below, the investment
advisory agreement between Taurus and FAM will continue from year to year if
approved annually (a) by the Board of Directors of Taurus or by a majority of
the outstanding shares of Taurus Common Stock and Taurus AMPS, voting together
as a single class, and (b) by a majority of the Directors of Taurus who are
not parties to such contract or "interested persons" of any such party. The
contract is not assignable and it may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of
the stockholders of Taurus.
VOTING RIGHTS
Voting rights are identical for the holders of shares of Insured Common
Stock and the holders of shares of Taurus Common Stock. Holders of each Fund's
Common Stock are entitled to one vote for each share held and will vote with
the holders of any outstanding shares of the Fund's AMPS or other preferred
stock on each matter submitted to a vote of holders of Common Stock, except as
set forth below.
Stockholders of each Fund are entitled to one vote for each share held. The
shares of each Fund's Common Stock, AMPS and any other preferred stock do not
have cumulative voting rights, which means that the holders of more than 50%
of the shares of a Fund's Common Stock, AMPS and any other preferred stock
voting for the election of Directors can elect all of the Directors standing
for election by such holders, and, in such event, the holders of the remaining
shares of a Fund's Common Stock, AMPS and any other preferred stock will not
be able to elect any of such Directors.
Voting rights of the holders of Insured AMPS are identical to voting rights
of the holders of Taurus AMPS. Except as otherwise indicated below, and except
as otherwise required by applicable law, holders of shares of a Fund's AMPS
will be entitled to one vote per share on each matter submitted to a vote of
the Fund's stockholders and will vote together with the holders of shares of
the Fund's Common Stock as a single class.
In connection with the election of a Fund's Directors, holders of shares of
a Fund's AMPS and any other preferred stock, voting separately as a class,
shall be entitled at all times to elect two of the Fund's Directors, and the
remaining Directors will be elected by holders of shares of the Fund's Common
Stock and shares of the Fund's AMPS and any other preferred stock, voting
together as a single class. In addition, if at any time dividends on
outstanding shares of a Fund's AMPS shall be unpaid in an amount equal to at
least two full years of dividends thereon or if at any time holders of any
shares of a Fund's preferred stock are entitled, together with the holders of
shares of the Fund's AMPS, to elect a majority of the Directors of the Fund
under the Investment Company Act, then the number of Directors constituting
the Board of Directors automatically shall be increased by the smallest number
that, when added to the two Directors elected exclusively by the holders of
39
<PAGE>
shares of AMPS and any other preferred stock as described above, would
constitute a majority of the Board of Directors as so increased by such
smallest number, and at a special meeting of stockholders, which will be
called and held as soon as practicable, and at all subsequent meetings at
which Directors are to be elected, the holders of shares of the Fund's AMPS
and any other preferred stock, voting separately as a class, will be entitled
to elect the smallest number of additional Directors that, together with the
two Directors that such holders in any event will be entitled to elect,
constitutes a majority of the total number of Directors of the Fund as so
increased. The terms of office of the persons who are Directors at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment in full, all dividends payable on all outstanding shares
of AMPS and any other preferred stock for all past dividend periods, the
additional voting rights of the holders of shares of AMPS and any other
preferred stock as described above shall cease, and the terms of office of all
of the additional Directors elected by the holders of shares of AMPS and any
other preferred stock (but not of the Directors with respect to whose election
the holders of shares of Common Stock were entitled to vote or the two
Directors the holders of shares of AMPS and any other preferred stock have the
right to elect in any event) will terminate automatically.
STOCKHOLDER INQUIRIES
Stockholder inquiries with respect to Insured and Taurus may be addressed to
either Fund by telephone at (609) 282-2800 or at the address set forth on the
cover page of this Proxy Statement and Prospectus.
DIVIDENDS AND DISTRIBUTIONS
Insured's current policy with respect to dividends and distributions
relating to shares of Insured Common Stock is identical to Taurus' policy with
respect to shares of Taurus Common Stock. Each Fund intends to distribute all
of its net investment income. Dividends from such net investment income are
declared and paid monthly to holders of a Fund's Common Stock. Monthly
distributions to holders of a Fund's Common Stock normally consist of
substantially all of the net investment income remaining after the payment of
dividends on the Fund's AMPS. All net realized long-term or short-term capital
gains, if any, are distributed at least annually, pro rata to holders of
shares of a Fund's Common Stock and AMPS. While any shares of a Fund's AMPS
are outstanding, the Fund may not declare any cash dividend or other
distribution on the Fund's Common Stock, unless at the time of such
declaration (1) all accumulated dividends on the Fund's AMPS have been paid,
and (2) 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 Fund's outstanding shares of AMPS. This
limitation on a Fund's ability to make distributions on its Common Stock under
certain circumstances could impair the ability of the Fund to maintain its
qualification for taxation as a RIC. See "The Reorganization--Agreement and
Plan of Reorganization--Tax Consequences of the Reorganization."
Similarly, Insured's current policy with respect to dividends and
distributions relating to shares of Insured AMPS is identical to Taurus'
current policy with respect to shares of Taurus AMPS. The holders of shares of
a Fund's AMPS are entitled to receive, when, as and if declared by the Board
of Directors of the Fund, out of funds legally available therefor, cumulative
cash dividends on their shares. Dividends on a Fund's shares of AMPS so
declared and payable shall be paid (i) in preference to and in priority over
any dividends so declared and payable on the Fund's Common Stock and (ii) to
the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Fund's investments. Dividends for the Insured
AMPS and the Taurus AMPS are paid through The Depository Trust Company ("DTC")
(or a successor securities depository) on each dividend payment date. DTC's
normal procedures now provide for it to distribute dividends in same-day funds
to agent members, who in turn are expected to distribute such dividends to the
person for whom they are acting as agent in accordance with the instructions
of such person. Prior to each dividend payment date, the relevant Fund is
required to deposit with the Auction Agent sufficient funds for the payment of
such declared dividends. Neither Fund intends to establish any reserves for
the payment of dividends, and no interest will be payable in respect of any
dividend payment or payment on the shares of a Fund's AMPS which may be in
arrears.
40
<PAGE>
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on Municipal Bonds, are exempt from Federal income taxes, subject to
the possible application of the alternative minimum tax. However, each Fund is
required to allocate net capital gains and other income subject to regular
Federal income taxes, if any, proportionately between shares of its Common
Stock and shares of its AMPS in accordance with the current position of the
IRS described herein. Each Fund notifies the Auction Agent of the amount of
any net capital gains or other taxable income to be included in any dividend
on shares of AMPS prior to the auction establishing the applicable rate for
such dividend. The Auction Agent in turn notifies each broker-dealer whenever
it receives any such notice from a Fund, and each broker-dealer then notifies
its customers who are holders of the Fund's AMPS. Each Fund also may include
such income in a dividend on shares of its AMPS without giving advance notice
thereof if it increases the dividend by an additional amount to offset the tax
effect thereof. The amount of taxable income allocable to shares of a Fund's
AMPS will depend upon the amount of such income realized by the Fund and other
factors, but generally is not expected to be significant.
For information concerning the manner in which dividends and distributions
to holders of each Fund's Common Stock may be reinvested automatically in
shares of the Fund's Common Stock, see "Automatic Dividend Reinvestment Plan."
Dividends and distributions may be taxable to stockholders under certain
circumstances as discussed below, whether they are reinvested in shares of a
Fund or received in cash.
If Insured or Taurus, as the case may be, retroactively allocates any net
capital gains or other income subject to regular Federal income taxes to
shares of its AMPS without having given advance notice thereof as described
above, which only may happen when such allocation is made as a result of the
redemption of all or a portion of the outstanding shares of its AMPS or the
liquidation of the Fund, the Fund will make certain payments to holders of
shares of its AMPS to which such allocation was made to offset substantially
the tax effect thereof. In no other instances will the Fund be required to
make payments to holders of shares of its AMPS to offset the tax effect of any
reallocation of net capital gains or other taxable income.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, a
"Plan"), unless a holder of a Fund's Common Stock elects otherwise, all
dividend and capital gains distributions are reinvested automatically by each
Fund's respective dividend disbursing agent, as agent for stockholders in
administering the Plan (the "Plan Agent") in additional shares of the Fund's
Common Stock. Holders of a Fund's Common Stock who elect not to participate in
the Plan receive all distributions in cash paid by check mailed directly to
the stockholder of record (or, if the shares are held in street or other
nominee name, then to such nominee) by each Fund's respective dividend paying
agent. Such stockholders 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 each Fund's respective 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 will be effective with respect to any
subsequently declared dividend or capital gains distribution.
Whenever a Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in the Plan receive cash, and participants in the
Plan receive the equivalent in shares of the Fund's Common Stock. The shares
are 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 the Fund's Common Stock from the Fund
("newly-issued shares") or (ii) by purchase of outstanding shares of the
Fund's Common Stock on the open market ("open-market purchases"), on the NYSE
or elsewhere. If on the payment date for the dividend, the net asset value per
share of the Fund's Common Stock is equal to or less than the market price per
share of the Fund's Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent
invests the dividend amount in newly-issued shares on behalf of the
participant. The number of newly-issued shares of the Fund's Common Stock to
be credited to the participant's account is 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
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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 invests the dividend
amount in shares acquired on behalf of the participant in open-market
purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent has 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. Each Fund intends to pay monthly
income dividends. Therefore, the period during which open-market purchases can
be made exists only from the payment date of the dividend through the date
before the next "ex-dividend" date, which typically is approximately ten days.
If, before the Plan Agent has completed its open-market purchases, the market
price of a share of a Fund's Common Stock exceeds the net asset value per
share, the average per share purchase price 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 ceases making open-market purchases and
invests 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 stockholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders for tax records. Shares in the account of
each Plan participant are held by the Plan Agent in non-certificated form in
the name of the participant, and each stockholder's proxy includes 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 stockholders 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 stockholders as representing the total amount registered
in the record stockholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There are no brokerage charges with respect to shares issued directly by
Insured or Taurus as a result of dividends or capital gains distributions
payable either in shares or in cash. However, each participant pays a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions does not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends.
Stockholders participating in the Plan may receive benefits not available to
stockholders not participating in the Plan. If the market price plus
commissions of shares of a Fund's Common Stock is above the net asset value,
participants in the Plan receive shares of the Fund's Common Stock at less
than they otherwise could purchase them and 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 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 neither Fund normally redeems its shares, the price on resale may
be more or less than the net asset value.
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Each Fund reserves the right to amend or terminate its Plan. There is no
direct service charge to participants in the Plan; however, each Fund reserves
the right to amend its Plan to include a service charge payable by the
participants.
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of Common Stock of Insured in its initial public
offering have an investment option consisting of the right to reinvest the net
proceeds from a sale of such shares (the "Original Shares") in Class A shares
of certain Merrill Lynch-sponsored open-end mutual funds ("Eligible Class A
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 A Shares. Second,
the Original Shares must have been either acquired in Insured's initial public
offering or be shares representing reinvested dividends from shares of Common
Stock acquired in such 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 A shares of certain of the mutual funds may be 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 A Shares may be redeemed
at any time at the next determined net asset value, subject in certain cases
to a redemption fee.
LIQUIDATION RIGHTS OF HOLDERS OF AMPS
Upon any liquidation, dissolution or winding up of Insured or Taurus, as the
case may be, whether voluntary or involuntary, the holders of shares of the
Fund's AMPS will be entitled to receive, out of the assets of the Fund
available for distribution to stockholders, before any distribution or payment
is made upon any shares of the Fund's Common Stock or any other capital stock
of the Fund ranking junior in right of payment upon liquidation to AMPS,
$25,000 per share together with the amount of any dividends accumulated but
unpaid (whether or not earned or declared) thereon to the date of
distribution, and after such payment the holders of AMPS will be entitled to
no other payments except for any additional dividends. If such assets of the
Fund shall be insufficient to make the full liquidation payment on the AMPS
and liquidation payments on any other outstanding class or series of preferred
stock of the Fund ranking on a parity with the AMPS as to payment upon
liquidation, then such assets will be distributed among the holders of shares
of AMPS and the holders of shares of such other class or series ratably in
proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of liquidation distribution to which they are
entitled, the holders of shares of a Fund's AMPS will not be entitled to any
further participation in any distribution of assets by the Fund except for any
additional dividends. A consolidation, merger or share exchange of a Fund with
or into any other entity or entities or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of
the assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
TAX RULES APPLICABLE TO INSURED, TAURUS AND THEIR STOCKHOLDERS
The tax consequences associated with investment in shares of Insured Common
Stock are identical to the tax consequences associated with investment in
shares of Taurus Common Stock. Similarly, the tax consequences associated with
investment in shares of Insured AMPS are identical to the tax consequences
associated with investment in shares of Taurus AMPS. Insured and Taurus have
elected and qualified for the special tax treatment afforded RICs under the
Code. As a result, in any taxable year in which they distribute an amount
equal to at least 90% of taxable net income and 90% of tax-exempt net income
(see below), the Funds (but not their stockholders) are not subject to Federal
income tax to the extent that they distribute their net investment income and
net realized capital gains. In prior taxable years and in the taxable year of
the Reorganization, each Fund has distributed substantially all of its income.
Insured intends to continue to distribute substantially all of its income in
the taxable years following the Reorganization. If, at any time when shares of
a Fund's AMPS are outstanding the Fund does not meet the asset coverage
requirements of the Investment Company Act, the Fund is required to
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suspend distributions to holders of shares of its Common Stock until the asset
coverage is restored. This can prevent the Fund from distributing at least 90%
of its net income and therefore can jeopardize the Fund's qualification for
taxation as a RIC. Upon any failure to meet the asset coverage requirements,
the Funds may, and under certain circumstances are required to, redeem shares
of AMPS in order to maintain or restore the requisite asset coverage and avoid
the adverse consequences of failing to qualify as a RIC.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
it does not distribute 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 does not apply to the tax-exempt
income of RICs, such as the Funds, that pay exempt-interest dividends.
Each Fund is qualified 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 a Fund's total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund is qualified to
pay exempt-interest dividends to its stockholders. Exempt-interest dividends
are dividends or any part thereof paid by a Fund which are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-
interest dividends in a written notice mailed to stockholders within 60 days
after the close of its taxable year. To the extent that the dividends
distributed to a Fund's stockholders are derived from interest income exempt
from Federal income tax under Code Section 103(a) and are properly designated
as exempt-interest dividends, they are excludable from a stockholder'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 benefits and railroad retirement benefits subject to Federal income
taxes. Interest on indebtedness incurred or continued to purchase or carry a
Fund's shares is not deductible for Federal income tax purposes to the extent
attributable to exempt-interest dividends. A tax adviser should be consulted
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if a stockholder would be treated as a "substantial user"
or "related person" under Code Section 147(a) with respect to property
financed with the proceeds from an issue of "industrial development bonds" or
"private activity bonds," if any, held by a Fund.
The portion of exempt-interest dividends paid from interest received by each
Fund from New York Municipal Bonds also will be exempt from New York State and
New York City personal income tax. However, exempt-interest dividends paid to
a corporate shareholder will be subject to New York State corporation
franchise tax and New York City general corporation tax. Shareholders subject
to income taxation by states other than New York and cities other than New
York City will realize a lower after-tax rate of return than New York State
and/or New York City shareholders since the dividends distributed by each Fund
generally will not be exempt, to any significant degree, from income taxation
by such other states and/or cities. Each 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/or New York City income taxes. Interest on indebtedness incurred or
continued to purchase or carry a Fund's shares is not deductible for Federal
or New York State or New York City personal income tax purposes to the extent
attributable to exempt-interest dividends.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the Insured AMPS and the
Taurus AMPS are substantially similar, but not identical, to the AMPS
discussed in the revenue ruling, and in the opinion of Brown & Wood LLP,
counsel to both Funds, the shares of each Fund's AMPS constitute stock and
distributions with respect to shares of such AMPS (other than distributions in
redemption of shares of AMPS subject to Section 302(b) of the Code) constitute
dividends to the extent of current and accumulated earnings and profits as
calculated for Federal income tax purposes. Nevertheless, the IRS could take a
contrary position, asserting, for example, that the shares of AMPS constitute
debt. If this position were upheld, the discussion of the treatment of
distributions below would not apply to
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holders of shares of AMPS. Instead, distributions by each Fund to holders of
shares of its AMPS would constitute interest, whether or not they exceed the
earnings and profits of the Fund, would be included in full in the income of
the recipient and taxed as ordinary income. Counsel believes that such a
position, if asserted by the IRS, would be unlikely to prevail.
To the extent that a Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered taxable ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the stockholder has owned Fund shares, and for New York State
and New York City personal income tax purposes, will be treated as capital
gains, which are taxed at ordinary income tax rates. Recent legislation
creates additional categories of capital gains taxable at different rates. It
is anticipated that regulations will be promulgated under the new legislation
to require RICs to designate the amounts of various categories of capital gain
income included in capital gain dividends in a notice sent to shareholders.
Distributions by a Fund, whether from exempt-interest income, ordinary income
or capital gains, will not be eligible for the dividends received deduction
for corporations under the Code.
All or a portion of a 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 stockholders. 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 stockholder. 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 capital gain dividends received by the
stockholder. Distributions in excess of a Fund's earnings and profits first
will 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). If a Fund pays a
dividend in January which was declared in the previous October, November or
December to stockholders of record on a specified date in one of such months,
then such dividend is treated for tax purposes as paid by the Fund and
received by its stockholders on December 31 of the year in which such dividend
was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two
classes of shares it may designate distributions made to each class in any
year as consisting of no more than such class' proportionate share of
particular types of income, including exempt-interest dividends and capital
gain dividends (including new categories of capital gains). Thus, each Fund is
required to allocate a portion of its net capital gains (including new
categories of capital gains) and other taxable income to the shares of its
AMPS. Each Fund may notify the Auction Agent of the amount of any net capital
gains and other taxable income to be included in any dividend on shares of its
AMPS prior to the auction establishing the applicable rate for such dividend.
Except for the portion of any dividend that a Fund informs the Auction Agent
will be treated as capital gains or other taxable income, the dividends paid
on the shares of AMPS constitute exempt-interest dividends. Alternatively,
each Fund may include such income in a dividend on shares of its AMPS without
giving advance notice thereof if it increases the dividend by an additional
amount to offset the tax effect thereof. The amount of net capital gains and
ordinary income allocable to shares of a Fund's AMPS (the "taxable
distribution") depends upon the amount of such gains and income realized by
the Fund and the total dividends paid by the Fund on shares of its Common
Stock and shares of its AMPS during a taxable year, but the taxable
distribution generally is not significant.
In the opinion of Brown & Wood LLP, counsel to both Funds, under current law
the manner in which each Fund allocates items of tax-exempt income, net
capital gains, and other taxable income, if any, between shares of its Common
Stock and shares of its AMPS will be respected for Federal income tax
purposes. However, the tax treatment of additional dividends may affect a
Fund's calculation of each class' allocable share of capital gains and other
taxable income. In addition, there is currently no direct guidance from the
IRS or other sources specifically addressing whether a Fund's method for
allocating tax-exempt income, net capital gains and other taxable income
between shares of its Common Stock and shares of its AMPS will be respected
for Federal
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income tax purposes, and it is possible that the IRS could disagree with
counsel's opinion and attempt to reallocate a Fund's net capital gains or
other taxable income. In the event of a reallocation, some of the dividends
identified by a Fund as exempt-interest dividends to holders of shares of its
AMPS could be recharacterized as additional capital gains or other taxable
income. In the event of such recharacterization, a Fund is not required to
make payments to such stockholders to offset the tax effect of such
reallocation. In addition, a reallocation could cause a Fund to be liable for
income tax and excise tax on any reallocated taxable income. Brown & Wood LLP
has advised each Fund that, in its opinion, if the IRS were to challenge in
court the Fund's allocations of income and gain, the IRS would be unlikely to
prevail. The opinion of Brown & Wood LLP, however, represents only its best
legal judgment and is not binding on the IRS or the courts.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
"Private activity bonds" are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item
of "tax preference" which could subject certain investors in such bonds,
including stockholders of the Funds, to an increased alternative minimum tax.
Each Fund purchases such "private activity bonds" and reports to stockholders
within 60 days after its fiscal year-end the portion of its dividends declared
during the year which constitutes an item of tax preference for alternative
minimum tax purposes. The Code further provides that corporations are subject
to an alternative minimum tax based, in part, on certain differences between
taxable income as adjusted for other tax preferences and the corporation's
"adjusted current earnings," which more closely reflect a corporation's
economic income. Because an exempt-interest dividend paid by a Fund is
included in adjusted current earnings, a corporate stockholder may be required
to pay an alternative minimum tax on exempt-interest dividends paid by such
Fund.
Under certain provisions of the Code, some stockholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with a 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 stockholder is not otherwise subject to backup withholding.
Ordinary income dividends paid to stockholders who are nonresident aliens or
foreign entities are 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.
A loss realized on a sale or exchange of shares of a Fund is disallowed if
other Fund shares are acquired (whether under the Automatic Dividend
Reinvestment Plan or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code provides that every stockholder 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 Funds) during the taxable
year.
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AGREEMENT AND PLAN OF REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
I), Insured will acquire all of the assets, and will assume all of the
liabilities, of Taurus, in exchange solely for an equal aggregate value of
Insured Common Stock and Insured Series D AMPS to be issued by Insured. Upon
receipt by Taurus of such shares, Taurus will distribute the shares of Insured
Common Stock to the holders of Taurus Common Stock and the shares of Insured
Series D AMPS to the holders of Taurus AMPS in exchange for their respective
shares in Taurus. Separate Articles Supplementary to the Articles of
Incorporation of Insured establishing the powers, rights and preferences of
the Insured Series D AMPS will have been filed with the State Department of
Assessments and Taxation of Maryland (the "Maryland Department") prior to the
closing of the Reorganization. As soon as practicable after the date that the
Reorganization takes place (the "Exchange Date"), Taurus will file Articles of
Dissolution with the Maryland Department to effect its formal dissolution and
Taurus will dissolve.
Taurus will distribute the shares of Insured Common Stock and Insured Series
D AMPS received by it pro rata to its holders of record of Taurus Common Stock
and Taurus AMPS, respectively, in exchange for such stockholders' shares in
Taurus. Such distribution would be accomplished by opening new accounts on the
books of Insured in the names of the common and preferred stockholders of
Taurus and transferring to those stockholder accounts the Insured Common Stock
and Insured Series D AMPS previously credited on those books to the account of
Taurus. Each newly-opened account on the books of Insured for the previous
holders of Taurus Common Stock would represent the respective pro rata number
of shares of Insured Common Stock (rounded down, in the case of fractional
shares, to the next largest number of whole shares) due such holder of Taurus
Common Stock. No fractional shares of Insured Common Stock will be issued. In
lieu thereof, Insured's transfer agent, State Street Bank and Trust Company,
will aggregate all fractional shares of Insured Common Stock and sell the
resulting whole shares on the NYSE for the account of all holders of
fractional interests, and each such holder will be entitled to a pro rata
share of the proceeds from such sale upon surrender of the Taurus Common Stock
certificates. Similarly, each newly-opened account on the books of Insured for
the previous holders of Taurus AMPS would represent the respective pro rata
number of shares of Insured Series D AMPS due such holder of Taurus AMPS. See
"Surrender and Exchange of Taurus Stock Certificates" below for a description
of the procedures to be followed by Taurus stockholders to obtain their
Insured Common Stock (and cash in lieu of fractional shares, if any) or
Insured Series D AMPS as the case may be.
Accordingly, as a result of the Reorganization, every holder of Taurus
Common Stock would own shares of Insured Common Stock that (except for cash
payments received in lieu of fractional shares) would have an aggregate net
asset value immediately after the Exchange Date equal to the aggregate net
asset value of that stockholder's Taurus Common Stock immediately prior to the
Exchange Date. Since the Insured Common Stock would be issued at net asset
value in exchange for the net assets of Taurus having a value equal to the
aggregate net asset value of those shares of Insured Common Stock, the net
asset value per share of Insured Common Stock should remain virtually
unchanged by the Reorganization. Similarly, since the Insured Series D AMPS
would be issued at a liquidation preference and value per share equal to the
liquidation preference and value per share of the Taurus AMPS, the liquidation
preference and value per share of the Insured Series D AMPS will remain
unchanged by the Reorganization. Thus, the Reorganization will result in no
dilution of net asset value of the Insured Common Stock, other than to reflect
the costs of the Reorganization, and will result in no dilution of liquidation
preference and value of the Insured Series D AMPS. However, as a result of the
Reorganization, a stockholder of either Fund likely will hold a reduced
percentage of ownership in the larger combined entity than he or she did in
either of the constituent Funds.
PROCEDURE
At meetings of the Boards of Directors of Insured and Taurus held on June
20, 1997 and July 7, 1997, respectively, the Boards of Directors of Insured
and Taurus, respectively, including all of the Directors who are not
"interested persons," as defined in the Investment Company Act, of Insured and
Taurus, unanimously
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approved the Agreement and Plan of Reorganization and the submission of such
Agreement and Plan of Reorganization to the Fund's respective stockholders for
approval.
Also on June 20, 1997, the Board of Directors of Insured approved the filing
of separate Articles Supplementary to Insured's Articles of Incorporation
establishing the powers, rights and preferences of the Insured Series D AMPS
and approved the issuance of the Series D AMPS in order that they may be given
to holders of Taurus AMPS as part of the Reorganization.
As a result of such Board approvals, Insured and Taurus jointly filed a
proxy statement with the Commission soliciting a vote of the stockholders of
Insured and Taurus to approve the Reorganization. The costs of such
solicitation are to be paid by Insured after the Reorganization so as to be
borne equally and exclusively on a per share basis by the holders of Insured
Common Stock and Taurus Common Stock. If the stockholders of both Insured and
Taurus approve the Reorganization, the Reorganization will take place as soon
as practicable after such approval, provided that the Funds have obtained
prior to that time a favorable private letter ruling from the IRS concerning
the tax consequences of the Reorganization as set forth in the Agreement and
Plan of Reorganization.
THE BOARDS OF DIRECTORS OF INSURED AND TAURUS RECOMMEND THAT THE
STOCKHOLDERS OF THE RESPECTIVE FUNDS APPROVE THE AGREEMENT AND PLAN OF
REORGANIZATION.
TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION
The following is a summary of the significant terms of the Agreement and
Plan of Reorganization. This summary is qualified in its entirety by reference
to the Agreement and Plan of Reorganization, attached hereto as Exhibit I.
Valuation of Assets and Liabilities. The respective assets of Insured and
Taurus will be valued on the business day immediately prior to the Exchange
Date (the "Valuation Date"). The valuation procedures are substantially the
same for both Funds: net asset value per share of the Insured Common Stock and
the Taurus Common Stock will be determined as of 15 minutes after the close of
business on the NYSE (generally, 4:00 p.m., New York time) on the Valuation
Date. For the purpose of determining the net asset value of a share of the
Insured Common Stock or the Taurus Common Stock, the value of the securities
held by the issuing Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
AMPS of the issuing Fund is divided by the total number of shares of Common
Stock of the issuing Fund outstanding at such time. Daily expenses, including
the fees payable to FAM, will accrue on the Valuation Date.
The New York Municipal Bonds and Municipal Bonds in which each Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value on the Valuation Date, each Fund will utilize the valuations of
portfolio securities furnished by a pricing service approved by the Boards of
Directors of the Funds. 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 will be valued at fair market value on a
consistent basis as determined by the pricing service using a matrix system to
determine valuations. The Boards of Directors of Insured and Taurus have
determined in good faith that the use of a pricing service is a fair method of
determining the valuation of portfolio securities. Positions in financial
futures contracts will be valued on the Valuation Date at closing prices for
such contracts established by the exchange on which they are traded, or if
market quotations are not readily available, will be valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Directors.
Distribution of Insured Common Stock and Insured Series D AMPS. On the
Exchange Date, Insured will issue to Taurus a number of shares of Insured
Common Stock the aggregate net asset value of which will equal the aggregate
net asset value of shares of Taurus Common Stock on the Valuation Date. Each
holder of Taurus
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Common Stock will receive the number of shares of Insured Common Stock
corresponding to his or her proportionate interest in the aggregate net asset
value of the Taurus Common Stock.
On the Exchange Date, Insured also will issue to Taurus a number of shares
of Insured Series D AMPS the aggregate liquidation preference and value of
which will equal the aggregate liquidation preference and value of Taurus AMPS
on the Valuation Date. Each holder of Taurus AMPS will receive the number of
shares of Insured Series D AMPS corresponding to his or her proportionate
interest in the aggregate liquidation preference and value of the Taurus AMPS.
No sales charge or fee of any kind will be charged to Taurus stockholders in
connection with their receipt of Insured Common Stock and Insured Series D
AMPS in the Reorganization. It is anticipated that the Insured Series D AMPS
will follow a similar auction schedule and procedures as those presently
followed by the Taurus AMPS. As a result of the Reorganization, the last
dividend period for the Taurus AMPS prior to the Exchange Date may be shorter
than the dividend period for such AMPS determined as set forth in the
applicable Articles Supplementary.
Expenses. Insured shall pay, subsequent to the Exchange Date, all expenses
incurred in connection with the Reorganization, including, but not limited to,
all costs related to the preparation and distribution of materials distributed
to each Fund's Board of Directors, expenses incurred in connection with the
preparation of the Agreement and Plan of Reorganization, a registration
statement on Form N-14 and a private letter ruling request submitted to the
IRS, Commission and state securities commission filing fees and legal and
audit fees in connection with the Reorganization, costs of printing and
distributing this Proxy Statement and Prospectus, legal fees incurred
preparing each Fund's board materials, attending each Fund's board meetings
and preparing the minutes, accounting fees associated with each Fund's
financial statements, stock exchange fees, rating agency fees, portfolio
transfer taxes (if any), and any similar expenses incurred in connection with
the Reorganization. In this regard, expenses of the Reorganization will be
deducted from the assets of the combined fund so as to be borne equally and
exclusively on a per share basis by the holders of Insured Common Stock and
Taurus Common Stock. Neither Insured nor Taurus shall pay any expenses of its
respective stockholders arising out of or in connection with the
Reorganization.
Required Approvals. Under Insured's Articles of Incorporation (as amended to
date and including Articles Supplementary establishing the powers, rights and
preferences of the Insured AMPS), relevant Maryland law and the rules of the
NYSE, stockholder approval of the Agreement and Plan of Reorganization
requires the affirmative vote of stockholders representing more than 50% of
the outstanding shares of Insured Common Stock and Insured AMPS, voting
together as a single class, and of the Insured AMPS, voting separately as a
class. Similarly, under Taurus' Articles of Incorporation (as amended to date
and including Articles Supplementary establishing the powers, rights and
preferences of the Taurus AMPS), relevant Maryland law and the rules of the
NYSE, stockholder approval of the Agreement and Plan of Reorganization
requires the affirmative vote of stockholders representing more than 50% of
the outstanding shares of Taurus Common Stock and Taurus AMPS, voting together
as a single class, and of the Taurus AMPS, voting separately as a class.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of Taurus to Insured and the distribution of shares of Insured
Common Stock and Insured Series D AMPS to Taurus stockholders, Taurus will
terminate its registration under the Investment Company Act and its
incorporation under Maryland law and will withdraw its authority to do
business in any state where it is required to do so.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the
terms therein. The obligations of Insured and Taurus pursuant to the Agreement
and Plan of Reorganization are subject to various conditions, including a
registration statement on Form N-14 being declared effective by the
Commission, approval of the Reorganization by the stockholders of Insured and
Taurus, a favorable private letter ruling being received from the IRS as to
tax matters, an opinion of counsel as to securities matters being received and
the continuing accuracy of various representations and warranties of Insured
and Taurus being confirmed by the respective parties.
49
<PAGE>
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Directors of either Fund may cause the Reorganization to be
postponed or abandoned should either Board determine that it is in the best
interests of the stockholders of its respective Fund to do so. The Agreement
and Plan of Reorganization may be terminated, and the Reorganization abandoned
at any time (whether before or after adoption thereof by the stockholders of
either Fund), prior to the Exchange Date, or the Exchange Date may be
postponed: (i) by mutual consent of the Boards of Directors of Insured and
Taurus; (ii) by the Board of Directors of Insured if any condition to
Insured's obligations set forth in Section 8 of the Agreement and Plan of
Reorganization has not been fulfilled or waived by such Board; or (iii) by the
Board of Directors of Taurus if any condition to Taurus' obligations set forth
in Section 9 of the Agreement and Plan of Reorganization has not been
fulfilled or waived by such Board.
POTENTIAL BENEFITS TO INSURED COMMON STOCKHOLDERS AND TAURUS COMMON
STOCKHOLDERS AS A RESULT OF THE REORGANIZATION
In approving the Reorganization, the Board of Directors of each Fund
identified certain benefits that are likely to result from the Reorganization,
including lower expenses per share of Common Stock, greater efficiency and
flexibility in portfolio management and a more liquid trading market for the
shares of Common Stock of the combined fund. The Boards also considered the
possible risks and costs of combining the Funds, and examined the relative
credit strength, maturity characteristics, mix of type and purpose, and yield
of the Funds' portfolios of Municipal Bonds and the costs involved in a
transaction such as the Reorganization. The Boards noted the many similarities
between the Funds, including their similar investment objectives and
investment policies, their common management and their similar portfolios of
Municipal Bonds. With respect to Taurus, following the Reorganization Taurus
stockholders will remain invested in a closed-end fund that has an investment
objective and policies similar to that of Taurus. Based on these factors, the
Boards concluded that the Reorganization (i) presents no significant risks
that would outweigh the benefits discussed above and (ii) involves minimal
costs (including relatively minor legal, accounting and administrative costs).
The surviving fund that would result from the Reorganization would have a
larger asset base than either Fund has currently. Based on data presented by
FAM, the Board of each Fund believes that administrative expenses for a larger
combined fund would be less than the aggregate expenses for the individual
Funds, resulting in a lower expense ratio for common stockholders of the
combined fund and higher earnings per common share. In particular, certain
fixed costs, such as costs of printing stockholder reports and proxy
statements, legal expenses, audit fees, mailing costs and other expenses will
be spread across a larger asset base, thereby lowering the expense ratio for
the combined fund. To illustrate the potential economies of scale, for the
three months ended April 30, 1997, the total annualized operating expense
ratio for Insured was 0.75%, based on average net assets of approximately
$450.4 million including proceeds from the issuance of AMPS, and 1.00%, based
on average net assets of approximately $306.4 million excluding proceeds from
the issuance of AMPS. For the six months ended April 30, 1997, the total
annualized operating expense ratio for Taurus was 0.81%, based on average net
assets of approximately $110.2 million including proceeds from the issuance of
AMPS, and 1.11%, based on average net assets of approximately $80.2 million
excluding proceeds from the issuance of AMPS. If the Reorganization had taken
place on April 30, 1997, the overall operating expense ratio for the combined
fund on a pro forma basis would have been 0.66%, based on average net assets
of approximately $560.5 million including proceeds from the issuance of AMPS,
and 0.96%, based on average net assets of approximately $386.5 million
excluding proceeds from the issuance of AMPS.
Management projections estimate that Insured will have net assets in excess
of $556 million upon completion of the Reorganization. A larger asset base
should provide benefits in portfolio management. After the Reorganization,
Insured should be able to purchase large amounts of Municipal Bonds at more
favorable prices than either of the Funds separately and, with this greater
purchasing power, request improvements in the terms of the Municipal Bonds
(e.g., added indenture provisions covering call protection, sinking funds and
audits for the benefit of large holders) prior to purchase.
50
<PAGE>
Based on the foregoing, the Boards concluded that the Reorganization
presents no significant risks or costs (including legal, accounting and
administrative costs) that would outweigh the benefits discussed above.
In approving the Reorganization, the Board of Directors of each Fund
determined that, with respect to net asset value and liquidation preference,
the interests of existing stockholders of the Fund would not be diluted as a
result of the Reorganization. Although the Reorganization is expected to
result in a reduction in net asset value per share of the combined fund after
the Reorganization of approximately $.01 as a result of the estimated costs of
the Reorganization, management of each Fund advised its Board that it expects
that such costs would be recovered within 12 months after the Exchange Date
due to a decrease in the operating expense ratio.
It is not anticipated that the Reorganization directly would benefit the
holders of shares of Insured AMPS or Taurus AMPS; however, the Reorganization
will not adversely affect the holders of shares of AMPS of either Fund and the
expenses of the Reorganization will not be borne by the holders of shares of
AMPS of either Fund.
SURRENDER AND EXCHANGE OF TAURUS STOCK CERTIFICATES
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of Taurus Common Stock or Taurus
AMPS, as the case may be, will be entitled to receive, upon surrender of his
or her certificate or certificates, a certificate or certificates representing
the number of shares of Insured Common Stock or Insured Series D AMPS
distributable with respect to such holder's shares of Taurus Common Stock or
Taurus AMPS, together with cash in lieu of any fractional shares. Promptly
after the Exchange Date, the transfer agent for the Insured Common Stock or
the Insured Series D AMPS as the case may be, will mail to each holder of
certificates formerly representing shares of Taurus Common Stock or Taurus
AMPS, as the case may be, a letter of transmittal for use in surrendering his
or her certificates for certificates representing shares of Insured Common
Stock or Insured Series D AMPS, as the case may be, and cash in lieu of any
fractional shares.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON CONSUMMATION
OF THE REORGANIZATION, HOLDERS OF TAURUS COMMON STOCK AND TAURUS AMPS WILL BE
FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR TAURUS STOCK CERTIFICATES FOR
INSURED STOCK CERTIFICATES AND, IF APPLICABLE, CASH IN LIEU OF FRACTIONAL
SHARES.
From and after the Exchange Date, certificates formerly representing shares
of Taurus Common Stock or Taurus AMPS, as the case may be, will be deemed for
all purposes to evidence ownership of the number of full shares of Insured
Common Stock or Insured Series D AMPS distributable with respect to such
shares of Taurus in the Reorganization, provided that, until such Taurus stock
certificates have been so surrendered, no dividends payable to the holders of
record of Insured Common Stock or Insured Series D AMPS, as the case may be,
as of any date subsequent to the Exchange Date will be paid to the holders of
such outstanding Taurus stock certificates. Dividends payable to holders of
record of shares of Insured Common Stock or Insured Series D AMPS, as the case
may be, as of any date after the Exchange Date and prior to the exchange of
certificates by any Taurus stockholder will be paid to such stockholder,
without interest, at the time such stockholder surrenders his or her Taurus
stock certificates for exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of Taurus. If, after the Exchange Date, certificates
representing shares of Taurus Common Stock or Taurus AMPS are presented to
Insured, they will be canceled and exchanged for certificates representing
Insured Common Stock or Insured Series D AMPS, as the case may be, and cash in
lieu of fractional shares, if any, distributable with respect to such Taurus
Common Stock or Taurus AMPS in the Reorganization.
TAX CONSEQUENCES OF THE REORGANIZATION
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Insured and Taurus each has elected and
qualified for the special tax treatment afforded RICs under the Code, and
Insured intends to continue
51
<PAGE>
to so qualify after the Reorganization. Insured and Taurus have jointly
requested a private letter ruling from the IRS that for Federal income tax
purposes: (i) the Reorganization, as described, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Insured and Taurus will each be deemed a "party" to a Reorganization within
the meaning of Section 368(b) of the Code; (ii) in accordance with Section
361(a) of the Code, no gain or loss will be recognized to Taurus as a result
of the Reorganization or on the distribution of Insured Common Stock and
Insured Series D AMPS to Taurus stockholders under Section 361(c)(1) of the
Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized
to Insured as a result of the Reorganization; (iv) in accordance with Section
354(a)(1) of the Code, no gain or loss will be recognized to the stockholders
of Taurus on the receipt of Insured Common Stock and Insured Series D AMPS in
exchange for their corresponding Taurus Common Stock and Taurus AMPS (except
to the extent that Taurus Common Stockholders receive cash representing an
interest in fractional shares of Insured in the Reorganization); (v) in
accordance with Section 362(b) of the Code, the tax basis of the Taurus assets
in the hands of Insured will be the same as the tax basis of such assets in
the hands of Taurus immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Insured Common Stock and
Insured Series D AMPS received by the stockholders of Taurus in the
Reorganization will be equal, in the aggregate, to the tax basis of the Taurus
Common Stock and Taurus AMPS surrendered in exchange; (vii) in accordance with
Section 1223 of the Code, a stockholder's holding period for the Insured
Common Stock and Insured Series D AMPS will be determined by including the
period for which such stockholder held the Taurus Common Stock or Taurus AMPS
exchanged therefor, provided, that such Taurus shares were held as a capital
asset; (viii) in accordance with Section 1223 of the Code, Insured's holding
period with respect to the Taurus assets transferred will include the period
for which such assets were held by Taurus; (ix) the payment of cash to Taurus
stockholders in lieu of fractional shares of Insured will be treated as though
the fractional shares were distributed as part of the Reorganization and then
redeemed, with the result that such Taurus stockholders will have short- or
long-term capital gain or loss to the extent that the cash distribution
differs from the basis allocable to the Insured fractional shares; and (x) the
taxable year of Taurus will end on the effective date of the Reorganization
and pursuant to Section 381(a) of the Code and regulations thereunder, Insured
will succeed to and take into account certain tax attributes of Taurus, such
as earnings and profits, capital loss carryovers and method of accounting.
As noted in the discussion under "The Reorganization--Comparison of the
Funds--Tax Rules Applicable to Insured, Taurus and Their Stockholders," a Fund
must distribute annually at least 90% of its net taxable and tax-exempt
income. A distribution will only be counted for this purpose if it qualifies
for the dividends paid deduction under the Code. In the opinion of Brown &
Wood LLP, the issuance of Insured Series D AMPS pursuant to the Reorganization
in addition to the already existing Insured Series A AMPS, Series B AMPS, and
Series C AMPS, will not cause distributions on any series of AMPS to be
treated as preferential dividends ineligible for the dividends paid deduction.
It is possible that the IRS may assert that, because there are several series
of AMPS, distributions on such shares are preferential under the Code and
therefore not eligible for the dividends paid deduction. If the IRS
successfully disallowed the dividends paid deduction for dividends on the
AMPS, Insured could lose the special tax treatment afforded RICs. In this
case, dividends on the shares of AMPS would not be exempt from Federal income
tax. Additionally, Insured would be subject to the alternative minimum tax.
Stockholders should consult their tax advisers regarding the effect of the
Reorganization in light of their individual circumstances. As the foregoing
relates only to Federal income tax consequences, stockholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Reorganization.
Status as a Regulated Investment Company. Both Insured and Taurus have
elected and qualified since inception for taxation as RICs under Sections 851-
855 of the Code, and after the Reorganization Insured intends to continue to
so qualify.
52
<PAGE>
CAPITALIZATION
The following table sets forth as of April 30, 1997 (i) the capitalization
of Insured, (ii) the capitalization of Taurus and (iii) the pro forma
capitalization of Insured as adjusted to give effect to the Reorganization.
PRO FORMA CAPITALIZATION OF INSURED, TAURUS AND THE COMBINED FUND
AS OF APRIL 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
FUND
PRO FORMA AS
INSURED TAURUS ADJUSTMENT ADJUSTED(A)
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets:............. $447,616,946 $109,028,674 ($3,212,600) $553,433,020
Net Assets
Attributable to
Common Stock......... $303,616,946 $ 79,028,674 ($3,212,600) $379,433,020
Net Assets
Attributable to AMPS. $144,000,000 $ 30,000,000 -- $174,000,000
Shares Outstanding:
Common Stock.......... 21,195,037 6,714,921 -- 26,642,080(b)
AMPS
Series A............ 2,800 1,200 -- 2,800
Series B............ 1,960 -- -- 1,960
Series C............ 1,000 -- -- 1,000
Series D............ -- -- -- 1,200(b)
Net Asset Value Per
Share:
Common Stock.......... $14.32 $11.77 -- $14.24(c)
AMPS.................. $25,000 $25,000 -- $25,000
</TABLE>
- --------
(a) The adjusted balances are presented as if the Reorganization had been
consummated on April 30, 1997 and are for informational purposes only.
Assumes distributions of undistributed net investment income, undistributed
capital gains and accrual of estimated Reorganization expenses of $200,000.
No assurance can be given as to how many shares of Insured Common Stock that
Taurus stockholders will receive on the Exchange Date, and the foregoing
should not be relied upon to reflect the number of shares of Insured Common
Stock that actually will be received on or after such date.
(b) Assumes the issuance of 5,447,043 shares of Insured Common Stock and a
newly-created series of AMPS consisting of 1,200 shares in exchange for
the net assets of Taurus. The number of shares of Common Stock issued was
based on the net asset value of each Fund, net of distributions on April
30, 1997.
(c) Net Asset Value Per Share of Common Stock after Reorganization-related
expenses and distribution of undistributed net investment income.
53
<PAGE>
ELECTION OF DIRECTORS
At the Insured Annual Meeting, the Board of Directors for Insured will be
elected to serve until the next annual meeting of stockholders of Insured and
until their successors are elected and qualified. If the stockholders of both
Insured and Taurus approve the Reorganization, then the Board of Directors of
Insured elected at the Insured Annual Meeting will serve as the Board of the
combined fund, until its next annual meeting of stockholders. If the
stockholders of either Insured or Taurus vote against the Reorganization, then
the Board of Directors of Insured elected at the Insured Annual Meeting will
continue to serve until the next annual meeting of stockholders of Insured and
the Board of Directors of Taurus elected at Taurus' annual meeting held on
June 19, 1997 will continue to serve until the next annual meeting of
stockholders of Taurus. It is intended that all properly executed proxies will
be voted (unless such authority has been withheld in the proxy) as follows:
With respect to the proxies of Insured stockholders:
(1) All proxies of the holders of shares of Insured AMPS, voting
separately as a class, will be voted in favor of the two persons designated
as Directors to be elected by the holders of shares of Insured AMPS; and
(2) All proxies of the holders of shares of Insured Common Stock and
Insured AMPS, voting together as a single class, will be voted in favor of
the four persons designated as Directors to be elected by the holders of
Insured Common Stock and Insured AMPS.
The Board of Directors of Insured knows of no reason why any of these
nominees will be unable to serve, but in the event of any such unavailability,
the proxies received will be voted for such substitute nominee or nominees as
the Board of Directors may recommend.
Certain information concerning the nominees for the Board of Directors of
Insured, including their designated classes, is set forth below.
TO BE ELECTED BY HOLDERS OF INSURED AMPS, VOTING SEPARATELY AS A CLASS
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED ON THE
PRINCIPAL OCCUPATIONS RECORD DATE
NAME AND DURING --------------------
ADDRESS OF THE PAST FIVE YEARS AND DIRECTOR COMMON
NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
---------- --- ----------------------- -------- ---------- ---------
<C> <C> <S> <C> <C> <C>
Joseph L. May (1)(2)....... 68 Attorney in private 1992 0 0
424 Church Street, Suite practice since 1984;
2000 Nashville, TN 37219 President, May and Ath-
ens Hosiery Mills Divi-
sion, Wayne-Gossard Cor-
poration from 1954 to
1983; Vice President,
Wayne-Gossard Corpora-
tion from 1972 to 1983;
Chairman, The May Corpo-
ration (personal holding
company) from 1972 to
1983; Director, Signal
Apparel Co. from 1972 to
1989.
Andre F. Perold(1)(2)...... 45 Professor, Harvard Busi- 1992 0 0
Morgan Hall ness School since 1989
Soldiers Field and Associate Professor
Boston, Massachusetts from 1983 to 1989;
02163 Trustee, The Common Fund
since 1989; Director,
Quantec Limited since
1991 and TIBCO from 1994
to 1996.
</TABLE>
(footnotes on following page)
54
<PAGE>
TO BE ELECTED BY HOLDERS OF INSURED AMPS AND INSURED COMMON STOCK, VOTING
TOGETHER AS A SINGLE CLASS
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED ON THE
PRINCIPAL OCCUPATIONS RECORD DATE
NAME AND DURING --------------------
ADDRESS OF THE PAST FIVE YEARS AND DIRECTOR COMMON
NOMINEE AGE PUBLIC DIRECTORSHIPS(1) SINCE STOCK AMPS
---------- --- ----------------------- -------- ---------- --------
<C> <C> <S> <C> <C> <C>
James H. Bodurtha(1)(2).... 53 Director and Executive 1995 0 0
36 Popponesset Road Vice President, The
Cotuit, Massachusetts China Business Group,
02635 Inc. since 1996; Chair-
man and Chief Executive
Officer, China Enter-
prise Management Corpo-
ration from 1993 to
1996; Chairman,
Berkshire Corporation
since 1980; Partner,
Squire, Sanders &
Dempsey from 1980 to
1993.
Herbert I. London (1)(2)... 58 Dean, Gallatin Division 1992 0 0
113-115 University Place of New York University
New York, New York 10003 from 1976 to 1993 and
Director from 1975 to
1976; John M. Olin Pro-
fessor of Humanities,
New York University
since 1993 and Professor
thereof since 1980; Dis-
tinguished Fellow, Her-
man Kahn Chair, Hudson
Institute from 1984 to
1985; Trustee, Hudson
Institute since 1980 and
President in 1997; Over-
seer, Center for Naval
Analyses; Director, Da-
mon Corporation from
1991 to 1995; Limited
Partner, Hypertech LP in
1996.
Robert R. Martin(1)(2)..... 70 Chairman and Chief Exec- 1994 0 0
513 Grand Hill utive Officer, Kinnard
St. Paul, Minnesota 55102 Investments, Inc. from
1990 to 1993, Executive
Vice President, Dain
Bosworth from 1974 to
1989; Director, Carnegie
Capital Management from
1977 to 1985 and Chair-
man thereof in 1979; Di-
rector, Securities In-
dustry 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.
Arthur Zeikel(1)(3)........ 65 President of FAM since 1992 4,600 0
800 Scudders Mill Road 1977; President of MLAM
Plainsboro, New Jersey since 1977; President
08536 and Director of Prince-
ton Services, Inc. since
1993; Executive Vice
President of ML & Co.
since 1990; Director of
MLFD since 1977.
</TABLE>
- --------
(1) Each of the nominees is a director, trustee or member of an advisory board
of certain other investment companies for which FAM or MLAM acts as
investment adviser. See "Compensation of Directors" below.
(2) Member of the Audit Committee of the Board of Directors.
(3) Interested person, as defined in the Investment Company Act, of the Fund.
55
<PAGE>
COMMITTEE AND BOARD MEETINGS
The Board of Directors of Insured has a standing Audit Committee, which
consists of the Directors who are not "interested persons," as defined in the
Investment Company Act, of the Fund. The principal purpose of the Audit
Committee is to review the scope of the annual audit conducted by Insured's
independent auditors and the evaluation by such auditors of the accounting
procedures followed by the Fund. The non-interested Directors have retained
independent legal counsel to assist them in connection with these duties.
Insured's Board of Directors does not have a nominating committee. During the
fiscal year ended October 31, 1996, the Board of Directors and the Audit
Committee of Insured held four quarterly meetings. All of the Directors of
Insured then in office attended at least 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings
held by all of the committees of the Board on which they served during such
period.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), requires each Fund's officers, Directors and
persons who own more than ten percent of a registered class of the Fund's
equity securities, to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Commission and the NYSE. Officers, Directors and
greater than ten percent stockholders are required by Commission regulations
to furnish the Fund with copies of all Forms 3, 4 and 5 that they file.
Based solely on each Fund's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its most recent
fiscal year, and written representations from certain reporting persons that
they were not required to file Form 5 with respect to the most recent fiscal
year, each Fund believes that all of its officers, Directors, greater than ten
percent beneficial owners and other persons subject to Section 16 of the
Securities Exchange Act because of the requirements of Section 30 of the
Investment Company Act (i.e., any advisory board member, investment adviser or
affiliated person of the Fund's investment adviser), have complied with all
filing requirements applicable to them with respect to transactions during the
Fund's most recent fiscal year.
INTERESTED PERSONS
Each Fund considers Mr. Zeikel to be an "interested person" of the Fund
within the meaning of Section 2(a)(19) of the Investment Company Act as a
result of the positions he holds with FAM and its affiliates. Mr. Zeikel is
the President of each Fund, the President of FAM and the President of MLAM.
COMPENSATION OF DIRECTORS
FAM, the investment adviser for Insured and Taurus, pays all compensation of
all officers of each Fund and all Directors of each Fund who are affiliated
with ML & Co. or its subsidiaries. Insured pays each non-affiliated Director a
fee of $2,500 per year plus $250 per regular meeting attended, together with
such Director's actual out-of-pocket expenses relating to attendance at
meetings. Insured also pays each member of its Audit Committee, which consists
of all of the non-affiliated Directors, a fee of $500 per year plus $125 per
meeting attended, together with such Director's out-of-pocket expenses
relating to attendance at meetings. These fees and expenses for the fiscal
year ended October 31, 1996 aggregated $22,928 for Insured.
The following table sets forth, for the fiscal year ended October 31, 1996,
compensation paid by Insured to the non-affiliated Directors, and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
FAM/MLAM Advised Funds, to the non-affiliated Directors.
56
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM INSURED AND
RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS
NAME OF DIRECTOR FROM INSURED FUND EXPENSES PAID TO DIRECTORS
---------------- ------------ ------------------- -----------------
<S> <C> <C> <C>
James H. Bodurtha(1)......... $4,500 None $148,500
Herbert I. London(1)......... $4,500 None $148,500
Robert R. Martin(1).......... $4,500 None $148,500
Joseph L. May(1)............. $4,500 None $148,500
Andre F. Perold(1)........... $4,500 None $148,500
</TABLE>
- --------
(1) The Directors serve on the boards of FAM/MLAM Advised Funds as follows:
Mr. Bodurtha (22 registered investment companies consisting of 46
portfolios); Mr. London (22 registered investment companies consisting of
46 portfolios); Mr. Martin (22 registered investment companies consisting
of 46 portfolios); Mr. May (22 registered investment companies consisting
of 46 portfolios); and Mr. Perold (22 registered investment companies
consisting of 46 portfolios). For purposes of this table, each series of a
series investment company is treated as a separate fund.
OFFICERS OF THE FUNDS
The Boards of Directors of Insured and Taurus have elected the following
officers of each Fund. The principal business address of each officer is 800
Scudders Mill Road, Plainsboro, New Jersey 08536. The following sets forth
information concerning each of these officers:
<TABLE>
<CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE* AGE SINCE
----------------------------- ------- --- -------
<S> <C> <C> <C>
Arthur Zeikel............................ President 65 1992
President of FAM since 1977; President
of MLAM since 1977; President and
Director of Princeton Services since
1993; Executive Vice President of ML &
Co. since 1990; Director of MLFD since
1977.
Terry K. Glenn........................... Executive Vice President 56 1992
Executive Vice President of FAM and of
MLAM since 1983; Executive Vice
President and Director of Princeton
Services since 1993; President of MLFD
since 1986 and Director thereof since
1991; President of Princeton
Administrators, L.P. since 1988.
Vincent R. Giordano...................... Senior Vice President 52 1992
Senior Vice President of FAM and of MLAM
since 1984; Senior Vice President of
Princeton Services since 1993.
Kenneth A. Jacob......................... Vice President 46 1992
Vice President of FAM and of MLAM since
1984.
Robert W. Roffo.......................... Portfolio Manager 31 1996
Vice President of MLAM and of FAM since
1996 and Portfolio Manager thereof since
1992.
Donald C. Burke.......................... Vice President 37 1993
Vice President and Director of Taxation
of MLAM since 1990.
Gerald M. Richard........................ Treasurer 48 1992
Senior Vice President and Treasurer of
FAM and of MLAM since 1984; Senior Vice
President and Treasurer of Princeton
Services since 1993; Treasurer of MLFD
since 1981 and Vice President thereof
since 1984.
Patrick D. Sweeney....................... Secretary of Taurus 43 1997
Vice President of MLAM since 1990.
Philip M. Mandel......................... Secretary of Insured 50 1997
Vice President of FAM and MLAM since
1997; Assistant General Counsel of
Merrill Lynch, Pierce, Fenner & Smith
Incorporated from 1989 to 1997.
</TABLE>
- --------
* Unless otherwise indicated, such officers hold this position in both Funds.
57
<PAGE>
SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of Insured, including a majority of the Directors who
are not "interested persons," as defined in the Investment Company Act, of the
Fund, has selected the firm of Ernst & Young LLP as independent auditors, to
audit the financial statements of Insured for the current fiscal year ending
October 31, 1997.
Insured knows of no direct or indirect financial interest of such firm in
Insured. Such appointment is subject to ratification or rejection by the
stockholders of Insured. If the stockholders of both Insured and Taurus
approve the Reorganization, then the independent auditors selected at the
Insured Annual Meeting for Insured will serve as the independent auditors of
the combined fund until its next annual meeting of stockholders. If the
stockholders of either Insured or Taurus vote against the Reorganization, then
the independent auditors of Insured selected at the Insured Annual Meeting
will continue to serve until the next annual meeting of stockholders of
Insured, and the independent auditors of Taurus selected at the Taurus annual
meeting held on June 19, 1997 will continue to serve until the next annual
meeting of stockholders of Taurus. Unless a contrary specification is made,
the accompanying proxy for Insured stockholders will be voted in favor of
ratification of the selection of such auditors.
Ernst & Young LLP also acts as independent auditors for several other
investment companies for which FAM or MLAM acts as investment adviser,
including Taurus. The fees received by Ernst & Young LLP from these other
entities are substantially greater, in the aggregate, than the total fees
received by it from Taurus or expected to be received from Insured. The Board
of Directors of Insured considered the fact that Ernst & Young LLP has been
retained as the independent auditors of the other entities described above in
its evaluation of the independence of Ernst & Young LLP with respect to
Insured.
Representatives of Ernst & Young LLP are expected to be present at the
Meetings and will have the opportunity to make a statement if they so desire
and to respond to questions from stockholders.
INFORMATION CONCERNING THE MEETINGS
DATE, TIME AND PLACE OF MEETINGS
The Meetings will be held on October 20, 1997 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at 10:45 a.m., New York time (for
Insured) and 11:00 a.m., New York time (for Taurus).
SOLICITATION, REVOCATION AND USE OF PROXIES
A stockholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of Insured or Taurus, as
the case may be. Although mere attendance at the Meetings will not revoke a
proxy, a stockholder present at the Meetings may withdraw his proxy and vote
in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meetings in accordance with
the directions on the proxies; if no direction is indicated, (i) all proxies
will be voted "FOR" the approval of the Agreement and Plan of Reorganization,
(ii) for the stockholders of Insured only, all proxies submitted by Insured
stockholders will be voted "FOR" the election of Directors of Insured and
"FOR" the ratification of the selection of Ernst & Young LLP as independent
accountants of Insured.
It is not anticipated that any matters other than (i) the adoption of the
Agreement and Plan of Reorganization, (ii) the election of Directors of
Insured and (iii) the ratification of the selection of Ernst & Young LLP as
independent auditors for Insured will be brought before the Meetings. If,
however, any other business properly is brought before the Meetings, proxies
will be voted in accordance with the judgment of the persons designated on
such proxies.
58
<PAGE>
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of Insured Common Stock, Insured AMPS,
Taurus Common Stock and Taurus AMPS at the close of business on the Record
Date are entitled to vote at the Meetings or any adjournment thereof. At the
close of business on the Record Date, there were 21,195,037 shares of Insured
Common Stock, 5,760 shares of Insured AMPS, 6,714,921 shares of Taurus Common
Stock and 1,200 shares of Taurus AMPS issued and outstanding and entitled to
vote.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF INSURED AND
TAURUS
To the knowledge of Insured and Taurus, at the date hereof, no person or
entity owns beneficially 5% or more of the shares of any of the Insured Common
Stock, the Insured AMPS, the Taurus Common Stock or the Taurus AMPS.
On the Record Date, the Directors and officers of Insured as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of
Insured Common Stock or Insured AMPS.
On the Record Date, the Directors and officers of Taurus as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of
Taurus Common Stock or Taurus AMPS.
On the Record Date, Mr. Zeikel, a Director and officer of each of the Funds,
and the other Directors and officers of each Fund, owned an aggregate of less
than 1% of the outstanding shares of Common Stock of ML & Co.
VOTING RIGHTS AND REQUIRED VOTE
For purposes of this Proxy Statement and Prospectus, each share of Insured
Common Stock, Insured AMPS, Taurus Common Stock and Taurus AMPS is entitled to
one vote. Approval of the Agreement and Plan of Reorganization requires the
affirmative vote of stockholders representing a majority of the outstanding
shares of Insured Common Stock and Insured AMPS, voting together as a single
class, and of the Insured AMPS, voting separately as a class, as well as the
affirmative vote of stockholders representing a majority of the outstanding
shares of Taurus Common Stock and Taurus AMPS, voting together as a single
class, and of the Taurus AMPS, voting separately as a class.
Under Maryland law, stockholders of a registered investment company whose
shares are traded publicly on a national securities exchange, such as Taurus,
are not entitled to demand the fair value of their shares upon a transfer of
assets; therefore, the Taurus Common Stockholders will be bound by the terms
of the Reorganization, if approved at the Meetings. However, any Common
Stockholder of Taurus may sell his or her shares of Common Stock at any time
on the NYSE. Conversely, since the Taurus AMPS are not traded publicly on a
national securities exchange, shareholders of Taurus AMPS will be entitled to
appraisal rights upon the consummation of the Reorganization. As stockholders
of the corporation acquiring the assets of Taurus, neither holders of Insured
Common Stock nor holders of Insured AMPS are entitled to appraisal rights
under Maryland law.
Under Maryland law, a holder of Taurus AMPS desiring to receive payment of
the fair value of his or her stock (an "objecting stockholder") (i) must file
with Taurus a written objection to the Reorganization at or before the
Meeting, (ii) must not vote in favor of the Reorganization and (iii) must make
written demand on Insured for payment of his or her stock stating the number
and class of shares for which he or she demands payment, within 20 days after
the Maryland Department of Assessments and Taxation accepts for filing the
Articles of Transfer with respect to the Reorganization (Insured is required
promptly to give written notice to all objecting stockholders of the date that
the Articles of Transfer are accepted for record). An objecting stockholder
who fails to adhere to this procedure will be bound by the terms of the
Reorganization. An objecting stockholder ceases to have any rights of a
stockholder except the right to receive fair value for his or her shares and
has no right to receive any dividends or distributions payable to such holders
on a record date after the close of business
59
<PAGE>
on the date on which fair value is to be determined, which, for these purposes
will be the date of the Meetings. A demand for payment of fair market value
may not be withdrawn, except upon the consent of Insured. Within 50 days after
the Articles of Transfer have been accepted for filing, an objecting
stockholder who has not received payment for his or her shares may petition a
court located in Baltimore, Maryland for an appraisal to determine the fair
market value of his or her stock.
For purposes of each Meeting, a quorum consists of a majority of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the
time scheduled for each Meeting, a quorum of the applicable Fund's
stockholders is not present or if a quorum is present but sufficient votes in
favor of the Agreement and Plan of Reorganization are not received from the
stockholders of the applicable Fund, the persons named as proxies may propose
one or more adjournments of the Meeting to permit further solicitation of
proxies from stockholders. Any such adjournment will require the affirmative
vote of a majority of the shares of the applicable Fund present in person or
by proxy and entitled to vote at the session of the Meeting to be adjourned.
The persons named as proxies will vote in favor of any such adjournment if
they determine that adjournment and additional solicitation are reasonable and
in the interests of the applicable Fund's stockholders.
With respect to the election of Directors of Insured, holders of shares of
Insured AMPS are entitled to elect two Directors of Insured and holders of
shares of Insured Common Stock and Insured AMPS, voting together as a single
class, are entitled to elect the remaining Directors of Insured. Assuming a
quorum is present, (x) election of the two Directors of Insured, to be elected
by the holders of shares of Insured AMPS, voting separately as a class, will
require the affirmative vote of a majority of the votes cast by the holders of
Insured AMPS, represented at the Insured Annual Meeting and entitled to vote;
and (y) election of the remaining Directors of Insured will require the
affirmative vote of a majority of the votes cast by the holders of Insured
Common Stock and Insured AMPS, represented at the Insured Annual Meeting and
entitled to vote, voting together as a single class.
Approval of the ratification of the selection of Ernst & Young LLP as the
independent auditors of Insured will require the affirmative vote of a
majority of the votes cast by the holders of Insured Common Stock and Insured
AMPS represented at the Insured Annual Meeting and entitled to vote, voting
together as a single class.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by Insured, the surviving fund after the Reorganization, so as to be
borne equally and exclusively on a per share basis by the holders of Insured
Common Stock and Taurus Common Stock.
Insured and Taurus likewise will reimburse banks, brokers and others for
their reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of Insured and Taurus and certain persons that
Insured or Taurus may employ for their reasonable expenses in assisting in the
solicitation of proxies from such beneficial owners of shares of capital stock
of Insured or Taurus.
In order to obtain the necessary quorum at the Meetings (i.e., a majority of
the shares of each class of each Fund's securities entitled to vote at the
Meetings, present in person or by proxy), supplementary solicitation may be
made by mail, telephone, telegraph or personal interview by officers of the
Fund. The Funds also may hire proxy solicitors at the expense of Insured. It
is anticipated that the cost of such supplementary solicitation, if any, will
be nominal.
Broker-dealer firms, including Merrill Lynch, holding Fund shares in "street
name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
proposal before the Meetings. The Funds understand that, under the rules of
the NYSE, such broker-dealer firms may, without instructions from their
customers and clients, grant authority to the proxies designated to vote on
the election of the Board of Directors of Insured to serve for the ensuing
year (proposal 2(a)) and the
60
<PAGE>
ratification of the selection of Ernst & Young LLP as independent auditors for
Insured for the current fiscal year (proposal 2(b)) if no instructions have
been received prior to the date specified in the broker-dealer firm's request
for voting instructions. With respect to Insured Common Stock and Taurus
Common Stock, broker-dealer firms, including Merrill Lynch, will not be
permitted to grant voting authority without instructions with respect to the
approval of the Agreement and Plan of Reorganization (proposal 1). Shares of
Insured AMPS and Taurus AMPS held in "street name," however, may be voted,
pursuant to rules of the NYSE, by broker-dealer firms, including Merrill
Lynch, with respect to the approval of the Agreement and Plan of
Reorganization (proposal 1) and counted for purposes of establishing a quorum
if no instructions are received one business day before the Meetings, or, if
adjourned, one business day before the day to which the Meetings are
adjourned. In such instances, the broker-dealer firm will vote these shares on
proposal 1 in the same proportion as the votes cast by all holders of AMPS of
the relevant Fund who have voted on proposal 1. The Funds will include shares
held of record by broker-dealers as to which such authority has been granted
in its tabulation of the total number of shares present for purposes of
determining whether the necessary quorum of stockholders of each Fund exists.
Proxies that are returned to a Fund but that are marked "abstain" or on which
a broker-dealer has declined to vote on any proposal ("broker non-votes") will
be counted as present for the purposes of determining a quorum. Merrill Lynch
has advised the Funds that it intends to exercise discretion over shares held
in its name for which no instructions have been received by voting such shares
on proposal 1 (in the case of AMPS only), and on proposals 2(a) and 2(b) (in
the case of Insured Common Stock and Insured AMPS) in the same proportion as
it has voted such shares for which it has received instructions. However,
abstentions and broker non-votes will not be counted as votes cast.
Abstentions and broker non-votes will not have an effect on the vote on
proposals 2(a) and 2(b); however, abstentions and broker non-votes will have
the same effect as a vote against proposal 1.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statement and the exhibits relating thereto
which Insured has filed with the Commission under the Securities Act and the
Investment Company Act, to which reference is hereby made.
Insured and Taurus both are subject to the informational requirements of the
Securities Exchange Act, and in accordance therewith file reports and other
information with the Commission. Reports, proxy statements, registration
statements and other information filed by Insured and Taurus can be inspected
and copied at the public reference facilities of the Commission in Washington,
D.C. and at the New York Regional Office of the Commission at Seven World
Trade Center, New York, New York 10048. Copies of such materials also can be
obtained by mail from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, 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 Funds that file
electronically with the Commission.
CUSTODIAN
State Street Bank and Trust Company acts as the custodian for cash and
securities of Insured and The Bank of New York acts as custodian for cash and
securities of Taurus. The principal business address of State Street Bank and
Trust Company in such capacity is One Heritage Drive, P2N, North Quincy,
Massachusetts 02171. The principal business address of The Bank of New York in
such capacity is 110 Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent and registrar with respect to the Insured Common Stock. The
principal business address of State Street Bank and Trust Company in such
capacity is One Heritage Drive, P2N, North Quincy, Massachusetts 02171. The
Bank of New York serves as transfer agent, dividend disbursing agent and
registrar with respect to the Taurus Common Stock.
61
<PAGE>
The principal business address of The Bank of New York in this capacity is 110
Washington Street, New York, New York 10268.
IBJ Schroder Bank and Trust Company serves as the transfer agent, registrar
and auction agent to Insured and Taurus, in connection with their respective
AMPS, at the same rate for each Fund, pursuant to separate registrar, transfer
agency and service agreements with each of the Funds. The principal business
address of IBJ Schroder Bank and Trust Company is One State Street, New York,
New York 10004.
LEGAL PROCEEDINGS
There are no material legal proceedings to which Insured or Taurus is a
party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for Insured and Taurus by Brown & Wood LLP, New York, New York.
EXPERTS
The financial statements as of October 31, 1996 of Insured included in this
Proxy Statement and Prospectus have been so included in reliance on the
reports of Deloitte & Touche LLP, Independent Auditors, given on their
authority as experts in auditing and accounting. As of January 24, 1997,
Deloitte & Touche LLP were no longer the independent auditors of Insured.
Ernst & Young LLP has been appointed independent auditors of Insured for the
fiscal year ending October 31, 1997, subject to ratification by the
shareholders at the Insured Annual Meeting. The principal business address of
Deloitte & Touche llp is 117 Campus Drive, Princeton, New Jersey 08540.
The statement of assets, liabilities and capital of Taurus at October 31,
1996 and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period
then ended and financial highlights for each of the years indicated therein
included in this Proxy Statement and Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The principal business address of Ernst & Young LLP is 202 Carnegie Center,
Princeton, New Jersey 08543.
STOCKHOLDER PROPOSALS
If a stockholder of Insured intends to present a proposal at the 1998 Annual
Meeting of Stockholders of Insured, which is anticipated to be held in
September, 1998, and desires to have the proposal included in Insured's proxy
statement and form of proxy for that meeting, the stockholder must deliver the
proposal to the offices of Insured by , 1998.
By Order of the Boards of Directors
Philip M. Mandel
Secretary of MuniYield
New York Insured Fund II, Inc.
Patrick D. Sweeney
Secretary of Taurus
MuniNewYork Holdings, Inc.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements for MuniYield New York Insured Fund II, Inc.
for the Fiscal Year Ended October 31, 1996.............................. F-2
Unaudited Financial Statements for MuniYield New York Insured Fund II,
Inc. for the Six-Month Period Ended April 30, 1997...................... F-11
Audited Financial Statements for Taurus MuniNewYork Holdings, Inc. for
the Fiscal Year Ended October 31, 1996.................................. F-23
Unaudited Financial Statements for Taurus MuniNewYork Holdings, Inc. for
the Six-Month Period Ended April 30, 1997............................... F-32
Unaudited Financial Statements for the Combined Fund on a Pro Forma
Basis, as of April 30, 1997............................................. F-40
</TABLE>
F-1
<PAGE>
Audited Financial Statements for MuniYield New York Insured Fund II, Inc. for
the Fiscal Year Ended October 31, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MUNIYIELD NEW YORK INSURED FUND II,
INC.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniYield New York Insured Fund II,
Inc. as of October 31, 1996, the related statements of operations for the year
then ended and changes in net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
four-year period then ended and the period June 26, 1992 (commencement of
operations) to October 31, 1992. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at October 31, 1996 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniYield New York
Insured Fund II, Inc. as of October 31, 1996, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 3, 1996
F-3
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York--98.5%
<S> <S> <C> <C> <C>
Battery Park City Authority, New York, Revenue Bonds:
AAA Aaa $ 3,305 Junior Series A, 5.50% due 11/01/2026 (d) $ 3,197
AAA Aaa 4,000 Refunding, Senior Series A, 5.25% due 11/01/2017 (c) 3,786
Metropolitan Transportation Authority, New York, Commuter Facilities Revenue
Bonds (c):
AAA Aaa 11,500 Refunding, Series B, 6.25% due 7/01/2017 12,077
AAA Aaa 8,650 Refunding, Series B, 6.25% due 7/01/2022 9,029
AAA Aaa 1,400 Series A, 6.50% due 7/01/2024 1,525
AAA Aaa 5,000 Metropolitan Transportation Authority, New York, Transportation Facilities
Revenue Bonds, Series J, 6.50% due 7/01/2018 (b) 5,426
Monroe County, New York, GO, Public Improvement, UT (d):
AAA Aaa 1,850 6.15% due 6/01/2016 1,939
AAA Aaa 1,000 6.15% due 6/01/2017 1,040
AAA Aaa 3,250 Nassau County, New York, GO, UT, Series P, 6.50% due 11/01/2010 (b) 3,639
A1+ NR* 3,200 Nassau County, New York, IDA, Civic Facilities Revenue Bonds (Cold Spring
Harbor Laboratory Project), VRDN, 3.50% due 7/01/2019 (a) 3,200
AAA Aaa 1,100 New Rochelle, New York, GO, UT, Series B, 6.15% due 8/15/2018 (c) 1,140
A1+ VMIG1++ 1,200 New York City, New York, Cultural Resource Trust Revenue Bonds (Soloman R.
Guggenheim), VRDN, Series B, 3.40% due 12/01/2015 (a) 1,200
New York City, New York, GO, UT:
BBB+ Baa1 5,000 Refunding, Series B, 6.375% due 8/15/2012 5,091
BBB+ Baa1 10,000 Series F, 6.625% due 2/15/2014 10,365
AAA Aaa 2,660 Series J, 6% due 2/15/2005 (c) 2,833
New York City, New York, IDA, Civic Facilities Revenue Bonds:
A1+ NR* 1,200 (National Audobon Society), VRDN, 3.40% due 12/01/2014 (a) 1,200
AAA Aaa 5,000 (USTA National Tennis Center Project), 6.375% due 11/15/2014 (f) 5,346
New York City, New York, Municipal Water Finance Authority, Water and Sewer
System Revenue Bonds:
AAA Aaa 3,325 Refunding, Series A, 5.375% due 6/15/2026 (f) 3,185
AAA Aaa 3,270 Series A, 7.25% due 6/15/2000 (c)(g) 3,625
AAA Aaa 1,760 Series A, 7% due 6/15/2001 (b)(g) 1,960
AAA Aaa 4,000 Series B, 5.50% due 6/15/2019 (c) 3,879
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 1,000 (City University), Third Generation Reserves, Series 2, 6.875% due 7/01/2014 (c) 1,117
AAA Aaa 1,050 (City University), Third Generation Reserves, Series 2, 6.25% due 7/01/2019 (c) 1,096
AAA Aaa 3,000 (City University System), Third Resolution, Series 1, 6.25% due 7/01/2016 (d) 3,178
AAA Aaa 3,640 (City University System), Third Resolution, Series 1, 6.25% due 7/01/2020 (d) 3,828
AAA Aaa 6,290 (City University System), Third Resolution, Series 1, 6.30% due 7/01/2024 (d) 6,634
A1+ VMIG1++ 1,500 (Cornell University), VRDN, Series B, 3.40% due 7/01/2025 (a) 1,500
AAA Aaa 3,500 (Mount Sinai School of Medicine), Series A, 5% due 7/01/2021 (c) 3,177
AAA Aaa 6,000 (Mount Sinai School of Medicine), Series A, 5.15% due 7/01/2024 (c) 5,670
AAA Aaa 1,750 Refunding (Mount Sinai School of Medicine), 6.75% due 7/01/2009 (c) 1,914
BBB+ Baa1 2,000 Refunding (State University Educational Facilities), Series B, 7% due 5/15/2016 2,140
AAA Aaa 1,050 (Saint John's University), 6.875% due 7/01/2011 (d) 1,167
New York State Energy Research and Development Authority, Facilities Revenue
Bonds (Consolidated Edison Company Inc.), AMT, Series A:
AAA Aaa 4,450 6.75% due 1/15/2027 (c) 4,755
AAA Aaa 3,785 6.75% due 1/15/2027 (d) 4,028
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York (concluded)
<S> <S> <C> <C> <C>
AAA Aaa $ 10,000 New York State Energy Research and Development Authority, Gas Facilities Revenue
Bonds (Brooklyn Union Gas Company), AMT, Series A, 6.75% due 2/01/2024 (c) $ 10,835
New York State Energy Research and Development Authority, PCR, AMT (c):
NR* Aaa 4,000 (New York State Electric and Gas Corporation Project), Series A, 6.15%
due 7/01/2026 4,081
AAA Aaa 3,600 Refunding (Rochester Gas and Electric Project), Series B, 6.50% due 5/15/2032 3,822
AAA Aaa 1,325 New York State Environmental Facilities Corporation, Water Facilities Revenue
Bonds (New Rochelle Water Company Inc. Project), AMT, 6.40% due 12/01/2024 (d) 1,396
AAA Aaa 1,000 New York State, HFA, Housing Mortgage Project Revenue Refunding Bonds, Series A,
6.125% due 11/01/2020 (f) 1,021
New York State Local Government Assistance Corporation, VRDN (a):
A1+ VMIG1++ 5,500 Series F, 3.40% due 4/01/2025 5,500
A1+ VMIG1++ 2,100 Series G, 3.40% due 4/01/2025 2,100
New York State Medical Care Facilities Finance Agency Revenue Bonds:
AAA Aaa 2,790 (Health Center Project--Second Mortgage), Series A, 6.375% due 11/15/2019 (d) 2,954
AAA Aaa 2,330 (Mental Health), Series F, 6.50% due 8/15/2012 (f) 2,471
AAA Aaa 6,250 (New York Hospital Mortgage), Series A, 6.80% due 8/15/2024 (d)(e) 6,899
AAA Aaa 8,500 (New York Hospital Mortgage), Series A, 6.50% due 8/15/2029 (d)(e) 9,146
AAA Aaa 5,200 Refunding (Hospital and Nursing Home), Series C, 6.375% due 8/15/2029 (c) 5,512
AAA VMIG1++ 1,000 New York State Thruway Authority, General Revenue Bonds, VRDN, 3.55%
due 1/01/2024 (a)(b) 1,000
New York State Thruway Authority, Highway and Bridge Trust Fund:
AAA Aaa 2,000 Series A, 6.25% due 4/01/2004 (c) 2,187
AAA Aaa 8,000 UT, Series B, 6.25% due 4/01/2012 (b) 8,521
AAA Aaa 2,365 UT, Series B, 6% due 4/01/2014 (b) 2,433
AAA Aaa 8,675 New York State Urban Development Corporation, Revenue Refunding Bonds
(Correctional Facilities), 5.375% due 1/01/2012 (c) 8,577
North Hempstead, New York, GO, Refunding, Series B, UT (b):
AAA Aaa 1,745 6.40% due 4/01/2013 1,939
AAA Aaa 555 6.40% due 4/01/2017 623
AA- A1 5,000 Port Authority of New York and New Jersey, Consolidated Revenue Bonds, 72nd
Series, 7.35% due 10/01/2002 (g) 5,743
Syracuse, New York, COP, Revenue Bonds (Syracuse Hancock International Airport),
AMT (b):
AAA Aaa 3,650 6.625% due 1/01/2012 3,899
AAA Aaa 3,120 6.50% due 1/01/2017 3,306
Triborough Bridge and Tunnel Authority, New York, Special Obligation Refunding
Bonds:
AAA Aaa 6,575 6.25% due 1/01/2012 (d) 6,914
AAA Aaa 2,000 Series B, 6.875% due 1/01/2015 (c) 2,191
Total Investments (Cost--$216,146)--98.5% 227,956
Other Assets Less Liabilities--1.5% 3,516
--------
Net Assets--100.0% $231,472
========
</TABLE>
[FN]
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1996.
(b)FGIC Insured.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)FHA Insured.
(f)FSA Insured.
(g)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte &Touche LLP.
See Notes to Financial Statements.
F-5
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of October 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$216,146,064) (Note 1a) $227,955,640
Cash 80,980
Receivables:
Interest $ 3,716,128
Securities sold 100,000 3,816,128
------------
Deferred organization expenses (Note 1e) 4,575
Prepaid expenses and other assets 16,821
------------
Total assets 231,874,144
------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) 304,722
Investment adviser (Note 2) 97,774 402,496
------------ ------------
Total liabilities 402,496
------------
Net Assets: Net assets $231,471,648
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (2,800 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $ 70,000,000
Common Stock, par value $.10 per share (11,114,832 shares
issued and outstanding) $ 1,111,483
Paid-in capital in excess of par 154,792,338
Undistributed investment income--net 823,736
Accumulated realized capital losses on investments--net (Note 5) (7,065,485)
Unrealized appreciation on investments--net 11,809,576
------------
Total--Equivalent to $14.53 net asset value per share of Common
Stock (market price--$13.375) 161,471,648
------------
Total capital $231,471,648
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-6
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
October 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 13,235,408
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 1,156,506
Commission fees (Note 4) 177,492
Professional fees 76,623
Accounting services (Note 2) 58,046
Transfer agent fees 49,189
Printing and shareholder reports 37,036
Listing fees 24,635
Directors' fees and expenses 22,928
Custodian fees 12,143
Pricing fees 8,157
Amortization of organization expenses (Note 1e) 6,948
Other 15,977
------------
Total expenses 1,645,680
------------
Investment income--net 11,589,728
------------
Realized & Realized loss on investments--net (1,623,682)
Unrealized Gain Change in unrealized appreciation on investments--net 479,529
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 10,445,575
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 11,589,728 $ 11,832,196
Realized loss on investments--net (1,623,682) (3,600,834)
Change in unrealized appreciation on investments--net 479,529 20,296,119
------------ ------------
Net increase in net assets resulting from operations 10,445,575 28,527,481
------------ ------------
Dividends to Investment income--net:
Shareholders Common Stock (9,071,415) (9,302,093)
(Note 1f): Preferred Stock (2,557,268) (2,547,832)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (11,628,683) (11,849,925)
------------ ------------
Net Assets: Total increase (decrease) in net assets (1,183,108) 16,677,556
Beginning of year 232,654,755 215,977,199
------------ ------------
End of year* $231,471,647 $232,654,755
============ ============
<FN>
*Undistributed investment income--net $ 823,736 $ 862,691
============ ============
See Notes to Financial Statements.
</TABLE>
F-7
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Financial Highlights
For the
Period
The following per share data and ratios have been derived June 26,
from information provided in the financial statements. 1992++ to
For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.63 $ 13.13 $ 15.89 $ 13.43 $ 14.18
Operating -------- -------- -------- -------- --------
Performance: Investment income--net 1.04 1.07 1.07 1.11 .27
Realized and unrealized gain (loss) on
investments--net (.09) 1.50 (2.76) 2.46 (.66)
-------- -------- -------- -------- --------
Total from investment operations .95 2.57 (1.69) 3.57 (.39)
-------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.82) (.84) (.87) (.91) (.18)
Realized gain on investments--net -- -- (.01) -- --
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders (.82) (.84) (.88) (.91) (.18)
-------- -------- -------- -------- --------
Capital charge resulting from issuance
of Common Stock -- -- -- -- (.03)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred Stock
shareholders:
Investment income--net (.23) (.23) (.19) (.20) (.02)
Realized gain on investments--net -- -- (.00)+++++ -- --
Capital charge resulting from issuance of
Preferred Stock -- -- -- -- (.13)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.23) (.23) (.19) (.20) (.15)
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.53 $ 14.63 $ 13.13 $ 15.89 $ 13.43
======== ======== ======== ======== ========
Market price per share, end of period $ 13.375 $ 13.25 $ 11.00 $ 15.25 $ 13.75
======== ======== ======== ======== ========
Total Investment Based on market price per share 7.28% 28.61% (22.96%) 17.90% (7.17%)+++
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 5.55% 18.96% (11.75%) 25.77% (4.09%)+++
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .71% .74% .74% .62% .13%*
Net Assets:*** ======== ======== ======== ======== ========
Expenses .71% .74% .74% .70% .68%*
======== ======== ======== ======== ========
Investment income--net 5.00% 5.27% 5.09% 5.25% 5.05%*
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of
Data: period(in thousands) $161,472 $162,655 $145,977 $176,595 $146,633
======== ======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $ 70,000 $ 70,000 $ 70,000 $ 70,000 $ 70,000
======== ======== ======== ======== ========
Portfolio turnover 118.28% 110.76% 36.79% 3.33% 19.40%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,307 $ 3,324 $ 3,085 $ 3,523 $ 3,095
======== ======== ======== ======== ========
Dividends Investment income--net $ 913 $ 910 $ 759 $ 809 $ 92
Per Share ======== ======== ======== ======== ========
On Preferred Stock
Outstanding:++++++
</TABLE>
[FN]
++Commencement of Operations.
++++The Fund's Preferred Stock was issued on September 16, 1992.
++++++Dividends per share have been adjusted to reflect a two-for-one
stock split that occurred on December 1, 1994.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value,
may result in substantially different returns. Total investment
returns exclude the effects of sales loads.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
See Notes to Financial Statements.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield New York Insured Fund II, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified,
closed-end management investment company. The Fund determines and
makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the
New York Stock Exchange under the symbol MYT. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of
such exchanges. Options, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges or,
lacking any sales, at the last available bid price. Securities with
remaining maturities of sixty days or less are valued at amortized
cost, which approximates market value. Securities for which market
quotations are not readily available are valued at their fair value
as determined in good faith by or under the direction of the Board
of Directors of the Fund, including valuations furnished by a
pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the
general supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
F-9
<PAGE>
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
NOTES TO FINANCIAL STATEMENTS (concluded)
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $254,676,996 and
$259,702,221, respectively.
Net realized and unrealized gains (losses) as of October 31, 1996
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (665,388) $11,809,576
Financial futures contracts (958,294) --
----------- -----------
Total $(1,623,682) $11,809,576
=========== ===========
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $11,809,576, all of which related to
appreciated securities. The aggregate cost of investments at October
31, 1996 for Federal income tax purposes was $216,146,064.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of the holders of Common Stock.
Common Stock
For the year ended October 31, 1996, shares issued and outstanding
remained constant at 11,114,832. At October 31, 1996, total paid-in
capital amounted to $155,903,821.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend periods. The yield in effect at October 31, 1996 was 3.25%.
As of October 31, 1996, there were 2,800 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended
October 31, 1996, MLPF&S, an affiliate of FAM, earned $107,426 as
commissions.
5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a net capital loss carryforward of
approximately $4,728,000, of which $1,841,000 expires in 2002,
$1,775,000 expires in 2003 and $1,112,000 expires in 2004. This
amount will be available to offset like amounts of any future
taxable gains.
6. Reorganization Plan:
On June 21, 1996, the Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other
conditions, whereby the Fund would acquire substantially all of the
assets and liabilities of MuniYield New York Insured Fund III, Inc.
and MuniVest New York Insured Fund, Inc. in exchange for newly
issued shares of the Fund. MuniYield New York Insured Fund III, Inc.
and MuniVest New York Insured Fund, Inc. are registered, non-
diversified, closed-end management investment companies. All three
entities have a similar investment objective and are managed by FAM.
7. Subsequent Event:
On November 8, 1996, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.069314 per share, payable on November 27, 1996 to shareholders
of record as of November 18, 1996.
F-10
<PAGE>
Unaudited Financial Statements for MuniYield New York Insured Fund II, Inc. for
the Six-Month Period Ended April 30, 1997
F-11
<PAGE>
<TABLE>
<CAPTION>
MuniYield New York Insured Fund II, Inc. April 30, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C>
New York -- 98.6%
AAA Aaa $4,000 Albany County, New York, Airport Authority, Airport Revenue Bonds, RITR, AMT,
Series RI-97-7, 7.17% due 12/15/2023 (f)(h) $4,050
AAA Aaa 1,020 Buffalo, New York, GO, UT, Series B, 5.375% due 2/01/2014 (d) 983
Metropolitan Transportation Authority, New York, Commuter Facilities Revenue Bonds (c):
AAA Aaa 2,990 Refunding, Series A, 6.125% due 7/01/2012 3,087
AAA Aaa 11,500 Refunding, Series B, 6.25% due 7/01/2017 11,942
AAA Aaa 8,650 Refunding, Series B, 6.25% due 7/01/2022 8,952
AAA Aaa 2,070 Series A, 6.375% due 7/01/2018 2,181
AAA Aaa 1,400 Series A, 6.50% due 7/01/2024 1,494
Metropolitan Transportation Authority, New York, Dedicated Tax Fund, Series A (c):
AAA Aaa 3,500 5.25% due 4/01/2021 3,278
AAA Aaa 20,735 5.25% due 4/01/2026 19,309
Metropolitan Transportation Authority, New York, Transportation Facilities Revenue Bonds:
AAA Aaa 5,650 Series J, 6.375% due 7/01/2010 (b) 6,031
AAA Aaa 5,000 Series J, 6.50% due 7/01/2018 (b) 5,354
AAA Aaa 5,000 Series O, 6.375% due 7/01/2020 (c) 5,245
AAA Aaa 1,005 Mount Sinai, New York, Union Free School District, Refunding, GO, UT, 6.20%
due 2/15/2019 (d) 1,083
Nassau County, New York, GO, UT, Series P (b):
AAA Aaa 3,250 6.50% due 11/01/2010 3,548
AAA Aaa 3,685 6.50% due 11/01/2011 4,023
A1+ NR* 2,000 Nassau County, New York, IDA, Civic Facilities Revenue Bonds (Cold Spring Harbor
Laboratory Project), VRDN, 4.35% due 7/01/2019 (a) 2,000
AAA Aaa 2,000 Nassau County, New York, Refunding (Combined Sewer Districts), Series G, GO, UT,
5.40% due 1/15/2012 (c) 1,987
AAA Aaa 2,500 New York City, New York, Educational Construction Fund Revenue Bonds, Junior
Sub-Lien, 5.50% due 4/01/2026 (d) 2,402
</TABLE>
To simplify the listings of MuniYield New York Insured Fund II, Inc.'s portfolio
holdings in the Schedule of Investments, we have abbreviated the names of many
of the securities according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificate of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
New York City, New York, GO, UT:
BBB+ Baa1 5,000 Series B (Fiscal 92), 7.50% due 2/01/2006 5,541
AAA Aaa 2,000 Series B (Fiscal 92), 7% due 2/01/2017 (d) 2,173
AAA Aaa 2,000 Series B (Fiscal 92), 7% due 2/01/2018 (d) 2,173
BBB+ Baa1 2,500 Series F, 5.75% due 2/01/2019 2,372
New York City, New York, IDA, Civic Facility Revenue Bonds:
A1+ NR* 1,600 (National Audubon Society), VRDN, 3.75% due 12/01/2014 (a) 1,600
AAA Aaa 12,500 (USTA National Tennis Center Project), 6.375% due 11/15/2014 (f) 13,303
A A 5,000 New York City, New York, IDA, Special Facility Revenue Bonds, RITR, AMT,
Series RI-5, 6.945% due 1/01/2024 (h) 4,975
New York City, New York, Municipal Water Finance Authority, Water and Sewer System
Revenue Bonds:
AAA Aaa 6,000 Refunding (Fiscal 1997), Series A, 5.375% due 6/15/2026 (f) 5,675
A- A2 5,000 RIB, 6.825% due 6/15/2025 (h) 5,006
AAA Aaa 1,760 Series A, 7% due 6/15/2001 (b)(g) 1,925
AAA Aaa 1,350 Series A - 1994, 7% due 6/15/2015 (b) 1,455
A1+ VMIG1+ 4,100 VRDN, Series A, 4.25% due 6/15/2025 (a)(b) 4,100
A1+ VMIG1+ 4,600 VRDN, Series C, 4.45% due 6/15/2023 (a)(b) 4,600
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 11,165 (City University), Third Generation Reserves, Series 2, 6.875% due 7/01/2014 (c) 12,285
AAA Aaa 3,000 (City University System), Third Resolution, Series 1, 6.25% due 7/01/2016 (d) 3,138
AAA Aaa 3,640 (City University System), Third Resolution, Series 1, 6.25% due 7/01/2020 (d) 3,786
AAA Aaa 6,290 (City University System), Third Resolution, Series 1, 6.30% due 7/01/2024 (d) 6,565
AAA Aaa 1,000 (Consolidated City University System), Second Generation, Series A, 5.75% due 7/01/2018 (f) 1,017
A1+ VMIG1+ 9,400 (Cornell University), VRDN, Series B, 4.25% due 7/01/2025 (a) 9,400
BBB Baa1 9,000 (Department of Health), 5.50% due 7/01/2025 8,300
AAA Aaa 12,500 (Mental Health Services Facilities Improvement), Series B, 5.125% due 8/15/2021 (c) 11,483
AAA Aaa 6,000 (Mount Sinai School of Medicine), Series A, 5.15% due 7/01/2024 (c) 5,515
AAA Aaa 1,000 Refunding (Colgate University), 6% due 7/01/2016 (c) 1,045
AAA Aaa 3,765 Refunding (Mental Health Services Facilities Improvement), Series E, 5.25%
due 2/15/2018 (d) 3,547
AAA Aaa 1,750 Refunding (Mount Sinai School of Medicine), 6.75% due 7/01/2009 (c) 1,899
AAA Aaa 4,500 Refunding (State University Educational Facilities), Series A, 5.875% due 5/15/2011 (b) 4,677
BBB+ Baa1 2,000 Refunding (State University Educational Facilities), Series B, 7% due 5/15/2016 2,128
AAA Aaa 1,050 (Saint John's University), 6.875% due 7/01/2011 (d) 1,136
AAA Aaa 2,250 (Saint Joseph's Health Hospital), 5.25% due 7/01/2018 (c) 2,118
BBB+ Baa1 6,000 (State University Educational Facilities), 5.50% due 5/15/2026 5,551
New York State Energy Research and Development Authority, Facilities Revenue Bonds
(Consolidated Edison Company Inc.), AMT, Series A:
AAA Aaa 6,950 6.75% due 1/15/2027 (c) 7,332
AAA Aaa 3,785 6.75% due 1/15/2027 (d) 3,993
New York State Energy Research and Development Authority, Gas Facilities Revenue
Bonds (Brooklyn Union Gas Company), AMT (c):
AAA Aaa 12,000 Series A, 6.75% due 2/01/2024 12,948
AAA Aaa 5,000 Series B, 6.75% due 2/01/2024 5,366
AAA Aaa 3,600 New York State Energy Research and Development Authority, PCR, Refunding (Rochester
Gas and Electric Project), AMT, Series B, 6.50% due 5/15/2032 (c) 3,742
</TABLE>
F-13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
A- Aa 5,000 New York State Environmental Facilities Corporation, PCR, RITR, Series RI-1,
6.745% due 6/15/2014 (h) 5,081
A1+ NR* 200 New York State Environmental Facilities Corporation, Resource Recovery Revenue
Bonds (OFS Equity Huntington Project), VRDN, AMT, 4.50% due 11/01/2014 (a) 200
AAA Aaa 11,265 New York State Environmental Facilities Corporation, Special Obligation Revenue
Refunding Bonds (Riverbank State Park), 5.125% due 4/01/2022 (d) 10,352
AAA Aaa 1,800 New York State, HFA, Housing Project Mortgage Revenue Refunding Bonds, Series A,
6.10% due 11/01/2015 (f) 1,830
A1+ VMIG1+ 2,100 New York State Local Government Assistance Corporation, VRDN, Series G,
4.50% due 4/01/2025 (a) 2,100
New York State Medical Care Facilities Finance Agency Revenue Bonds:
AAA Aaa 2,790 (Health Center Project - Secured Mortgage), Series A, 6.375% due 11/15/2019 (d) 2,935
AAA Aaa 3,000 (Mental Health), Series E, 6.50% due 8/15/2015 (f) 3,184
AAA Aaa 4,330 (Mental Health), Series F, 6.50% due 8/15/2012 (f) 4,563
AAA Aaa 12,850 (New York Hospital Mortgage), Series A, 6.80% due 8/15/2024 (d)(e) 13,987
AAA Aaa 11,750 (New York Hospital Mortgage), Series A, 6.50% due 8/15/2029 (d)(e) 12,456
AAA Aaa 5,200 Refunding (Hospital and Nursing Home), Series C, 6.375% due 8/15/2029 (c) 5,407
New York State Mortgage Agency, Homeowner Mortgage:
NR* Aa2 4,595 AMT, Series 50, 6.625% due 4/01/2025 4,739
NR* Aa2 1,000 AMT, Series 58, 6.40% due 4/01/2027 1,017
AAA Aaa 1,000 Series 43, 6.45% due 10/01/2017 (c) 1,060
New York State Thruway Authority, General Revenue Bonds:
AAA Aaa 6,700 Series B, 5% due 1/01/2020 (c) 5,974
AAA VMIG1+ 1,000 VRDN, 5% due 1/01/2024 (a)(b) 1,000
AAA Aaa 11,000 New York State Thruway Authority, Highway and Bridge Trust Fund, UT, Series B,
6.25% due 4/01/2012 (b) 11,599
New York State Urban Development Corporation, Revenue Refunding Bonds:
AAA Aaa 2,295 (Correctional Capital Facilities), Series A, 5.25% due 1/01/2014 (f) 2,209
AAA Aaa 8,675 (Correctional Facilities), 5.375% due 1/01/2012 (c) 8,515
AAA Aaa 6,000 (Correctional Facilities), Series A, 5% due 1/01/2017 (d) 5,447
AAA Aaa 1,000 Niagara Falls, New York, Water Treatment Plant, UT, AMT, 7.25% due 11/01/2010 (c) 1,157
North Hempstead, New York, GO, UT, Refunding, Series B (b):
AAA Aaa 1,745 6.40% due 4/01/2013 1,916
AAA Aaa 555 6.40% due 4/01/2017 607
Oswego County, New York, Public Improvement Bonds, UT:
NR* A 1,100 6.70% due 6/15/2010 1,231
NR* A 1,100 6.70% due 6/15/2011 1,232
NR* A 1,100 6.70% due 6/15/2012 1,232
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Port Authority of New York and New Jersey, Consolidated Revenue Bonds:
AAA Aaa 2,000 71st Series, 6.50% due 1/15/2026 (b) 2,109
AA- A1 8,000 72nd Series, 7.35% due 10/01/2002 (g) 9,013
AAA Aaa 3,000 72nd Series, 7.40% due 10/01/2002 (d)(g) 3,391
AA- A1 5,000 109th Series (Fourth Installment), 5.375% due 1/15/2032 4,698
AAA Aaa 4,000 Port Authority of New York and New Jersey, RITR, Series FR3-108th,
AMT, 6.885% due 1/15/2017 (f)(h) 4,080
A1+ VMIG1+ 1,200 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds
(Versatile Structure Obligation), VRDN, AMT, Series 1, 4.25% due 8/01/2028 (a) 1,200
Syracuse, New York, COP (Syracuse Hancock International Airport), AMT (b):
AAA Aaa 3,650 6.625% due 1/01/2012 3,872
AAA Aaa 3,120 6.50% due 1/01/2017 3,255
A1+ VMIG1+ 2,200 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Multi-Modal Syracuse University
Project), VRDN, 4.25% due 3/01/2023 (a) 2,200
Triborough Bridge and Tunnel Authority, New York, General Purpose Revenue Bonds:
AAA Aaa 4,000 Refunding, Series Y, 6.125% due 1/01/2021 (i) 4,241
A+ Aa 6,150 Series B, 5.20% due 1/01/2027 5,654
Triborough Bridge and Tunnel Authority, New York, Special Obligation Refunding Bonds:
AAA Aaa 6,575 6.25% due 1/01/2012 (d) 6,868
AAA Aaa 6,975 Series A, 6.625% due 1/01/2017 (c) 7,452
AAA Aaa 1,000 Series B, 6.875% due 1/01/2015 (b) 1,075
AAA Aaa 2,000 Series B, 6.875% due 1/01/2015 (c) 2,151
AAA Aaa 5,150 Series B, 6.875% due 1/01/2015 (d) 5,538
AAA Aaa 5,000 Upper Mohawk Valley, Regional Water Finance Authority, New York, Water Systems
Revenue Refunding Bonds, Series A, 5.125% due 10/01/2026 (f) 4,565
Total Investments (Cost -- $425,278) -- 98.6% 441,210
Other Assets Less Liabilities -- 1.4% 6,407
--------
Net Assets -- 100.0% $447,617
========
</TABLE>
(a) The interest rate is subject to change periodically based
upon prevailing market rates. The interest rate shown is
the rate in effect at April 30, 1997.
(b) FGIC Insured.
(c) MBIA Insured.
(d) AMBAC Insured.
(e) FHA Insured.
(f) FSA Insured.
(g) Prerefunded.
(h) The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is
the rate in effect at April 30, 1997.
(i) CAPMAC Insured.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements
F-15
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of April 30, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $425,278,377) (Note 1a) $441,209,989
Cash 46,554
Interest receivable 7,210,796
Deferred organization expenses (Note 1e) 4,575
Prepaid expenses and other assets 14,968
-------------
Total assets 448,486,882
-------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) $459,452
Investment adviser (Note 2) 161,096 620,548
-------------
Accrued expenses and other liabilities 249,388
-------------
Total liabilities 869,936
-------------
Net Assets: Net assets $447,616,946
=============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (5,760 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $144,000,000
Common Stock, par value $.10 per share (21,195,037 shares issued
and outstanding) $2,119,504
Paid-in capital in excess of par 305,895,835
Undistributed investment income -- net 1,600,962
Accumulated realized capital losses on investments -- net (Note 5) (21,930,967)
Unrealized appreciation on investments -- net 15,931,612
-------------
Total -- Equivalent to $14.32 net asset value per share of
Common Stock (market price -- $13.50) 303,616,946
-------------
Total capital $447,616,946
=============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
For the Six
Months Ended
April 30, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $9,855,986
Note (1d):
Expenses: Investment advisory fees (Note 2) $856,191
Commission fees (Note 4) 141,803
Transfer agent fees 44,115
Professional fees 34,968
Accounting services (Note 2) 24,822
Printing and shareholder reports 20,871
Listing fees 13,342
Custodian fees 11,099
Directors' fees and expenses 9,799
Pricing fees 7,875
Amortization of organization expenses (Note 1e) 1,962
Other 14,549
------------
Total expenses 1,181,396
------------
Investment income -- net 8,674,590
------------
Realized & Realized gain on investments -- net 1,326,217
Unrealized Change in unrealized appreciation on investments -- net (4,382,194)
Gain (Loss) on ------------
Investments - Net Net Increase in Net Assets Resulting from Operations $5,618,613
(Notes 1b, 1d & 3) ============
See Notes to Financial Statements.
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets For the Six For the
Months Ended Year Ended
April 30, October 31,
1997 1996
------------ ------------
Increase (Decrease) in Net Assets:
<S> <C> <C> <C>
Operations: Investment income -- net $8,674,590 $11,589,728
Realized gain (loss) on investments -- net 1,326,217 (1,623,682)
Change in unrealized appreciation on investments -- net (4,382,194) 479,529
------------ ------------
Net increase in net assets resulting from operations 5,618,613 10,445,575
------------ ------------
Dividends to Investment income -- net:
Shareholders Common Stock (6,053,210) (9,071,415)
(Note 1f): Preferred Stock (1,844,154) (2,557,268)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (7,897,364) (11,628,683)
------------ ------------
Capital Stock Net proceeds from issuance of Common Stock resulting from reorganization 144,424,050 --
Transactions Proceeds from issuance of Preferred Stock resulting from reorganization 74,000,000 --
(Note 4): ------------ ------------
Net increase in net assets derived from capital stock transactions 218,424,050 --
------------ ------------
Net Assets: Total increase (decrease) in net assets 216,145,299 (1,183,108)
Beginning of period 231,471,647 232,654,755
------------ ------------
End of period* $447,616,946 $231,471,647
============ ============
* Undistributed investment income -- net $1,600,962 $823,736
============ ============
See Notes to Financial Statements.
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For the
Six
Months
The following per share data and ratios have been derived Ended For the Year Ended
from information provided in the financial statements. April 30, October 31,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $14.53 $14.63 $13.13 $15.89 $13.43
Performance: -------- -------- -------- -------- --------
Investment income -- net .53 1.04 1.07 1.07 1.11
Realized and unrealized
gain (loss) on investments -- net (.20) (.09) 1.50 (2.76) 2.46
-------- -------- -------- -------- --------
Total from investment operations .33 .95 2.57 (1.69) 3.57
-------- -------- -------- -------- --------
Less dividends and distributions
to Common Stock shareholders:
Investment income -- net (.41) (.82) (.84) (.87) (.91)
Realized gain on
investments -- net -- -- -- (.01) --
-------- -------- -------- -------- --------
Total dividends and distributions
to Common Stock shareholders (.41) (.82) (.84) (.88) (.91)
-------- -------- -------- -------- --------
Capital charge resulting from
issuance of Common Stock (.02) -- -- -- --
-------- -------- -------- -------- --------
Effect of Preferred Stock
activity:+
Dividends and distributions
to Preferred
Stock shareholders:
Investment income -- net (.11) (.23) (.23) (.19) (.20)
Realized gain on -------- -------- -------- -------- --------
investments -- net -- -- -- --+++++ --
-------- -------- -------- -------- --------
Total effect of Preferred
Stock activity (.11) (.23) (.23) (.19) (.20)
-------- -------- -------- -------- --------
Net asset value, end of
period $14.32 $14.53 $14.63 $13.13 $15.89
======== ======== ======== ======== ========
Market price per share,
end of period $13.50 $13.375 $13.25 $11.00 $15.25
======== ======== ======== ======== ========
Total Investment Based on market
Return:** price per share 4.08%++++ 7.28% 28.61% (22.96%) 17.90%
======== ======== ======== ======== ========
Based on net asset
value per share 1.62%++++ 5.55% 18.96% (11.75%) (25.77%)
======== ======== ======== ======== ========
Ratios to Average Expenses,
Net Assets:*** net of reimbursement .69%* .71% .74% .74% .62%
======== ======== ======== ======== ========
Expenses .69%* .71% .74% .74% .70%
======== ======== ======== ======== ========
Investment income -- net 5.10%* 5.00% 5.27% 5.09% 5.25%
======== ======== ======== ======== ========
Supplemental Net assets,
Data: net of Preferred Stock, end of period
(in thousands) $303,617 $161,472 $162,655 $145,977 $176,595
======== ======== ======== ======== ========
Preferred Stock outstanding,
end of period
(in thousands) $144,000 $70,000 $70,000 $70,000 $70,000
======== ======== ======== ======== ========
Portfolio turnover 58.18% 118.28% 110.76% 36.79% 3.33%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $3,108 $3,307 $3,324 $3,085 $3,523
======== ======== ======== ======== ========
Dividends Per Share Series A --
On Preferred Stock Investment income -- net $417 $913 $910 $759 $809
Outstanding:++ ======== ======== ======== ======== ========
Series B --
Investment income -- net $214 -- -- -- --
======== ======== ======== ======== ========
Series C --
Investment income -- net $257 -- -- -- --
======== ======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns based on market value, which
can be significantly greater or lesser than the net asset
value, may result in substantially different returns.
Total investment returns exclude the effects of sales loads
*** Do not reflect the effect of dividends to Preferred
Stock shareholders.
+ The Fund's Preferred Stock was issued on
September 16, 1992 (Series A) and January 27, 1997
(Series B and Series C).
++ Dividends per share have been adjusted to reflect a two-
for-one stock split that occurred on December 1, 1994.
++++ Aggregate total investment return.
+++++ Amount is less than $.01 per share.
See Notes to Financial Statements.
F-19
<PAGE>
MuniYield New York Insured Fund II, Inc. April 30, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield New York Insured Fund II, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, closed-
end management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of results for the interim period
presented. All such adjustments are of a normal recurring nature. The
Fund determines and makes available for publication the net asset value
of its Common Stock on a weekly basis. The Fund's Common Stock is listed
on the New York Stock Exchange under the symbol MYT. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or
yield equivalent as obtained by the Fund's pricing service from dealers
that make markets in such securities. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
closing prices as of the close of such exchanges. Options, which are
traded on exchanges, are valued at their last sale price as of the close
of such exchanges or, lacking any sales, at the last available bid
price. Securities with remaining maturities of sixty days or less are
valued at amortized cost, which approximates market value. Securities
for which market quotations are not readily available are valued at
their fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund, including valuations furnished by
a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses
may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
[bullet] Options -- The Fund is authorized to write covered call options
and purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset and
an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is
required.
(d) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Interest income is recognized on the accrual basis. Discounts
and market premiums are amortized into interest income. Realized gains
and losses on security transactions are determined on the identified
cost basis.
F-20
<PAGE>
(e) Deferred organization expenses -- Deferred organization expenses are
amortized on a straight-line basis over a five-year period.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded
on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of the
Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities and
securities acquired through the reorganization, for the six months ended
April 30, 1997 were $194,810,093 and $203,341,441, respectively.
Net realized and unrealized gains as of April 30,1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $1,326,217 $15,931,612
---------- -----------
Total $1,326,217 $15,931,612
========== ===========
As of April 30, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $15,931,612, of which $17,146,932 related to
appreciated securities and $1,215,320 related to depreciated securities.
The aggregate cost of investments at April 30, 1997 for Federal income
tax purposes was $425,278,377.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of the
holders of Common Stock.
Common Stock
For the six months ended April 30, 1997, shares issued and outstanding
increased by 10,080,205, to 21,195,037 pursuant to a plan of
reorganization. At April 30, 1997, total paid-in capital amounted to
$308,015,339.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of
the Fund that entitle their holders to receive cash dividends at an
annual rate that may vary for the successive dividend periods. The
yields in effect at April 30, 1997 were as follows: Series A, 4.05%;
Series B, 4.10%; and Series C, 3.75%.
In addition, AMPS shares increased by 2,960 pursuant to a plan of
reorganization. As a result, as of April 30, 1997, there were 5,760 AMPS
shares authorized, issued and outstanding, with a liquidation preference
of $25,000 per share.
The Fund pays commissions to certain broker-dealers at the end of each
auction at an annual rate ranging from 0.25% to 0.375%, calculated on
the proceeds of each auction. For the six months ended April 30, 1997,
Merrill Lynch, Pierce, Fenner & Smith Inc., an affiliate of FAM, earned
$74,113 as commissions.
5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a net capital loss carryforward of
approximately $4,728,000, of which $1,841,000 expires in 2002,
$1,775,000 expires in 2003 and $1,112,000 expires in 2004. This amount
will be available to offset like amounts of any future taxable gains.
F-21
<PAGE>
6. Acquisition of MuniYield New York Insured Fund III, Inc. and MuniVest
New York Insured Fund, Inc.:
On January 27, 1997, MuniYield New York Insured Fund II, Inc. acquired
all of the net assets of MuniYield New York Insured Fund III, Inc. and
MuniVest New York Insured Fund, Inc. pursuant to a plan of
reorganization. The acquisition was accomplished by a tax-free exchange
of 3,688,900 Common Stock shares and 1,000 AMPS shares of MuniYield New
York Insured Fund III, Inc., and 7,204,432 Common Stock shares and 1,960
AMPS shares of MuniVest New York Insured Fund, Inc. for 10,080,205
Common Stock shares and 2,960 AMPS shares of MuniYield New York Insured
Fund II, Inc. MuniYield New York Insured Fund III, Inc.'s net assets
on that date of $77,037,487, including $2,948,846 of unrealized
appreciation and $2,421,657 of accumulated net realized capital
losses, and MuniVest New York Insured Fund, Inc.'s net assets on that
date of $141,743,167, including $5,555,384 of unrealized appreciation
and $13,770,042 of accumulated net realized capital losses, were
combined with those of MuniYield New York Insured Fund II, Inc.
The aggregate net assets of MuniYield New York Insured Fund II, Inc.
immediately after the acquisition amounted to $448,419,691.
7. Subsequent Event:
On May 9, 1997, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of $.075364
per share, payable on May 29, 1997 to shareholders of record as of May
19, 1997.
F-22
<PAGE>
Audited Financial Statements for Taurus MuniNewYork Holdings, Inc. for the
Fiscal Year Ended October 31, 1996
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS, TAURUS MUNINEWYORK HOLDINGS, INC.
We have audited the accompanying statement of assets, liabilities and
capital of Taurus MuniNew York Holdings, Inc., including the schedule of
investments, as of October 31, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended and financial highlights for each of
the years indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of October 31, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Taurus MuniNew York Holdings, Inc., at October 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and financial highlights for each of
the indicated years, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Princeton, New Jersey
November 25, 1996
F-24
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (In Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York--98.6%
<S> <S> <C> <S> <C>
AAA Aaa $1,600 Buffalo, New York, Sewer Authority Revenue Bonds, Series F, 6% due
7/01/2013 (c) $ 1,714
AAA Aaa 5,000 Metropolitan Transportation Authority, New York, Dedicated Tax Fund,
Series A, 5.25% due 4/01/2026 (e) 4,728
BBB Baa1 3,000 Metropolitan Transportation Authority, New York, Transit Facilities Service
Contract, Refunding, Series 5, 7% due 7/01/2012 3,237
A1+ NR* 300 Nassau County, New York, IDA, Civic Facility Revenue Bonds (Cold Spring
Harbor Laboratory Project), VRDN, 3.50% due 7/01/2019(a) 300
BBB+ Baa1 2,000 New York City, New York, GO, Refunding, Series A, 6.50% due 8/01/2011 2,066
A1+ NR* 1,500 New York City, New York, IDA, Civic Facility Revenue Bonds (National
Audobon Society), VRDN, 3.40% due 12/01/2014 (a) 1,500
BB+ Baa2 2,000 New York City, New York, IDA, Special Facility Revenue Bonds (1990 AMR/
American Airlines Inc. Project), AMT, 7.75% due 7/01/2019 2,107
New York City, New York, Municipal Water Finance Authority, Water and Sewer
System Revenue Bonds:
A- A 3,375 RIB, 7.716% due 6/15/2025 (f) 3,439
AAA Aaa 2,000 Series 1994-A, 7% due 6/15/2015 (c) 2,204
A- A 1,290 Series A, 6.75% due 6/15/2017 1,390
A1+ VMIG1++ 1,100 VRDN, Series C, 3.50% due 6/15/2023 (a)(c) 1,100
A1+ VMIG1++ 80 VRDN, Series G, 3.60% due 6/15/2024 (a)(c) 80
A1+ VMIG1++ 900 New York City, New York, Trust for Cultural Resources Revenue Bonds
(Soloman R. Guggenheim), VRDN, Series B, 3.40% due 12/01/2015 (a) 900
AAA Aaa 3,500 New York State Dormitory Authority, Lease Revenue Refunding Bonds
(State University Dormitory Facilities), Series A, 5.30% due 7/01/2024 (b) 3,343
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 6,000 (City University System), Third Generation, Series 1, 5.375% due
7/01/2025 (b) 5,791
A1+ VMIG1++ 1,800 (Cornell University), VRDN, Series B, 3.40% due 7/01/2025 (a) 1,800
BBB Baa1 8,000 (Department of Health), 5.50% due 7/01/2025 7,424
BBB+ Baa1 2,370 (Mental Health Services Facilities Improvement), Series B, 5.375% due
2/15/2026 2,161
AAA Aaa 1,000 Refunding (Department of Education), 5.75% due 7/01/2021 (h) 997
AAA Aa 5,000 Refunding (Long Island Medical Center), Series A, 7.75% due 8/15/2027 (d) 5,284
BBB- Baa1 1,000 (State University Athletic Facilities), 7.25% due 7/01/2021 1,089
BBB+ Baa1 2,250 (State University Educational Facilities), Series C, 5.40% due 5/15/2023 2,044
AAA Aaa 2,000 New York State Energy Research and Development Authority, Facilities
Revenue Bonds (Con Edison Company Inc.), AMT, Series A, 6.75% due
1/15/2027 (e) 2,137
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Taurus MuniNew York Holdings, Inc.'s
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
F-25
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (In Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York (concluded)
<S> <S> <C> <S> <C>
A1+ VMIG1++ $1,400 New York State Energy Research and Development Authority, PCR
(New York Electric and Gas), VRDN, Series D, 3.50% due 10/01/2029 (a) $ 1,400
AAA Aaa 1,065 New York State, HFA, M/F Housing Revenue Bonds, AMT, Series A, 7.75%
due 11/01/2020 (b) 1,143
New York State Local Government Assistance Corporation:
A A 2,500 Refunding, Series B, 5.50% due 4/01/2021 2,387
A A 1,000 Series A, 6% due 4/01/2024 1,011
A A 2,000 Series D, 5% due 4/01/2023 1,782
BBB Baa 2,485 New York State Medical Care Facilities Finance Agency Revenue Bonds
(Brookdale Hospital Medical Center), Series A, 6.85% due 2/15/2017 2,597
New York State Mortgage Agency, Homeownership Revenue Bonds:
NR* Aa 3,270 AMT, Series 44, 7.50% due 4/01/2026 3,539
NR* Aa 2,500 AMT, Series 50, 6.625% due 4/01/2025 2,627
NR* Aa 5,750 AMT, Series HH-3, 7.95% due 4/01/2022 6,106
NR* Aa 1,100 Series EE-2, 7.50% due 4/01/2016 1,160
NR* Aa 4,550 New York State Mortgage Agency Revenue Bonds, Series B-41, 6.30% due
10/01/2017 4,686
BBB Baa1 3,170 New York State Thruway Authority, Service Contract Revenue Bonds
(Local Highway and Bridge), 5.25% due 4/01/2013 2,933
New York State Urban Development Corporation Revenue Bonds:
BBB Baa1 5,000 (Correctional Capital Facilities), Series 6, 5.375% due 1/01/2025 4,565
BBB Baa1 3,265 Refunding (University Facilities Grants), 5.50% due 1/01/2015 3,141
Port Authority of New York and New Jersey, Consolidated Bonds:
AA- A1 3,000 71st Series, 6.50% due 1/15/2026 3,156
AA- A1 3,000 72nd Series, 7.35% due 10/01/2002 (g) 3,446
BBB Baa1 4,000 Triborough Bridge and Tunnel Authority, New York (Convention Center
Project), Series E, 7.25% due 1/01/2010 4,552
AAA Aaa 2,000 Triborough Bridge and Tunnel Authority, New York, General Purpose
Revenue Refunding Bonds, Series Y, 6.125% due 1/01/2021 (h) 2,155
Puerto Rico--0.2%
A1+ VMIG1++ 200 Puerto Rico Commonwealth, Government Development Bank, Refunding,
VRDN, 3.30% due 12/01/2015 (a) 200
Total Investments (Cost--$104,535)--98.8% 109,421
Other Assets Less Liabilities--1.2% 1,348
--------
Net Assets--100.0% $110,769
========
</TABLE>
[FN]
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1996.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)FHA Insured.
(e)MBIA Insured.
(f)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at October 31, 1996.
(g)Prerefunded.
(h)CAPMAC Insured.
*Not Rated.
++Highest short-term rating issued by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
F-26
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of October 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$104,535,167) (Note 1a) $109,421,134
Cash 23,571
Interest receivable 1,563,833
Prepaid expenses and other assets 6,536
------------
Total assets 111,015,074
------------
Liabilities: Payables:
Dividends to shareholders (Note 1e) $ 111,134
Investment adviser (Note 2) 46,807 157,941
------------
Accrued expenses and other liabilities 88,363
------------
Total liabilities 246,304
------------
Net Assets: Net assets $110,768,770
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (1,200 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) $ 30,000,000
Common Stock, par value $.10 per share (6,714,921 shares
issued and outstanding) $ 671,492
Paid-in capital in excess of par 73,695,014
Undistributed investment income--net 809,447
Undistributed realized capital gains on investments--net 706,850
Unrealized appreciation on investments--net 4,885,967
------------
Total--Equivalent to $12.03 net asset value per share of
Common Stock (market price--$10.875) 80,768,770
------------
Total capital $110,768,770
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-27
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the
Year Ended
October 31, 1996
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 6,588,310
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 549,888
Commission fees (Note 4) 81,648
Professional fees 79,820
Transfer agent fees 48,458
Printing and shareholder reports 43,001
Accounting services (Note 2) 34,948
Directors' fees and expenses 19,880
Listing fees 16,545
Custodian fees 12,741
Pricing fees 5,028
Other 12,752
------------
Total expenses 904,709
------------
Investment income--net 5,683,601
------------
Realized & Realized gain on investments--net 1,475,289
Unrealized Gain Change in unrealized appreciation on investments--net (1,066,500)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 6,092,390
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 5,683,601 $ 5,934,650
Realized gain (loss) on investments--net 1,475,289 (64,466)
Change in unrealized appreciation/depreciation on investments
--net (1,066,500) 6,364,528
------------ ------------
Net increase in net assets resulting from operations 6,092,390 12,234,712
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (4,660,309) (4,765,156)
Shareholders Preferred Stock (980,749) (1,138,986)
(Note 1e): Realized gain on investments--net:
Common Stock (566,101) (343,596)
Preferred Stock (134,351) (43,734)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (6,341,510) (6,291,472)
------------ ------------
Net Assets: Total increase (decrease) in net assets (249,120) 5,943,240
Beginning of year 111,017,890 105,074,650
------------ ------------
End of year* $110,768,770 $111,017,890
============ ============
<FN>
*Undistributed investment income--net $ 809,447 $ 766,904
============ ============
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.07 $ 11.18 $ 13.23 $ 11.95 $ 11.64
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .85 .88 .91 .99 1.05
Realized and unrealized gain (loss) on
investments--net .05 .95 (1.76) 1.28 .32
-------- -------- -------- -------- --------
Total from investment operations .90 1.83 (.85) 2.27 1.37
-------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.69) (.71) (.78) (.88) (.90)
Realized gain on investments--net (.08) (.05) (.28) -- --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.77) (.76) (1.06) (.88) (.90)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Dividends and distributions to
Preferred Stock shareholders:
Investment income--net (.15) (.17) (.10) (.11) (.16)
Realized gain on investments--net (.02) (.01) (.04) -- --
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.17) (.18) (.14) (.11) (.16)
-------- -------- -------- -------- --------
Net asset value, end of year $ 12.03 $ 12.07 $ 11.18 $ 13.23 $ 11.95
======== ======== ======== ======== ========
Market price per share, end of year $ 10.875 $ 10.75 $ 9.875 $ 14.25 $ 12.75
======== ======== ======== ======== ========
Total Investment Based on market price per share 8.54% 16.98% (24.38%) 19.63% 14.36%
Return:* ======== ======== ======== ======== ========
Based on net asset value per share 6.94% 16.01% (7.78%) 18.50% 10.50%
======== ======== ======== ======== ========
Ratios to Average Expenses .82% .83% .80% .86% .82%
Net Assets:** ======== ======== ======== ======== ========
Investment income--net 5.15% 5.54% 5.40% 5.82% 6.37%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end
Data: of year (in thousands) $ 80,769 $ 81,018 $ 75,075 $ 87,553 $ 77,775
======== ======== ======== ======== ========
Preferred Stock outstanding, end of year
(in thousands) $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
======== ======== ======== ======== ========
Portfolio turnover 193.24% 165.22% 65.74% 34.31% 20.18%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,692 $ 3,701 $ 3,503 $ 3,916 $ 3,593
======== ======== ======== ======== ========
Dividends Per Share Investment income--net $ 817 $ 949 $ 573 $ 626 $ 839
On Preferred Stock ======== ======== ======== ======== ========
Outstanding:++
</TABLE>
[FN]
*Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
**Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Dividends per share have been adjusted to reflect a two-for-one
stock split that occurred on December 1, 1994.
See Notes to Financial Statements.
F-29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Taurus MuniNew York Holdings, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund determines and makes
available for publication the net asset value of its Common Stock on
a weekly basis. The Fund's Common Stock is listed on the New York
Stock Exchange under the symbol MNY. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter market and are valued at the most recent bid
price or yield equivalent as obtained by the Fund's pricing service
from dealers that make markets in such securities. Financial futures
contracts and options thereon, which are traded on exchanges, are
valued at their closing prices as of the close of such exchanges.
Options, which are traded on exchanges, are valued at their last
sale price as of the close of such exchanges or, lacking any sales,
at the last available bid price. Short-term securities with a
remaining maturity of sixty days or less are valued at amortized
cost, which approximates market value. Securities for which market
quotations are not readily available are valued at their fair value
as determined in good faith by or under the direction of the Board
of Directors of the Fund including valuations furnished by a pricing
service retained by the Fund which may utilize a matrix system for
valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margins as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Options--The Fund is authorized to write covered call options and
purchase call and put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired, or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into
F-30
<PAGE>
interest income. Realized gains and losses on security transactions are
determined on the identified cost basis.
NOTES TO FINANCIAL STATEMENTS (concluded)
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $195,483,440 and
$201,637,764, respectively.
Net realized and unrealized gains (losses) as of October 31, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $1,440,618 $4,885,967
Short-term investments (1,365) --
Financial futures contracts 36,036 --
---------- ----------
Total $1,475,289 $4,885,967
========== ==========
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $4,885,967, of which $4,946,306
related to appreciated securities and $60,339 related to depreciated
securities. The aggregate cost of investments at October 31, 1996
for Federal income tax purposes was $104,535,167.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of the holders of Common Stock.
Common Stock
For the year ended October 31, 1996, shares issued and outstanding
remained constant at 6,714,921. At October 31, 1996, total paid-in
capital amounted to $74,366,506.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend periods. The yield in effect at October 31, 1996 was 3.30%.
As of October 31, 1996, there were 1,200 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended
October 31, 1996, MLPF&S, an affiliate of FAM, earned $66,446 as
commissions.
5. Subsequent Event:
On November 8, 1996, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.058549 per share, payable on November 27, 1996 to shareholders
of record as of November 18, 1996.
F-31
<PAGE>
Unaudited Financial Statements for Taurus MuniNewYork Holdings, Inc. for the
Six-Month Period Ended April 30, 1997
F-32
<PAGE>
<TABLE>
<CAPTION>
Taurus MuniNew York Holdings, Inc. April 30, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
New York - 97.5%
<S> <C> <C> <C> <C>
A A2 $3,000 Allegany County, New York, IDA, Solid Waste Disposal Facility Revenue Bonds
(Atlantic Richfield Company), AMT, 6.625% due 9/01/2016 $3,170
AAA Aaa 1,600 Buffalo, New York, Sewer Authority Revenue Bonds, Series F, 6% due 7/01/2013 (c) 1,695
AAA Aaa 2,000 Metropolitan Transportation Authority, New York, Dedicated Tax Fund, Series A, 5.25%
due 4/01/2026 (e) 1,862
BBB Baa1 3,000 Metropolitan Transportation Authority, New York, Transit Facilities Service Contract,
Refunding, Series 5, 7% due 7/01/2012 3,222
AAA Aaa 1,850 Municipal Assistance Corporation for City of Troy, New York, Series A, 5% due 1/15/2016 (e) 1,702
AAA Aaa 2,500 New York City, New York, Educational Construction Fund Revenue Bonds, Junior Sub-Lien,
5.50% due 4/01/2026 (b) 2,402
A1+ NR* 300 New York City, New York, IDA, Civic Facility Revenue Bonds (National Audobon Society),
VRDN, 4.25% due 12/01/2014 (a) 300
New York City, New York, IDA, Special Facility Revenue Bonds, AMT:
BB+ Baa2 2,000 (1990 AMR/American Airlines Inc. Project), 7.75% due 7/01/2019 2,107
A A 2,220 RITR, Series 5, 7.645% due 1/01/2024 (f) 2,209
New York City, New York, Municipal Water Finance Authority, Water and Sewer
System Revenue Bonds:
A- A2 3,375 RITR, 7.475% due 6/15/2025 (f) 3,379
AAA Aaa 2,000 Series 1994-A, 7% due 6/15/2015 (c) 2,156
A- A2 1,290 Series A, 6.75% due 6/15/2017 1,383
A1+ VMIG1+ 1,000 VRDN, Series C, 4.45% due 6/15/2023 (a)(c) 1,000
A1+ VMIG1+ 280 VRDN, Series G, 4.45% due 6/15/2024 (a)(c) 280
A1+ VMIG1+ 1,000 New York City, New York, Trust for Cultural Resources Revenue Bonds
(Solomon R. Guggenheim), VRDN, Series B, 4.25% due 12/01/2015 (a) 1,000
New York State Dormitory Authority Revenue Bonds:
BBB Baa1 4,000 (Department of Health), 5.50% due 7/01/2025 3,689
AAA Aaa 6,000 (Ithaca College), 5.25% due 7/01/2026 (b) 5,585
BBB+ Baa1 2,340 (Mental Health Services Facilities Improvement), Series B, 6% due 8/15/2016 2,361
AAA Aaa 2,250 (Mental Health Services Facilities Improvement), Series B, 5.125% due 8/15/2021 (e) 2,067
BBB+ Baa1 2,370 (Mental Health Services Facilities Improvement), Series B, 5.375% due 2/15/2026 2,144
BBB+ Baa1 1,500 Refunding (State University Educational Facilities), Series A, 5.50% due 5/15/2019 1,421
BBB- Baa1 1,000 (State University Athletic Facilities), 7.25% due 7/01/2021 1,084
BBB+ Baa1 2,500 (State University Educational Facilities), 5.50% due 5/15/2026 2,313
AAA Aaa 2,000 New York State Energy Research and Development Authority, Facilities Revenue Bonds
(Con Edison Company Inc.), AMT, Series A, 6.75% due 1/15/2027 (e) 2,110
AAA Aaa 1,255 New York State Energy Research and Development Authority, Gas Facilities Revenue Bonds
(Brooklyn Union Gas Company), AMT, Series B, 6.75% due 2/01/2024 (e) 1,347
AAA Aaa 2,000 New York State Environmental Facilities Corporation, Special Obligation, Revenue
Refunding Bonds (Riverbank State Park), 5.125% due 4/01/2022 (b) 1,838
AAA Aaa 1,065 New York State, HFA, M/F Housing Revenue Bonds, AMT, Series A, 7.75% due 11/01/2020 (b) 1,134
A A3 2,000 New York State Local Government Assistance Corporation, Series D, 5% due 4/01/2023 1,760
BBB Baa 2,485 New York State Medical Care Facilities Finance Agency Revenue Bonds (Brookdale
Hospital Medical Center), Series A, 6.85% due 2/15/2017 2,607
</TABLE>
F-33
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
New York State Mortgage Agency, Homeownership Revenue Bonds:
NR* Aa2 3,270 AMT, Series 44, 7.50% due 4/01/2026 3,509
NR* Aa2 2,490 AMT, Series 50, 6.625% due 4/01/2025 2,568
NR* Aa2 5,750 AMT, Series HH-3, 7.95% due 4/01/2022 6,039
NR* Aa2 1,100 Series EE-2, 7.50% due 4/01/2016 1,156
NR* Aa 4,550 New York State Mortgage Agency Revenue Bonds, Series B-41, 6.30% due 10/01/2017 4,740
AAA Aaa 1,000 New York State Thruway Authority, General Revenue Bonds, Series B, 5% due 1/01/2020 (e) 892
New York State Urban Development Corporation Revenue Bonds:
BBB Baa1 8,830 (Correctional Capital Facilities), Series 6, 5.375% due 1/01/2025 7,990
BBB Baa1 3,265 Refunding (University Facilities Grants), 5.50% due 1/01/2015 3,126
Port Authority of New York and New Jersey, Consolidated Bonds:
AA- A1 3,000 71st Series, 6.50% due 1/15/2026 3,146
AA- A1 3,000 72nd Series, 7.35% due 10/01/2002 (g) 3,380
AA- A1 1,000 109th Series (Fourth Installment), 5.375% due 1/15/2032 939
A1+ VMIG1+ 2,900 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Syracuse University Project),
VRDN, 4.25% due 3/01/2023 (a) 2,900
BBB Baa1 4,000 Triborough Bridge and Tunnel Authority, New York (Convention Center Project), Series E,
7.25% due 1/01/2010 4,477
AAA Aaa 2,000 Triborough Bridge and Tunnel Authority, New York, General Purpose Revenue Refunding
Bonds, Series Y, 6.125% due 1/01/2021 (d) 2,120
Puerto Rico -- 1.2%
A1+ VMIG1+ 200 Puerto Rico Commonwealth, Government Development Bank, Refunding, VRDN, 4.30%
due 12/01/2015 (a) 200
A Baa1 1,150 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway Revenue
Bonds, Series Y, 5.50% due 7/01/2036 1,080
Total Investments (Cost -- $104,339) -- 98.7% 107,589
Other Assets Less Liabilities -- 1.3% 1,440
---------
Net Assets -- 100.0% $109,029
=========
</TABLE>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at April 30,
1997.
(b) AMBAC Insured.
(c) FGIC Insured.
(d) CAPMAC Insured.
(e) MBIA Insured.
(f) The interest rate is subject to change periodically and inversely based upon
prevailing market rates. The interest rate shown is the rate in effect at
April 30, 1997.
(g) Prerefunded.
* Not Rated.
+ Highest short-term rating issued by Moody's Investors Service, Inc.
See Notes to Financial Statements.
F-34
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of April 30, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $104,338,867) (Note 1a) $107,589,397
Cash 22,027
Interest receivable 1,604,820
Prepaid expenses and other assets 6,535
--------------
Total assets 109,222,779
--------------
Liabilities: Payables:
Dividends to shareholders (Note 1e) $114,012
Investment adviser (Note 2) 44,379 158,391
--------------
Accrued expenses and other liabilities 35,714
--------------
Total liabilities 194,105
--------------
Net Assets: Net assets $109,028,674
==============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (1,200 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $30,000,000
Common Stock, par value $.10 per share (6,714,921 shares issued
and outstanding) $671,492
Paid-in capital in excess of par 73,695,014
Undistributed investment income -- net 967,326
Undistributed realized capital gains on investment income -- net 444,312
Unrealized appreciation on investments -- net 3,250,530
--------------
Total -- Equivalent to $11.77 net asset value per share of
Common Stock (market price -- $11.375) 79,028,674
--------------
Total capital $109,028,674
==============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
F-35
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
For the Six
Months Ended
April 30, 1997
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $3,265,764
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $272,951
Professional fees 39,794
Commission fees (Note 4) 37,208
Transfer agent fees 23,115
Accounting services (Note 2) 19,753
Printing and shareholder reports 14,077
Directors' fees and expenses 9,552
Listing fees 7,936
Custodian fees 5,532
Pricing fees 2,354
Other 7,666
-------------
Total expenses 439,938
-------------
Investment income -- net 2,825,826
-------------
Realized & Realized gain on investments -- net 792,825
Unrealized Change in unrealized appreciation on investments -- net (1,635,437)
Gain (Loss) on -------------
Investments -- Net Net Increase in Net Assets Resulting from Operations $1,983,214
(Notes 1b, 1d & 3): =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
April 30, October 31,
1997 1996
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
Operations: Investment income -- net $2,825,826 $5,683,601
Realized gain on investments -- net 792,825 1,475,289
Change in unrealized appreciation/depreciation on investments -- net (1,635,437) (1,066,500)
------------- -------------
Net increase in net assets resulting from operations 1,983,214 6,092,390
------------- -------------
Dividends & Investment income -- net:
Distributions to Common Stock (2,339,291) (4,660,309)
Shareholders Preferred Stock (328,656) (980,749)
(Note 1e): Realized gain on investments -- net:
Common Stock (873,551) (566,101)
Preferred Stock (181,812) (134,351)
------------- -------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (3,723,310) (6,341,510)
------------- -------------
Net Assets: Total decrease in net assets (1,740,096) (249,120)
Beginning of period 110,768,770 111,017,890
------------- -------------
End of period* $109,028,674 $110,768,770
============= =============
*Undistributed investment income -- net $967,326 $809,447
============= =============
See Notes to Financial Statements.
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
April 30, For the Year Ended October 31,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $12.03 $12.07 $11.18 $13.23 $11.95
Operating ------- ------- ------- ------- -------
Performance: Investment income -- net .42 .85 .88 .91 .99
Realized and unrealized gain (loss) on
investments -- net (.12) .05 .95 (1.76) 1.28
------- ------- ------- ------- -------
Total from investment operations .30 .90 1.83 (.85) 2.27
------- ------- ------- ------- -------
Less dividends and distributions to
Common Stock shareholders:
Investment income -- net (.35) (.69) (.71) (.78) (.88)
Realized gain on investments -- net (.13) (.08) (.05) (.28) --
------- ------- ------- ------- -------
Total dividends and distributions to Common
Stock shareholders (.48) (.77) (.76) (1.06) (.88)
------- ------- ------- ------- -------
Effect of Preferred Stock activity:
Dividends and distributions to
Preferred Stock shareholders:
Investment income -- net (.05) (.15) (.17) (.10) (.11)
Realized gain on investments -- net (.03) (.02) (.01) (.04) --
------- ------- ------- ------- -------
Total effect of Preferred Stock activity (.08) (.17) (.18) (.14) (.11)
------- ------- ------- ------- -------
Net asset value, end of period $11.77 $12.03 $12.07 $11.18 $13.23
======= ======= ======= ======= =======
Market price per share, end of period $11.375 $10.875 $10.75 $9.875 $14.25
======= ======= ======= ======= =======
Total Investment Based on market price per share 9.14%++++ 8.54% 16.98% (24.38%) 19.63%
Return:** ======= ======= ======= ======= =======
Based on net asset value per share 2.09%++++ 6.94% 16.01% (7.78%) 18.50%
======= ======= ======= ======= =======
Ratios to Average Expenses .81%* .82% .83% .80% .86%
Net Assets:*** ======= ======= ======= ======= =======
Investment income -- net 5.17%* 5.15% 5.54% 5.40% 5.82%
======= ======= ======= ======= =======
Supplemental Net assets, net of Preferred Stock, end
Data: of period (in thousands) $79,029 $80,769 $81,018 $75,075 $87,553
======= ======= ======= ======= =======
Preferred Stock outstanding, end of period
(in thousands) $30,000 $30,000 $30,000 $30,000 $30,000
======= ======= ======= ======= =======
Portfolio turnover 62.33% 193.24% 165.22% 65.74% 34.31%
======= ======= ======= ======= =======
Leverage: Asset coverage per $1,000 $3,634 $3,692 $3,701 $3,503 $3,916
======= ======= ======= ======= =======
Dividends Per Share Investment income -- net $274 $817 $949 $573 $626
On Preferred Stock ======= ======= ======= ======= =======
Outstanding:+
</TABLE>
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Dividends per share have been adjusted to reflect a two-for-one stock split
that occurred on December 1, 1994.
++++ Aggregate total investment return.
See Notes to Financial Statements.
F-37
<PAGE>
Taurus MuniNew York Holdings, Inc. April 30, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Taurus MuniNew York Holdings, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature. The
Fund determines and makes available for publication the net asset value
of its Common Stock on a weekly basis. The Fund's Common Stock is listed
on the New York Stock Exchange under the symbol MNY. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in
the over-the-counter market and are valued at the most recent bid price
or yield equivalent as obtained by the Fund's pricing service from
dealers that make markets in such securities. Financial futures
contracts and options thereon, which are traded on exchanges, are valued
at their closing prices as of the close of such exchanges. Options,
which are traded on exchanges, are valued at their last sale price as of
the close of such exchanges or, lacking any sales, at the last available
bid price. Short-term securities with a remaining maturity of sixty days
or less are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are
valued at their fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund including valuations
furnished by a pricing service retained by the Fund which may utilize a
matrix system for valuations. The procedures of the pricing service and
its valuations are reviewed by the officers of the Fund under the
general supervision of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the counterparty
does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margins as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
[bullet] Options -- The Fund is authorized to write covered call options
and purchase call and put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of the
option written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired, or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required.
(d) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Interest income is recognized on the accrual basis. Discounts
and market premiums are amortized into interest income. Realized gains
and losses on security transactions are determined on the identified
cost basis.
F-38
<PAGE>
(e) Dividends and distributions -- Dividends from net investment income
are declared and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of the
Fund's average weekly net assets.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the six months ended April 30, 1997 were $64,508,579 and $66,145,222,
respectively.
Net realized and unrealized gains as of April 30, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $792,825 $3,250,530
---------- ----------
Total $792,825 $3,250,530
========== ==========
As of April 30, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $3,250,530, of which $3,586,076 related to
appreciated securities and $335,546 related to depreciated securities.
The aggregate cost of investments at April 30, 1997 for Federal income
tax purposes was $104,338,867.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were
initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital stock
without approval of the holders of Common Stock.
Common Stock
For the six months ended April 30, 1997, shares issued and outstanding
remained constant at 6,714,921. At April 30, 1997, total paid-in capital
amounted to $74,366,506.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of
the Fund that entitle their holders to receive cash dividends at an
annual rate that may vary for the successive dividend periods. The yield
in effect at April 30, 1997 was 3.72%.
As of April 30,1997, there were 1,200 AMPS shares authorized, issued and
outstanding with a liquidation preference of $25,000 per share.
The Fund pays commissions to certain broker-dealers at the end of each
auction at an annual rate ranging from 0.25% to 0.375%, calculated on
the proceeds of each auction. For the six months ended April 30, 1997,
Merrill Lynch, Pierce, Fenner & Smith Inc., an affiliate of FAM, earned
$25,135 as commissions.
5. Subsequent Event:
On May 9, 1997, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of $.056999
per share, payable on May 29, 1997 to shareholders of record as of May
19, 1997.
F-39
<PAGE>
Unaudited Financial Statements for the Combined Fund on a Pro Forma Basis, as
of April 30, 1997
F-40
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND TAURUS MUNINEWYORK HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNIYIELD PRO FORMA
NEW YORK TAURUS FOR
INSURED MUNINEWYORK COMBINED
New York--98.4% FUND II, INC. HOLDINGS, INC. FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 4,000 Albany County, New York,
Airport Authority,
Airport Revenue Bonds,
RITR, AMT, Series RI-97-
7, 7.17% due
12/15/2023(f)(h)......... $ 4,050 $ -- $ 4,050
3,000 Allegany County, New York,
IDA, Solid Waste Disposal
Facility Revenue Bonds
(Atlantic Richfield
Company), AMT, 6.625% due
9/01/2016................ -- 3,170 3,170
1,020 Buffalo, New York, Series
B, GO, UT, 5.375% due
2/01/2014(d)............. 983 -- 983
1,600 Buffalo, New York, Sewer
Authority Revenue Bonds,
Series F, 6% due
7/01/2013(b)............. -- 1,695 1,695
Metropolitan
Transportation Authority,
New York, Commuter
Facilities Revenue
Bonds(c):
2,990 Refunding, Series A,
6.125% due 7/01 /2012.... 3,087 -- 3,087
11,500 Refunding Series B, 6.25%
due 7/01/2017............ 11,942 -- 11,942
8,650 Refunding, Series B, 6.25%
due 7/01/2022............ 8,952 -- 8,952
2,070 Series A, 6.375% due
7/01/2018................ 2,181 -- 2,181
1,400 Series A, 6.50% due
7/01/2024................ 1,494 -- 1,494
Metropolitan
Transportation Authority,
New York, Dedicated Tax
Fund, Series A(c):
3,500 5.25% due 4/01/2021....... 3,278 -- 3,278
22,735 5.25% due 4/01/2026....... 19,309 1,862 21,171
3,000 Metropolitan
Transportation Authority,
New York, Transit
Facilities Service
Contract, Refunding,
Series 5, 7% due
7/01/2012................ -- 3,222 3,222
Metropolitan
Transportation Authority,
New York, Transportation
Facilities Revenue Bonds:
5,650 Series J, 6.375% due
7/01/2010(b)............. 6,031 -- 6,031
5,000 Series J, 6.50% due
7/01/2018(b)............. 5,354 -- 5,354
5,000 Series O, 6.375% due
7/01/2020(c)............. 5,245 -- 5,245
1,005 Mount Sinai, New York,
Union Free School
District, Refunding, GO,
UT, 6.20% due
2/15/2019(d)............. 1,083 -- 1,083
1,850 Municipal Assistance
Corporation for City of
Troy, New York, Series A,
5.00% due 1/15/2016(c)... -- 1,702 1,702
2,000 Nassau County, New York,
Refunding Combined (COMB
Sewer Districts), Series
G, GO, UT, 5.40% due
1/15/2012(c)............. 1,987 -- 1,987
Nassau County, New York,
GO, UT, Series P(b):
3,250 6.50% due 11/01/2010...... 3,548 -- 3,548
3,685 6.50% due 11/01/2011...... 4,023 -- 4,023
</TABLE>
F-41
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND TAURUS MUNINEWYORK HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNIYIELD PRO FORMA
NEW YORK TAURUS FOR
INSURED MUNINEWYORK COMBINED
New York (continued) FUND II, INC. HOLDINGS, INC. FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,000 Nassau County, New York,
IDA, Civic Facilities
Revenue Bonds (Cold
Spring Harbor Laboratory
Project), VRDN, 4.35% due
7/01/2019(a)............. $ 2,000 $ -- $ 2,000
5,000 New York City, New York,
Educational Construction
Fund Revenue Bonds,
Junior Sub-Lien, 5.50%
due 4/01/2026(d)......... 2,402 2,402 4,804
New York City, New York,
GO, UT, Series B (Fiscal
92):
5,000 7.50% due 2/01/2006....... 5,541 -- 5,541
2,000 7% due 2/01/2017(d)....... 2,173 -- 2,173
2,000 7% due 2/01/2018(d)....... 2,173 -- 2,173
2,500 New York City, New York,
GO, UT, Series F, 5.75%
due 2/01/2019............ 2,372 -- 2,372
New York City, New York,
IDA, Civic Facility
Revenue Bonds:
1,600 (National Audobon
Society), VRDN, 3.75% due
12/01/2014(a)............ 1,600 -- 1,600
12,500 (USTA National Tennis
Center Project), 6.375%
due 11/15/2014(f)........ 13,303 -- 13,303
300 New York City, New York,
IDA, Civic Facility
Revenue Bonds (National
Audobon Society), VRDN,
4.25% due 12/01/2014(a).. -- 300 300
New York City, New York,
IDA, Special Facility
Revenue Bonds, RITR, AMT,
Series 5:
5,000 6.945% due 1/01/2024...... 4,975 -- 4,975
2,200 7.645% due 1/01/2024...... -- 2,209 2,209
2,000 New York City, New York,
IDA, Special Facility
Revenue Bonds (1990
AMR/American Airlines
Inc. Project), AMT, 7.75%
due 7/01/2019............ -- 2,107 2,107
New York City, New York,
Municipal Water Finance
Authority, Water and
Sewer System Revenue
Bonds:
6,000 Refunding (Fiscal 1997),
Series A, 5.375% due
6/15/2026(f)............. 5,675 -- 5,675
5,000 RIB, 6.825% due
6/15/2025(h)............. 5,006 -- 5,006
3,375 RITR, 7.475% due
6/15/2025(h)............. -- 3,379 3,379
3,350 Series A-1994, 7.00% due
6/15/2015(b)............. 1,455 2,156 3,611
1,760 Series A, 7% due
6/15/2001(b)(g).......... 1,925 -- 1,925
1,290 Series A, 6.75% due
6/15/2017................ -- 1,383 1,383
4,100 VRDN, Series A, 4.25% due
6/15/2025(a)(b).......... 4,100 -- 4,100
5,600 VRDN, Series C, 4.45% due
6/15/2023(a)(b).......... 4,600 1,000 5,600
280 VRDN, Series G, 4.45% due
6/15/2024(a)(b).......... -- 280 280
</TABLE>
F-42
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND TAURUS MUNINEWYORK HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNIYIELD TAURUS PRO FORMA
NEW YORK MUNINEWYORK FOR
INSURED HOLDINGS, COMBINED
New York (continued) FUND II, INC. INC. FUND
- --------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000 New York City, New York, Trust
for Cultural Resources
Revenue Bonds (Soloman R.
Guggenheim), VRDN, Series B,
4.25% due 12/01/2015(a)...... $ -- $ 1,000 $ 1,000
New York State Dormitory
Authority Revenue Bonds:
11,165 (City University), Third
Generation Reserves, Series
2, 6.875% due 7/01/2014(c)... 12,285 -- 12,285
3,000 (City University System),
Third Resolution, Series 1,
6.25% due 7/01/2016(d)....... 3,138 -- 3,138
3,640 (City University System),
Third Resolution, Series 1,
6.25% due 7/01/2020(d)....... 3,786 -- 3,786
6,290 (City University System),
Third Resolution, Series 1,
6.30% due 7/01/2024(d)....... 6,565 -- 6,565
1,000 (Consolidated City University
System), Second Generation,
Series A, 5.75% due
7/01/2018(f)................. 1,017 -- 1,017
9,400 (Cornell University), VRDN,
Series B, 4.25% due
7/01/2025(a)................. 9,400 -- 9,400
13,000 (Department of Health), 5.50%
due 7/01/2025................ 8,300 3,689 11,989
6,000 (Ithaca College), 5.25% due
7/01/2026(d)................. -- 5,585 5,585
2,340 (Mental Health Services
Facilities Improvement),
Series B, 6.00% due
8/15/2016.................... -- 2,361 2,361
14,750 (Mental Health Services
Facilities Improvement),
Series B, 5.125% due
8/15/2021(c)................. 11,483 2,067 13,550
2,370 (Mental Health Services
Facilities Improvement),
Series B, 5.375% due
2/15/2026.................... -- 2,144 2,144
6,000 (Mount Sinai School of
Medicine), Series A, 5.15%
due 7/01/2024(c)............. 5,515 -- 5,515
1,000 Refunding (Colgate
University), 6% due
7/01/2016(c)................. 1,045 -- 1,045
3,765 Refunding (Mental Health
Services Facilities
Improvement), Series E, 5.25%
due 2/15/2018(d)............. 3,547 -- 3,547
1,750 Refunding (Mount Sinai School
of Medicine), 6.75% due
7/01/2009(c)................. 1,899 -- 1,899
4,500 Refunding (State University
Educational Facilities),
Series A, 5.875% due
5/15/2011(b)................. 4,677 -- 4,677
1,500 Refunding (State University
Educational Facilities),
Series A, 5.50% due
5/15/2019.................... -- 1,421 1,421
2,000 Refunding (State University
Educational Facilities),
Series B, 7% due 5/15/2016... 2,128 -- 2,128
2,250 (Saint Joseph's Health
Hospital), 5.25% due
7/01/2018(c)................. 2,118 -- 2,118
1,050 (Saint John's University),
6.875% due 7/01/2011(d)...... 1,136 -- 1,136
1,000 (State University Athletic
Facilities), 7.25% due
7/01/2021.................... -- 1,084 1,084
8,500 (State University Educational
Facilities), 5.50% due
5/15/2026.................... 5,551 2,313 7,864
</TABLE>
F-43
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND TAURUS MUNINEWYORK HOLDINGS,INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
MUNIYIELD TAURUS PRO FORMA
NEW YORK MUNINEWYORK FOR
INSURED HOLDINGS, COMBINED
New York (continued) FUND II, INC. INC. FUND
- --------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
New York State Energy
Research and Development
Authority, Facilities
Revenue Bonds (Consolidated
Edison Company, Inc.), AMT,
Series A:
$ 8,950 6.75% due 1/15/2027(c)....... $ 7,332 $ 2,110 $ 9,442
3,785 6.75% due 1/15/2027(d)....... 3,993 -- 3,993
New York State Energy
Research and Development
Authority, Gas Facilities
Revenue Bonds (Brooklyn
Union Gas Co.), AMT(c):
12,000 Series A, 6.75% due
2/01/2024................... 12,948 -- 12,948
6,255 Series B, 6.75% due
2/10/2024................... 5,366 1,347 6,713
3,600 New York State Energy
Research and Development
Authority, PCR, Refunding
(Rochester Gas and Electric
Project), AMT, Series B,
6.50% due 5/15/2032(c)...... 3,742 -- 3,742
5,000 New York State Environmental
Facilities Corporation, PCR,
RITR, Series RI-1, 6.745%
due 6/15/2014............... 5,081 -- 5,081
200 New York State Environmental
Facilities Corporation,
Resource Recovery Revenue
Bonds (OFS Equity Huntington
Project), VRDN, AMT, 4.50%
due 11/01/2014(a)........... 200 -- 200
13,265 New York State Environmental
Facilities Corporation,
Special Obligation Revenue
Refunding Bonds (Riverbank
State Park), 5.125% due
4/01/2022(d)................ 10,352 1,838 12,190
1,800 New York State HFA, Housing
Project Mortgage Revenue
Refunding Bonds, Series A,
6.10% due 11/01/2015(f)..... 1,830 -- 1,830
1,065 New York State, HFA, M/F
Housing Revenue Bonds, AMT,
Series A, 7.75% due
11/01/2020(d)............... -- 1,134 1,134
New York State Local
Government Assistance
Corporation:
2,000 Series D, 5.00% due
4/01/2023................... -- 1,760 1,760
2,100 VRDN, Series G, 4.50% due
4/01/2025(a)................ 2,100 -- 2,100
New York State Medical Care
Facilities Finance Agency
Revenue Bonds:
2,485 (Brookdale Hospital Medical
Center), Series A, 6.85% due
2/15/2017................... -- 2,607 2,607
3,000 (Mental Health), Series E,
6.50% due 8/15/2015(f)...... 3,184 -- 3,184
4,330 (Mental Health), Series F,
6.50% due 8/15/2012(f)...... 4,563 -- 4,563
2,790 (Health Center Project-
Secured Mortgage), Series A,
6.375% due 11/15/2019(d).... 2,935 -- 2,935
12,850 (New York Hospital Mortgage),
Series A, 6.80% due
8/15/2024(d)(e)............. 13,987 -- 13,987
11,750 (New York Hospital Mortgage),
Series A, 6.50% due
8/15/2029(d)(e)............. 12,456 -- 12,456
</TABLE>
F-44
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND TAURUS MUNINEWYORK HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNIYIELD TAURUS PRO FORMA
NEW YORK MUNINEWYORK FOR
INSURED HOLDINGS, COMBINED
New York (continued) FUND II, INC. INC. FUND
- --------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 5,200 Refunding (Hospital and
Nursing Home), Series C,
6.375% due 8/15/2029(c)...... $ 5,407 $ -- $ 5,407
New York State Mortgage
Agency, Homeownership Revenue
Bonds:
3,270 AMT, Series 44, 7.50% due
4/01/2026.................... -- 3,509 3,509
7,085 AMT, Series 50, 6.625% due
4/01/2025.................... 4,739 2,568 7,307
1,000 AMT, Series 58, 6.40% due
4/01/2027.................... 1,017 -- 1,017
5,750 AMT, Series HH-3, 7.95% due
4/01/2022.................... -- 6,039 6,039
1,100 Series EE-2, 7.50% due
4/01/2016.................... -- 1,156 1,156
1,000 Series 43, 6.45% due
10/01/2017(c)................ 1,060 -- 1,060
4,550 New York State Mortgage Agency
Revenue Bonds, Series B-41,
6.30% due 10/01/2017......... -- 4,740 4,740
New York State Thruway
Authority, General Revenue
Bonds:
7,700 Series B, 5% due 1/01/2020(c). 5,974 892 6,866
1,000 VRDN, 5% due 1/01/2024(a)(b).. 1,000 -- 1,000
11,000 New York State Thruway
Authority, Highway and Bridge
Trust Fund, UT, Series B,
6.25% due 4/01/2012(b)....... 11,599 -- 11,599
8,830 New York State Urban
Development Corporation
Revenue Bonds (Correctional
Capital Facilities), Series
6, 5.375% due 1/01/2025...... -- 7,990 7,990
New York State Urban
Development Corporation
Revenue Refunding Bonds:
2,295 (Correctional Capital
Facilities), Series A, 5.25%
due 1/01/2014(f)............. 2,209 -- 2,209
8,675 (Correctional Facilities),
5.375% due 1/01/2012(c)...... 8,515 -- 8,515
6,000 (Correctional Facilities),
Series A, 5% due
1/01/2017(d)................. 5,447 -- 5,447
3,265 (University Facilities
Grants), 5.50% due 1/01/2015. -- 3,126 3,126
1,000 Niagara Falls, New York, Water
Treatment Plant, UT, AMT,
7.25% due 11/01/2010(c)...... 1,157 -- 1,157
North Hempstead, New York, GO,
Refunding, Series B, UT(b):
1,745 6.40% due 4/01/2013........... 1,916 -- 1,916
555 6.40% due 4/01/2017........... 607 -- 607
Oswego County, New York,
Public Improvement Bonds, UT:
1,100 6.70% due 6/15/2010........... 1,231 -- 1,231
1,100 6.70% due 6/15/2011........... 1,232 -- 1,232
1,100 6.70% due 6/15/2012........... 1,232 -- 1,232
</TABLE>
F-45
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND TAURUS MUNINEWYORK HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
APRIL 30, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNIYIELD TAURUS PRO FORMA
NEW YORK MUNINEWYORK FOR
INSURED HOLDINGS, COMBINED
New York (continued) FUND II, INC. INC. FUND
- -------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 4,000 Port Authority of New York
and New Jersey, RITR,
Series FR3-108th, AMT,
6.885% due 1/15/2017(f)(h). $ 4,080 $ -- $ 4,080
Port Authority of New York
and New Jersey,
Consolidated Revenue Bonds:
71st Series, 6.50% due
5,000 1/15/2026(b)............... 2,109 3,146 5,255
72nd Series, 7.35% due
11,000 10/01/2002(g).............. 9,013 3,380 12,393
72nd Series, 7.40% due
3,000 10/01/2002(d)(g)........... 3,391 -- 3,391
6,000 109th Series (Fourth
Installment), 5.375% due
1/15/2032.................. 4,698 939 5,637
1,200 Port Authority of New York
and New Jersey, Special
Obligation Revenue Bonds
(Versatile Structure
Obligation), VRDN, AMT,
Series 1, 4.25% due
8/01/2028(a)............... 1,200 -- 1,200
Syracuse, New York, COP,
(Syracuse Hancock
International Airport),
AMT(b):
3,650 6.625% due 1/01/2012........ 3,872 -- 3,872
3,120 6.50% due 1/01/2017......... 3,255 -- 3,255
5,100 Syracuse, New York, IDA,
Civic Facility Revenue
Bonds (Multi-Modal Syracuse
University Project), VRDN,
4.25% due 3/01/2023(a)..... 2,200 2,900 5,100
Triborough Bridge and Tunnel
Authority, New York,
General Purpose Revenue
Bonds:
Refunding, Series Y, 6.125%
6,000 due 1/01/2021(i)........... 4,241 2,120 6,361
Series B, 5.20% due
6,150 1/01/2027.................. 5,654 -- 5,654
4,000 Triborough Bridge and Tunnel
Authority, New York
(Convention Center
Project), Series E, 7.25%
due 1/01/2010.............. -- 4,477 4,477
Triborough Bridge and Tunnel
Authority, New York,
Special Obligation
Refunding Bonds:
6,575 6.25% due 1/01/2012(d)...... 6,868 -- 6,868
Series A, 6.625% due
6,975 1/01/2017(c)............... 7,452 -- 7,452
Series B, 6.875% due
2,000 1/01/2015(c)............... 2,151 -- 2,151
Series B, 6.875% due
1,000 1/01/2015(b)............... 1,075 -- 1,075
Series B, 6.875% due
5,150 1/01/2015(d)............... 5,538 -- 5,538
5,000 Upper Mohawk Valley, New
York, Regional Water
Finance Authority, Water
Systems Revenue Refunding
Bonds, Series A, 5.125% due
10/01/2026(f).............. 4,565 -- 4,565
</TABLE>
F-46
<PAGE>
COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIYIELD NEW YORK INSURED FUND II, INC.
AND TAURUS MUNINEWYORK HOLDINGS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONCLUDED)
APRIL 30, 1997
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNIYIELD TAURUS PRO FORMA
NEW YORK MUNINEWYORK FOR
INSURED HOLDINGS, COMBINED
Puerto Rico -- 0.2% FUND II, INC. INC. FUND
- --------------------------------------------------------------------------------
TOTAL FACE
AMOUNT ISSUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 200 Puerto Rico Commonwealth,
Government Development Bank,
Refunding, VRDN, 4.30% due
12/01/2015(a)................ $ -- $ 200 $ 200
1,150 Puerto Rico Commonwealth,
Highway and Transportation
Authority, Highway Revenue
Bonds, Series Y, 5.50% due
7/01/2036.................... -- 1,080 1,080
- --------------------------------------------------------------------------------
Total Investment (cost -- $ $441,210 $107,589 $548,799
529,617) -- 98.6%............. ======== ======== ========
</TABLE>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at April 30,
1997.
(b) FGIC Insured.
(c) MBIA Insured.
(d) AMBAC Insured.
(e) FHA Insured.
(f) FSA Insured.
(g) Prerefunded.
(h) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at April 30, 1997.
(i) CAPMAC Insured.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
PORTFOLIO ABBREVIATIONS
To simplify the listing of MuniYield New York Insured Fund II, Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated the
names of many of the securities according to the list below.
<TABLE>
<S> <C>
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Authority
IDA Industrial Development Authority
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
UT Unlimited Tax
VRDN Variable Rate Demand Notes
</TABLE>
F-47
<PAGE>
The following unaudited pro forma Combined Statement of Assets, Liabilities
and Capital for the Combined Fund has been derived from the Statements of
Assets, Liabilities and Capital of the respective Funds at April 30, 1997 and
such information has been adjusted to give effect to the Reorganization as if
the Reorganization had occurred at April 30, 1997. The pro forma Combined
Statement of Assets, Liabilities and Capital is presented for informational
purposes only and does not purport to be indicative of the financial condition
that actually would have resulted if the Reorganization had been consummated
at April 30, 1997. The pro forma Combined Statement of Assets, Liabilities and
Capital should be read in conjunction with the Funds' financial statements and
related notes thereto which are included in this Joint Proxy Statement and
Prospectus.
COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AS OF APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MUNIYIELD
NEW YORK TAURUS PRO FORMA
INSURED MUNINEWYORK FOR
FUND II, INC. HOLDINGS, INC. ADJUSTMENTS COMBINED FUND
------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value... $441,209,989 $107,589,397 $ 0 $548,799,386
Cash.................... 46,554 22,027 0 68,581
Interest Receivable..... 7,210,796 1,604,820 0 8,815,616
Deferred organization
expenses............... 4,575 0 0 4,575
Prepaid expenses and
other assets........... 14,968 6,535 0 21,503
------------ ------------ ----------- ------------
Total assets........ 448,486,882 109,222,779 0 557,709,661
------------ ------------ ----------- ------------
LIABILITIES:
Payables:
Dividends to
shareholders.......... 459,452 114,012 3,012,600(1) 3,586,064
Investment adviser..... 161,096 44,379 205,475
Accrued expenses and
other liabilities...... 249,388 35,714 200,000(2) 485,102
------------ ------------ ----------- ------------
Total liabilities... 869,936 194,105 3,212,600 4,276,641
------------ ------------ ----------- ------------
Net Assets.............. $447,616,946 $109,028,674 $(3,212,600) $553,433,020
============ ============ =========== ============
CAPITAL:
Capital Stock
(200,000,000 shares of
each fund authorized;
200,000,000 shares as
adjusted); Preferred
Stock, par value $.05
per share (5,760 shares
of MuniYield New York
Insured Fund II, Inc.
AMPS*, and 1,200 shares
of Taurus MuniNewYork
Holdings, Inc. AMPS*
issued and outstanding
at $25,000 liquidation
preference; 6,960
shares for the Combined
Fund, as adjusted)..... $144,000,000 $ 30,000,000 $ 0 $174,000,000
Common Stock, par value
$.10 per share
(21,195,037 shares of
MuniYield New York
Insured Fund II, Inc.
Common Stock, and
6,714,921 shares of
Taurus MuniNewYork
Holdings, Inc. Common
Stock issued and
outstanding; 26,642,080
shares for the Combined
Fund, as adjusted)..... 2,119,504 671,492 (126,788) 2,664,208
Paid-in-capital in
excess of par.......... 305,895,835 73,695,014 (73,212) 379,517,637
Undistributed investment
income -- net.......... 1,600,962 967,326 (2,568,288) 0
Accumulated realized
capital gains (losses)
on investments -- net.. (21,930,967) 444,312 (444,312) (21,930,967)
Unrealized appreciation
on investments -- net.. 15,931,612 3,250,530 0 19,182,142
------------ ------------ ----------- ------------
Total -- Equivalent to
$14.32 net asset value
per share of MuniYield
New York Insured Fund
II, Inc. Common Stock,
and $11.77 net asset
value per share of
Taurus MuniNewYork
Holdings, Inc. Common
Stock and $14.24 net
asset value per share
for the Combined Fund,
as adjusted............ 303,616,946 79,028,674 (3,212,600) 379,433,020
------------ ------------ ----------- ------------
Total Capital........... $447,616,946 $109,028,674 $(3,212,600) $553,433,020
============ ============ =========== ============
</TABLE>
- --------
* Auction Market Preferred Stock (AMPS).
(1) Assumes the distribution of undistributed investment income and
undistributed capital gains.
(2) Reflects the charge for estimated Reorganization expenses of $200,000.
F-48
<PAGE>
The following unaudited pro forma Combined Statement of Operations for the
Combined Fund has been derived from the statements of operations of the
respective Funds for the six months ended April 30, 1997, and such information
has been adjusted to give effect to the Reorganization as if the
Reorganization had occurred on April 30, 1997. The pro forma Combined
Statement of Operations is presented for informational purposes only and does
not purport to be indicative of the results of operations that actually would
have resulted if the Reorganization had been consummated on November 1, 1996
nor which may result from future operations. The pro forma Combined Statement
of Operations should be read in conjunction with the Funds' financial
statements and related notes thereto which are included in this Joint Proxy
Statement and Prospectus.
COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MUNIYIELD
NEW YORK TAURUS
INSURED MUNINEWYORK PRO FORMA
FUND II, HOLDINGS, FOR
INC. INC. ADJUSTMENTS COMBINED FUND
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and
amortization of premium
and discount earned.... $ 9,855,986 $3,265,764 $ 0 $13,121,750
EXPENSES:
Investment advisory
fees................... 856,191 272,951 0 1,129,142
Commission fees......... 141,803 37,208 0 179,011
Transfer agent fees..... 44,115 23,115 0 67,230
Professional fees....... 34,968 39,794 0 74,762
Accounting services..... 24,822 19,753 0 44,575
Directors' fees and
expenses............... 9,799 9,552 0 19,351
Printing and shareholder
reports................ 20,871 14,077 0 34,948
Custodian fees.......... 11,099 5,532 0 16,631
Listing fees............ 13,342 7,936 0 21,278
Pricing fees............ 7,875 2,354 0 10,229
Amortization of
organization expenses.. 1,962 0 0 1,982
Other................... 14,549 7,666 200,000 (1) 222,215
----------- ---------- --------- -----------
Total expenses.......... 1,181,396 439,938 200,000 1,821,334
----------- ---------- --------- -----------
Investment income --
net................... 8,674,590 2,825,826 (200,000) 11,300,416
----------- ---------- --------- -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS -- NET:
Realized gain on
investments -- net..... 1,326,217 792,825 0 2,119,042
Change in unrealized
appreciation on
investments -- net..... (4,382,194) (1,635,437) 0 (6,017,631)
----------- ---------- --------- -----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............. $ 5,618,613 $1,983,214 $(200,000) $ 7,401,827
=========== ========== ========= ===========
</TABLE>
- --------
(1) Reflects the charge for estimated Reorganization expenses of $200,000.
F-49
<PAGE>
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the day of , 1997, by and between MuniYield New York Insured Fund II,
Inc., a Maryland corporation ("Insured"), and Taurus MuniNewYork Holdings,
Inc., a Maryland corporation ("Taurus").
PLAN OF REORGANIZATION
The reorganization will comprise (a) the acquisition by Insured of all of
the assets, and the assumption by Insured of all of the liabilities, of Taurus
in exchange solely for an equal aggregate value of newly-issued shares of (i)
common stock, par value $.10 per share, of Insured ("Insured Common Stock")
and (ii) auction market preferred stock, with a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to be designated Series D, of
Insured ("Insured Series D AMPS"), and (b) the subsequent distribution to
Taurus stockholders of (x) all of the Insured Common Stock received by Taurus
in exchange for their shares of common stock, par value $.10 per share, of
Taurus ("Taurus Common Stock") and (y) all of the Insured Series D AMPS
received by Taurus in exchange for their shares of auction market preferred
stock, with a liquidation preference of $25,000 per share plus an amount equal
to accumulated but unpaid dividends thereon (whether or not earned or
declared) of Taurus ("Taurus AMPS"), all upon and subject to the terms
hereinafter set forth (collectively, the "Reorganization").
In the course of the Reorganization, Insured Common Stock and Insured Series
D AMPS will be distributed to Taurus stockholders as follows: (i) each holder
of Taurus Common Stock will be entitled to receive a number of shares of
Insured Common Stock equal to the aggregate net asset value of the Taurus
Common Stock owned by such stockholder on the Exchange Date (as defined in
Section 7(a) of this Agreement); (ii) each holder of Taurus AMPS will be
entitled to receive a number of shares of Insured Series D AMPS equal to the
aggregate liquidation preference (and aggregate value) of the Taurus AMPS
owned by such stockholder on the Exchange Date. In consideration therefor, on
the Exchange Date Insured shall acquire all of the assets of Taurus and shall
assume all of Taurus' obligations and liabilities then existing, whether
absolute, accrued, contingent or otherwise. It is intended that the
Reorganization described in this Plan shall be a reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as
amended (the "Code"), and any successor provision.
Prior to the Exchange Date, Taurus shall declare a dividend or dividends
which, together with all such previous dividends, shall have the effect of
distributing to its stockholders all of its net investment company taxable
income for the period from October 31, 1996 to and including the Exchange
Date, if any (computed without regard to any deduction or dividends paid), and
all of its net capital gain, if any, realized for the period from October 31,
1996 to and including the Exchange Date. In this regard, the last dividend
period for the Taurus AMPS prior to the Exchange Date may be shorter than the
dividend period for such AMPS determined as set forth in the applicable
Articles Supplementary.
Separate Articles Supplementary to Insured's Articles of Incorporation
establishing the powers, rights and preferences of the Insured Series D AMPS
will have been filed with the State Department of Assessments and Taxation of
Maryland (the "Maryland Department") prior to the closing of the
Reorganization.
As promptly as practicable after the liquidation of Taurus pursuant to the
Reorganization, Taurus shall be dissolved in accordance with the laws of the
State of Maryland and will terminate its registration under the Investment
Company Act of 1940, as amended (the "1940 Act").
I-1
<PAGE>
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Insured and Taurus hereby agree as follows:
1.Representations and Warranties of Insured.
Insured represents and warrants to, and agrees with, Taurus that:
(a) Insured is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland, and has the
power to own all of its assets and to carry out this Agreement. Insured has
all necessary Federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) Insured is duly registered under the 1940 Act as a non-diversified,
closed-end management investment company (File No. 811-6661), and such
registration has not been revoked or rescinded and is in full force and
effect. Insured has elected and qualified for the special tax treatment
afforded regulated investment companies ("RICs") under Sections 851-855 of
the Code at all times since its inception, and intends to continue to so
qualify both until consummation of the Reorganization and thereafter.
(c) Insured has full power and authority to enter into and perform its
obligations under this Agreement. The execution, delivery and performance
of this Agreement has been duly authorized by all necessary action of its
Board of Directors and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects
of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(d) Taurus has been furnished with Insured's Annual Report to
Stockholders for the year ended October 31, 1996, and the audited financial
statements appearing therein, having been examined by Deloitte & Touche
LLP, independent public accountants, fairly present the financial position
of Insured as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(e) Taurus has been furnished with Insured's Semi-Annual Report to
Stockholders for the six months ended April 30, 1997, and the unaudited
financial statements appearing therein fairly present the financial
position of Insured as of the respective dates indicated, in conformity
with generally accepted accounting principles applied on a consistent
basis.
(f) An unaudited statement of assets, liabilities and capital of Insured
and an unaudited schedule of investments of Insured, each as of the
Valuation Time (as defined in Section 3(d) of this Agreement), will be
furnished to Taurus at or prior to the Exchange Date for the purpose of
determining the number of shares of Insured Common Stock and Insured Series
D AMPS to be issued pursuant to Section 4 of this Agreement; each will
fairly present the financial position of Insured as of the Valuation Time
in conformity with generally accepted accounting principles applied on a
consistent basis.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Insured, threatened against Insured which
assert liability on the part of Insured or which materially affect its
financial condition or its ability to consummate the Reorganization.
Insured is not charged with or, to the best of its knowledge, threatened
with any violation or investigation of any possible violation of any
provisions of any Federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(h) Insured is not a party to or obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or any
contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under
this Agreement, except insofar as Insured and Taurus have mutually agreed
to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
I-2
<PAGE>
(i) There are no material contracts outstanding to which Insured is a
party that have not been disclosed in the N-14 Registration Statement (as
defined in subsection (l) below) or will not otherwise be disclosed to
Taurus prior to the Valuation Time.
(j) Insured has no known liabilities of a material amount, contingent or
otherwise, other than those shown on Insured's statements of assets,
liabilities and capital referred to above, those incurred in the ordinary
course of its business as an investment company since April 30, 1997 and
those incurred in connection with the Reorganization. As of the Valuation
Time, Insured will advise Taurus in writing of all known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued as of such time.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Insured of the
Reorganization, except such as may be required under the Securities Act of
1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act or state securities laws.
(l) The registration statement filed by Insured on Form N-14 relating to
the Insured Common Stock and the Insured Series D AMPS to be issued
pursuant to this Agreement, which includes the joint proxy statement of
Insured and Taurus and the prospectus of Insured with respect to the
transaction contemplated herein, and any supplement or amendment thereto or
to the documents therein (as amended, the "N-14 Registration Statement"),
on its effective date, at the time of the stockholders' meetings referred
to in Section 6(a) of this Agreement and at the Exchange Date, insofar as
it relates to Insured (i) complied or will comply in all material respects
with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the
rules and regulations thereunder and (ii) did not or will 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; and the joint proxy statement and prospectus included
therein did not or will not contain any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection only shall apply to statements in or omissions from the N-
14 Registration Statement made in reliance upon and in conformity with
information furnished by Insured for use in the N-14 Registration Statement
as provided in Section 6(e) of this Agreement.
(m) Insured is authorized to issue 200,000,000 shares of capital stock,
of which 2,800 shares have been designated as Series A AMPS, 1,960 shares
have been designated as Series B AMPS, 1,000 shares have been designated as
Series C AMPS (collectively, the "Insured AMPS"), and 199,994,240 shares
have been designated as common stock, par value $.10 per share, each
outstanding share of which is fully paid, nonassessable and has full voting
rights.
(n) The Insured Common Stock and Insured Series D AMPS to be issued to
Taurus pursuant to this Agreement will have been duly authorized and, when
issued and delivered pursuant to this Agreement, will be legally and
validly issued and will be fully paid and nonassessable and will have full
voting rights, and no stockholder of Insured will have any preemptive right
of subscription or purchase in respect thereof.
(o) At or prior to the Exchange Date, the Insured Common Stock and
Insured Series D AMPS to be transferred to Taurus on the Exchange Date will
be duly qualified for offering to the public in all states of the United
States in which the sale of shares of Taurus presently are qualified, and
there are a sufficient number of such shares registered under the 1933 Act
and with each pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Exchange Date, Insured will have obtained any and
all regulatory, Director and stockholder approvals necessary to issue the
Insured Common Stock and Insured Series D AMPS to Taurus.
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2.Representations and Warranties of Taurus.
Taurus represents and warrants to, and agrees with, Insured that:
(a) Taurus is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland, and has the
power to own all of its assets and to carry out this Agreement. Taurus has
all necessary Federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) Taurus is duly registered under the 1940 Act as a non-diversified,
closed-end management investment company (File No. 811-5884), and such
registration has not been revoked or rescinded and is in full force and
effect. Taurus has elected and qualified for the special tax treatment
afforded RICs under Sections 851-855 of the Code at all times since its
inception and intends to continue to so qualify through its final taxable
year ending upon liquidation.
(c) As used in this Agreement, the term "Investments" shall mean (i) the
investments of Taurus shown on the schedule of its investments as of the
Valuation Time furnished to Insured; and (ii) all other assets owned by
Taurus or liabilities incurred as of the Valuation Time.
(d) Taurus has full power and authority to enter into and perform its
obligations under this Agreement. The execution, delivery and performance
of this Agreement has been duly authorized by all necessary action of its
Board of Directors, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects
of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) Insured has been furnished with Taurus' Annual Report to Stockholders
for the year ended October 31, 1996, and the audited financial statements
appearing therein, having been examined by Ernst & Young LLP, independent
public accountants, fairly present the financial position of Taurus as of
the respective dates indicated, in conformity with generally accepted
accounting principles applied on a consistent basis.
(f) Insured has been furnished with Taurus' Semi-Annual Report to
Stockholders for the six months ended April 30, 1997, and the unaudited
financial statements appearing therein fairly present the financial
position of Taurus as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(g) An unaudited statement of assets, liabilities and capital of Taurus
and an unaudited schedule of investments of Taurus, each as of the
Valuation Time, will be furnished to Insured at or prior to the Exchange
Date for the purpose of determining the number of shares of Insured Common
Stock and Insured Series D AMPS to be issued to Taurus pursuant to Section
4 of this Agreement; and each will fairly present the financial position of
Taurus as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Taurus, threatened against Taurus which
assert liability on the part of Taurus or which materially affect its
financial condition or its ability to consummate the Reorganization. Taurus
is not charged with or, to the best of its knowledge, threatened with any
violation or investigation of any possible violation of any provisions of
any Federal, state or local law or regulation or administrative ruling
relating to any aspect of its business.
(i) There are no material contracts outstanding to which Taurus is a
party that have not been disclosed in the N-14 Registration Statement or
will not otherwise be disclosed to Insured prior to the Valuation Time.
(j) Taurus is not a party to or obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or any
contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under
this Agreement, except insofar as Insured and Taurus have mutually agreed
to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
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(k) Taurus has no known liabilities of a material amount, contingent or
otherwise, other than those shown on its statements of assets, liabilities
and capital referred to above, those incurred in the ordinary course of its
business as an investment company since April 30, 1997, and those incurred
in connection with the Reorganization. As of the Valuation Time, Taurus
will advise Insured in writing of all known liabilities, contingent or
otherwise, whether or not incurred in the ordinary course of business,
existing or accrued as of such time.
(l) Taurus has filed, or has obtained extensions to file, all Federal,
state and local tax returns which are required to be filed by it, and has
paid or has obtained extensions to pay, all Federal, state and local taxes
shown on said returns to be due and owing and all assessments received by
it, up to and including the taxable year in which the Exchange Date occurs.
All tax liabilities of Taurus have adequately been provided for on its
books, and no tax deficiency or liability of Taurus has been asserted and
no question with respect thereto has been raised by the Internal Revenue
Service (the "IRS") or by any state or local tax authority for taxes in
excess of those already paid, up to and including the taxable year in which
the Exchange Date occurs.
(m) At both the Valuation Time and the Exchange Date, Taurus will have
full right, power and authority to sell, assign, transfer and deliver the
Investments. At the Exchange Date, subject only to the delivery of the
Investments as contemplated by this Agreement, Taurus will have good and
marketable title to all of the Investments, and Insured will acquire all of
the Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except
those imposed by the Federal or state securities laws and those
imperfections of title or encumbrances as do not materially detract from
the value or use of the Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Taurus of the
Reorganization, except such as may be required under the 1933 Act, the 1934
Act and the 1940 Act or state securities laws (which term as used herein
shall include the laws of the District of Columbia and Puerto Rico).
(o) The N-14 Registration Statement, on its effective date, at the time
of the stockholders' meetings referred to in Section 6(a) of this Agreement
and on the Exchange Date, insofar as it relates to Taurus (i) complied or
will comply in all material respects with the provisions of the 1933 Act,
the 1934 Act and the 1940 Act and the rules and regulations thereunder, and
(ii) did not or will 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; and the joint proxy
statement and prospectus included therein did not or will not contain any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Taurus for
use in the N-14 Registration Statement as provided in Section 6(e) of this
Agreement.
(p) Taurus is authorized to issue 200,000,000 shares of capital stock, of
which 1,200 shares have been designated as AMPS and 199,998,800 shares have
been designated as common stock, par value $.10 per share, each outstanding
share of which is fully paid, nonassessable and has full voting rights.
(q) All of the issued and outstanding shares of Taurus Common Stock and
Taurus AMPS were offered for sale and sold in conformity with all
applicable Federal and state securities laws.
(r) The books and records of Taurus made available to Insured and/or its
counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of Taurus.
(s) Taurus will not sell or otherwise dispose of any of the shares of
Insured Common Stock or Insured Series D AMPS to be received in the
Reorganization, except in distribution to the stockholders of Taurus as
provided in Section 4 of this Agreement.
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3.The Reorganization.
(a) Subject to receiving the requisite approvals of the stockholders of each
of Insured and Taurus and to the other terms and conditions contained herein,
Taurus agrees to convey, transfer and deliver to Insured for the benefit of
Insured, and Insured agrees to acquire from Taurus for the benefit of Insured,
on the Exchange Date all of the Investments (including interest accrued as of
the Valuation Time on debt instruments) of Taurus, and assume all of the
liabilities of Taurus, in exchange solely for that number of shares of Insured
Common Stock and Insured Series D AMPS provided in Section 4 of this
Agreement. Pursuant to this Agreement, as soon as practicable after the
Exchange Date Taurus will distribute all shares of Insured Common Stock and
Insured Series D AMPS received by it to its stockholders in exchange for their
corresponding shares of Taurus Common Stock and Taurus AMPS. Such distribution
shall be accomplished by the opening of stockholder accounts on the stock
ledger records of Insured in the amounts due the stockholders of Taurus based
on their respective holdings in Taurus as of the Valuation Time.
(b) Prior to the Exchange Date, Taurus shall declare a dividend or dividends
which, together with all such previous dividends, shall have the effect of
distributing to its stockholders all of its net investment company taxable
income for the period from October 31, 1996 to and including the Exchange
Date, if any (computed without regard to any deduction or dividends paid), and
all of its net capital gain, if any, realized for the period from October 31,
1996 to and including the Exchange Date. In this regard, the last dividend
period for the Taurus AMPS prior to the Exchange Date may be shorter than the
dividend period for such AMPS determined as set forth in the applicable
Articles Supplementary.
(c) Taurus will pay, or cause to be paid, to Insured any interest it
receives on or after the Exchange Date with respect to the Investments
transferred to Insured hereunder.
(d) The Valuation Time shall be 4:15 P.M., New York time, on ,
1997, or such earlier or later day and time as mutually may be agreed upon in
writing (the "Valuation Time").
(e) Insured will acquire all of the assets of, and assume all of the known
liabilities of, Taurus, except that recourse for such liabilities will be
limited to Insured. The known liabilities of Taurus as of the Valuation Time
shall be confirmed in writing to Insured by Taurus pursuant to Section 2(k) of
this Agreement.
(f) Insured will file separate Articles Supplementary to its Articles of
Incorporation establishing the powers, rights and preferences of the Insured
Series D AMPS with the Maryland Department prior to the closing of the
Reorganization.
(g) Insured and Taurus will jointly file Articles of Transfer with the
Maryland Department and any such other instrument as may be required by the
State of Maryland to effect the transfer of Investments of Taurus to Insured.
(h) Taurus will be dissolved following the Exchange Date by filing Articles
of Dissolution with the Maryland Department.
(i) As promptly as practicable after the liquidation of Taurus pursuant to
the Reorganization, Taurus shall terminate its registration under the 1940
Act.
4. Issuance and Valuation of Insured Common Stock and Insured Series D AMPS in
the Reorganization.
Full shares of Insured Common Stock and Insured Series D AMPS of an
aggregate net asset value or liquidation preference, as the case may be, equal
(to the nearest one ten thousandth of one cent) to the value of the assets of
Taurus acquired in the Reorganization determined as hereinafter provided,
reduced by the amount of liabilities of Taurus assumed by Insured, shall be
issued by Insured in exchange for such assets of Taurus, plus cash in lieu of
fractional shares. The net asset value of Insured and Taurus shall be
determined as of the Valuation Time in accordance with the procedures
described in (i) the prospectus of Insured, dated June 19, 1992, relating to
the Insured Common Stock and (ii) the prospectus of Insured, dated September
11, 1992, relating to the Insured AMPS, and no formula will be used to adjust
the net asset value so determined of either Insured or Taurus to take into
account differences in realized and unrealized gains and losses. Values in all
cases
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shall be determined as of the Valuation Time. The value of the Investments of
Taurus to be transferred to Insured shall be determined by Insured pursuant to
the procedures utilized by Insured in valuing its own assets and determining
its own liabilities for purposes of the Reorganization. Such valuation and
determination shall be made by Insured in cooperation with Taurus and shall be
confirmed in writing by Insured to Taurus. The net asset value per share of
the Insured Common Stock and the liquidation preference per share of the
Insured Series D AMPS shall be determined in accordance with such procedures
and Insured shall certify the computations involved. Insured shall issue to
Taurus separate certificates or share deposit receipts for the Insured Common
Stock and the Insured Series D AMPS, each registered in the name of Taurus.
Taurus then shall distribute the Insured Common Stock and the Insured Series D
AMPS to its corresponding stockholders of Taurus Common Stock and Taurus AMPS
by redelivering the certificates or share deposit receipts evidencing
ownership of (i) the Insured Common Stock to State Street Bank and Trust
Company, as the transfer agent and registrar for the Insured Common Stock and
(ii) the Insured Series D AMPS to IBJ Schroder Bank and Trust Company, as the
transfer agent and registrar for the Insured Series D AMPS. With respect to
any Taurus stockholder holding certificates evidencing ownership of either the
Taurus Common Stock or the Taurus AMPS as of the Exchange Date, and subject to
Insured being informed thereof in writing by Taurus, Insured will not permit
such stockholder to receive new certificates evidencing ownership of the
Insured Common Stock or Insured Series D AMPS, exchange Insured Common Stock
or Insured Series D AMPS credited to such stockholder's account for shares of
other investment companies managed by Merrill Lynch Asset Management, L.P. or
any of its affiliates, or pledge or redeem such Insured Common Stock or
Insured Series D AMPS, in any case, until notified by Taurus or its agent that
such stockholder has surrendered his or her outstanding certificates
evidencing ownership of the Taurus Common Stock or the Taurus AMPS, or in the
event of lost certificates, posted adequate bond. Taurus, at its own expense,
will request its stockholders to surrender their outstanding certificates
evidencing ownership of the Taurus Common Stock or the Taurus AMPS, as the
case may be, or post adequate bond therefor.
Dividends payable to holders of record of shares of Insured Common Stock and
Insured Series D AMPS, as the case may be, as of any date after the Exchange
Date and prior to the exchange of certificates by any stockholder of Taurus
shall be payable to such stockholder without interest; however, such dividends
shall not be paid unless and until such stockholder surrenders his or her
stock certificates of Taurus for exchange.
No fractional shares of Insured Common Stock will be issued to holders of
Taurus Common Stock. In lieu thereof, Insured's transfer agent, State Street
Bank and Trust Company, will aggregate all fractional shares of Insured Common
Stock and sell the resulting full shares on the New York Stock Exchange at the
current market price for shares of Insured for the account of all holders of
fractional interests, and each such holder will receive such holder's pro rata
share of the proceeds of such sale upon surrender of such holder's Taurus
Common Stock certificates.
5.Payment of Expenses.
(a) Insured shall pay, subsequent to the Exchange Date, all expenses
incurred in connection with the Reorganization, including, but not limited to,
all costs related to the preparation and distribution of a memorandum to the
independent Directors of each of the Funds, the N-14 Registration Statement
and the preparation and filing of a private letter ruling request with the
IRS, expenses incurred in connection with the deregistration and dissolution
of Taurus and the fees of special counsel to the Reorganization. Such fees and
expenses shall include legal, accounting and state securities or blue sky
fees, printing costs, filing fees, stock exchange fees, rating agency fees,
portfolio transfer taxes (if any), and any similar expenses incurred in
connection with the Reorganization. Neither Insured nor Taurus shall pay any
expenses of its respective stockholders arising out of or in connection with
the Reorganization.
(b) If for any reason the Reorganization is not consummated, no party shall
be liable to any other party for any damages resulting therefrom, including,
without limitation, consequential damages.
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6.Covenants of Insured and Taurus.
(a) Insured and Taurus each agrees to call an annual or special meeting of
its respective stockholders as soon as is practicable after the effective date
of the N-14 Registration Statement for the purpose of considering the
Reorganization as described in this Agreement.
(b) Insured and Taurus each covenants to operate its respective business as
presently conducted between the date hereof and the Exchange Date.
(c) Taurus agrees that following the consummation of the Reorganization, it
will liquidate and dissolve in accordance with the laws of the State of
Maryland and any other applicable law, it will not make any distributions of
any Insured Common Stock or Insured Series D AMPS other than to the
stockholders of Taurus and without first paying or adequately providing for
the payment of all of Taurus' liabilities not assumed by Insured, if any, and
on and after the Exchange Date it shall not conduct any business except in
connection with its liquidation and dissolution.
(d) Taurus undertakes that if the Reorganization is consummated, it will
file, or cause its agents to file, an application pursuant to Section 8(f) of
the 1940 Act for an order declaring that Taurus has ceased to be a registered
investment company.
(e) Insured will file the N-14 Registration Statement with the Securities
and Exchange Commission (the "Commission") and will use its best efforts to
provide that the N-14 Registration Statement becomes effective as promptly as
practicable. Insured and Taurus agree to cooperate fully with each other, and
each will furnish to the other the information relating to itself to be set
forth in the N-14 Registration Statement as required by the 1933 Act, the 1934
Act, the 1940 Act, and the rules and regulations thereunder and the state
securities or blue sky laws.
(f) Insured and Taurus each agrees that by the Exchange Date all of its
Federal and other tax returns and reports required to be filed on or before
such date shall have been filed and all taxes shown as due on said returns
either have been paid or adequate liability reserves have been provided for
the payment of such taxes. In connection with this covenant, the funds agree
to cooperate with each other in filing any tax return, amended return or claim
for refund, determining a liability for taxes or a right to a refund of taxes
or participating in or conducting any audit or other proceeding in respect of
taxes. Insured agrees to retain for a period of ten (10) years following the
Exchange Date all returns, schedules and work papers and all material records
or other documents relating to tax matters of Taurus for its taxable period
first ending after the Exchange Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential except
as otherwise may be necessary in connection with the filing of returns or
claims for refund or in conducting an audit or other proceeding. After the
Exchange Date, Taurus shall prepare, or cause its agents to prepare, any
Federal, state or local tax returns, including any Forms 1099, required to be
filed by Taurus with respect to Taurus' final taxable year ending with its
complete liquidation and for any prior periods or taxable years and further
shall cause such tax returns and Forms 1099 to be duly filed with the
appropriate taxing authorities. Notwithstanding the aforementioned provisions
of this subsection, any expenses incurred by Taurus (other than for payment of
taxes) in connection with the preparation and filing of said tax returns and
Forms 1099 after the Exchange Date shall be borne by Insured.
(g) Insured and Taurus each agrees to mail to each of its respective
stockholders of record entitled to vote at the annual meeting of stockholders
at which action is to be considered regarding this Agreement, in sufficient
time to comply with requirements as to notice thereof, a combined Proxy
Statement and Prospectus which complies in all material respects with the
applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of
the 1940 Act, and the rules and regulations, respectively, thereunder.
(h) Following the consummation of the Reorganization, Insured expects to
stay in existence and continue its business as a closed-end management
investment company registered under the 1940 Act.
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7.Exchange Date.
(a) Delivery of the assets of Taurus to be transferred, together with any
other Investments, and the Insured Common Stock and Insured Series D AMPS to
be issued, shall be made at the offices of Brown & Wood LLP, One World Trade
Center, New York, New York 10048, at 10:00 A.M. on the next full business day
following the Valuation Time, or at such other place, time and date agreed to
by Insured and Taurus, the date and time upon which such delivery is to take
place being referred to herein as the "Exchange Date". To the extent that any
Investments, for any reason, are not transferable on the Exchange Date, Taurus
shall cause such Investments to be transferred to Insured's account with State
Street Bank and Trust Company at the earliest practicable date thereafter.
(b) Taurus will deliver to Insured on the Exchange Date confirmations or
other adequate evidence as to the tax basis of each of the Investments
delivered to Insured hereunder, certified by Ernst & Young LLP.
(c) Insured shall have made prior arrangements for the delivery on the
Exchange Date of the Investments to State Street Bank and Trust Company as the
custodian for Insured.
(d) As soon as practicable after the close of business on the Exchange Date,
Taurus shall deliver to Insured a list of the names and addresses of all of
the stockholders of record of Taurus on the Exchange Date and the number of
shares of Taurus Common Stock and Taurus AMPS owned by each such stockholder,
certified to the best of their knowledge and belief by the transfer agent for
the Taurus Common Stock and the Taurus AMPS, as applicable, or by its
President.
8.Insured Conditions.
The obligations of Insured hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of two-thirds of the
members of the Board of Directors of each of Insured and Taurus and by the
affirmative vote of (i) the holders of (a) a majority of the Insured Common
Stock and Insured AMPS, voting together as a single class, and (b) a
majority of the Insured AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon; and (ii) the holders
of (x) a majority of the Taurus Common Stock and the Taurus AMPS, voting
together as a single class, and (y) a majority of the Taurus AMPS, voting
separately as a class, in each case issued and outstanding and entitled to
vote thereon; and further that (iii) Insured shall have delivered to Taurus
a copy of the resolution approving this Agreement adopted by Insured's
Board of Directors, and a certificate setting forth the vote of Insured's
stockholders obtained, each certified by the Secretary of Insured; and (iv)
Taurus shall have delivered to Insured a copy of the resolution approving
this Agreement adopted by Taurus' Board of Directors, and a certificate
setting forth the vote of Taurus' stockholders obtained, each certified by
the Secretary of Taurus.
(b) That Taurus shall have furnished to Insured a statement of Taurus'
assets, liabilities and capital, with values determined as provided in
Section 4 of this Agreement, together with a schedule of investments with
their respective dates of acquisition and tax costs, all as of the
Valuation Time, certified on Taurus' behalf by its President (or any Vice
President) and its Treasurer, and a certificate of both such officers,
dated the Exchange Date, certifying that as of the Valuation Time and as of
the Exchange Date there has been no material adverse change in the
financial position of Taurus since April 30, 1997, other than changes in
the Investments since that date or changes in the market value of the
Investments.
(c) That Taurus shall have furnished to Insured a certificate signed by
Taurus' President (or any Vice President) and its Treasurer, dated the
Exchange Date, certifying that as of the Valuation Time and as of the
Exchange Date all representations and warranties of Taurus made in this
Agreement are true and correct in all material respects with the same
effect as if made at and as of such dates and Taurus has complied with all
of the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to such dates.
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(d) That Taurus shall have delivered to Insured a letter from Ernst &
Young LLP, dated the Exchange Date, stating that such firm has performed a
limited review of the Federal, state and local income tax returns of Taurus
for the period ended October 31, 1996 (which returns originally were
prepared and filed by Taurus), and that based on such limited review,
nothing came to their attention which caused them to believe that such
returns did not properly reflect, in all material respects, the Federal,
state and local income taxes of Taurus for the period covered thereby; and
that for the period from November 1, 1996 to and including the Exchange
Date and for any taxable year of Taurus ending upon the liquidation of
Taurus, such firm has performed a limited review to ascertain the amount of
applicable Federal, state and local taxes, and has determined that either
such amount has been paid or reserves established for payment of such
taxes, this review to be based on unaudited financial data; and that based
on such limited review, nothing has come to their attention which caused
them to believe that the taxes paid or reserves set aside for payment of
such taxes were not adequate in all material respects for the satisfaction
of Federal, state and local taxes for the period from November 1, 1996 to
and including the Exchange Date and for the final taxable year of Taurus
ending upon liquidation or that Taurus had not qualified as a RIC for
Federal income tax purposes for the period from November 1, 1996 through
liquidation of Taurus.
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That Insured shall have received an opinion of Brown & Wood LLP, as
counsel to both Insured and Taurus, in form and substance satisfactory to
Insured and dated the Exchange Date, to the effect that (i) each of Insured
and Taurus is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) the
Insured Common Stock and Insured Series D AMPS to be issued pursuant to
this Agreement are duly authorized and, upon delivery, will be validly
issued and outstanding and fully paid and nonassessable by Insured, and no
stockholder of Insured has any preemptive right to subscription or purchase
in respect thereof (pursuant to the Articles of Incorporation, as amended,
or the by-laws of Insured or, to the best of such counsel's knowledge,
otherwise); (iii) this Agreement has been duly authorized, executed and
delivered by each of Insured and Taurus, and represents a valid and binding
contract, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws pertaining to the enforcement of creditors' rights
generally and equitable principles; (iv) Taurus has the power to sell,
assign, transfer and deliver the assets transferred by it hereunder and,
upon consummation of the Reorganization in accordance with the terms of
this Agreement, Taurus will have duly transferred such assets and
liabilities in accordance with this Agreement; (v) to the best of such
counsel's knowledge, no consent, approval, authorization or order of any
United States federal or Maryland state court or governmental authority is
required for the consummation by Insured and Taurus of the Reorganization,
except such as have been obtained under the 1933 Act, the 1934 Act and the
1940 Act and the published rules and regulations of the Commission
thereunder and under Maryland law and such as may be required under state
securities or blue sky laws; (vi) the N-14 Registration Statement has
become effective under the 1933 Act, no stop order suspending the
effectiveness of the N-14 Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and the N-14 Registration Statement, and
each amendment or supplement thereto, as of their respective effective
dates, appear on their face to be appropriately responsive in all material
respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act
and the published rules and regulations of the Commission thereunder; (vii)
the descriptions in the N-14 Registration Statement of statutes, legal and
governmental proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; (viii) such counsel
does not know of any statutes, legal or governmental proceedings or
contracts or other documents related to the Reorganization of a character
required to be described in the N-14 Registration Statement which are not
described therein or, if required to be filed, filed as required; (ix) the
execution and delivery of this Agreement does not, and the consummation of
the Reorganization will not, violate any material provision of the Articles
of Incorporation, as amended, the by-laws, as amended, or any agreement
(known to such counsel) to which either Insured or Taurus is a party or by
which either Insured or Taurus is bound, except insofar as the parties have
agreed to amend such provision as a condition precedent to the
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Reorganization; (x) neither Insured nor Taurus, to the knowledge of such
counsel, is required to qualify to do business as a foreign corporation in
any jurisdiction except as may be required by state securities or blue sky
laws, and except where each has so qualified or the failure so to qualify
would not have a material adverse effect on Insured, Taurus, or their
respective stockholders; (xi) to the best of such counsel's knowledge, no
material suit, action or legal or administrative proceeding is pending or
threatened against Insured or Taurus, the unfavorable outcome of which
would materially adversely affect Insured or Taurus; and (xii) all
corporate actions required to be taken by Insured and Taurus to authorize
this Agreement and to effect the Reorganization have been duly authorized
by all necessary corporate actions on the part of Insured and Taurus. Such
opinion also shall state that (x) while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in
the N-14 Registration Statement or any amendment or supplement thereto,
nothing has come to their attention that would lead them to believe that,
on the respective effective dates of the N-14 Registration Statement and
any amendment or supplement thereto, (1) the N-14 Registration Statement or
any amendment or supplement thereto contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2)
the prospectus included in the N-14 Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (y) such counsel does not
express any opinion or belief as to the financial statements, other
financial data, statistical data or information relating to Insured or
Taurus contained or incorporated by reference in the N-14 Registration
Statement. In giving the opinion set forth above, Brown & Wood LLP may
state that it is relying on certificates of officers of Insured and Taurus
with regard to matters of fact and certain certificates and written
statements of governmental officials with respect to the good standing of
Insured and Taurus.
(g) That Insured shall have received a private letter ruling from the
IRS, to the effect that for Federal income tax purposes (i) the transfer of
all of the Investments of Taurus to Insured in exchange solely for Insured
Common Stock and Insured Series D AMPS as provided in this Agreement will
constitute a reorganization within the meaning of Section 368(a)(1)(C) of
the Code, and Insured and Taurus will each be deemed a "party" to a
Reorganization within the meaning of Section 361(b) of the Code; (ii) in
accordance with Section 361(a) of the Code, no gain or loss will be
recognized to Taurus as a result of the Reorganization or on the
distribution of Insured Common Stock and Insured Series D AMPS to Taurus
stockholders under Section 361(c)(1) of the Code; (iii) under Section 1032
of the Code, no gain or loss will be recognized to Insured as a result of
the Reorganization; (iv) in accordance with Section 354(a)(1) of the Code,
no gain or loss will be recognized to the stockholders of Taurus on the
receipt of Insured Common Stock and Insured Series D AMPS in exchange for
their corresponding Taurus Common Stock and Taurus AMPS (except to the
extent that Taurus stockholders receive cash representing an interest in
fractional shares of Insured in the Reorganization); (v) in accordance with
Section 362(b) of the Code, the tax basis of the Taurus assets in the hands
of Insured will be the same as the tax basis of such assets in the hands of
Taurus immediately prior to the consummation of the Reorganization; (vi) in
accordance with Section 358 of the Code, immediately after the
Reorganization, the tax basis of the Insured Common Stock and Insured
Series D AMPS received by the stockholders of Taurus in the Reorganization
will be equal, in the aggregate, to the tax basis of the Taurus Common
Stock and Taurus AMPS surrendered in exchange; (vii) in accordance with
Section 1223 of the Code, a stockholder's holding period for the Insured
Common Stock and Insured Series D AMPS will be determined by including the
period for which such stockholder held the Taurus Common Stock and Taurus
AMPS exchanged therefor, provided, that such Taurus shares were held as a
capital asset; (viii) in accordance with Section 1223 of the Code,
Insured's holding period with respect to the Taurus assets transferred will
include the period for which such assets were held by Taurus; (ix) the
payment of cash to Taurus stockholders in lieu of fractional shares of
Insured will be treated as though the fractional shares were distributed as
part of the Reorganization and then redeemed by Insured, with the result
that each Taurus stockholder will have short- or long-term capital gain or
loss to the extent that the cash distribution differs from such
stockholder's basis allocable to the Insured fractional shares;
and (x) the taxable year of Taurus will end on the effective date of the
Reorganization and pursuant to
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Section 381(a) of the Code and regulations thereunder, Insured will succeed
to and take into account certain tax attributes of Taurus, such as earnings
and profits, capital loss carryovers and method of accounting.
(h) That Insured shall have received from Ernst & Young LLP a letter
dated as of the effective date of the N-14 Registration Statement and a
similar letter dated within five days prior to the Exchange Date, in form
and substance satisfactory to Insured, to the effect that (i) they are
independent public accountants with respect to Taurus within the meaning of
the 1933 Act and the applicable published rules and regulations thereunder;
(ii) in their opinion, the financial statements and supplementary
information of Taurus included or incorporated by reference in the N-14
Registration Statement and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and the published rules and regulations thereunder; (iii) on the basis
of limited procedures agreed upon by Insured and Taurus and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Taurus
included in the N-14 Registration Statement, and inquiries of certain
officials of Taurus responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that (a) such
unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder, (b) such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the
audited financial statements, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to
the unaudited financial statements taken as a whole; and (iv) on the basis
of limited procedures agreed upon by Insured and Taurus and described in
such letter (but not an examination in accordance with generally accepted
auditing standards), the information relating to Taurus appearing in the N-
14 Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) concerning Taurus (with the
exception of performance comparisons, if any), has been obtained from the
accounting records of Taurus or from schedules prepared by officials of
Taurus having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations
made therefrom.
(i) That the Investments to be transferred to Insured shall not include
any assets or liabilities which Insured, by reason of charter limitations
or otherwise, may not properly acquire or assume.
(j) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Taurus, contemplated by the
Commission.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Taurus or would prohibit
the Reorganization.
(l) That Insured shall have received from the Commission such orders or
interpretations as Brown & Wood LLP, as counsel to Insured, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall
be in full force and effect.
(m) That all proceedings taken by Taurus and its counsel in connection
with the Reorganization and all documents incidental thereto shall be
satisfactory in form and substance to Insured.
(n) That prior to the Exchange Date, Taurus shall declare a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to its stockholders all of its net investment
company taxable income for the period from October 31, 1996 to and
including the Exchange Date, if any (computed without regard to any
deduction or dividends paid), and all of its net capital gain, if any,
realized
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for the period from October 31, 1996 to and including the Exchange Date. In
this regard, the last dividend period for the Taurus AMPS prior to the
Exchange Date may be shorter than the dividend period for such AMPS
determined as set forth in the applicable Articles Supplementary.
9.Taurus Conditions.
The obligations of Taurus hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by all of the requisite votes set forth in
Section 8(a) of this Agreement, and that all such certificates as set forth
in such Section shall have been obtained.
(b) That Insured shall have furnished to Taurus a statement of Insured's
assets, liabilities and capital, with values determined as provided in
Section 4 of this Agreement, together with a schedule of its investments,
all as of the Valuation Time, certified on Insured's behalf by its
President (or any Vice President) and its Treasurer, and a certificate
signed by such officers, dated as of the Exchange Date, certifying that as
of the Valuation Time and as of the Exchange Date there has been no
material adverse change in the financial position of Insured since October
31, 1996, other than changes in its portfolio securities since that date or
changes in the market value of its portfolio securities.
(c) That Insured shall have furnished to Taurus a certificate signed by
Insured's President (or any Vice President) and its Treasurer, dated as of
the Exchange Date, certifying that as of the Valuation Time and as of the
Exchange Date all representations and warranties of Insured made in this
Agreement are true and correct in all material respects with the same
effect as if made at and as of such dates, and that Insured has complied
with all of the agreements and satisfied all of the conditions on its part
to be performed or satisfied at or prior to such date.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That Taurus shall have received an opinion of Brown & Wood LLP, as
counsel to both Insured and Taurus, in form and substance satisfactory to
Taurus and dated the Exchange Date, with respect to the matters specified
in Section 8(f) of this Agreement and such other matters as Taurus
reasonably may deem necessary or desirable.
(f) That Taurus shall have received a private letter ruling from the IRS
with respect to the matters specified in Section 8(g) of this Agreement.
(g) That all proceedings taken by Insured and its counsel in connection
with the Reorganization and all documents incidental thereto shall be
satisfactory in form and substance to Taurus.
(h) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Insured, contemplated by the
Commission.
(i) That Taurus shall have received from Deloitte & Touche LLP a letter
dated as of the effective date of the N-14 Registration Statement and a
similar letter dated within five days prior to the Exchange Date, in form
and substance satisfactory to Taurus, to the effect that (i) they were
independent public accountants with respect to Insured within the meaning
of the 1933 Act and the applicable published rules and regulations
thereunder from June 26, 1992 to January 24, 1997; (ii) in their opinion,
the financial statements and supplementary information of Insured included
or incorporated by reference in the N-14 Registration Statement and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder.
(j) That Taurus shall have received from Ernst & Young LLP a letter dated
as of the effective date of the N-14 Registration Statement and a similar
letter dated within five days prior to the Exchange Date, in form and
substance satisfactory to Taurus, to the effect that (i) since January 24,
1997, they have served
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as independent public accountants with respect to Insured within the
meaning of the 1933 Act and the applicable published rules and regulations
thereunder; (ii) on the basis of limited procedures agreed upon by Insured
and Taurus and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of Insured included in the N-14 Registration
Statement, and inquiries of certain officials of Insured responsible for
financial and accounting matters, nothing came to their attention that
caused them to believe that (a) such unaudited financial statements and
related unaudited supplementary information do not comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and the published rules and regulations thereunder, (b) such unaudited
financial statements are not fairly presented in conformity with generally
accepted accounting principles, applied on a basis substantially consistent
with that of the audited financial statements, or (c) such unaudited
supplementary information is not fairly stated in all material respects in
relation to the unaudited financial statements taken as a whole; and (iii)
on the basis of limited procedures agreed upon by Insured and Taurus and
described in such letter (but not an examination in accordance with
generally accepted auditing standards), the information relating to Insured
appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) concerning
Insured (with the exception of performance comparisons, if any), if any,
has been obtained from the accounting records of Insured or from schedules
prepared by officials of Insured having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Insured or would
prohibit the Reorganization.
(l) That Taurus shall have received from the Commission such orders or
interpretations as Brown & Wood LLP, as counsel to Taurus, deems reasonably
necessary or desirable under the 1933 Act and the 1940 Act in connection
with the Reorganization, provided, that such counsel shall have requested
such orders as promptly as practicable, and all such orders shall be in
full force and effect.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the stockholders of each of
Insured and Taurus) prior to the Exchange Date, or the Exchange Date may be
postponed, (i) by mutual consent of the Boards of Directors of Insured and
Taurus; (ii) by the Board of Directors of Insured if any condition of
Insured's obligations set forth in Section 8 of this Agreement has not been
fulfilled or waived by such Board; or (iii) by the Board of Directors of
Taurus if any condition of Taurus' obligations set forth in Section 9 of this
Agreement has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by June 30, 1998, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of
Directors of Insured and Taurus.
(c) In the event of termination of this Agreement pursuant to the provisions
hereof, the same shall become void and have no further effect, and there shall
not be any liability on the part of either Insured or Taurus or persons who
are their directors, trustees, officers, agents or stockholders in respect of
this Agreement.
(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Directors of either Insured or
Taurus, respectively (whichever is entitled to the benefit thereof), if, in
the judgment of such Board after consultation with its counsel, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement to the stockholders of their respective fund, on behalf of
which such action is taken. In addition, the Boards of Directors of Insured
and
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Taurus have delegated to Fund Asset Management, L.P. the ability to make non-
material changes to the transaction if it deems it to be in the best interests
of Insured and Taurus to do so.
(e) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither Insured nor Taurus nor any of
their officers, directors or trustees, agents or stockholders shall have any
liability with respect to such representations or warranties after the
Exchange Date. This provision shall not protect any officer, director or
trustee, agent or stockholder of Insured or Taurus against any liability to
the entity for which that officer, director or trustee, agent or stockholder
so acts or to its stockholders to which that officer, director or trustee,
agent or stockholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the Commission with respect to this Agreement
shall be issued prior to the Exchange Date and shall impose any terms or
conditions which are determined by action of the Boards of Directors of
Insured and Taurus to be acceptable, such terms and conditions shall be
binding as if a part of this Agreement without further vote or approval of the
stockholders of Insured and Taurus, unless such terms and conditions shall
result in a change in the method of computing the number of shares of Insured
Common Stock and Insured Series D AMPS to be issued to Taurus in which event,
unless such terms and conditions shall have been included in the proxy
solicitation materials furnished to the stockholders of Insured and Taurus
prior to the meetings at which the Reorganization shall have been approved,
this Agreement shall not be consummated and shall terminate unless Insured and
Taurus promptly shall call special meetings of stockholders at which such
conditions so imposed shall be submitted for approval.
11. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization pursuant to
Rule 145(c), Insured will cause to be affixed upon the certificate(s) issued
to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO
MUNIYIELD NEW YORK INSURED FUND II, INC. (OR ITS STATUTORY SUCCESSOR) OR
ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION
IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to Insured's
transfer agent with respect to such shares. Taurus will provide Insured on the
Exchange Date with the name of any Taurus stockholder who is to the knowledge
of Taurus an affiliate of it on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to Insured or
Taurus, in either case at 800 Scudders Mill Road, Plainsboro, New Jersey
08536, Attn: Arthur Zeikel, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in
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accordance with the laws of the State of New York applicable to agreements made
and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, of Insured and
Taurus are on file with the Maryland Department and notice is hereby given that
this instrument is executed on behalf of the Directors of each Fund.
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be deemed to be an original but all such
counterparts together shall constitute but one instrument.
MuniYield New York Insured Fund II,
Inc.
By: _________________________________
ARTHUR ZEIKEL
PRESIDENT
Taurus MuniNewYork Holdings, Inc.
By: _________________________________
ARTHUR ZEIKEL
PRESIDENT
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EXHIBIT II
ECONOMIC CONDITIONS IN NEW YORK
The information set forth below is derived from the official statements
prepared in connection with the issuance of New York Municipal Bonds and other
sources that are generally available to investors. The following information
is provided as general information intended to give a recent historical
description and is not intended to indicate future or continuing trends in the
financial or other conditions of New York City (the "City") or New York State
(the "State" or "New York"). The Funds have not independently verified this
information.
In recent years, the State, some of its agencies, instrumentalities and
public authorities and certain of its municipalities have 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
Funds invest.
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 national economic
downturn that began in July 1990 adversely affected the local economy, which
had been declining since late 1989. As a result, the City experienced job
losses in 1990 and 1991 and real Gross City Product ("GCP") fell in those two
years. Beginning in calendar year 1992, the improvement in the national
economy helped stabilize conditions in the City. Employment losses moderated
toward year-end and real GCP increased, boosted by strong wage gains. However,
after noticeable improvements in the City's economy during the calendar year
1994, economic growth slowed in calendar year 1995, and thereafter improved
commencing in calendar year 1996, reflecting improved securities industry
earnings and employment in other sectors. The City's current four-year
financial plan assumes that moderate economic growth will exist through
calendar year 2001.
For each of the 1981 through 1996 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City has been required to close substantial budget
gaps in recent fiscal years in order to maintain balanced operating results.
There can be no assurance that the City will continue to maintain a balanced
budget as required by the State law without additional reductions in City
services or entitlement programs or tax or other revenue increases that could
adversely affect the City's economic base.
The most recent quarterly modification to the City's financial plan for the
1997 fiscal year (July 1, 1996 through June 30, 1997) projects a balanced
budget in accordance with GAAP for the 1997 fiscal year after taking into
account an increase in projected tax revenues of $1.2 billion during the 1997
fiscal year and a discretionary prepayment in the 1997 fiscal year of $1.3
billion of debt service due in the 1998 and 1999 fiscal years. Although
several sectors of the City's economy have expanded recently, including
tourism and business and professional services, City tax revenues remain
heavily dependent on the continued profitability of the securities industry.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's four-year financial plan, including the City's current financial
plan for the 1998 through 2001 fiscal years (the "1998-2001 Financial Plan" or
"City Financial Plan"). The City's projections set forth in the City Financial
Plan are based on various assumptions and contingencies that are uncertain and
may not materialize. Changes in major assumptions could significantly affect
the City's ability to balance its budget as required by State law and to meet
its annual cash flow and financing requirements.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets.
The City's financing program for fiscal years 1998 through 2001 contemplates
the issuance of $4.3 billion of general obligation bonds and $7.1 billion of
bonds to be issued by
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the New York City Transitional Finance Authority (the "Transitional Finance
Authority") to finance City capital projects. In 1997, the State enacted the
New York City Transitional Finance Authority Act (the "Finance Authority
Act"), which created the Transitional Finance Authority, to assist the City in
avoiding certain state constitutional debt limitations. The Transitional
Finance Authority is authorized to issue up to $7.5 billion in long-term debt.
On June 2, 1997, an action was brought in the State Supreme Court, Albany
County, seeking a declaratory judgment declaring the Finance Authority Act to
be unconstitutional. If the Finance Authority Act were voided, and depending
on whether the State took other action that would provide relief to the City
under the general debt limit, the City might be required to curtail its
currently defined capital program early in the 1998 fiscal year. In addition,
the City issues revenue notes and tax anticipation notes to finance its
seasonal working capital requirements. The success of projected public sales
of City bonds and notes, New York City Municipal Water Finance Authority (the
"Water Authority") bonds and Transitional Finance Authority bonds will be
subject to prevailing market conditions, and no assurance can be given that
such sales will be completed. If the City were unable to sell its general
obligation bonds and notes or the Water Authority or the Transitional Finance
Authority were unable to sell its bonds, the City would be prevented from
meeting its planned operating and capital expenditures.
1998-2001 Financial Plan. On June 10, 1997 the City submitted to the New
York State Financial Control Board (the "Control Board") the Financial Plan
for the 1998 through 2001 fiscal years that reflects the City's expense and
capital budgets for the 1998 fiscal year that were adopted on June 6, 1997.
The City Financial Plan projects revenues and expenditures for the 1998 fiscal
year (July 1, 1997 through June 30, 1998) balanced in accordance with GAAP.
The City Financial Plan sets forth gap-closing actions to eliminate a
previously projected gap for the 1998 fiscal year, after taking into account
the prepayment in the 1997 fiscal year of $1.3 billion of debt service due in
the 1998 and 1999 fiscal years. The gap-closing actions for the 1998 fiscal
year include (i) additional agency actions; (ii) the proposed sale of various
assets; (iii) additional State aid; and (iv) entitlement savings in Medicaid.
The City Financial Plan also sets forth projections for the 1999 through 2001
fiscal years and projects budget gaps of $1.8 billion, $2.8 billion and $2.6
billion for the 1999 through 2001 fiscal years, respectively. The City has
outlined a gap-closing program for these years that assumes additional agency
actions, savings from restructuring City government and privatization and
procurement initiatives, additional revenue initiatives and asset sales,
additional State aid, additional entitlement cost containment initiatives and
the availability of funds from the General Reserve.
The City Financial Plan includes a proposed tax reduction program totaling
$272 million, $435 million, $465 million and $481 million in the 1998 through
2001 fiscal years, respectively. The City Financial Plan assumes that portions
of these reductions will be offset by increased State aid totaling $47
million, $254 million, $472 million and $722 million in the 1998 through 2001
fiscal years, respectively.
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. Such assumptions and contingencies include the condition of the
regional and local economies, the impact on real estate tax revenues of the
real estate market, employment growth, wage increases for City employees
consistent with those assumed in the City Financial Plan, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, continuation of interest earning assumptions for pension funds
assets, the ability of the City's hospital and educational entities to take
actions to offset potential budget shortfalls, the ability to complete revenue
generating transactions, provision of State and Federal aid and mandate
relief, the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements, approval by the Governor and the State Legislature of the
extension of certain personal income tax surcharges, that are scheduled to
expire in 1997 and 1998, and adoption of the City's budgets by the City
Council in substantially the forms submitted by the Mayor.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions and to obtain the savings outlined in the
City Financial Plan. In addition, the City may incur expenditures that exceed
those projected in the City Financial Plan. There can be no assurance that
additional gap-closing measures
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will not be required to enable the City to achieve a balanced budget in a
particular fiscal year. Certain identified savings are subject to negotiation
with the City's municipal unions. Various other actions proposed for the 1998
through 2001 fiscal years are subject to approval by the Governor and the
State Legislature and the proposed reductions in spending for entitlement
programs may be subject to legal challenge.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during its
1997-1998 fiscal year or subsequent fiscal years, such developments could
result in reductions in anticipated State aid to the City. The State did not
adopt its budget for the 1997-1998 fiscal year by April 1, 1997, the beginning
of the fiscal year. As of August 10, 1997, the State Legislature had passed
the budget for the 1997-1998 fiscal year and the budget had been delivered to
the Governor for his signature. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow
and additional City expenditures as a result of such reductions or delays.
The City's financial plans have been the subject of extensive public comment
and criticism. On May 29, 1997, the City Comptroller issued a report on the
executive budget published on May 8, 1997 (the "Executive Budget"). The report
identified a total net budget gap of up to $796 million for the 1998 fiscal
year. With respect to the 1999 and subsequent fiscal years, the report noted
that the financial plan published on May 8, 1997 (the "May Financial Plan")
fails to address the City's long-term financial weaknesses, resulting in large
out-year budget gaps. On June 5, 1997, the staff of the New York State Control
Board (the "Control Board") issued a report commenting on the City's 1997
fiscal year. The report noted that the City projects that it will end the 1997
fiscal year with a substantial surplus that will be used to reduce the 1998
and 1999 fiscal year budget gaps. On July 2, 1997, the staff of the Office of
the State Deputy Comptroller of New York (the "OSDC") issued a report on the
City Financial Plan. For the 1998 fiscal year, the report projected a
potential surplus of $190 million. The report also identified risks of $518
million, $1.1 billion, $1.3 billion and $1.4 billion for the 1998 through 2001
fiscal years, respectively. On October 31, 1996, the City's Independent Budget
Office (the "IBO") released a report assessing the costs that could be
incurred by the City in response to the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996 (the "1996 Welfare Act"). The IBO
report noted that if the requirement that all recipients work after two years
of receiving benefits is enforced, these additional costs could be substantial
starting in 1999, reflecting costs for worker training and supervision of new
workers and increased child care costs. The report further noted that, if
economic performance weakened, resulting in an increased number of public
assistance cases, potential costs to the City could substantially increase.
The report noted that the new welfare law's most significant fiscal impact is
likely to occur in the years 2002 and beyond, reflecting the full impact of
the lifetime limit on welfare participation, which only will begin to be felt
in 2002. In addition, the report noted that, given the State constitutional
requirement to care for the needy, the 1996 Welfare Act might well prompt a
migration of benefit-seekers into the City. The report concluded that the
impact of the 1996 Welfare Act on the City will ultimately depend on decisions
of State and City officials, including the allocation of block grant funds
between the State and New York local governments and the division between the
State and local governments of welfare costs not funded by the Federal
Government, the performance of the local economy and the behavior of thousands
of individuals in response to the new system.
Ratings. As of July 24, 1997, Moody's Investors Service, Inc. ("Moody's")
rated the City's outstanding general obligation bonds "Baa1," Standard &
Poor's Ratings Services ("Standard & Poor's") rated such bonds BBB+ and Fitch
Investors Service ("Fitch") rated such bonds A-. On July 10, 1995, Standard &
Poor's revised downwards its ratings on outstanding general obligation bonds
of the City from A- to BBB+. On February 28, 1996, Fitch placed the City's
general obligation bonds on FitchAlert with negative implications. On November
5, 1996, Fitch removed the City's general obligation bonds from FitchAlert,
although Fitch stated that the outlook remains negative. Such ratings reflect
only the view of Moody's, Standard & Poor's and Fitch, from which an
explanation of the significance of such ratings may be obtained. There is no
assurance that such ratings will continue for any given period of time or that
they will not be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an adverse effect on the market prices of
City bonds.
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Outstanding Indebtedness. As of March 31, 1997, the City and the Municipal
Assistance Corporation for the City of New York had respectively approximately
$26.0 and $3.8 billion of outstanding net long-term debt. As of May 1, 1997,
the New York City Municipal Water Finance Authority (the "Water Authority")
had approximately $6.8 billion of aggregate principal amount of outstanding
bonds and $600 million aggregate principal amount of outstanding commercial
paper notes.
Debt service on Water Authority obligations is secured by fees and charges
collected from the users of the City's water and sewer system. State and
Federal regulations require the City's water supply to meet certain standards
to avoid filtration. The City's water supply now meets all technical standards
and the City has taken the position that increased regulatory, enforcement and
other efforts to protect its water supply, will prevent the need for
filtration. On May 6, 1997, the U.S. Environmental Protection Agency granted
the City a filtration avoidance waiver through April 15, 2002 in response to
the City's adoption of certain watershed regulations, which became effective
May 1, 1997. The estimated incremental cost to the City of implementing this
Watershed Memorandum of Agreement, beyond investments in the watershed which
are planned independently, is approximately $400 million. Preliminary
estimates of the costs of such filtration, if it were required, are from $4
billion to $8 billion. Such an expenditure could cause significant increases
in City water and sewer charges.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability
to carry out the City Financial Plan. As of June 30, 1996, the City estimated
its potential future liability on account of all outstanding claims to be
approximately $2.8 billion.
NEW YORK STATE
Current Economic Outlook. The national economy has resumed a more robust
rate of growth after a "soft landing" in 1995, with over 11 million jobs added
since early 1992. Although the State has added approximately 240,000 jobs
since late 1992, employment growth in the state has been hindered during
recent years by significant cutbacks in the computer and instrument
manufacturing, utility, defense and banking industries.
On March 10, 1997 the State Legislature and the Governor conducted a
consensus economic and revenue forecasting process as required under law. As
part of the process, the State Division of the Budget updated the economic
forecast upon which the State's receipts estimates are based. The forecast for
income growth in 1997 was increased modestly to the 5.2 to 5.6 percent range,
consistent with an economic outlook of modest growth in the State's economy
and moderate inflation.
The 1997-1998 Fiscal Year. On January 14, 1997, the Governor released the
Executive Budget for the State's 1997-1998 fiscal year (subsequently as
amended, the "Executive Budget"). As of August 10, 1997, the State's budget
for its 1997-1998 fiscal year, which began on April 1, 1997, required the
signature of the Governor in order to be fully enacted into law. Debt service
appropriations for existing State-supported obligations have been enacted for
the entire 1997-1998 fiscal year.
The State Division of the Budget has reported that approximately $1.56
billion in unbudgeted resources has been identified for use in the 1997-1998
Financial Plan. These additional resources have arisen primarily from revenues
produced by stronger-than-expected growth in the State's economy, higher final
personal income tax payments for the 1996 tax year and additional nonrecurring
1996-1997 cash resources and nonrecurring federal aid.
The draft 1997-1998 Financial Plan, based on the Executive Budget, projects
General Fund receipts of $32.94 billion. General Fund disbursements are
projected at $32.90 billion. The Executive Budget projects
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budget balance on a cash basis but identifies a potential budget gap of
approximately $2.3 billion due primarily to previously enacted tax reduction
programs, the loss of nonrecurring revenues available in the 1996-1997 fiscal
year, growth in Medicaid, collective bargaining agreements and higher fixed
costs such as pensions and debt service. Proposed gap-closing actions in the
Executive Budget include cost containment in State Medicaid, spending
reductions, the use of a portion of the 1996-1997 fiscal year budget surplus
and other actions. The Executive Budget also anticipates a significant
increase in federal aid to the State related to the Medicaid program and the
new federal welfare block grant. There can be no assurance that the Executive
Budget will be enacted as proposed, the cost containment and spending
reduction programs can be implemented as proposed or the anticipated increase
in federal aid will materialize as expected.
The draft 1997-1998 Financial Plan projects budget imbalances of $1.08
billion for the 1998-1999 fiscal year and $1.35 billion for the 1999-2000
fiscal year that are expected to be closed primarily through spending
reductions. The Executive Budget contains several new tax initiatives that are
projected to reduce total receipts by $170 million in the 1997-1998 fiscal
year. In addition, there has been discussion of additional tax reductions,
beyond those reflected in the State's current projections for the 1997-1998
fiscal year that, if enacted, could make it more difficult to achieve budget
balance over this period. The Executive Budget identifies various risks,
including a financial market or broader economic correction, and potential
changes to federal tax law that could alter the federal definitions of income
on which many State taxes rely.
The draft 1997-1998 Financial Plan and the Executive Budget are based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and State economies. Many uncertainties exist in forecasts of
both the national and State economies, including consumer attitudes toward
spending, federal financial and monetary policies, the availability of credit
and the condition of the world economy, which could have an adverse effect on
the State. There can be no assurance that the State economy will not
experience worse-than-predicted results in the 1997-1998 and subsequent fiscal
years, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Owing to these and other factors, the State may face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending required to
maintain State programs at mandated levels. Any such recurring imbalance would
be exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
The Governor is required to submit a balanced budget to the State
Legislature and has indicated that he will close any potential imbalances in
the State's 1997-1998 Financial Plan primarily through General Fund
expenditure reductions and without increases in taxes or deferrals of
scheduled tax reductions. The draft 1997-1998 Financial Plan reflects, and the
1998-1999 Financial Plan, when enacted, is expected to reflect, a continuing
strategy of substantially reduced State spending. There can be no assurance,
however, that the State's actions will be sufficient to preserve budget
balances in the then current or future fiscal years.
On August 22, 1996, the President signed into law the 1996 Welfare Act. The
new law abolishes the Federal Aid to Families with Dependent Children program,
and creates a new Temporary Assistance to Needy Families program (TANF) funded
with a fixed federal block grant to states. The new law also imposes (with
certain exceptions) a five-year durational limit on TANF recipients, requires
that virtually all recipients be engaged in work or community service
activities within two years of receiving benefits, and limits assistance
provided to certain immigrants and other classes of individuals. States are
required to meet work activity participation targets for their TANF caseload.
These requirements are phased in over time. States who fail to meet these
federally mandated job participation rates, or who fail to conform with
certain other Federal standards, face potential sanctions in the form of a
reduced federal block grant.
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On October 16, 1996, the Governor submitted the State's TANF implementation
plan to the Federal government as required under the new federal welfare law.
Submission of this plan to the Federal government requires New York State to
begin compliance with certain time limits on welfare benefits and permits the
State to become eligible for federal block grant funding. On December 13,
1996, the State's plan was approved by the Federal government. The Governor
has introduced legislation necessary to conform with Federal law for
consideration by the Legislature in the 1997 legislative session. There can be
no assurances that the State Legislature will enact welfare reform proposals
as submitted by the Governor and as required under Federal law.
The net fiscal impact of any changes to the State's welfare programs that
are necessary to conform with federal law will be dependent upon such factors
as the ability of the State to avoid any Federal fiscal penalties, the level
of additional resources required to comply with any new State and/or Federal
requirements, and the division of non-Federal welfare costs between the State
and its localities.
Uncertainties exist with regard to both the economy and potential decisions
at the federal level. Future developments may make it more difficult to
balance future New York State budgets. Specific budget proposals being
discussed at the federal level but not included in the State's current
economic forecast would (if enacted) have a disproportionate negative impact
on the longer-term outlook for the State's economy as compared to other
states.
The 1996-1997 Fiscal Year. The State ended its 1996-1997 fiscal year on
March 31, 1997 in balance 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. Of the cash surplus amount, $1.05 billion was previously budgeted by
the Governor in his Executive Budget to finance the 1997-1998 Financial Plan,
and the additional $373 million is available for use in financing the 1997-
1998 Financial Plan. The surplus results primarily from higher-than-expected
revenues and lower-than-expected spending for social service programs. The
General Fund closing balance was $433 million. 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.
Prior Fiscal Years. The State ended its 1995-1996 fiscal year in balance,
with a reported 1995-1996 General Fund cash surplus of $445 million. General
Fund receipts and transfers from other funds totaled $32.81 billion, a
decrease of 1.1 percent from the 1994-1995 levels. General Fund disbursements
and transfers to other funds totaled $32.68 billion for the 1995-1996 fiscal
year, a decrease of 2.2 percent from the 1994-1995 levels. Prior to adoption
of the State's 1995-1996 fiscal year budget, the State had projected a
potential budget gap of approximately $5 billion, which was closed primarily
through spending reductions, cost containment measures, State agency actions
and local assistance reforms.
The State ended its 1994-1995 fiscal year with the General Fund in balance.
General Fund receipts and transfers from other funds totaled $33.16 billion,
an increase of 2.9 percent from the 1993-1994 levels. General Fund
disbursements and transfers to other funds totaled $33.40 billion, an increase
of 4.7 percent from the 1993-1994 levels.
Local Government Assistance Corporation. In 1990, as part of a State fiscal
reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. As of June
1995, LGAC has 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.
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.
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As of March 31, 1997, the total amount of outstanding general obligation
debt was approximately $5.028 billion, including $293.6 million in BANs. The
total amount of moral obligation debt was approximately $4.069 billion, and
$22.499 billion of bonds issued primarily in connection with lease-purchase
and contractual-obligation financing of State capital programs were
outstanding.
Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence 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
September 30, 1996, 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 $75.4 billion. 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. Currently, Moody's, Standard & Poor's and Fitch rate New York
State's outstanding general obligation bonds "A2," A- and A+, respectively.
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, or either of them, may have
an effect on the market price of the New York Municipal Bonds in which the
Fund invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and
other alleged violations of State and Federal laws. State programs are
frequently challenged on State and Federal constitutional grounds. Adverse
developments in legal proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced State Financial Plan in
any given fiscal year. There can be no assurance that an adverse decision in
one or more legal proceedings would not exceed the amount the State reserves
for the payment of judgments or materially impair the State's financial
operations. In its audited financial statements for the fiscal year ended
March 31, 1997, the State reported its estimated liability for awarded and
anticipated unfavorable judgments at $364 million.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1997-1998 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 1997-1998 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers
Board") by the State in 1984. The Yonkers Board is charged with oversight of
the fiscal affairs of Yonkers. Future actions taken by the Governor or the
State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
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EXHIBIT III
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
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.
Con.(. . .)-Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: These bonds in the "Aa," "A," "Baa," "Ba" and "B" groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols "Aal," "Al," "Baal," "Bal" and "Bl."
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Short-term Notes and Variable Rate Demand Obligations: The four ratings of
Moody's for short-term notes and VRDOs are "MIG-1"/"VMIG-1," "MIG-2"/"VMIG-2,"
"MIG-3"/"VMIG-3," and "MIG-4"/"VMIG-4"; "MIG-1"/"VMIG-1" denotes "best
quality, enjoying strong protection from established cash flows"; "MIG-
2"/"VMIG-2" denotes "high quality" with "ample margins of protection"; "MIG-
3"/"VMIG-3" instruments are of "favorable quality . . . but lacking the
undeniable strength of the preceding grades"; "MIG-4"/"VMIG-4" instruments are
of "adequate quality, carrying specific risk but having protection . . . and
not distinctly or predominantly speculative."
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:
"PRIME-1"-Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
Prime-l repayment capacity will often be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and with established access to a range of financial
markets and assured sources of alternate liquidity.
"PRIME-2"-Issuers rated "Prime-2" (or supporting institutions) have a
strong ability for repayment of senior short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
"PRIME-3"-Issuers rated "Prime-3" (or supporting institutions) have an
acceptable ability for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
to the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
"NOT PRIME"-Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within the parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representations and gives no opinion on the legal
validity or enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("S&P'S") MUNICIPAL DEBT
RATINGS
An S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P's from other sources S&P's considers reliable. S&P'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 for other circumstances.
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The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA-Debt rated "AAA" has the highest rating assigned by S&P's. Capacity
to pay interest and repay principal is extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A-Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
BB, B, CCC, CC, C-Debt rated "BB," "B," "CCC," "CC" and "C" is regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C1-The rating "Cl" is reserved for income bonds on which no interest is
being paid.
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 S&P'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 if debt service
payments 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 S&P'S COMMERCIAL PAPER RATINGS
An S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1-This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2-Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3-Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
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<PAGE>
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 S&P's believes
that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P's by the issuer or obtained by S&P's from other sources it
considers reliable. S&P's does not conduct an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information or based on other circumstances.
An S&P's municipal note rating reflects the liquidity concerns and market
access risks unique to such notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
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Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA-Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-
1+."
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining or uncertain, as follows:
Improving (up arrow)
Stable (left arrow/right arrow)
Declining (down arrow)
Uncertain (up arrow/down arrow)
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive" indicating a
potential upgrade. "Negative" for potential downgrade, or "Evolving" where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within three to 12 months.
III-5
<PAGE>
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB-Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B-Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC-Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C-Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D-Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
III-6
<PAGE>
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.
III-7
<PAGE>
EXHIBIT IV
PORTFOLIO INSURANCE
Set forth below is further information with respect to the Mutual Fund
Insurance Policies (the "Policies") that Insured may obtain from several
insurance companies with respect to insured Municipal Bonds held by Insured.
Insured has no obligation to obtain any such Policies and the terms of any
Policies actually obtained may vary significantly from the terms described
below.
In determining eligibility for insurance, insurance companies will apply
their own standards, which correspond generally to the standards they normally
use in establishing the insurability of new issues of Municipal Bonds and
which are not necessarily the criteria that would be used in regard to the
purchase of such bonds by Insured. The Policies do not insure (i) municipal
securities ineligible for insurance and (ii) municipal securities no longer
owned by Insured.
The Policies do not guarantee the market value of the insured Municipal
Bonds or the value of the shares of Insured. 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 Insured which is adversely affected by
either of the above described events. In addition to the payment of premiums,
the Policies may require that Insured notify the insurance company as to all
Municipal Bonds in its portfolio and permit the insurance company to audit its
records. The insurance premiums will be payable monthly by Insured 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 insurance companies will have insurance claims-paying ability ratings of
AAA from Standard & Poor's Ratings Services ("S&P"), "Aaa" from Moody's
Investors Service, Inc. ("Moody's") or AAA from Fitch Investors Service, Inc.
("Fitch").
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 adjudged by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Moody's
insurance claims-paying ability rating is an opinion of the ability of an
insurance company to repay punctually senior policyholder obligations and
claims. An insurer with an insurance claims-paying ability rating of Aaa is
adjudged 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. 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.
An insurance claims-paying ability rating by S&P, Moody's or Fitch 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, Moody's or Fitch 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.
IV-1
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, Article VI of the
Registrant's By-Laws and the Registrant's Investment Advisory Agreement with
Fund Asset Management, Inc., now known as Fund Asset Management, L.P. (the
"Investment Adviser") provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be provided to directors,
officers and controlling persons of each Fund, pursuant to the foregoing
provisions or otherwise, each Fund has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and, therefore, is unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by a Fund of expenses incurred or paid by a director, officer
or controlling person of the Registrant in connection with any successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant, unless in the opinion of its counsel the matter
has been settled by controlling precedent, will submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Reference is made to (i) Section Six of the Purchase Agreement relating to
the Registrant's Common Stock, a form of which previously was filed as an
exhibit to the Common Stock Registration Statement (as defined below), and
(ii) Section Seven of the Purchase Agreement relating to the Registrant's
AMPS, a form of which previously was filed as an exhibit to the AMPS
Registration Statement (as defined below), for provisions relating to the
indemnification of the underwriter.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
(1)(a) --Articles of Incorporation of the Registrant(a)
(b) --Form of Articles Supplementary creating the AMPS(b)
(c) --Form of Articles Supplementary creating the Series D AMPS(c)
(2) --By-Laws of the Registrant(a)
(3) --Not applicable
(4) --Form of Agreement and Plan of Reorganization between the Registrant
and Taurus MuniNewYork Holdings, Inc.(d)
(5)(a) --Form of specimen certificate for Common Stock(e)
(b) --Form of Certificate for AMPS(f)
(c) --Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(g)
(6) --Investment Advisory Agreement between the Registrant and the
Investment Adviser(e)
(7)(a) --Purchase Agreement between the Registrant, the Investment Adviser
and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") relating to the Registrant's Common Stock(e)
(b) --Form of Purchase Agreement between the Registrant, the Investment
Adviser and Merrill Lynch relating to the Registrant's AMPS(f)
(c) --Form of Merrill Lynch Standard Dealer Agreement(a)
(8) --Not applicable
(9) --Custody Agreement between the Registrant and State Street Bank and
Trust Company(e)
(10) --Not applicable
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
(11) --Opinion and Consent of Brown & Wood LLP, counsel for the
Registrant(c)
(12) --Private Letter Ruling from the Internal Revenue Service(c)
(13)(a) --Transfer Agency and Service Agreement between the Registrant and
State Street Bank and Trust Company(e)
(b) --Form of Auction Agent Agreement(f)
(c) --Form of Broker-Dealer Agreement(f)
(d) --Form of Letter of Representations(f)
(14)(a) --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant
(b) --Consent of Ernst & Young LLP, independent auditors for Taurus
MuniNewYork Holdings, Inc.
(15) --Not applicable
(16) --Power of Attorney(h)
</TABLE>
- --------
(a) Incorporated by reference to the Registrant's registration statement on
Form N-2 relating to the Registrant's Common Stock (File Nos. 33-47744 and
811-6661), filed with the Securities and Exchange Commission (the
"Commission") on May 8, 1992 (the "Common Stock Registration Statement").
(b) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2 relating to the
Registrant's Auction Market Preferred Shares (File Nos. 33-50304 and 811-
6661), filed with the Commission on August 28, 1992 (the "AMPS
Registration Statement").
(c) To be filed by amendment.
(d) Included as Exhibit I to the Proxy Statement and Prospectus included in
this Registration Statement.
(e) Incorporated by reference to Pre-Effective Amendment No. 2 to the Common
Stock Registration Statement ("Pre-Effective Amendment No. 2"), filed with
the Commission on June 19, 1992.
(f) Incorporated by reference to the AMPS Registration Statement, filed with
the Commission on July 31, 1992.
(g) Reference is made to Article V, Article VI (section 6), Article VII,
Article VIII, Article X, Article XI, Article XII and Article XIII of the
Registrant's Articles of Incorporation, filed as Exhibit 1 to the Common
Stock Registration Statement; and to Article II, Article III (sections 1,
3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrant's By-Laws, filed as Exhibit 2 to the Common
Stock Registration Statement.
(h) Included on the signature page of this Registration Statement on Form N-
14.
ITEM 17. UNDERTAKINGS.
(a) The Registrant undertakes to suspend 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 percent from its net
asset value per share of Common Stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of Common Stock
increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(b) The Registrant undertakes that: (1) For the purpose of determining any
liability under the Securities Act, the information omitted from the form of
prospectus filed as part of a 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 Securities Act shall be deemed to be a part of the
registration statement as of the time it was declared effective. (2) For the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1993, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 14th day of August, 1997.
MuniYield New York Insured Fund II,
Inc.
(Registrant)
/s/ Arthur Zeikel
By __________________________________
(ARTHUR ZEIKEL, PRESIDENT)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn and Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his behalf, individually and in each capacity stated below, any
amendments to this Registration Statement (including post-effective
amendments) and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURES TITLE DATE
/s/ Arthur Zeikel President (Principal August 14, 1997
- ------------------------------------- Executive Officer)
(ARTHUR ZEIKEL) and Director
/s/ Gerald M. Richard Treasurer (Principal August 14, 1997
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
/s/ James H. Bodurtha Director August 14, 1997
- -------------------------------------
(JAMES H. BODURTHA)
/s/ Herbert I. London Director August 14, 1997
- -------------------------------------
(HERBERT I. LONDON)
/s/ Robert R. Martin Director August 14, 1997
- -------------------------------------
(ROBERT R. MARTIN)
/s/ Joseph L. May Director August 14, 1997
- -------------------------------------
(JOSEPH L. MAY)
/s/ Andre F. Perold Director August 14, 1997
- -------------------------------------
(ANDRE F. PEROLD)
<PAGE>
[Proxy Card Front] COMMON STOCK
MUNIYIELD NEW YORK INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Patrick
D. Sweeney as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Common Stock of MuniYield New York Insured Fund II,
Inc. (the "Fund") held of record by the undersigned on August 25, 1997 at the
Annual Meeting of Stockholders of the Fund to be held on October 20, 1997, or
any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and Taurus MuniNewYork Holdings, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to for all nominees listed below [_]
the contrary below) [_]
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Herbert I. London, Robert R. Martin, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Ernst &
Young LLP as the independent auditors of the Fund to serve for the current
fiscal year ending October 31, 1997.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized persons.
Dated: ______________________________, 1997
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front] AUCTION MARKET
PREFERRED STOCK
MUNIYIELD NEW YORK INSURED FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Patrick
D. Sweeney as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Auction Market Preferred Stock of MuniYield New
York Insured Fund II, Inc. (the "Fund") held of record by the undersigned on
August 25, 1997 at the Annual Meeting of Stockholders of the Fund to be held on
October 20, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and Taurus MuniNewYork Holdings, Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. To consider and act upon a proposal to elect the following persons as
Directors of the Fund:
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to for all nominees listed below [_]
the contrary below) [_]
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James H. Bodurtha, Herbert I. London, Robert R. Martin, Joseph L. May,
Andre F. Perold, Arthur Zeikel
3. To consider and act upon a proposal to ratify the selection of Ernst &
Young LLP as the independent auditors of the Fund to serve for the current
fiscal year ending October 31, 1997.
FOR [_] AGAINST [_] ABSTAIN [_]
4. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized persons.
Dated: ______________________________, 1997
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front] COMMON STOCK
TAURUS MUNINEWYORK HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Patrick
D. Sweeney as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Common Stock of Taurus MuniNewYork Holdings, Inc.
(the "Fund") held of record by the undersigned on August 25, 1997 at a Special
Meeting of Stockholders of the Fund to be held on October 20, 1997, or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield New York Insured Fund II,
Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized persons.
Dated: ______________________________, 1997
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
[Proxy Card Front] AUCTION MARKET
PREFERRED STOCK
TAURUS MUNINEWYORK HOLDINGS, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Patrick
D. Sweeney as proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of Auction Market Preferred Stock of Taurus
MuniNewYork Holdings, Inc. (the "Fund") held of record by the undersigned on
August 25, 1997 at a Special Meeting of Stockholders of the Fund to be held on
October 20, 1997, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
<PAGE>
[Proxy Card Reverse]
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield New York Insured Fund II,
Inc.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the discretion of such proxies, upon such other business as properly may
come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
When signing as attorney or as executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized persons.
Dated: ______________________________, 1997
X _____________________________________________
Signature
X _____________________________________________
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
EXHIBIT 1(b)
MUNIYIELD NEW YORK INSURED FUND II, INC.
Articles Supplementary creating a series of
Auction Market Preferred Stock(R)
MUNIYIELD NEW YORK INSURED FUND II, INC., a Maryland corporation having its
principal Maryland office in the City of Baltimore (the "Corporation"),
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by article fifth of its Charter, the Board of Directors has
reclassified 1,200 authorized and unissued shares of common stock of the
Corporation as preferred stock of the Corporation and has authorized the
issuance of two series of preferred stock, par value $.10 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) thereon, to be designated Auction
Market Preferred Stock, Series D.
SECOND: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of such series of preferred stock are as follows:
_____________________
(R) Registered trademark of Merrill Lynch & Co., Inc.
<PAGE>
DESIGNATION
A series of 1,200 shares of preferred stock, par value $.10 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared) thereon, is hereby
designated "Auction Market Preferred Stock, Series D." Each share of Auction
Market Preferred Stock, Series D (sometimes referred to herein as "AMPS") shall
be issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an Initial Dividend
Rate and an Initial Dividend Payment Date as shall be determined in advance of
the issuance thereof by the Board of Directors of the Corporation or pursuant to
their delegated authority; and have such other preferences, voting powers,
limitations as to dividends, qualifications and terms and conditions of
redemption as are set forth in these Articles Supplementary. The Auction Market
Preferred Stock, Series D shall constitute a separate series of preferred stock
of the Corporation, and each share of Auction Market Preferred Stock, Series D
shall be identical.
1. Definitions. (a) Unless the context or use indicates another or
-----------
different meaning or intent, in these Articles Supplementary the following terms
have the following meanings, whether used in the singular or plural:
"'AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate
2
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bonds are rated "AA" by S&P or "Aa" by Moody's or the equivalent of such rating
by another nationally recognized rating agency, as such rate is made available
on a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day immediately preceding such date, or (ii) in the event that the
Federal Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
Merrill Lynch, Pierce, Fenner & Smith Incorporated or its successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on the
Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Corporation to provide such rate or rates not being supplied by
the Commercial Paper Dealer. If the number of Dividend Period days shall be (i)
7 or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall
be the arithmetic average of the Interest Equivalent on the 60-day and 90-day
rates on such
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commercial paper; (iv) 85 or more days but fewer than 99 days, such rate shall
be the Interest Equivalent of the 90-day rate on such commercial paper; (v) 99
or more days but fewer than 120 days, such rate shall be the arithmetic average
of the Interest Equivalent of the 90-day and 120-day rates on such commercial
paper; (vi) 120 or more days but fewer than 141 days, such rate shall be the
Interest Equivalent of the 120-day rate on such commercial paper; (vii) 141 or
more days but fewer than 162 days, such rate shall be the arithmetic average of
the Interest Equivalent of the 120-day and 180-day rates on such commercial
paper; and (viii) 162 or more days but fewer than 183 days, such rate shall be
the Interest Equivalent of the 180-day rate on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in paragraph 7(c)
of these Articles Supplementary.
"Additional Dividend" has the meaning set forth in paragraph 2(e) of
these Articles Supplementary.
"Adviser" means the Corporation's investment adviser which initially
shall be Fund Asset Management, L.P.
"Affiliate" means any Person, other than Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successors, known to the Auction Agent to be
controlled by, in control of, or under common control with, the Corporation.
"Agent Member" means a member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of AMPS or a Potential
Beneficial Owner.
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<PAGE>
"AMPS" means the Auction Market Preferred Stock, Series D.
"AMPS Basic Maintenance Amount," as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares of
AMPS and Other AMPS Outstanding on such Valuation Date multiplied by the sum of
(a) $25,000 and (b) any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each share of
AMPS and Other AMPS Outstanding, in each case, to (but not including) the end of
the current Dividend Period that follows such Valuation Date in the event the
then current Dividend Period will end within 49 calendar days of such Valuation
Date or through the 49th day after such Valuation Date in the event the then
current Dividend Period will not end within 49 calendar days of such Valuation
Date; (C) in the event the then current Dividend Period will end within 49
calendar days of such Valuation Date, the aggregate amount of cash dividends
that would accumulate at the Maximum Applicable Rate applicable to a Dividend
Period of 28 or fewer days on any shares of AMPS and Other AMPS Outstanding from
the end of such Dividend Period through the 49th day after such Valuation Date,
multiplied by the larger of the Moody's Volatility Factor and the S&P Volatility
Factor, determined from time to time by Moody's and S&P, respectively (except
that if such Valuation Date occurs during a Non-Payment Period, the cash
dividend for purposes of calculation would accumulate at the then current Non-
Payment Period Rate);
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(D) the amount of anticipated expenses of the Corporation for the 90 days
subsequent to such Valuation Date (including any premiums payable with respect
to a Policy); (E) the amount of the Corporation's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities as
of such Valuation Date to the extent not reflected in any of (i)(A) through
(i)(E) (including, without limitation, and immediately upon determination, any
amounts due and payable by the Corporation pursuant to repurchase agreements and
any amounts payable for New York Municipal Bonds or Municipal Bonds purchased as
of such Valuation Date) less (ii) either (A) the Discounted Value of any of the
Corporation's assets, or (B) the face value of any of the Corporation's assets
if such assets mature prior to or on the date of redemption of AMPS or payment
of a liability and are either securities issued or guaranteed by the United
States Government or Deposit Securities, in both cases irrevocably deposited by
the Corporation for the payment of the amount needed to redeem shares of AMPS
subject to redemption or any of (i)(B) through (i)(F). For Moody's, the
Corporation shall include as a liability an amount calculated semi-annually
equal to 150% of the estimated cost of obtaining other insurance guaranteeing
the timely payment of interest on a Moody's Eligible Asset and principal thereof
to maturity with respect to Moody's Eligible Assets that (i) are covered by a
Policy which provides the Corporation with the option to obtain such other
insurance and (ii) are discounted by a Moody's Discount Factor determined
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<PAGE>
by reference to the insurance claims-paying ability rating of the issuer of such
Policy.
"AMPS Basic Maintenance Cure Date," with respect to the failure by the
Corporation to satisfy the AMPS Basic Maintenance Amount (as required by
paragraph 7(a) of these Articles Supplementary) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
"AMPS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any Vice President of the
Corporation which sets forth, as of the related Valuation Date, the assets of
the Corporation, the Market Value and the Discounted Value thereof (seriatim and
in aggregate), and the AMPS Basic Maintenance Amount.
"Anticipation Notes" shall mean the following New York Municipal
Bonds: revenue anticipation notes, tax anticipation notes, tax and revenue
anticipation notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth in paragraph
10(a)(vii) of these Articles Supplementary.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS or Other AMPS, as the case may be, for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means IBJ Schroder Bank & Trust Company unless and
until another commercial bank, trust company or other
7
<PAGE>
financial institution appointed by a resolution of the Board of Directors of the
Corporation or a duly authorized committee thereof enters into an agreement with
the Corporation to follow the Auction Procedures for the purpose of determining
the Applicable Rate and to act as transfer agent, registrar, dividend disbursing
agent and redemption agent for the AMPS and Other AMPS.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 10 of these Articles Supplementary.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares of AMPS or a Broker-Dealer that holds AMPS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to
perform the functions required of a Broker-Dealer in paragraph 10 of these
Articles Supplementary, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a
Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in paragraph 10 of these Articles Supplementary.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading and which is not a Saturday,
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<PAGE>
Sunday or other day on which banks in The City of New York are authorized or
obligated by law to close.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including these Articles Supplementary), of the Corporation on file in the
State Department of Assessments and Taxation of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other commercial paper dealer or dealers as the
Corporation may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors.
"Common Stock" means the common stock, par value $.10 per share, of the
Corporation.
"Corporation" means MuniYield New York Insured Fund II, Inc., a Maryland
corporation.
"Date of Original Issue" means, with respect to any share of AMPS or Other
AMPS, the date on which the Corporation originally issues such share.
"Deposit Securities" means cash and New York Municipal Bonds and Municipal
Bonds rated at least A2 (having a remaining maturity of 12 months or less), P-1,
VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or
less), A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the
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<PAGE>
applicable S&P Discount Factor and (ii) with respect to a Moody's Eligible
Asset, the lower of par and the quotient of the Market Value thereof divided by
the applicable Moody's Discount Factor.
"Dividend Payment Date," with respect to AMPS, has the meaning set forth
in paragraph 2(b)(i) of these Articles Supplementary and, with respect to Other
AMPS, has the equivalent meaning.
"Dividend Period" means the Initial Dividend Period, any 28-Day Dividend
Period and any Special Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other Person as may be
permitted by the Corporation that is listed as the holder of record of shares of
AMPS in the Stock Books.
"Forward Commitment" has the meaning set forth in paragraph 8(c) of these
Articles Supplementary.
"Holder" means a Person identified as a holder of record of shares of AMPS
in the Stock Register.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Corporation, an independent public
accountant or firm of independent public accountants under the Securities Act
of 1933, as amended.
"Initial Dividend Payment Date" means the Initial Dividend Payment Date as
determined by the Board of Directors of the Corporation with respect to the
AMPS.
"Initial Dividend Period," with respect to the AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Sup-
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<PAGE>
plementary and, with respect to Other AMPS, has the equivalent meaning.
"Initial Dividend Rate," with respect to the AMPS, means the rate per annum
applicable to the Initial Dividend Period for the AMPS and, with respect to
Other AMPS, has the equivalent meaning.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing
security.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per share of AMPS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption and excluding Additional Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Market Value" of any asset of the Corporation shall be the market value
thereof determined by the Pricing Service. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service shall value portfolio
securities at the
11
<PAGE>
quoted bid prices or the mean between the quoted bid and asked price or the
yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Corporation from dealers who are
members of the National Association of Securities Dealers, Inc. and make a
market in the security, at least one of which shall be in writing. Futures
contracts and options are valued at closing prices for such instruments
established by the exchange or board of trade on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Directors.
"Maximum Applicable Rate," with respect to AMPS, has the meaning set forth
in paragraph 10(a)(vii) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Maximum Potential Additional Dividend Liability," as of any Valuation Date,
means the aggregate amount of Additional
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<PAGE>
Dividends that would be due if the Corporation were to make Retroactive Taxable
Allocations, with respect to any fiscal year, estimated based upon dividends
paid and the amount of undistributed realized net capital gains and other
taxable income earned by the Corporation, as of the end of the calendar month
immediately preceding such Valuation Date and assuming such Additional Dividends
are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any New York Municipal Bond or Municipal Bond which constitutes a
Moody's Eligible Asset, the percentage determined by reference to (a)(i) the
rating by Moody's or S&P on such Bond or (ii) in the event the Moody's Eligible
Asset is insured under a Policy and the terms of the Policy permit the
Corporation, at its option, to obtain other insurance guaranteeing the timely
payment of interest on such Moody's Eligible Asset and principal thereof to
maturity, the Moody's insurance claims-paying ability rating of the issuer of
the Policy or (iii) in the event the Moody's Eligible Asset is insured under an
insurance policy which guarantees the timely payment of interest on such Moody's
Eligible Asset and principal thereof to maturity, the Moody's insurance claims-
paying ability rating of the issuer of the insurance policy (provided that for
purposes of clauses (ii) and (iii) if the insurance claims-paying ability of an
issuer of a Policy or insurance policy is not rated
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<PAGE>
by Moody's but is rated by S&P, such issuer shall be deemed to have a Moody's
insurance claims-paying ability rating which is two full categories lower than
the S&P insurance claims-paying ability rating) and (b) the Moody's Exposure
Period, in accordance with the table set forth below:
<TABLE>
<CAPTION>
Rating Category
------------------------------------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+***
- -------------------------- ----- ---- ---- ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less........... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but
greater than seven weeks.. 154 164 173 205 235 137 149
9 weeks or less but
greater than eight weeks.. 158 169 179 209 242 138 150
</TABLE>
- ---------------
* Moody's rating.
** New York Municipal Bonds and Municipal Bonds not rated by Moody's but rated
BBB or BBB+ by S&P.
*** New York Municipal Bonds and Municipal Bonds rated MIG-1, VMIG-1 or P-1 or,
if not rated by Moody's, rated SP-1+ or A-1+ by S&P which do not mature or
have a demand feature at par exercisable within the Moody's Exposure Period
and which do not have a long-term rating. For the purposes of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of "A" by Moody's.
; provided, however, in the event a Moody's Discount Factor applicable to a
Moody's Eligible Asset is determined by reference to an insurance claims-paying
ability rating in accordance with clause (a)(ii) or (a)(iii), such Moody's
Discount Factor shall be increased by an amount equal to 50% of the difference
between (a) the percentage set forth in the foregoing table under the applicable
rating category and (b) the percentage set forth in the foregoing table under
the rating category which is one category lower than the applicable rating
category.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term New York Municipal Bonds and short-term Municipal Bonds,
so long as such New York Municipal Bonds and Municipal Bonds are rated at least
MIG-1, VMIG-1 or P-1
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<PAGE>
by Moody's and mature or have a demand feature at par exercisable within the
Moody's Exposure Period, and the Moody's Discount Factor for such Bonds will be
125% if such Bonds are not rated by Moody's but are rated A-1+ or SP-1+ or AA by
S&P and mature or have a demand feature at par exercisable within the Moody's
Exposure Period, and (ii) no Moody's Discount Factor will be applied to cash or
to Receivables for New York Municipal Bonds or Municipal Bonds Sold.
"Receivables for New York Municipal Bonds or Municipal Bonds Sold," for purposes
of calculating Moody's Eligible Assets as of any Valuation Date, means no more
than the aggregate of the following: (i) the book value of receivables for New
York Municipal Bonds or Municipal Bonds sold as of or prior to such Valuation
Date if such receivables are due within five Business Days of such Valuation
Date, and if the trades which generated such receivables are (x) settled through
clearing house firms with respect to which the Corporation has received prior
written authorization from Moody's or (y) with counterparties having a Moody's
long-term debt rating of at least Baa3; and (ii) the Moody's Discounted Value of
New York Municipal Bonds or Municipal Bonds sold as of or prior to such
Valuation Date which generated receivables, if such receivables are due within
five Business Days of such Valuation Date but do not comply with either of
conditions (x) or (y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for New York Municipal
Bonds or Municipal Bonds Sold, a New York
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Municipal Bond or a Municipal Bond that (i) pays interest in cash, (ii) is
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated by
S&P, is rated at least BBB by S&P (provided that, for purposes of determining
the Moody's Discount Factor applicable to any such S&P-rated New York Municipal
Bond or S&P-rated Municipal Bond, such New York Municipal Bond or Municipal Bond
(excluding any short-term New York Municipal Bond or Municipal Bond) will be
deemed to have a Moody's rating which is one full rating category lower than its
S&P rating), (iii) does not have its Moody's rating suspended by Moody's; and
(iv) is part of an issue of New York Municipal Bonds or Municipal Bonds of at
least $10,000,000. In addition, New York Municipal Bonds and Municipal Bonds in
the Corporation's portfolio must be within the following diversification
requirements in order to be included within Moody's Eligible Assets:
<TABLE>
<CAPTION>
Minimum Maximum Maximum Maximum Maximum
Issue Size Underlying Issue Type County State or Territory
Rating ($ Millions) Obligor (%)(1) Concentration(%)(1)(3) Concentration(%)(1)(4) Concentration (1)(5)
- ------------- ------------ --------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
Aaa ......... 10 100 100 100 100
Aa .......... 10 20 60 60 60
A ........... 10 10 40 40 40
Baa ......... 10 6 20 20 20
Other(2) .... 10 4 12 12 12
</TABLE>
- -----------------
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) New York Municipal Bonds and Municipal Bonds not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) Does not apply to general obligation bonds.
(4) Applicable to general obligation bonds only.
(5) Does not apply to New York Municipal Bonds. Territorial bonds (other
than those issued by Puerto Rico and counted collectively) are each
limited to 10% of Moody's Eligible Assets. For diversification purposes,
Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above, any
such New York Municipal Bond or Municipal Bond backed by the guaranty, letter of
credit or insurance issued by a third party will be deemed to be issued by such
third party
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<PAGE>
if the issuance of such third party credit is the sole determinant of the rating
on such Bond. For purposes of the issue type concentration requirement
described above, New York Municipal Bonds and Municipal Bonds will be classified
within one of the following categories: health care issues (teaching and non-
teaching hospitals, public and private), housing issues (single- and multi-
family), educational facilities issues (public and private schools), student
loan issues, resource recovery issues, transportation issues (mass transit,
airport and highway bonds), industrial revenue/pollution control bond issues,
utility issues (including water, sewer and electricity), general obligation
issues, lease obligations/certificates of participation, escrowed bonds and
other issues ("Other Issues") not falling within one of the aforementioned
categories (includes special obligations to crossover, excise and sales tax
revenue, recreation revenue, special assessment and telephone revenue bonds).
In no event shall (a) more than 10% of Moody's Eligible Assets consist of
student loan issues, (b) more than 10% of Moody's Eligible Assets consist of
resource recovery issues or (c) more than 10% of Moody's Eligible Assets consist
of Other Issues.
When the Corporation sells a New York Municipal Bond or Municipal Bond and
agrees to repurchase it at a future date, the Discounted Value of such Bond will
constitute a Moody's Eligible Asset and the amount the Corporation is required
to pay upon repurchase of such Bond will count as a liability for purposes of
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<PAGE>
calculating the AMPS Basic Maintenance Amount. When the Corporation purchases a
New York Municipal Bond or Municipal Bond and agrees to sell it at a future date
to another party, cash receivable by the Corporation thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Corporation for the payment of dividends or
redemption.
"Moody's Exposure Period" means a period that is the same length or longer
than the number of days used in calculating the cash dividend component of the
AMPS Basic Maintenance Amount and shall initially be the period commencing on
and including a given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in paragraph 8(b)
of these Articles Supplementary.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
18
<PAGE>
% Change in
Marginal Tax Moody's Volatility
Rate Factor
------------ ------------------
less than or equal to 5% 292%
greater than 5% but less than or equal to 10% 313%
greater than 10% but less than or equal to 15% 338%
greater than 15% but less than or equal to 20% 364%
greater than 20% but less than or equal to 25% 396%
greater than 25% but less than or equal to 30% 432%
greater than 30% but less than or equal to 35% 472%
greater than 35% but less than or equal to 40% 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such other
potential dividend rate increase factor as Moody's advises the Corporation in
writing is applicable.
"Municipal Bonds" means "Municipal Bonds" as defined in the Corporation's
Registration Statement on Form N-14 (File No. 333-____) on file with the
Securities and Exchange Commission, as such Registration Statement may be
amended from time to time, as well as short-term municipal obligations.
"Municipal Index" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"1940 Act" means the Investment Company Act of 1940, as amended from time to
time.
"1940 Act AMPS Asset Coverage" means asset coverage, as defined in section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Corporation which are stock, including all outstanding shares
of AMPS and Other AMPS (or such other asset coverage as may in the future be
specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are stock of a closed-end investment company as a condition of
paying dividends on its common stock).
19
<PAGE>
"1940 Act Cure Date," with respect to the failure by the Corporation to
maintain the 1940 Act AMPS Asset Coverage (as required by paragraph 6 of these
Articles Supplementary) as of the last Business Day of each month, means the
last Business Day of the following month.
"New York Municipal Bonds" means municipal obligations issued by or on
behalf of the State of New York, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal and New York
income taxes.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Non-Payment Period" means, with respect to the AMPS, any period commencing
on and including the day on which the Corporation shall fail to (i) declare,
prior to the close of business on the second Business Day preceding any Dividend
Payment Date, for payment on or (to the extent permitted by paragraph 2(c)(i) of
these Articles Supplementary) within three Business Days after such Dividend
Payment Date to the Holders as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date, the full amount of any
dividend on shares of AMPS payable on such Dividend Payment Date or (ii)
deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, New York City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on
20
<PAGE>
such shares payable (if declared) on such Dividend Payment Date or (B) on any
redemption date for any shares of AMPS called for redemption, the Mandatory
Redemption Price per share of such AMPS or, in the case of an optional
redemption, the Optional Redemption Price per share, and ending on and including
the Business Day on which, by 12:00 noon, New York City time, all unpaid cash
dividends and unpaid redemption prices shall have been so deposited or shall
have otherwise been made available to Holders in same-day funds; provided that,
a Non-Payment Period shall not end unless the Corporation shall have given at
least five days' but no more than 30 days' written notice of such deposit or
availability to the Auction Agent, all Existing Holders (at their addresses
appearing in the Stock Books) and the Securities Depository. Notwithstanding
the foregoing, the failure by the Corporation to deposit funds as provided for
by clauses (ii)(A) or (ii)(B) above within three Business Days after any
Dividend Payment Date or redemption date, as the case may be, in each case to
the extent contemplated by paragraph 2(c)(i) of these Articles Supplementary,
shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Corporation has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to paragraph 2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of
21
<PAGE>
AMPS), provided that the Board of Directors of the Corporation shall have the
authority to adjust, modify, alter or change from time to time the initial Non-
Payment Period Rate if the Board of Directors of the Corporation determines and
Moody's and S&P (or any Substitute Rating Agency in lieu of Moody's or S&P in
the event either of such parties shall not rate the AMPS) advise the Corporation
in writing that such adjustment, modification, alteration or change will not
adversely affect their then-current ratings on the AMPS.
"Normal Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of these Articles Supplementary.
"Notice of Redemption" means any notice with respect to the redemption of
shares of AMPS pursuant to paragraph 4 of these Articles Supplementary.
"Notice of Revocation" has the meaning set forth in paragraph 2(c)(iii) of
these Articles Supplementary.
"Notice of Special Dividend Period" has the meaning set forth in paragraph
2(c)(iii) of these Articles Supplementary.
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption and excluding Additional Dividends plus any applicable
redemption premium attributable to the designation of a Premium Call Period.
"Other AMPS" means the Auction Market Preferred Stock, Series A, Auction
Market Preferred Stock, Series B, Auction
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<PAGE>
Market Preferred Stock, Series C and any other auction rate preferred stock of
the Corporation, other than the AMPS.
"Outstanding" means, as of any date (i) with respect to AMPS, shares of
AMPS theretofore issued by the Corporation except, without duplication, (A) any
shares of AMPS theretofore cancelled or delivered to the Auction Agent for
cancellation, or redeemed by the Corporation, or as to which a Notice of
Redemption shall have been given and Deposit Securities shall have been
deposited in trust or segregated by the Corporation pursuant to paragraph 4(c)
and (B) any shares of AMPS as to which the Corporation or any Affiliate thereof
shall be a Beneficial Owner, provided that shares of AMPS held by an Affiliate
shall be deemed outstanding for purposes of calculating the AMPS Basic
Maintenance Amount and (ii) with respect to shares of other Preferred Stock, has
the equivalent meaning.
"Parity Stock" means the AMPS and each other outstanding series of
Preferred Stock the holders of which, together with the holders of the AMPS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
23
<PAGE>
"Policy" means an insurance policy purchased by the Corporation which
guarantees the payment of principal and interest on specified New York Municipal
Bonds or Municipal Bonds during the period in which such New York Municipal
Bonds or Municipal Bonds are owned by the Corporation; provided, however, that,
as long as the AMPS are rated by Moody's and S&P, the Corporation will not
obtain any Policy unless Moody's and S&P advise the Corporation in writing that
the purchase of such Policy will not adversely affect their then-current rating
on the AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Corporation, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
"Preferred Stock" means the preferred stock of the Corporation, and
includes AMPS and Other AMPS.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions".
"Pricing Service" means J.J. Kenny or any pricing service designated by the
Board of Directors of the Corporation provided
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<PAGE>
the Corporation obtains written assurance from S&P and Moody's that such
designation will not impair the rating then assigned by S&P and Moody's to the
AMPS.
"Quarterly Valuation Date" means the twenty-first day of the last month of
each fiscal quarter of the Corporation (or, if such day is not a Business Day,
the next succeeding Business Day) in each fiscal year of the Corporation,
commencing _________, 1998.
"Receivables for New York Municipal Bonds Sold" has the meaning set forth
under the definition of S&P Discount Factor.
"Receivables for New York Municipal Bonds or Municipal Bonds Sold" has the
meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial
Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or
more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv)
with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Special Dividend Period" has the meaning set forth in
paragraph 2(c)(iii) of these Articles Supplementary.
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"Response" has the meaning set forth in paragraph 2(c)(iii) of these
Articles Supplementary.
"Retroactive Taxable Allocation" has the meaning set forth in paragraph
2(e) of these Articles Supplementary.
"Right," with respect to the AMPS, has the meaning set forth in paragraph
2(e) of these Articles Supplementary and, with respect to Other AMPS, has the
equivalent meaning.
"S&P" means Standard & Poor's Ratings Services or its successors.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any New York Municipal Bond which constitutes an S&P Eligible Asset,
the percentage determined by reference to (a)(i) the rating by S&P or Moody's on
such Bond or (ii) in the event the New York Municipal Bond is insured under a
Policy and the terms of the Policy permit the Corporation, at its option, to
obtain other permanent insurance guaranteeing the timely payment of interest on
such New York Municipal Bond and principal thereof to maturity, the S&P
insurance claims-paying ability rating of the issuer of the Policy or (iii) in
the event the New York Municipal Bond is insured under an insurance policy which
guarantees the timely payment of interest on such New York Municipal Bond and
principal thereof to maturity, the S&P insurance claims-paying ability rating of
the issuer of the insurance policy and (b) the S&P Exposure Period, in
accordance with the tables set forth below:
26
<PAGE>
<TABLE>
<CAPTION>
For New York Municipal Bonds:
- -------------------------------
Rating Category
------------------------
S&P Exposure Period AAA* AA* A* BBB*
- ------------------------------- ----- ---- ---- -----
<S> <C> <C> <C> <C>
40 Business Days............... 210% 215% 230% 270%
22 Business Days............... 190 195 210 250
10 Business Days............... 175 180 195 235
7 Business Days............... 170 175 190 230
3 Business Days............... 150 155 170 210
</TABLE>
- -------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
New York Municipal Bonds will be 115%, so long as such New York Municipal Bonds
are rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
in 30 days or less, or 125% if such New York Municipal Bonds are not rated by
S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, such
short-term New York Municipal Bonds rated by Moody's but not rated by S&P having
a demand feature exercisable in 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-1+ from S&P; and further
provided that such short-term New York Municipal Bonds rated by Moody's but not
rated by S&P may comprise no more than 50% of short-term New York Municipal
Bonds that qualify as S&P Eligible Assets and (ii) no S&P Discount Factor will
be applied to cash or to Receivables for New York Municipal Bonds Sold.
"Receivables for New York Municipal Bonds Sold," for purposes of calculating S&P
Eligible Assets as of any Valuation Date, means the book value of receivables
for New York Municipal Bonds sold as of or prior to
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<PAGE>
such Valuation Date if such receivables are due within five Business Days of
such Valuation Date. The Corporation may adopt S&P Discount Factors for
Municipal Bonds other than New York Municipal Bonds provided that S&P advises
the Corporation in writing that such action will not adversely affect its then
current rating on the AMPS. For purposes of the foregoing, Anticipation Notes
rated SP-1+ or, if not rated by S&P, rated VMIG-1 by Moody's, which do not
mature or have a demand feature exercisable in 30 days and which do not have a
long-term rating, shall be considered to be short-term New York Municipal Bonds.
"S&P Eligible Asset" means cash, Receivables for New York Municipal Bonds
Sold or a New York Municipal Bond that (i) is interest bearing and pays interest
at least semi-annually; (ii) is payable with respect to principal and interest
in United States Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are grant anticipation notes or
bond anticipation notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by Moody's, is rated at least A
by Moody's (provided that such Moody's-rated New York Municipal Bonds will be
included in S&P Eligible Assets only to the extent the Market Value of such New
York Municipal Bonds does not exceed 50% of the aggregate Market Value of the
S&P Eligible Assets; and further provided that, for purposes of determining the
S&P Discount Factor applicable to any such Moody's-rated New York Municipal
Bond, such New York Municipal Bond will be deemed to have an S&P
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<PAGE>
rating which is one full rating category lower than its Moody's rating); (iv) is
not subject to a covered call or covered put option written by the Corporation;
(v) is not part of a private placement of New York Municipal Bonds; and (vi) is
part of an issue of New York Municipal Bonds with an original issue size of at
least $20 million or, if of an issue with an original issue size below $20
million (but in no event below $10 million), is issued by an issuer with a total
of at least $50 million of securities outstanding. Notwithstanding the
foregoing:
(1) New York Municipal Bonds of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to
the extent the Market Value of such New York Municipal Bonds does not
exceed 10% of the aggregate Market Value of the S&P Eligible Assets,
provided that 2% is added to the applicable S&P Discount Factor for every
1% by which the Market Value of such New York Municipal Bonds exceeds 5% of
the aggregate Market Value of the S&P Eligible Assets; and
(2) New York Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the extent
the Market Value of such Bonds does not exceed 20% of the aggregate Market
Value of S&P Eligible Assets, except that New York Municipal Bonds falling
within the utility issue type category will be broken down into three sub-
categories (as described below) and such New York Municipal Bonds will be
considered S&P
29
<PAGE>
Eligible Assets to the extent the Market Value of such Bonds in each such
sub-category does not exceed 20% of the aggregate Market Value of S&P
Eligible Assets. For purposes of the issue type category requirement
described above, New York Municipal Bonds will be classified within one of
the following categories: health care issues, housing issues, educational
facilities issues, student loan issues, transportation issues, industrial
development bond issues, utility issues, general obligation issues, lease
obligations, escrowed bonds and other issues not falling within one of the
aforementioned categories. For purposes of the issue type category
requirement described above, New York Municipal Bonds in the utility issue
type category will be classified within one of the three following sub-
categories: (i) electric, gas and combination issues (if the combination
issue includes an electric issue), (ii) water and sewer utilities and
combination issues (if the combination issue does not include an electric
issue), and (iii) irrigation, resource recovery, solid waste and other
utilities, provided that New York Municipal Bonds included in this sub-
category (iii) must be rated by S&P in order to be included in S&P Eligible
Assets.
The Corporation may include Municipal Bonds other than New York Municipal
Bonds as S&P Eligible Assets pursuant to guidelines and restrictions to be
established by S&P provided
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<PAGE>
that S&P advises the Corporation in writing that such action will not adversely
affect its then current rating on the AMPS.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the AMPS Basic Maintenance Cure
Date, that the Corporation has under these Articles Supplementary to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the AMPS Basic Maintenance Amount (as described in
paragraph 7(a) of these Articles Supplementary).
"S&P Hedging Transactions" has the meaning set forth in paragraph 8(a) of
these Articles Supplementary.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Corporation in writing is applicable.
"Securities Depository" means The Depository Trust Company or any successor
company or other entities elected by the Corporation as securities depository
for the shares of AMPS that agrees to follow the procedures required to be
followed by such securities depository in connection with the shares of AMPS.
"Service" means the United States Internal Revenue Service.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days (other than 28), evenly divisible by seven and not
fewer than seven nor more than 364.
"Special Dividend Period" means a Dividend Period consisting of (i) a
specified number of days (other than 28), evenly divisible by seven and not
fewer than seven nor more than 364 or
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<PAGE>
(ii) a specified period of one whole year or more but not greater than five
years (in each case subject to adjustment as provided in paragraph 2(b)(i)).
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Board of Directors of the Corporation, after consultation with
the Auction Agent and the Broker-Dealers, during which the shares of AMPS
subject to such Dividend Period shall not be subject to redemption at the option
of the Corporation and (ii) a period (a "Premium Call Period"), consisting of a
number of whole years and determined by the Board of Directors of the
Corporation, after consultation with the Auction Agent and the Broker-Dealers,
during each year of which the shares of AMPS subject to such Dividend Period
shall be redeemable at the Corporation's option at a price per share equal to
$25,000 plus accumulated but unpaid dividends plus a premium expressed as a
percentage of $25,000, as determined by the Board of Directors of the
Corporation after consultation with the Auction Agent and the Broker-Dealers.
"Stock Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the AMPS.
"Stock Register" means the register of Holders maintained on behalf of the
Corporation by the Auction Agent in its capacity as transfer agent and registrar
for the AMPS.
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<PAGE>
"Subsequent Dividend Period," with respect to AMPS, has the meaning set
forth in paragraph 2(c)(i) of these Articles Supplementary and, with respect to
Other AMPS, has the equivalent meaning.
"Substitute Commercial Paper Dealers" means such Substitute Commercial
Paper Dealer or Dealers as the Corporation may from time to time appoint or, in
lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Merrill
Lynch, Pierce, Fenner & Smith Incorporated or its affiliates and successors,
after consultation with the Corporation, to act as the substitute rating agency
or substitute rating agencies, as the case may be, to determine the credit
ratings of the shares of AMPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York City
time, on such date by Kenny Information Systems Inc. or any successor thereto,
based upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Code of "high
grade" component
33
<PAGE>
issuers selected by Kenny Information Systems Inc. or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available by 8:30
A.M., New York City time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall
mean the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal). The Corporation may not utilize a successor index to the Kenny Index
unless Moody's and S&P provide the Corporation with written confirmation that
the use of such successor index will not adversely affect the then-current
respective Moody's and S&P ratings of the AMPS.
"Treasury Bonds" has the meaning set forth in paragraph 8(a) of these
Articles Supplementary.
"28-Day Dividend Period" means a Dividend Period consisting of 28 days.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with
34
<PAGE>
a maturity most nearly comparable to the length of the related Dividend Period,
as such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S.
Government Securities report for such Business Day, or (ii) if such yield as so
calculated is not available, the Alternate Treasury Bill Rate on such date.
"Alternate Treasury Bill Rate" on any date means the Interest Equivalent of the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as determined by bid
price quotations as of any time on the Business Day immediately preceding such
date, obtained from at least three recognized primary U.S. Government securities
dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate"
on any date means the yield as calculated by reference to the
35
<PAGE>
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by the bid price quotations as of any
time on the Business Day immediately preceding such date, obtained from at least
three recognized primary U.S. Government securities dealers selected by the
Auction Agent.
"Valuation Date" means, for purposes of determining whether the Corporation
is maintaining the AMPS Basic Maintenance Amount, each Business Day commencing
with the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Corporation, the amount of cash or securities paid
to or received from a broker (subsequent to the Initial Margin payment) from
time to time as the price of such futures contract fluctuates.
(b) The foregoing definitions of Accountant's Confirmation, AMPS Basic
Maintenance Amount, AMPS Basic Maintenance Cure Date, AMPS Basic Maintenance
Report, Deposit Securities, Discounted Value, Independent Accountant, Initial
Margin, Market Value, Maximum Potential Additional Dividend Liability, Moody's
Discount Factor, Moody's Eligible Asset, Moody's Exposure Period, Moody's
Hedging Transactions, Moody's Volatility Factor, S&P Discount Factor, S&P
Eligible Asset, S&P Exposure Period, S&P Hedging Transactions, S&P Volatility
Factor, Valuation Date and Variation Margin have been determined by the Board of
Directors of the Corporation in order to obtain a "aaa" rating from Moody's and
a
36
<PAGE>
AAA rating from S&P on the AMPS on their Date of Original Issue; and the Board
of Directors of the Corporation shall have the authority, without shareholder
approval, to amend, alter or repeal from time to time the foregoing definitions
and the restrictions and guidelines set forth thereunder if Moody's and S&P or
any Substitute Rating Agency advises the Corporation in writing that such
amendment, alteration or repeal will not adversely affect their then current
ratings on the AMPS.
2. Dividends. (a) The Holders shall be entitled to receive, when, as
---------
and if declared by the Board of Directors of the Corporation, out of funds
legally available therefor, cumulative dividends each consisting of (i) cash at
the Applicable Rate, (ii) a Right to receive cash as set forth in paragraph 2(e)
below, and (iii) any additional amounts as set forth in paragraph 2(f) below,
and no more, payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid (i) in preference to and in
priority over any dividends declared and payable on the Common Stock, and (ii)
to the extent permitted under the Code and to the extent available, out of net
tax-exempt income earned on the Corporation's investments. To the extent
permitted under the Code, dividends on shares of AMPS will be designated as
exempt-interest dividends. For the purposes of this section, the term "net tax-
exempt income" shall exclude capital gains of the Corporation.
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<PAGE>
(b) (i) Cash dividends on shares of AMPS shall accumulate from the Date
of Original Issue and shall be payable, when, as and if declared by the Board of
Directors, out of funds legally available therefor, commencing on the Initial
Dividend Payment Date with respect to the AMPS. Following the Initial Dividend
Payment Date for the AMPS, dividends on the AMPS will be payable, at the option
of the Corporation, either (i) with respect to any 28-Day Dividend Period and
any Short Term Dividend Period of 35 or fewer days, on the day next succeeding
the last day thereof or (ii) with respect to any Short Term Dividend Period of
more than 35 days and with respect to any Long Term Dividend Period, monthly on
the first Business Day of each calendar month during such Short Term Dividend
Period or Long Term Dividend Period and on the day next succeeding the last day
thereof (each such date referred to in clause (i) or (ii) being herein referred
to as a "Normal Dividend Payment Date"), except that if such Normal Dividend
Payment Date is not a Business Day, then (i) the Dividend Payment Date shall be
the first Business Day next succeeding such Normal Dividend Payment Date if such
Normal Dividend Payment Date is a Monday, Tuesday, Wednesday or Thursday, or
(ii) the Dividend Payment Date shall be the first Business Day next preceding
such Normal Dividend Payment Date if such Normal Dividend Payment Date is a
Friday. Although any particular Dividend Payment Date may not occur on the
originally scheduled date because of the exceptions discussed above, the next
succeeding Dividend Payment Date, subject to such
38
<PAGE>
exceptions, will occur on the next following originally scheduled date. If for
any reason a Dividend Payment Date cannot be fixed as described above, then the
Board of Directors shall fix the Dividend Payment Date. The Board of Directors
by resolution may change a Dividend Payment Date if such change does not
adversely affect the contract rights of Holders of shares of AMPS set forth in
the Charter. The Initial Dividend Period, 28-Day Dividend Periods and Special
Dividend Periods are hereinafter sometimes referred to as Dividend Periods.
Each dividend payment date determined as provided above is hereinafter referred
to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the
Stock Register as of 12:00 noon, New York City time, on the Business Day
preceding the Dividend Payment Date. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as they appear on the Stock Register on a
date, not exceeding 15 days prior to the payment date therefor, as may be fixed
by the Board of Directors of the Corporation.
(c) (i) During the period from and including the Date of Original Issue
to but excluding the Initial Dividend Payment Date for the AMPS (the "Initial
Dividend Period"), the Applicable Rate shall be the Initial Dividend Rate.
Commencing on the Initial Dividend Payment Date for the AMPS, the Applicable
Rate for each subsequent dividend period (hereinafter referred to as a
39
<PAGE>
"Subsequent Dividend Period"), which Subsequent Dividend Period shall commence
on and include a Dividend Payment Date and shall end on and include the calendar
day prior to the next Dividend Payment Date (or last Dividend Payment Date in a
Dividend Period if there is more than one Dividend Payment Date), shall be equal
to the rate per annum that results from implementation of the Auction
Procedures.
The Applicable Rate for each Dividend Period commencing during a Non-
Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend
Period, commencing after the first day of, and during, a Non-Payment Period
shall be a 28-Day Dividend Period, provided that if the preceding Dividend
Period is a Special Dividend Period of less than 28 days, the Dividend Period
commencing during a Non-Payment Period will be the same length as such preceding
Dividend Period. Except in the case of the willful failure of the Corporation
to pay a dividend on a Dividend Payment Date or to redeem any shares of AMPS on
the date set for such redemption, any amount of any dividend due on any Dividend
Payment Date (if, prior to the close of business on the second Business Day
preceding such Dividend Payment Date, the Corporation has declared such dividend
payable on such Dividend Payment Date to the Holders of such shares of AMPS as
of 12:00 noon, New York City time, on the Business Day preceding such Dividend
Payment Date) or redemption price with respect to any shares of AMPS not paid to
such Holders when due may be paid to such Holders in the same form of funds by
12:00 noon, New York
40
<PAGE>
City time, on any of the first three Business Days after such Dividend Payment
Date or due date, as the case may be, provided that, such amount is accompanied
by a late charge calculated for such period of non-payment at the Non-Payment
Period Rate applied to the amount of such non-payment based on the actual number
of days comprising such period divided by 365. In the case of a willful failure
of the Corporation to pay a dividend on a Dividend Payment Date or to redeem any
shares of AMPS on the date set for such redemption, the preceding sentence shall
not apply and the Applicable Rate for the Dividend Period commencing during the
Non-Payment Period resulting from such failure shall be the Non-Payment Period
Rate. For the purposes of the foregoing, payment to a person in same-day funds
on any Business Day at any time shall be considered equivalent to payment to
such person in New York Clearing House (next-day) funds at the same time on the
preceding Business Day, and any payment made after 12:00 noon, New York City
time, on any Business Day shall be considered to have been made instead in the
same form of funds and to the same person before 12:00 noon, New York City time,
on the next Business Day.
(ii) The amount of cash dividends per share of any series of AMPS payable
(if declared) on the Initial Dividend Payment Date, each 28-Day Dividend Period
and each Dividend Payment Date of each Short Term Dividend Period shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
41
<PAGE>
Period or part thereof that such share was outstanding and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of AMPS payable (if declared) on
any Dividend Payment Date shall be computed by multiplying the Applicable Rate
for such Dividend Period by a fraction, the numerator of which will be such
number of days in such part of such Dividend Period that such share was
outstanding and for which dividends are payable on such Dividend Payment Date
and the denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
(iii) With respect to each Dividend Period that is a Special Dividend
Period, the Corporation may, at its sole option and to the extent permitted by
law, by telephonic and written notice (a "Request for Special Dividend Period")
to the Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for the AMPS be the number of days (other than 28), evenly
divisible by seven, and not fewer than seven nor more than 364 in the case of a
Short Term Dividend Period or one whole year or more but not greater than five
years in the case of a Long Term Dividend Period, specified in such notice,
provided that the Corporation may not give a Request for Special Dividend Period
(and any such request shall be null and void) unless, for any Auction occurring
after the initial Auction, Sufficient Clearing
42
<PAGE>
Bids were made in the last occurring Auction and unless full cumulative
dividends, any amounts due with respect to redemptions, and any Additional
Dividends payable prior to such date have been paid in full. Such Request for
Special Dividend Period, in the case of a Short Term Dividend Period, shall be
given on or prior to the second Business Day but not more than seven Business
Days prior to an Auction Date for AMPS and, in the case of a Long Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
28 days prior to an Auction Date for the AMPS. Upon receiving such Request for
Special Dividend Period, the Broker-Dealer(s) shall jointly determine whether,
given the factors set forth below, it is advisable that the Corporation issue a
Notice of Special Dividend Period for the series of AMPS as contemplated by such
Request for Special Dividend Period and the Optional Redemption Price of the
AMPS during such Special Dividend Period and the Specific Redemption Provisions
and shall give the Corporation and the Auction Agent written notice (a
"Response") of such determination by no later than the second Business Day prior
to such Auction Date. In making such determination the Broker-Dealer(s) will
consider (1) existing short-term and long-term market rates and indices of such
short-term and long-term rates, (2) existing market supply and demand for short-
term and long-term securities, (3) existing yield curves for short-term and
long-term securities comparable to the AMPS, (4) industry and financial
conditions which may affect the AMPS, (5) the investment objective of the
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Corporation, and (6) the Dividend Periods and dividend rates at which current
and potential beneficial holders of the AMPS would remain or become beneficial
holders. If the Broker-Dealer(s) shall not give the Corporation and the Auction
Agent a Response by such second Business Day or if the Response states that
given the factors set forth above it is not advisable that the Corporation give
a Notice of Special Dividend Period for the AMPS, the Corporation may not give a
Notice of Special Dividend Period in respect of such Request for Special
Dividend Period. In the event the Response indicates that it is advisable that
the Corporation give a Notice of Special Dividend Period for the AMPS, the
Corporation may by no later than the second Business Day prior to such Auction
Date give a notice (a "Notice of Special Dividend Period") to the Auction Agent,
the Securities Depository and each Broker-Dealer which notice will specify (i)
the duration of the Special Dividend Period, (ii) the Optional Redemption Price
as specified in the related Response and (iii) the Specific Redemption
Provisions, if any, as specified in the related Response. The Corporation also
shall provide a copy of such Notice of Special Dividend Period to Moody's and
S&P. The Corporation shall not give a Notice of Special Dividend Period and, if
the Corporation has given a Notice of Special Dividend Period, the Corporation
is required to give telephonic and written notice of its revocation (a "Notice
of Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to
44
<PAGE>
the relevant Auction Date if (x) either the 1940 Act AMPS Asset Coverage is not
satisfied or the Corporation shall fail to maintain S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value at least equal
to the AMPS Basic Maintenance Amount, in each case on each of the two Valuation
Dates immediately preceding the Business Day prior to the relevant Auction Date
on an actual basis and on a pro forma basis giving effect to the proposed
Special Dividend Period (using as a pro forma dividend rate with respect to such
Special Dividend Period the dividend rate which the Broker-Dealers shall advise
the Corporation is an approximately equal rate for securities similar to the
AMPS with an equal dividend period), provided that, in calculating the aggregate
Discounted Value of Moody's Eligible Assets for this purpose, the Moody's
Exposure Period shall be deemed to be one week longer, (y) sufficient funds for
the payment of dividends payable on the immediately succeeding Dividend Payment
Date have not been irrevocably deposited with the Auction Agent by the close of
business on the third Business Day preceding the related Auction Date or (z) the
Broker-Dealer(s) jointly advise the Corporation that after consideration of the
factors listed above they have concluded that it is advisable to give a Notice
of Revocation. The Corporation also shall provide a copy of such Notice of
Revocation to Moody's and S&P. If the Corporation is prohibited from giving a
Notice of Special Dividend Period as a result of any of the factors enumerated
in clause (x), (y) or (z) above or
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if the Corporation gives a Notice of Revocation with respect to a Notice of
Special Dividend Period for any series of AMPS, the next succeeding Dividend
Period will be a 28-Day Dividend Period, provided that if the then current
Dividend Period for the AMPS is a Special Dividend Period of less than 28 days,
the next succeeding Dividend Period for the AMPS will be the same length as such
current Dividend Period. In addition, in the event Sufficient Clearing Bids are
not made in the applicable Auction or such Auction is not held for any reason,
such next succeeding Dividend Period will be a 28-Day Dividend Period and the
Corporation may not again give a Notice of Special Dividend Period for the AMPS
(and any such attempted notice shall be null and void) until Sufficient Clearing
Bids have been made in an Auction with respect to a 28-Day Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of full cumulative dividends and
applicable late charges, as herein provided, on the shares of AMPS (except for
Additional Dividends as provided in paragraph 2(e) hereof and additional
payments as provided in paragraph 2(f) hereof). Except for the late charge
payable pursuant to paragraph 2(c)(i) hereof, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment on the
shares of AMPS that may be in arrears.
(ii) For so long as any share of AMPS is Outstanding, the Corporation shall
not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or
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<PAGE>
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Stock or other stock, if any, ranking junior to the shares
of AMPS as to dividends or upon liquidation) in respect of the Common Stock or
any other stock of the Corporation ranking junior to or on a parity with the
shares of AMPS as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any shares of the Common
Stock or any other such junior stock (except by conversion into or exchange for
stock of the Corporation ranking junior to the shares of AMPS as to dividends
and upon liquidation) or any other such Parity Stock (except by conversion into
or exchange for stock of the Corporation ranking junior to or on a parity with
the shares of AMPS as to dividends and upon liquidation), unless (A) immediately
after such transaction, the Corporation shall have S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount and the Corporation shall
maintain the 1940 Act AMPS Asset Coverage, (B) full cumulative dividends on
shares of AMPS and shares of Other AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid under paragraph 2(e) below on or
before the date of such declaration or payment has been paid and (D) the
Corporation has redeemed the full number of shares of AMPS
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<PAGE>
required to be redeemed by any provision for mandatory redemption contained
herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii)
an uncertificated right (a "Right") to receive an Additional Dividend (as
defined below), and (iii) any additional amounts as set forth in paragraph 2(f)
below. Each Right shall thereafter be independent of the share or shares of
AMPS on which the dividend was paid. The Corporation shall cause to be
maintained a record of each Right received by the respective Holders. A Right
may not be transferred other than by operation of law. If the Corporation
retroactively allocates any net capital gains or other income subject to regular
Federal income taxes to shares of AMPS without having given advance notice
thereof to the Auction Agent as described in paragraph 2(f) hereof solely by
reason of the fact that such allocation is made as a result of the redemption of
all or a portion of the outstanding shares of AMPS or the liquidation of the
Corporation (the amount of such allocation referred to herein as a "Retroactive
Taxable Allocation"), the Corporation will, within 90 days (and generally within
60 days) after the end of the Corporation's fiscal year for which a Retroactive
Taxable Allocation is made, provide notice thereof to the Auction Agent and to
each holder of a Right applicable to such shares of AMPS (initially Cede & Co.
as nominee of The Depository Trust Company) during such fiscal year at such
holder's address as the same appears or last appeared on the Stock Books of the
Corporation.
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<PAGE>
The Corporation will, within 30 days after such notice is given to the Auction
Agent, pay to the Auction Agent (who will then distribute to such holders of
Rights), out of funds legally available therefor, an amount equal to the
aggregate Additional Dividend with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate amount
of Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question, would cause such holder's dividends in dollars (after
Federal, New York State and New York City income tax consequences) from the
aggregate of both the Retroactive Taxable Allocations and the Additional
Dividend to be equal to the dollar amount of the dividends which would have been
received by such holder if the amount of the aggregate Retroactive Taxable
Allocations would have been excludable from the gross income of such holder.
Such Additional Dividend shall be calculated (i) without consideration being
given to the time value of money; (ii) assuming that no holder of shares of AMPS
is subject to the Federal alternative minimum tax with respect to dividends
received from the Corporation; and (iii) assuming that each Retroactive Taxable
Allocation would be taxable in the hands of each holder of shares of AMPS at the
greater of: (x) the maximum combined marginal regular Federal, New York State
and New York City individual income tax rate applicable to ordinary income or
49
<PAGE>
capital gains depending on the taxable character of the distribution (including
any surtax); or (y) the maximum combined marginal regular Federal, New York
State and New York City corporate income tax rate applicable to ordinary income
or capital gains depending on the taxable character of the distribution (taking
into account in both (x) and (y) the Federal income tax deductibility of state
taxes paid or incurred but not any phase out of, or provision limiting, personal
exemptions, itemized deductions, or the benefit of lower tax brackets and
assuming the taxability of Federally tax-exempt dividends for corporations for
New York State and New York City income tax purposes).
(f) Except as provided below, whenever the Corporation intends to include
any net capital gains or other income subject to regular Federal income taxes in
any dividend on shares of AMPS, the Corporation will notify the Auction Agent of
the amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established. The
Corporation may also include such income in a dividend on shares of AMPS without
giving advance notice thereof if it increases the dividend by an additional
amount calculated as if such income was a Retroactive Taxable Allocation and the
additional amount was an Additional Dividend, provided that the Corporation will
notify the Auction Agent of the additional amounts to be included in such
dividend at least five Business Days prior to the applicable Dividend Payment
Date.
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(g) No fractional shares of AMPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or winding up
------------------
of the Corporation, whether voluntary or involuntary, the Holders shall be
entitled to receive, out of the assets of the Corporation available for
distribution to shareholders, before any distribution or payment is made upon
any Common Stock or any other capital stock ranking junior in right of payment
upon liquidation to the AMPS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Additional Dividends as provided in paragraph 2(e) hereof.
If upon any liquidation, dissolution or winding up of the Corporation, the
amounts payable with respect to the AMPS and any other Outstanding class or
series of Preferred Stock of the Corporation ranking on a parity with the AMPS
as to payment upon liquidation are not paid in full, the Holders and the holders
of such other class or series will share ratably in any such distribution of
assets in proportion to the respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the Holders will not be entitled to any further
participation in any distribution of assets by the Corporation except for any
Additional Dividends. A consolidation, merger or statutory share exchange of
the Corporation with or into any other corporation or entity or a sale, whether
for cash, shares
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<PAGE>
of stock, securities or properties, of all or substantially all or any part of
the assets of the Corporation shall not be deemed or construed to be a
liquidation, dissolution or winding up of the Corporation.
4. Redemption. (a) Shares of AMPS shall be redeemable by the
----------
Corporation as provided below:
(i) To the extent permitted under the 1940 Act and Maryland law, upon
giving a Notice of Redemption, the Corporation at its option may redeem
shares of AMPS, in whole or in part, out of funds legally available
therefor, at the Optional Redemption Price per share, on any Dividend
Payment Date; provided that no share of AMPS may be redeemed at the option
of the Corporation during a Non-Call Period to which such share is subject.
In addition, holders of AMPS which are redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The
Corporation may not give a Notice of Redemption relating to an optional
redemption as described in this paragraph 4(a)(i) unless, at the time of
giving such Notice of Redemption, the Corporation has available Deposit
Securities with maturity or tender dates not later than the day preceding
the applicable redemption date and having a value not less than the amount
due to Holders by reason of the redemption of their shares of AMPS on such
redemption date.
(ii) The Corporation shall redeem, out of funds legally available
therefor, at the Mandatory Redemption Price per
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<PAGE>
share, shares of AMPS to the extent permitted under the 1940 Act and
Maryland law, on a date fixed by the Board of Directors, if the Corporation
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with
an aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount as provided in paragraph 7(a) or to satisfy the 1940 Act
AMPS Asset Coverage as provided in paragraph 6 and such failure is not
cured on or before the AMPS Basic Maintenance Cure Date or the 1940 Act
Cure Date (herein collectively referred to as a "Cure Date"), as the case
may be. In addition, holders of AMPS so redeemed shall be entitled to
receive Additional Dividends to the extent provided herein. The number of
shares of AMPS to be redeemed shall be equal to the lesser of (i) the
minimum number of shares of AMPS the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the Cure Date,
together with all shares of other Preferred Stock subject to redemption or
retirement, would result in the Corporation having S&P Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount or satisfaction of the 1940
Act AMPS Asset Coverage, as the case may be, on such Cure Date (provided
that, if there is no such minimum number of shares of AMPS and shares of
other Preferred Stock the redemption of which would have such result, all
shares of AMPS and shares of other
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Preferred Stock then Outstanding shall be redeemed), and (ii) the maximum
number of shares of AMPS, together with all shares of other Preferred Stock
subject to redemption or retirement, that can be redeemed out of funds
expected to be legally available therefor on such redemption date. In
determining the number of shares of AMPS required to be redeemed in
accordance with the foregoing, the Corporation shall allocate the number
required to be redeemed which would result in the Corporation having S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount
or satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be,
pro rata among shares of AMPS, Other AMPS and other Preferred Stock subject
to redemption pursuant to provisions similar to those contained in this
paragraph 4(a)(ii); provided that, shares of AMPS which may not be redeemed
at the option of the Corporation due to the designation of a Non-Call
Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to
satisfy the number of shares required to be redeemed and (B) will be
selected for redemption in an ascending order of outstanding number of days
in the Non-Call Period (with shares with the lowest number of days to be
redeemed first) and by lot in the event of shares having an equal number of
days in such Non-Call Period. The Corporation shall effect such
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<PAGE>
redemption on a Business Day which is not later than 35 days after such
Cure Date, except that if the Corporation does not have funds legally
available for the redemption of all of the required number of shares of
AMPS and shares of other Preferred Stock which are subject to mandatory
redemption or the Corporation otherwise is unable to effect such redemption
on or prior to 35 days after such Cure Date, the Corporation shall redeem
those shares of AMPS which it is unable to redeem on the earliest
practicable date on which it is able to effect such redemption out of funds
legally available therefor.
(b) Notwithstanding any other provision of this paragraph 4, no shares of
AMPS may be redeemed pursuant to paragraph 4(a)(i) of these Articles
Supplementary (i) unless all dividends in arrears on all remaining outstanding
shares of Parity Stock shall have been or are being contemporaneously paid or
declared and set apart for payment and (ii) if redemption thereof would result
in the Corporation's failure to maintain Moody's Eligible Assets or S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount. In the event that less than all the outstanding
shares of a series of AMPS are to be redeemed and there is more than one Holder,
the shares of that series of AMPS to be redeemed shall be selected by lot or
such other method as the Corporation shall deem fair and equitable.
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(c) Whenever shares of AMPS are to be redeemed, the Corporation, not less
than 20 nor more than 30 days prior to the date fixed for redemption, shall
mail a notice ("Notice of Redemption") by first-class mail, postage prepaid, to
each Holder of shares of AMPS to be redeemed and to the Auction Agent. The
Corporation shall cause the Notice of Redemption to also be published in the
eastern and national editions of The Wall Street Journal. The Notice of
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Redemption shall set forth (i) the redemption date, (ii) the amount of the
redemption price, (iii) the aggregate number of shares of AMPS to be redeemed,
(iv) the place or places where shares of AMPS are to be surrendered for payment
of the redemption price, (v) a statement that dividends on the shares to be
redeemed shall cease to accumulate on such redemption date (except that holders
may be entitled to Additional Dividends) and (vi) the provision of these
Articles Supplementary pursuant to which such shares are being redeemed. No
defect in the Notice of Redemption or in the mailing or publication thereof
shall affect the validity of the redemption proceedings, except as required by
applicable law.
If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Corporation shall have deposited in trust with
the Auction Agent, or segregated in an account at the Corporation's custodian
bank for the benefit of the Auction Agent, Deposit Securities (with a right of
substitution) having an aggregate Discounted Value (utilizing in the case of S&P
an S&P Exposure Period of 22 Business Days) equal
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to the redemption payment for the shares of AMPS as to which such Notice of
Redemption has been given with irrevocable instructions and authority to pay the
redemption price to the Holders of such shares, then upon the date of such
deposit or, if no such deposit is made, then upon such date fixed for redemption
(unless the Corporation shall default in making the redemption payment), all
rights of the Holders of such shares as shareholders of the Corporation by
reason of the ownership of such shares will cease and terminate (except their
right to receive the redemption price in respect thereof and any Additional
Dividends, but without interest), and such shares shall no longer be deemed
outstanding. The Corporation shall be entitled to receive, from time to time,
from the Auction Agent the interest, if any, on such Deposit Securities
deposited with it and the Holders of any shares so redeemed shall have no claim
to any of such interest. In case the Holder of any shares so called for
redemption shall not claim the redemption payment for his shares within one year
after the date of redemption, the Auction Agent shall, upon demand, pay over to
the Corporation such amount remaining on deposit and the Auction Agent shall
thereupon be relieved of all responsibility to the Holder of such shares called
for redemption and such Holder thereafter shall look only to the Corporation for
the redemption payment.
5. Voting Rights. (a) General. Except as otherwise provided in the
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Charter or By-Laws, each Holder of shares of AMPS shall be entitled to one vote
for each share held on each matter
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submitted to a vote of shareholders of the Corporation, and the holders of
outstanding shares of Preferred Stock, including AMPS, and of shares of Common
Stock shall vote together as a single class; provided that, at any meeting of
the shareholders of the Corporation held for the election of directors, the
holders of outstanding shares of Preferred Stock, including AMPS, shall be
entitled, as a class, to the exclusion of the holders of all other securities
and classes of capital stock of the Corporation, to elect two directors of the
Corporation. Subject to paragraph 5(b) hereof, the holders of outstanding
shares of capital stock of the Corporation, including the holders of outstanding
shares of Preferred Stock, including AMPS, voting as a single class, shall elect
the balance of the directors.
(b) Right to Elect Majority of Board of Directors. During any period in
---------------------------------------------
which any one or more of the conditions described below shall exist (such period
being referred to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically increased by the
smallest number that, when added to the two directors elected exclusively by the
holders of shares of Preferred Stock, would constitute a majority of the Board
of Directors as so increased by such smallest number; and the holders of shares
of Preferred Stock shall be entitled, voting separately as one class (to the
exclusion of the holders of all other securities and classes of capital stock of
the Corporation), to elect such smallest number of additional directors,
together with the two directors that
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such holders are in any event entitled to elect. A Voting Period shall
commence:
(i) if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding shares of AMPS equal to at least
two full years' dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the Auction Agent
for the payment of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Stock are
entitled to elect a majority of the directors of the Corporation under the
1940 Act.
Upon the termination of a Voting Period, the voting rights described in
this paragraph 5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this paragraph 5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as any
---------------------------------------------------
shares of AMPS are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of Preferred Stock
Outstanding at the time, voting separately as one class: (i) authorize, create
or issue (other than with respect to the issuance of AMPS authorized hereby), or
increase the authorized or issued aggregate stated capital amount of (other than
with respect to the issuance of
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AMPS authorized hereby), any class or series of stock ranking prior to or on a
parity with any series of Preferred Stock with respect to payment of dividends
or the distribution of assets on liquidation, or increase the authorized
aggregate stated capital amount of AMPS or any other Preferred Stock, or (ii)
amend, alter or repeal the provisions of the Charter, whether by merger,
consolidation or otherwise, so as to adversely affect any of the contract rights
expressly set forth in the Charter of holders of shares of AMPS or any other
Preferred Stock. To the extent permitted under the 1940 Act, in the event
shares of more than one series of AMPS or Other AMPS are outstanding, the
Corporation shall not approve any of the actions set forth in clause (i) or (ii)
which adversely affects the contract rights expressly set forth in the Charter
of a Holder of shares of a series of AMPS or Other AMPS differently than those
of a Holder of shares of any other series of AMPS or Other AMPS without the
affirmative vote of the holders of at least a majority of the shares of AMPS or
Other AMPS of each series adversely affected and outstanding at such time (each
such adversely affected series voting separately as a class). The Corporation
shall notify Moody's and S&P ten Business Days prior to any such vote described
in clause (i) or (ii). Unless a higher percentage is provided for under the
Charter, the affirmative vote of the holders of a majority of the outstanding
shares of Preferred Stock, including AMPS, voting together as a single class,
will be required to approve any plan of reorganization (including bankruptcy
proceedings) adversely
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affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act. The class vote of holders of shares of Preferred
Stock, including AMPS, described above will in each case be in addition to a
separate vote of the requisite percentage of shares of Common Stock and shares
of Preferred Stock, including AMPS, voting together as a single class necessary
to authorize the action in question.
(d) Voting Procedures.
-----------------
(i) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Stock to elect additional directors as
described in paragraph 5(b) above, the Corporation shall call a special
meeting of such holders and instruct the Auction Agent to mail a notice of
such special meeting to such holders, such meeting to be held not less than
10 nor more than 20 days after the date of mailing of such notice. If the
Corporation fails to send such notice to the Auction Agent or if the
Corporation does not call such a special meeting, it may be called by any
such holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting held
during a Voting Period, such Holders, voting together as a class (to the
exclusion of the holders of all other securities and classes of capital
stock of the Corporation), shall be
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entitled to elect the number of directors prescribed in paragraph 5(b)
above. At any such meeting or adjournment thereof in the absence of a
quorum, a majority of such holders present in person or by proxy shall have
the power to adjourn the meeting without notice, other than by an
announcement at the meeting, to a date not more than 120 days after the
original record date.
(ii) For purposes of determining any rights of the Holders to vote on
any matter or the number of shares required to constitute a quorum, whether
such right is created by these Articles Supplementary, by the other
provisions of the Charter, by statute or otherwise, a share of AMPS which
is not Outstanding shall not be counted.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of Holders and holders of
other Preferred Stock to elect directors shall continue, notwithstanding
the election at such meeting by the Holders and such other holders of the
number of directors that they are entitled to elect, and the persons so
elected by the Holders and such other holders, together with the two
incumbent directors elected by the Holders and such other holders of
Preferred Stock and the remaining incumbent directors elected by the
holders of the Common Stock and Preferred Stock, shall constitute the duly
elected directors of the Corporation.
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(iv) Simultaneously with the expiration of a Voting Period, the terms
of office of the additional directors elected by the Holders and holders of
other Preferred Stock pursuant to paragraph 5(b) above shall terminate, the
remaining directors shall constitute the directors of the Corporation and
the voting rights of the Holders and such other holders to elect additional
directors pursuant to paragraph 5(b) above shall cease, subject to the
provisions of the last sentence of paragraph 5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of
----------------
shares of AMPS shall not have any rights or preferences other than those
specifically set forth herein. The Holders of shares of AMPS shall have no
preemptive rights or rights to cumulative voting. In the event that the
Corporation fails to pay any dividends on the shares of AMPS, the exclusive
remedy of the Holders shall be the right to vote for directors pursuant to the
provisions of this paragraph 5.
(f) Notification to S&P and Moody's. In the event a vote of Holders of
-------------------------------
AMPS is required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Corporation shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify S&P and Moody's that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and, not later than ten Business Days after the date on which such vote is
taken, notify S&P and Moody's of the result of such vote.
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6. 1940 Act AMPS Asset Coverage. The Corporation shall maintain, as of
----------------------------
the last Business Day of each month in which any share of AMPS is outstanding,
the 1940 Act AMPS Asset Coverage.
7. AMPS Basic Maintenance Amount. (a) The Corporation shall maintain,
-----------------------------
on each Valuation Date, and shall verify to its satisfaction that it is
maintaining on such Valuation Date, (i) S&P Eligible Assets having an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount and
(ii) Moody's Eligible Assets having an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount. Upon any failure to maintain
the required Discounted Value, the Corporation will use its best efforts to
alter the composition of its portfolio to reattain a Discounted Value at least
equal to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic
Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Corporation fails to satisfy the AMPS Basic
Maintenance Amount, the Corporation shall complete and deliver to the Auction
Agent, and Moody's and S&P, as the case may be, a complete AMPS Basic
Maintenance Report as of the date of such failure, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy or
telecopy, telex or other electronic transcription thereof and on the same day
the Corporation mails to the Auction Agent for delivery on the next Business Day
the complete AMPS Basic Maintenance Report. The Corporation will
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deliver an AMPS Basic Maintenance Report to the Auction Agent and Moody's and
S&P, as the case may be, on or before 5:00 p.m., New York City time, on the
third Business Day after a Valuation Date on which the Corporation cures its
failure to maintain Moody's Eligible Assets or S&P Eligible Assets, as the case
may be, with an aggregate Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount or on which the Corporation fails to maintain Moody's
Eligible Assets or S&P Eligible Assets, as the case may be, with an aggregate
Discounted Value which exceeds the AMPS Basic Maintenance Amount by 5% or more.
The Corporation will also deliver an AMPS Basic Maintenance Report to the
Auction Agent, Moody's and S&P as of each Quarterly Valuation Date on or before
the third Business Day after such date. Additionally, on or before 5:00 p.m.,
New York City time, on the third Business Day after the first day of a Special
Dividend Period, the Corporation will deliver an AMPS Basic Maintenance Report
to S&P and the Auction Agent. The Corporation shall also provide Moody's and
S&P with an AMPS Basic Maintenance Report when specifically requested by either
Moody's or S&P. A failure by the Corporation to deliver an AMPS Basic
Maintenance Report under this paragraph 7(b) shall be deemed to be delivery of
an AMPS Basic Maintenance Report indicating the Discounted Value for S&P
Eligible Assets and Moody's Eligible Assets of the Corporation is less than the
AMPS Basic Maintenance Amount, as of the relevant Valuation Date.
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(c) Within ten Business Days after the date of delivery of an AMPS Basic
Maintenance Report in accordance with paragraph 7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent, S&P and Moody's (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other AMPS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Corporation during the quarter ending on such Quarterly Valuation Date),
(ii) that, in such Report (and in such randomly selected Report), the
Corporation correctly determined the assets of the Corporation which constitute
S&P Eligible Assets or Moody's Eligible Assets, as the case may be, at such
Quarterly Valuation Date in accordance with these Articles Supplementary, (iii)
that, in such Report (and in such randomly selected Report), the Corporation
determined whether the Corporation had, at such Quarterly Valuation Date (and at
the Valuation Date addressed in such randomly selected Report) in accordance
with these Articles Supplementary, S&P Eligible Assets of an aggregate
Discounted Value at least equal to the AMPS Basic Maintenance Amount and Moody's
Eligible Assets of an aggregate Discounted Value at least equal to the AMPS
Basic Maintenance Amount, (iv) with respect to the S&P ratings on New York
Municipal Bonds or Municipal Bonds, the issuer name, issue size and coupon rate
listed in such Report, that the Independent Accountant has requested that S&P
verify such information and the Independent Accountant shall
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<PAGE>
provide a listing in its letter of any differences, (v) with respect to the
Moody's ratings on New York Municipal Bonds or Municipal Bonds, the issuer name,
issue size and coupon rate listed in such Report, that such information has been
verified by Moody's (in the event such information is not verified by Moody's,
the Independent Accountant will inquire of Moody's what such information is, and
provide a listing in its letter of any differences), (vi) with respect to the
bid or mean price (or such alternative permissible factor used in calculating
the Market Value) provided by the custodian of the Corporation's assets to the
Corporation for purposes of valuing securities in the Corporation's portfolio,
the Independent Accountant has traced the price used in such Report to the bid
or mean price listed in such Report as provided to the Corporation and verified
that such information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
and (vii) with respect to such confirmation to Moody's, that the Corporation has
satisfied the requirements of paragraph 8(b) of these Articles Supplementary
(such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction
Agent, S&P and Moody's of an AMPS Basic Maintenance Report in accordance with
paragraph 7(b) above relating to any Valuation Date on which the Corporation
failed to maintain S&P Eligible Assets with an aggregate Discounted Value and
Moody's Eligible Assets with an aggregate Discounted Value equal to or
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<PAGE>
greater than the AMPS Basic Maintenance Amount, and relating to the AMPS Basic
Maintenance Cure Date with respect to such failure, the Independent Accountant
will provide to the Auction Agent, S&P and Moody's an Accountant's Confirmation
as to such AMPS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph (c)
or (d) of this paragraph 7 shows that an error was made in the AMPS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets or Moody's
Eligible Assets, as the case may be, of the Corporation was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Corporation, and the Corporation shall accordingly amend and deliver the AMPS
Basic Maintenance Report to the Auction Agent, S&P and Moody's promptly
following receipt by the Corporation of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the shares of AMPS, the Corporation will
complete and deliver to S&P and Moody's an AMPS Basic Maintenance Report as of
the close of business on such Date of Original Issue. Within five Business Days
of such Date of Original Issue, the Independent Accountant will confirm in
writing to S&P and Moody's (i) the mathematical
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<PAGE>
accuracy of the calculations reflected in such Report and (ii) that the
aggregate Discounted Value of S&P Eligible Assets and the aggregate Discounted
Value of Moody's Eligible Assets reflected thereon equals or exceeds the AMPS
Basic Maintenance Amount reflected thereon. Also, on or before 5:00 p.m., New
York City time, on the first Business Day after shares of Common Stock are
repurchased by the Corporation, the Corporation will complete and deliver to S&P
and Moody's an AMPS Basic Maintenance Report as of the close of business on such
date that Common Stock is repurchased.
(g) For so long as shares of AMPS are rated by Moody's, in managing the
Corporation's portfolio, the Adviser will not alter the composition of the
Corporation's portfolio if, in the reasonable belief of the Adviser, the effect
of any such alteration would be to cause the Corporation to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of such
Valuation Date; provided, however, that in the event that, as of the immediately
preceding Valuation Date, the aggregate Discounted Value of Moody's Eligible
Assets exceeded the AMPS Basic Maintenance Amount by five percent or less, the
Adviser will not alter the composition of the Corporation's portfolio in a
manner reasonably expected to reduce the aggregate Discounted Value of Moody's
Eligible Assets unless the Corporation shall have confirmed that, after giving
effect to
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<PAGE>
such alteration, the aggregate Discounted Value of Moody's Eligible Assets would
exceed the AMPS Basic Maintenance Amount.
8. Certain Other Restrictions.
--------------------------
(a) For so long as any shares of AMPS are rated by S&P, the Corporation
will not purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not impair
the ratings then assigned to the shares of AMPS by S&P, except that the
Corporation may purchase or sell futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call options on
such contracts (collectively, "S&P Hedging Transactions"), subject to the
following limitations:
(i) the Corporation will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions which terminate a
futures contract or option held by the Corporation by the Corporation's
taking an opposite position thereto ("Closing Transactions")), which would
cause the Corporation at the time of such transaction to own or have sold
the least of (A) more than 1,000 outstanding futures contracts based on the
Municipal Index, (B) outstanding futures contracts based on the Municipal
Index exceeding in number 25% of the quotient of the Market
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Value of the Corporation's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts based on
the Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
-----------------------
(ii) the Corporation will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause
the Corporation at the time of such transaction to own or have sold the
lesser of (A) outstanding futures contracts based on Treasury Bonds and on
the Municipal Index exceeding in number 25% of the quotient of the Market
Value of the Corporation's total assets divided by $100,000 ($200,000 in
the case of the two-year United States Treasury Note) or (B) outstanding
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded futures contracts based on Treasury Bonds in
the 30 days preceding the time of effecting such transaction as reported by
The Wall Street Journal;
-----------------------
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract which the Corporation owns or has sold
or any outstanding option thereon owned by the Corporation in the event (A)
the Corporation does not have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the AMPS
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Basic Maintenance Amount on two consecutive Valuation Dates and (B) the
Corporation is required to pay Variation Margin on the second such
Valuation Date;
(iv) the Corporation will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month prior
to the delivery month under the terms of such futures contract or option
thereon unless the Corporation holds the securities deliverable under such
terms; and
(v) when the Corporation writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P), fixed-income securities in a
segregated account with the Corporation's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in
the account of or on behalf of the Corporation's broker with respect to
such futures contract or option equals the Market Value of the futures
contract or option, or, in the event the Corporation writes a futures
contract or option thereon which requires delivery of an underlying
security, it shall hold such underlying security in its portfolio.
For purposes of determining whether the Corporation has S&P Eligible Assets
with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P
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Eligible Assets shall be reduced by an amount equal to (i) 30% of the aggregate
settlement value, as marked to market, of any outstanding futures contracts
based on the Municipal Index which are owned by the Corporation plus (ii) 25% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on Treasury Bonds which contracts are owned by the Corporation.
(b) For so long as any shares of AMPS are rated by Moody's, the Corporation
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the ratings then assigned to the shares of AMPS by Moody's, except that
the Corporation may purchase or sell exchange-traded futures contracts based on
the Municipal Index or Treasury Bonds and purchase, write or sell exchange-
traded put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively, "Moody's
Hedging Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing Transactions)
which would cause the Corporation at the time of such transaction to own or
have sold (A) outstanding futures contracts based on the Municipal Index
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exceeding in number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal or (B)
-----------------------
outstanding futures contracts based on the Municipal Index having a Market
Value exceeding 50% of the Market Value of all New York Municipal Bonds and
Municipal Bonds constituting Moody's Eligible Assets owned by the
Corporation (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction);
(ii) the Corporation will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions) which
would cause the Corporation at the time of such transaction to own or have
sold (A) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 20% of the aggregate Market Value of
Moody's Eligible Assets owned by the Corporation and rated Aa by Moody's
(or, if not rated by Moody's but rated by S&P, rated AAA by S&P) or (B)
outstanding futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 40% of the aggregate Market Value of all New York
Municipal Bonds and Municipal Bonds constituting Moody's Eligible Assets
owned by the Corporation (other than Moody's Eligible Assets already
subject to a Moody's Hedging Transaction) and rated Baa or A by Moody's
(or, if not rated by Moody's but rated by S&P,
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rated A or AA by S&P) (for purposes of the foregoing clauses (i) and (ii),
the Corporation shall be deemed to own the number of futures contracts that
underlie any outstanding options written by the Corporation);
(iii) the Corporation will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
--------
Street Journal is less than 5,000;
--------------
(iv) the Corporation will engage in a Closing Transaction to close
out any outstanding futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a futures
contract by no later than the first Business Day of the month in which such
option expires;
(v) the Corporation will engage in Moody's Hedging Transactions
only with respect to futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Corporation will not engage in options and futures
transactions for leveraging or speculative purposes and will not write any
call options or sell any futures contracts for the purpose of hedging the
anticipated purchase of an asset prior to completion of such purchase; and
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(vii) the Corporation will not enter into an option or futures
transaction unless, after giving effect thereto, the Corporation would
continue to have Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets which the
Corporation is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows: (i) assets subject to call
options written by the Corporation which are either exchange-traded and "readily
reversible" or which expire within 49 days after the date as of which such
valuation is made shall be valued at the lesser of (a) Discounted Value and (b)
the exercise price of the call option written by the Corporation; (ii) assets
subject to call options written by the Corporation not meeting the requirements
of clause (i) of this sentence shall have no value; (iii) assets subject to put
options written by the Corporation shall be valued at the lesser of (A) the
exercise price and (B) the Discounted Value of the subject security; (iv)
futures contracts shall be valued at the lesser of (A) settlement price and (B)
the Discounted Value of the subject security, provided that, if a contract
matures within 49 days after the date as of which such valuation is made, where
the Corporation is the seller the contract may be valued at the
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settlement price and where the Corporation is the buyer the contract may be
valued at the Discounted Value of the subject securities; and (v) where delivery
may be made to the Corporation with any security of a class of securities, the
Corporation shall assume that it will take delivery of the security with the
lowest Discounted Value.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the Corporation: (i)
10% of the exercise price of a written call option; (ii) the exercise price of
any written put option; (iii) where the Corporation is the seller under a
futures contract, 10% of the settlement price of the futures contract; (iv)
where the Corporation is the purchaser under a futures contract, the settlement
price of assets purchased under such futures contract; (v) the settlement price
of the underlying futures contract if the Corporation writes put options on a
futures contract; and (vi) 105% of the Market Value of the underlying futures
contracts if the Corporation writes call options on a futures contract and does
not own the underlying contract.
(c) For so long as any shares of AMPS are rated by Moody's, the Corporation
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary
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settlement time (other than such contracts that constitute Moody's Hedging
Transactions that are permitted under paragraph 8(b) of these Articles
Supplementary), except that the Corporation may enter into such contracts to
purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitations:
(i) the Corporation will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities
rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of the
Forward Commitment with a Market Value that equals or exceeds the amount of
the Corporation's obligations under any Forward Commitments to which it is
from time to time a party or long-term fixed income securities with a
Discounted Value that equals or exceeds the amount of the Corporation's
obligations under any Forward Commitment to which it is from time to time a
party; and
(ii) the Corporation will not enter into a Forward Commitment unless,
after giving effect thereto, the Corporation would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than
the AMPS Basic Maintenance Amount.
For purposes of determining whether the Corporation has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
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Corporation is a party and of all securities deliverable to the Corporation
pursuant to such Forward Commitments shall be zero.
(d) For so long as shares of AMPS are rated by S&P or Moody's, the
Corporation will not, unless it has received written confirmation from S&P
and/or Moody's, as the case may be, that such action would not impair the
ratings then assigned to shares of AMPS by S&P and/or Moody's, as the case may
be, (i) borrow money except for the purpose of clearing transactions in
portfolio securities (which borrowings shall under any circumstances be limited
to the lesser of $10 million and an amount equal to 5% of the Market Value of
the Corporation's assets at the time of such borrowings and which borrowings
shall be repaid within 60 days and not be extended or renewed and shall not
cause the aggregate Discounted Value of Moody's Eligible Assets and S&P Eligible
Assets to be less than the AMPS Basic Maintenance Amount), (ii) engage in short
sales of securities, (iii) lend any securities, (iv) issue any class or series
of stock ranking prior to or on a parity with the AMPS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Corporation, (v) reissue any AMPS previously purchased or
redeemed by the Corporation, (vi) merge or consolidate into or with any other
corporation or entity, (vii) change the Pricing Service or (viii) engage in
reverse repurchase agreements.
9. Notice. All notices or communications, unless otherwise specified in
------
the By-Laws of the Corporation or these
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Articles Supplementary, shall be sufficiently given if in writing and delivered
in person or mailed by first-class mail, postage prepaid. Notice shall be
deemed given on the earlier of the date received or the date seven days after
which such notice is mailed.
10. Auction Procedures. (a) Certain definitions. As used in this
------------------ -------------------
paragraph 10, the following terms shall have the following meanings, unless the
context otherwise requires:
(i) "AMPS" means the shares of AMPS being auctioned pursuant to this
paragraph 10.
(ii) "Auction Date" means the first Business Day preceding the first
day of a Dividend Period.
(iii) "Available AMPS" has the meaning specified in paragraph 10(d)(i)
below.
(iv) "Bid" has the meaning specified in paragraph 10(b)(i) below.
(v) "Bidder" has the meaning specified in paragraph 10(b)(i) below.
(vi) "Hold Order" has the meaning specified in paragraph 10(b)(i)
below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Applicable Percentage
will be determined based on (i) the lower of the credit rating or ratings
assigned on such date to such shares by Moody's and S&P (or if Moody's or
S&P or both shall not make such rating available, the
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equivalent of either or both of such ratings by a Substitute Rating Agency
or two Substitute Rating Agencies or, in the event that only one such
rating shall be available, such rating) and (ii) whether the Corporation
has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend pursuant to paragraph
2(f) hereof that net capital gains or other taxable income will be included
in such dividend on shares of AMPS as follows:
<TABLE>
<CAPTION>
Applicable Applicable
Percentage of Percentage of
Credit Ratings Reference Reference
- --------------------------------- Rate - Rate -
Moody's S&P No Notification Notification
- ------------------ ------------- ---------------- --------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
</TABLE>
The Corporation shall take all reasonable action necessary to enable S&P
and Moody's to provide a rating for the AMPS. If either S&P or Moody's shall
not make such a rating available, or neither S&P nor Moody's shall make such a
rating available, Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates and successors, after consultation with the Corporation, shall select
a nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations to act as a Substitute Rating Agency
or Substitute Rating Agencies, as the case may be.
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(viii) "Order" has the meaning specified in paragraph 10(b)(i) below.
(ix) "Sell Order" has the meaning specified in paragraph 10(b)(i)
below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent from time to time as the time by which each Broker-Dealer
must submit to the Auction Agent in writing all Orders obtained by it for
the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in paragraph 10(d)(i)
below.
(xii) "Submitted Hold Order" has the meaning specified in paragraph
10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in paragraph 10(d)(i)
below.
(xiv) "Submitted Sell Order" has the meaning specified in paragraph
10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in paragraph
10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in paragraph
10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
------------------------------------------------------------------
Holders and Potential Holders.
- -----------------------------
(i) Unless otherwise permitted by the Corporation, Beneficial Owners
and Potential Beneficial Owners may only
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participate in Auctions through their Broker-Dealers. Broker-Dealers will
submit the Orders of their respective customers who are Beneficial Owners and
Potential Beneficial Owners to the Auction Agent, designating themselves as
Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners. A
Broker-Dealer may also hold shares of AMPS in its own account as a Beneficial
Owner. A Broker-Dealer may thus submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner and therefore participate in an
Auction as an Existing Holder or Potential Holder on behalf of both itself and
its customers. On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information
as to:
(1) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to continue
to hold, provided that the Applicable Rate for the next succeeding
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Dividend Period shall not be less than the rate per annum specified by
such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding Dividend
Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of Outstanding shares, if any, of AMPS which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable Rate for
the next succeeding Dividend Period shall not be less than the rate per
annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a Broker-
Dealer acting for its own account to the Auction Agent, of information referred
to in clause (A) or (B) of this paragraph 10(b)(i) is hereinafter referred to as
an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order, including a Broker-Dealer acting in such capacity for its own account,
is hereinafter referred to as a "Bidder"; an Order containing the information
referred to in
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clause (A)(1) of this paragraph 10(b)(i) is hereinafter referred to as a "Hold
Order"; an Order containing the information referred to in clause (A)(2) or (B)
of this paragraph 10(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this paragraph
10(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a Broker-
Dealer participates in an Auction as an Existing Holder or a Potential Holder
only to represent the interests of a Beneficial Owner or Potential Beneficial
Owner, whether it be its customers or itself, all discussion herein relating to
the consequences of an Auction for Existing Holders and Potential Holders also
applies to the underlying beneficial ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of Outstanding shares of AMPS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less than the
rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of AMPS to
be determined as set forth in paragraph 10(e)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum
specified therein; or
(3) a lesser number of Outstanding shares of AMPS to be determined as
set forth in paragraph 10(e)(ii)(C) if such
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specified rate per annum shall be higher than the Maximum Applicable Rate
and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding shares of AMPS specified in such
Sell Order; or
(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 10(e)(ii)(C) if Sufficient
Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of Outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of AMPS
to be determined as set forth in paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to the
rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
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(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all
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Orders obtained by such Broker-Dealer, designating itself (unless otherwise
permitted by the Corporation) as an Existing Holder in respect of shares subject
to Orders submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Corporation);
(B) the aggregate number of Outstanding shares of AMPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of AMPS subject to
any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of AMPS subject to
any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of Outstanding shares, if any, of AMPS subject to
any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the
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Auction Agent shall round such rate up to the next highest one-thousandth (.001)
of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of AMPS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Dividend Period which is not a Special Dividend Period)
and a Sell Order (in the case of an Auction relating to a Special Dividend
Period) to have been submitted on behalf of such Existing Holder covering the
number of Outstanding shares of AMPS held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of Outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of Outstanding shares of
AMPS held by such Existing Holder; provided that if more than one Hold
Order is submitted on behalf of such Existing Holder and the number of
shares of AMPS subject to such Hold Orders exceeds the number of
Outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders shall be reduced pro
rata so that
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such Hold Orders, in the aggregate, will cover exactly the number of
Outstanding shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing Holder,
up to and including the excess of the number of Outstanding shares of AMPS
held by such Existing Holder over the number of shares of AMPS subject to
any Hold Order referred to in paragraph 10(c)(iv)(A) above (and if more
than one Bid submitted on behalf of such Existing Holder specifies the same
rate per annum and together they cover more than the remaining number of
shares that can be the subject of valid Bids after application of paragraph
10(c)(iv)(A) above and of the foregoing portion of this paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum,
the number of shares subject to each of such Bids shall be reduced pro rata
so that such Bids, in the aggregate, cover exactly such remaining number of
shares); and the number of shares, if any, subject to Bids not valid under
this paragraph 10(c)(iv)(B) shall be treated as the subject of a Bid by a
Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding shares of AMPS held by such Existing
Holder over the number of shares
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of AMPS subject to Hold Orders referred to in paragraph 10(c)(iv)(A) and
Bids referred to in paragraph 10(c)(iv)(B); provided that if more than one
Sell Order is submitted on behalf of any Existing Holder and the number of
shares of AMPS subject to such Sell Orders is greater than such excess, the
number of shares of AMPS subject to each of such Sell Orders shall be
reduced pro rata so that such Sell Orders, in the aggregate, cover exactly
the number of shares of AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number of
shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner as a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date shall be irrevocable.
(d) Determination of Sufficient Clearing Bids, Winning Bid
------------------------------------------------------
Rate and Applicable Rate.
- ------------------------
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as
a "Submitted Order") and shall determine:
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(A) the excess of the total number of Outstanding shares of AMPS over
the number of Outstanding shares of AMPS that are the subject of Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
AMPS");
(B) from the Submitted Orders whether the number of Outstanding shares
of AMPS that are the subject of Submitted Bids by Potential Holders
specifying one or more rates per annum equal to or lower than the Maximum
Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of AMPS that are the subject
of Submitted Bids by Existing Holders specifying one or more rates per
annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of AMPS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other
than because the number of Outstanding shares of AMPS in clause (1)
above and this clause (2) are each zero because all of the Outstanding
shares of AMPS are the subject of Submitted Hold Orders), such
Submitted Bids by Potential Holders being hereinafter referred to
collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
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(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other Submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such
Existing Holders to continue to hold the shares of AMPS that are the
subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the shares of AMPS that are the subject
of such Submitted Bids,
would result in the number of shares subject to all Submitted Bids specifying
the Winning Bid Rate or a lower rate per annum being at least equal to the
Available AMPS.
(ii) Promptly after the Auction Agent has made the determinations pursuant
to paragraph 10(d)(i), the Auction Agent shall advise the Corporation of the
Maximum Applicable Rate and, based on such determinations, the Applicable Rate
for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the Outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate
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for the next succeeding Dividend Period shall be equal to the Maximum
Applicable Rate; or
(C) if all of the Outstanding shares of AMPS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the Auction
shall automatically be the same length as the immediately preceding
Dividend Period and the Applicable Rate for the next succeeding Dividend
Period shall be equal to 59% of the Reference Rate (or 90% of such rate if
the Corporation has provided notification to the Auction Agent prior to the
Auction establishing the Applicable Rate for any dividend pursuant to
paragraph 2(f) hereof that net capital gains or other taxable income will
be included in such dividend on shares of AMPS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
--------------------------------------------------------------------
and Allocation of Shares. Based on the determinations made pursuant to
- ------------------------
paragraph 10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as set
forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 10(e)(iii) and paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority and
all other Submitted Bids shall be rejected:
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(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the Outstanding shares of AMPS
that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid,
unless the number of Outstanding shares of AMPS subject to all such
Submitted Bids shall be greater than the number of Outstanding shares of
AMPS ("Remaining Shares") equal to the excess of the Available AMPS over
the number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph 10(e)(i)(B) and paragraph 10(e)(i)(C), in which
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event the Submitted Bids of each such Existing Holder shall be accepted,
and each such Existing Holder shall be required to sell Outstanding shares
of AMPS, but only in an amount equal to the difference between (1) the
number of Outstanding shares of AMPS then held by such Existing Holder
subject to such Submitted Bid and (2) the number of shares of AMPS obtained
by multiplying (x) the number of Remaining Shares by (y) a fraction the
numerator of which shall be the number of Outstanding shares of AMPS held
by such Existing Holder subject to such Submitted Bid and the denominator
of which shall be the sum of the number of Outstanding shares of AMPS
subject to such Submitted Bids made by all such Existing Holders that
specified a rate per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but
only in an amount equal to the number of Outstanding shares of AMPS
obtained by multiplying (x) the difference between the Available AMPS and
the number of Outstanding shares of AMPS subject to Submitted Bids
described in paragraph 10(e)(i)(B), paragraph 10(e)(i)(C) and paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the number of
Outstanding shares of AMPS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of Outstanding shares
of AMPS subject to such Submitted Bids made by all such Potential
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<PAGE>
Holders that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the Outstanding shares of AMPS are subject to Submitted Hold Orders), subject
to the provisions of paragraph 10(e)(iii), Submitted Orders shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
Outstanding shares of AMPS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the
Outstanding shares of AMPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be accepted
and the Submitted Sell Orders of each Existing Holder shall be accepted, in
both cases only in an amount equal to the difference between (1) the number
of Outstanding shares of AMPS then held by
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such Existing Holder subject to such Submitted Bid or Submitted Sell Order
and (2) the number of shares of AMPS obtained by multiplying (x) the
difference between the Available AMPS and the aggregate number of
Outstanding shares of AMPS subject to Submitted Bids described in paragraph
10(e)(ii)(A) and paragraph 10(e)(ii)(B) by (y) a fraction the numerator of
which shall be the number of Outstanding shares of AMPS held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the number of Outstanding shares of AMPS
subject to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in paragraph 10(e)(i) or
paragraph 10(e)(ii), any Existing Holder would be entitled or required to sell,
or any Potential Holder would be entitled or required to purchase, a fraction of
a share of AMPS on any Auction Date, the Auction Agent shall, in such manner as
in its sole discretion it shall determine, round up or down the number of shares
of AMPS to be purchased or sold by any Existing Holder or Potential Holder on
such Auction Date so that each Outstanding share of AMPS purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be a whole
share of AMPS.
(iv) If, as a result of the procedures described in paragraph 10(e)(i), any
Potential Holder would be entitled or required to purchase less than a whole
share of AMPS on any
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Auction Date, the Auction Agent shall, in such manner as in its sole discretion
it shall determine, allocate shares of AMPS for purchase among Potential Holders
so that only whole shares of AMPS are purchased on such Auction Date by any
Potential Holder, even if such allocation results in one or more of such
Potential Holders not purchasing any shares of AMPS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of
Outstanding shares of AMPS to be purchased and the aggregate number of the
Outstanding shares of AMPS to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of Outstanding shares to
be purchased and such aggregate number of Outstanding shares to be sold differ,
the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers
acting for one or more purchasers such Broker-Dealer shall deliver, or from
which other Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, Outstanding shares of AMPS.
(f) Miscellaneous. The Corporation may interpret the provisions of this
-------------
paragraph 10 to resolve any inconsistency or ambiguity, remedy any formal defect
or make any other change or modification that does not substantially adversely
affect the rights of Beneficial Owners of AMPS. A Beneficial Owner or an
Existing Holder (A) may sell, transfer or otherwise dispose of
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shares of AMPS only pursuant to a Bid or Sell Order in accordance with the
procedures described in this paragraph 10 or to or through a Broker-Dealer,
provided that in the case of all transfers other than pursuant to Auctions such
Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or its
Agent Member advises the Auction Agent of such transfer and (B) except as
otherwise required by law, shall have the ownership of the shares of AMPS held
by it maintained in book entry form by the Securities Depository in the account
of its Agent Member, which in turn will maintain records of such Beneficial
Owner's beneficial ownership. Neither the Corporation nor any Affiliate shall
submit an Order in any Auction. Any Beneficial Owner that is an Affiliate shall
not sell, transfer or otherwise dispose of shares of AMPS to any Person other
than the Corporation. All of the Outstanding shares of AMPS shall be
represented by a single certificate registered in the name of the nominee of the
Securities Depository unless otherwise required by law or unless there is no
Securities Depository. If there is no Securities Depository, at the
Corporation's option and upon its receipt of such documents as it deems
appropriate, any shares of AMPS may be registered in the Stock Register in the
name of the Beneficial Owner thereof and such Beneficial Owner thereupon will be
entitled to receive certificates therefor and required to deliver certificates
therefor upon transfer or exchange thereof.
11. Securities Depository; Stock Certificates. (a) If there is a
-----------------------------------------
Securities Depository, one certificate for all of the
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shares of AMPS of each series shall be issued to the Securities Depository and
registered in the name of the Securities Depository or its nominee. Additional
certificates may be issued as necessary to represent shares of AMPS. All such
certificates shall bear a legend to the effect that such certificates are issued
subject to the provisions restricting the transfer of shares of AMPS contained
in these Articles Supplementary. Unless the Corporation shall have elected,
during a Non-Payment Period, to waive this requirement, the Corporation will
also issue stop-transfer instructions to the Auction Agent for the shares of
AMPS. Except as provided in paragraph (b) below, the Securities Depository or
its nominee will be the Holder, and no Beneficial Owner shall receive
certificates representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all shares of AMPS shall be the
Non-Payment Period Rate or there is no Securities Depository, the Corporation
may at its option issue one or more new certificates with respect to such shares
(without the legend referred to in paragraph 11(a)) registered in the names of
the Beneficial Owners or their nominees and rescind the stop-transfer
instructions referred to in paragraph 11(a) with respect to such shares.
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IN WITNESS WHEREOF, MUNIYIELD NEW YORK INSURED FUND II, INC. has caused
these presents to be signed in its name and on its behalf by a duly authorized
officer, and attested by its Secretary, and the said officers of the Corporation
further acknowledge said instrument to be the corporate act of the Corporation,
and state that to the best of their knowledge, information and belief the
matters and facts herein set forth with respect to approval are true in all
material respects, all on , 1997.
MUNIYIELD NEW YORK INSURED
FUND II, INC.
By _______________________
Name:
Title:
Attest:
___________________________
Secretary
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INDEPENDENT AUDITORS' CONSENT
MuniYield New York Insured Fund II, Inc.:
We consent to the use in this Registration Statement on Form N-14 of our report
dated December 3, 1996 appearing in the Proxy Statement and Prospectus, which is
a part of such Registration Statement, and to the reference to us under the
captions "The Reorganization - Comparison of the Funds - Financial Highlights"
and "Experts" also appearing in such Proxy Statement and Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
August 13, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "The
Reorganization-Comparison of the Funds-Financial Highlights," "Selection of
Independent Auditors" and "Experts" and to the use of our report on Taurus
MuniNewYork Holdings, Inc. dated November 25, 1996, in this Registration
Statement on Form N-14 under the Securities Act of 1933 (File No. 333-00000) and
related Joint Proxy Statement and Prospectus of MuniYield New York Insured Fund
II, Inc.
/s/ Ernst & Young LLP
Princeton, New Jersey
August 8, 1997
