0000950123-11-047154.txt : 201105090000950123-11-047154.hdr.sgml : 2011050920110509111342ACCESSION NUMBER:0000950123-11-047154CONFORMED SUBMISSION TYPE:N-CSRPUBLIC DOCUMENT COUNT:14CONFORMED PERIOD OF REPORT:20110228FILED AS OF DATE:20110509DATE AS OF CHANGE:20110509EFFECTIVENESS DATE:20110509
FILER:
COMPANY DATA:COMPANY CONFORMED NAME:Invesco New York Quality Municipal SecuritiesCENTRAL INDEX KEY:0000898659IRS NUMBER:000000000STATE OF INCORPORATION:MAFISCAL YEAR END:1031
FILING VALUES:FORM TYPE:N-CSRSEC ACT:1940 ActSEC FILE NUMBER:811-07562FILM NUMBER:11821910
BUSINESS ADDRESS:STREET 1:1555 PEACHTREE STREET, N.E.STREET 2:SUITE 1800CITY:ATLANTASTATE:2QZIP:30309BUSINESS PHONE:404-439-3217
MAIL ADDRESS:STREET 1:1555 PEACHTREE STREET, N.E.STREET 2:SUITE 1800CITY:ATLANTASTATE:2QZIP:30309
FORMER COMPANY:FORMER CONFORMED NAME:MORGAN STANLEY NEW YORK QUALITY MUNICIPAL SECURITIESDATE OF NAME CHANGE:20090827
FORMER COMPANY:FORMER CONFORMED NAME:MORGAN STANLEY NEW YORK QUALITY MUNICIPAL SECURIDATE OF NAME CHANGE:20011220
FORMER COMPANY:FORMER CONFORMED NAME:MORGAN STANLEY DEAN WITTER NEW YORK QUALITY MUNICIPAL SECURIDATE OF NAME CHANGE:19981221
N-CSR1h80724nvcsr.htmFORM N-CSR
nvcsr
OMB APPROVAL
SECURITIES AND EXCHANGE COMMISSION
INVESTMENT COMPANIES
Investment Company Act file number 811-07562
Annual Report to Shareholders
February28, 2011
NYSE: IQN
Letters to Shareholders
Performance Summary
Management Discussion
Supplemental Information
Dividend Reinvestment Plan
Schedule of Investments
Financial Statements
Notes to Financial Statements
Financial Highlights
Auditors Report
Tax Information
Trustees and Officers
Philip Taylor
Dear Shareholders:
Sincerely,
Philip Taylor
Senior Managing Director, Invesco Ltd.
Bruce Crockett
Dear Fellow Shareholders:
Sincerely,
Bruce L. Crockett
Independent Chair
Invesco Funds Board of Trustees
1 Among the criteria Morningstar considers when evaluating a fund board are the degree towhich the board is independent of the fund company; board members financial interests arealigned with those of fund shareholders; the board acts in fund shareholders interests; andthe board works constructively with company management and investment personnel. Morningstarfirst awarded an A rating to the Invesco Funds board on September13, 2007; that rating hasbeen maintained in subsequent reports, the most recent of which was released December17,2010. Ratings are subject to change, usually every 12 to 24months. Morningstar ratings rangefrom A to F.
-6.38 %
-10.58
-9.25
1.
Dormitory Authority
6.9 %
2.
Trust for Cultural Resources
4.0
3.
Local Government Assistance Corp.
4.0
4.
Health & Hospital Corp.
3.6
5.
Industrial Development Agency
3.4
84.5 %
9.8
5.7
$58.0 million
114
Sell decisions are based on:
n A deterioration or likely deterioration of an individual issuers capacity to meet its debtobligations on a timely basis.
n A deterioration or likely deterioration of the broader fundamentals of a particular industry orsector.
n Opportunities in the secondary or primary market to exchange into a security with better relativevalue.
1 Bureau of Economic Analysis
2 U.S. Federal Reserve
Portfolio manager, is manager of Invesco New York Quality Municipal Securities. Mr.Parisjoined Invesco in 2010. He was associated with the Trusts previous investment adviser or itsinvestment advisory affiliates in an investment management capacity from 2002 to 2010 and beganmanaging the Trust in 2009. Mr.Paris earned a B.B.A. in finance from the City University of NewYork.
Chartered Financial Analyst, portfolio manager, is manager of Invesco New YorkQuality Municipal Securities.Mr.Stryker joined Invesco in 2010. He was associated with the Trusts previous investment adviseror its investment advisory affiliates in an investment management capacity from 1994 to 2010 andbegan managing the Trust in 2009. Mr.Stryker earned a B.S. in finance from the University ofIllinois, Chicago.
Portfolio manager, is manager of Invesco New York Quality Municipal Securities. Mr.Williams joined Invesco in 2010.He was associated with the Trusts previous investment adviser or its investment advisoryaffiliates in an investment management capacity from 2000 to 2010 and began managing the Trust in2009. Mr.Williams earned a B.A. in economics and sociology and an M.E. in educational psychologyfrom the University of Virginia.
n Unless otherwise stated, information presented in this report is as of February28, 2011,and is based on total net assets applicable to common shares.
n Unless otherwise noted, all data provided by Invesco.
n To access your Trusts reports, visit invesco.com/fundreports.
n The prices of securities held by the Trust may decline in response to market risks.
n Other risks are described and defined later in this report.
n The Chartered Financial Analyst (CFA) designation is globallyrecognized and attests to a charterholders success in a rigorous and comprehensive studyprogram in the field of investment management and research analysis.
n The returns shown in managements discussion of Trust performance are based on net assetvalues calculated for shareholder transactions. Generally accepted accounting principlesrequire adjustments to be made to the net assets of the Trust at period end for financialreporting purposes, and as such, the net asset values for shareholder transactions and thereturns based on those net asset values may differ from the net asset values and returnsreported in the Financial Highlights.
IQN
n Add to your account
You may increase the amount of shares in your Trust easily and automatically with the Plan.
n Low transaction costs
Transaction costs are low because the new shares are bought in blocks and the brokeragecommission is shared among all participants.
n Convenience
You will receive a detailed account statement from Computershare Trust Company, N.A. (the Agent)which administers the Plan. The statement shows your total Distributions, date ofinvestment, shares acquired, and price per share, as well as the total number of shares in your reinvestmentaccount. You can also access your account via the Internet. To do this, please go toinvesco.com/us.
n Safekeeping
The Agent will hold the shares it has acquired for you in safekeeping.
1. If you opt to continue to hold your non-certificated shares, whole shares will be held bythe Agent and fractional shares will be sold. The proceeds will be sent via check to youraddress of record after deducting per share fees. Per share fees include any applicablebrokerage commissions the Agent is required to pay.
2. If you opt to sell your shares through the Agent, we will sell all full and fractional shares and send the proceeds via check to your address of record after deducting per sharefees. Per share fees include any applicable brokerage commissions the Agent is required topay.
3. You may sell your shares through your financial adviser through the Direct RegistrationSystem (DRS). DRS is a service within the securities industry that allows Trust shares to beheld in your name in electronic format. You retain full ownership of your shares, withouthaving to hold a stock certificate. You should contact your financial adviser to learn moreabout any restrictions or fees that may apply.
Principal
Interest
Maturity
Amount
Rate
Date
(000)
Value
Municipal Obligations138.31%
New York128.56%
6.25
%
11/15/38
$
500
$
499,939
Albany (County of) Airport Authority; Series2010A, Ref. RB (INSAGM)(a)
5.00
%
12/15/25
500
508,520
Series2009,CAB RB(b)
0.00
%
07/15/34
1,615
337,438
6.25
%
07/15/40
200
195,772
6.38
%
07/15/43
200
198,600
5.88
%
04/01/42
650
625,748
Essex (County of) Industrial Development Agency (International Paper); Series2005A, Solid Waste Disposal Ref. IDR(c)
5.20
%
12/01/23
500
478,075
5.50
%
06/01/32
395
396,248
5.75
%
07/01/39
460
463,901
5.00
%
12/01/35
1,000
937,870
5.75
%
04/01/39
635
653,148
5.00
%
07/01/33
1,000
1,001,140
5.50
%
02/01/32
250
218,005
5.00
%
11/15/34
500
491,100
Montgomery (County of) Industrial Development Agency (Hamilton Fulton Montgomery Board of Cooperative Educational Services); Series2005A, Lease RB (INSSGI)(a)
5.00
%
07/01/34
1,000
831,440
5.88
%
01/01/18
500
487,125
5.25
%
06/01/26
1,000
860,080
5.75
%
07/01/33
540
559,483
5.00
%
10/01/41
555
568,908
New York (State of) Dormitory Authority (Cornell University); Series2006A, Non State Supported DebtRB(d)
5.00
%
07/01/35
3,990
4,016,693
Series2005A, Non State Supported Debt RB (INSAMBAC)(a)
5.50
%
05/15/27
700
739,312
Series2005A, Non State Supported Debt RB (INSAMBAC)(a)
5.50
%
05/15/31
445
460,971
5.00
%
07/01/23
1,000
1,029,040
New York (State of) Dormitory Authority (FIT Student Housing Corp.); Series2007, Non State Supported Debt RB (INSNATL)(a)
5.25
%
07/01/28
410
401,070
New York (State of) Dormitory Authority (Fordham University); Series2008B, Non State Supported Debt RB (INSAGC)(a)
5.00
%
07/01/33
500
501,645
New York (State of) Dormitory Authority (Manhattan College); Series2007A, Non State Supported Debt RB (INSRADIAN)(a)
5.00
%
07/01/41
400
333,744
New York (State of) Dormitory Authority (Mental Health Services Facilities Improvement); Series2007A, State Supported Debt RB (INSAGM)(a)
5.00
%
02/15/27
500
509,535
New York (State of) Dormitory Authority (Montefiore Hospital); Series2004, FHA Insured Mortgage RB (INSNATL)(a)
5.00
%
08/01/29
1,000
996,380
6.00
%
07/01/40
500
500,305
Series2001 1, RB (INSAMBAC)(a)
5.50
%
07/01/31
500
538,520
Series2001 1, RB (INSBHAC)(a)
5.50
%
07/01/31
285
300,533
5.00
%
07/01/38
470
460,699
Principal
Interest
Maturity
Amount
Rate
Date
(000)
Value
6.13
%
12/01/29
$
375
$
355,564
New York (State of) Dormitory Authority (Pratt Institution); Series2009C, Non State Supported Debt RB (INSAGC)(a)
5.13
%
07/01/39
400
391,484
5.00
%
07/01/40
400
386,832
New York (State of) Dormitory Authority (School District Financial Program); Series2009C, Non State Supported Debt RB (INSAGC)(a)
5.00
%
10/01/24
500
522,705
New York (State of) Dormitory Authority (School District Revenue Bond Financing Program); Series2008D, RB (INSAGC)(a)
5.75
%
10/01/24
500
547,530
5.00
%
07/01/34
1,000
997,200
5.00
%
10/01/40
400
369,820
5.25
%
07/01/35
500
468,665
5.50
%
07/01/40
555
543,484
5.00
%
07/01/46
405
393,526
5.50
%
07/01/23
750
756,487
5.00
%
02/15/40
500
490,610
New York (State of) Energy Research& Development Authority; Series1993,RB(e)
11.98
%
04/01/20
1,500
1,553,220
5.00
%
10/15/39
400
401,284
5.50
%
04/01/17
2,000
2,309,640
New York (State of) Mortgage Agency; Series2007 143, Homeowner MortgageRB(c)
4.90
%
10/01/37
960
860,266
5.00
%
03/15/25
410
436,367
5.25
%
01/01/24
750
792,472
Series2003A, Health System RB (INSAMBAC)(a)
5.25
%
02/15/21
2,000
2,070,160
5.00
%
02/15/30
550
529,127
5.00
%
09/01/35
545
464,956
6.25
%
03/01/15
450
450,212
5.00
%
05/01/25
500
516,565
New York City (City of) Industrial Development Agency (Polytechnic University); Series2007, Civic Facility RB (INSACA)(a)
5.25
%
11/01/37
500
455,305
New York City (City of) Industrial Development Agency (Queens Baseball Stadium); Series2006, Pilot RB (INSAMBAC)(a)
5.00
%
01/01/46
1,750
1,372,700
6.38
%
07/01/31
445
431,988
New York City (City of) Industrial Development Agency (Terminal One Group Association); Series2005, Special Facility IDR(c)(f)
5.50
%
01/01/24
2,000
2,001,520
6.38
%
07/15/49
555
555,511
5.50
%
06/15/40
1,500
1,546,710
Series2003D, Future Tax Sec. RB (INSNATL)(a)
5.25
%
02/01/21
885
939,728
Series2004C, Future Tax Sec. RB (INSNATL)(a)
5.00
%
02/01/21
500
531,775
6.00
%
07/15/33
300
323,970
5.25
%
01/15/27
500
520,080
5.25
%
01/15/39
500
504,305
Series2009A, Future Tax Sec.RB(d)
5.00
%
05/01/28
625
647,219
Principal
Interest
Maturity
Amount
Rate
Date
(000)
Value
Series2009A, Future Tax Sec.RB(d)
5.00
%
05/01/29
$
500
$
517,430
Series2009A, Future Tax Sec.RB(d)
5.00
%
05/01/30
500
513,640
Series2004A, Ref. RB (INSNATL)(a)
5.00
%
07/01/36
500
491,850
Series2008 A-2,VRD RB(e)(g)(h)
0.24
%
03/10/11
700
700,000
5.00
%
12/01/39
380
361,623
New York City (City of) Trust for Cultural Resources (Museum of Modern Art); Series2008 1A, Ref.RB(d)
5.00
%
04/01/28
2,250
2,326,703
New York City (City of) Trust for Cultural Resources (Wildlife Conservation Society); Series2004, RB (INSNATL)(a)
5.00
%
02/01/34
1,000
993,890
5.50
%
11/15/28
750
794,610
Subseries 1993 A-7, Unlimited Tax GO Bonds VRD (LOCJP Morgan Chase Bank)(g)(h)(i)
0.17
%
03/10/11
500
500,000
Subseries 1993 E-5, Unlimited Tax GO Bonds VRD (LOCJP Morgan Chase Bank)(g)(h)(i)
0.17
%
03/10/11
500
500,000
Subseries 2001 A-6, Unlimited Tax GO Bonds VRD (INSAGM)(a)(g)(h)
0.23
%
03/10/11
600
600,000
6.25
%
12/15/35
400
437,728
Subseries 2008 L5, Unlimited Tax VRD GO Bonds(g)
0.23
%
03/10/11
300
300,000
Series2008 A-1, Unlimited Tax GO Bonds(d)
5.25
%
08/15/27
1,140
1,187,435
Series2008 A-1, Unlimited Tax GO Bonds(d)
5.25
%
08/15/28
1,140
1,185,247
5.25
%
04/01/32
900
923,517
Niagara Falls (City of) Public Water Authority; Series2005, Water& Sewer System RB (INSSGI)(a)
5.00
%
07/15/26
1,000
989,900
Niagara Falls (City of) School District (High School Facility); Series2005, Ref. COP (INSAGM)(a)
5.00
%
06/15/28
1,000
984,570
North Syracuse Central School District (Onondaga County); Series2007A, Ref. Unlimited Tax GO Bonds (INSNATL)(a)
5.00
%
06/15/23
940
1,023,585
5.88
%
12/01/29
475
420,233
5.38
%
07/01/40
485
467,976
6.00
%
12/01/42
390
380,133
Sales Tax Asset Receivable Corp.; Series2005A, RB (INSAMBAC)(a)
5.00
%
10/15/29
1,500
1,521,525
Seneca (County of) Industrial Development Agency (Seneca Meadows, Inc.); Series2005, Solid Waste DisposalRB(c)(f)(j)
6.63
%
10/01/13
380
378,408
6.00
%
12/01/40
210
197,539
5.00
%
11/01/28
1,000
895,890
5.50
%
06/01/21
1,000
1,068,480
Series2002E, Ref. Sub. RB (INSNATL)(a)(d)
5.00
%
11/15/32
1,000
1,001,140
Series2003A, Sub. RB (INSAMBAC)(a)
5.00
%
11/15/28
1,500
1,504,980
5.00
%
09/01/30
500
482,485
5.13
%
09/01/40
985
919,163
5.13
%
06/01/42
425
285,018
5.00
%
07/01/26
815
829,686
Series2002, Unlimited Tax Ref. GO Bonds (INSNATL)(a)
5.75
%
06/15/27
660
668,620
Series2002, Unlimited Tax Ref. GO Bonds (INSNATL)(a)
5.75
%
06/15/28
610
617,802
74,510,780
Principal
Interest
Maturity
Amount
Rate
Date
(000)
Value
Guam0.90%
5.63
%
12/01/29
$
110
$
108,548
5.63
%
07/01/40
255
225,601
5.50
%
10/01/40
200
184,408
518,557
Puerto Rico6.68%
6.00
%
07/01/38
650
609,414
5.25
%
07/01/33
600
542,922
5.75
%
07/01/36
400
381,524
Puerto Rico (Commonwealth of) Infrastructure Financing Authority; Series2005C, Special Tax Ref. RB (INSAMBAC)(a)
5.50
%
07/01/27
300
288,717
First Subseries 2010, Sales Tax CABRB(b)
0.00
%
08/01/33
415
283,217
Series2010A, Sales Tax, CABRB(b)
0.00
%
08/01/34
1,000
217,980
5.25
%
07/01/16
1,000
1,036,160
5.38
%
08/01/39
235
217,474
5.25
%
08/01/41
325
294,014
3,871,422
Virgin Islands2.17%
6.63
%
10/01/29
280
287,888
5.00
%
10/01/29
500
471,095
5.00
%
07/01/22
500
499,965
1,258,948
TOTAL INVESTMENTS(k)138.31%
(Cost$81,193,886)
80,159,707
Notes with interest rates ranging from 0.26% to 0.32% at 02/28/11 and contractual maturities of collateral ranging from 08/15/27 to 07/01/35 (See Note1I)(l)
(7,220,000
)
316,106
(15,300,000
)
$
57,955,813
ACA Financial Guaranty Corp.
Assured Guaranty Corp.
Assured Guaranty Municipal Corp.
American Municipal Bond Assurance Corp.*
Berkshire Hathaway Assurance Corp.
Certificates of Participation
Convertible
General Obligation
Industrial Development Revenue Bonds
Insurer
Letter of Credit
National Public Finance Guarantee Corp.
Revenue Bonds
Radian Asset Assurance, Inc.
Refunding
Secured
Syncora Guarantee, Inc.
Senior
Subordinated
(a) Principal and/or interest payments are secured by the bond insurance company listed.
(b) Zero coupon bond issued at a discount.
(c) Security subject to the alternative minimum tax.
(d) Underlying security related to Dealer Trusts entered into by the Trust. See Note1I.
(e) Current coupon rate for an inverse floating rate municipal obligation. This rate resets periodically as the auction rate on the related security changes. Position in an inverse floating rate municipal obligation has a total value of $1,553,220 which represents 3.0% of net assets.
(f) Interest or dividend rate is redetermined periodically. Rate shown is the rate in effect on February28, 2011.
(g) Demand security payable upon demand by the Trust at specified time intervals no greater than thirteen months. Interest rate is redetermined periodically. Rate shown is the rate in effect on February28, 2011.
(h) Security has an irrevocable call by the issuer or mandatory put by the holder. Maturity date reflects such call or put.
(i) Principal and interest payments are fully enhanced by a letter of credit from the bank listed or a predecessor bank, branch or subsidiary.
(j) Security purchased or received in a transaction exempt from registration under the Securities Act of 1933, as amended. The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The value of this security at February28, 2011 represented 0.65% of the Trusts Net Assets.
(k) This table provides a listing of those entities that have either issued, guaranteed, backed or otherwise enhanced the credit quality of more than 5% of the securities held in the portfolio. In instances where the entity has guaranteed, backed or otherwise enhanced the credit quality of a security, it is not primarily responsible for the issuers obligations but may be called upon to satisfy the issuers obligations.
Entities
Percentage
14.66
%
13.23
* AMBAC filed for bankruptcy on November8, 2010.
(l) Floating rate note obligations related to securities held. The interest rates shown reflect the rates in effect at February28, 2011. At February28, 2011, the Trusts investments with a value of $11,395,507 are held by Dealer Trusts and serve as collateral for the $7,220,000 in the floating rate note obligations outstanding at that date.
Assets:
$
80,159,707
868,428
1,178
3,675
81,032,988
Liabilities:
7,220,000
500,175
677
2,710
52,089
1,524
7,777,175
15,300,000
$
57,955,813
Net assets applicable to common shares consist of:
$
58,219,559
1,334,048
(563,615
)
(1,034,179
)
$
57,955,813
Shares outstanding, $0.01 par value per common share with an
unlimited number of shares authorized:
4,030,281
$
14.38
$
13.05
For the
four months ended
For the year ended
February 28,
October 31,
2011
2010
Investment income:
$
1,346,578
$
4,126,111
Expenses:
73,078
228,528
16,438
59,725
1,134
2,406
38,256
175,537
3,067
11,774
6,627
7,655
23,616
119,946
6,416
11,427
(58,717
)
66,196
121,342
671,767
1,225,236
3,454,344
Realized and unrealized gain (loss) from:
(404,021
)
(137,718
)
189,750
(404,021
)
52,032
(4,859,099
)
3,937,109
(40,942
)
(4,859,099
)
3,896,167
(5,263,120
)
3,948,199
(4,037,884
)
7,402,543
(21,737
)
(61,286
)
$
(4,059,621
)
$
7,341,257
Four months ended
Year ended
Year Ended
February 28,
October, 31
October, 31
2011
2010
2009
Operations:
$
1,225,236
$
3,454,344
$
3,374,093
(404,021
)
52,032
(8,857
)
(4,859,099
)
3,896,167
6,836,783
(4,037,884
)
7,402,543
10,202,019
(21,737
)
(61,286
)
(173,537
)
(4,059,621
)
7,341,257
10,028,482
Dividends and distributions to shareholders from:
(967,267
)
(2,902,623
)
(2,744,585
)
(128,342
)
(967,267
)
(2,902,623
)
(2,872,927
)
(78,017
)
(5,026,888
)
4,360,617
7,155,555
Net Assets applicable to common shares:
62,982,701
58,622,084
51,466,529
$
57,955,813
$
62,982,701
$
58,622,084
2011
2010
$
(4,059,621
)
$
7,341,257
Adjustments to reconcile change in net assets applicable to common
shares from operations to net cash provided by operating
activities
404,021
137,718
4,859,099
(3,937,109
)
63,445
215,260
(19,149
)
(45,969
)
(8,939,434
)
(21,673,148
)
10,519,067
17,312,556
900,000
380,345
29,666
(69,249
)
28,920
3,138,524
309,151
Cash flows provided by (used in) financing
activities:
(78,017
)
(967,267
)
(2,902,623
)
298,743
201,432
(2,470,000
)
2,450,000
(3,138,524
)
(329,208
)
(20,057
)
20,057
$
$
Supplemental disclosure of cash flow information:
$
38,256
$
120,433
For the year ended October31, 2010, facilities and maintenance fees were excluded.
NOTE1Significant Accounting Policies
A. Security Valuations Securities, including restricted securities, are valued according to the following policy.
Securities are fair valued using an evaluated quote provided by an independent pricing service approved by the Board of Trustees. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices and may reflect appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, individual trading characteristics and other market data. Short-term obligations, including commercial paper, having 60days or less to maturity are recorded at amortized cost which approximates value. Securities with a demand feature exercisable within one to seven days are valued at par. Debt securities are subject to interest rate and credit risks. In addition, all debt securities involve some risk of default with respect to interest and principal payments.
Securities for which market quotations either are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trusts officers following procedures approved by the Board of Trustees. Some of the factors which may be considered in determining fair value are fundamental analytical data relating to the investment; the nature and duration of any restrictions on transferability or disposition; trading
in similar securities by the same issuer or comparable companies; relevant political, economic or issuer specific news; and other relevant factors under the circumstances.
Valuations change in response to many factors including the historical and prospective earnings of the issuer, the value of the issuers assets, general economic conditions, interest rates, investor perceptions and market liquidity. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may materially differ from the value received upon actual sale of those investments.
B. Securities Transactions and Investment Income Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income (net of withholding tax, if any) is recorded on the ex-dividend date. Bond premiums and discounts are amortized and/or accreted for financial reporting purposes.
The Trust may periodically participate in litigation related to Trust investments. As such, the Trust may receive proceeds from litigation settlements. Any proceeds received are included in the Statement of Operations as realized gain (loss) for investments no longer held and as unrealized gain (loss) for investments still held.
Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of net realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the net realized and unrealized gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Trusts net asset value and, accordingly, they reduce the Trusts total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Trust and the investment adviser.
C. Country Determination For the purposes of making investment selection decisions and presentation in the Schedule of Investments, the investment adviser may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuers securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America, unless otherwise noted.
D. Distributions The Trust declares and pays monthly dividends from net investment income to common shareholders. Distributions from net realized capital gain, if any, are generally paid annually and are distributed on a pro rata basis to common and preferred shareholders. The Trust may elect to treat a portion of the proceeds from redemptions as distributions for federal income tax purposes.
E. Federal Income Taxes The Trust intends to comply with the requirements of SubchapterM of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Trusts taxable earnings to shareholders. As such, the Trust will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements.
In addition, the trust intends to invest in such municipal securities to allow it to qualify to pay shareholders exempt-interest dividends as defined in the Internal Revenue Code.
The Trust files tax returns in the U.S.Federal jurisdiction and certain other jurisdictions. Generally the Trust is subject to examinations by such taxing authorities for up to three years after the filing of the return for the tax period.
F. Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates by a significant amount. In addition, the Trust monitors for material events or transactions that may occur or become known after the period-end date and before the date the financial statements are released to print.
G. Indemnifications Under the Trusts organizational documents, each Trustee, officer, employee or other agent of the Trust is indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts, including the Trusts servicing agreements that contain a variety of indemnification clauses. The Trusts maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote.
H. Cash and Cash Equivalents For the purposes of the Statement of Cash Flows the Trust defines Cash and Cash Equivalents as cash (including foreign currency), money market funds and other investments held in lieu of cash and excludes investments made with cash collateral received.
I. Floating Rate Note Obligations The Trust invests in inverse floating rate securities, such as Residual Interest Bonds (RIBs) or Tender Option Bonds (TOBs) for investment purposes and to enhance the yield of the Trust. Inverse floating rate investments tend to underperform the market for fixed rate bonds in a rising interest rate environment, but tend to outperform the market for fixed rate bonds when interest rates decline or remain relatively stable. Such transactions may be purchased in the secondary market without first owning the underlying bond or by the sale of fixed rate bonds by the Trust to Special Purpose Trusts established by a broker dealer (Dealer Trusts) in exchange for cash and residual interests in the Dealer Trusts assets and cash flows, which are in the form of inverse floating rate securities. The Dealer Trusts finance the purchases of the fixed rate bonds by issuing floating rate obligations to third parties and allowing the Trust to retain residual interest in the bonds. The floating rate notes issued by the Dealer Trusts have interest rates that reset weekly and the floating rate note holders have the option to tender their notes to the Dealer Trusts for redemption at par at each reset date. The residual interests held by the Trust (inverse floating rate investments) include the right of the Trust (1)to cause the holders of the
floating rate notes to tender their notes at par at the next interest rate reset date, and (2)to transfer the municipal bond from the Dealer Trusts to the Trust, thereby collapsing the Dealer Trusts.
TOBs are presently classified as private placement securities. Private placement securities are subject to restrictions on resale because they have not been registered under the Securities Act of 1933, as amended or are otherwise not readily marketable. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Trust or less than what may be considered the fair value of such securities.
The Trust accounts for the transfer of bonds to the Dealer Trusts as secured borrowings, with the securities transferred remaining in the Trusts investment assets, and the related floating rate notes reflected as Trust liabilities under the caption Floating rate note obligations on the Statement of Assets and Liabilities. The Trust records the interest income from the fixed rate bonds under the caption Interest and records the expenses related to floating rate obligations and any administrative expenses of the Dealer Trusts as a component of Interest, Facilities and Maintenance Fees on the Statement of Operations.
The Trust generally invest in inverse floating rate securities that include embedded leverage, thus exposing the Trust to greater risks and increased costs. The primary risks associated with inverse floating rate securities are varying degrees of liquidity and the changes in the value of such securities in response to changes in market rates of interest to a greater extent than the value of an equal principal amount of a fixed rate security having similar credit quality, redemption provisions and maturity which may cause the Trusts net asset value to be more volatile than if it had not invested in inverse floating rate securities. In certain instances, the short-term floating rate interests created by the special purpose trust may not be able to be sold to third parties or, in the case of holders tendering (or putting) such interests for repayment of principal, may not be able to be remarketed to third parties. In such cases, the special purpose trust holding the long-term fixed rate bonds may be collapsed. In the case of RIBs or TOBs created by the contribution of long-term fixed income bonds by the Trust, the Trust will then be required to repay the principal amount of the tendered securities. During times of market volatility, illiquidity or uncertainty, the Trust could be required to sell other portfolio holdings at a disadvantageous time to raise cash to meet that obligation.
J. Futures Contracts The Trust may enter into futures contracts to manage exposure to interest rate, equity and market price movements and/or currency risks. A futures contract is an agreement between two parties to purchase or sell a specified underlying security, currency or commodity (or delivery of a cash settlement price, in the case of an index future) for a fixed price at a future date. The Trust currently invests only in exchange-traded futures and they are standardized as to maturity date and underlying financial instrument. Initial margin deposits required upon entering into futures contracts are satisfied by the segregation of specific securities or cash as collateral at the futures commission merchant (broker). During the period the futures contracts are open, changes in the value of the contracts are recognized as unrealized gains or losses by recalculating the value of the contracts on a daily basis. Subsequent or variation margin payments are received or made depending upon whether unrealized gains or losses are incurred. These amounts are reflected as receivables or payables on the Statement of Assets and Liabilities. When the contracts are closed or expire, the Trust recognizes a realized gain or loss equal to the difference between the proceeds from, or cost of, the closing transaction and the Trusts basis in the contract. The net realized gain (loss) and the change in unrealized gain (loss) on futures contracts held during the period is included on the Statement of Operations. The primary risks associated with futures contracts are market risk and the absence of a liquid secondary market. If the Trust were unable to liquidate a futures contract and/or enter into an offsetting closing transaction, the Trust would continue to be subject to market risk with respect to the value of the contracts and continue to be required to maintain the margin deposits on the futures contracts. Futures contracts have minimal counterparty risk since the exchanges clearinghouse, as counterparty to all exchange traded futures, guarantees the futures against default. Risks may exceed amounts recognized in the Statement of Assets and Liabilities.
K. Other Risks The Fund may be affected by economic and political developments in the state of New York.
The value of, payment of interest on, repayment of principal for and the ability to sell a municipal security may be affected by constitutional amendments, legislative enactments, executive orders, administrative regulations, voter initiatives and the economics of the regions in which the issuers are located.
Since, many municipal securities are issued to finance similar projects, especially those relating to education, health care, transportation and utilities, conditions in those sectors can affect the overall municipal securities market and a Funds investments in municipal securities.
There is some risk that a portion or all of the interest received from certain tax-free municipal securities could become taxable as a result of determinations by the Internal Revenue Service.
L. Interest, Facilities and Maintenance Fees Interest, Facilities and Maintenance Fees include interest and related borrowing costs such as commitment fees and other expenses associated with lines of credit and interest and administrative expenses related to establishing and maintaining Auction Rate Preferred Shares and floating rate note obligations, if any.
NOTE2Advisory Fees and Other Fees Paid to Affiliates