<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1999
SECURITIES ACT FILE NO. 333-87083
INVESTMENT COMPANY ACT FILE NO. 811-8621
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
[X] PRE-EFFECTIVE AMENDMENT NO. 1 [ ] POST-EFFECTIVE AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MUNIHOLDINGS NEW JERSEY INSURED FUND, 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:
NUMBER, STREET, CITY, STATE, ZIP CODE)
------------------------
TERRY K. GLENN
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
FRANK P. BRUNO, ESQ. MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
ONE WORLD TRADE CENTER 800 SCUDDERS MILL ROAD
NEW YORK, NY 10048-0557 PLAINSBORO, NJ 08536
</TABLE>
------------------------
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 MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT(1) PRICE(1) FEE(3)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par value)............. 11,833,889 $13.78 $163,070,990 $45,335
Auction Market Preferred Stock, Series 2,400 $25,000(2) $60,000,000 $16,680
C.......................................
Auction Market Preferred Stock, Series 1,880 $25,000(2) $47,000,000 $13,066
D.......................................
=================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Represents the liquidation preference of a share of preferred stock after
the reorganization.
(3) Previously 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> 2
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------
NOTICE OF ANNUAL MEETINGS OF STOCKHOLDERS
------------------------
TO BE HELD ON DECEMBER 15, 1999
TO THE STOCKHOLDERS OF
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
NOTICE IS HEREBY GIVEN that the annual meetings of stockholders (the
"Meetings") of MuniHoldings New Jersey Insured Fund, Inc. ("New Jersey
Insured"), MuniHoldings New Jersey Insured Fund II, Inc. ("New Jersey Insured
II") and MuniHoldings New Jersey Insured Fund III, Inc. ("New Jersey Insured
III") will be held at the offices of Merrill Lynch Asset Management, L.P., 800
Scudders Mill Road, Plainsboro, New Jersey on Wednesday, December 15, 1999 at
12:00 p.m. Eastern time (for New Jersey Insured), 12:15 p.m. Eastern time (for
New Jersey Insured II) and 12:30 p.m. Eastern time (for New Jersey Insured III)
for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization
(the "Agreement and Plan of Reorganization") contemplating (i) the
acquisition of substantially all of the assets and the assumption of
substantially all of the liabilities of New Jersey Insured II by New Jersey
Insured, in exchange solely for an equal aggregate value of newly-issued
shares of New Jersey Insured Common Stock and shares of a newly-created
series of Auction Market Preferred Stock ("AMPS") of New Jersey Insured to
be designated Series C ("New Jersey Insured Series C AMPS") and the
distribution by New Jersey Insured II of such New Jersey Insured Common
Stock to the holders of Common Stock of New Jersey Insured II and such New
Jersey Insured Series C AMPS to the holders of Series A and Series B AMPS
of New Jersey Insured II; and (ii) the acquisition of substantially all of
the assets and the assumption of substantially all of the liabilities of
New Jersey Insured III by New Jersey Insured, in exchange solely for an
equal aggregate value of newly-issued shares of New Jersey Insured Common
Stock and shares of a newly-created series of AMPS of New Jersey Insured to
be designated Series D ("New Jersey Insured Series D AMPS") and the
distribution by New Jersey Insured III of such New Jersey Insured Common
Stock to the holders of Common Stock of New Jersey Insured III and such New
Jersey Insured Series D AMPS to the holders of Series A AMPS of New Jersey
Insured III. A vote in favor of this proposal also will constitute a vote
in favor of the liquidation and dissolution of each of New Jersey Insured
II and New Jersey Insured III and the termination of their respective
registration under the Investment Company Act of 1940;
(2) To elect a Board of Directors of each of New Jersey Insured, New
Jersey Insured II and New Jersey Insured III to serve for the ensuing year;
(3) (a) For the stockholders of New Jersey Insured and New Jersey
Insured II only: To consider and act upon a proposal to ratify the
selection of Ernst & Young LLP to serve as independent auditors of each of
New Jersey Insured and New Jersey Insured II for the respective Fund's
current fiscal year; and
(b) For the stockholders of New Jersey Insured III only: To
consider and act upon a proposal to ratify the selection of Deloitte &
Touche LLP to serve as independent auditors of New Jersey Insured III
for the Fund's current fiscal year; and
(4) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
<PAGE> 3
The Boards of Directors of New Jersey Insured, New Jersey Insured II and
New Jersey Insured III have fixed the close of business on October 20, 1999 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 New Jersey Insured, New Jersey
Insured II and New Jersey Insured III entitled to vote at the Meetings will be
available and open to the examination of any stockholder of New Jersey Insured,
New Jersey Insured II or New Jersey Insured III, respectively, for any purpose
germane to the Meetings during ordinary business hours from and after December
1, 1999, at the offices of New Jersey Insured, 800 Scudders Mill Road,
Plainsboro, New Jersey.
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 New Jersey Insured, New Jersey Insured II or
New Jersey Insured III, as applicable.
By Order of the Boards of Directors
WILLIAM E. ZITELLI
Secretary of MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund II, Inc. and
MuniHoldings New Jersey Insured
Fund III, Inc.
Plainsboro, New Jersey
Dated: November 5, 1999
<PAGE> 4
PROXY STATEMENT AND PROSPECTUS
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
------------------------
ANNUAL MEETINGS OF STOCKHOLDERS
------------------------
DECEMBER 15, 1999
This Joint Proxy Statement and Prospectus is furnished to you as a
stockholder of one of the funds listed above. An Annual Meeting of the
stockholders of each of these funds will be held on December 15, 1999 to
consider several items that are listed below and discussed in greater detail
elsewhere in this Proxy Statement and Prospectus. The Board of Directors of each
of the funds is requesting its stockholders to submit a proxy to be used at the
Annual Meeting to vote the shares held by the stockholder submitting the proxy.
The proposals to be considered at the Annual Meetings are:
1. To approve or disapprove an Agreement and Plan of Reorganization among
the funds;
2. To elect a Board of Directors for each of the funds;
3. To ratify the selection of the independent auditors of each of the
funds; and
4. To transact such other business as may properly come before the Annual
Meetings or any adjournment thereof.
The Agreement and Plan of Reorganization that you are being asked to
consider involves a transaction that will be referred to in this Proxy Statement
and Prospectus as the Reorganization. The Reorganization involves the
combination of three funds into one. The three funds are:
MuniHoldings New Jersey Insured Fund, Inc. ("New Jersey Insured"),
which will be the surviving fund
MuniHoldings New Jersey Insured Fund II, Inc. ("New Jersey Insured
II")
MuniHoldings New Jersey Insured Fund III, Inc. ("New Jersey Insured
III")
New Jersey Insured II and New Jersey Insured III are sometimes referred to
herein collectively as the "Acquired Funds" and, together with New Jersey
Insured, as the "Funds."
In the Reorganization, New Jersey Insured will acquire substantially all of
the assets and assume substantially all of the liabilities of each of the
Acquired Funds solely in exchange for shares of its Common Stock, par value $.10
per share, and shares of two newly-created series of its Auction Market
Preferred Stock ("AMPS"), with a par value of $.10 per share and a liquidation
preference of $25,000 per share. The Acquired Funds will distribute the Common
Stock and AMPS of New Jersey Insured received in the Reorganization to their
respective stockholders and will then liquidate and dissolve and terminate their
registration under the Investment Company Act. New Jersey Insured will continue
to operate as a registered closed-end investment company with the investment
objective and policies described in this Proxy Statement and Prospectus.
In the Reorganization, New Jersey Insured will issue shares of its Common
Stock and AMPS to each of the Acquired Funds based on the value of the assets
transferred to New Jersey Insured by that Acquired Fund. These shares will then
be distributed by each Acquired Fund to its stockholders based on the value of
the shares held by each stockholder just prior to the Reorganization. A holder
of Common Stock of an Acquired Fund will receive Common Stock of New Jersey
Insured and a holder of AMPS of an Acquired Fund will receive shares of one of
the newly-created series of AMPS of New Jersey Insured.
This Proxy Statement and Prospectus serves as a prospectus of New Jersey
Insured in connection with the issuance of New Jersey Insured Common Stock and
two newly-created series of New Jersey Insured AMPS in the Reorganization.
------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT AND
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS NOVEMBER 5, 1999.
<PAGE> 5
The Proxy Statement and Prospectus sets forth information about New Jersey
Insured, New Jersey Insured II and New Jersey Insured III that stockholders of
the Funds should know before considering the Reorganization and should be
retained for future reference. Each of the Funds has 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 New Jersey Insured, New
Jersey Insured II and New Jersey Insured III is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.
The Common Stock of each of the Funds is listed on the New York Stock
Exchange (the "NYSE") under the symbols "MVJ" (New Jersey Insured), "MWJ" (New
Jersey Insured II) and "MNJ" (New Jersey Insured III). Subsequent to the
Reorganization, shares of New Jersey Insured Common Stock will continue to be
listed on the NYSE under the symbol "MVJ". Reports, proxy materials and other
information concerning any of the Funds may be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION................................................ 4
ITEM 1. THE REORGANIZATION.................................. 5
SUMMARY................................................... 5
RISK FACTORS AND SPECIAL CONSIDERATIONS................... 15
New Jersey Municipal Bonds............................. 15
Interest Rate and Credit Risk.......................... 15
Non-diversification.................................... 15
Rating Categories...................................... 15
Private Activity Bonds................................. 15
Portfolio Insurance.................................... 15
Leverage............................................... 15
Portfolio Management................................... 16
Inverse Floating Obligations........................... 17
Options and Futures Transactions....................... 17
Antitakeover Provisions................................ 17
Ratings Considerations................................. 17
COMPARISON OF THE FUNDS................................... 18
Financial Highlights................................... 18
Investment Objective and Policies...................... 25
Portfolio Insurance.................................... 27
Description of New Jersey Municipal Bonds and Municipal
Bonds................................................. 28
Special Considerations Relating to New Jersey Municipal
Bonds................................................. 29
Other Investment Policies.............................. 29
Information Regarding Options and Futures
Transactions.......................................... 30
Investment Restrictions................................ 33
Rating Agency Guidelines............................... 35
Portfolio Composition.................................. 35
Portfolio Transactions................................. 37
Portfolio Turnover..................................... 38
Net Asset Value........................................ 38
Capital Stock.......................................... 39
Management of the Funds................................ 41
Code of Ethics......................................... 42
Voting Rights.......................................... 43
Stockholder Inquiries.................................. 44
Dividends and Distributions............................ 44
Automatic Dividend Reinvestment Plan................... 45
Mutual Fund Investment Option.......................... 47
Liquidation Rights of Holders of AMPS.................. 47
Tax Rules Applicable to the Funds and their
Stockholders.......................................... 47
AGREEMENT AND PLAN OF REORGANIZATION...................... 53
General................................................ 53
Procedure.............................................. 54
Terms of the Agreement and Plan of Reorganization...... 54
Potential Benefits to Common Stockholders of the Funds
as a Result of the Reorganization..................... 56
Surrender and Exchange of Stock Certificates........... 57
</TABLE>
2
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tax Consequences of the Reorganization................. 58
Capitalization......................................... 60
ITEM 2. ELECTION OF DIRECTORS............................... 61
Committee and Board Meetings........................... 62
Compliance with Section 16(a) of the Securities
Exchange Act of 1934.................................. 63
Interested Persons..................................... 63
Compensation of Directors.............................. 63
Officers of the Funds.................................. 63
ITEM 3. SELECTION OF INDEPENDENT AUDITORS................... 64
INFORMATION CONCERNING THE ANNUAL MEETINGS.................. 65
Date, Time and Place of Meetings....................... 65
Solicitation, Revocation and Use of Proxies............ 65
Record Date and Outstanding Shares..................... 65
Security Ownership of Certain Beneficial Owners and
Management............................................ 65
Voting Rights and Required Vote........................ 65
Appraisal Rights....................................... 67
ADDITIONAL INFORMATION.................................... 67
Year 2000 Issues....................................... 68
CUSTODIAN................................................. 68
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR... 68
LEGAL PROCEEDINGS......................................... 69
LEGAL OPINIONS............................................ 69
EXPERTS................................................... 69
STOCKHOLDER PROPOSALS..................................... 69
</TABLE>
<TABLE>
<S> <C> <C>
INDEX TO FINANCIAL STATEMENTS............................................ F-1
EXHIBIT I INFORMATION PERTAINING TO EACH FUND......................... I-1
EXHIBIT II AGREEMENT AND PLAN OF REORGANIZATION........................ II-1
EXHIBIT III ECONOMIC AND OTHER CONDITIONS IN NEW JERSEY................. III-1
EXHIBIT IV RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER............. IV-1
EXHIBIT V PORTFOLIO INSURANCE......................................... V-1
</TABLE>
3
<PAGE> 8
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Boards of Directors of New Jersey
Insured, New Jersey Insured II and New Jersey Insured III 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 December 15, 1999,
at the time specified for each Fund in Exhibit I to this Proxy Statement and
Prospectus. The mailing address for each of the Funds is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy
Statement and Prospectus is November 9, 1999.
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 New Jersey Insured, New Jersey Insured II or New Jersey Insured
III, 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, proxies will be voted "FOR" each of the following items:
(1) to approve the Agreement and Plan of Reorganization among New Jersey
Insured, New Jersey Insured II and New Jersey Insured III (the "Agreement and
Plan of Reorganization"); (2) to elect a Board of Directors of each Fund to
serve for the ensuing year; and (3) to ratify the selection of independent
auditors for each of the Funds for its current fiscal year.
With respect to Item 1, assuming a quorum is present at the Meetings,
approval of the Agreement and Plan of Reorganization will require the
affirmative vote of stockholders representing (i) a majority of the outstanding
shares of New Jersey Insured Common Stock and New Jersey Insured AMPS, voting
together as a single class, and a majority of the outstanding shares of New
Jersey Insured AMPS, Series A and B, voting together as a single class, (ii) a
majority of the outstanding shares of New Jersey Insured II Common Stock and New
Jersey Insured II AMPS, voting together as a single class, and a majority of the
outstanding shares of New Jersey Insured II AMPS, Series A and B, voting
together as a single class and (iii) a majority of the outstanding shares of New
Jersey Insured III Common Stock and New Jersey Insured III AMPS, voting together
as a single class, and a majority of the outstanding shares of New Jersey
Insured III AMPS, Series A, voting separately as a class. Because of the
requirement that the Agreement and Plan of Reorganization be approved by
stockholders of all three Funds, the Reorganization will not take place if
stockholders of any one Fund do not approve the Agreement and Plan of
Reorganization.
With respect to Item 2, holders of shares of AMPS of each of the Funds are
entitled to elect two Directors of that Fund, and holders of shares of AMPS and
Common Stock, voting together as a single class, are entitled to elect the
remaining Directors of that Fund. Assuming a quorum is present at the Meetings,
election of the two Directors of each Fund to be elected by the holders of AMPS,
voting separately as a class, will require the affirmative vote of a plurality
of the votes cast by the holders of shares of a Fund's AMPS, represented at the
Meeting and entitled to vote; and election of the remaining Directors of each
Fund will require the affirmative vote of a plurality of the votes cast by the
holders of shares of that Fund's Common Stock and AMPS, represented at the
Meeting and entitled to vote, voting together as a single class. A "plurality of
the votes cast" means that the candidates must receive more votes than any other
candidates for the same positions, but not necessarily a majority of votes cast.
With respect to Item 3, assuming a quorum is present at the Meetings,
approval of the ratification of the selection of independent auditors of a Fund
will require the affirmative vote of a majority of the votes cast by the holders
of shares of Common Stock and AMPS of that Fund represented at the Meeting in
person or by proxy, and entitled to vote, voting together as a single class.
The Board of Directors of each of the Funds has fixed the close of business
on October 20, 1999 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. At the
Record Date, each Fund had outstanding the number of shares of Common Stock and
AMPS indicated in Exhibit I. To the knowledge of the
4
<PAGE> 9
management of each of the Funds, no person owned beneficially more than 5% of
the respective outstanding shares of either class of capital stock of any Fund
at the Record Date.
The Boards of Directors of the Funds know of no business other than that
discussed in Items 1, 2, and 3 above that 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.
ITEM 1. 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 in this Proxy Statement and
Prospectus and in the Agreement and Plan of Reorganization attached hereto as
Exhibit II.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of New Jersey Insured II by
New Jersey Insured and the subsequent distribution of New Jersey Insured Common
Stock and New Jersey Insured Series C AMPS to the holders of New Jersey Insured
II Common Stock and New Jersey Insured II AMPS, Series A and Series B,
respectively; (ii) the acquisition of substantially all of the assets and the
assumption of substantially all the liabilities of New Jersey Insured III by New
Jersey Insured and the subsequent distribution of New Jersey Insured Common
Stock and New Jersey Insured Series D AMPS to the holders of New Jersey Insured
III Common Stock and New Jersey Insured III AMPS, Series A, respectively; and
(iii) the subsequent deregistration and dissolution of each of New Jersey
Insured II and New Jersey Insured III.
At meetings of the Boards of Directors of each of the Funds, the Board of
Directors of each of the Funds unanimously approved the Reorganization. Subject
to obtaining the necessary approvals from the stockholders of each of the Funds,
the Board of Directors of each Acquired Fund also deemed advisable the
deregistration of the Fund under the Investment Company Act of 1940, as amended
(the "Investment Company Act") and its dissolution under the laws of the State
of Maryland. The Reorganization requires approval of the stockholders of each of
the three Funds. The Reorganization will not take place if the stockholders of
any one Fund do not approve the Agreement and the Plan of Reorganization.
Each of the Funds seeks to provide stockholders with current income exempt
from Federal income tax and New Jersey personal income taxes. Each of the Funds
seeks to achieve its investment objective by investing primarily in a portfolio
of long-term, investment grade municipal obligations, the interest on which, in
the opinion of bond counsel to the issuer, is exempt from Federal income tax and
New Jersey personal income taxes. 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.
Each of the Funds is a non-diversified, leveraged, closed-end management
investment company registered under the Investment Company Act. If the
stockholders of the Funds approve the Reorganization, (i) New Jersey Insured
Common Stock and New Jersey Insured Series C AMPS will be issued to New Jersey
Insured II in exchange for the assets of New Jersey Insured II; (ii) New Jersey
Insured Common Stock and New Jersey Insured Series D AMPS will be issued to New
Jersey Insured III in exchange for the assets of New Jersey Insured III; and
(iii) New Jersey Insured II and New Jersey Insured III will distribute these
shares to their respective stockholders as provided in the Agreement and Plan of
Reorganization. After the Reorganization, each of New Jersey Insured II and New
Jersey Insured III will terminate its registration under the Investment Company
Act and its incorporation under Maryland law.
Based upon their evaluation of all relevant information, the Directors of
each Fund have determined that the Reorganization will potentially benefit the
holders of Common Stock of that Fund. Specifically, after the Reorganization,
stockholders of each of the Acquired Funds will remain invested in a closed-end
fund with an
5
<PAGE> 10
investment objective and policies substantially similar to the Acquired Fund's
investment objective and policies and that uses substantially the same
management personnel. In addition, it is anticipated that common stockholders of
each of the Funds will be subject to a reduced overall operating expense ratio
based on the anticipated pro forma combined total operating expenses and the
total combined assets of the surviving fund after the Reorganization. The Boards
also considered the relative tax positions of the Funds' portfolios. It is not
anticipated that the Reorganization will directly benefit the holders of shares
of AMPS of any of the Funds; however, the Reorganization will not adversely
affect the holders of shares of any series of AMPS of any of the Funds and the
expenses of the Reorganization will not be borne by the holders of shares of
AMPS of any of the Funds.
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 or an opinion of counsel to the same effect. Under the Agreement
and Plan of Reorganization, however, the Board of Directors of any Fund may
cause the Reorganization to be postponed or abandoned in certain circumstances
should such Board determine that it is in the best interests of the stockholders
of that Fund 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 all of the Funds or
(ii) by the Board of Directors of any Fund if any condition to that Fund's
obligations has not been fulfilled or waived by such Fund's Board of Directors.
6
<PAGE> 11
FEE TABLE FOR COMMON STOCKHOLDERS OF NEW JERSEY INSURED,
NEW JERSEY INSURED II, NEW JERSEY INSURED III AND
PRO FORMA NEW JERSEY INSURED AS OF JUNE 30, 1999 (UNAUDITED)(a)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
--------------------------------------- ----------
NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
INSURED INSURED II INSURED III INSURED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
COMMON STOCKHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of
offering price)........................... None(b) None(b) None(b) None(c)
Dividend Reinvestment Plan Fees.............. None None None None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON STOCK AT JUNE 30,
1999)(d)
Investment Advisory Fees(e).................. 0.92% 0.95% 0.90% 0.92%
Interest Payments on Borrowed Funds.......... None None None None
Other Expenses............................... 0.43% 0.48% 0.47% 0.32%
---- ---- ---- ----
Total Annual Expenses (e)...................... 1.35% 1.43% 1.37% 1.24%
==== ==== ==== ====
</TABLE>
---------------
(a) No information is presented with respect to AMPS because no Fund's
operating expenses or expenses of the Reorganization will be borne by the
holders of AMPS of any of the Funds. Generally, AMPS are sold at a fixed
liquidation preference of $25,000 per share and investment return is set at
an auction.
(b) Shares of Common Stock purchased in the secondary market 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 annual operating expenses for pro forma New Jersey Insured are
projections for a 12-month period.
(e) Based on net assets of each Fund and pro forma New Jersey Insured,
excluding assets attributable to AMPS. If assets attributable to AMPS are
included, the Investment Advisory Fees for each Fund and pro forma New
Jersey Insured would be 0.55% and the Total Annual Expenses would be 0.81%,
0.83%, 0.83% and 0.74%.
EXAMPLE:
CUMULATIVE EXPENSES PAID ON SHARES OF COMMON STOCK
FOR THE PERIODS INDICATED:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) the operating expense ratio for
each Fund (as a percentage of net assets attributable to
Common Stock) set forth in the table above and (2) a 5%
annual return throughout the period:
New Jersey Insured..................................... $14 $43 $74 $162
New Jersey Insured II.................................. $15 $45 $78 $171
New Jersey Insured III................................. $14 $43 $75 $165
Pro Forma New Jersey Insured*.......................... $13 $39 $68 $150
</TABLE>
---------------
* Assumes that the Reorganization had taken place on June 30, 1999.
7
<PAGE> 12
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a common stockholder of each of the Funds 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 USES A 5%
ANNUAL RATE OF RETURN AS MANDATED BY SECURITIES AND EXCHANGE COMMISSION (THE
"SEC") REGULATIONS. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. See "Comparison of the Funds" and "The Reorganization -- Potential
Benefits to Common Stockholders of the Funds as a Result of the Reorganization."
8
<PAGE> 13
BUSINESS OF NEW JERSEY
INSURED.................... New Jersey Insured was incorporated under the laws
of the State of Maryland on January 27, 1998 and
commenced operations on March 11, 1998. New Jersey
Insured is a non-diversified, leveraged,
closed-end management investment company whose
investment objective is to provide stockholders
with current income exempt from Federal income tax
and New Jersey personal income taxes. New Jersey
Insured seeks to achieve its investment objective
by investing primarily in a portfolio of long-term
investment grade obligations, the interest on
which, in the opinion of bond counsel to the
issuer, is exempt from Federal income taxes and
New Jersey personal income taxes ("New Jersey
Municipal Bonds"). Under normal circumstances, at
least 80% of New Jersey 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. The
Fund intends to invest primarily in long-term New
Jersey Municipal Bonds and other long-term
municipal obligations exempt from Federal income
taxes but not New Jersey personal income taxes
("Municipal Bonds") with a maturity of more than
ten years. The weighted average maturity of the
Fund's portfolio was 24.51 years as of September
30, 1999. The average maturity of the Fund's
portfolio securities, and therefore the Fund's
portfolio as a whole, will vary based upon the
assessment of Fund Asset Management, L.P. ("FAM"),
the Fund's investment adviser, of economic and
market conditions. See "Comparison of the
Funds -- Investment Objectives and Policies."
New Jersey Insured has outstanding Common Stock
and two series of AMPS, designated Series A and
Series B, which shall be referred to herein
collectively as "New Jersey Insured AMPS." As of
September 30, 1999, New Jersey Insured had net
assets of $162,252,112.
BUSINESS OF NEW JERSEY
INSURED II............... New Jersey Insured II was incorporated under the
laws of the State of Maryland on August 17, 1998
and commenced operations on September 25, 1998.
New Jersey Insured II is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to provide
stockholders with current income exempt from
Federal income taxes and New Jersey personal
income taxes. New Jersey Insured II seeks to
achieve its investment objective by investing
primarily in a portfolio of New Jersey Municipal
Bonds. Under normal circumstances, at least 80% of
New Jersey Insured II'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. The Fund
intends to invest primarily in long-term New
Jersey Municipal Bonds and Municipal Bonds with a
maturity of more than ten years. The weighted
average maturity of the Fund's portfolio was 25.58
years as of September 30, 1999. The average
maturity of the Fund's portfolio securities, and
therefore the Fund's portfolio as a whole, will
vary based upon FAM's assessment of economic and
market conditions. See "Comparison of the
Funds -- Investment Objectives and Policies."
New Jersey Insured II has outstanding Common Stock
and two series of AMPS, designated Series A and
Series B, which shall be referred to
9
<PAGE> 14
herein collectively as "New Jersey Insured II
AMPS." As of September 30, 1999, New Jersey
Insured II had net assets of $136,449,331.
BUSINESS OF NEW JERSEY
INSURED III.............. New Jersey Insured III was incorporated under the
laws of the State of Maryland on November 30, 1998
and commenced operations on January 29, 1999. New
Jersey Insured III is a non-diversified,
leveraged, closed-end management investment
company whose investment objective is to provide
stockholders with current income exempt from
Federal income taxes and New Jersey personal
income taxes. New Jersey Insured III seeks to
achieve its investment objective by investing
primarily in a portfolio of New Jersey Municipal
Bonds. Under normal circumstances, at least 80% of
New Jersey Insured III'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. The Fund
intends to invest primarily in long-term New
Jersey Municipal Bonds and Municipal Bonds with a
maturity of more than ten years. The weighted
average maturity of the Fund's portfolio was 25.95
years as of September 30, 1999. The average
maturity of the Fund's portfolio securities, and
therefore the Fund's portfolio as a whole, will
vary based upon FAM's assessment of economic and
market conditions. See "Comparison of the
Funds -- Investment Objectives and Policies."
New Jersey Insured III has outstanding Common
Stock and one series of AMPS, designated Series A
(the "New Jersey Insured III AMPS"). As of
September 30, 1999, New Jersey Insured III had net
assets of $114,638,774.
COMPARISON OF THE FUNDS.... Investment Objectives and Policies. The Funds
have substantially similar investment objectives
and policies. All three Funds seek to provide
stockholders (including holders of AMPS) with
current income exempt from Federal income tax and
New Jersey personal income taxes and seek to
invest primarily in a portfolio of long-term
investment grade New Jersey Municipal Bonds. The
Funds each intend to invest substantially all (at
least 80%) of their assets in New Jersey Municipal
Bonds, except when there is an insufficient supply
of New Jersey Municipal Bonds at reasonable
prices. Under normal circumstances, the Fund will
maintain at least 80% of its net assets in New
Jersey Municipal Bonds. Each Fund is subject to
the requirement that 80% of its assets be invested
in municipal obligations covered by insurance
guaranteeing the timely payment of principal at
maturity and interest. See "Comparison of the
Funds -- Investment Objectives and Policies."
Capital Stock. Each Fund has outstanding both
Common Stock and AMPS. The Common Stock of each of
the Funds is traded on the NYSE. As of September
30, 1999, (i) the net asset value per share of New
Jersey Insured Common Stock was $13.46 and the
market price per share was $12.6875; (ii) the net
asset value per share of New Jersey Insured II
Common Stock was $12.43 and the market price per
share was $11.75; and (iii) the net asset value
per share of New Jersey Insured III Common Stock
was $12.77 and the market price per share was
$12.3125. The AMPS of each of the Funds have a
liquidation preference of $25,000 per share and
are sold principally at auctions. See "Comparison
of the Funds -- Capital Stock."
10
<PAGE> 15
Auctions generally have been held and will be held
every seven days for each series of AMPS of each
of the Funds unless the applicable Fund elects,
subject to certain limitations, to have a special
dividend period. In connection with the
Reorganization, a holder of AMPS of an Acquired
Fund may receive New Jersey Insured AMPS with a
dividend payment date and an auction date that
fall on a day of the week that is different from
the schedule of the AMPS of the Acquired Fund that
he or she holds. See "Comparison of the
Funds--Capital Stock." The following table
provides information about the dividend rates for
each series of AMPS of each of the Funds as of a
recent auction.
<TABLE>
<CAPTION>
AUCTION DATE FUND SERIES DIVIDEND RATE
------------ ---- ------ -------------
<S> <C> <C> <C> <C>
October 8, 1999 New Jersey Insured A 3.70%
October 14, 1999 New Jersey Insured B 3.50%
October 12, 1999 New Jersey Insured II A 3.44%
October 8, 1999 New Jersey Insured II B 3.70%
October 13, 1999 New Jersey Insured III A 3.30%
</TABLE>
Advisory Fees. The investment adviser for each of
the Funds is FAM. The principal business address
of FAM is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536. FAM was organized as an investment
adviser in 1977 and offers investment advisory
services to more than 50 registered investment
companies. The Asset Management Group of Merrill
Lynch & Co., Inc. ("ML & Co.") (which includes
FAM) acts as investment adviser for over 100
registered investment companies and also offers
portfolio management and portfolio analysis
services to individuals and institutional
accounts.
FAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund. Robert A.
DiMella and Robert D. Sneeden serve as the
portfolio managers for New Jersey Insured. Robert
A. DiMella and Roberto W. Roffo serve as the
portfolio managers for New Jersey Insured II and
New Jersey Insured III. After the Reorganization
Messrs. DiMella and Sneeden will serve as the
portfolio managers of the combined fund.
Pursuant to separate investment advisory
agreements between each Fund and FAM, each Fund
pays FAM a monthly fee at the annual rate of 0.55%
of such Fund's average weekly net assets,
including assets acquired from the sale of AMPS.
Subsequent to the Reorganization, FAM will
continue to receive compensation at the rate of
0.55% of the average weekly net assets, including
assets acquired from the sale of AMPS, of the
combined fund. See "Comparison of the Funds --
Management of the Funds."
Other Significant Fees. The Bank of New York is
the custodian, transfer agent, dividend disbursing
agent and registrar for the Common Stock of New
Jersey Insured. State Street Bank and Trust
Company is the custodian, transfer agent, dividend
disbursing agent and registrar for the Common
Stock of New Jersey Insured II and New Jersey
Insured III. The Bank of New York is the transfer
agent, dividend disbursing agent, registrar and
auction agent for each Fund's AMPS. The principal
business addresses are as follows: The Bank of New
York, 90 Washington Street, New York, New York
10286 (for its custodial
11
<PAGE> 16
services) and 101 Barclay Street, New York, New
York 10286 (for its transfer agency and auction
agency services); and State Street Bank and Trust
Company, 225 Franklin Street, Boston,
Massachusetts 02110. See "Comparison of the
Funds -- Management of the Funds."
Overall Expense Ratio. As of June 30, 1999, the
overall annualized operating expense ratio for New
Jersey Insured was 1.35%, based on net assets of
approximately $101.8 million excluding AMPS, and
0.81%, based on net assets of approximately $169.8
million including AMPS; the overall annualized
operating expense ratio for New Jersey Insured II
was 1.43%, based on net assets of approximately
$83.4 million excluding AMPS, and 0.83%, based on
net assets of approximately $143.4 million
including AMPS; and the overall annualized
operating expense ratio for New Jersey Insured III
was 1.37%, based on net assets of approximately
$73.2 million excluding AMPS, and 0.83%, based on
net assets of approximately $120.2 million
including AMPS. If the Reorganization had taken
place on June 30, 1999, the overall operating
expense ratio for pro forma New Jersey Insured
would have been 1.24%, based on net assets of
approximately $258.5 million excluding AMPS, and
0.74%, based on net assets of approximately $433.5
million including AMPS.
Purchases and Sales of Common Stock and
AMPS. Purchase and sale procedures for the Common
Stock of each of the Funds are identical, and
investors typically purchase and sell shares of
Common Stock of the 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 the Funds through
privately negotiated transactions with existing
stockholders.
Purchase and sale procedures for the AMPS of each
of the Funds also are identical. Such AMPS
generally are purchased and sold at separate
auctions conducted on a regular basis by The Bank
of New York, 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 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
will develop or if it does develop, that it will
provide holders with a liquid trading market for
the AMPS of any of the Funds.
Ratings of AMPS. The AMPS of each Fund have been
assigned a rating of AAA from Standard & Poor's
("S&P") and "aaa" from Moody's Investors Service,
Inc. ("Moody's"). See "Comparison of the
Funds -- Rating Agency Guidelines."
Portfolio Insurance. Each of the Funds has a
similar policy with respect to obtaining insurance
for portfolio securities. Under normal
circumstances, at least 80% of each Fund's assets
will be invested in municipal obligations either
(i) insured under an insurance policy
12
<PAGE> 17
purchased by the Fund or (ii) insured under an
insurance policy obtained by the issuer thereof or
any other party. See "Comparison of the
Funds -- Investment Objectives and
Policies -- Portfolio Insurance."
Ratings of Municipal Obligations. Each of the
Funds will invest only in municipal obligations
that at the time of purchase are considered
investment grade.
Portfolio Transactions. The portfolio
transactions in which the Funds may engage are
similar, as are the procedures for such
transactions. See "Comparison of the
Funds -- Portfolio Transactions."
Dividends and Distributions. The methods of
dividend payment and distributions are similar for
all of the Funds, both with respect to the Common
Stock and the AMPS of each Fund. See "Comparison
of the Funds -- Dividends and Distributions."
Net Asset Value. The net asset value per share of
Common Stock of each Fund is determined after the
close of business on the NYSE (generally, 4:00
p.m., Eastern time) on the last business day of
each week. For purposes of determining the net
asset value of a share of Common Stock 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 fees
payable to FAM, are accrued daily. See "Comparison
of the Funds -- Net Asset Value."
Voting Rights. The corresponding voting rights of
the holders of shares of each Fund's Common Stock
are substantially similar. Likewise, the
corresponding voting rights of the holders of
shares of each Fund's AMPS are substantially
similar. See "Comparison of the Funds -- Capital
Stock."
Stockholder Services. An automatic dividend
reinvestment plan is available to holders of
shares of each Fund's Common Stock. The plans are
similar for the three Funds. See "Comparison of
the Funds -- Automatic Dividend Reinvestment
Plan." Other stockholder services, including the
provision of annual and semi-annual reports, are
the same for the three Funds.
13
<PAGE> 18
OUTSTANDING SECURITIES OF NEW JERSEY INSURED,
NEW JERSEY INSURED II AND NEW JERSEY INSURED III AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT
AMOUNT FUND FOR ITS OWN SHOWN IN PREVIOUS
TITLE OF CLASS AUTHORIZED ACCOUNT COLUMN
-------------- ----------- ------------------- -------------------
<S> <C> <C> <C>
New Jersey Insured
Common Stock.............................. 199,997,280 -0- 7,000,496
AMPS
Series A............................... 1,360 -0- 1,360
Series B............................... 1,360 -0- 1,360
New Jersey Insured II
Common Stock.............................. 199,997,600 -0- 6,151,635
AMPS
Series A............................... 1,200 -0- 1,200
Series B............................... 1,200 -0- 1,200
New Jersey Insured III
Common Stock.............................. 199,998,120 -0- 5,297,667
AMPS
Series A............................... 1,880 -0- 1,880
</TABLE>
TAX CONSIDERATIONS......... The Funds have jointly requested a private letter
ruling from the IRS with respect to the
Reorganization to the effect that, among other
things, no Fund will recognize gain or loss on the
transaction and the stockholders of the Acquired
Funds will not recognize gain or loss on the
exchange of their shares for New Jersey Insured
Common Stock (except to the extent that a common
stockholder in an Acquired Fund receives cash
representing an interest in less than a full share
of New Jersey Insured Common Stock in the
Reorganization) or New Jersey Insured AMPS. The
consummation of the Reorganization is subject to
the receipt of such ruling or of an opinion of
counsel to the same effect. The Reorganization
will not affect the status of New Jersey Insured
as a regulated investment company (a "RIC") under
the Internal Revenue Code of 1986, as amended (the
"Code"). Each of the Acquired Funds will liquidate
pursuant to the Reorganization. See "Agreement and
Plan of Reorganization -- Tax Consequences of the
Reorganization."
14
<PAGE> 19
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since each of the three Funds invests primarily in a portfolio of New
Jersey Municipal Bonds, any risks inherent in such investments are equally
applicable to all three 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 of
any series of AMPS of any of the Funds or create additional risks.
NEW JERSEY MUNICIPAL BONDS
Each of the Funds intends to invest the majority of its portfolio in New
Jersey Municipal Bonds. As a result, each Fund is more exposed to risks
affecting issuers of New Jersey Municipal Bonds than is a municipal bond fund
that invests more widely. See "Comparison of the Funds -- Special Considerations
Relating to New Jersey Municipal Bonds" and Exhibit III -- "Economic and Other
Conditions in New Jersey." If a Fund invests less than 80% of its assets in New
Jersey Municipal Bonds, the income provided by that Fund may not be exempt from
New Jersey personal income tax.
INTEREST RATE AND CREDIT RISK
Each Fund invests in municipal bonds that are subject to interest rate and
credit risk. Interest rate risk is the risk that prices of municipal bonds
generally increase when interest rates decline and decrease when interest rates
increase. Prices of longer-term securities generally change more in response to
interest rate changes than prices of shorter-term securities. Credit risk is the
risk that the issuer will be unable to pay the interest or principal when due.
The degree of credit risk depends on both the financial condition of the issuer
and the terms of the obligation.
NON-DIVERSIFICATION
Each Fund is registered as a "non-diversified" investment company. This
means that each Fund may invest a greater percentage of its assets in a single
issuer than a diversified investment company. Since a Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more exposed to the effects of any single economic, political or
regulatory occurrence than a more widely-diversified fund. Even as a
non-diversified fund, each Fund must still meet the diversification requirements
of applicable Federal income tax law.
RATING CATEGORIES
The Funds intend to invest in municipal bonds that are rated investment
grade by S&P, Moody's or Fitch IBCA, Inc. ("Fitch") or are considered by FAM to
be of comparable quality. Obligations rated in the lowest investment grade
category may have certain speculative characteristics.
PRIVATE ACTIVITY BONDS
Each Fund may invest all or a portion of its assets in certain tax-exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in a Fund to a Federal alternative minimum tax.
PORTFOLIO INSURANCE
Each of the Funds is subject to certain investment restrictions imposed by
guidelines of the insurance companies that issue portfolio insurance. The Funds
do not believe these guidelines prevent FAM from managing the Funds' portfolios
in accordance with the Funds' investment objective and policies.
LEVERAGE
Use of leverage, through the issuance of AMPS, involves certain risks to
holders of Common Stock of each of the Funds. 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
15
<PAGE> 20
addition, changes in the short-term and medium-term dividend rates on, and the
amount of taxable income allocable to, the AMPS will affect the yield to holders
of Common Stock. Under certain circumstances when a Fund is required to allocate
taxable income to holders of AMPS, the Fund may be required to make an
additional distribution to such holders in an amount approximately equal to the
tax liability resulting from that allocation (an "Additional Distribution").
Leverage will allow holders of each Fund's Common Stock to realize a higher
current rate of return than if the Fund were not leveraged as long as the Fund,
while accounting for its costs and operating expenses, is able to realize a
higher net return on its investment portfolio than the then-current dividend
rate (and any Additional Distribution) paid on the AMPS. Similarly, since a pro
rata portion of each Fund's net realized capital gains is generally payable to
holders of the Fund's Common Stock, the use of leverage will 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
do their relationships to each other (i.e., the slope of the yield curve)
depending upon such factors as supply and demand forces, monetary and tax
policies and investor expectations. Changes in any or all of such factors could
cause the relationship between short-term, medium-term and long-term rates to
change (i.e., to flatten or to invert the slope of the yield curve) so that
short-term and medium-term rates may substantially increase relative to the
long-term obligations in which each Fund may be invested. To the extent that the
current dividend rate (and any Additional Distribution) on the AMPS approaches
the net return on a Fund's investment portfolio, the benefit of leverage to
holders of Common Stock will be decreased. If the current dividend rate (and any
Additional Distribution) on the AMPS were to exceed the net return on a Fund's
portfolio, holders of Common Stock would receive a lower rate of return than if
the Fund were not leveraged. Similarly, since both the costs of issuing AMPS and
any decline in the value of a Fund's investments (including investments
purchased with the proceeds from any AMPS offering) will be 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. If a Fund is liquidated, holders of that
Fund's AMPS will be entitled to receive liquidating distributions before any
distribution is made to holders of Common Stock of that Fund.
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 as a RIC under the
Federal tax laws. See "Comparison of the Funds -- Tax Rules Applicable to the
Funds and their Stockholders." However, each Fund intends to take all measures
necessary to make Common Stock dividend payments. If a Fund's current investment
income is ever insufficient to meet dividend payments on either the Common Stock
or the AMPS, the Fund may have 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 under the following circumstances:
- if 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 the Fund can obtain if the Common Stock were not
leveraged,
- if the asset coverage for the AMPS declines below 200%, either as a
result of a decline in the value of the Fund's portfolio investments or
as a result of the repurchase of Common Stock in tender offers, or
otherwise, or
- in order to maintain the asset coverage established by Moody's and S&P in
rating 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 to do so.
Portfolio Management
The portfolio management strategies of the Funds 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
16
<PAGE> 21
impact of leverage on holders of its Common Stock. Each Fund also may attempt to
reduce the degree to which it is leveraged by redeeming AMPS pursuant to the
provisions of the 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.
INVERSE FLOATING OBLIGATIONS
A Fund's investments in "inverse floating obligations" or "residual
interest bonds" provide investment leverage because their market value increases
or decreases in response to market changes at a greater rate than fixed rate,
long term tax exempt securities. The market values of such securities are more
volatile than the market values of fixed rate, tax exempt securities.
OPTIONS AND FUTURES TRANSACTIONS
Each Fund may engage in certain options and futures transactions to reduce
its exposure to interest rate movements. If a Fund incorrectly forecasts market
values, interest rates or other factors, that Fund's performance could suffer.
Each Fund also may suffer a loss if the other party to the transaction fails to
meet its obligations. The Funds are not required to use hedging and may choose
not to do so.
ANTITAKEOVER PROVISIONS
The Articles of Incorporation of each of the Funds (in each case the
"Charter") include provisions that could limit the ability of other entities or
persons to acquire control of that Fund or to change the composition of its
Board of Directors. Such provisions could limit the ability of stockholders to
sell their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund.
RATINGS CONSIDERATIONS
The Funds 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 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 shares of AMPS will be able to sell such
shares in an auction. The ratings are based on current information furnished to
Moody's and S&P by the 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. The Common Stock of the
Funds has not been rated by a nationally recognized statistical rating
organization.
The Board of Directors of each of the Funds, without stockholder approval,
may amend, alter or repeal certain definitions or restrictions which 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.
17
<PAGE> 22
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
New Jersey Insured
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Ernst & Young LLP, independent auditors. The following per share data and ratios
have been derived from information provided in the financial statements of the
Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MARCH 11, 1998+
JULY 31, 1999 TO JULY 31, 1998
------------------ ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 15.09 $ 15.00
-------- --------
Investment income -- net.................................... 1.13 .46
Realized and unrealized gain (loss) on investments -- net... (.58) .16
-------- --------
Total from investment operations............................ .55 .62
-------- --------
Less dividends and distributions to Common Stock
shareholders:
Investment income -- net.................................. (.81) (.26)
Realized gain on investments -- net....................... (.01) --
In excess of realized gain on investments -- net.......... (.03) --
-------- --------
Total dividends and distributions to Common Stock
shareholders.............................................. (.85) (.26)
-------- --------
Capital charge resulting from issuance of Common Stock...... -- (.03)
-------- --------
Effect of Preferred Stock activity:++
Dividends and distributions to Preferred Stock
shareholders:
Investment income -- net............................... (.30) (.12)
Realized gain on investments -- net.................... (.02) --
Capital charge resulting from issuance of Preferred
Stock.................................................. -- (.12)
-------- --------
Total effect of Preferred Stock activity.................... (.32) (.24)
-------- --------
Net asset value, end of period.............................. $ 14.47 $ 15.09
======== ========
Market price per share, end of period....................... $13.4375 $ 15.375
======== ========
TOTAL INVESTMENT RETURN:**
Based on market price per share............................. (7.44%) 4.29%#
======== ========
Based on net asset value per share.......................... 1.56% 2.35%#
======== ========
RATIOS BASED ON AVERAGE NET ASSETS OF COMMON STOCK:
Total Expenses, net of reimbursement***..................... 1.22% .29%*
======== ========
Total Expenses***........................................... 1.31% 1.21%*
======== ========
Total investment income-net***.............................. 7.32% 8.17%*
======== ========
Amount of Dividends to Preferred Stockholders............... 1.93% 2.14%*
======== ========
Investment income -- net, to Common Stockholders............ 5.39% 6.03%*
======== ========
</TABLE>
18
<PAGE> 23
New Jersey Insured (continued)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MARCH 11, 1998+
JULY 31, 1999 TO JULY 31, 1998
------------------ ----------------
<S> <C> <C>
RATIOS BASED ON TOTAL AVERAGE NET ASSETS:+++***
Total expenses, net of reimbursement........................ .75% .18%*
======== ========
Total expenses.............................................. .80% .76%*
======== ========
Total investment income -- net.............................. 4.48% 5.13%*
======== ========
RATIOS BASED ON AVERAGE NET ASSETS OF PREFERRED STOCK:
Dividends to Preferred Stockholders......................... 3.04% 3.61%*
======== ========
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of period (in
thousands)................................................ $101,300 $104,967
======== ========
Preferred Stock outstanding, end of period (in thousands)... $ 68,000 $ 68,000
======== ========
Portfolio turnover.......................................... 64.93% 32.46%
======== ========
DIVIDENDS PER SHARE ON PREFERRED STOCK OUTSTANDING
Investment income -- net
Series A.................................................. $ 763 $ 317
======== ========
Series B.................................................. $ 766 $ 300
======== ========
LEVERAGE:
Asset coverage per $1,000................................... $ 2,490 $ 2,544
======== ========
</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
charges.
*** Do not reflect the effect of dividends to Preferred Stockholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on March 30, 1998.
+++ Includes Common and Preferred Stock average net assets.
# Aggregate total investment return.
19
<PAGE> 24
New Jersey Insured II
The financial information in the table below has been audited in
conjunction with the annual audit of the financial statements of the Fund by
Ernst & Young LLP, independent auditors. The following per share data and ratios
have been derived from information provided in the financial statements of the
Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 25, 1998+ TO
MAY 31, 1999
----------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 15.00
--------
Investment income -- net.................................... .73
Realized and unrealized loss on investments -- net.......... (.78)
--------
Total from investment operations............................ (.05)
--------
Less dividends to Common Stock shareholders:
Investment income -- net.................................. (.47)
--------
Capital charge resulting from issuance of Common Stock...... (.03)
--------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net............................... (.19)
Capital charge resulting from issuance of Preferred Stock... (.10)
--------
Total effect of Preferred Stock activity.................... (.29)
--------
Net asset value, end of period.............................. $ 14.16
========
Market price per share, end of period....................... $12.9375
========
TOTAL INVESTMENT RETURN:**
Based on market price per share............................. (10.88%)#
========
Based on net asset value per share.......................... (2.46%)#
========
RATIOS BASED ON AVERAGE NET ASSETS OF COMMON STOCK:***
Total expenses, net of reimbursement***..................... .66%*
========
Total expenses***........................................... 1.29%*
========
Total investment income -- net***........................... 7.49%*
========
Amount of Dividends to Preferred Stockholders............... 1.99%*
========
Investment income -- net, to Common Stockholders............ 5.50%*
========
RATIOS BASED ON TOTAL AVERAGE NET ASSETS: +++***
Expenses, net of reimbursement.............................. .41%*
========
Total expenses.............................................. .80%*
========
Total investment income -- net.............................. 4.65%*
========
RATIOS BASED ON AVERAGE NET ASSETS OF PREFERRED STOCK:
Dividends to Preferred Stockholders......................... 3.26%*
========
</TABLE>
20
<PAGE> 25
New Jersey Insured II (continued)
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 25, 1998+ TO
MAY 31, 1999
----------------------
<S> <C>
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of period (in
thousands)................................................ $ 87,095
========
Preferred Stock outstanding, end of period (in thousands)... $ 60,000
========
Portfolio turnover.......................................... 92.47%
========
DIVIDENDS PER SHARE ON PREFERRED STOCK OUTSTANDING:
Series A -- Investment income -- net...................... $ 489
========
Series B -- Investment income -- net...................... $ 506
========
LEVERAGE:
Asset coverage per $1,000................................... $ 2,452
========
</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
charges.
*** Do not reflect the effect of dividends to Preferred Stockholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on October 19, 1998.
+++ Includes Common and Preferred Stock average net assets.
# Aggregate total investment return.
21
<PAGE> 26
New Jersey Insured III
The financial information in the table below is unaudited and has been
provided by FAM. The following per share data and ratios have been derived from
information provided in the financial statements of the Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 29, 1999+ TO
MARCH 31, 1999
(UNAUDITED)
--------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 15.00
-------
Investment income -- net.................................... .16
Realized and unrealized loss on investments -- net.......... (.13)
-------
Total from investment operations............................ .03
-------
Capital charge resulting from issuance of Common Stock...... (.05)
-------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net............................... (.03)
Capital charge resulting from issuance of Preferred
Stock................................................. (.10)
-------
Total effect of Preferred Stock activity.................... (.13)
-------
Net asset value, end of period.............................. $ 14.85
=======
Market price per share, end of period....................... $ 14.25
=======
TOTAL INVESTMENT RETURN:**
Based on market price per share............................. (5.00%)#
=======
Based on net asset value per share.......................... (1.00%)#
=======
RATIOS TO AVERAGE NET ASSETS:***
Expenses, net of reimbursement.............................. .16%*
=======
Expenses.................................................... .81%*
=======
Investment income -- net.................................... 5.17%*
=======
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of period (in
thousands)................................................ $78,691
=======
Preferred Stock outstanding, end of period (in thousands)... $47,000
=======
Portfolio turnover.......................................... 32.08%
=======
DIVIDENDS PER SHARE ON PREFERRED STOCK OUTSTANDING:
Investment income -- net.................................... $ 82
=======
LEVERAGE:
Asset coverage per $1,000................................... $ 2,674
=======
</TABLE>
---------------
* Annualized.
22
<PAGE> 27
** 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
charges.
*** Do not reflect the effect of dividends to Preferred Stockholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on February 22, 1999.
# Aggregate total investment return.
23
<PAGE> 28
PER SHARE DATA FOR COMMON STOCK*
TRADED ON THE NEW YORK STOCK EXCHANGE (UNAUDITED)
New Jersey Insured
<TABLE>
<CAPTION>
PREMIUM
(DISCOUNT)
TO NET
MARKET PRICE ($)** NET ASSET VALUE ($) ASSET VALUE (%)
------------------- -------------------- -----------------
QUARTER ENDED* HIGH LOW HIGH LOW HIGH LOW
-------------- ------- ------ ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
April 30, 1998+.............. 15.1875 14.75 15.11 14.63 1.59 (1.67)
July 31, 1998................ 15.6875 15.00 15.20 15.05 2.58 (4.99)
October 31, 1998............. 16.125 15.375 16.06 15.41 2.29 (2.61)
January 31, 1999............. 15.3125 14.625 15.54 15.24 5.05 (5.03)
April 30, 1999............... 14.9375 14.50 15.46 15.31 N/A (6.03)
July 31, 1999................ 13.625 13.25 14.63 14.47 N/A (9.42)
October 31, 1999............. 13.4375 11.75 14.44 12.43 (3.60) (9.47)
</TABLE>
New Jersey Insured II
<TABLE>
<CAPTION>
PREMIUM
(DISCOUNT)
TO NET
MARKET PRICE ($)** NET ASSET VALUE ($) ASSET VALUE (%)
-------------------- -------------------- -----------------
QUARTER ENDED* HIGH LOW HIGH LOW HIGH LOW
-------------- ------- ------- ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
November 30, 1998++......... 16.25 15.6875 14.79 14.59 8.77 (0.53)
February 28, 1999........... 14.9375 14.4375 14.77 14.57 9.61 (1.40)
May 31, 1999................ 14.4375 12.8125 14.45 14.15 2.67 (8.63)
August 31, 1999............. 13.3125 12.00 14.01 12.66 N/A (10.84)
</TABLE>
New Jersey Insured III
<TABLE>
<CAPTION>
PREMIUM
(DISCOUNT)
TO NET
MARKET PRICE ($)** NET ASSET VALUE ($) ASSET VALUE (%)
-------------------- -------------------- -----------------
QUARTER ENDED* HIGH LOW HIGH LOW HIGH LOW
-------------- ------- ------- ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999+++........... 15.5625 15.00 15.10 14.86 3.96 (0.33)
June 30, 1999............... 14.9375 13.375 14.73 14.42 2.97 (7.38)
September 30, 1999.......... 13.375 12.25 13.95 12.74 0.67 (10.39)
</TABLE>
---------------
* Calculations are based upon shares of Common Stock outstanding at the end of
each quarter.
** As reported in the consolidated transaction operating system.
+ For the period March 11, 1998 to April 30, 1998.
++ For the period September 25, 1998 to November 30, 1998.
+++ For the period January 29, 1999 to March 31, 1999.
As indicated in the tables above, for the periods shown the Common Stock of
the Funds generally has traded at prices close to net asset value, with premiums
or discounts to net asset value of less than 12% being reflected in the market
value of the shares from time to time. Although there is no reason to believe
that this pattern should be affected by the Reorganization, it is not possible
to predict 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.
24
<PAGE> 29
INVESTMENT OBJECTIVE AND POLICIES
The structure, organization and investment policies of the Funds are
substantially similar, with the differences among the three Funds set forth
below. Each Fund seeks as a fundamental investment objective current income
exempt from Federal income tax and New Jersey personal income taxes. The
investment objective of each Fund is a fundamental policy that may not be
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 Jersey Municipal Bonds. Each Fund intends to invest
substantially all (at least 80%) of its assets in New Jersey Municipal Bonds
except at times when FAM considers that New Jersey Municipal Bonds of sufficient
quantity and quality are unavailable at suitable prices. To the extent that FAM
considers that suitable New Jersey Municipal Bonds are not available for
investment, the Fund may purchase Municipal Bonds. The Fund will maintain at
least 80% of its assets in New Jersey Municipal Bonds, except during interim
periods pending investment of the net proceeds of public offerings of its
securities and during temporary defensive periods. 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. 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.
Ordinarily, none of the Funds intends to realize significant investment
income subject to Federal income tax and New Jersey personal income taxes. Each
Fund may invest all or a portion of its assets in certain tax-exempt securities
classified as "private activity bonds" (in general, bonds that benefit
non-governmental entities) that may subject certain investors in the Fund to a
Federal alternative minimum tax.
Each Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in New Jersey Municipal Bonds and Municipal
Bonds, to the extent such investments are permitted by the Investment Company
Act. Other Non-Municipal Tax-Exempt Securities could include trust certificates
or other instruments evidencing interests in one or more long-term New Jersey
Municipal Bonds or Municipal Bonds. Certain Non-Municipal Tax-Exempt Securities
may be characterized as derivative instruments. For purposes of a Fund's
investment objective and policies, Non-Municipal Tax-Exempt Securities that pay
interest that is exempt from Federal income taxes and New Jersey personal income
taxes will be considered "New Jersey Municipal Bonds" and Non-Municipal
Tax-Exempt Securities that pay interest that is exempt from Federal income taxes
will be considered "Municipal Bonds."
Each Fund will invest in investment grade New Jersey Municipal Bonds and
Municipal Bonds that are rated at the date of purchase in the four highest
rating categories of S&P, Moody's or Fitch or, if unrated, are 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 and Fitch and Aaa through
Baa for Moody's. In the case of short-term notes, the investment grade rating
categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moody's and
F-1+ through F-3 for Fitch. In the case of tax-exempt commercial paper, the
investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through
Prime-3 for Moody's and F-1+ through F-3 for Fitch. Obligations ranked in the
lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3
and Prime-3 for Moody's; and BBB and F-3 for Fitch), while considered
"investment grade," may have certain speculative characteristics. There may be
sub-categories or gradations indicating relative standing within the rating
categories set forth above. In assessing the quality of New Jersey Municipal
Bonds and Municipal Bonds with respect to the foregoing requirements, FAM takes
into account the portfolio insurance as well as the nature of any letters of
credit or similar credit enhancement to which particular New Jersey Municipal
Bonds and Municipal Bonds are entitled and the creditworthiness of the insurance
company or financial institution that provided such insurance or credit
enhancements. Consequently, if New Jersey Municipal Bonds or Municipal Bonds are
covered by insurance policies issued by insurers whose claims-paying ability is
rated AAA by S&P or Fitch or Aaa by Moody's, FAM may consider such municipal
25
<PAGE> 30
obligations to be equivalent to AAA- or Aaa- rated securities, as the case may
be, even though such New Jersey Municipal Bonds or Municipal Bonds would
generally be assigned a lower rating if the rating were based primarily upon the
credit characteristics of the issuers without regard to the insurance feature.
The insured New Jersey Municipal Bonds and Municipal Bonds must also comply with
the standards applied by the insurance carriers in determining eligibility for
portfolio insurance. See Exhibit IV -- "Ratings of Municipal Bonds and
Commercial Paper" and Exhibit V -- "Portfolio Insurance."
Each of the Funds may 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 each Fund may invest are tax-exempt
obligations, in the opinion of counsel to the issuer, that contain a floating or
variable interest rate adjustment formula and a right of demand on the part of
the holder thereof to receive payment of the unpaid principal balance plus
accrued interest on a short notice period not to exceed seven days.
Participating VRDOs provide each Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDOs from the
financial institution on a specified number of days' notice, not to exceed seven
days. There is, however, the possibility that because of default or insolvency,
the demand feature of VRDOs or Participating VRDOs may not be honored. Each Fund
has been advised by its counsel that the Fund should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt obligations
for Federal income tax purposes.
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-term securities. These changes in net asset
value are likely to be greater in the case of a fund having a leveraged capital
structure, such as that used by the Funds. See "Risk Factors and Special
Considerations -- Leverage."
Each Fund intends to invest primarily in long-term New Jersey Municipal
Bonds and Municipal Bonds with a maturity of more than ten years. However, each
Fund may also invest in intermediate-term New Jersey Municipal Bonds and
Municipal Bonds with a maturity of between three years and ten years. Each Fund
may also invest in short-term tax-exempt securities, short-term U.S. Government
securities, repurchase agreements or cash. Such short-term securities or cash
will not exceed 20% of each Fund's total assets except during interim periods
pending investment of the net proceeds from public offerings of the Fund's
securities or in anticipation of the repurchase or redemption of the Fund's
securities and temporary periods when, in the opinion of FAM, prevailing market
or economic conditions warrant. The Funds do not ordinarily intend to realize
significant interest income that is subject to Federal income tax and New Jersey
personal income taxes.
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 Federal tax laws. 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 will be invested in the securities
(other than U.S. Government securities) of a single issuer, and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities (other than
U.S. Government securities) of a single issuer. A fund that elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% requirement with respect to 75% of its total assets. To the extent
that any Fund assumes large positions in the securities of a small number of
issuers, the Fund's yield may fluctuate to a
26
<PAGE> 31
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the assets of each of the Funds
will be invested in New Jersey Municipal Bonds and Municipal Bonds either (i)
insured under an insurance policy purchased by the Fund, or (ii) insured under
an insurance policy obtained by the issuer thereof or any other party. The Funds
will seek to limit their investments to municipal obligations insured under
insurance policies issued by insurance carriers that have total admitted assets
(unaudited) of at least $75,000,000 and capital and surplus (unaudited) of at
least $50,000,000 and insurance claims-paying ability ratings of AAA from S&P or
Fitch, or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be available. See Exhibit V to
this Proxy Statement and Prospectus for a brief description of insurance
claims-paying ability ratings of S&P, Moody's and Fitch. Currently, it is
anticipated that a majority of the insured New Jersey Municipal Bonds and
Municipal Bonds in each Fund's portfolio will be insured by the following
insurance companies which satisfy the foregoing criteria: AMBAC Indemnity
Corporation, Financial Guaranty Insurance Company, Financial Security Assurance
and Municipal Bond Investors Assurance Corporation. Each Fund also may purchase
New Jersey Municipal Bonds and Municipal Bonds covered by insurance issued by
any other insurance company that satisfies the foregoing criteria. A majority of
insured New Jersey Municipal Bonds and Municipal Bonds held by each Fund will be
insured under policies obtained by parties other than the Fund.
Each Fund may purchase, but has no obligation to purchase, separate
insurance policies (the "Policies") from insurance companies meeting the
criteria set forth above that guarantee payment of principal and interest on
specified eligible New Jersey Municipal Bonds and Municipal Bonds purchased by
the Funds. A New Jersey Municipal Bond or 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 of an insured New Jersey Municipal
Bond or Municipal Bond is not paid when due, the insurer will be obligated under
its Policy to make such payment not later than 30 days after it has been
notified by, and provided with documentation from, the Fund that such nonpayment
has occurred.
The Policies will be effective only as to insured New Jersey Municipal
Bonds and Municipal Bonds beneficially owned by a Fund. In the event of a sale
of any New Jersey Municipal Bonds and Municipal Bonds held by a Fund, the issuer
of the relevant Policy will be liable only for those payments of interest and
principal that are then due and owing. The Policies will not guarantee the
market value of an insured New Jersey Municipal Bond or Municipal Bond or the
value of the shares of a Fund.
The insurer will not have the right to withdraw coverage on securities
insured by its Policies and held by a Fund so long as such securities remain in
the Fund's portfolio. In addition, the insurer may not cancel its Policies for
any reason except failure to pay premiums when due. The Board of Directors of
each Fund reserves the right to terminate any of the Policies if it determines
that the benefits to the Fund of having its portfolio insured under such Policy
are not justified by the expense involved.
The premiums for the Policies are paid by the Fund and the yield on its
portfolio is reduced thereby. FAM estimates that the cost of the annual premiums
for the Policies of each Fund currently range from approximately .02 of 1% to
.15 of 1% of the principal amount of the New Jersey Municipal Bonds and
Municipal Bonds covered by such Policies. The estimate is based on the expected
composition of each Fund's portfolio of New Jersey Municipal Bonds and Municipal
Bonds. Additional information regarding the Policies is set forth in Exhibit V
to this Proxy Statement and Prospectus. In instances in which a Fund purchases
New Jersey Municipal Bonds and Municipal Bonds insured under policies obtained
by parties other than the Fund, the Insured Fund does not pay the premiums for
such policies; rather, the cost of such policies may be reflected in the
purchase price of the New Jersey Municipal Bonds and Municipal Bonds.
It is the intention of FAM to retain any insured securities that are in
default or in significant risk of default and to place a value on the insurance,
which ordinarily will be the difference between the market value of the
defaulted security and the market value of similar securities which are not in
default. In certain
27
<PAGE> 32
circumstances, however, FAM may determine that an alternate value for the
insurance, such as the difference between the market value of the defaulted
security and its par value, is more appropriate. FAM's ability to manage the
portfolio of a Fund may be limited to the extent it holds defaulted securities,
which may limit its ability in certain circumstances to purchase other New
Jersey Municipal Bonds and Municipal Bonds. See "Net Asset Value" below for a
more complete description of each Fund's method of valuing securities for which
market quotations are not generally available.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to each Fund. In the event the Board of Directors of a Fund determines
that such insurance is unavailable or that the cost of such insurance outweighs
the benefits to the Fund, the Fund may modify the criteria for insurance
carriers or the terms of the insurance, or may discontinue its policy of
maintaining insurance for all or any of the New Jersey Municipal Bonds and
Municipal Bonds held in the Fund's 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 New Jersey Municipal Bonds or
Municipal Bonds will not receive timely scheduled payments of principal or
interest). However, the insured New Jersey Municipal Bonds or Municipal Bonds
are subject to market risk (i.e., fluctuations in market value as a result of
changes in prevailing interest rates).
DESCRIPTION OF NEW JERSEY MUNICIPAL BONDS AND MUNICIPAL BONDS
New Jersey Municipal Bonds and Municipal Bonds include debt obligations
issued to obtain funds for various public purposes, including construction of a
wide range of public facilities, refunding of outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of private activity
bonds ("PABs") are issued by or on behalf of public authorities to finance
various privately operated facilities, including, among other things, airports,
public ports, mass commuting facilities, multi family housing projects, as well
as facilities for water supply, gas, electricity, sewage or solid waste
disposal. For purposes of this Proxy Statement and Prospectus, such obligations
are Municipal Bonds if the interest paid thereon is exempt from Federal income
tax and are New Jersey Municipal Bonds if the interest thereon is exempt from
Federal income tax and exempt from New Jersey personal income tax, even though
such bonds may be industrial development bonds or PABs as discussed below. Also,
for purposes of this Proxy Statement and Prospectus, Non-Municipal Tax-Exempt
Securities as discussed above will be considered New Jersey Municipal Bonds or
Municipal Bonds.
The two principal classifications of New Jersey Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which latter
category includes PABs and, for bonds issued on or before August 15, 1986,
industrial development bonds or "IDBs." General obligation bonds (other than
those of the State of New Jersey which has limited taxing powers) are typically
secured by the issuer's pledge of faith, credit and taxing power for the
repayment of principal and the payment of interest. Revenue or special
obligation bonds are typically payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as from the user
of the facility being financed. PABs are in most cases revenue bonds and do not
generally constitute the pledge of the credit or taxing power of the issuer of
such bonds. The repayment of principal and the payment of interest on such IDBs
depends solely on the ability of the user of the facility financed by the bonds
to meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. New Jersey Municipal Bonds
and Municipal Bonds may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Each Fund may purchase New Jersey Municipal Bonds and Municipal Bonds
classified as PABs. Interest received on certain PABs is treated as an item of
"tax preference" for purposes of the Federal alternative minimum tax and may
impact the overall tax liability of certain investors in the Fund. There is no
limitation
28
<PAGE> 33
on the percentage of each Fund's assets that may be invested in New Jersey
Municipal Bonds and Municipal Bonds the interest on which is treated as an item
of "tax preference" for purposes of the Federal alternative minimum tax. See
"Comparison of the Funds--Tax Rules Applicable to the Funds and Their
Stockholders."
Also included within the general category of New Jersey Municipal Bonds
and/or Municipal Bonds are certificates of participation ("COPs") executed and
delivered for the benefit of government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. COPs represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations
typically do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses, which provide that the issuer has no obligation to make
lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the property
in the event of foreclosure might prove difficult.
Federal tax legislation has limited and may continue to limit the types and
volume of such bonds the interest on which is excludable from income for Federal
income tax purposes. Such legislation may affect the availability of New Jersey
Municipal Bonds and Municipal Bonds for investment by the Fund.
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL BONDS
Each Fund ordinarily will invest at least 80% of its total assets in New
Jersey Municipal Bonds and, therefore, is more susceptible to factors adversely
affecting issuers of New Jersey Municipal Bonds than is a municipal bond fund
that is not concentrated in issuers of New Jersey Municipal Bonds to this
degree. FAM does not believe that current economic conditions in New Jersey will
have a significant adverse effect on each Fund's ability to invest in
high-quality New Jersey Municipal Bonds. Currently, New Jersey's general
obligation bonds are rated AA+ by S&P, Aa1 by Moody's and AA+ by Fitch. See
Exhibit III -- "Economic and Other Conditions in New Jersey" and Exhibit
IV -- "Ratings of Municipal Bonds and Commercial Paper."
OTHER INVESTMENT POLICIES
The Funds 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 moneys in amounts of up to 33 1/3% of the
value of its total assets at the time of such borrowings to finance the
repurchase of its own common stock pursuant to tender offers or otherwise to
redeem or repurchase shares of preferred stock or for temporary, extraordinary
or emergency purposes. Borrowings by each Fund (commonly known, as with the
issuance of preferred stock, as "leveraging") create an opportunity for greater
total return since the Fund will not be required to sell portfolio securities to
repurchase or redeem shares but, at the same time, increase exposure to capital
risk. In addition, borrowed funds are subject to interest costs that may offset
or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. Each Fund may
purchase or sell New Jersey Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms. These
transactions arise when securities are purchased or sold by 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.
29
<PAGE> 34
Indexed and Inverse Floating Obligations. Each Fund may invest in New
Jersey Municipal Bonds and Municipal Bonds yielding a return based on a
particular index of value or interest rates. For example, each Fund may invest
in New Jersey Municipal Bonds and Municipal Bonds that pay interest based on an
index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain New Jersey Municipal Bonds and Municipal Bonds also may be
based on the value of an index. To the extent a Fund invests in these types of
Municipal Bonds, the Fund's return on such New Jersey Municipal Bonds and
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Also, a Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates typically
vary inversely with a short-term floating rate (which may be reset periodically
by a dutch auction, a remarketing agent, or by reference to a short-term
tax-exempt interest rate index). Each Fund may purchase synthetically-created
inverse floating obligations evidenced by custodial or trust receipts.
Generally, income on inverse floating obligations 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 that is a multiple (typically
two) of the rate at which fixed-rate, long-term, tax-exempt securities increase
or decrease in response to such changes. As a result, the market values of such
securities generally will be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, a
Fund may purchase inverse floating obligations with shorter-term maturities or
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 the Funds that allows FAM to vary the degree of
investment leverage relatively efficiently under different market conditions.
Call Rights. Each of the Funds may purchase a New Jersey Municipal Bond or
Municipal Bond issuer's rights to call all or a portion of such New Jersey
Municipal Bond or Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related New Jersey Municipal Bonds or Municipal
Bonds, subject to certain conditions. A Call Right that is not exercised prior
to the maturity of the related New Jersey Municipal Bond or Municipal Bond will
expire without value. The economic effect of holding both the Call Right and the
related New Jersey Municipal Bond or Municipal Bond is identical to holding a
New Jersey Municipal Bond or Municipal Bond as a non-callable security.
Repurchase Agreements. The Funds may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract, to repurchase the security at a mutually
agreed-upon time and price, thereby determining the yield during the term of the
agreement. The Funds may not invest in repurchase agreements maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. In the event of default
by the seller under a repurchase agreement, the Funds may suffer time delays and
incur costs or possible losses in connection with the disposition of the
underlying securities.
In general, for Federal and New Jersey income tax purposes, repurchase
agreements are treated as collateralized loans secured by the securities "sold."
Therefore, amounts earned under such agreements will not be considered
tax-exempt interest.
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 and options thereon. While each Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common stock, the net asset value of the common stock will fluctuate. There can
be no assurance that a Fund's hedging transactions will be effective. In
addition, because of the leveraged nature of the Common Stock, hedging
transactions will result in a larger impact on the net asset value of the Common
Stock than would be the case if the Common Stock were not leveraged.
Furthermore, a Fund may only engage in hedging activities from time to time and
30
<PAGE> 35
may not necessarily be engaging in hedging activities when movements in interest
rates occur. No Fund has an obligation to enter into hedging transactions and
each may choose not to do so.
Certain Federal income tax requirements may limit a Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to stockholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to stockholders. See
"Comparison of the Funds -- Tax Rules Applicable to the Funds and their
Stockholders -- Tax Treatment of Options and Futures Transactions." In addition,
in order to obtain ratings of the AMPS from one or more NRSROs, a Fund may be
required to limit its use of hedging techniques in accordance with the specified
guidelines of such rating organizations. See "Rating Agency Guidelines" below.
The following is a description of the options and futures transactions in
which each Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of 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 New Jersey Municipal Bonds and
Municipal Bonds it owns, thereby giving the holder of the option the right to
buy the underlying security covered by the option from the Fund at the stated
exercise price until the option expires. 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 may purchase put options in connection with
its hedging activities. By buying a put, the Fund has a right to sell the
underlying security at the exercise price, thus limiting its risk of loss
through a decline in the market value of the security until the put expires. The
amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be sold in
a closing sale transaction; profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option
plus the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale of
an identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options, or on securities 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. Each Fund is authorized to
purchase and sell certain financial futures contracts and options thereon solely
for the purposes of hedging its investments in New Jersey Municipal Bonds and
Municipal Bonds against declines in value and hedging against increases in the
cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract to
take delivery of the type of financial instrument covered by the contract or, in
the case of index-based financial futures contracts, to make and accept a cash
settlement, at a specific future time for a specified price. A sale of financial
futures contracts may provide a hedge against a decline in the value of
portfolio securities because such depreciation may be offset, in whole or in
part, by an increase in the value of the position in the financial futures
contracts or options. A purchase of financial futures contracts may provide a
hedge against an increase in the cost of securities intended to be purchased,
because such appreciation may be offset, in whole or in part, by an increase in
the value of the position in the financial futures contracts.
31
<PAGE> 36
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker equal to
approximately 5% of the contract amount must be deposited with the broker. This
amount is known as initial margin. Subsequent payments to and from the broker,
called variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the financial
futures contract more or less valuable.
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 New Jersey Municipal
Bonds and 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, such as financial
futures contracts on other municipal bond indices that may become available, if
FAM should determine that there is normally sufficient correlation between the
prices of such financial futures contracts and the New Jersey Municipal Bonds
and Municipal Bonds in which the Fund invests to make such hedging appropriate.
Over-The-Counter Options. Each Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC option
transactions are two-party contracts with price and terms negotiated by the
buyer and seller.
Restrictions on OTC Options. Each Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at least $50
million. Certain OTC options and assets used to cover OTC options written by the
Funds are considered to be illiquid. The illiquidity of such options or assets
may prevent a successful sale of such options or assets, result in a delay of
sale, or reduce the amount of proceeds that otherwise might be realized.
Risk Factors in Financial Futures Contracts and Options Thereon. Use of
futures transactions involves the risk of imperfect correlation in movements in
the price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial futures
contract moves more or less than the price of the security that is the subject
of the hedge, a Fund will experience a gain or loss that will not be completely
offset by movements in the price of such security. There is a risk of imperfect
correlation where the securities underlying financial futures contracts have
different maturities, ratings, geographic compositions or other characteristics
different from those of the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and New Jersey
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments which have a disparate impact on
the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in a Fund being deemed a
"commodity pool," as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
financial futures contracts and options thereon (i) for bona fide hedging
purposes, without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) for non-hedging purposes, if, immediately
thereafter the sum of the amount of initial margin deposits on the Fund's
existing futures positions and option premiums entered into for non-hedging
purposes do not exceed 5% of the market value of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses
32
<PAGE> 37
on any such transactions. 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 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 options and futures transactions,
FAM believes that, because each Fund will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of a Fund will not subject the Fund to the risks associated with
speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to New Jersey
Municipal Bonds or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
Each Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an option or futures transaction. The inability
to close options and futures positions 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 an option or financial
futures contract.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges that limit the amount of fluctuation in a financial futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
reached or exceeded the daily limit on a number of consecutive trading days.
If it is not possible to close a financial futures position entered into by
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.
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 these rates remain stable during the period in
which a financial futures contract is held by a Fund or move in a direction
opposite to that anticipated, the Fund may realize a loss on the hedging
transaction that is not fully or partially offset by an increase in the value of
portfolio securities. As a result, the Fund's total return for such period may
be less than if it had not engaged in the hedging transaction. Furthermore, the
Fund will only engage in hedging transactions from time to time and may not
necessarily be engaging in hedging transactions when movements in interest rates
occur.
INVESTMENT RESTRICTIONS
The Funds 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, for the Common Stock and AMPS voting together
as a single class "majority" means the lesser of (i) 67% of the shares of each
class of
33
<PAGE> 38
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, but for the AMPS voting
separately as a single class, "majority" means more than 50% of the outstanding
AMPS.) No Fund may:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by
Section 18 of the Investment Company Act.
4. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 (the
"Securities Act") in selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase New
Jersey Municipal Bonds, Municipal Bonds and other debt securities and enter
into repurchase agreements in accordance with its investment objective,
policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry;
provided, that for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
For purposes of restriction (6), the exception for states, municipalities
and their political subdivisions applies only to tax-exempt securities issued by
such entities.
Additional investment restrictions adopted by each Fund, which may be
changed by the Board of Directors without stockholder approval, provide that no
Fund may:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings mentioned in investment
restriction (3) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on New Jersey Municipal Bonds,
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may purchase
and sell Call Rights to require mandatory tender for the purchase of
related New Jersey Municipal Bonds and Municipal Bonds.
34
<PAGE> 39
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
For so long as shares of AMPS are rated by Moody's, no Fund will change
these additional investment restrictions unless it receives written confirmation
from Moody's that engaging in such transactions would not impair the rating then
assigned to the shares of AMPS by Moody's.
FAM and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") are owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co.").
Because of the affiliation of Merrill Lynch with FAM, each Fund is prohibited
from engaging in certain transactions involving Merrill Lynch except pursuant to
an exemptive order or otherwise in compliance with the provisions of the
Investment Company Act and the rules and regulations thereunder. Included among
such restricted transactions will be purchases from or sales to Merrill Lynch of
securities in transactions in which it acts as principal. An exemptive order has
been obtained that permits the Funds to effect principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities subject to
conditions set forth in such order. The Funds may consider in the future
requesting an order permitting other principal transactions with Merrill Lynch,
but there can be no assurance that such application will be made and, if made,
that such order would be granted.
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 or
prior to their date of original issue of at least "aaa" from Moody's and AAA
from S&P. Moody's and S&P, which are 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
stock, generally on a case-by-case basis through discussions with the issuers of
these securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be varied sufficiently and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law but have been adopted by 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
There are small differences in concentration among the categories of
issuers of the New Jersey Municipal Bonds and Municipal Bonds held in the
portfolios of the Funds. For New Jersey Insured, as of August 31, 1999, the
highest concentration of New Jersey Municipal Bonds and Municipal Bonds was in
Education,
35
<PAGE> 40
Transportation and Hospitals/Healthcare, accounting for 18%, 13%, and 12% of the
Fund's portfolio, respectively; for New Jersey Insured II, the highest
concentration was in Hospitals/Healthcare, Water and Sewer Utilities, and
Education, accounting for 16%, 13% and 16% of the Fund's portfolio,
respectively; and for New Jersey Insured III, the highest concentration was in
Education, Housing and Hospitals/Healthcare, accounting for 15%, 14% and 14% of
the Fund's portfolio, respectively.
Although the investment portfolios of all three Funds must satisfy the same
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
of the three investment portfolios. The tables below set forth ratings
information for the New Jersey Municipal Bonds and Municipal Bonds held by each
Fund, as of a certain date.
New Jersey Insured
As of August 31, 1999, approximately 99% of the market value of New Jersey
Insured's portfolio was invested in long-term municipal obligations and
approximately 1% of the market value of New Jersey Insured's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of New Jersey Insured's
long-term municipal obligation investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 44 $137,895 85.0%
A A 3 9,189 5.7
BBB Baa 5 15,019 9.3
-- -------- -----
52 $162,103 100.0%
== ======== =====
</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 and BBB ratings. Moody's rating categories may be modified
further by a 1, 2 or 3 in Aa, A and Baa ratings. See Exhibit IV -- "Ratings of
Municipal Bonds and Commercial Paper."
New Jersey Insured II
As of August 31, 1999, approximately 99% of the market value of New Jersey
Insured II's portfolio was invested in long-term municipal obligations and
approximately 1% of the market value of New Jersey Insured II's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain information with respect to the composition of New Jersey Insured II's
long-term municipal obligation investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 44 $131,223 96.1%
BBB Baa 1 5,368 3.9
-- -------- -----
45 $136,591 100.0%
== ======== =====
</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 and BBB ratings. Moody's rating categories may be modified
further by a 1, 2 or 3 in Aa, A and Baa ratings. See Exhibit IV -- "Ratings of
Municipal Bonds and Commercial Paper."
New Jersey Insured III
As of August 31, 1999, approximately 96% of the market value of New Jersey
Insured III's portfolio was invested in long-term municipal obligations and
approximately 4% of the market value of New Jersey Insured III's portfolio was
invested in short-term municipal obligations. The following table sets forth
certain
36
<PAGE> 41
information with respect to the composition of New Jersey Insured III's
long-term municipal obligation investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
AAA Aaa 39 $105,990 95.7%
AA Aa 1 4,791 4.3
-- -------- -----
40 $110,781 100.0%
== ======== =====
</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 and BBB ratings. Moody's rating categories may be modified
further by a 1, 2 or 3 in Aa, A and Baa ratings. See Exhibit IV -- "Ratings of
Municipal Bonds and Commercial Paper."
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are the same for each
of the Funds. 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, the Funds do not necessarily pay the lowest
commission or spread available.
None of the Funds 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, 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.
Each Fund invests in securities that are primarily 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,
the Funds do 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.
The Funds also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the 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 Funds 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 of each Fund
made a determination not to seek such recapture. The Directors will reconsider
this matter from time to time.
37
<PAGE> 42
Periodic auctions are conducted for the AMPS of each of the Funds 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 .25%,
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, no Fund purchases securities for short-term trading profits.
However, any of the Funds 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 portfolio turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by the monthly average of the value of the portfolio securities
owned by 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.) A high portfolio turnover rate results in greater
transaction costs, which are borne directly by the Fund, and also has certain
tax consequences for stockholders. The portfolio turnover rate for each of the
Funds for the periods indicated is set forth below:
<TABLE>
<CAPTION>
NEW JERSEY INSURED PERIOD MARCH 11, 1998+ YEAR
TO JULY 31, 1998 ENDED JULY 31, 1999
-------------------------- ------------------------
<S> <C> <C>
32.46% 64.93%
</TABLE>
<TABLE>
<CAPTION>
NEW JERSEY INSURED II PERIOD SEPTEMBER 25, 1998+
TO MAY 31, 1999
--------------------------
<S> <C> <C>
92.47%
</TABLE>
<TABLE>
<CAPTION>
NEW JERSEY INSURED III PERIOD JANUARY 29, 1999+
TO MARCH 31, 1999
(UNAUDITED)
--------------------------
<S> <C> <C>
32.08%
</TABLE>
------------------------
+ Commencement of operations
NET ASSET VALUE
The net asset value per share of Common Stock of each Fund is determined
after the close of business on the NYSE (generally, 4:00 p.m., Eastern time) on
the last business day in each week. For purposes of determining the net asset
value of a share of Common Stock 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 is divided by the
total number of shares of Common Stock outstanding at such time. Expenses,
including the fees payable to FAM, are accrued daily.
The New Jersey Municipal Bonds and Municipal Bonds in which each Fund
invests are traded primarily in the over-the-counter markets. In determining net
asset value, each Fund uses the valuations of portfolio securities furnished by
a pricing service approved by its Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. New Jersey Municipal Bonds and Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of 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. 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.
38
<PAGE> 43
Each Fund determines and makes available for publication the net asset
value of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities are
published in Barron's, the Monday edition of The Wall Street Journal, and the
Monday and Saturday editions of The New York Times.
CAPITAL STOCK
Each of the Funds has outstanding both Common Stock and AMPS. The Common
Stock of each of the Funds is traded on the NYSE. The shares of New Jersey
Insured Common Stock commenced trading on the NYSE on March 12, 1998. As of
September 30, 1999, the net asset value per share of New Jersey Insured Common
Stock was $13.46 and the market price per share was $12.6875. The shares of New
Jersey Insured II Common Stock commenced trading on the NYSE on September 28,
1998. As of September 30, 1999, the net asset value per share of New Jersey
Insured II Common Stock was $12.43 and the market price per share was $11.75.
The shares of New Jersey Insured III Common Stock commenced trading on the NYSE
on February 8, 1999. As of September 30, 1999, the net asset value per share of
New Jersey Insured III Common Stock was $12.77 and the market price per share
was $12.3125.
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
respective Fund's offering of shares of AMPS, New Jersey Insured reclassified
2,720 shares of unissued capital stock as AMPS, New Jersey Insured II
reclassified 2,400 shares of unissued capital stock as AMPS and New Jersey
Insured III reclassified 1,880 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 outstanding preferred stock. See "Voting Rights" and "Liquidation
Rights of Holders of AMPS" below. 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
The AMPS of each of the Funds have a similar structure. 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. The AMPS of all of the Funds have liquidation
preferences of $25,000 per share; none of the 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 for the
AMPS of each of the Funds, unless the applicable Fund elects, subject to certain
limitations, to declare a special dividend period. The
39
<PAGE> 44
following table provides information about the dividend rates for each series of
AMPS of each of the Funds as of a recent auction.
<TABLE>
<CAPTION>
AUCTION DATE FUND SERIES DIVIDEND RATE
------------------ ---------------------- ------ -------------
<S> <C> <C> <C>
October 8, 1999 New Jersey Insured A 3.70%
October 14, 1999 New Jersey Insured B 3.50%
October 12, 1999 New Jersey Insured II A 3.44%
October 8, 1999 New Jersey Insured II B 3.70%
October 13, 1999 New Jersey Insured III A 3.30%
</TABLE>
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.
The redemption provisions pertaining to the AMPS of each Fund are
substantially similar. It is anticipated that shares of AMPS of each Fund will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference of $25,000 plus accumulated but unpaid dividends (whether
or not earned or declared) to the date of redemption plus, under certain
circumstances, a redemption premium. Shares of AMPS will also be subject to
mandatory redemption at a price equal to their liquidation preference plus
accumulated but unpaid dividends to the date of redemption upon the occurrence
of certain specified events, such as the failure of the Fund to maintain the
asset coverage for the AMPS specified by Moody's and S&P in connection with
their issuance of ratings on the AMPS.
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 vote of the holders of at least 66 2/3% of the votes entitled
to be voted on the matter. A Director elected by all of the holders of capital
stock may be removed only by action of such holders, and a Director elected by
the holders of AMPS and any other preferred stock may be removed only by action
of the holders of AMPS and any other preferred stock.
In addition, the Charter of each Fund requires the favorable 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:
- a merger or consolidation or statutory share exchange of the Fund with
any other corporation or entity,
- a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities), or
- a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in accordance
with the by-laws, in which case the affirmative vote of a majority of all of the
votes entitled to be cast by 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 at least a majority of the Fund's shares of
preferred stock then 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 Charter. 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
40
<PAGE> 45
66 2/3% of the Fund's outstanding shares of capital stock (including the AMPS
and any other preferred stock) entitled to be voted on the matter, voting as a
single class (or a majority of such shares if the amendment was previously
approved, adopted or authorized by at least two-thirds of the total number of
Directors fixed in accordance with the by-laws), and the affirmative vote of at
least a majority of outstanding shares of preferred stock of a Fund (including
the AMPS), voting as a separate 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 would also require redemption of all outstanding shares of preferred
stock (including the AMPS) and would require changes in certain of the Fund's
investment policies and restrictions, such as those relating to the issuance of
senior securities, the borrowing of money and the purchase of illiquid
securities.
The Board of Directors 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 SEC for the full text of these provisions.
MANAGEMENT OF THE FUNDS
Directors and Officers. The Board of Directors of each of the Funds
currently consists of the same seven persons, five of whom are not "interested
persons," as defined in the Investment Company Act, of any of those Funds. Terry
K. Glenn serves as a Director and President of each of the Funds, and Arthur
Zeikel serves as a Director of each of the Funds. The Directors of each Fund are
responsible for the overall supervision of the operations of the Fund and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act and under applicable Maryland law. The Funds have the
same slate of officers with a few exceptions. For further information regarding
the Directors and officers of each Fund, see "Item 2. Election of Directors" and
Exhibit I -- "Information Pertaining to Each Fund."
Robert A. DiMella and Robert D. Sneeden serve as the portfolio managers for
New Jersey Insured. Robert A. DiMella and Roberto W. Roffo serve as the
portfolio managers for New Jersey Insured II and New Jersey Insured III. Messrs.
DiMella and Sneeden will continue to serve as the portfolio managers of the
combined fund after the Reorganization. The portfolio managers are primarily
responsible for the management of the applicable Fund's portfolio. Biographical
information about Messrs. DiMella, Sneeden and Roffo is contained in Exhibit
I -- "Information Pertaining to Each Fund."
Management and Advisory Arrangements. FAM, which is owned and controlled
by ML & Co., serves as the investment adviser for each of the Funds pursuant to
separate investment advisory agreements that, except for their termination
dates, are identical. FAM provides each Fund with the same investment advisory
and management services. The Asset Management Group of ML & Co. (which includes
FAM) acts as the investment adviser to more than 100 registered investment
companies and offers services to individuals and institutional accounts. As of
September 1999, the Asset Management Group had a total of approximately $514
billion in investment company and other portfolio assets under management
(approximately $38.5 billion of which were invested in municipal securities).
This amount includes assets managed for certain affiliates of FAM. FAM is a
limited partnership, the partners of which are ML & Co. and Princeton Services,
Inc. FAM was organized as an investment adviser in 1977 and offers investment
advisory services to more than 50 registered investment companies. 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 supervision of the Board of Directors of the Fund, FAM is responsible for
the actual management of the Fund's portfolio. The
41
<PAGE> 46
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 each of the Funds. 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 .55 of 1% of the
Fund's average weekly net assets (i.e., the average weekly value of the total
assets of the Fund, including assets acquired from the sale of preferred stock,
minus the sum of accrued liabilities of the Fund and accumulated dividends on
its shares of preferred stock). For purposes of this calculation, average weekly
net assets are determined at the end of each month on the basis of the average
net assets of the Fund for each week during the month. The assets for each
weekly period are determined by averaging the net assets at the last business
day of a week with the net assets at the last business day of the prior week.
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 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, SEC 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 each Fund and FAM will continue from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund's Common Stock and AMPS, voting together as a
single class, and (b) by a majority of the Directors of the Fund 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 the Fund.
Securities held by a Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which FAM or its
affiliates act as an adviser. Because of different objectives or other factors,
a particular security may be bought for an advisory client when other clients
are selling the same security. If purchases or sales of securities by FAM for a
Fund or other funds for which it acts as investment adviser or for advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. Transactions effected by FAM (or
its affiliates) on behalf of more than one of its clients during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, causing an adverse effect on price.
CODE OF ETHICS
The Board of Directors of each of the Funds has adopted a Code of Ethics
pursuant to Rule 17j-l under the Investment Company Act that incorporates the
Code of Ethics of FAM (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of FAM and, as described
below, impose additional, more onerous, restrictions on Fund investment
personnel.
The Codes require that all employees of FAM preclear any personal
securities investment (with limited exceptions, such as U.S. Government
securities). The preclearance requirement and associated procedures are
42
<PAGE> 47
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees of
FAM include a ban on acquiring any securities in a "hot" initial public offering
and a prohibition from profiting on short-term trading securities. In addition,
no employee may purchase or sell any security that at the time is being
purchased or sold (as the case may be), or to the knowledge of the employee is
being considered for purchase or sale, by any fund advised by FAM. Furthermore,
the Codes provide for trading "blackout periods" that prohibit trading by
investment personnel of each of the Funds within periods of trading by the Fund
in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
VOTING RIGHTS
Voting rights are identical for the holders of shares of each Fund's 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.
Voting rights of the holders of each Fund's AMPS are identical. 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.
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.
In connection with the election of a Fund's Directors, holders of shares of
a Fund's AMPS, 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' 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 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 which such holders in any event will be entitled to elect, constitutes
a majority of the total number of Directors of the Fund as so increased. The
terms of office of the persons who are Directors at the time of that election
will continue. If the Fund thereafter shall pay, or declare and set apart for
payment in full, all dividends payable on all outstanding shares of AMPS and any
other preferred stock for all past dividend periods, the additional voting
rights of the holders of shares of AMPS and any other preferred stock as
described above shall cease, and the terms of office of all of the additional
Directors elected by the holders of shares of AMPS and any other preferred stock
(but not of the Directors with respect to whose election the holders of 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.
The affirmative vote of the holders of a majority of the outstanding shares
of a Fund's AMPS, voting as a separate class, will be required to (i) authorize,
create or issue any class or series of stock ranking prior to any series of
preferred stock with respect to payment of dividends or the distribution of
assets on liquidation, (ii) amend, alter or repeal the provisions of the
Charter, whether by merger, consolidation or otherwise, so as to adversely
affect any of the contract rights expressly set forth in the Charter of holders
of preferred stock,
43
<PAGE> 48
(iii) approve any plan of reorganization adversely affecting such AMPS or (iv)
take any action to change a Fund's investment policies requiring a vote of
stockholders under Section 13(a) of the Investment Company Act.
STOCKHOLDER INQUIRIES
Stockholder inquiries with respect to any of the Funds may be addressed to
such 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
The Funds' current policies with respect to dividends and distributions
relating to shares of their Common Stock are identical. Each Fund intends to
distribute all or a portion of its net investment income monthly to holders of a
Fund's Common Stock. Monthly distributions to holders of a Fund's Common Stock
normally consist of all or a portion of its net investment income remaining
after the payment of dividends (and any Additional Distribution) on the Fund's
AMPS. A Fund may at times pay out less than the entire amount of net investment
income earned in any particular period and may at times pay out such accumulated
undistributed income in addition to net investment income earned in other
periods in order to permit the Fund to maintain a more stable level of dividends
to holders of Common Stock. As a result, the dividend paid by a Fund to holders
of its Common Stock for any particular period may be more or less than the
amount of net investment income earned by the Fund during such period. For
Federal tax purposes, the Fund is required to distribute substantially all of
its net investment income for each year. All net realized long-term or
short-term capital gains, if any, are distributed pro rata at least annually 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, including any Additional
Distribution, 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. If a Fund's ability to make distributions on its
Common Stock is limited, such limitation could under certain circumstances
impair the ability of the Fund to maintain its qualification for taxation as a
regulated investment company, which would have adverse tax consequences for
stockholders. See "Comparison of the Funds -- Tax Rules Applicable to the Funds
and their Stockholders."
Similarly, the Funds' current policies with respect to dividends and
distributions on shares of their AMPS are identical. 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 each Fund's 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. None of the
Funds 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.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on New Jersey Municipal Bonds, are exempt from Federal income tax and New
Jersey personal income taxes, subject to the possible application of the Federal
alternative minimum tax. However, each Fund is required to allocate net capital
gains and other income subject to regular Federal income tax and New Jersey
personal 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. See "Tax Rules Applicable to the Funds and their Stockholders"
below. Each Fund notifies the Auction Agent of the amount of any net capital
gains or other taxable income to
44
<PAGE> 49
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" below.
Dividends and distributions will be subject to the tax treatment discussed
below, whether they are reinvested in shares of a Fund or received in cash.
If any Fund retroactively allocates any net capital gains or other income
subject to regular Federal income tax and New Jersey personal 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 automatically reinvested by either The Bank
of New York or State Street Bank and Trust Company, as applicable, as agent for
stockholders in administering the Plan (as applicable, the "Plan Agent"), in
additional shares of the Fund's Common Stock. The Bank of New York is the Plan
Agent for New Jersey Insured and will be the Plan Agent following the
Reorganization. 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 The Bank of New York or State Street Bank and
Trust Company, as applicable, as 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 The Bank
of New York or State Street Bank and Trust Company, as applicable, as dividend
paying agent, at the address set forth below. Participation in the Plan is
completely voluntary and may be terminated or resumed at any time without
penalty by written notice if received by the Plan Agent not less than ten days
prior to any dividend record date; otherwise, such termination or resumption
will be effective with respect to any subsequently declared dividend or 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 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
45
<PAGE> 50
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 on 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 which 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
any Fund 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. See "Comparison of the Funds -- Tax
Rules Applicable to the Funds and their Stockholders."
Stockholders participating in the Plan may receive benefits not available
to stockholders not participating in the Plan. If the market price (plus
commissions) of a Fund's shares of Common Stock is higher than the net asset
value of such shares, 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 lower
than the net asset value of such shares, participants receive distributions of
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 of shares at prices below
the net asset value. Also, since the Funds normally do not redeem their shares,
the price on resale may be more or less than the net asset value. See
"Comparison of the Funds -- Tax Rules Applicable to the Funds and their
Stockholders" for a discussion of the tax consequences of the Plan.
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.
46
<PAGE> 51
After the Reorganization, a holder of shares of an Acquired Fund who has
elected to receive dividends in cash will continue to receive dividends in cash;
all other holders will have their dividends automatically reinvested in shares
of the combined fund. However, if a stockholder owns shares in an Acquired Fund
and in New Jersey Insured, after the Reorganization, the stockholder's election
with respect to the dividends of New Jersey Insured will control unless the
stockholder specifically elects a different option at that time. Following the
Reorganization, all correspondence should be directed to the Plan Agent, The
Bank of New York, at 101 Barclay Street, New York, New York 10286.
MUTUAL FUND INVESTMENT OPTION
A holder of Common Stock of any Fund, who purchased his or her shares
through Merrill Lynch in the Fund's initial public offering, has the right to
reinvest the net proceeds from a sale of such shares in Class D shares of
certain Merrill Lynch-sponsored open-end funds without the imposition of an
initial sales charge, if certain conditions are satisfied. A holder of Common
Stock of an Acquired Fund who qualifies for this option will have the same
option with respect to the shares of New Jersey Insured Common Stock received in
the Reorganization.
LIQUIDATION RIGHTS OF HOLDERS OF AMPS
Upon any liquidation, dissolution or winding up of any Fund, 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 for this purpose.
TAX RULES APPLICABLE TO THE FUNDS AND THEIR STOCKHOLDERS
The tax consequences of investing in shares of Common Stock or AMPS of each
of the Funds are identical. The Funds 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 all taxable years
through the taxable year of the Reorganization, each Fund has distributed
substantially all of its income. New Jersey Insured intends to continue to
distribute substantially all of its income following the Reorganization. Under
present New Jersey law, a RIC, such as each Fund, pays a flat tax of $250 per
year. Each Fund might be subject to the New Jersey corporation business
(franchise) tax for any taxable year in which it does not qualify as a RIC.
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
47
<PAGE> 52
any part thereof paid by a Fund which are attributable to interest on tax-exempt
obligations and designated by a 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. 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 properly identified in a year-end
statement as directly attributable to interest on New Jersey Municipal Bonds and
the portion of distributions attributable to gains from New Jersey Municipal
Bonds ("New Jersey exempt-interest dividends") also will be exempt from New
Jersey personal income tax. In order to pass through tax-exempt interest for New
Jersey personal income tax purposes, each Fund, among other requirements, must
have not less than 80% of the aggregate principal amount of its investments
invested in New Jersey Municipal Bonds at the close of each quarter of the tax
year (the "80% Test"). For purposes of calculating whether the 80% Test is
satisfied, financial options, futures, forward contracts and similar financial
instruments relating to interest-bearing obligations are excluded from the
principal amount of the Fund's investments. Each Fund intends to comply with
this requirement so as to enable it to pass through interest exempt from both
Federal income tax and New Jersey personal income tax. In the event a Fund does
not so comply, distributions by that Fund may be taxable to stockholders for New
Jersey personal income tax purposes. However, regardless of whether the Fund
meets the 80% Test, all distributions attributable to interest earned on Federal
obligations will be exempt from New Jersey personal income tax. Stockholders
subject to income taxation by states other than New Jersey will realize a lower
after-tax rate of return than New Jersey stockholders since the dividends
distributed by a Fund will generally not be exempt, to any significant degree,
from income taxation by such other states. Each Fund will inform stockholders
annually as to the portion of the Fund's distributions that constitutes
exempt-interest dividends and the portion that is exempt from New Jersey
personal income tax. To the extent attributable to exempt-interest dividends,
interest on indebtedness incurred or continued to purchase or carry Fund shares
is not deductible for Federal income tax purposes and is not deductible for New
Jersey personal income tax purposes.
Exempt-interest dividends and gains paid to a corporate stockholder will be
subject to New Jersey corporation business (franchise) tax and, if applicable,
the New Jersey corporation income tax. Accordingly, investors in each Fund,
including, in particular, corporate investors that may be subject to the New
Jersey corporation business (franchise) tax and, if applicable, the New Jersey
corporation income tax, should consult their tax advisors with respect to the
application of such taxes to an investment in each Fund, to the receipt of Fund
dividends and as to their New Jersey tax situation in general.
On February 21, 1997, the Tax Court of New Jersey ruled against the
Director of the Division of Taxation holding against the New Jersey requirement
that fund investors pay state taxes on interest their funds earned from U.S.
government securities if the 80% Test was not met. As a result of the court
decision, the State of New Jersey could be forced to pay substantial amounts in
tax refunds to state residents who are mutual fund investors. At this time, the
effect of this litigation cannot be evaluated.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the currently outstanding
AMPS of each of the Funds, as well as the Series C and D AMPS to be issued by
New Jersey Insured, are substantially similar, but not identical, to the AMPS
discussed in the revenue ruling. In the opinion of Brown & Wood LLP, counsel to
all three Funds, the shares of each Fund's currently outstanding AMPS, as well
as the Series C and D AMPS to be issued by New Jersey Insured, 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) will
constitute dividends to the extent of current and accumulated earnings and
profits as calculated for Federal income tax purposes. Nevertheless,
48
<PAGE> 53
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 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. Certain categories of
capital gains are taxable at different rates for Federal income tax purposes.
Generally not later than 60 days after the close of its taxable year, a Fund
provides its stockholders with a written notice designating the amounts of any
exempt-interest dividends and capital gain dividends, as well as any amount of
capital gain dividends in the different categories of capital gain referred to
above. Distributions by a Fund, whether from exempt-interest income, ordinary
income or capital gains, are not 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 is treated as long-term capital loss to the
extent of exempt-interest dividends received by the stockholder. In addition,
such loss is disallowed to the extent of any 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 or
more 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.
A class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC during such year
that was paid to such class. Consequently, when Common Stock and one or more
series of AMPS are outstanding, each Fund intends to designate distributions
made to the classes as consisting of particular types of income in accordance
with each class's proportionate share of such income. After the Reorganization,
New Jersey Insured will, likewise, so designate distributions with respect to
its Common Stock and its AMPS, Series A, B, C and D. 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 all three Funds, under
current law the manner in which each Fund allocates, and New Jersey Insured will
allocate, items of tax-exempt income, net capital gains, and other taxable
income, if any, among shares of Common Stock and outstanding AMPS (including,
for New
49
<PAGE> 54
Jersey Insured Series A and B AMPS and the newly issued series of 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 among shares of Common Stock and the outstanding series of AMPS
will be respected for Federal income tax purposes, and it is possible that the
IRS could disagree with counsel's opinion and attempt to reallocate 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 all reallocated taxable income. Brown & Wood LLP
has advised each Fund that, in its opinion, if the IRS were to challenge in
court a 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 requires a RIC to pay a nondeductible 4% excise tax to the extent
it does not distribute during each calendar year 98% of its ordinary income,
determined on a calendar year basis, and 98% of its capital gains, determined in
general, on an October 31 year-end, plus certain undistributed amounts from
previous years. The required distributions, however, are based only on the
taxable income of a RIC. The excise tax, therefore, generally does not apply to
the tax-exempt income of RICs, such as the Funds, that pay exempt-interest
dividends.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal 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 investors in such bonds,
including stockholders of the Funds, to an increased Federal alternative minimum
tax. Each Fund purchases such "private activity bonds" and reports to
stockholders within 60 days after calendar year-end the portion of its dividends
declared during the year which constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to a Federal alternative minimum tax based, in part, on certain
differences between taxable income as adjusted for other tax preferences and the
corporation's "adjusted current earnings" which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by a
Fund is included in adjusted current earnings, a corporate stockholder may be
required to pay a Federal alternative minimum tax on exempt-interest dividends
paid by such Fund.
The Funds may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which a Fund may be required to accrue and distribute income before
amounts due under the obligations are paid. In addition, it is possible that all
or a portion of the interest payments on such nontraditional instruments could
be recharacterized as taxable ordinary income.
If at any time when shares of AMPS are outstanding a Fund does not meet the
asset coverage requirements of the Investment Company Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent such
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. If a Fund
were to fail to qualify as a RIC, some or all of the distributions paid by the
Fund would be fully taxable to stockholders for Federal income tax and New
Jersey personal income tax purposes. Upon any failure to meet the asset coverage
requirements of the Investment Company Act, a Fund, in its sole discretion, may
redeem shares of AMPS in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its stockholders of
failing to qualify as a RIC. There can be no assurance, however, that any such
action would achieve such objectives.
50
<PAGE> 55
As noted above, a Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Funds have issued and that New Jersey
Insured contemplates issuing may raise a question as to whether distributions on
such preferred stock are "preferential" under the Code and, therefore, not
eligible for the dividends paid deduction. Counsel has advised the Funds that
the outstanding preferred stock and the preferred stock to be issued by New
Jersey Insured will not result in the payment of a preferential dividend. If a
Fund ultimately relies solely on a legal opinion when it issues such preferred
stock, there is no assurance that the IRS would agree that dividends on the
preferred stock are not preferential. If the IRS successfully disallowed the
dividends paid deduction for dividends the Funds on the preferred stock, the
Funds could be disqualified as RICs. In this case, dividends paid by the Funds
on the Common Stock and the AMPS would not be exempt from Federal income taxes.
Additionally, the Funds would be subject to a Federal alternative minimum tax.
Under certain circumstances when a Fund is required to allocate taxable
income to the AMPS, it will pay Additional Distributions to holders of shares of
AMPS. The Federal income tax consequences of Additional Distributions under
existing law are uncertain. The Funds treat and New Jersey Insured intends to
continue to treat a holder as receiving a dividend distribution in the amount of
any Additional Distribution only as and when such Additional Distribution is
paid. An Additional Distribution generally is designated by a Fund as an
exempt-interest dividend except as otherwise required by applicable law.
However, the IRS may assert that all or part of an Additional Distribution is a
taxable dividend either in the taxable year for which the allocation of taxable
income is made or in the taxable year in which the Additional Distribution is
paid.
The value of shares acquired pursuant to a Fund's dividend reinvestment
plan is generally excluded from gross income to the extent that the cash amount
reinvested would be excluded from gross income. If, when a Fund's shares are
trading at a premium over net asset value, the Fund issues shares pursuant to
the dividend reinvestment plan that have a greater fair market value than the
amount of cash reinvested, it is possible that all or a portion of such discount
(which may not exceed 5% of the fair market value of the Fund's shares) could be
viewed as a taxable distribution. If the discount is viewed as a taxable
distribution, it is also possible that the taxable character of this discount
would be allocable to all of the stockholders, including stockholders who do not
participate in the Fund's dividend reinvestment plan. Thus, stockholders who do
not participate in the dividend reinvestment plan, as well as dividend
reinvestment plan participants, might be required to report as ordinary income a
portion of their distributions equal to the allocable share of the discount.
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. Nonresident stockholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
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.
Tax Treatment of Options and Futures Transactions. Each Fund may purchase
or sell municipal bond index financial futures contracts and interest rate
financial futures contracts on U.S. Government securities. Each Fund may also
purchase and write call and put options on such financial futures contracts. In
general, unless an election is available to a Fund or an exception applies, such
options and financial futures contracts that are "Section 1256 contracts" will
be "marked to market" for Federal income tax purposes at the end of each taxable
year, i.e., each such option or financial futures contract will be treated as
sold for its fair market
51
<PAGE> 56
value on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain or
loss. Application of these rules to Section 1256 contracts held by a Fund may
alter the timing and character of distributions to stockholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by a Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of a Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, a Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New Jersey personal income
tax, corporation business (franchise) tax and the corporation income tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury Regulations promulgated thereunder and
the New Jersey personal income tax, corporation business (franchise) tax and the
corporation income tax laws. The Code and the Treasury Regulations, as well as
the New Jersey personal income tax, corporation business (franchise) tax and the
corporation income tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Stockholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local tax consequences of an
investment in a Fund.
52
<PAGE> 57
AGREEMENT AND PLAN OF REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
II), (i) New Jersey Insured will acquire substantially all of the assets, and
will assume substantially all of the liabilities, of New Jersey Insured II, in
exchange solely for shares of an equal aggregate value of New Jersey Insured
Common Stock and New Jersey Insured Series C AMPS to be issued by New Jersey
Insured and (ii) New Jersey Insured will acquire substantially all of the
assets, and will assume substantially all of the liabilities, of New Jersey
Insured III, in exchange solely for shares of an equal aggregate value of New
Jersey Insured Common Stock and New Jersey Insured Series D AMPS to be issued by
New Jersey Insured. The number of shares of New Jersey Insured Common Stock
issued to each Acquired Fund will have an aggregate net asset value equal to the
aggregate net asset value of the shares of Common Stock of that Acquired Fund
(except that cash will be paid in lieu of any fractional shares), and the number
of shares of New Jersey Insured Series C AMPS and New Jersey Insured Series D
AMPS issued to New Jersey Insured II and New Jersey Insured III, respectively,
will have an aggregate liquidation preference and value equal to the aggregate
liquidation preference and value of each such Fund's AMPS. Upon receipt by the
Acquired Funds of such shares, the Acquired Funds will (i) distribute the shares
of New Jersey Insured Common Stock to the holders of New Jersey Insured II
Common Stock and New Jersey Insured III Common Stock, as applicable, in exchange
for their shares of Common Stock in the Acquired Funds and (ii) distribute the
shares of New Jersey Insured Series C AMPS to the holders of New Jersey Insured
II AMPS and the shares of New Jersey Insured Series D AMPS to the holders of New
Jersey Insured III AMPS, in exchange for their shares of AMPS in the Acquired
Funds. New Jersey Insured will file Articles Supplementary establishing the
powers, rights and preferences of the New Jersey Insured Series C AMPS and the
New Jersey Insured Series D AMPS 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"), each of the Acquired Funds will file Articles
of Dissolution with the Maryland Department to effect the formal dissolution of
such Funds, and will dissolve.
Each of the Acquired Funds will distribute the shares of New Jersey Insured
Common Stock and the shares of New Jersey Insured Series C AMPS or New Jersey
Insured Series D AMPS received by it pro rata to its holders of record of Common
Stock and AMPS, as applicable, in exchange for such stockholders' shares in the
Acquired Funds. Such distribution would be accomplished by opening new accounts
on the books of New Jersey Insured in the names of the common and preferred
stockholders of each of the Acquired Funds and transferring to those stockholder
accounts the New Jersey Insured Common Stock or New Jersey Insured AMPS
previously credited on those books to the accounts of the Acquired Funds. Each
newly-opened account on the books of New Jersey Insured for the previous holders
of Common Stock of the Acquired Funds would represent the respective pro rata
number of shares of New Jersey Insured Common Stock (rounded down, in the case
of fractional shares, to the next largest number of whole shares) due such
holder of Common Stock. No fractional shares of New Jersey Insured Common Stock
will be issued. In lieu thereof, New Jersey Insured's transfer agent, The Bank
of New York, will aggregate all fractional shares of New Jersey 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 the
pro rata share of the proceeds from such sale upon surrender of the Common Stock
certificates of the applicable Acquired Fund. Similarly, each newly-opened
account on the books of New Jersey Insured for the previous holders of AMPS of
an Acquired Fund would represent the respective pro rata number of shares of New
Jersey Insured Series C AMPS or New Jersey Insured Series D AMPS due such holder
of AMPS. See "Surrender and Exchange of Stock Certificates" below for a
description of the procedures to be followed by the stockholders of the Acquired
Funds to obtain their New Jersey Insured Common Stock (and cash in lieu of
fractional shares, if any). Because AMPS are held in "street name" by the
Depository Trust Company, all transfers are accomplished by book entry.
Accordingly, as a result of the Reorganization, every holder of Common
Stock of an Acquired Fund would own shares of New Jersey 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
53
<PAGE> 58
aggregate net asset value of that stockholder's Common Stock immediately prior
to the Exchange Date. Since the New Jersey Insured Common Stock would be issued
at net asset value and the shares of Common Stock of the Acquired Funds would be
valued at net asset value for the purposes of the exchange, the holders of
Common Stock of each of the Funds will not be diluted as a result of the
Reorganization. Similarly, since the New Jersey Insured Series C AMPS and New
Jersey 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
AMPS of the Acquired Funds, holders of AMPS of each of the Funds will not be
diluted as result of the Reorganization. However, as a result of the
Reorganization, a stockholder of any of the Funds likely will hold a reduced
percentage of ownership in the larger combined entity than he or she did in any
of the constituent Funds.
PROCEDURE
At a meeting of the Board of Directors of each of the Funds, the Board of
Directors of each of the Funds, including all of the Directors who are not
"interested persons," as defined in the Investment Company Act, of the
applicable Fund, unanimously approved the Agreement and Plan of Reorganization
and the submission of such Agreement and Plan of Reorganization to the
stockholders of each of the Funds for approval.
Also, the Board of Directors of New Jersey Insured approved the filing of
Articles Supplementary establishing the powers, rights and preferences of the
New Jersey Insured Series C AMPS and the New Jersey Insured Series D AMPS in
order that they may be distributed to holders of AMPS of each of the Acquired
Funds as part of the Reorganization.
As a result of such Board approvals, the Funds have jointly filed this
proxy statement with the SEC soliciting a vote of the stockholders of each of
the Funds to approve the Reorganization. The costs of such solicitation are to
be paid by New Jersey Insured after the Reorganization so as to be borne equally
and exclusively on a per share basis by the holders of Common Stock of each of
the Funds. Annual meetings of stockholders of the Funds will be held on December
15, 1999. If the stockholders of all three Funds 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 or an opinion of
counsel to the same effect.
THE BOARDS OF DIRECTORS OF NEW JERSEY INSURED, NEW JERSEY INSURED II AND
NEW JERSEY INSURED III 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 II.
Valuation of Assets and Liabilities. The respective assets of each of the
Funds will be valued on the business day prior to the Exchange Date (the
"Valuation Date"). The valuation procedures are the same for all three Funds:
net asset value per share of the Common Stock of each Fund will be determined
after the close of business on the NYSE (generally, 4:00 p.m., Eastern time) on
the Valuation Date. For the purpose of determining the net asset value of a
share of Common Stock of each Fund, 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 Jersey 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 use the
54
<PAGE> 59
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 Jersey 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 the Funds 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 New Jersey Insured Common Stock, New Jersey Insured Series
C AMPS and New Jersey Insured Series D AMPS. On the Exchange Date, New Jersey
Insured will issue to each Acquired Fund a number of shares of New Jersey
Insured Common Stock the aggregate net asset value of which will equal the
respective aggregate net asset value of shares of Common Stock of the Acquired
Fund on the Valuation Date. Each holder of Common Stock of an Acquired Fund will
receive the number of shares of New Jersey Insured Common Stock corresponding to
his or her proportionate interest in the respective aggregate net asset value of
the Common Stock of the Acquired Fund, as applicable.
On the Exchange Date, New Jersey Insured also will issue (i) to New Jersey
Insured II a number of shares of New Jersey Insured Series C AMPS, the aggregate
liquidation preference and value of which will equal the aggregate liquidation
preference and value of New Jersey Insured II AMPS on the Valuation Date and
(ii) to New Jersey Insured III a number of shares of New Jersey Insured Series D
AMPS, the aggregate liquidation preference and value of which will equal the
aggregate liquidation preference and value of New Jersey Insured III AMPS on the
Valuation Date. Each holder of AMPS of an Acquired Fund will receive the number
of shares of New Jersey Insured Series C AMPS or New Jersey Insured Series D
AMPS corresponding to his or her proportionate interest in the aggregate
liquidation preference and value of the AMPS of the Acquired Fund. No sales
charge or fee of any kind will be charged to stockholders of the Acquired Funds
in connection with their receipt of New Jersey Insured Common Stock or AMPS in
the Reorganization. Holders of certain series of AMPS of the Acquired Funds will
find that the auction date and dividend payment date for the New Jersey Insured
AMPS received in the Reorganization fall on different days of the week than the
auction date and dividend payment date of the AMPS currently held. Any such
change in the auction date and dividend payment date will not adversely affect
the value of a holder's AMPS. It is anticipated that (i) the auction for New
Jersey Insured Series C AMPS will be held on Tuesday; the New Jersey Insured II
Series A AMPS are auctioned on Tuesday, but the New Jersey Insured II Series B
AMPS are auctioned on Friday; and (ii) the auction for New Jersey Insured Series
D AMPS will be held on Wednesday; the New Jersey Insured III Series A AMPS are
also auctioned on Wednesday. The auction procedures for all of the AMPS are
substantially the same. As a result of the Reorganization, the last dividend
period for the AMPS of each Acquired Fund 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. New Jersey 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,
SEC 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 Common Stock of each of the Funds. No Fund shall pay any expenses of
its respective stockholders arising out of or in connection with the
Reorganization.
55
<PAGE> 60
Required Approvals. Under Articles of Incorporation of each Fund (as
amended to date and including Articles Supplementary establishing the powers,
rights and preferences of the AMPS of each Fund), 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 Common Stock and AMPS, voting together as
a single class, and more than 50% of the AMPS, voting separately as a single
class. Because of the requirement that the Agreement and Plan of Reorganization
be approved by the stockholders of all three Funds, the Reorganization will not
take place if the stockholders of any one Fund do not approve the Agreement and
Plan of Reorganization.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of the Acquired Funds and the distribution of shares of New Jersey
Insured Common Stock, New Jersey Insured Series C AMPS and New Jersey Insured
Series D AMPS to stockholders of the Acquired Funds, in accordance with the
foregoing, each of the Acquired Funds 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 each Fund 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 SEC, approval by the
stockholders of each of the Funds, a favorable IRS ruling or an opinion of
counsel being received as to tax matters, an opinion of counsel as to securities
matters being received and the continuing accuracy of various representations
and warranties of the Funds being confirmed by the respective parties.
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Directors of any of the Funds may cause the Reorganization to be
postponed or abandoned under certain circumstances should such 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 any of the Funds) prior to the Exchange Date, or the
Exchange Date may be postponed: (i) by mutual consent of the Boards of Directors
of the three Funds and (ii) by the Board of Directors of any Fund if any
condition to that Fund's obligations set forth in the Agreement and Plan of
Reorganization has not been fulfilled or waived by such Board.
POTENTIAL BENEFITS TO COMMON STOCKHOLDERS OF THE FUNDS 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 aggregate operating 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. With respect to each
of the Acquired Funds, following the Reorganization their respective
stockholders will remain invested in a closed-end fund that has investment
objectives and policies substantially similar to those of the Acquired 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 New Jersey Municipal Bonds and
Municipal Bonds and the costs involved in a transaction such as the
Reorganization. The Boards noted the many similarities between the Funds,
including their substantially similar investment objectives and investment
policies, their use of substantially the same management personnel and their
similar portfolios of New Jersey Municipal Bonds and Municipal Bonds. The Boards
also considered the relative tax positions of each of the Fund's portfolios.
Based on these factors, the Boards concluded that the Reorganization will
potentially benefit the stockholders of each Fund in that it (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 any of the Funds 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
56
<PAGE> 61
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, the table below shows the
total annualized operating expense ratio of each Fund and pro forma New Jersey
Insured based on net assets both excluding and including assets attributable to
AMPS as of June 30, 1999:
<TABLE>
<CAPTION>
TOTAL ANNUALIZED NET
OPERATING NET TOTAL ANNUALIZED ASSETS,
EXPENSE RATIO, ASSETS, EXCLUDING OPERATING INCLUDING
EXCLUDING AMPS EXPENSE RATIO, AMPS
FUND AMPS (IN MILLIONS) INCLUDING AMPS (IN MILLIONS)
---- ---------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C>
New Jersey Insured.................... 1.35% $101.8 0.81% $169.8
New Jersey Insured II................. 1.43% $ 83.4 0.83% $143.4
New Jersey Insured III................ 1.37% $ 73.2 0.83% $120.2
Pro Forma New Jersey Insured(1)....... 1.24% $258.5 0.74% $433.5
</TABLE>
---------------
(1) Assumes Reorganization had taken place on June 30, 1999.
Management projections estimate that New Jersey Insured will have net
assets in excess of $433 million including assets attributable to AMPS upon
completion of the Reorganization. A larger asset base should provide benefits in
portfolio management. After the Reorganization, New Jersey Insured should be
able to purchase larger amounts of New Jersey Municipal Bonds and Municipal
Bonds at more favorable prices than any of the Funds separately and, with this
greater purchasing power, request improvements in the terms of the New Jersey
Municipal Bonds and Municipal Bonds (e.g., added indenture provisions covering
call protection, sinking funds and audits for the benefit of large holders)
prior to purchase.
Based on the foregoing, the Boards concluded that the Reorganization is in
the best interests of the stockholders of each of the Funds because 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 the Reorganization is in the best interests of that Fund and,
with respect to net asset value and liquidation preference, that the interests
of existing stockholders of that 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 $.02 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 approximately one year 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 AMPS of any of the Funds; however, the Reorganization will
not adversely affect the holders of shares of AMPS of any of the Funds and the
expenses of the Reorganization will not be borne by the holders of shares of
AMPS of any of the Funds.
SURRENDER AND EXCHANGE OF STOCK CERTIFICATES
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of Common Stock of any one of the
Acquired Funds will be entitled to receive, upon surrender of his or her
certificate or certificates, a certificate or certificates representing the
number of shares of New Jersey Insured Common Stock distributable with respect
to such holder's shares of Common Stock of the Acquired Fund, together with cash
in lieu of any fractional shares of Common Stock. Promptly after the Exchange
Date, the transfer agent for the New Jersey Insured Common Stock will mail to
each holder of certificates formerly representing shares of Common Stock of an
Acquired Fund a letter of transmittal for use in surrendering his or her
certificates for certificates representing shares of New Jersey Insured Common
Stock and cash in lieu of any fractional shares of Common Stock.
57
<PAGE> 62
Shares of AMPS are held in "street name" by the Depository Trust Company,
and all transfers will be accomplished by book entry. Surrender of physical
certificates for AMPS is not required.
<TABLE>
<CAPTION>
IF PRIOR TO THE REORGANIZATION YOU HELD: AFTER THE REORGANIZATION, YOU WILL HOLD:
---------------------------------------- ----------------------------------------
<S> <C>
New Jersey Insured Common Stock New Jersey Insured Common Stock
New Jersey Insured Series A AMPS New Jersey Insured Series A AMPS
New Jersey Insured Series B AMPS New Jersey Insured Series B AMPS
New Jersey Insured II Common Stock New Jersey Insured Common Stock
New Jersey Insured II Series A AMPS New Jersey Insured Series C AMPS
New Jersey Insured II Series B AMPS New Jersey Insured Series C AMPS
New Jersey Insured III Common Stock New Jersey Insured Common Stock
New Jersey Insured III Series A AMPS New Jersey Insured Series D AMPS
</TABLE>
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON
CONSUMMATION OF THE REORGANIZATION, COMMON STOCKHOLDERS OF THE ACQUIRED FUNDS
WILL BE FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR STOCK CERTIFICATES FOR
NEW JERSEY INSURED STOCK CERTIFICATES AND, IF APPLICABLE, CASH IN LIEU OF
FRACTIONAL SHARES.
From and after the Exchange Date, certificates formerly representing shares
of Common Stock or AMPS of an Acquired Fund will be deemed for all purposes to
evidence ownership of the number of full shares of New Jersey Insured Common
Stock, New Jersey Insured Series C AMPS or New Jersey Insured Series D AMPS
distributable with respect to the shares of the Acquired Fund held before the
Reorganization as described above and as shown in the table above, provided
that, until such stock certificates have been so surrendered, no dividends
payable to the holders of record of Common Stock or AMPS of an Acquired Fund as
of any date subsequent to the Exchange Date will be paid to the holders of such
outstanding stock certificates. Dividends payable to holders of record of shares
of Common Stock or AMPS of New Jersey Insured, as of any date after the Exchange
Date and prior to the exchange of certificates by any stockholder of an Acquired
Fund, will be paid to such stockholder, without interest, at the time such
stockholder surrenders his or her stock certificates for exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of any Acquired Fund. If, after the Exchange Date, certificates
representing shares of Common Stock or AMPS of an Acquired Fund are presented to
New Jersey Insured, they will be canceled and exchanged for certificates
representing Common Stock or AMPS of New Jersey Insured, as applicable, and cash
in lieu of fractional shares of Common Stock, if any, distributable with respect
to such Common Stock or 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. Each of the Funds has elected and qualified
for the special tax treatment afforded RICs under the Code, and New Jersey
Insured intends to continue to so qualify after the Reorganization. The Funds
have jointly requested a private letter ruling from the IRS that for Federal
income tax purposes: (i) the exchange of assets by each Acquired Fund for New
Jersey Insured stock, as described, will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code, and each of the Acquired Funds and
New Jersey Insured will 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 the Acquired Funds as a result
of the Reorganization or on the distribution of New Jersey Insured Common Stock
and New Jersey Insured Series C AMPS or New Jersey Insured Series D AMPS to the
respective stockholders of the Acquired Funds under Section 361(c)(1) of the
Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized
to New Jersey 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 the Acquired Funds on the receipt of New Jersey Insured Common
Stock and New Jersey Insured Series C AMPS or New Jersey Insured Series D AMPS
in exchange for their corresponding shares of Common Stock or AMPS of an
Acquired Fund (except to the
58
<PAGE> 63
extent that common stockholders receive cash representing an interest in
fractional shares of New Jersey Insured Common Stock in the Reorganization); (v)
in accordance with Section 362(b) of the Code, the tax basis of the assets of
the Acquired Funds in the hands of New Jersey Insured will be the same as the
tax basis of such assets in the hands of the Acquired Fund that transferred them
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 New Jersey Insured Common Stock, New Jersey Insured Series C AMPS
or New Jersey Insured Series D AMPS received by the stockholders of the Acquired
Funds in the Reorganization will be equal to the tax basis of the Common Stock
or AMPS of the Acquired Fund surrendered in exchange; (vii) in accordance with
Section 1223 of the Code, a stockholder's holding period for the New Jersey
Insured Common Stock, New Jersey Insured Series C AMPS or New Jersey Insured
Series D AMPS will be determined by including the period for which such
stockholder held the Common Stock or AMPS of the Acquired Fund exchanged
therefor, provided, that such shares were held as a capital asset; (viii) in
accordance with Section 1223 of the Code, New Jersey Insured's holding period
with respect to the Acquired Funds transferred will include the period for which
such assets were held by the Acquired Fund; (ix) the payment of cash to common
stockholders of an Acquired Fund in lieu of fractional shares of New Jersey
Insured Common Stock will be treated as though the fractional shares were
distributed as part of the Reorganization and then redeemed, with the result
that such stockholders will have short- or long-term capital gain or loss to the
extent that the cash distribution differs from the stockholder's basis allocable
to the New Jersey Insured fractional shares; and (x) the taxable year of each of
the Acquired Funds will end on the effective date of the Reorganization and
pursuant to Section 381(a) of the Code and regulations thereunder, New Jersey
Insured will succeed to and take into account certain tax attributes of the
Acquired Funds, such as earnings and profits, capital loss carryovers and method
of accounting.
As noted in the discussion under "Comparison of the Funds -- Tax Rules
Applicable to the Funds and Their Stockholders," a Fund must distribute annually
at least 90% of its net taxable and tax-exempt income. A distribution only will
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 New Jersey
Insured Series C AMPS and New Jersey Insured Series D AMPS pursuant to the
Reorganization in addition to the already existing New Jersey Insured Series A
AMPS and New Jersey Insured Series B AMPS will not cause distributions on any
series of New Jersey Insured AMPS to be treated as preferential dividends
ineligible for the dividends paid deduction. It is possible, however, 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, New Jersey Insured could lose the special
tax treatment afforded RICs. In this case, dividends on the shares of New Jersey
Insured Common Stock and AMPS would not be exempt from Federal income tax.
Additionally, New Jersey Insured would be subject to the Federal alternative
minimum tax and might be subject to the New Jersey corporate business
(franchise) tax.
Under Section 381(a) of the Code, New Jersey Insured will succeed to and
take into account certain tax attributes of the Acquired Funds, including, but
not limited to, earnings and profits, any net operating loss carryovers, any
capital loss carryovers and method of accounting. The Code, however, contains
special limitations with regard to the use of net operating losses, capital
losses and other similar items in the context of certain reorganizations,
including tax-free reorganizations pursuant to Section 368(a)(1)(C) of the Code,
which could reduce the benefit of these attributes to New Jersey Insured.
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.
Regulated Investment Company Status. The Funds have elected and qualified
for taxation as RICs under Sections 851-855 of the Code, and after the
Reorganization New Jersey Insured intends to continue to so qualify.
59
<PAGE> 64
CAPITALIZATION
The following table sets forth as of July 31, 1999 (i) the capitalization
of New Jersey Insured, (ii) the capitalization of New Jersey Insured II, (iii)
the capitalization of New Jersey Insured III and (iv) the capitalization of Pro
Forma New Jersey Insured as adjusted to give effect to the Reorganization.
PRO FORMA CAPITALIZATION OF NEW JERSEY INSURED, NEW JERSEY INSURED II,
NEW JERSEY INSURED III AND PRO FORMA NEW JERSEY INSURED AS OF JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
NEW JERSEY
NEW JERSEY NEW JERSEY NEW JERSEY PRO FORMA INSURED, AS
INSURED INSURED II INSURED III ADJUSTMENT ADJUSTED(a)
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets:
Net Assets Attributable to
Common Stock................ $101,300,436 $82,714,787 $72,716,690 ($1,955,377) $254,776,536
Net Assets Attributable to
AMPS........................ $ 68,000,000 $60,000,000 $47,000,000 -- $175,000,000
Shares Outstanding:
Common Stock.................. 7,000,496 6,151,635 5,297,667 (695,909) 17,753,889(b)
AMPS
Series A.................... 1,360 1,200 1,880 (3,080) 1,360
Series B.................... 1,360 1,200 -- (1,200) 1,360
Series C.................... -- -- -- 2,400 2,400(b)
Series D.................... -- -- -- 1,880 1,880(b)
Net Asset Value Per Share:
Common Stock.................. $ 14.47 $ 13.45 $ 13.73 -- $ 14.35(c)
AMPS.......................... $ 25,000 $ 25,000 $ 25,000 -- $ 25,000
</TABLE>
---------------
(a) The adjusted balances are presented as if the Reorganization had been
consummated on July 31, 1999 and are for informational purposes only.
Assumes distribution of undistributed net investment income and accrual of
estimated Reorganization expenses of $396,000. No assurance can be given as
to how many shares of New Jersey Insured Common Stock that stockholders of
New Jersey Insured II or New Jersey Insured III will receive on the Exchange
Date, and the foregoing should not be relied upon to reflect the number of
shares of New Jersey Insured Common Stock that actually will be received on
or after such date.
(b) Assumes the issuance of 10,753,393 shares of New Jersey Insured Common Stock
and two newly-created series of AMPS consisting of 2,400 Series C shares and
1,880 Series D shares, respectively, in exchange for the net assets of each
of New Jersey Insured II and New Jersey Insured III. The estimated number of
shares issued was based on the net asset value of each Fund, net of
distributions, on July 31, 1999.
(c) Net Asset Value Per Share of Common Stock net of Reorganization-related
expenses and distribution of undistributed net investment income of $683,924
for New Jersey Insured, $455,375 for New Jersey Insured II and $420,078 for
New Jersey Insured III.
60
<PAGE> 65
ITEM 2. ELECTION OF DIRECTORS
At the Meetings, the Board of Directors for each of the Funds will be
elected to serve until the next Annual Meeting of Stockholders and until their
successors are elected and qualified. If the stockholders of all of the Funds
approve the Reorganization, then the Board of Directors of New Jersey Insured
elected at the Meetings will serve as the Board of the combined fund, until its
next Annual Meeting of Stockholders. If the stockholders of any Fund vote
against the Reorganization, then the Board of Directors of each Fund elected at
the Meetings will continue to serve until the next Annual Meeting of
Stockholders of each Fund. It is intended that all properly executed proxies
will be voted (unless such authority has been withheld in the proxy) as follows:
(1) All proxies of the holders of shares of AMPS of any Fund, 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 AMPS of that Fund;
and
(2) All proxies of the holders of shares of Common Stock and AMPS of
any Fund, voting together as a single class, will be voted in favor of the
five persons designated as Directors to be elected by the holders of shares
of Common Stock and AMPS of that Fund.
The Boards of Directors of the Funds know 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 appropriate Board of Directors may recommend.
Certain information concerning the nominees is set forth below. Additional
information concerning the nominees and other information relevant to the
election of Directors is set forth in Exhibit I.
TO BE ELECTED BY HOLDERS OF AMPS OF NEW JERSEY INSURED AND EACH OF THE ACQUIRED
FUNDS, VOTING SEPARATELY AS A CLASS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PAST
NAME AND ADDRESS AGE FIVE YEARS AND PUBLIC DIRECTORSHIPS(1)
---------------- --- ------------------------------------------
<S> <C> <C>
Charles C. Reilly(1)(2)................... 68 Self-employed financial consultant since
9 Hampton Harbor Road 1990; President and Chief Investment
Hampton Bays, New York 11946 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 from 1986 to
1997.
Richard R. West(1)(2)..................... 61 Professor of Finance since 1984, Dean from
Box 604 1984 to 1993, and currently Dean Emeritus
Genoa, Nevada 89411 of New York University, Leonard N. Stern
School of Business Administration;
Director of Bowne & Co., Inc. (financial
printers), Vornado Realty Trust, Inc.
(real estate holding company) and
Alexander's Inc. (real estate company).
</TABLE>
61
<PAGE> 66
TO BE ELECTED BY HOLDERS OF COMMON STOCK AND AMPS OF NEW JERSEY INSURED AND EACH
OF THE ACQUIRED FUNDS, VOTING TOGETHER AS A SINGLE CLASS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PAST
NAME AND ADDRESS AGE FIVE YEARS AND PUBLIC DIRECTORSHIPS(1)
---------------- --- ------------------------------------------
<S> <C> <C>
Terry K. Glenn (1)*....................... 59 Executive Vice President of FAM and
P. O. Box 9011 Merrill Lynch Asset Management, L.P.
Princeton, New Jersey 08543-9011 ("MLAM") (which terms as used herein
include their corporate predecessors)
since 1983; Executive Vice President and
Director of Princeton Services, Inc.
("Princeton Services") since 1993;
President of Princeton Funds Distributor,
Inc. ("PFD") since 1986 and Director
thereof since 1991; President of Princeton
Administrators, L.P. ("Princeton
Administrators") since 1988.
Ronald W. Forbes(1)(2).................... 59 Professor of Finance, School of Business,
1400 Washington Avenue State University of New York at Albany,
Albany, New York 12222 since 1989; Consultant, Urban Institute,
Washington, D.C. since 1995.
Cynthia A. Montgomery(1)(2)............... 47 Professor, Harvard Business School since
Harvard Business School 1989; Associate Professor, J.L. Kellogg
Soldiers Field Road Graduate School of Management,
Boston, Massachusetts 02163 Northwestern University from 1985 to 1989;
Assistant Professor, Graduate School of
Business Administration, The University of
Michigan from 1979 to 1985; Director, UNUM
Provident since 1990 and Director of
Newell Rubbermaid since 1995.
Kevin A. Ryan(1)(2)....................... 67 Founder and Director Emeritus of The
127 Commonwealth Avenue Boston University Center for the
Chestnut Hill, Advancement of Ethics and Character and
Massachusetts 02167 Director thereof until 1999; Professor
until 1999 and currently Professor
Emeritus of Education at Boston University
since 1982; formerly taught on the
faculties of The University of Chicago,
Stanford University and Ohio State
University.
Arthur Zeikel(1)*......................... 67 Chairman of FAM and MLAM from 1997 to
300 Woodland Avenue 1999; President of FAM and MLAM from 1977
Westfield, New Jersey 07090 to 1997; Chairman of Princeton Services
from 1997 to 1999 and Director thereof
from 1993 to 1999; President of Princeton
Services from 1993 to 1997; Executive Vice
President of ML & Co. from 1990 to 1999.
</TABLE>
---------------
(1) Each of the nominees is a director, trustee or member of an advisory board
of one or more additional investment companies for which FAM, MLAM or their
affiliates act as investment adviser. See "Compensation of Board Members" in
Exhibit I.
(2) Member of Audit Committee of the Board of Directors
* Interested person, as defined in the Investment Company Act, of each of the
Funds.
62
<PAGE> 67
COMMITTEE AND BOARD MEETINGS
The Board of each Fund has a standing Audit Committee, which consists of
Board members who are not "interested persons" of the Fund within the meaning of
the Investment Company Act. The principal purpose of the Audit Committee is to
review the scope of the annual audit conducted by the Fund's independent
auditors and the evaluation by such auditors of the accounting procedures
followed by the Fund. The Audit Committee also reviews and nominates candidates
to serve as non-affiliated Board members. The non-interested Board members have
retained independent legal counsel to assist them in connection with these
duties.
During each Fund's last fiscal year, each of the Board members then in
office attended at least 75% of the aggregate of the total number of meetings of
the Board held during the fiscal year and, if a member, of the total number of
meetings of the Audit Committee held during the period for which he or she
served. See Exhibit I for further information about Audit Committee and Board
meetings.
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
"Exchange Act"), requires the officers and directors of each Fund 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 SEC and the NYSE. Officers, directors and greater than ten
percent stockholders are required by SEC regulations to furnish the Fund with
copies of all Forms 3, 4 and 5 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
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 and Mr. Glenn to be "interested persons" of
the Fund within the meaning of Section 2(a)(19) of the Investment Company Act
because of the positions each holds or has held with FAM and its affiliates. Mr.
Glenn is the President of each Fund.
COMPENSATION OF DIRECTORS
FAM, the investment adviser of each Fund, pays all compensation to all
officers of each Fund and all Directors of each Fund who are affiliated with ML
& Co. or its subsidiaries. Each Fund pays each Director not affiliated with FAM
(each a "non-affiliated Director") an annual fee plus a fee for each meeting
attended, and each Fund also pays each member of its Audit Committee, which
consists of all of the non-affiliated Directors, an annual fee plus a fee for
each meeting attended, together with such Director's out-of-pocket expenses
relating to attendance at such meetings. Information with respect to fees and
expenses paid to the non-affiliated Directors for each Fund's most recently
completed fiscal year is set forth in Exhibit I.
OFFICERS OF THE FUNDS
Information regarding the officers of each Fund is set forth in Exhibit I.
Officers of the Funds are elected and appointed by the Board and hold office
until they resign, are removed or are otherwise disqualified to serve.
63
<PAGE> 68
ITEM 3. SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of each Fund, including a majority of the Directors
who are not interested persons of the Fund, has selected independent auditors to
examine the financial statements of the Fund for the Fund's current fiscal year.
Ernst & Young LLP ("E&Y") acts as independent auditors for New Jersey Insured
and New Jersey Insured II and is expected to act as independent auditors for the
combined fund. Deloitte & Touche LLP ("D&T") acts as independent auditors for
New Jersey Insured III. The current fiscal year for New Jersey Insured is the
fiscal year ending July 31, 2000; for New Jersey Insured II, the fiscal year
ending May 31, 2000; and for New Jersey Insured III, the fiscal year ending
September 30, 2000.
No Fund knows of any direct or indirect financial interest of such auditors
in any Fund. Such appointment is subject to ratification or rejection by the
stockholders of each respective Fund. If the stockholders of each of the Funds
approve the Reorganization, then the independent auditors selected at the
Meeting for New Jersey Insured will serve as the independent auditors of the
combined fund until its next Annual Meeting of Stockholders. If the stockholders
of any of the Funds vote against the Reorganization, then the independent
auditors of each Fund selected at the Meetings will continue to serve as
independent auditors of that Fund until the next Annual Meeting of Stockholders
of that Fund. Unless a contrary specification is made, the accompanying proxy of
each Fund will be voted in favor of ratifying the selection of such Fund's
auditors.
D&T also acts as independent auditors for ML & Co. and most of its
subsidiaries, including FAM and MLAM, and for most other investment companies
for which FAM or MLAM acts as investment adviser. Additionally, E&Y also acts as
independent auditors for several other investment companies for which FAM or
MLAM acts as investment adviser. The Board of Directors of New Jersey Insured
III considered the fact that D&T have been retained as the independent auditors
for ML & Co. and the other entities described above in its evaluation of the
independence of D&T with respect to each applicable Fund. The Board of Directors
of each of New Jersey Insured and New Jersey Insured II considered the fact that
E&Y have been retained as independent auditors for the other entities described
above in its evaluation of the independence of E&Y with respect to each
applicable Fund.
Representatives of the independent auditors 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.
64
<PAGE> 69
INFORMATION CONCERNING THE ANNUAL MEETINGS
DATE, TIME AND PLACE OF MEETINGS
The Meetings will be held on December 15, 1999 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at the times listed on Exhibit I.
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, by giving
written notice of the revocation to the Secretary of the appropriate Fund or by
voting in person at the Meeting. Although mere attendance at the Meetings will
not revoke a proxy, a stockholder present at the Meetings may withdraw his or
her 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, the shares will be
voted "FOR" (i) the approval of the Agreement and Plan of Reorganization, (ii)
the election of the nominees to the Board of Directors and (iii) the
ratification of the selection of D&T or E&Y, as applicable, as independent
accountants. It is not anticipated that any other matters 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.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of Common Stock or AMPS of any of the
Funds 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, the Funds had the number of shares outstanding indicated in Exhibit I.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the Funds, at the date hereof, no person or entity owns
beneficially 5% or more of the shares of the Common Stock or AMPS of any Fund.
As of the Record Date, none of the nominees held shares of the Funds.
As of the Record Date, the Directors and officers of New Jersey Insured as
a group (13 persons) owned an aggregate of less than 1% of the outstanding
shares of New Jersey Insured Common Stock and owned no New Jersey Insured AMPS.
As of the Record Date, the Directors and officers of New Jersey Insured II
as a group (13 persons) owned an aggregate of less than 1% of the outstanding
shares of New Jersey Insured II Common Stock and owned no New Jersey Insured II
AMPS.
As of the Record Date, the Directors and officers of New Jersey Insured III
as a group (13 persons) owned an aggregate of less than 1% of the outstanding
shares of New Jersey Insured III Common Stock and owned no New Jersey Insured
III AMPS.
On the Record Date, Mr. Glenn, a Director and an officer of each of the
Funds, Mr. Zeikel, a Director 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 Common
Stock and AMPS of each of the Funds is entitled to one vote. Approval of the
Agreement and Plan of Reorganization requires the approval of each Fund. With
respect to each Fund, approval of the Agreement and Plan of Reorganization
requires the affirmative vote of stockholders representing (i) a majority of the
outstanding shares of the Fund's
65
<PAGE> 70
Common Stock and AMPS, voting together as a single class, and (ii) a majority of
the outstanding shares of the Fund's AMPS, voting separately as a single class.
For purposes of each Meeting, a quorum consists of one-third 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, assuming a quorum is present,
holders of shares of a Fund's AMPS, voting separately as a class, are entitled
to elect two Directors of the Fund and holders of shares of a Fund's Common
Stock and AMPS, voting together as a single class, are entitled to elect the
remaining Directors of that Fund. With respect to each Fund, assuming a quorum
is present, (x) election of the two Directors of the Fund to be elected by the
holders of shares of that Fund's AMPS, voting separately as a class, will
require the affirmative vote of a plurality of the votes cast by the holders of
that Fund's AMPS, represented at the Meeting and entitled to vote, voting
together as a single class; and (y) election of the remaining Directors of the
Fund will require the affirmative vote of a plurality of the votes cast by the
holders of that Fund's Common Stock and AMPS, represented at the Meetings and
entitled to vote, voting together as a single class.
Assuming a quorum is present, approval of the ratification of the selection
of the independent auditors of each Fund, will require the affirmative vote of a
majority of the votes cast by the holders of that Fund's Common Stock and AMPS
represented at the Meetings and entitled to vote, voting together as a single
class.
APPRAISAL RIGHTS
Under Maryland law, stockholders of a company whose shares are traded
publicly on a national securities exchange, such as each of the Acquired Funds,
are not entitled to demand the fair value of their shares upon a transfer of
assets; therefore, the common stockholders of each of the Acquired Funds will be
bound by the terms of the Reorganization, if approved at the Meetings. However,
any common stockholder of an Acquired Fund may sell his or her shares of Common
Stock at any time on the NYSE. Conversely, since the AMPS are not traded
publicly on a national securities exchange, holders of AMPS issued by an
Acquired Fund will be entitled to appraisal rights upon the consummation of the
Reorganization. As stockholders of the corporation acquiring the assets of the
Acquired Funds, neither holders of New Jersey Insured Common Stock nor holders
of New Jersey Insured AMPS are entitled to appraisal rights under Maryland law.
Under Maryland law, a holder of AMPS of any of the Acquired Funds desiring
to receive payment of the fair value of his or her stock (an "objecting
stockholder") (i) must file with the applicable Acquired Fund a written
objection to the Reorganization at or before the Meeting, (ii) must not vote in
favor of the Reorganization (although a vote against the Reorganization is not
required), and (iii) must make written demand on New Jersey 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 (New Jersey Insured is required promptly to give written notice
to all objecting stockholders of the date that the Articles of Transfer are
accepted for record). A vote against the Reorganization will not be sufficient
to satisfy the requirement of a written demand described in (iii). 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 distribution payable to such holders on a
record date after the close of business on the date on which fair value is to be
determined, which, for these purposes, will be the date of the Meeting. A demand
for payment of fair
66
<PAGE> 71
market value may not be withdrawn, except upon the consent of New Jersey
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.
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 New Jersey Insured, the surviving fund after the Reorganization, so as
to be borne equally and exclusively on a per share basis by the holders of
Common Stock of each of the Funds. If the Reorganization is not approved, these
expenses will be allocated among the Funds according to the net asset value of
the Common Stock of each Fund on the Meeting date.
The Funds likewise will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the beneficial
owners of shares of each of the Funds and certain persons that the Funds may
employ for their reasonable expenses in assisting in the solicitation of proxies
from such beneficial owners of shares of capital stock of the Funds.
In order to obtain the necessary quorum at the Meetings, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview by
officers of the Funds. Each of the Funds has retained Shareholder Communications
Corporation, 17 State Street, New York, New York 10004 to aid in the
solicitation of proxies, at a cost to be borne by each of the Funds of
approximately $7,500, plus out-of-pocket expenses.
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 Directors of each Fund Item 2 and the ratification of the selection of
independent auditors for each Fund Item 3 if no instructions have been received
prior to the date specified in the broker-dealer firm's request for voting
instructions. With respect to shares of Common Stock of each Fund, 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 Item 1. Shares of AMPS of a Fund held in "street name," however,
may be voted without instructions under certain conditions by broker-dealer
firms with respect to Item 1 and counted for purposes of establishing a quorum
of that Fund if no instructions are received one business day before the Meeting
or, if adjourned, one business day before the day to which the Meeting is
adjourned. With respect to each Fund, these conditions include, among others,
that (i) at least 30% of that Fund's AMPS outstanding have voted on Item 1, (ii)
less than 10% of that Fund's AMPS outstanding have voted against Item 1 and
(iii) holders of that Fund's Common Stock have voted to approve Item 1. In such
instances, the broker-dealer firm will vote that Fund's shares of AMPS on Item 1
in the same proportion as the votes cast by all holders of that Fund's AMPS who
voted on Item 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
vote shares held in its name for which no instructions are received, except as
limited by agreement or applicable law, on Items 2 and 3 (with respect to Common
Stock and AMPS) and on Item 1 (with respect to AMPS only) in the same proportion
as the votes received from beneficial owners of those shares for which
instructions have been received, whether or not held in nominee name.
Abstentions and broker non-votes will not be counted as votes cast. Abstentions
and broker non-votes, therefore, will not have an effect on the vote on Items 2
and 3. Abstentions and broker non-votes will have the same effect as a vote
against Item 1.
67
<PAGE> 72
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statement and the exhibits relating thereto which
New Jersey Insured has filed with the Commission under the Securities Act and
the Investment Company Act, to which reference is hereby made.
The Funds are subject to the informational requirements of the Exchange Act
and the Investment Company Act and in accordance therewith are required to file
reports, proxy statements and other information with the SEC. Any such reports,
proxy statements and other information can be inspected and copied at the public
reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the SEC:
Regional Office, at Seven World Trade Center, Suite 1300, New York, New York
10048; Pacific Regional Office, at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036; and Midwest Regional Office, at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials can be obtained from the public reference section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The SEC 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 SEC. Reports, proxy statements and
other information concerning the Funds can also be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). The Funds could be adversely
affected if the computer systems used by FAM or other Fund service providers do
not properly address this problem before January 1, 2000. FAM expects to have
addressed this problem before then, and does not anticipate that the services it
provides will be adversely affected. The Fund's other service providers have
told FAM that they also expect to resolve the Year 2000 Problem, and FAM will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Funds could be negatively affected.
The Year 2000 Problem could also have a negative impact on the issuers of
securities in which the Funds invest, and this could hurt the Funds' investment
returns.
CUSTODIAN
The Bank of New York acts as the custodian for cash and securities of New
Jersey Insured. The principal business address of The Bank of New York in such
capacity is 90 Washington Street, New York, New York 10286. State Street Bank
and Trust Company acts as the custodian for cash and securities of New Jersey
Insured II and New Jersey Insured III. The principal business address of State
Street Bank and Trust Company in such capacity is One Heritage Drive, P2N, North
Quincy, Massachusetts 02171.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Bank of New York serves as the transfer agent, dividend disbursing
agent and registrar with respect to the Common Stock of New Jersey Insured,
pursuant to a registrar, transfer agency and service agreements with each of the
Funds. The principal business address of The Bank of New York in such capacity
is 101 Barclay Street, New York, New York 10286.
State Street Bank and Trust Company serves as the transfer agent, dividend
disbursing agent and registrar with respect to the Common Stock of New Jersey
Insured II and New Jersey Insured III, pursuant to a separate registrar,
transfer agency and service agreement with each of the Funds. The principal
business address of State Street Bank and Trust Company in such capacity is 225
Franklin Street, Boston, Massachusetts 02110.
The Bank of New York serves as the transfer agent, dividend disbursing
agent, registrar and auction agent to New Jersey Insured, New Jersey Insured II
and New Jersey Insured III, in connection with their respective AMPS, pursuant
to separate registrar, transfer agency, dividend disbursing agency and service
agreements with each of the Funds. The principal business address of The Bank of
New York in such capacity is 101 Barclay Street, New York, New York 10286.
68
<PAGE> 73
LEGAL PROCEEDINGS
There are no material legal proceedings to which any Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for the Funds by Brown & Wood LLP, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the financial
statements and financial highlights of New Jersey Insured as of July 31, 1999
and New Jersey Insured II as of May 31, 1999 as set forth in their reports which
appear in this Proxy Statement and Prospectus. The financial statements and
financial highlights of New Jersey Insured and New Jersey Insured II are
included in reliance upon their reports, given on their authority as experts in
accounting and auditing.
E&Y will serve as the independent auditors for the combined fund after the
reorganization. The principal business address of Ernst & Young LLP is 99 Wood
Avenue South, Iselin, New Jersey 08830.
STOCKHOLDER PROPOSALS
If a stockholder of any of the Funds intends to present a proposal at the
2000 Annual Meeting of Stockholders of any of the Funds, all of which are
anticipated to be held in December 2000, and desires to have the proposal
included in the Fund's proxy statement and form of proxy for that meeting, the
stockholder must deliver the proposal to the offices of the appropriate Fund by
July 9, 2000.
By Order of the Boards of Directors
WILLIAM E. ZITELLI
Secretary of MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund II, Inc. and
MuniHoldings New Jersey Insured
Fund III, Inc.
69
<PAGE> 74
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Audited Financial Statements for MuniHoldings New Jersey
Insured Fund, Inc. for the Fiscal Year Ended July 31,
1999...................................................... F-2
Audited Financial Statements for MuniHoldings New Jersey
Insured Fund II, Inc. for the Fiscal Year Ended May 31,
1999...................................................... F-15
Unaudited Financial Statements for MuniHoldings New Jersey
Insured Fund III, Inc. for the Period January 29, 1999 to
March 31, 1999............................................ F-27
Unaudited Financial Statements for Pro Forma New Jersey
Insured as of July 31, 1999............................... F-38
</TABLE>
F-1
<PAGE> 75
Audited Financial Statements for
MuniHoldings New Jersey Insured Fund, Inc.
for the Fiscal Year Ended July 31, 1999
F-2
<PAGE> 76
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniHoldings New Jersey Insured Fund, Inc.
We have audited the accompanying statement of assets, liabilities and
capital of MuniHoldings New Jersey Insured Fund, Inc., including the schedule of
investments, as of July 31, 1999, and the related statements of operations for
the year then ended, the statements of changes in net assets and financial
highlights for the year then ended and for the period from March 11, 1998
(commencement of operations) to July 31, 1998. 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 audits 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 and financial highlights. Our procedures included confirmation of
securities owned as of July 31, 1999, by correspondence with the custodian and
brokers. 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
MuniHoldings New Jersey Insured Fund, Inc., at July 31, 1999 and the results of
its operations for the year then ended, and the changes in its net assets and
the financial highlights for the indicated periods in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
August 26, 1999
F-3
<PAGE> 77
MuniHoldings New Jersey Insured Fund, Inc., July 31, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New Jersey--92.1% Bernards Township, New Jersey, School District GO:
AA A1 $ 3,205 5.30% due 1/01/2022 $ 3,185
AA A1 3,370 5.30% due 1/01/2023 3,347
----------------------------------------------------------------------------------------------------------------
AAA Aaa 3,350 Brick Township, New Jersey, Municipal Utilities Authority, Revenue Refunding
Bonds, 5% due 12/01/2016 (b) 3,251
----------------------------------------------------------------------------------------------------------------
AAA Aaa 7,000 Delaware River and Bay Authority Revenue Bonds, 5.25% due 1/01/2026 (b) 6,843
----------------------------------------------------------------------------------------------------------------
AAA Aaa 2,845 East Orange, New Jersey, Board of Education, COP, 5.36%** due 8/01/2025 (d) 675
----------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Essex County, New Jersey, Improvement Authority, Lease Revenue Refunding Bonds
(County Jail and Youth House Project), 5.35% due 12/01/2024 (a) 4,972
----------------------------------------------------------------------------------------------------------------
NR* Aaa 2,000 Essex County, New Jersey, Utilities Authority, Solid Waste Revenue Refunding
Bonds, Series A, 5% due 4/01/2022 (d) 1,911
----------------------------------------------------------------------------------------------------------------
Freehold Township, New Jersey, Board of Education, GO (d):
AAA NR* 1,455 5.40% due 7/15/2024 (i) 1,460
AAA NR* 1,540 5.40% due 7/15/2025 1,545
----------------------------------------------------------------------------------------------------------------
AAA NR* 2,550 Hudson County, New Jersey, Improvement Authority, Facility Lease Revenue
Refunding Bonds (Hudson County Lease Project), 5.40% due 10/01/2025 (b) 2,554
----------------------------------------------------------------------------------------------------------------
Metuchen, New Jersey, School District GO (b):
AAA NR* 1,185 5.20% due 9/15/2023 1,164
AAA NR* 1,245 5.20% due 9/15/2024 1,221
AAA NR* 1,315 5.20% due 9/15/2025 1,289
AAA NR* 1,385 5.20% due 9/15/2026 1,354
AAA NR* 1,460 5.20% due 9/15/2027 1,427
----------------------------------------------------------------------------------------------------------------
Middlesex County, New Jersey, COP (e):
AAA Aaa 4,855 5.25% due 6/15/2023 4,796
AAA Aaa 8,575 5.30% due 6/15/2029 8,486
----------------------------------------------------------------------------------------------------------------
BBB- NR* 4,000 New Jersey EDA, First Mortgage Revenue Refunding Bonds (Fellowship Village),
Series A, 5.50% due 1/01/2025 3,731
----------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 700 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI Corporation Project),
VRDN, AMT, Series A, 3.25% due 6/01/2026 (a)(g) 700
----------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 New Jersey EDA, Natural Gas Facilities Revenue Refunding Bonds (NUI Corporation
Project), AMT, Series A, 5.70% due 6/01/2032 (e) 5,094
----------------------------------------------------------------------------------------------------------------
New Jersey EDA, Water Facilities Revenue Bonds, RITR, AMT (f):
AAA Aaa 8,960 Series 34, 7.32% due 5/01/2032 (b) 8,700
AAA Aaa 7,400 Series 35, 7.27% due 2/01/2038 (e) 7,023
----------------------------------------------------------------------------------------------------------------
New Jersey Health Care Facilities Financing Authority, Revenue Refunding Bonds:
AAA Aaa 3,270 (AHS Hospital Corporation), Series A, 5.375% due 7/01/2019 (a) 3,260
AAA Aaa 2,750 (Cathedral Health Services), 5.25% due 8/01/2021 (c)(e) 2,680
BBB NR* 3,075 (Christian Health Care Center), Series A, 5.50% due 7/01/2018 2,909
AAA Aaa 2,000 (Meridan Health System Obligation Group), 5.25% due 7/01/2029 (d) 1,930
AAA Aaa 1,570 (Shoreline Behavioral Health Center), 5.50% due 7/01/2017 (e) 1,579
AAA Aaa 3,270 (Shoreline Behavioral Health Center), 5.50% due 7/01/2027 (e) 3,275
</TABLE>
F-4
<PAGE> 78
<TABLE>
<S> <C> <C> <C> <C> <C>
BBB Baa2 6,130 (Saint Elizabeth Hospital Obligation Group), 6% due 7/01/2027 6,139
AAA Aaa 2,340 (Virtua Health Inc.), 5.25% due 7/01/2014 (d) 2,323
----------------------------------------------------------------------------------------------------------------
AAA Aaa 6,640 New Jersey Sports and Exposition Authority, Convention Center, Luxury Tax
Revenue Refunding Bonds, 5% due 9/01/2017 (e) 6,432
----------------------------------------------------------------------------------------------------------------
AAA Aaa 5,200 New Jersey State Educational Facilities Authority Revenue Bonds (The College of
New Jersey), Series A, 5.125% due 7/01/2006 (e)(h) 5,417
----------------------------------------------------------------------------------------------------------------
New Jersey State Educational Facilities Authority, Revenue Refunding Bonds:
BBB Baa2 2,030 (Monmouth University), Series C, 5.75% due 7/01/2017 2,034
BBB Baa2 2,000 (Monmouth University), Series C, 5.80% due 7/01/2022 2,000
AAA Aaa 2,850 (University of Medicine & Dentistry), Series B, 5.25% due 12/01/2021 (a) 2,817
----------------------------------------------------------------------------------------------------------------
AAA NR* 2,730 New Jersey State Higher Education Assistance Authority, Student Loan Revenue
Bonds, AMT, Series A, 5.25% due 6/01/2018 (e) 2,658
----------------------------------------------------------------------------------------------------------------
New Jersey State Housing and Mortgage Finance Agency Revenue Bonds, Home Buyer,
AMT (e):
AAA Aaa 4,195 Series K, 6.375% due 10/01/2026 4,433
AAA Aaa 2,000 Series U, 5.60% due 10/01/2012 2,032
AAA Aaa 2,820 Series U, 5.65% due 10/01/2013 2,899
AAA Aaa 5,000 Series U, 5.85% due 4/01/2029 5,138
----------------------------------------------------------------------------------------------------------------
AAA NR* 1,200 North Hudson Sewer Authority, New Jersey, Revenue Bonds, 5.125%
due 8/01/2022 (b) 1,163
----------------------------------------------------------------------------------------------------------------
AAA Aaa 2,045 Perth Amboy, New Jersey, Board of Education, GO, Refunding, 5.25%
due 8/01/2019 (e) 2,030
----------------------------------------------------------------------------------------------------------------
AA A1 3,500 Rutgers State University, New Jersey, Revenue Bonds, Series A, 5.20%
due 5/01/2027 3,395
----------------------------------------------------------------------------------------------------------------
South Jersey Transportation Authority, New Jersey, Transportation System
Revenue Refunding Bonds (a):
AAA Aaa 1,765 5% due 11/01/2019 1,700
AAA Aaa 6,325 5% due 11/01/2029 5,985
----------------------------------------------------------------------------------------------------------------
AAA NR* 4,260 Sparta Township, New Jersey, School District, GO, Refunding, 5%
due 9/01/2020 (e) 4,099
----------------------------------------------------------------------------------------------------------------
Winslow Township, New Jersey, School District, GO (b):
AAA NR* 1,430 5.20% due 8/01/2018 1,418
AAA NR* 1,500 5.20% due 8/01/2019 1,483
----------------------------------------------------------------------------------------------------------------
</TABLE>
Portfolio To simplify the AMT Alternative Minimum Tax (subject to)
Abbreviations listings of COP Certificates of Participation
MuniHoldings New EDA Economic Development Authority
Jersey Insured Fund, GO General Obligation Bonds
Inc.'s portfolio RITR Residual Interest Trust Receipts
holdings in the VRDN Variable Rate Demand Notes
Schedule of
Investments, we have
abbreviated the names
of many of the
securities according
to the list at right.
F-5
<PAGE> 79
MuniHoldings New Jersey Insured Fund, Inc., July 31, 1999
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New York--3.2% AAA Aaa $ 5,000 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds
(JFK International Air Terminal Project), AMT, Series 6, 5.75% due 12/01/2025 (e) $ 5,089
------------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 400 Port Authority of New York and New Jersey, Special Obligation Revenue Refunding
Bonds (Versatile Structure Obligation), VRDN, Series 3, 3.25% due 6/01/2020 (g) 400
Puerto Rico--4.0% AAA Aaa 6,000 Puerto Rico Commonwealth, Infrastructure Financing Authority, Special Revenue
Bonds, Series A, 5% due 7/01/2028 (a) 5,651
------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,095 Puerto Rico Public Buildings Authority Revenue Bonds (Government Facilities),
Series B, 5% due 7/01/2027 (a) 1,031
Total Investments (Cost--$171,487)--99.3% 168,127
Variation Margin on Financial Futures Contracts--Net***--0.0% 77
Other Assets Less Liabilities--0.7% 1,096
--------
Net Assets--100.0% $169,300
========
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FHA Insured.
(d) FSA 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 July 31, 1999.
(g) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31,
1999.
(h) Prerefunded.
(i) All or a portion of security held as collateral in connection with
financial futures contracts.
See Notes to Financial Statements.
+ Highest short-term rating by Moody's Investors Service, Inc.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
*** Financial futures contracts sold as of July 31, 1999 were as follows:
--------------------------------------------------------------------------------
(in Thousands)
--------------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
--------------------------------------------------------------------------------
223 US Treasury Bonds September 1999 $25,638
--------------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$25,753) $25,638
=======
--------------------------------------------------------------------------------
Ratings of issues shown have not been audited by Ernst & Young LLP.
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of July 31, 1999 were as
follows:
----------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
----------------------------------------------------------
AAA/Aaa ........................................ 82.9%
AA/Aa .......................................... 5.9
BBB/Baa ........................................ 9.9
Other+ ......................................... 0.6
----------------------------------------------------------
+ Temporary investments in short-term municipal securities.
F-6
<PAGE> 80
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of July 31, 1999
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$171,486,819) (Note 1a) ..................... $168,126,988
Receivables:
Securities sold ................................................................... $ 6,645,022
Interest .......................................................................... 2,071,399
Variation margin (Note 1b) ........................................................ 76,656 8,793,077
------------
Deferred organization expenses (Note 1e) ............................................ 14,688
Prepaid expenses .................................................................... 9,932
------------
Total assets ........................................................................ 176,944,685
------------
Liabilities: Payables:
Securities purchased .............................................................. 7,182,302
Dividends to shareholders (Note 1f) ............................................... 173,330
Investment adviser (Note 2) ....................................................... 75,189
Custodian bank (Note 1g) .......................................................... 67,970
Offering costs (Note 1e) .......................................................... 60,000 7,558,791
------------
Accrued expenses .................................................................... 85,458
------------
Total liabilities ................................................................... 7,644,249
------------
Net Assets: Net assets .......................................................................... $169,300,436
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (2,720 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) ............... $ 68,000,000
Common Stock, par value $.10 per share (7,000,496 shares issued and outstanding) .. $ 700,050
Paid-in capital in excess of par .................................................... 103,388,100
Undistributed investment income--net ................................................ 683,924
Accumulated distribution in excess of realized capital gains on investments--net
(Note 1f) ........................................................................... (226,339)
Unrealized depreciation on investments--net ......................................... (3,245,299)
------------
Total--Equivalent to $14.47 net asset value per share of Common Stock
(market price--$13.4375) ............................................................ 101,300,436
------------
Total capital ....................................................................... $169,300,436
============
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
F-7
<PAGE> 81
MuniHoldings New Jersey Insured Fund, Inc., July 31, 1999
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended July 31, 1999
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ................... $ 9,187,631
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) .......................................... $ 967,863
Commission fees (Note 4) ................................................... 174,189
Professional fees .......................................................... 82,666
Accounting services (Note 2) ............................................... 52,712
Transfer agent fees ........................................................ 31,777
Printing and shareholder reports ........................................... 23,543
Directors' fees and expenses ............................................... 19,489
Listing fees ............................................................... 17,123
Custodian fees ............................................................. 13,805
Pricing fees ............................................................... 8,664
Amortization of organization expenses (Note 1e) ............................ 4,066
Other ...................................................................... 8,664
----------
Total expenses before reimbursement ........................................ 1,404,561
Reimbursement of expenses (Note 2) ......................................... (92,053)
----------
Total expenses after reimbursement ......................................... 1,312,508
-----------
Investment income--net ..................................................... 7,875,123
-----------
Realized & Unrealized Realized gain on investments--net .......................................... 325,337
Gain (Loss) on Change in unrealized appreciation/depreciation on investments--net ......... (4,373,963)
Investments--Net -----------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ....................... $ 3,826,497
===========
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE> 82
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year For the Period
Ended March 11, 1998+
Increase (Decrease) in Net Assets: July 31, 1999 to July 31, 1998
<S> <C> <C> <C>
Operations: Investment income--net ................................................... $ 7,875,123 $ 3,212,922
Realized gain (loss) on investments--net ................................. 325,337 (116,731)
Change in unrealized appreciation/depreciation on investments--net ....... (4,373,963) 1,128,664
------------ ------------
Net increase in net assets resulting from operations ..................... 3,826,497 4,224,855
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock ........................................................... (5,676,267) (1,809,255)
Shareholders Preferred Stock ........................................................ (2,078,554) (840,045)
(Note 1f): Realized gain on investments--net:
Common Stock ........................................................... (77,651) --
Preferred Stock ........................................................ (130,955) --
In excess of realized gain on investments--net:
Common Stock ........................................................... (226,339) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders .......................................................... (8,189,766) (2,649,300)
------------ ------------
Capital Stock Proceeds from issuance of Common Stock ................................... -- 104,025,000
Transactions Proceeds from issuance of Preferred Stock ................................ -- 68,000,000
(Notes 1e & 4): Value of shares issued to Common Stock shareholders in reinvestment of
dividends and distributions .............................................. 696,570 228,035
Offering costs resulting from the issuance of Common Stock ............... -- (190,000)
Offering and underwriting costs resulting from the issuance of
Preferred Stock .......................................................... -- (771,460)
------------ ------------
Net increase in net assets derived from capital stock transactions ....... 696,570 171,291,575
------------ ------------
Net Assets: Total increase (decrease) in net assets .................................. (3,666,699) 172,867,130
Beginning of period ...................................................... 172,967,135 100,005
------------ ------------
End of period* ........................................................... $169,300,436 $172,967,135
============ ============
* Undistributed investment income--net ..................................... $ 683,924 $ 563,622
============ ============
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
F-9
<PAGE> 83
MuniHoldings New Jersey Insured Fund, Inc., July 31, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the For the Period
Year Ended March 11, 1998+
Increase (Decrease) in Net Asset Value: July 31, 1999 to July 31, 1998
<S> <C> <C> <C>
Per Share Net asset value, beginning of period ............................... $ 15.09 $ 15.00
Operating ---------- ----------
Performance: Investment income--net ............................................. 1.13 .46
Realized and unrealized gain (loss) on investments--net ............ (.58) .16
---------- ----------
Total from investment operations ................................... .55 .62
---------- ----------
Less dividends and distributions to Common Stock shareholders:
Investment income--net ........................................... (.81) (.26)
Realized gain on investments--net ................................ (.01) --
In excess of realized gain on investments--net ................... (.03) --
---------- ----------
Total dividends and distributions to Common Stock shareholders ..... (.85) (.26)
---------- ----------
Capital charge resulting from issuance of Common Stock ............. -- (.03)
---------- ----------
Effect of Preferred Stock activity:++
Dividends and distributions to Preferred Stock shareholders:
Investment income--net ......................................... (.30) (.12)
Realized gain on investments--net .............................. (.02) --
Capital charge resulting from issuance of Preferred Stock .......... -- (.12)
---------- ----------
Total effect of Preferred Stock activity ........................... (.32) (.24)
---------- ----------
Net asset value, end of period ..................................... $ 14.47 $ 15.09
========== ==========
Market price per share, end of period .............................. $ 13.4375 $ 15.375
========== ==========
Total Investment Based on market price per share .................................... (7.44%) 4.29%++++
Return:** ========== ==========
Based on net asset value per share ................................. 1.56% 2.35%++++
========== ==========
Ratios Based on Total expenses, net of reimbursement*** ............................ 1.22% .29%*
Average Net Assets of ========== ==========
Common Stock: Total expenses*** .................................................. 1.31% 1.21%*
========== ==========
Total investment income--net*** .................................... 7.32% 8.17%*
========== ==========
Amount of dividends to Preferred Stock shareholders ................ 1.93% 2.14%*
========== ==========
Investment income--net, to Common Stock shareholders ............... 5.39% 6.03%*
========== ==========
Ratios Based on Total expenses, net of reimbursement ............................... .75% .18%*
Total Average ========== ==========
Net Assets:+++*** Total expenses ..................................................... .80% .76%*
========== ==========
Total investment income--net ....................................... 4.48% 5.13%*
========== ==========
Ratios Based on Dividends to Preferred Stock shareholders .......................... 3.04% 3.61%*
Average Net Assets of ========== ==========
Preferred Stock:
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) ... $ 101,300 $ 104,967
========== ==========
</TABLE>
F-10
<PAGE> 84
<TABLE>
<S> <C> <C> <C>
Preferred Stock outstanding, end of period (in thousands) .......... $ 68,000 $ 68,000
========== ==========
Portfolio turnover ................................................. 64.93% 32.46%
========== ==========
Leverage: Asset coverage per $1,000 .......................................... $ 2,490 $ 2,544
========== ==========
Dividends Per Share Series A--Investment income--net ................................... $ 763 $ 317
On Preferred Stock ========== ==========
Outstanding: Series B--Investment income--net ................................... $ 766 $ 300
========== ==========
</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
charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on March 30, 1998.
+++ Includes Common and Preferred Stock average net assets.
++++ Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings New Jersey Insured Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles, which may require the use of
management accruals and estimates. 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
MUJ. The following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
F-11
<PAGE> 85
MuniHoldings New Jersey Insured Fund, Inc., July 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
o Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o 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.
(e) Deferred organization and offering expenses--Deferred organization expenses
are amortized on a straight-line basis over a period not exceeding five years.
In accordance with Statement of Position 98-5, any unamortized organization
expenses will be expensed on August 1, 1999. This charge will not have any
material impact on the operations of the Fund. Direct expenses relating to the
public offering of the Fund's Common and Preferred Stock were charged to capital
at the time of issuance of the shares.
(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. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for futures transactions and post-October
losses.
(g) Custodian bank--The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft resulting from a failed trade, which settled
the next day.
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 .55% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred
F-12
<PAGE> 86
Stock. For the year ended July 31, 1999, FAM earned fees of $967,863, of which
$92,053 was voluntarily waived.
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
year ended July 31, 1999 were $112,329,676 and $114,083,407, respectively.
Net realized gains for the year ended July 31, 1999 and net unrealized gains
(losses) as of July 31, 1999 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains Gains (Losses)
--------------------------------------------------------------------------------
Long-term investments ................... $ 37,698 $(3,359,831)
Financial futures contracts ............. 287,639 114,532
----------- -----------
Total ................................... $ 325,337 $(3,245,299)
=========== ===========
--------------------------------------------------------------------------------
As of July 31, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $3,359,831, of which $229,611 related to appreciated securities and
$3,589,442 related to depreciated securities. The aggregate cost of investments
at July 31, 1999 for Federal income tax purposes was $171,486,819.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
Common Stock
Shares issued and outstanding during the year ended July 31, 1999 increased by
44,928 as a result of dividend reinvestment and during the period March 11, 1998
to July 31, 1998 increased by 6,935,000 as a result of the initial public
offering and by 13,901 as a result of dividend reinvestment.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.10 per share and a liquidation preference of $25,000
per share, 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
July 31, 1999 were Series A, 2.70% and Series B, 2.60%.
Shares issued and outstanding during the year ended July 31, 1999 remained
constant and during the period March 11, 1998 to July 31, 1998 increased by
2,720 as a result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .375%, calculated on the proceeds of each
auction. For the year ended July 31, 1999, MLPF&S earned $43,069 as commissions.
5. Reorganization Plan:
On September 9, 1999, the Fund's Board of Directors approved a plan of
reorganization whereby the Fund would acquire substantially all of the assets
and liabilities of MuniHoldings New Jersey Insured Fund II, Inc. and
MuniHoldings New Jersey Insured Fund III, Inc. in exchange for newly issued
shares of the Fund. The plan of reorganization is subject to shareholder
approval. MuniHoldings New Jersey Insured Fund II, Inc. and MuniHoldings New
Jersey Insured Fund III, Inc. are registered, non-diversified, closed-end
management investment companies. All three entities have a similar investment
objective and are managed by FAM.
6. Subsequent Event:
On August 6, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.069000 per share,
payable on August 30, 1999 to shareholders of record as of August 23, 1999.
F-13
<PAGE> 87
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings New Jersey
Insured Fund, Inc. during its taxable year ended July 31, 1999 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Additionally, the following table summarizes the taxable distributions paid by
the Fund during the year:
------------------------------------------------------------------------------
Payable Ordinary
Date Income
------------------------------------------------------------------------------
Common Stock Shareholders 12/30/98 $.043424
------------------------------------------------------------------------------
Preferred Stock Shareholders: Series A 11/17/98 $ 27.39
11/24/98 $ 21.16
----------------------------------------------
Series B 11/20/98 $ 27.39
11/27/98 $ 20.35
------------------------------------------------------------------------------
Please retain this information for your records.
YEAR 2000 ISSUES (unaudited)
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the securities in which
the Fund invests, and this could hurt the Fund's investment returns.
MANAGED DIVIDEND POLICY (unaudited)
The Fund's dividend policy is to distribute substantially all of its net
investment income to its shareholders on a monthly basis. However, in order to
provide shareholders with a more consistent yield to the current trading price
of shares of Common Stock of the Fund, the Fund may at times pay out less than
the entire amount of net investment income earned in any particular month and
may at times in any particular month pay out such accumulated but undistributed
income in addition to net investment income earned in that month. As a result,
the dividends paid by the Fund for any particular month may be more or less than
the amount of net investment income earned by the Fund during such month. The
Fund's current accumulated but undistributed net investment income, if any, is
disclosed in the Statement of Assets, Liabilities and Capital, which comprises
part of the financial information included in this report.
F-14
<PAGE> 88
Audited Financial Statements for
MuniHoldings New Jersey Insured Fund II, Inc.
for the Fiscal Year Ended May 31, 1999
F-15
<PAGE> 89
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniHoldings New Jersey Insured Fund II, Inc.
We have audited the accompanying statement of assets, liabilities and
capital of MuniHoldings New Jersey Insured Fund II, Inc., including the schedule
of investments, as of May 31, 1999, and the related statements of operations and
changes in net assets, and financial highlights for the period from September
25, 1998 (commencement of operations) to May 31, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 and financial highlights. Our procedures included confirmation of
securities owned as of May 31, 1999, by correspondence with the custodian and
brokers. 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 audit provides 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
MuniHoldings New Jersey Insured Fund II, Inc., at May 31, 1999 and the results
of its operations, the changes in its net assets and the financial highlights
for the period from September 25, 1998 to May 31, 1999, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Princeton, New Jersey
June 24, 1999
F-16
<PAGE> 90
SCHEDULE OF INVESTMENTS
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
MAY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE NOTE 1a)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NEW JERSEY -- 96.9% Atlantic City, New Jersey, Municipal Utilities Revenue
Bonds(a):
AAA Aaa $1,605 5% due 6/01/2022 $ 1,575
AAA Aaa 2,695 5% due 6/01/2029 2,630
---------------------------------------------------------------------------------------------------
NR* Aaa 2,000 Bayonne, New Jersey, Municipal Utilities Authority, Water 1,952
System Revenue Bonds, 5% due 1/01/2028(d)
---------------------------------------------------------------------------------------------------
Black Horse Pike, New Jersey, Regional School District,
GO(b):
AAA Aaa 2,370 4.75% due 12/01/2014 2,332
AAA Aaa 2,780 4.75% due 12/01/2016 2,703
AAA Aaa 1,175 4.75% due 12/01/2017 1,134
---------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Camden County, New Jersey, Improvement Authority, Revenue 1,029
Refunding Bonds (Health System -- Catholic Health East),
Series B, 5.25% due 11/15/2011(a)
---------------------------------------------------------------------------------------------------
AAA Aaa 7,040 Casino Reinvestment Development Authority, New Jersey, 7,101
Parking Fee Revenue Bonds, Series A, 5.25% due 10/01/2017(c)
---------------------------------------------------------------------------------------------------
AAA Aaa 8,900 Delaware River Port Authority of Pennsylvania and New Jersey 8,695
Revenue Bonds
(Port District Project), Series B, 5% due 1/01/2026(d)
---------------------------------------------------------------------------------------------------
AAA NR* 3,195 Hudson County, New Jersey, Improvement Authority, Facility 3,302
Lease Revenue Refunding Bonds (Hudson County Lease Project),
5.25% due 10/01/2012(b)
---------------------------------------------------------------------------------------------------
AAA Aaa 1,460 Jersey City, New Jersey, Municipal Utilities Authority, 1,519
Sewer Revenue Refunding Bonds, 5.25% due 12/01/2012(c)
---------------------------------------------------------------------------------------------------
AAA Aaa 4,250 Middlesex County, New Jersey, COP, Refunding, 5% due 4,197
2/15/2019(d)
---------------------------------------------------------------------------------------------------
AAA Aaa 2,560 Middlesex County, New Jersey, Improvement Authority, Utility 2,497
System Revenue Refunding Bonds (Perth Amboy Franchise
Project), Series A, 5% due 9/01/2029(a)
---------------------------------------------------------------------------------------------------
Montgomery Township, New Jersey, Board of Education, COP(d):
NR* Aaa 2,000 4.75% due 9/01/2018 1,924
NR* Aaa 1,100 4.875% due 9/01/2023 1,060
---------------------------------------------------------------------------------------------------
Moorestown Township, New Jersey, School District, GO(b):
AAA Aaa 1,180 4.90% due 1/01/2021 1,154
AAA Aaa 1,315 4.95% due 1/01/2023 1,291
---------------------------------------------------------------------------------------------------
AAA Aaa 1,405 New Brunswick, New Jersey, Housing Authority, Lease Revenue 1,414
Refunding Bonds (Rutgers University), 5% due 7/01/2013(b)
---------------------------------------------------------------------------------------------------
New Jersey EDA, First Mortgage Revenue Refunding Bonds
(Fellowship Village), Series A:
BBB- NR* 3,500 5.50% due 1/01/2018 3,430
BBB- NR* 3,000 5.50% due 1/01/2025 2,881
---------------------------------------------------------------------------------------------------
A1+ VMIG1++ 2,000 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI 2,000
Corporation Project), VRDN, AMT, Series A, 3.25% due
6/01/2026(a)(f)
---------------------------------------------------------------------------------------------------
AAA Aaa 1,430 New Jersey EDA, Parking Facility Revenue Bonds (Elizabeth 1,503
Development Company Project), 5.60% due 10/15/2019(b)
---------------------------------------------------------------------------------------------------
New Jersey EDA, Water Facilities Revenue Bonds, AMT:
AAA Aaa 7,000 (American Water Company Inc.), Series A, 5.25% due 6,942
7/01/2038(b)
AAA Aaa 2,500 RITR, Series 35, 7.02% due 2/01/2038(d)(e) 2,532
---------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE> 91
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A1+ VMIG1++ 400 New Jersey EDA, Water Facilities Revenue Refunding Bonds 400
(United Water New Jersey Inc. Project), VRDN, Series A,
3.35% due 11/01/2026(a)(f)
---------------------------------------------------------------------------------------------------
New Jersey Health Care Facilities Financing Authority,
Revenue Refunding Bonds:
AAA Aaa 6,750 (Atlantic Health Systems Hospital Corporation), Series A, 6,581
5% due 7/01/2027(a)
AAA Aaa 6,750 (JFK Medical Center -- Hartwyck), 5% due 7/01/2025(d) 6,586
AAA Aaa 3,000 (Medical Center at Princeton Obligation Group), 5% due 2,938
7/01/2023(a)
AAA Aaa 3,000 (Saint Barnabas Health), Series B, 5.25% due 7/01/2013(d) 3,061
NR* Aaa 605 (Saint Barnabas Medical Center), Series A, 5% due 593
7/01/2023(d)
---------------------------------------------------------------------------------------------------
New Jersey State Educational Facilities Authority Revenue
Bonds:
AAA Aaa 3,805 (Higher Education Facilities Trust Fund), Series A, 5.125% 3,949
due 9/01/2009(a)
AA+ Aaa 1,825 (Institute for Advanced Study), Series G, 5% due 7/01/2028 1,789
---------------------------------------------------------------------------------------------------
New Jersey State Higher Education Assistance Authority,
Student Loan Revenue Bonds, AMT, Series A(d):
AAA NR* 1,535 5.125% due 6/01/2014 1,536
AAA NR* 4,000 5.25% due 6/01/2018 4,009
---------------------------------------------------------------------------------------------------
AAA Aaa 2,800 New Jersey State Housing and Mortgage Finance Agency Revenue 2,930
Bonds, Home Buyer, AMT, Series U, 5.85% due 4/01/2029(d)
---------------------------------------------------------------------------------------------------
New Jersey State Housing and Mortgage Finance Agency,
Revenue Refunding Bonds, Home Buyer(d):
AAA Aaa $ 500 AMT, Series X, 5.35% due 4/01/2029 $ 503
AAA Aaa 3,000 Series V, 5.25% due 4/01/2026 3,012
---------------------------------------------------------------------------------------------------
AAA NR* 3,280 Port Authority of New York and New Jersey, Revenue Bonds, 3,381
RIB, Series 50, 7.109% due 1/15/2032(d)(e)
---------------------------------------------------------------------------------------------------
A1+ VMIG1++ 3,700 Port Authority of New York and New Jersey, Special 3,700
Obligation Revenue Refunding Bonds (Versatile Structure
Obligation), VRDN, Series 3, 3.35% due 6/01/2020(f)
---------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Rutgers State University, New Jersey, Revenue Bonds, Series 2,813
A, 4.75% due 5/01/2029(a)
---------------------------------------------------------------------------------------------------
South Jersey Transportation Authority, New Jersey,
Transportation System Revenue Bonds(a):
AAA Aaa 4,000 5% due 11/01/2017 3,962
AAA Aaa 1,900 5.125% due 11/01/2022 1,888
---------------------------------------------------------------------------------------------------
NR* Aaa 6,880 Union County, New Jersey, Utilities Authority, RITR, AMT, 7,164
Series 38, 7.07% due 6/01/2020(a)(e)
---------------------------------------------------------------------------------------------------
Union County, New Jersey, Utilities Authority, Revenue
Refunding Bonds, AMT(a):
AAA Aaa 5,500 County Deficiency, Series A-2, 5% due 6/15/2028 5,328
AAA Aaa 5,000 Senior Lease (Ogden Martin), Series A, 5% due 6/01/2014 4,943
---------------------------------------------------------------------------------------------------
Wall Township, New Jersey, School District, GO(c):
AAA Aaa 2,250 4.50% due 7/15/2018 2,091
AAA Aaa 2,640 4.75% due 7/15/2022 2,517
---------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO To simplify the listings of MuniHoldings New Jersey Insured
ABBREVIATIONS 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 at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
F-18
<PAGE> 92
SCHEDULE OF INVESTMENTS (CONCLUDED)
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
MAY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE NOTE 1a)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PUERTO RICO -- 4.7% AAA Aaa 640 Puerto Rico Commonwealth, GO, 5.40% due 7/01/2025(a) 651
---------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Puerto Rico Electric Power Authority, Power Revenue Bonds, 5,830
Series DD, 5% due 7/01/2028(d)
---------------------------------------------------------------------------------------------------
AAA Aaa 500 Puerto Rico Public Buildings Authority Revenue Bonds 486
(Government Facilities), Series B, 5% due 7/01/2027(a)
---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST -- $152,256) -- 101.6% 149,438
LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.6%) (2,343)
--------
NET ASSETS -- 100.0% $147,095
========
</TABLE>
---------------
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) 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
May 31, 1999.
(f) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at May 31, 1999.
* Not Rated.
++ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements
QUALITY PROFILE
The quality ratings of securities in the Fund as of May 31, 1999 were as
follows:
<TABLE>
<CAPTION>
S&P RATING/MOODY'S RATING PERCENT OF NET ASSETS
------------------------------------------------
<S> <C>
AAA/Aaa 93.2%
BBB/Baa 4.3
Other+ 4.1
</TABLE>
---------------
+ Temporary investments in short-term municipal securities.
F-19
<PAGE> 93
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AS OF MAY 31, 1999
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $152,255,917)
(Note 1a)................................................. $149,437,717
Cash........................................................ 83,177
Receivables:
Securities sold........................................... $ 5,302,112
Interest.................................................. 2,709,605 8,011,717
-----------
Deferred organization expenses (Note 1e).................... 10,796
Prepaid expenses and other assets........................... 13,879
------------
Total assets................................................ 157,557,286
------------
LIABILITIES:
Payables:
Securities purchased...................................... 10,059,368
Dividends to shareholders (Note 1f)....................... 189,531
Offering costs (Note 1e).................................. 101,128
Investment adviser (Note 2)............................... 43,655 10,393,682
-----------
Accrued expenses and other liabilities...................... 68,358
------------
Total liabilities........................................... 10,462,040
------------
NET ASSETS:
Net assets.................................................. $147,095,246
============
CAPITAL:
Capital Stock (200,000,000 shares authorized)(Note 4):
Preferred Stock, par value $.10 per share (2,400 shares of
AMPS* issued and outstanding at $25,000 per share
liquidation preference)................................. $ 60,000,000
Common Stock, par value $.10 per share (6,151,635 shares
issued and outstanding)................................. $ 615,164
Paid-in capital in excess of par............................ 90,851,407
Undistributed investment income -- net...................... 401,833
Accumulated realized capital losses on investments -- net
(Note 5).................................................. (1,954,958)
Unrealized depreciation on investments -- net............... (2,818,200)
-----------
Total -- Equivalent to $14.16 net asset value per share of
Common Stock
(market price -- $12.9375)................................ 87,095,246
------------
Total capital............................................... $147,095,246
============
</TABLE>
--------------------------------------------------------------------------------
* Auction Market Preferred Stock.
See Notes to Financial Statements.
F-20
<PAGE> 94
STATEMENT OF OPERATIONS
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.,
MAY 31, 1999
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 25, 1998+
TO MAY 31, 1999
-------------------
<S> <C>
INVESTMENT INCOME (NOTE 1d):
Interest and amortization of premium and discount
earned.................................................. $ 4,887,915
EXPENSES:
Investment advisory fees (Note 2)......................... $ 531,241
Commission fees (Note 4).................................. 90,936
Accounting services (Note 2).............................. 36,517
Professional fees......................................... 33,676
Transfer agent fees....................................... 25,830
Directors' fees and expenses.............................. 18,332
Listing fees.............................................. 10,913
Printing and shareholder reports.......................... 9,271
Custodian fees............................................ 6,747
Pricing fees.............................................. 2,821
Amortization of organization expenses (Note 1e)........... 2,454
Other..................................................... 4,218
-----------
Total expenses before reimbursement....................... 772,956
Reimbursement of expenses (Note 2)........................ (375,291)
-----------
Total expenses after reimbursement........................ 397,665
-----------
Investment income -- net.................................. 4,490,250
-----------
REALIZED & UNREALIZED LOSS ON INVESTMENTS -- NET (NOTES 1b,
1d & 3):
Realized loss on investments -- net....................... (1,954,958)
Unrealized depreciation on investments -- net............. (2,818,200)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (282,908)
===========
</TABLE>
--------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
F-21
<PAGE> 95
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 25, 1998+
TO MAY 31, 1999
-------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Investment income -- net.................................... $ 4,490,250
Realized loss on investments -- net......................... (1,954,958)
Unrealized depreciation on investments -- net............... (2,818,200)
------------
Net decrease in net assets resulting from operations........ (282,908)
------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1f):
Investment income -- net:
Common Stock.............................................. (2,894,873)
Preferred Stock........................................... (1,193,544)
------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (4,088,417)
------------
CAPITAL STOCK TRANSACTIONS (NOTES 1e & 4):
Proceeds from issuance of Common Stock...................... 91,425,000
Proceeds from issuance of Preferred Stock................... 60,000,000
Value of shares issued to Common Stock shareholders in
reinvestment of dividends................................. 735,916
Offering costs resulting from the issuance of Common
Stock..................................................... (200,945)
Offering and underwriting costs resulting from the issuance
of Preferred Stock........................................ (593,405)
------------
Net increase in net assets derived from capital stock
transactions.............................................. 151,366,566
------------
NET ASSETS:
Total increase in net assets................................ 146,995,241
Beginning of period......................................... 100,005
------------
End of period*.............................................. $147,095,246
============
*Undistributed investment income -- net..................... $ 401,833
============
</TABLE>
--------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
F-22
<PAGE> 96
FINANCIAL HIGHLIGHTS
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.,
MAY 31, 1999
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 25, 1998+
TO MAY 31, 1999
-------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 15.00
--------
Investment income -- net.................................... .73
Realized and unrealized loss on investments -- net.......... (.78)
--------
Total from investment operations............................ (.05)
--------
Less dividends to Common Stock shareholders:
Investment income -- net.................................. (.47)
--------
Capital charge resulting from issuance of Common Stock...... (.03)
--------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net................................ (.19)
Capital charge resulting from issuance of Preferred
Stock.................................................. (.10)
--------
Total effect of Preferred Stock activity.................... (.29)
--------
Net asset value, end of period.............................. $ 14.16
--------
Market price per share, end of period....................... $12.9375
========
TOTAL INVESTMENT RETURN:**
Based on market price per share............................. (10.88%)+++
--------
Based on net asset value per share.......................... (2.46%)+++
========
RATIOS BASED ON AVERAGE NET ASSETS OF COMMON STOCK:
Total expenses, net of reimbursement***..................... .66%*
--------
Total expenses***........................................... 1.29%*
--------
Total investment income -- net***........................... 7.49%*
--------
Amount of dividends to Preferred Stock shareholders......... 1.99%*
--------
Investment income -- net, to Common Stock shareholders...... 5.50%*
========
RATIOS BASED ON TOTAL AVERAGE NET ASSETS:++++***
Expenses, net of reimbursement.............................. .41%*
--------
Total expenses.............................................. .80%*
--------
Total investment income -- net.............................. 4.65%*
========
RATIOS BASED ON AVERAGE NET ASSETS OF PREFERRED STOCK:
Dividends to Preferred Stock shareholders................... 3.26%*
========
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of period (in
thousands)................................................ $ 87,095
--------
Preferred Stock outstanding, end of period (in thousands)... $ 60,000
--------
Portfolio turnover.......................................... 92.47%
========
LEVERAGE:
Asset coverage per $1,000................................... $ 2,452
========
F-23
<PAGE> 97
DIVIDEND PER SHARE ON PREFERRED STOCK OUTSTANDING:
Series A -- Investment income -- net........................ $ 489
========
Series B -- Investment income -- net........................ $ 506
========
</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.
++ The Fund's Preferred Stock was issued on October 19, 1998.
+++ Aggregate total investment return.
++++ Includes Common and Preferred Stock average net assets.
See Notes to Financial Statements.
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniHoldings New Jersey 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's financial statements are prepared in
accordance with generally accepted accounting principles which may require the
use of management accruals and estimates. Prior to commencement of operations on
September 25, 1998, the Fund had no operations other than those relating to
organizational matters and the sale of 6,667 shares of Common Stock on September
18, 1998 to Fund Asset Management, L.P. ("FAM") for $100,005. The Fund
determines and makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol MWJ. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities and assets 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 fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
- Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts for the purpose
of hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific price
or yield. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
- Options -- The Fund is authorized to write covered call options and
purchase 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.
F-24
<PAGE> 98
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
MAY 31, 1999
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.
(e) Deferred organization and offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a period not exceeding five
years. In accordance with Statement of Position 98-5, any unamortized
organization expenses will be expensed on the first day of the next fiscal year
beginning after December 15, 1998. This charge will not have any material impact
on the operations of the Fund. Direct expenses relating to the public offering
of the Fund's Common and Preferred Stock were charged to capital at the time of
issuance of the shares.
(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 FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net assets,
including proceeds from the issuance of Preferred Stock. For the period
September 25, 1998 to May 31, 1999, FAM earned fees of $531,241, of which
$357,632 was voluntarily waived. In addition, FAM also reimbursed the Fund
$17,659 in additional expenses.
During the period September 25, 1998 to May 31, 1999, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, received
underwriting fees of $450,000 in connection with the issuance of the Fund's
Preferred Stock.
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 period September 25, 1998 to May 31, 1999 were $266,501,824 and
$118,294,800, respectively.
Net realized gains (losses) for the period September 25, 1998 to May 31,
1999 and net unrealized losses as of May 31, 1999 were as follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS (LOSSES) LOSSES
-------------- -----------
<S> <C> <C>
Long-term investments..................................... $(1,958,932) $(2,818,200)
Financial futures contracts............................... 3,974 --
----------- -----------
Total..................................................... $(1,954,958) $(2,818,200)
=========== ===========
</TABLE>
F-25
<PAGE> 99
As of May 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $2,818,200, of which $25,680 related to appreciated and
$2,843,880 related to depreciated securities. The aggregate cost of investments
at May 31, 1999 for Federal income tax purposes was $152,255,917.
4. CAPITAL STOCK TRANSACTIONS:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
COMMON STOCK
Shares issued and outstanding during the period September 25, 1998 to May
31, 1999 increased by 6,095,000 as a result of the initial offering and by
49,968 as a result of dividend reinvestment.
PREFERRED STOCK
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of
the Fund, with a par value of $.10 per share and a liquidation preference of
$25,000 per share, 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 May 31, 1999 were as follows: Series A, 3.20% and Series B, 3.30%.
In connection with the offering of AMPS, the Board of Directors
reclassified 2,400 shares of unissued capital stock as AMPS. Shares issued and
outstanding during the period September 25, 1998 to May 31, 1999 increased by
2,400 as a result of the AMPS offering.
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 period September 25, 1998 to May 31, 1999,
MLPF&S, an affiliate of FAM, earned $73,944 as commissions.
5. CAPITAL LOSS CARRYFORWARD:
At May 31, 1999, the Fund had a net capital loss carryforward of
approximately $523,000, all of which expires in 2007. This amount will be
available to offset like amounts of any future taxable gains.
6. SUBSEQUENT EVENT:
On June 9, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.060907 per share,
payable on June 29, 1999 to shareholders of record as of June 23, 1999.
F-26
<PAGE> 100
Unaudited Financial Statements for
MuniHoldings New Jersey Insured Fund III, Inc.
for the Period January 29, 1999 to March 31, 1999
F-27
<PAGE> 101
SCHEDULE OF INVESTMENTS
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NEW JERSEY -- 89.9% Essex County, New Jersey, GO, General Improvement(a):
NR* Aaa $ 3,250 5% due 8/01/2008 $ 3,433
NR* Aaa 6,250 5% due 8/01/2009 6,590
----------------------------------------------------------------------------------------------------
NR* Aaa 2,825 Lacey Municipal Utilities Authority, New Jersey, Water 2,885
Revenue Refunding Bonds, 5.20% due 12/01/2024(d)
----------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Lenape, New Jersey, Regional High School District, GO, 5% 3,000
due 4/01/2020(b)
----------------------------------------------------------------------------------------------------
AAA NR* 1,120 Metuchen, New Jersey, School District, GO, UT, 5.20% due 1,134
9/15/2022(b)
----------------------------------------------------------------------------------------------------
AAA Aaa 5,500 Middlesex County, New Jersey, Improvement Authority, Utility 5,474
System Revenue Refunding Bonds (Perth Amboy Franchise
Project), Series A, 5% due 9/01/2029(a)
----------------------------------------------------------------------------------------------------
NR* Aaa 5,000 Mount Holly, New Jersey, Municipal Utilities Authority, 4,778
Sewer Revenue Bonds, 4.75% due 12/01/2028(d)
----------------------------------------------------------------------------------------------------
AAA Aaa 5,015 New Brunswick, New Jersey, Housing Authority, Lease Revenue 4,733
Refunding Bonds (Rutgers University), 4.625% due
7/01/2024(b)
----------------------------------------------------------------------------------------------------
A1+ VMIG1+ 1,200 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI 1,200
Corporation Project), VRDN, AMT, Series A, 2.90% due
6/01/2026(a)(e)
----------------------------------------------------------------------------------------------------
AAA Aaa 2,975 New Jersey EDA, Natural Gas Facilities Revenue Refunding 3,159
Bonds (NUI Corporation Projects), AMT, Series A, 5.70% due
6/01/2032(d)
----------------------------------------------------------------------------------------------------
AAA Aaa 4,400 New Jersey EDA, Revenue Refunding Bonds (Educational Testing 4,203
Service), Series A, 4.75% due 5/15/2025(d)
----------------------------------------------------------------------------------------------------
AAA Aaa 2,000 New Jersey EDA, Water Facilities Revenue Bonds (United Water 1,963
New Jersey Inc. Project), AMT, 5% due 11/01/2028(a)
----------------------------------------------------------------------------------------------------
A1+ VMIG1+ 100 New Jersey EDA, Water Facilities Revenue Refunding Bonds 100
(United Water New Jersey Inc. Project), VRDN, Series A,
2.15% due 11/01/2026(a)(e)
----------------------------------------------------------------------------------------------------
AAA Aaa 5,000 New Jersey Health Care Facilities Financing Authority 4,730
Revenue Bonds (Catholic Health East), Series E, 4.75% due
11/15/2029(a)
----------------------------------------------------------------------------------------------------
New Jersey Health Care Facilities Financing Authority,
Revenue Refunding Bonds:
AAA Aaa 5,500 (Centrastate Medical Center Obligation Group), 4.50% due 5,009
7/01/2028(a)
AAA Aaa 2,125 (Hackensack University Medical Center), Series A, 5% due 2,099
1/01/2028(d)
AAA Aaa 2,265 (Virtua Health Issue), 4.75% due 7/01/2018(c) 2,187
----------------------------------------------------------------------------------------------------
A1+ VMIG1+ 1,800 New Jersey Sports and Exposition Authority, State Contract 1,800
Revenue Bonds, VRDN, Series C, 2.80% due 9/01/2024(d)(e)
----------------------------------------------------------------------------------------------------
AA+ Aaa 1,000 New Jersey State Educational Facilities Authority Revenue 995
Bonds (Institute for Advanced Study), Series G, 5% due
7/01/2028
----------------------------------------------------------------------------------------------------
AAA Aaa 2,730 New Jersey State Educational Facilities Authority, Revenue 2,557
Refunding Bonds (Ramapo College), Series G, 4.625% due
7/01/2028(a)
----------------------------------------------------------------------------------------------------
AAA NR* 2,500 New Jersey State Housing and Mortgage Finance Agency, M/F 2,469
Housing Revenue Bonds, RITR, AMT, Series 110, 6.915% due
11/01/2030(c)(f)
----------------------------------------------------------------------------------------------------
New Jersey State Housing and Mortgage Finance Agency Revenue
Bonds (Home Buyer)(d):
AAA Aaa 2,000 AMT, Series K, 6.375% due 10/01/2026 2,142
AAA Aaa 2,000 AMT, Series M, 6.95% due 10/01/2022 2,182
---------------------------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE> 102
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AAA Aaa 2,000 AMT, Series M, 7% due 10/01/2026 2,179
AAA Aaa 3,000 Series L, 6.65% due 10/01/2014 3,272
----------------------------------------------------------------------------------------------------
AAA Aaa 6,680 New Jersey State Housing and Mortgage Finance Agency Revenue 6,749
Refunding Bonds (Home Buyer), AMT, Series X, 5.25% due
10/01/2018(d)
----------------------------------------------------------------------------------------------------
New Jersey State Transportation Trust Fund Authority,
Transportation System Revenue Bonds, Series A:
AA- Aa2 5,000 5.25% due 6/15/2008 5,346
AAA Aaa 2,500 4.50% due 6/15/2019(c) 2,351
----------------------------------------------------------------------------------------------------
Ocean County, New Jersey, Utilities Authority, Wastewater
Revenue Refunding Bonds, Series A:
NR* Aa2 1,700 4.35% due 1/01/2011 1,667
NR* Aa2 2,005 4.45% due 1/01/2012 1,970
NR* Aa2 2,055 4.65% due 1/01/2014 2,032
----------------------------------------------------------------------------------------------------
NR* Aaa 1,000 Plainfield, New Jersey, Municipal Utilities Authority, Sewer 962
Revenue Bonds, Series A, 4.75% due 12/15/2023(c)
----------------------------------------------------------------------------------------------------
NR* Aaa 1,000 Plainfield, New Jersey, Municipal Utilities Authority, Solid 962
Waste Revenue Bonds, Series A, 4.75% due 12/15/2023(c)
----------------------------------------------------------------------------------------------------
Port Authority of New York and New Jersey, Special
Obligation Revenue Refunding Bonds (Versatile Structure
Obligation), VRDN(e):
NR* VMIG1+ 100 AMT, Series 6, 3.05% due 12/01/2017 $ 100
A1+ VMIG1+ 400 Series 2, 2.90% due 5/01/2019 400
A1+ VMIG1+ 1,500 Series 3, 2.85% due 6/01/2020 1,500
----------------------------------------------------------------------------------------------------
AA A1 5,500 Rutgers State University, New Jersey, Series A, 4.75% due 5,238
5/01/2029
----------------------------------------------------------------------------------------------------
A1+ P1 200 Union County, New Jersey, Industrial Pollution Control 200
Financing Authority, PCR, Refunding (Exxon Project), VRDN,
2.40% due 10/01/2024(e)
----------------------------------------------------------------------------------------------------
Union County, New Jersey, Utilities Authority Revenue
Refunding Bonds (County Deficiency):
AAA Aaa 4,500 AMT, Series A-2, 5% due 6/15/2028(a) 4,422
AA+ Aaa 3,250 Series C-1, 5% due 6/15/2028 3,235
----------------------------------------------------------------------------------------------------
AAA Aaa 1,685 Wall Township, New Jersey, School District, GO, 4.75% due 1,623
7/15/2023(c)
----------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO To simplify the listings of MuniHoldings New Jersey Insured
ABBREVIATIONS Fund III, Inc.'s portfolio holdings in the Schedule of
Investments, we have abbreviated the names of many of the
securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
EDA Economic Development Authority
GO General Obligation Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
UT Unlimited Tax
VRDN Variable Rate Demand Notes
F-29
<PAGE> 103
SCHEDULE OF INVESTMENTS (CONCLUDED)
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
S&P MOODY'S FACE VALUE
STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PENNSYLVANIA -- 9.3%
Delaware River Port Authority of Pennsylvania and New Jersey
Revenue Refunding Bonds, Series B(a):
AAA Aaa 5,090 5.25% due 1/01/2006 5,429
AAA Aaa 5,795 5.25% due 1/01/2009 6,196
----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST -- $125,270) -- 99.2% 124,655
VARIATION MARGIN ON FINANCIAL FUTURES CONTRACTS** -- 0.0% 47
OTHER ASSETS LESS LIABILITIES -- 0.8% 989
--------
NET ASSETS -- 100.0% $125,691
========
</TABLE>
---------------
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at March 31,
1999.
(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 March 31, 1999.
+ Highest short-term ratings by Moody's Investors Service, Inc.
* Not Rated.
** Financial futures contracts purchased as of March 31, 1999 were as follows:
See Notes to Financial Statements.
<TABLE>
<CAPTION>
(IN THOUSANDS)
NUMBER VALUE
OF CONTRACTS ISSUE EXPIRATION DATE (NOTES 1a & 1b)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
100 US Treasury Bonds June 1999 $12,359
------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT
PRICE -- $12,303) $12,359
------------------------------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE> 104
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
AS OF MARCH 31, 1999
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $125,269,858)
(Note 1a)................................................. $124,655,007
Cash........................................................ 23,365
Receivables:
Securities sold........................................... $ 4,807,425
Interest.................................................. 1,944,329
Variation margin (Note 1b)................................ 46,875
Investment adviser (Note 2)............................... 15,352
------------
6,813,981
Other assets................................................ 22,125
------------
Total assets................................................ 131,514,478
------------
LIABILITIES:
Payables:
Securities purchased...................................... 5,442,038
Offering costs (Note 1e).................................. 137,500
Dividends to shareholders (Note 1f)....................... 29,478 5,609,016
------------
Accrued expenses and other liabilities...................... 214,160
------------
Total liabilities........................................... 5,823,176
------------
NET ASSETS:
Net assets.................................................. $125,691,302
============
CAPITAL:
Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (1,880 shares of
AMPS* issued and outstanding at $25,000 per share
liquidation preference)................................. $ 47,000,000
Common Stock, par value $.10 per share (5,297,667 shares
issued and outstanding)................................. $ 529,767
Paid-in capital in excess of par............................ 78,216,291
Undistributed investment income -- net...................... 678,779
Accumulated realized capital losses on investments -- net... (62,434)
Unrealized depreciation on investments -- net............... (671,101)
------------
Total -- Equivalent to $14.85 net asset value per share of
Common Stock
(market price -- $14.25).................................. 78,691,302
------------
Total capital............................................... $125,691,302
============
</TABLE>
--------------------------------------------------------------------------------
* Auction Market Preferred Stock.
See Notes to Financial Statements.
F-31
<PAGE> 105
STATEMENT OF OPERATIONS
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.,
MARCH 31, 1999
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 29, 1999+
TO MARCH 31, 1999
-----------------
<S> <C>
INVESTMENT INCOME (NOTE 1d):
Interest and amortization of premium and discount
earned.................................................. $ 859,505
EXPENSES:
Investment advisory fees (Note 2)......................... $ 88,631
Commission fees (Note 4).................................. 14,596
Accounting services (Note 2).............................. 6,786
Professional fees......................................... 5,131
Directors' fees and expenses.............................. 3,725
Transfer agent fees....................................... 3,722
Listing fees.............................................. 2,213
Custodian fees............................................ 1,636
Printing and shareholder reports.......................... 1,314
Pricing fees.............................................. 836
Other..................................................... 1,188
---------
Total expenses before reimbursement....................... 129,778
Reimbursement of expenses (Note 2)........................ (103,983)
---------
Total expenses after reimbursement........................ 25,795
---------
Investment income -- net.................................. 833,710
---------
REALIZED & UNREALIZED LOSS ON INVESTMENTS -- NET (NOTES 1b,
1d & 3):
Realized loss on investments -- net....................... (62,434)
Unrealized depreciation on investments -- net............. (671,101)
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 100,175
=========
</TABLE>
--------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
F-32
<PAGE> 106
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 29, 1999+
TO MARCH 31, 1999
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Investment income -- net.................................... $ 833,710
Realized loss on investments -- net......................... (62,434)
Unrealized depreciation on investments -- net............... (671,101)
------------
Net increase in net assets resulting from operations........ 100,175
------------
DIVIDENDS TO SHAREHOLDERS (NOTE 1f):
Investment income -- net to Preferred Stock shareholders.... (154,931)
------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (154,931)
------------
CAPITAL STOCK TRANSACTIONS (NOTES 1e & 4):
Proceeds from issuance of Common Stock...................... 79,365,000
Proceeds from issuance of Preferred Stock................... 47,000,000
Offering costs resulting from the issuance of Common
Stock..................................................... (223,447)
Offering and underwriting costs resulting from the issuance
of Preferred Stock........................................ (495,500)
------------
Net increase in net assets derived from capital stock
transactions.............................................. 125,646,053
------------
NET ASSETS:
Total increase in net assets................................ 125,591,297
Beginning of period......................................... 100,005
------------
End of period*.............................................. $125,691,302
============
*Undistributed investment income -- net..................... $ 678,779
============
</TABLE>
--------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
F-33
<PAGE> 107
FINANCIAL HIGHLIGHTS
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.,
MARCH 31, 1999
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 29, 1999+
TO MARCH 31, 1999
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 15.00
-------
Investment income -- net.................................... 16
Realized and unrealized loss on investments -- net.......... (.13)
-------
Total from investment operations............................ .03
-------
Capital charge resulting from issuance of Common Stock...... (.05)
-------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net................................ (.03)
Capital charge resulting from issuance of Preferred
Stock.................................................. (.10)
-------
Total effect of Preferred Stock activity.................... (.13)
-------
Net asset value, end of period.............................. $ 14.85
-------
Market price per share, end of period....................... $ 14.25
=======
TOTAL INVESTMENT RETURN:**
Based on market price per share............................. (5.00%)+++
-------
Based on net asset value per share.......................... (1.00%)+++
=======
RATIOS TO AVERAGE NET ASSETS:***
Expenses, net of reimbursement.............................. .16%*
-------
Expenses.................................................... 81%*
-------
Investment income -- net.................................... 5.17%*
=======
SUPPLEMENTAL DATA:
Net assets, net of Preferred Stock, end of period (in
thousands)................................................ $78,691
-------
Preferred Stock outstanding, end of period (in thousands)... $47,000
-------
Portfolio turnover.......................................... 32.08%
=======
LEVERAGE:
Asset coverage per $1,000................................... $ 2,674
=======
DIVIDENDS PER SHARE ON PREFERRED STOCK OUTSTANDING:
Investment income -- net.................................... $ 82
=======
</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.
++ The Fund's Preferred Stock was issued on February 22, 1999.
+++ Aggregate total investment return.
See Notes to Financial Statements.
F-34
<PAGE> 108
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniHoldings New Jersey Insured Fund III, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund's financial statements are prepared in
accordance with generally accepted accounting principles which may require the
use of management accruals and estimates. 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. Prior to commencement of
operations on January 29, 1999, the Fund had no operations other than those
relating to organizational matters and the sale of 6,667 shares of Common Stock
on January 13, 1999, to Fund Asset Management, L.P. ("FAM") for $100,005. The
Fund determines and makes available for publication the net asset value of its
Common Stock on a weekly basis. The Fund's Common Stock is listed on the New
York Stock Exchange under the symbol MNJ. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
- Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts for the purpose
of hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific price
or yield. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
- Options -- The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an
F-35
<PAGE> 109
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.
(e) Offering expenses -- Direct expenses relating to the public offering of
the Fund's Common and Preferred Stock were charged to capital at the time of
issuance of the shares.
(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 FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net assets
including proceeds from the issuance of Preferred Stock. For the period January
29, 1999 to March 31, 1999, FAM earned fees of $88,631, all of which was
voluntarily waived. FAM also reimbursed the Fund additional expenses of $15,352.
During the period January 29, 1999 to March 31, 1999, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S") received underwriting fees of
$352,500 in connection with the issuance of the Fund's Preferred Stock.
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 period January 29, 1999 to March 31, 1999 were $149,627,487 and $29,387,770,
respectively.
Net realized gains (losses) for the period January 29, 1999 to March 31,
1999 and net unrealized losses as of March 31, 1999 were as follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS (LOSSES) LOSSES
-------------- ----------
<S> <C> <C>
Long-term investments....................................... $(246,629) $(614,851)
Foreign financial futures................................... 184,195 (56,250)
--------- ---------
Total....................................................... $ (62,434) $(671,101)
========= =========
</TABLE>
As of March 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $614,851 of which $21,952 related to appreciated securities
and $636,803 related to depreciated securities. The aggregate cost of
investments at March 31, 1999 for Federal income tax purposes was $125,269,858.
F-36
<PAGE> 110
4. CAPITAL STOCK TRANSACTIONS:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
COMMON STOCK
Shares issued and outstanding during the period January 29, 1999 to March
31, 1999 increased by 5,291,000 from shares sold.
PREFERRED STOCK
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of
the Fund, with a par value of $.10 per share and a liquidation preference of
$25,000 per share, 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 March 31, 1999 was 3.27%.
In connection with the offering of AMPS, the Board of Directors
reclassified 1,880 shares of unissued capital stock as AMPS. Shares issued and
outstanding during the period January 29, 1999 to March 31, 1999 increased by
1,880 as a result of the AMPS offering.
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 period January 29, 1999 to March 31, 1999,
MLPF&S, an affiliate of FAM, earned $8,785 as commissions.
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute substantially all of its net
investment income to its shareholders on a monthly basis. However, in order to
provide shareholders with a more consistent yield to the current trading price
of shares of Common Stock of the Fund, the Fund may at times pay out less than
the entire amount of net investment income earned in any particular month and
may at times in any particular month pay out such accumulated but undistributed
income in addition to net investment income earned in that month. As a result,
the dividends paid by the Fund for any particular month may be more or less than
the amount of net investment income earned by the Fund during such month. The
Fund's current accumulated but undistributed net investment income, if any, is
disclosed in the Statement of Assets, Liabilities and Capital, which comprises
part of the financial information included in this report.
QUALITY PROFILE
The quality ratings of securities in the Fund as of March 31, 1999 were as
follows:
<TABLE>
<CAPTION>
PERCENT OF
S&P RATING/MOODY'S RATING NET ASSETS
------------------------- ----------
<S> <C>
AAA/Aaa..................................................... 82.0%
AA/Aa....................................................... 13.0
Other+...................................................... 4.2
</TABLE>
+ Temporary investments in short-term municipal securities.
F-37
<PAGE> 111
Unaudited Financial Statements for
Pro Forma New Jersey Insured
as of July 31, 1999
F-38
<PAGE> 112
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.,
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC. AND
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
JULY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
S&P MOODY'S FACE NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
RATINGS RATINGS AMOUNT ISSUE INSURED ++ INSURED II++ INSURED III++ INSURED++
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NEW JERSEY -- 94.7%
Atlantic City, New Jersey, Municipal
Utilities Revenue Bonds(a):
AAA Aaa $ 1,605 5% due 6/01/2022 -- $ 1,533 -- $ 1,533
AAA Aaa 2,695 5% due 6/01/2029 -- 2,551 -- 2,551
--------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 2,000 Bayonne, New Jersey, Municipal Utilities 1,896 -- 1,896
Authority, Water System Revenue Bonds, 5%
due 1/01/2028(e)
--------------------------------------------------------------------------------------------------------------------------------
Bernards Township, New Jersey, School
District GO:
AA A1 3,205 5.30% due 1/01/2022 $ 3,185 -- -- 3,185
AA A1 3,370 5.30% due 1/01/2023 3,347 -- -- 3,347
--------------------------------------------------------------------------------------------------------------------------------
Black Horse Pike, New Jersey, Regional
School District, GO(b):
AAA Aaa 2,370 4.75% due 12/01/2014 -- 2,261 -- 2,261
AAA Aaa 1,175 4.75% due 12/01/2017 -- 1,097 -- 1,097
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 3,350 Brick Township, New Jersey, Municipal 3,251 -- -- 3,251
Utilities Authority, Revenue Refunding
Bonds, 5% due 12/01/2016(b)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Camden County, New Jersey, Improvement -- 1,008 -- 1,008
Authority Revenue Refunding Bonds (Health
System -- Catholic Health East), Series
B, 5.25% due 11/15/2011(a)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,040 Casino Reinvestment Development -- 7,007 -- 7,007
Authority, New Jersey, Parking Fee
Revenue Bonds, Series A, 5.25% due
10/01/2017(d)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,000 Delaware River and Bay Authority Revenue 6,843 -- -- 6,843
Bonds, 5.25% due 1/01/2026(b)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 8,900 Delaware River Port Authority of -- 8,449 -- 8,449
Pennsylvania and New Jersey Revenue Bonds
(Port District Project), Series B, 5% due
1/01/2026(e)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,845 East Orange, New Jersey, Board of 675 -- -- 675
Education COP, 0% due 8/01/2025(d)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Essex County, New Jersey, Improvement 4,972 -- -- 4,972
Authority Lease Revenue Refunding Bonds
(County Jail and Youth House Project),
5.35% due 12/01/2024(a)
--------------------------------------------------------------------------------------------------------------------------------
NR Aaa 2,000 Essex County, New Jersey, Utilities 1,911 -- -- 1,911
Authority, Solid Waste Revenue Refunding
Bonds, Series A, 5% due 4/01/2022(d)
--------------------------------------------------------------------------------------------------------------------------------
Freehold Township, New Jersey, Board of
Education, GO:
AAA NR* 1,455 5.40% due 7/15/2024(d) 1,460 -- -- 1,460
AAA NR* 1,540 5.40% due 7/15/2025(d) 1,545 -- -- 1,545
--------------------------------------------------------------------------------------------------------------------------------
AAA NR* 3,195 Hudson County, New Jersey, Improvement -- 3,233 -- 3,233
Authority, Facility Lease Revenue
Refunding Bonds (Hudson County Lease
Project), 5.25% due 10/01/2012(b)
--------------------------------------------------------------------------------------------------------------------------------
AAA NR* 2,550 Hudson County, New Jersey, Improvement 2,554 -- -- 2,554
Authority, Lease Revenue Refunding Bonds
(Hudson County Lease Project), 5.40% due
10/01/2025(b)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 1,460 Jersey City, New Jersey, Municipal -- 1,488 -- 1,488
Utilities Authority, Sewer Revenue
Refunding Bonds, 5.25% due 12/01/2012(d)
--------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 2,825 Lacey Municipal Utilities Authority, New -- -- $ 2,759 2,759
Jersey Water Revenue Refunding Bonds,
5.20% due 12/01/2024(e)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-39
<PAGE> 113
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.,
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC. AND
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC. -- (CONTINUED)
JULY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
S&P MOODY'S FACE NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
RATINGS RATINGS AMOUNT ISSUE INSURED ++ INSURED II++ INSURED III++ INSURED++
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa $ 3,000 Lenape, New Jersey, Regional High School -- -- $ 2,888 $ 2,888
District, GO, 5% due 4/01/2020(b)
--------------------------------------------------------------------------------------------------------------------------------
Metuchen, New Jersey, School District GO:
AAA NR* 1,185 5.20% due 9/15/2023 $ 1,164 1,164
AAA NR* 1,245 5.20% due 9/15/2024 1,221 1,221
AAA NR* 1,315 5.20% due 9/15/2025 1,289 -- -- 1,289
AAA NR* 1,385 5.20% due 9/15/2026 1,354 -- -- 1,354
AAA NR* 1,460 5.20% due 9/15/2027 1,427 -- -- 1,427
--------------------------------------------------------------------------------------------------------------------------------
Middlesex County, New Jersey, COP:
AAA Aaa 4,855 5.25% due 6/15/2023(e) 4,796 -- -- 4,796
AAA Aaa 8,575 5.30% due 6/15/2029(e) 8,486 -- -- 8,486
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,250 Middlesex County, New Jersey, COP, -- $ 4,081 4,081
Refunding, 5% due 2/15/2019(e)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 8,060 Middlesex County, New Jersey, Improvement -- 2,423 5,206 7,629
Authority, Utility System Revenue
Refunding Bonds (Perth Amboy Franchise
Project), Series A, 5% due 9/01/2029(a)
--------------------------------------------------------------------------------------------------------------------------------
Montgomery Township, New Jersey, Board of
Education, COP(e):
NR* Aaa 2,000 4.75% due 9/01/2018 -- 1,858 -- 1,858
NR* Aaa 1,100 4.875% due 9/01/2023 -- 1,020 -- 1,020
--------------------------------------------------------------------------------------------------------------------------------
Moorestown Township, New Jersey, School
District, GO(b):
AAA Aaa 1,180 4.90% due 1/01/2021 -- 1,109 -- 1,109
AAA Aaa 1,315 4.95% due 1/01/2023 -- 1,243 -- 1,243
--------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 Mount Holly, New Jersey, Municipal -- -- 4,504 4,504
Utilities Authority, Sewer Revenue Bonds,
4.75% due 12/01/2028(e)
--------------------------------------------------------------------------------------------------------------------------------
New Brunswick, New Jersey, Housing
Authority, Lease Revenue Refunding Bonds
(Rutgers University)(b)
AAA Aaa 1,405 5% due 7/01/2013 -- 1,388 -- 1,388
AAA Aaa 5,015 4.625% due 7/01/2024 -- -- 4,436 4,436
--------------------------------------------------------------------------------------------------------------------------------
BBB- NR* 10,000 New Jersey EDA, First Mortgage Revenue 3,731 5,596 9,327
Refunding Bonds (Fellowship Village),
Series A, 5.50% due 1/01/2025
--------------------------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 1,100 New Jersey EDA, Natural Gas Facilities 700 200 200 1,100
Revenue Bonds (NUI Corporation Project),
VRDN, AMT, Series A, 3.30% due
6/01/2026(a)(g)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 7,975 New Jersey EDA, Natural Gas Facilities 5,094 -- 3,031 8,125
Revenue Refunding Bonds (NUI Corporation
Projects), AMT, Series A, 5.70% due
6/01/2032(e)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,400 New Jersey EDA Revenue Refunding Bonds -- -- 3,987 3,987
(Educational Testing Service), Series A,
4.75% due 5/15/2025(e)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 13,000 New Jersey EDA, Water Facilities Revenue -- 6,709 5,751 12,460
Bonds (American Water Company Inc.), AMT,
Series A, 5.25% due 7/01/2038(b)
--------------------------------------------------------------------------------------------------------------------------------
New Jersey EDA, Water Facilities Revenue
Bonds, RITR, AMT(f):
AAA Aaa 8,960 Series 34, 7.52% due 5/01/2032(b) 8,700 -- -- 8,700
AAA Aaa 9,900 Series 35, 7.47% due 2/01/2038(e) 7,023 2,373 -- 9,396
--------------------------------------------------------------------------------------------------------------------------------
New Jersey EDA, Water Facilities Revenue
Refunding Bonds (United Water New Jersey
Inc. Project)(a):
AAA Aaa+ 2,000 AMT, 5% due 11/01/2028 -- -- 1,872 1,872
A-1+ VMIG1+ 200 VRDN, Series A, 2.95% due 11/01/2026(g) -- 200 -- 200
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-40
<PAGE> 114
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.,
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC. AND
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC. -- (CONTINUED)
JULY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
S&P MOODY'S FACE NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
RATINGS RATINGS AMOUNT ISSUE INSURED ++ INSURED II++ INSURED III++ INSURED++
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa $ 5,000 New Jersey Health Care Facilities -- -- $ 4,456 $ 4,456
Financing Authority Revenue Bonds
(Catholic Health East), Series E, 4.75%
due 11/15/2029(a)
--------------------------------------------------------------------------------------------------------------------------------
New Jersey Health Care Facilities
Financing Authority Revenue Refunding
Bonds:
AAA Aaa 3,270 (AHS Hospital Corporation), Series A, $ 3,260 -- -- 3,260
5.375% due 7/01/2019(a)
AAA Aaa 6,750 (Atlantic Health Systems Hospital -- $ 6,344 -- 6,344
Corporation), Series A, 5% due
7/01/2027(a)
AAA Aaa 2,750 (Barnert Hospital), 5% due -- -- 2,590 2,590
8/01/2025(c)(e)
AAA Aaa 2,750 (Cathedral Health Services), 5.25% due 2,680 -- -- 2,680
8/01/2021(c)(e)
AAA Aaa 5,500 (Centrastate Medical Center Obligation -- 2,956 1,689 4,645
Group), 4.50% due 7/01/2028(a)
BBB NR* 3,075 (Christian Heatlh Care Center), Series 2,909 -- -- 2,909
A, 5.50% due 7/01/2018
AAA Aaa 2,125 (Hackensack University Medical Center), -- -- 1,996 1,996
Series A, 5% due 1/01/2028 (e)
AAA Aaa 6,750 (JFK Medical Center--Hartwyck), 5% due -- 6,357 -- 6,357
7/01/2025(e)
AAA Aaa 3,000 (Medical Center at Princeton Obligation -- 2,840 -- 2,840
Group), 5% due 7/01/2023(a)
AAA Aaa 7,140 (Meridan Health System Obligation -- 3,515 3,514 7,029
Group), 5.375% due 7/01/2024(d)
AAA Aaa 2,000 (Meridan Health System Obligation 1,930 -- -- 1,930
Group), 5.25% due 7/01/2029(d)
NR* Aaa 605 (Saint Barnabas Medicial Center), -- 573 -- 573
Series A, 5% due 7/01/2023(e)
BBB Baa2 6,130 (Saint Elizabeth Hospital Obligation 6,139 -- -- 6,139
Group), 6% due 7/01/2027
AAA Aaa 1,570 (Shorline Behavioral Health Center), 1,579 -- -- 1,579
5.50% due 7/01/2017(e)
AAA Aaa 3,270 (Shorline Behavioral Health Center), 3,275 -- -- 3,275
5.50% due 7/01/2027(e)
AAA Aaa 4,605 (Virtua Health Inc. Issue), 5.25% due 2,323 -- 2,079 4,402
7/01/2014(d)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,640 New Jersey Sports and Exposition 6,432 -- -- 6,432
Authority, Convention Center, Luxury Tax
Revenue Refunding Bonds, 5% due
9/01/2017(e)
--------------------------------------------------------------------------------------------------------------------------------
New Jersey State Educational Facilities
Authority Revenue Bonds
AA+ Aaa 2,825 (Institute for Advanced Study), Series 2,660 -- 2,660
G, 5% due 7/01/2028
AAA Aaa 5,200 (The College of New Jersey), Series A, 5,417 -- -- 5,417
5.125% due 7/01/2006(e)(h)
--------------------------------------------------------------------------------------------------------------------------------
New Jersey State Educational Facilities
Authority Revenue Bonds (University of
Medical Dentistry of New Jersey), Series
C(a):
AAA Aaa 1,000 5.20% due 12/01/2019 -- -- 992 992
AAA Aaa 2,700 5.125% due 12/01/2029 -- -- 2,597 2,597
--------------------------------------------------------------------------------------------------------------------------------
New Jersey State Educational Facilities
Authority Revenue Refunding Bonds:
BBB Baa2 2,030 (Monmouth University), Series C, 5.75% 2,034 -- -- 2,034
due 7/01/2017
BBB Baa2 2,000 (Monmouth University), Series C, 5.80% 2,000 -- -- 2,000
due 7/01/2022
AAA Aaa 2,730 (Ramapo College), Series G, 4.625% due -- 2,375 -- 2,375
7/01/2028(a)
AAA Aaa 2,850 (University of Medicine & Dentistry), 2,817 -- -- 2,817
Series B, 5.25% due 12/01/2021(a)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-41
<PAGE> 115
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.,
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC. AND
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC. -- (CONTINUED)
JULY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
S&P MOODY'S FACE NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
RATINGS RATINGS AMOUNT ISSUE INSURED ++ INSURED II++ INSURED III++ INSURED++
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
New Jersey State Higher Education
Assistance Authority, Student Loan
Revenue Bonds, AMT, Series A(e)
AAA NR* $ 1,185 5.05% due 6/01/2012 -- -- $ 1,163 $ 1,163
AAA NR 1,000 5.10% due 6/01/2013 -- -- 980 980
AAA NR* 1,535 5.125% due 6/01/2014 -- $ 1,501 -- 1,501
AAA NR 11,230 5.25% due 6/01/2018 $ 2,658 3,895 4,382 10,935
--------------------------------------------------------------------------------------------------------------------------------
New Jersey State Housing and Mortgage
Finance Agency Revenue Bonds, Home
Buyer(e):
AAA Aaa 6,195 AMT, Series K, 6.375% due 10/01/2026 4,433 -- 2,114 6,547
AAA Aaa 2,000 AMT, Series M, 6.95% due 10/01/2022 -- -- 2,152 2,152
AAA Aaa 2,000 AMT, Series M, 7% due 10/01/2026 -- -- 2,154 2,154
AAA Aaa 2,000 AMT, Series U, 5.60% due 10/01/2012 2,032 -- -- 2,032
AAA Aaa 2,820 AMT, Series U, 5.65% due 10/01/2013 2,899 -- -- 2,899
AAA Aaa 7,800 AMT, Series U, 5.85% due 4/01/2029 5,138 2,878 -- 8,016
AAA Aaa 3,000 Series L, 6.65% due 10/01/2014 3,228 3,228
--------------------------------------------------------------------------------------------------------------------------------
New Jersey State Housing and Mortgage
Finance Agency Revenue Refunding Bonds,
Home Buyer(e):
AAA Aaa 2,440 AMT, Series S, 5.95% due 10/01/2017 -- 1,271 1,271 2,542
AAA Aaa 6,680 AMT, Series X, 5.25% due 10/01/2018 -- -- 6,537 6,537
AAA Aaa 2,500 AMT, Series X, 5.35% due 4/01/2029 -- 1,461 974 2,435
AAA Aaa 3,000 Series V, 5.25% due 4/01/2026 -- 2,924 -- 2,924
--------------------------------------------------------------------------------------------------------------------------------
AAA NR* 2,500 New Jersey State Housing and Mortgage -- -- 2,283 2,283
Finance Agency, M/F Housing Revenue
Bonds, RITR, AMT, Series 110, 6.765% due
11/01/2030(d)(f)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 New Jersey State Transportation Trust -- -- 2,219 2,219
Fund Authority Revenue Bonds,
Transportation System, Series A, 4.50%
due 6/15/2019(d):
--------------------------------------------------------------------------------------------------------------------------------
AAA NR* 1,200 North Hudson, New Jersey, Sewer Authority 1,163 -- -- 1,163
Revenue Bonds, 5.125% due 8/01/2022(b)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 2,045 Perth Amboy, New Jersey, Refunding (Board 2,030 -- -- 2,030
of Education), GO, 5.25% due 8/01/2019(e)
--------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 1,000 Plainfield, New Jersey Municipal -- -- 910 910
Utilities Authority, Solid Waste Revenue
Bonds, Series A, 4.75% due 12/15/2023(d)
--------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 1,000 Plainfield, New Jersey, Municipal -- -- 910 910
Utilities Authority, Sewer Revenue Bonds,
Series A, 4.75% due 12/15/2023(d)
--------------------------------------------------------------------------------------------------------------------------------
AAA NR* 3,280 Port Authority of New York and New -- 3,147 -- 3,147
Jersey, Revenue Bonds, RIB, Series 50,
7.269% due 1/15/2032(e)(f)
--------------------------------------------------------------------------------------------------------------------------------
A-1+ VMIG1+ 3,900 Port Authority of New York and New -- 2,100 1,800 3,900
Jersey, Special Obligation Revenue
Refunding Bonds (Versatile Structure
Obligation), VRDN, Series 3, 3.25% due
6/01/2020(g)
--------------------------------------------------------------------------------------------------------------------------------
Rancocas Valley, New Jersey, Regional
High School District, GO(b):
AAA Aaa 1,000 5.30% due 2/01/2022 -- 996 -- 996
AAA Aaa 1,105 5.30% due 2/01/2024 -- -- 1,100 1,100
AAA Aaa 1,220 5.30% due 2/01/2026 -- 1,211 -- 1,211
AAA Aaa 1,345 5.30% due 2/01/2028 -- -- 1,335 1,335
--------------------------------------------------------------------------------------------------------------------------------
Rutgers State University, New Jersey,
Revenue Bonds, Series A:
AA A1 3,500 5.20% due 5/01/2027 3,395 -- -- 3,395
AAA Aaa 8,500 4.75% due 5/01/2029(a) -- 2,696 4,936 7,632
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-42
<PAGE> 116
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.,
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC. AND
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC. -- (CONTINUED)
JULY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
S&P MOODY'S FACE NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
RATINGS RATINGS AMOUNT ISSUE INSURED ++ INSURED II++ INSURED III++ INSURED++
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa $ 3,000 Salem County New Jersey Industrial -- -- $ 3,012 $ 3,012
Pollution Control Financing Authority
Revenue Refunding Pollution Control
Public Service Electric & Gas Series C,
5.55% due 11/01/2033(e)
--------------------------------------------------------------------------------------------------------------------------------
South Jersey Transportation Authority,
New Jersey, Transportation System Revenue
Bonds(a):
AAA Aaa 4,000 5% due 11/01/2017 -- $ 3,883 -- 3,883
AAA Aaa 7,935 5.125% due 11/01/2022 -- 1,841 5,847 7,688
--------------------------------------------------------------------------------------------------------------------------------
South Jersey Transportation Authority,
New Jersey, Transportation System Revenue
Refunding Bonds(a):
AAA Aaa 1,765 5% due 11/01/2019 $ 1,700 -- -- 1,700
AAA Aaa 6,325 5% due 11/01/2029 5,985 -- -- 5,985
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 4,260 Sparta Township, New Jersey, School 4,099 -- -- 4,099
District, GO, Refunding, 5% due
9/01/2020(e)
--------------------------------------------------------------------------------------------------------------------------------
Union County, New Jersey, Utilities
Authority Revenue Refunding Bonds,
AMT(a):
AAA Aaa 5,500 County Deficiency, AMT, Series A-2, 5% -- 5,149 -- 5,149
due 6/15/2028
AAA Aaa 3,000 Senior Lease (Ogden Martin), AMT, -- 2,896 -- 2,896
Series A, 5% due 6/01/2014
AAA Aaa 3,100 Sub-Lease (Ogden Martin), Series A, -- -- 3,050 3,050
5.35% due 6/01/2023
--------------------------------------------------------------------------------------------------------------------------------
Union County, New Jersey, Utilities
Authority Revenue Refunding Bonds, County
Deficiency:
AAA Aaa 4,500 AMT, Series A-2, 5% due 6/15/2028(a) -- -- 4,213 4,213
AA+ Aaa 3,250 Series C-1, 5% due 6/15/2028 -- -- 3,065 3,065
--------------------------------------------------------------------------------------------------------------------------------
NR* Aaa 6,880 Union County, New Jersey, Utilities -- 6,923 -- 6,923
Authority, RITR, Series 38, 7.32% due
6/01/2020(f)
--------------------------------------------------------------------------------------------------------------------------------
Wall Township, New Jersey, School
District, GO(d):
AAA Aaa 2,250 4.50% due 7/15/2018 -- 2,014 -- 2,014
AAA Aaa 2,640 4.75% due 7/15/2022 -- 2,414 -- 2,414
AAA Aaa 1,685 4.75% due 7/15/2023 -- -- 1,537 1,537
--------------------------------------------------------------------------------------------------------------------------------
Winslow Township, New Jersey, School
District, GO(b):
AAA NR* 1,430 5.20% due 8/01/2018 1,418 -- -- 1,418
AAA NR* 1,500 5.20% due 8/01/2019 1,483 -- -- 1,483
--------------------------------------------------------------------------------------------------------------------------------
NEW YORK -- 1.3%
AAA Aaa 5,000 Port Authority of New York and New 5,089 -- -- 5,089
Jersey, Special Obligation Revenue Bonds
(JFK International Air Terminal Project),
AMT, Series 6, 5.75% due 12/01/2025(e)
--------------------------------------------------------------------------------------------------------------------------------
A-1+ VMIG+ 400 Port Authority of New York and New 400 -- -- 400
Jersey, Special Obligation Revenue
Refunding Bonds (Versatile Structure
Obligation), VRDN, Series 3, 3.25% due
6/01/2020(g)
--------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 0.7%
AAA Aaa 2,795 Delaware River Port Authority of -- -- 2,874 2,874
Pennsylvania and New Jersey Revenue
Refunding Bonds, Series B 5.25% due
1/01/2009(a):
--------------------------------------------------------------------------------------------------------------------------------
PUERTO RICO -- 2.8%
AAA Aaa 6,000 Puerto Rico Commonwealth, Infrastructure 5,651 -- -- 5,651
Financing Authority, Special Revenue
Bonds, Series A, 5% due 7/01/2028(a)
--------------------------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Puerto Rico Electric Power Authority, -- 5,642 -- 5,642
Power Revenue Bonds, Series DD, 5% due
7/01/2028(e)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-43
<PAGE> 117
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.,
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC. AND
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC. -- (CONCLUDED)
JULY 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
S&P MOODY'S FACE NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
RATINGS RATINGS AMOUNT ISSUE INSURED ++ INSURED II++ INSURED III++ INSURED++
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa $ 1,095 Puerto Rico Public Buildings Authority $ 1,031 -- -- $ 1,031
Revenue Bonds (Government Facilities),
Series B, 5% due 7/01/2027(a)
--------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 168,127 $141,185 $118,593 427,905
(COST -- $442,453) -- 99.5%
VARIATION MARGIN ON FINANCIAL FUTURES 77 353 296 726
CONTRACTS+++ -- 0.2%
OTHER ASSETS LESS LIABILITIES -- 0.3% 1,096 1,177 828 1,146
-------- -------- -------- --------
NET ASSETS -- 100.0% $169,300 $142,715 $119,717 $429,777
======== ======== ======== ========
</TABLE>
---------------
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FHA Insured.
(d) FSA 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
July 31, 1999.
(g) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at July 31,
1999.
(h) Prerefunded.
(i) All or a portion of security held as collateral in connection with financial
futures contracts.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
++ Value as discussed in the Combined Notes to Pro Forma Financial Statements.
+++ Financial futures contracts sold as of July 31, 1999 were as follows:
<TABLE>
<CAPTION>
NUMBER VALUE
OF CONTRACTS ISSUE EXPIRATION DATE (NOTES 1a & 1b)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
618 US Treasury Bonds September 1999 $71,051
------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS SOLD (TOTAL CONTRACT
PRICE -- $71,292) $71,051
------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
PORTFOLIO To simplify the listings of MuniHoldings New Jersey Insured
ABBREVIATIONS Fund, Inc.'s portfolio holdings in the Schedule of
Investments, we have abbreviated the names of many of the
securities according to the list below.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
RITR Residual Interest Trust Receipts
VRDN Variable Rate Demand Notes
</TABLE>
See Notes to Financial Statements.
F-44
<PAGE> 118
The following unaudited pro forma Combined Statement of Assets, Liabilities
and Capital has been derived from the Statements of Assets, Liabilities and
Capital of the respective Funds at July 31, 1999 and such information has been
adjusted to give effect to the Reorganization as if the Reorganization had
occurred at July 31, 1999. 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 July 31, 1999. 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 the Joint Proxy Statement and Prospectus.
PRO FORMA COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
FOR MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.,
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.,
AND MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
AS OF JULY 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
INSURED INSURED II INSURED III ADJUSTMENTS INSURED
------------ ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a)....... $168,126,988 $141,184,561 $118,592,933 $427,904,482
Cash................................... 0 0 1,797,589 1,797,589
Receivables:
Securities sold...................... 6,645,022 200,412 0 6,845,434
Interest............................. 2,071,399 1,640,741 1,412,377 5,124,517
Variation margin (Note 1b)........... 76,656 352,764 296,370 725,790
Prepaid expenses and other assets...... 24,620 13,878 19,000 57,498
------------ ------------ ------------ ------------ ------------
Total assets........................... 176,944,685 143,392,356 122,118,269 442,455,310
------------ ------------ ------------ ------------ ------------
LIABILITIES:
Payables:
Securities purchased................. 7,182,302 0 2,003,973 9,186,275
Custodian bank (Note 1g)............. 67,970 229,900 0 297,870
Offering costs (Note 1e)............. 60,000 101,129 196,487 357,616
Dividends to shareholders (Note
1f)................................ 173,330 166,125 146,604 1,559,377(1) 2,045,436
Investment adviser (Note 2).......... 75,189 46,575 10,224 131,988
Accrued expenses and other
liabilities.......................... 85,458 133,840 44,291 396,000(2) 659,589
------------ ------------ ------------ ------------ ------------
Total liabilities...................... 7,644,249 677,569 2,401,579 1,955,377 12,678,774
------------ ------------ ------------ ------------ ------------
NET ASSETS:
Net Assets............................. $169,300,436 $142,714,787 $119,716,690 $ (1,955,377) $429,776,536
============ ============ ============ ============ ============
</TABLE>
F-45
<PAGE> 119
<TABLE>
<CAPTION>
PRO FORMA
NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
INSURED INSURED II INSURED III ADJUSTMENTS INSURED
------------ ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CAPITAL
Capital Stock (200,000,000 shares
authorized) Preferred Stock, par
value $.10 per share of AMPS** issued
and outstanding+ at $25,000 per share
liquidation preference............... $ 68,000,000 $ 60,000,000 $ 47,000,000 $175,000,000
Common Stock, par value $.10 per share,
issued and outstanding++............. 700,050 615,164 529,767 (69,592) 1,775,389
Paid-in capital in excess of par....... 103,388,100 90,851,406 78,216,291 (326,408) 272,129,389
Undistributed investment
income -- net........................ 683,924 455,375 420,078 (1,559,377) 0
Accumulated realized capital losses on
investments -- net................... 0 (2,874,919) (1,749,826) (4,624,745)
Accumulated distributions in excess of
realized capital gains on
investments -- net (Note 1f)......... (226,339) 0 0 (226,339)
Unrealized depreciation on
investments -- net................... (3,245,299) (6,332,239) (4,699,620) (14,277,158)
------------ ------------ ------------ ------------ ------------
Total Capital+++....................... $169,300,436 $142,714,787 $119,716,690 $ (1,955,377) $429,776,536
============ ============ ============ ============ ============
--------------------------------------------------------------------------------------------------------------------
* Identified Cost.................... $171,486,819 $147,584,925 $123,351,303 -- $442,423,047
============ ============ ============ ============ ============
+ Shares issued and outstanding...... 2,720 2,400 1,880 -- 7,000
============ ============ ============ ============ ============
++ Shares issued and outstanding...... 7,000,496 6,151,635 5,297,667 (695,909) 17,753,889
============ ============ ============ ============ ============
+++ Net asset value per share of Common
Stock.............................. $ 14.47 $ 13.45 $ 13.73 -- $ 14.35
============ ============ ============ ============ ============
</TABLE>
--------------------------------------------------------------------------------
** Auction Market Preferred Stock.
(1) Assumes the distribution of undistributed net investment income.
(2) Reflects the charge for estimated Reorganization expenses of $396,000.
See Notes to Financial Statements.
F-46
<PAGE> 120
The following unaudited pro forma Combined Statement of Operations has been
derived from the statement of operations of the respective Funds for the periods
indicated through July 31, 1999 and such information has been adjusted to give
effect to the Reorganization as if the Reorganization had occurred on August 1,
1998. 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 August 1, 1998 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
the Joint Proxy Statement and Prospectus.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.,
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.,
AND MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
NEW JERSEY NEW JERSEY NEW JERSEY
INSURED INSURED II INSURED III
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD PRO FORMA
AUGUST 1, 1998 SEPTEMBER 25, 1998+ JANUARY 29, 1999+ NEW JERSEY
TO JULY 31, 1999 TO JULY 31, 1999 TO JULY 31, 1999 ADJUSTMENTS INSURED
---------------- ------------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (NOTE
1D):
Interest and amortization
of premium and discount
earned................. $ 9,187,631 $ 6,169,909 $ 2,924,830 $ 18,282,370
----------- ----------- ----------- ---------- ------------
EXPENSES:
Investment advisory fees
(Note 2)............... 882,358 655,724 295,620 1,833,702
Commission fees.......... 174,189 117,583 53,125 344,897
Professional fees........ 82,666 45,577 21,295 (66,338)(1) 83,200
Accounting services (Note
2)..................... 52,712 41,465 17,520 (45,797)(1) 65,900
Transfer agent fees...... 31,777 33,721 13,547 79,045
Directors' fees and
expenses............... 19,489 21,541 13,702 (35,243)(1) 19,489
Printing and shareholder
reports................ 23,544 13,846 8,349 (12,539)(1) 33,200
Listing fees............. 17,123 13,743 7,743 38,609
Custodian fees........... 13,805 8,893 4,046 26,744
Pricing fees............. 8,664 3,354 3,330 15,348
Amortization of
organization expenses
(Note 1e).............. 4,066 2,454 -- (6,520) --
Organization expense..... -- 1,889 -- (1,889) --
Other.................... 8,663 7,226 3,795 19,684
----------- ----------- ----------- ---------- ------------
Total expenses before
reimbursement.......... 1,319,056 967,016 442,072 (168,326) 2,559,818
Reimbursement of expenses
(Note 2)............... (6,548) (409,241) (283,714) (699,503)
----------- ----------- ----------- ---------- ------------
Total expenses after
reimbursement.......... 1,312,508 557,775 158,358 (168,326) 1,860,315
----------- ----------- ----------- ---------- ------------
Investment
income -- net.......... 7,875,123 5,612,134 2,766,472 168,326 16,422,055
----------- ----------- ----------- ---------- ------------
</TABLE>
F-47
<PAGE> 121
<TABLE>
<CAPTION>
NEW JERSEY NEW JERSEY NEW JERSEY
INSURED INSURED II INSURED III
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD PRO FORMA
AUGUST 1, 1998 SEPTEMBER 25, 1998+ JANUARY 29, 1999+ NEW JERSEY
TO JULY 31, 1999 TO JULY 31, 1999 TO JULY 31, 1999 ADJUSTMENTS INSURED
---------------- ------------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REALIZED & UNREALIZED GAIN
(LOSS) ON INVESTMENTS --
NET (NOTES 1b & 1d)
Realized gain (loss) on
investments -- net..... 325,337 (2,874,919) (1,749,825) (4,299,407)
Change in unrealized
appreciation/depreciation
on
investments -- net..... (4,373,964) (6,332,239) (4,699,621) (15,405,824)
----------- ----------- ----------- ---------- ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS............... $ 3,826,496 $(3,595,024) $(3,682,974) $ 168,326 $ (3,283,176)
=========== =========== =========== ========== ============
</TABLE>
---------------
+ Commencement of operations.
(1) Reflects the anticipated savings as a result of the Reorganization through
fewer audits and consolidation of printing, accounting and other services.
(2) This Pro Forma Combined Statement of Operations excludes non-recurring
estimated Reorganization expenses of $396,000.
F-48
<PAGE> 122
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC., MUNIHOLDINGS NEW JERSEY
INSURED FUND II, INC. AND MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
MuniHoldings New Jersey Insured Fund, Inc. (the "Fund," which term as used
herein shall refer to MuniHoldings New Jersey Insured Fund, Inc. after giving
effect to the Reorganization) is registered under the Investment Company Act of
1940 as a non-diversified, closed-end management investment company. The Fund's
pro forma financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management accruals
and estimates. These pro forma 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. The Fund will
determine and make 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 MWJ. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the debt markets. Losses may arise due to changes
in the value of the contract or if the counterparty does not perform under the
contract.
- Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts for the purpose
of hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific price
or yield. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
- Options -- The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
F-49
<PAGE> 123
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
securities transactions are determined on the identified cost basis.
(e) Deferred organization and offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a period not exceeding five
years. In accordance with Statement of Position 98-5, any unamortized
organization expenses will be expensed on the first day of the next fiscal year
beginning after December 15, 1998. This charge will not have any material impact
on the operations of the Fund. Direct expenses relating to the public offering
of the Fund's common and preferred shares were charged to capital at the time of
issuance of the shares.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distribution of capital gains are recorded on the
ex-dividend dates. Distributions in excess of realized capital gains on
investments are due primarily to differing tax treatments for futures
transactions and post-October losses.
(g) Custodian bank -- The MuniHoldings New Jersey Insured Fund, Inc. and
MuniHoldings New Jersey Insured Fund II, Inc., recorded an amount payable to the
custodian bank reflecting an overnight overdraft, which resulted from timing
differences of security transaction settlements.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.55% of the Fund's average weekly net assets,
including proceeds from the issuance of Preferred Stock.
For MuniHoldings New Jersey Insured Fund, Inc., FAM earned fees of $882,358
for the fiscal year-ended July 31, 1999, of which $6,548 was voluntarily waived.
For MuniHoldings New Jersey Insured Fund II, Inc., FAM earned fees of $655,724
for the period September 25, 1998 (commencement of operations) to July 31, 1999,
of which $327,632 was voluntarily waived. In addition FAM also reimbursed
MuniHoldings New Jersey Insured Fund II, Inc. $81,609 in additional expenses.
For MuniHoldings New Jersey Insured Fund III, Inc., FAM earned fees of $295,620
for the period January 29, 1999 (commencement of operations) to July 31, 1999,
of which $283,714 was voluntarily waived.
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.
F-50
<PAGE> 124
EXHIBIT I
INFORMATION PERTAINING TO EACH FUND
GENERAL INFORMATION PERTAINING TO THE FUNDS
<TABLE>
<CAPTION>
FISCAL
DEFINED TERM YEAR STATE OF MEETING
FUND USED IN EXHIBIT I END ORGANIZATION TIME
---- ---------------------- -------- ------------ ----------
<S> <C> <C> <C> <C>
MuniHoldings New Jersey Insured Fund,
Inc. ................................. New Jersey Insured 7/31 MD 12:00 p.m.
MuniHoldings New Jersey Insured Fund II,
Inc. ................................. New Jersey Insured II 5/31 MD 12:15 p.m.
MuniHoldings New Jersey Insured Fund
III, Inc. ............................ New Jersey Insured III 9/30 MD 12:30 p.m.
</TABLE>
<TABLE>
<CAPTION>
SHARES OF CAPITAL STOCK
OUTSTANDING AS OF
THE RECORD DATE
------------------------
FUND COMMON STOCK AMPS
---- ------------ ----
<S> <C> <C>
New Jersey Insured.......................................... 7,000,496 2,720
New Jersey Insured II....................................... 6,151,635 2,400
New Jersey Insured III...................................... 5,297,667 1,880
</TABLE>
INFORMATION PERTAINING TO OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
YEAR IN WHICH EACH NOMINEE OF EACH FUND
BECAME A MEMBER OF THE BOARD
-----------------------------------------------------------
FUND FORBES GLENN MONTGOMERY REILLY RYAN WEST ZEIKEL
---- ------ ----- ---------- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
New Jersey Insured....................... 1998 1999 1998 1998 1998 1998 1998
New Jersey Insured II.................... 1998 1999 1998 1998 1998 1998 1998
New Jersey Insured III................... 1999 1999 1999 1999 1999 1999 1999
</TABLE>
Set forth in the table below is information regarding board and committee
meetings held and the aggregate fees and expenses paid by the Fund to
non-affiliated Board members during each Fund's most recently completed fiscal
year.
<TABLE>
<CAPTION>
BOARD AUDIT COMMITTEE
------------------------------- ---------------------------------
# # AGGREGATE
MEETINGS ANNUAL PER MEETING MEETINGS ANNUAL PER MEETING FEES AND
FUND HELD* FEE($) FEE($)*** HELD FEE($)** FEE($) EXPENSES($)
---- -------- ------ ----------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
New Jersey Insured....... 4 2,000 200 4 800 0 19,489
New Jersey Insured II.... 4 2,000 200 4 800 0 18,332
New Jersey Insured III... 4 2,000 200 4 800 0 18,329
</TABLE>
---------------
* Includes meetings held via teleconferencing equipment.
** The Chairman of the Audit Committee receives an annual fee of $1,000.
*** The fee is payable for each meeting attended in person. A fee is not paid
for telephonic meetings.
I-1
<PAGE> 125
Set forth in the table below is information regarding compensation paid by
the Fund to the non-affiliated Board members for the most recently completed
fiscal year.
<TABLE>
<CAPTION>
COMPENSATION FROM EACH FUND($)*
--------------------------------------------
FUND FORBES MONTGOMERY REILLY RYAN WEST
---- ------ ---------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
New Jersey Insured................................... 3,600 3,600 4,600 3,600 3,600
New Jersey Insured II................................ 3,400 3,400 4,400 3,400 3,400
New Jersey Insured III............................... 3,600 3,600 4,600 3,600 3,600
</TABLE>
---------------
* No pension or retirement benefits are accrued as part of Fund expenses.
Set forth in the table below is information regarding the aggregate
compensation paid by all registered investment companies advised by FAM and its
affiliate, MLAM ("FAM/MLAM Advised Funds"), including the Funds, to the
non-affiliated Board members for the year ended December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM FAM/MLAM
NAME OF BOARD MEMBER ADVISED FUNDS PAID TO BOARD MEMBERS($)(*)
-------------------- -----------------------------------------
<S> <C>
Ronald W. Forbes.......................................... 192,567
Cynthia A. Montgomery..................................... 192,567
Charles C. Reilly......................................... 362,858
Kevin A. Ryan............................................. 192,567
Richard R. West........................................... 346,125
</TABLE>
---------------
* The Directors serve on the boards of FAM/MLAM-advised funds as follows: Mr.
Forbes (42 registered investment companies consisting of 55 portfolios); Ms.
Montgomery (42 registered investment companies consisting of 55 portfolios);
Mr. Reilly (60 registered investment companies consisting of 73 portfolios);
Mr. Ryan (42 registered investment companies consisting of 55 portfolios); and
Mr. West (62 registered investment companies consisting of 86 portfolios).
Set forth in the table below is information about the officers of each of
the Funds.
<TABLE>
<CAPTION>
OFFICER SINCE
-----------------------------------
NEW JERSEY NEW JERSEY NEW JERSEY
NAME AND BIOGRAPHY AGE OFFICE INSURED INSURED II INSURED III
------------------ --- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Terry K. Glenn............................ 59 President 1998* 1998* 1998*
Executive Vice President of MLAM and FAM
since 1983; Executive Vice President and
Director of Princeton Services, Inc.
("Princeton Services") since 1993;
President of Princeton Funds
Distributor, Inc. ("PFD"). since 1986
and Director thereof since 1991;
President of Princeton Administrators,
L.P. since 1988.
Vincent R. Giordano....................... 55 Senior 1998 1998 1998
Senior Vice President of FAM and MLAM Vice President
since 1984; Portfolio Manager of FAM and
MLAM since 1977; Senior Vice President
of Princeton Services since 1993.
Kenneth A. Jacob.......................... 48 Vice President 1998 1998 1998
First Vice President of MLAM since 1997;
Vice President of MLAM from 1984 to
1997; Vice President of FAM since 1984.
</TABLE>
I-2
<PAGE> 126
<TABLE>
<CAPTION>
OFFICER SINCE
-----------------------------------
NEW JERSEY NEW JERSEY NEW JERSEY
NAME AND BIOGRAPHY AGE OFFICE INSURED INSURED II INSURED III
------------------ --- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Donald C. Burke........................... 39 Vice President 1998 1998 1998
Senior Vice President and Treasurer of Treasurer 1999 1999 1999
MLAM and FAM since 1999; Senior Vice
President and Treasurer of Princeton
Services since 1999; Vice President of
PFD since 1999; First Vice President of
MLAM from 1997 to 1999; Vice President
of MLAM from 1990 to 1997; Director of
Taxation of MLAM since 1990.
Robert A. DiMella, CFA.................... 33 Vice President 1998 1998 1998
Vice President of MLAM since 1997;
Assistant Vice President of MLAM from
1995 to 1997; Assistant Portfolio
Manager of MLAM from 1993 to 1995.
Roberto W. Roffo.......................... 33 Vice President -- 1998 1998
Vice President of MLAM since 1996;
Portfolio Manager with MLAM since 1992.
Robert D. Sneeden......................... 46 Vice President 1998 -- --
Assistant Vice President and Portfolio
Manager of MLAM since 1994; Vice
President of Lehman Brothers from 1990
to 1994.
William E. Zitelli, Jr.................... 31 Secretary 1999 1999 1999
Attorney associated with MLAM since
1998; Attorney associated with Pepper
Hamilton LLP from 1997 to 1998; Attorney
associated with Reboul, MacMurray,
Hewitt, Maynard and Kristol from 1994 to
1997.
</TABLE>
---------------
* Mr. Glenn was elected President of each Fund in 1999. Prior to that he served
as Executive Vice President of each Fund.
I-3
<PAGE> 127
EXHIBIT II
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the 4th day of November, 1999, by and between MuniHoldings New Jersey Insured
Fund, Inc., a Maryland corporation ("New Jersey Insured"), MuniHoldings New
Jersey Insured Fund II, Inc., a Maryland corporation ("New Jersey Insured II")
and MuniHoldings New Jersey Insured Fund III, Inc., a Maryland corporation ("New
Jersey Insured III") (New Jersey Insured, New Jersey Insured II and New Jersey
Insured III are sometimes referred to herein collectively as the "Funds"; New
Jersey Insured II and New Jersey Insured III are sometimes referred to herein
collectively as the "Acquired Funds").
PLAN OF REORGANIZATION
The reorganization will comprise the following:
(a)(1) the acquisition by New Jersey Insured of substantially all of
the assets, and the assumption by New Jersey Insured of substantially all
of the liabilities of New Jersey Insured II in exchange solely for an equal
aggregate value of newly issued shares of (A) common stock, with a par
value of $0.10 per share of New Jersey Insured ("New Jersey Insured Common
Stock") and (B) auction market preferred stock of New Jersey 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 C ("New Jersey Insured Series C AMPS"),
and (2) the subsequent distribution by New Jersey Insured II to New Jersey
Insured II stockholders of (x) all of the New Jersey Insured Common Stock
received by New Jersey Insured II in exchange for such stockholders' shares
of common stock, with a par value of $0.10 per share, of New Jersey Insured
II ("New Jersey Insured II Common Stock") and (y) all of the New Jersey
Insured Series C AMPS received by New Jersey Insured II in exchange for
such stockholders' shares of auction market preferred stock of New Jersey
Insured II, 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) designated Series A ("New Jersey Insured II Series A
AMPS") and such stockholders' shares of auction market preferred stock of
New Jersey Insured II, 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) designated Series B ("New Jersey Insured II
Series B AMPS," and together with New Jersey Insured II Series A AMPS the
"New Jersey Insured II AMPS");
(b)(1) the acquisition by New Jersey Insured of substantially all of
the assets, and the assumption by New Jersey Insured of substantially all
of the liabilities of New Jersey Insured III in exchange solely for an
equal aggregate value of newly issued shares of (A) New Jersey Insured
Common Stock and (B) auction market preferred stock of New Jersey 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 ("New Jersey Insured Series D AMPS"),
and (2) the subsequent distribution by New Jersey Insured III to New Jersey
Insured III stockholders of (x) all of the New Jersey Insured Common Stock
received by New Jersey Insured III in exchange for such stockholders'
shares of common stock, with a par value of $0.10 per share, of New Jersey
Insured III ("New Jersey Insured III Common Stock") and (y) all of the New
Jersey Insured Series D AMPS received by New Jersey Insured III in exchange
for such stockholders' shares of auction market preferred stock of New
Jersey Insured III, 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) designated Series A ("New Jersey Insured III AMPS");
all upon and subject to the terms hereinafter set forth (collectively, the
"Reorganization").
II-1
<PAGE> 128
In the course of the Reorganization, New Jersey Insured Common Stock, New
Jersey Insured Series C AMPS and New Jersey Insured Series D AMPS will be
distributed to the stockholders of the Acquired Funds as follows:
(a)(1) each holder of New Jersey Insured II Common Stock will be
entitled to receive a number of shares of New Jersey Insured Common Stock
equal to the aggregate net asset value of the New Jersey Insured II Common
Stock owned by such stockholder on the Exchange Date; and (2) each holder
of New Jersey Insured II AMPS will be entitled to receive a number of
shares of New Jersey Insured Series C AMPS equal to the aggregate
liquidation preference (and aggregate value) of the New Jersey Insured II
AMPS owned by such stockholder on the Exchange Date; and
(b)(1) each holder of New Jersey Insured III Common Stock will be
entitled to receive a number of shares of New Jersey Insured Common Stock
equal to the aggregate net asset value of the New Jersey Insured III Common
Stock owned by such stockholder on the Exchange Date; and (2) each holder
of New Jersey Insured III AMPS will be entitled to receive a number of
shares of New Jersey Insured Series D AMPS equal to the aggregate
liquidation preference (and aggregate value) of the New Jersey Insured III
AMPS owned by such stockholder on the Exchange Date.
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, each Acquired Fund shall declare a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to their respective stockholders all of their respective
net investment company taxable income to and including the Exchange Date, if any
(computed without regard to any deduction for dividends paid), and all of its
net capital gain, if any, realized to and including the Exchange Date. In this
regard and in connection with the Reorganization, the last dividend period for
the New Jersey Insured II AMPS and New Jersey Insured III 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.
Articles Supplementary to New Jersey Insured's Articles of Incorporation
establishing the powers, rights and preferences of the New Jersey Insured Series
C AMPS and the New Jersey Insured Series D AMPS will have been filed with the
State Department of Assessments and Taxation of Maryland (the "Maryland
Department") prior to the Exchange Date.
As promptly as practicable after the consummation of the Reorganization,
each Acquired Fund 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").
AGREEMENT
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, each of the Funds hereby agrees as follows:
1. Representations and Warranties of New Jersey Insured.
New Jersey Insured represents and warrants to, and agrees with, the
Acquired Funds that:
(a) New Jersey 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. New Jersey 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) New Jersey Insured is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-8621), and such registration has not been revoked or rescinded and is
in full force and effect. New Jersey Insured has elected and qualified for
the special tax
II-2
<PAGE> 129
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 until consummation of the Reorganization and
thereafter.
(c) Each of the Acquired Funds has been furnished with New Jersey
Insured's Annual Report to Stockholders for the fiscal year ended July 31,
1999, and the audited financial statements appearing therein, having been
examined by Ernst & Young LLP, independent public accountants, fairly
present the financial position of New Jersey Insured as of the respective
dates indicated, in conformity with generally accepted accounting
principles applied on a consistent basis.
(d) An unaudited statement of assets, liabilities and capital of New
Jersey Insured and an unaudited schedule of investments of New Jersey
Insured, each as of the Valuation Time (as defined in Section 4(d) of this
Agreement), will be furnished to each of the Acquired Funds, at or prior to
the Exchange Date for the purpose of determining the number of shares of
New Jersey Insured Common Stock, New Jersey Insured Series C AMPS and New
Jersey Insured Series D AMPS to be issued pursuant to Section 5 of this
Agreement; each will fairly present the financial position of New Jersey
Insured as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(e) New Jersey 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.
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of New Jersey Insured, threatened against it
which assert liability on the part of New Jersey Insured or which
materially affect its financial condition or its ability to consummate the
Reorganization. New Jersey 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.
(g) New Jersey Insured is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a
party to 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 the Funds have mutually
agreed to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
(h) There are no material contracts outstanding to which New Jersey
Insured is a party that have not been disclosed in the N-14 Registration
Statement (as defined in subsection (k) below) or will not otherwise be
disclosed to the Acquired Funds prior to the Valuation Time.
(i) New Jersey Insured 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 July 31,
1999; and those incurred in connection with the Reorganization. As of the
Valuation Time, New Jersey Insured will advise each Acquired Fund 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.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by New Jersey
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") 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).
II-3
<PAGE> 130
(k) The registration statement filed by New Jersey Insured on Form
N-14 which includes the joint proxy statement of the Funds with respect to
the transactions contemplated herein and the prospectus of New Jersey
Insured relating to the New Jersey Insured Common Stock, New Jersey Insured
Series C AMPS and New Jersey Insured Series D AMPS to be issued pursuant to
this Agreement, (the "Joint Proxy Statement and Prospectus"), and any
supplement or amendment thereto or to the documents therein (as amended or
supplemented, the "N-14 Registration Statement"), on its effective date, at
the time of the stockholders' meetings referred to in Section 7(a) of this
Agreement and at the Exchange Date, insofar as it relates to New Jersey
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 New Jersey Insured for use in the N-14
Registration Statement as provided in Section 7(e) of this Agreement.
(l) New Jersey Insured is authorized to issue 200,000,000 shares of
capital stock, of which 1,360 shares have been designated as Series A AMPS,
1,360 shares have been designated as Series B AMPS and 199,996,280 shares
have been designated as common stock, par value $.10 per share; each
outstanding share of which is fully paid and nonassessable and has full
voting rights.
(m) The shares of New Jersey Insured Common Stock, New Jersey Insured
Series C AMPS and New Jersey Insured Series D AMPS to be issued to the
Acquired Funds 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 New Jersey Insured will have any
preemptive right of subscription or purchase in respect thereof.
(n) At or prior to the Exchange Date, the New Jersey Insured Common
Stock to be transferred to the Acquired Funds for distribution to the
stockholders of the Acquired Funds 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 the Funds presently are qualified, and there
will be a sufficient number of such shares registered under the 1933 Act
and, as may be necessary, with each pertinent state securities commission
to permit the transfers contemplated by this Agreement to be consummated.
(o) At or prior to the Exchange Date, the shares of New Jersey Insured
Series C AMPS to be transferred to New Jersey Insured II on the Exchange
Date and the shares of New Jersey Insured Series D AMPS to be transferred
to New Jersey Insured III 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 AMPS of the Acquired Funds presently are qualified, and there are a
sufficient number of each series of New Jersey Insured AMPS 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, New Jersey Insured will have
obtained any and all regulatory, Director and stockholder approvals
necessary to issue the New Jersey Insured Common Stock, New Jersey Insured
Series C AMPS and New Jersey Insured Series D AMPS to New Jersey Insured II
and New Jersey Insured III, as applicable.
2. Representations and Warranties of New Jersey Insured II.
New Jersey Insured II represents and warrants to, and agrees with, New
Jersey Insured and New Jersey Insured III that:
(a) New Jersey Insured II 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
II-4
<PAGE> 131
out this Agreement. New Jersey Insured II 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) New Jersey Insured II is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-8971), and such registration has not been revoked or rescinded and is
in full force and effect. New Jersey Insured II 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 taxable year ending upon liquidation.
(c) As used in this Agreement, the term "New Jersey Insured II
Investments" shall mean (i) the investments of New Jersey Insured II shown
on the schedule of its investments as of the Valuation Time furnished to
each of New Jersey Insured and New Jersey Insured III; and (ii) all other
assets owned by New Jersey Insured II or liabilities incurred as of the
Valuation Time.
(d) New Jersey Insured II 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) Each of New Jersey Insured and New Jersey Insured III has been
furnished with New Jersey Insured II's Annual Report to Stockholders for
the fiscal year ended May 31, 1999, and the audited financial statements
appearing therein having been examined by Ernst & Young LLP, independent
public accountants, fairly present the financial position of New Jersey
Insured II 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 New
Jersey Insured II and an unaudited schedule of investments of New Jersey
Insured II, each as of the Valuation Time, will be furnished to each of New
Jersey Insured and New Jersey Insured III at or prior to the Exchange Date
for the purpose of determining the number of shares of New Jersey Insured
Common Stock and New Jersey Insured Series C AMPS to be issued to New
Jersey Insured II pursuant to Section 5 of this Agreement; each will fairly
present the financial position of New Jersey Insured II 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 New Jersey Insured II, threatened against
it which assert liability on the part of New Jersey Insured II or which
materially affect its financial condition or its ability to consummate the
Reorganization. New Jersey Insured II 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) There are no material contracts outstanding to which New Jersey
Insured II is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to New Jersey Insured and New
Jersey Insured III prior to the Valuation Time.
(i) New Jersey Insured II is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a
party to 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 the Funds have mutually
agreed to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
(j) New Jersey Insured II 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 May 31, 1999
and those incurred in connection with the Reorganization. As of the
Valuation Time, New Jersey Insured II will advise New
II-5
<PAGE> 132
Jersey Insured and New Jersey Insured III 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) New Jersey Insured II 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 New Jersey Insured II have
been adequately provided for on its books, and no tax deficiency or
liability of New Jersey Insured II has been asserted and no question with
respect thereto has been raised by the Internal Revenue Service 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.
(l) At both the Valuation Time and the Exchange Date, New Jersey
Insured II will have full right, power and authority to sell, assign,
transfer and deliver the New Jersey Insured II Investments. At the Exchange
Date, subject only to the obligation to deliver the New Jersey Insured II
Investments as contemplated by this Agreement, New Jersey Insured II will
have good and marketable title to all of the New Jersey Insured II
Investments, and New Jersey Insured will acquire all of the New Jersey
Insured II 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 New Jersey Insured II Investments or materially
affect title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by New Jersey
Insured II of the Reorganization, except such as may be required under the
1933 Act, the 1934 Act, the 1940 Act or state securities laws.
(n) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 7(a) of this
Agreement and on the Exchange Date, insofar as it relates to New Jersey
Insured II (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 New Jersey Insured II for use in the N-14
Registration Statement as provided in Section 7(e) of this Agreement.
(o) New Jersey Insured II is authorized to issue 200,000,000 shares of
capital stock, of which 1,200 shares have been designated as Series A AMPS
and 1,200 shares have been designated as Series B AMPS, and 199,997,600
shares have been designated as common stock, par value $.10 per share; each
outstanding share of which is fully paid and nonassessable and has full
voting rights.
(p) All of the issued and outstanding shares of New Jersey Insured II
Common Stock and New Jersey Insured II AMPS were offered for sale and sold
in conformity with all applicable Federal and state securities laws.
(q) The books and records of New Jersey Insured II made available to
New Jersey Insured and New Jersey Insured III and/or their counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of New Jersey Insured II.
(r) New Jersey Insured II will not sell or otherwise dispose of any of
the shares of New Jersey Insured Common Stock or New Jersey Insured Series
C AMPS to be received in the Reorganization, except in distribution to the
stockholders of New Jersey Insured II, as provided in Section 4 of this
Agreement.
II-6
<PAGE> 133
3. Representations and Warranties of New Jersey Insured III.
New Jersey Insured III represents and warrants to, and agrees with, New
Jersey Insured and New Jersey Insured II that:
(a) New Jersey Insured III 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. New Jersey Insured III 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) New Jersey Insured III is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-9127), and such registration has not been revoked or rescinded and is
in full force and effect. New Jersey Insured III 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 taxable year ending upon liquidation.
(c) As used in this Agreement, the term "New Jersey Insured III
Investments" shall mean (i) the investments of New Jersey Insured III shown
on the schedule of its investments as of the Valuation Time furnished to
each of New Jersey Insured and New Jersey Insured II; and (ii) all other
assets owned by New Jersey Insured III or liabilities incurred as of the
Valuation Time. The New Jersey Insured III Investments together with the
New Jersey Insured II Investments may sometimes be referred to herein
collectively as the "Acquired Fund Investments."
(d) New Jersey Insured III 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) Each of New Jersey Insured and New Jersey Insured II has been
furnished with New Jersey Insured III's Semi-Annual Report to Stockholders
for the fiscal period ended March 31, 1999, and the unaudited financial
statements appearing therein fairly present the financial position of New
Jersey Insured III as of the date indicated, in conformity with generally
accepted accounting principles applied on a consistent basis.
(f) Each of New Jersey Insured and New Jersey Insured II has been
furnished with New Jersey Insured III's Semi-Annual Report to Stockholders
for the period ended March 31, 1999, and the unaudited financial statements
appearing therein fairly present the financial position of New Jersey
Insured III 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 New
Jersey Insured III and an unaudited schedule of investments of New Jersey
Insured III, each as of the Valuation Time, will be furnished to each of
New Jersey Insured and New Jersey Insured II at or prior to the Exchange
Date for the purpose of determining the number of shares of New Jersey
Insured Common Stock and New Jersey Insured Series D AMPS to be issued to
New Jersey Insured III pursuant to Section 5 of this Agreement; each will
fairly present the financial position of New Jersey Insured III 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 New Jersey Insured III, threatened against
it which assert liability on the part of New Jersey Insured III or which
materially affect its financial condition or its ability to consummate the
Reorganization. New Jersey Insured III, 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.
II-7
<PAGE> 134
(i) There are no material contracts outstanding to which New Jersey
Insured III is a party that have not been disclosed in the N-14
Registration Statement or will not otherwise be disclosed to New Jersey
Insured and New Jersey Insured II prior to the Valuation Time.
(j) New Jersey Insured III is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a
party to 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 the Funds have mutually
agreed to amend such contract or other commitment or obligation to cure any
potential violation as a condition precedent to the Reorganization.
(k) New Jersey Insured III 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 March 31,
1999 and those incurred in connection with the Reorganization. As of the
Valuation Time, New Jersey Insured III will advise New Jersey Insured and
New Jersey Insured II 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) New Jersey Insured III 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 New Jersey Insured III
have been adequately provided for on its books, and no tax deficiency or
liability of New Jersey Insured III has been asserted and no question with
respect thereto has been raised by the Internal Revenue Service 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, New Jersey
Insured III will have full right, power and authority to sell, assign,
transfer and deliver the New Jersey Insured III Investments. At the
Exchange Date, subject only to the obligation to deliver the New Jersey
Insured III Investments as contemplated by this Agreement, New Jersey
Insured III will have good and marketable title to all of the New Jersey
Insured III Investments, and New Jersey Insured will acquire all of the New
Jersey Insured III 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 New Jersey Insured III 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 New Jersey
Insured III of the Reorganization, except such as may be required under the
1933 Act, the 1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 7(a) of this
Agreement and on the Exchange Date, insofar as it relates to New Jersey
Insured III (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 New Jersey Insured III for use in the N-14
Registration Statement as provided in Section 7(e) of this Agreement.
(p) New Jersey Insured III is authorized to issue 200,000,000 shares
of capital stock, of which 1,880 shares have been designated as Series A
AMPS, and 199,998,120 shares have been designated as
II-8
<PAGE> 135
common stock, par value $.10 per share; each outstanding share of which is
fully paid and nonassessable and has full voting rights.
(q) All of the issued and outstanding shares of New Jersey Insured III
Common Stock and New Jersey Insured III AMPS were offered for sale and sold
in conformity with all applicable Federal and state securities laws.
(r) The books and records of New Jersey Insured III made available to
New Jersey Insured and New Jersey Insured II and/or their counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of New Jersey Insured III.
(s) New Jersey Insured III will not sell or otherwise dispose of any
of the shares of New Jersey Insured Common Stock or New Jersey Insured
Series D AMPS to be received in the Reorganization, except in distribution
to the stockholders of New Jersey Insured III, as provided in Section 4 of
this Agreement.
4. The Reorganization.
(a) Subject to receiving the requisite approvals of the stockholders of
each of the Funds, and to the other terms and conditions contained herein, (i)
New Jersey Insured II agrees to convey, transfer and deliver to New Jersey
Insured and New Jersey Insured agrees to acquire from New Jersey Insured II on
the Exchange Date, all of the New Jersey Insured II Investments (including
interest accrued as of the Valuation Time on debt instruments) and assume
substantially all of the liabilities of New Jersey Insured II in exchange solely
for that number of shares of New Jersey Insured Common Stock and New Jersey
Insured Series C AMPS provided in Section 5 of this Agreement; and (ii) New
Jersey Insured III agrees to convey, transfer and deliver to New Jersey Insured
and New Jersey Insured agrees to acquire from New Jersey Insured III on the
Exchange Date, all of the New Jersey Insured III Investments (including interest
accrued as of the Valuation Time on debt instruments) and assume substantially
all of the liabilities of New Jersey Insured III in exchange solely for that
number of shares of New Jersey Insured Common Stock and New Jersey Insured
Series D AMPS provided in Section 5 of this Agreement.
Pursuant to this Agreement, as soon as practicable after the Exchange Date
(i) New Jersey Insured II will distribute all shares of New Jersey Insured
Common Stock and New Jersey Insured Series C AMPS received by it to its
stockholders in exchange for their shares of New Jersey Insured II Common Stock
and New Jersey Insured II AMPS; and (ii) New Jersey Insured III will distribute
all shares of New Jersey Insured Common Stock and New Jersey Insured Series D
AMPS received by it to its stockholders in exchange for their shares of New
Jersey Insured III Common Stock and New Jersey Insured III AMPS. Such
distributions shall be accomplished by the opening of stockholder accounts on
the stock ledger records of New Jersey Insured in the amounts due the
stockholders of each Acquired Fund based on their respective holdings in such
Acquired Fund as of the Valuation Time.
(b) Prior to the Exchange Date, each Acquired Fund shall declare a dividend
or dividends which, together with all such previous dividends, shall have the
effect of distributing to their respective stockholders all of their respective
net investment company taxable income to and including the Exchange Date, if any
(computed without regard to any deduction for dividends paid), and all of its
net capital gain, if any, realized to and including the Exchange Date. In this
regard and in connection with the Reorganization, the last dividend period for
the New Jersey Insured II AMPS and the New Jersey Insured III 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) Each of the Acquired Funds will pay or cause to be paid to New Jersey
Insured any interest such Acquired Fund receives on or after the Exchange Date
with respect to any of the Acquired Fund Investments transferred to New Jersey
Insured hereunder.
(d) The Valuation Time shall be 4:00 p.m., Eastern time, on February 18,
2000, or such earlier or later day and time as may be mutually agreed upon in
writing (the "Valuation Time").
II-9
<PAGE> 136
(e) Recourse for liabilities assumed from each Acquired Fund by New Jersey
Insured in the Reorganization will be limited to the net assets of each such
fund acquired by New Jersey Insured. The known liabilities of the Acquired
Funds, as of the Valuation Time, shall be confirmed in writing to New Jersey
Insured pursuant to Sections 2(j) and 3(j) of this Agreement.
(f) The Funds will jointly file Articles of Transfer with the Maryland
Department and any other such instrument as may be required by the State of
Maryland to effect the transfer of the Acquired Fund Investments.
(g) The Acquired Funds will each be dissolved following the Exchange Date
by filing separate Articles of Dissolution with the Maryland Department.
(h) New Jersey Insured will file with the Maryland Department Articles
Supplementary to its Articles of Incorporation establishing the powers, rights
and preferences of the New Jersey Insured Series C AMPS and the New Jersey
Insured Series D AMPS prior to the closing of the Reorganization.
(i) As promptly as practicable after the liquidation of each of the
Acquired Fund pursuant to the Reorganization, each Acquired Fund shall terminate
its respective registration under the 1940 Act.
5. Issuance and Valuation of New Jersey Insured Common Stock, New Jersey
Insured Series C AMPS and New Jersey Insured Series D AMPS in the
Reorganization.
Full shares of New Jersey Insured Common Stock and New Jersey Insured
Series C 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 New Jersey Insured II acquired in the Reorganization determined
as hereinafter provided, reduced by the amount of liabilities of New Jersey
Insured II assumed by New Jersey Insured in the Reorganization, shall be issued
by New Jersey Insured to New Jersey Insured II in exchange for such assets of
New Jersey Insured II, plus cash in lieu of fractional shares. New Jersey
Insured will issue to New Jersey Insured II (a) a number of shares of New Jersey
Insured Common Stock, the aggregate net asset value of which will equal the
aggregate net asset value of the shares of New Jersey Insured II Common Stock,
determined as set forth below, and (b) a number of shares of New Jersey Insured
Series C AMPS, the aggregate liquidation preference and value of which will
equal the aggregate liquidation preference and value of the New Jersey Insured
II AMPS, determined as set forth below.
Full shares of New Jersey Insured Common Stock and New Jersey 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 New Jersey Insured III acquired in the Reorganization
determined as hereinafter provided, reduced by the amount of liabilities of New
Jersey Insured III assumed by New Jersey Insured in the Reorganization, shall be
issued by New Jersey Insured to New Jersey Insured III in exchange for such
assets of New Jersey Insured III, plus cash in lieu of fractional shares. New
Jersey Insured will issue to New Jersey Insured III (a) a number of shares of
New Jersey Insured Common Stock, the aggregate net asset value of which will
equal the aggregate net asset value of the shares of New Jersey Insured III
Common Stock, determined as set forth below, and (b) a number of shares of New
Jersey Insured Series D AMPS, the aggregate liquidation preference and value of
which will equal the aggregate liquidation preference and value of the New
Jersey Insured III AMPS, determined as set forth below.
The net asset value of each of the Funds and the liquidation preference and
value of the AMPS of each of the Funds shall be determined as of the Valuation
Time in accordance with the procedures described in (i) the final prospectus of
New Jersey Insured, dated March 6, 1998, relating to the New Jersey Insured
Common Stock and (ii) the final prospectus of New Jersey Insured, dated March
25, 1998 relating to the New Jersey Insured AMPS, and no formula will be used to
adjust the net asset value so determined of any Fund to take into account
differences in realized and unrealized gains and losses. Values in all cases
shall be determined as of the Valuation Time. The value of the Acquired Fund
Investments to be transferred to New Jersey Insured shall be determined by New
Jersey Insured pursuant to the procedures utilized by New Jersey Insured in
valuing its own assets and determining its own liabilities for purposes of the
Reorganization. Such valuation and determination shall be made by New Jersey
Insured in cooperation with the Acquired Funds and shall be confirmed in writing
by New Jersey Insured to the Acquired Funds. The net asset value per share
II-10
<PAGE> 137
of the New Jersey Insured Common Stock and the liquidation preference and value
per share of the New Jersey Insured Series C AMPS and the New Jersey Insured
Series D AMPS shall be determined in accordance with such procedures and New
Jersey Insured shall certify the computations involved. 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 that Fund is divided by the total number of shares
of Common Stock of that Fund outstanding at such time.
New Jersey Insured shall issue to New Jersey Insured II separate
certificates or share deposit receipts for the New Jersey Insured Common Stock
and the New Jersey Insured Series C AMPS, each registered in the name of New
Jersey Insured II. New Jersey Insured II then shall distribute the New Jersey
Insured Common Stock and the New Jersey Insured Series C AMPS to the holders of
New Jersey Insured II Common Stock and New Jersey Insured II AMPS by
redelivering the certificates or share deposit receipts evidencing ownership of
(i) the New Jersey Insured Common Stock to The Bank of New York as the transfer
agent and registrar for the New Jersey Insured Common Stock for distribution to
the holders of New Jersey Insured II Common Stock on the basis of such holder's
proportionate interest in the aggregate net asset value of the Common Stock of
New Jersey Insured II and (ii) the New Jersey Insured Series C AMPS to The Bank
of New York as the transfer agent and registrar for the New Jersey Insured
Series C AMPS for distribution to the holders of New Jersey Insured II AMPS on
the basis of such holder's proportionate interest in the aggregate liquidation
preference and value of the AMPS of New Jersey Insured II. With respect to any
New Jersey Insured II stockholder holding certificates evidencing ownership of
either New Jersey Insured II Common Stock or New Jersey Insured II AMPS as of
the Exchange Date, and subject to New Jersey Insured being informed thereof in
writing by New Jersey Insured II, New Jersey Insured will not permit such
stockholder to receive new certificates evidencing ownership of the New Jersey
Insured Common Stock or New Jersey Insured Series C AMPS, exchange New Jersey
Insured Common Stock or New Jersey Insured Series C AMPS credited to such
stockholder's account for shares of other investment companies managed by MLAM
or any of its affiliates, or pledge or redeem such New Jersey Insured Common
Stock or New Jersey Insured Series C AMPS, in any case, until notified by New
Jersey Insured II or its agent that such stockholder has surrendered his or her
outstanding certificates evidencing ownership of New Jersey Insured II Common
Stock or New Jersey Insured II AMPS or, in the event of lost certificates,
posted adequate bond. New Jersey Insured II, at its own expense, will request
its stockholders to surrender their outstanding certificates evidencing
ownership of New Jersey Insured II Common Stock or New Jersey Insured II AMPS,
as the case may be, or post adequate bond therefor.
New Jersey Insured shall issue to New Jersey Insured III separate
certificates or share deposit receipts for the New Jersey Insured Common Stock
and the New Jersey Insured Series D AMPS, each registered in the name of New
Jersey Insured III. New Jersey Insured III then shall distribute the New Jersey
Insured Common Stock and the New Jersey Insured Series D AMPS to the holders of
New Jersey Insured III Common Stock and New Jersey Insured III AMPS by
redelivering the certificates or share deposit receipts evidencing ownership of
(i) the New Jersey Insured Common Stock to The Bank of New York as the transfer
agent and registrar for the New Jersey Insured Common Stock for distribution to
the holders of New Jersey Insured III Common Stock on the basis of such holder's
proportionate interest in the aggregate net asset value of the Common Stock of
New Jersey Insured III and (ii) the New Jersey Insured Series D AMPS to The Bank
of New York as the transfer agent and registrar for the New Jersey Insured
Series D AMPS for distribution to the holders of New Jersey Insured III AMPS on
the basis of such holder's proportionate interest in the aggregate liquidation
preference and value of the AMPS of New Jersey Insured III. With respect to any
New Jersey Insured III stockholder holding certificates evidencing ownership of
either New Jersey Insured III Common Stock or New Jersey Insured III AMPS as of
the Exchange Date, and subject to New Jersey Insured being informed thereof in
writing by New Jersey Insured III, New Jersey Insured will not permit such
stockholder to receive new certificates evidencing ownership of New Jersey
Insured Common Stock or New Jersey Insured Series D AMPS, exchange New Jersey
Insured Common Stock or New Jersey Insured Series D AMPS credited to such
stockholder's account for shares of other investment companies managed by MLAM
or any of its affiliates, or pledge or redeem such New Jersey Insured Common
Stock or
II-11
<PAGE> 138
New Jersey Insured Series D AMPS, in any case, until notified by New Jersey
Insured III or its agent that such stockholder has surrendered his or her
outstanding certificates evidencing ownership of New Jersey Insured III Common
Stock or New Jersey Insured III AMPS or, in the event of lost certificates,
posted adequate bond. New Jersey Insured III, at its own expense, will request
its stockholders to surrender their outstanding certificates evidencing
ownership of New Jersey Insured III Common Stock or New Jersey Insured III AMPS,
as the case may be, or post adequate bond therefor.
Dividends payable to holders of record of shares of New Jersey Insured
Common Stock, New Jersey Insured Series C AMPS or New Jersey 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 an Acquired Fund shall be
payable to such stockholder without interest; however, such dividends shall not
be paid unless and until such stockholder surrenders the stock certificates
representing shares of common stock or AMPS of the Acquired Funds, as the case
may be, for exchange.
No fractional shares of New Jersey Insured Common Stock will be issued to
holders of New Jersey Insured II Common Stock or New Jersey Insured III Common
Stock. In lieu thereof, New Jersey Insured's transfer agent, The Bank of New
York, will aggregate all fractional shares of New Jersey Insured Common Stock
and sell the resulting full shares on the New York Stock Exchange at the current
market price for shares of New Jersey Insured Common Stock 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 certificates representing New Jersey Insured II Common Stock or New
Jersey Insured III Common Stock.
6. Payment of Expenses.
(a) With respect to expenses incurred in connection with the
Reorganization, (i) each Fund shall pay all expenses incurred that are
attributable solely to such Fund and the conduct of its business, and (ii) New
Jersey Insured shall pay, subsequent to the Exchange Date and pro rata according
to each Fund's net assets at the Valuation Time, all expenses incurred in
connection with the Reorganization, including, but not limited to, all costs
related to the preparation and distribution of the N-14 Registration Statement.
Such fees and expenses shall include the cost of preparing and filing a ruling
request with the Internal Revenue Service, legal and accounting 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.
(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.
7. Covenants of the Funds.
(a) Each Fund agrees to call an annual meeting of its 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) Each Fund covenants to operate its business as presently conducted
between the date hereof and the Exchange Date.
(c) Each Acquired Fund agrees that following the consummation of the
Reorganization, it will dissolve in accordance with the laws of the State of
Maryland and any other applicable law, it will not make any distributions of any
shares of New Jersey Insured Common Stock, New Jersey Insured Series C AMPS or
New Jersey Insured Series D AMPS, as applicable other than to its respective
stockholders and without first paying or adequately providing for the payment of
all of its respective liabilities not assumed by New Jersey Insured, if any, and
on and after the Exchange Date it shall not conduct any business except in
connection with its dissolution.
(d) Each Acquired Fund undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section 8(f) of the 1940
Act for an order declaring that such Acquired Fund has ceased to be a registered
investment company.
II-12
<PAGE> 139
(e) New Jersey 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. Each Fund agrees to cooperate fully with the others,
and each will furnish to the others 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 laws.
(f) New Jersey Insured has no plan or intention to sell or otherwise
dispose of the Acquired Fund Investments, except for dispositions made in the
ordinary course of business.
(g) Each of the Funds 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. New Jersey 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 the Acquired
Funds for each of such Fund's 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, each of the Acquired Funds
shall prepare, or cause its agents to prepare, any Federal, state or local tax
returns, including any Forms 1099, required to be filed by such fund with
respect to its 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 the Acquired Funds (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 each such Fund to the extent such expenses have
been accrued by such Fund in the ordinary course without regard to the
Reorganization; any excess expenses shall be borne by Fund Asset Management,
L.P. ("FAM") at the time such tax returns and Forms 1099 are prepared.
(h) The Funds each agree to mail to 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.
(i) Following the consummation of the Reorganization, New Jersey Insured
will stay in existence and continue its business as a non-diversified,
closed-end management investment company registered under the 1940 Act.
8. Exchange Date.
(a) Delivery of the assets of the Acquired Funds to be transferred,
together with any other Acquired Fund Investments, and the shares of New Jersey
Insured Common Stock, New Jersey Insured Series C AMPS and New Jersey Insured
Series D AMPS to be issued as provided in this Agreement, 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 the Funds, 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 Acquired Fund Investments, for any reason, are not
transferable on the Exchange Date, the applicable Acquired Fund shall cause such
Acquired Fund Investments to be transferred to New Jersey Insured's account with
The Bank of New York at the earliest practicable date thereafter.
(b) Each of the Acquired Funds will deliver to New Jersey Insured on the
Exchange Date confirmations or other adequate evidence as to the tax basis of
each of their respective Acquired Fund Investments delivered
II-13
<PAGE> 140
to New Jersey Insured hereunder, certified by Ernst & Young LLP (for New Jersey
Insured and New Jersey Insured II) and Deloitte & Touche LLP (for New Jersey
Insured III).
(c) As soon as practicable after the close of business on the Exchange
Date, each of the Acquired Funds shall deliver to New Jersey Insured a list of
the names and addresses of all of the stockholders of record of such Acquired
Fund on the Exchange Date and the number of shares of common stock and AMPS of
such Acquired Fund owned by each such stockholder, certified to the best of
their knowledge and belief by the applicable transfer agent for such Acquired
Fund or by its President.
9. Conditions of the Acquired Funds.
The obligations of each Acquired Fund 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 the Funds
and by the affirmative vote of (i) the holders of (a) a majority of the New
Jersey Insured Common Stock and New Jersey Insured AMPS, voting together as
a single class, and (b) a majority of the New Jersey Insured AMPS, voting
separately as a class, in each case issued and outstanding and entitled to
vote thereon; (ii) the holders of (a) a majority of the New Jersey Insured
II Common Stock and New Jersey Insured II AMPS, voting together as a single
class, and (b) a majority of the New Jersey Insured II AMPS, voting
separately as a class, in each case issued and outstanding and entitled to
vote thereon; (iii) the holders of (a) a majority of the New Jersey Insured
III Common Stock and New Jersey Insured III AMPS, voting together as a
single class, and (b) a majority of the New Jersey Insured III AMPS, voting
separately as a class, in each case issued and outstanding and entitled to
vote thereon; and further that each Fund shall have delivered to each other
Fund a copy of the resolution approving this Agreement adopted by such
Fund's Board of Directors, and a certificate setting forth the vote of such
Fund's stockholders obtained at its Annual Meeting, each certified by the
Secretary of the appropriate Fund.
(b) That each Acquired Fund shall have received from New Jersey
Insured and from each other Acquired Fund a statement of assets,
liabilities and capital, with values determined as provided in Section 5 of
this Agreement, together with a schedule of such fund's investments, all as
of the Valuation Time, certified on the Fund's behalf by its President (or
any Vice President) and its Treasurer, and a certificate signed by the
Fund'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 there has been no material adverse change in the financial
position of the Fund since the date of such Fund's most recent Annual or
Semi-Annual Report as applicable, other than changes in its portfolio
securities since that date or changes in the market value of its portfolio
securities.
(c) That New Jersey Insured shall have furnished to the Acquired Funds
a certificate signed by New Jersey 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 New Jersey 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 New Jersey 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 each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That the Acquired Funds shall have received an opinion or opinions
of Brown & Wood LLP, as counsel to the Funds, in form and substance
satisfactory to the Acquired Funds and dated the Exchange Date, to the
effect that (i) each of the Funds is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland; (ii) the shares of New Jersey Insured Common Stock, New Jersey
Insured Series C AMPS and New Jersey 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 New
Jersey Insured, and no stockholder of New Jersey
II-14
<PAGE> 141
Insured has any preemptive right to subscription or purchase in respect
thereof (pursuant to the Articles of Incorporation or the by-laws of New
Jersey Insured or the state law of Maryland, or to the best of such
counsel's knowledge, otherwise); (iii) this Agreement has been duly
authorized, executed and delivered by each of the Funds, 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 court decisions with respect thereto;
provided, such counsel shall express no opinion with respect to the
application of equitable principles in any proceeding, whether at law or in
equity; (iv) the execution and delivery of this Agreement does not, and the
consummation of the Reorganization will not, violate any material
provisions of Maryland law or the Articles of Incorporation, as amended,
the by-laws, as amended, or any agreement (known to such counsel) to which
any Fund is a party or by which any Fund is bound, except insofar as the
parties have agreed to amend such provision as a condition precedent to the
Reorganization; (v) each of the Acquired Funds 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, each of the Acquired Funds will have duly transferred such
assets and liabilities in accordance with this Agreement; (vi) to the best
of such counsel's knowledge, no consent, approval, authorization or order
of any United States federal court, Maryland state court or governmental
authority is required for the consummation by the Funds 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 laws; (vii) 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;
(viii) 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; (ix) the
information in the Joint Proxy Statement and Prospectus under "Comparison
of the Funds -- Tax Rules Applicable to the Funds and their Stockholders"
and "Agreement and Plan of Reorganization -- Tax Consequences of the
Reorganization," (other than information related to New Jersey law or legal
conclusions involving matters of New Jersey law as to which we express no
opinion) to the extent that it constitutes matters of law, summaries of
legal matters or legal conclusions, has been reviewed by such counsel and
is correct in all material respects as of the date of the Joint Proxy
Statement and Prospectus; (x) 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; (xi) no Fund, 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 laws, and
except where each has so qualified or the failure so to qualify would not
have a material adverse effect on such Fund or its respective stockholders;
(xii) such counsel does not have actual knowledge of any material suit,
action or legal or administrative proceeding pending or threatened against
any of the Funds, the unfavorable outcome of which would materially and
adversely affect such Fund; (xiii) all corporate actions required to be
taken by the Funds to authorize this Agreement and to effect the
Reorganization have been duly authorized by all necessary corporate actions
on the part of such Fund; and (xiv) such opinion is solely for the benefit
of the Funds and their Directors and officers. 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
II-15
<PAGE> 142
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 or other
financial or statistical data relating to any Fund 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 a Fund with regard to matters of fact and
certain certificates and written statements of governmental officials with
respect to the good standing of a Fund.
(f) That each Acquired Fund shall have received either (a) a private
letter ruling from the Internal Revenue Service or (b) an opinion of Brown
& Wood LLP, to the effect that for Federal income tax purposes (i) the
transfer by such Acquired Fund of substantially all of its assets to New
Jersey Insured in exchange solely for shares of New Jersey Insured Common
Stock and New Jersey Insured Series C AMPS or New Jersey 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 the respective Funds
will each be deemed to be a "party" to a reorganization within the meaning
of Section 368(b); (ii) in accordance with Section 361(a) of the Code, no
gain or loss will be recognized to an Acquired Fund as a result of the
asset transfer solely in exchange for shares of New Jersey Insured Common
Stock and New Jersey Insured Series C AMPS or New Jersey Insured Series D
AMPS as the case may be, or on the distribution of the New Jersey Insured
stock to stockholders of the respective Acquired Fund under Section
361(c)(1); (iii) under Section 1032 of the Code, no gain or loss will be
recognized to New Jersey Insured on the receipt of assets of an Acquired
Fund in exchange for its shares; (iv) in accordance with Section 354(a)(1)
of the Code, no gain or loss will be recognized to the stockholders of an
Acquired Fund on the receipt of shares of New Jersey Insured in exchange
for their shares of the Acquired Fund (except to the extent that common
stockholders receive cash in the Reorganization representing an interest in
fractional shares of New Jersey Insured Common Stock); (v) in accordance
with Section 362(b) of the Code, the tax basis of an Acquired Fund's assets
in the hands of New Jersey Insured will be the same as the tax basis of
such assets in the hands of the Acquired Fund 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 shares
of New Jersey Insured received by the stockholders of an Acquired Fund in
the Reorganization will be equal, in the aggregate, to the tax basis of the
shares of the Acquired Fund surrendered in exchange; (vii) in accordance
with Section 1223 of the Code, a stockholder's holding period for the
shares of New Jersey Insured will be determined by including the period for
which such stockholder held the Acquired Fund shares exchanged therefor,
provided that such shares were held as a capital asset; (viii) in
accordance with Section 1223 of the Code, New Jersey Insured's holding
period with respect to an Acquired Fund's assets transferred will include
the period for which such assets were held by the Acquired Fund; (ix) the
payment of cash to common stockholders of an Acquired Fund in lieu of
fractional shares of New Jersey Insured Common Stock will be treated as
though the fractional shares were distributed as part of the Reorganization
and then redeemed, with the result that such stockholders will have short-
or long-term capital gain or loss to the extent that the cash distribution
differs from the stockholder's basis allocable to the New Jersey Insured
fractional shares; and (x) the taxable year of each Acquired Fund will end
on the effective date of the Reorganization and pursuant to Section 381(a)
of the Code and regulations thereunder, New Jersey Insured will succeed to
and take into account certain tax attributes of each Acquired Fund, such as
earnings and profits, capital loss carryovers and method of accounting.
(g) That all proceedings taken by each of the Funds and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to the others.
(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 New Jersey Insured, be
contemplated by the Commission.
(i) That Acquired Funds shall have received from Ernst & Young LLP a
letter dated within three days prior to the effective date of the N-14
Registration Statement and a similar letter dated within five
II-16
<PAGE> 143
days prior to the Exchange Date, in form and substance satisfactory to
them, to the effect that (i) they are independent public accountants with
respect to New Jersey Insured 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 New
Jersey 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; (iii) on the basis
of limited procedures agreed upon by the Funds 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 New Jersey Insured
included in the N-14 Registration Statement, and inquiries of certain
officials of New Jersey 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 (iv) on the basis
of limited procedures agreed upon by the Funds and described in such letter
(but not an examination in accordance with generally accepted auditing
standards), the information relating to New Jersey Insured appearing in the
N-14 Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of New Jersey Insured or from schedules prepared by officials of New Jersey
Insured having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations
made therefrom.
(j) 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, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of New Jersey Insured or
would prohibit the Reorganization.
(k) That the Acquired Funds shall have received from the Commission
such orders or interpretations as Brown & Wood LLP, as their counsel, 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. New Jersey Insured Conditions.
The obligations of New Jersey 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 Board of Directors and the
stockholders of each of the Funds as set forth in Section 9(a); and that
each of the Acquired Funds shall have delivered to New Jersey Insured a
copy of the resolution approving this Agreement adopted by such Acquired
Fund's Board of Directors, and a certificate setting forth the vote of the
stockholders of such Acquired Fund obtained, each certified by its
Secretary.
(b) That each Acquired Fund shall have furnished to New Jersey Insured
a statement of its assets, liabilities and capital, with values determined
as provided in Section 5 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 such Fund's behalf by its President
(or any Vice President) and its Treasurer, and a certificate signed by such
Fund'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 there has been no material adverse change in the financial
position of the Acquired Fund since the date of such Fund's most
II-17
<PAGE> 144
recent Annual Report or Semi-Annual Report, as applicable, other than
changes in the Acquired Fund Investments since that date or changes in the
market value of the Acquired Fund Investments.
(c) That each Acquired Fund shall have furnished to New Jersey Insured
a certificate signed by such Fund's 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 the
Acquired Fund 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 the
Acquired Fund 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.
(d) That each Acquired Fund shall have delivered to New Jersey Insured
a letter from Ernst & Young LLP (for New Jersey Insured II), or Deloitte &
Touche LLP (for New Jersey Insured III) dated the Exchange Date, stating
that such firm has performed a limited review of the Federal, state and
local income tax returns of the Acquired Fund for the period ended May 31,
1999 (for New Jersey Insured II) and September 30, 1999 (for New Jersey
Insured III) (which returns originally were prepared and filed by the
Acquired Fund), 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 the Acquired Fund for the period covered thereby; and that
for the period from June 1, 1999 (for New Jersey Insured II) and October 1,
1999 (for New Jersey Insured III), to and including the Exchange Date and
for any taxable year of the Acquired Fund ending upon the liquidation of
that Acquired Fund, 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 have been 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 June 1,
1999 (for New Jersey Insured II) and October 1, 1999 (for New Jersey
Insured III), to and including the Exchange Date and for any taxable year
of that Acquired Fund, ending upon the liquidation of such fund or that
such fund would not qualify as a regulated investment company for Federal
income tax purposes for the tax years in question.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That New Jersey Insured shall have received an opinion of Brown &
Wood LLP, as counsel to the Funds, in form and substance satisfactory to
New Jersey Insured and dated the Exchange Date, with respect to the matters
specified in Section 9(e) of this Agreement and such other matters as New
Jersey Insured reasonably may deem necessary or desirable.
(g) That New Jersey Insured shall have received a private letter
ruling from the Internal Revenue Service or an opinion of Brown & Wood LLP
with respect to the matters specified in Section 9(f) of this Agreement.
(h) That New Jersey Insured shall have received from Ernst & Young LLP
(New Jersey Insured II) or Deloitte & Touche LLP (for New Jersey Insured
III) a letter dated within three days prior to 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 New
Jersey Insured, to the effect that (i) they are independent public
accountants with respect to such fund 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
such fund 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 the Funds 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 the Acquired Fund
included in the N-14 Registration Statement, and inquiries of certain
officials of the Acquired Fund responsible for financial and accounting
matters, nothing came to their attention that caused them to
II-18
<PAGE> 145
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 the Funds and described
in such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to the Acquired Fund
appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) (with the
exception of performance comparisons, if any), if any, has been obtained
from the accounting records of the Acquired Fund or from schedules prepared
by officials of the Acquired Fund having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(i) That the Acquired Fund Investments to be transferred to New Jersey
Insured shall not include any assets or liabilities which New Jersey
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 any Acquired Fund, be
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, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of any Acquired Fund or
would prohibit the Reorganization.
(l) That New Jersey Insured shall have received from the Commission
such orders or interpretations as Brown & Wood LLP, as counsel to New
Jersey 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 each Acquired Fund and its
respective counsel in connection with the Reorganization and all documents
incidental thereto shall be satisfactory in form and substance to New
Jersey Insured.
(n) That prior to the Exchange Date, each of the Acquired Funds shall
have declared 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 to and including the Exchange Date, if any (computed without regard
to any deduction for dividends paid), and all of its net capital gain, if
any, realized to and including the Exchange Date. In this regard, the last
dividend period for the New Jersey Insured II AMPS and the New Jersey
Insured III AMPS may be shorter than the dividend period for such AMPS
determined as set forth in the applicable Articles Supplementary.
11. 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 the Funds)
prior to the Exchange Date, or the Exchange Date may be postponed, (i) by mutual
consent of the Boards of Directors of the Funds, (ii) by the Board of Directors
of any Acquired Fund if any condition of such Acquired Fund's obligations set
forth in Section 9 of this Agreement has not been fulfilled or waived by such
Board; or (iii) by the Board of Directors of New Jersey Insured if any condition
of New Jersey Insured's obligations set forth in Section 10 of this Agreement
have not been fulfilled or waived by such Board.
II-19
<PAGE> 146
(b) If the transactions contemplated by this Agreement have not been
consummated by August 31, 2000, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of Directors
of the Funds.
(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 any Fund 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 any Fund (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 the Funds have delegated to FAM the ability to make
non-material changes to the transaction if it deems it to be in the best
interests of the Funds to do so.
(e) The respective representations and warranties contained in Sections 1,
2 and 3 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and no Fund nor any of its officers,
directors, 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, trustee, agent or stockholder
of any Fund against any liability to the entity for which that officer,
director, trustee, agent or stockholder so acts or to its stockholders, to which
that officer, director, 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 the
Funds 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 the
Funds unless such terms and conditions shall result in a change in the method of
computing the number of shares of New Jersey Insured Common Stock, New Jersey
Insured Series C AMPS and New Jersey Insured Series D AMPS to be issued to the
Acquired Funds, as applicable, in which event, unless such terms and conditions
shall have been included in the proxy solicitation materials furnished to the
stockholders of the Funds prior to the meetings at which the Reorganization
shall have been approved, this Agreement shall not be consummated and shall
terminate unless the Funds promptly shall call a special meeting of stockholders
at which such conditions so imposed shall be submitted for approval.
12. Indemnification.
(a) Each Acquired Fund hereby severally agrees to indemnify and hold New
Jersey Insured harmless from all loss, liability and expenses (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which New Jersey Insured may incur or sustain by reason of the fact that
(i) New Jersey Insured shall be required to pay any corporate obligation of such
Acquired Fund, whether consisting of tax deficiencies or otherwise, based upon a
claim or claims against such Acquired Fund which were omitted or not fairly
reflected in the financial statements to be delivered to New Jersey Insured in
connection with the Reorganization; (ii) any representations or warranties made
by such Acquired Fund in this Agreement should prove to be false or erroneous in
any material respect; (iii) any covenant of such Acquired Fund has been breached
in any material respect; or (iv) any claim is made alleging that (a) the N-14
Registration Statement included 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 attributable to such Fund not misleading or (b) the
Joint Proxy Statement and Prospectus delivered to the stockholders of the Funds
and forming a part of the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein attributable to such Fund, in the light of the
circumstances under which they were made, not misleading, except with respect to
(iv)(a) and (b) herein insofar as such claim is based on written information
furnished to the Acquired Funds by New Jersey Insured.
II-20
<PAGE> 147
(b) New Jersey Insured hereby agrees to indemnify and hold each Acquired
Fund harmless from all loss, liability and expenses (including reasonable
counsel fees and expenses in connection with the contest of any claim) which
such Acquired Fund may incur or sustain by reason of the fact that (i) any
representations or warranties made by New Jersey Insured in this Agreement
should prove false or erroneous in any material respect, (ii) any covenant of
New Jersey Insured has been breached in any material respect, or (iii) any claim
is made alleging that (a) the N-14 Registration Statement included 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 or
(b) the Joint Proxy Statement and Prospectus delivered to stockholders of the
Funds and forming a part of the N-14 Registration Statement included 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, except with respect to (ii)(a) and (b) herein insofar
as such claim is based on written information furnished to New Jersey Insured by
the Acquired Fund seeking indemnification.
(c) In the event that any claim is made against New Jersey Insured in
respect of which indemnity may be sought by New Jersey Insured from an Acquired
Fund under Section 12(a) of this Agreement, or in the event that any claim is
made against an Acquired Fund in respect of which indemnity may be sought by an
Acquired Fund from New Jersey Insured under Section 12(b) of this Agreement,
then the party seeking indemnification (the "Indemnified Party"), with
reasonable promptness and before payment of such claim, shall give written
notice of such claim to the other party (the "Indemnifying Party"). If no
objection as to the validity of the claim is made in writing to the Indemnified
Party by the Indemnifying Party within thirty (30) days after the giving of
notice hereunder, then the Indemnified Party may pay such claim and shall be
entitled to reimbursement therefor, pursuant to this Agreement. If, prior to the
termination of such thirty-day period, objection in writing as to the validity
of such claim is made to the Indemnified Party, the Indemnified Party shall
withhold payment thereof until the validity of such claim is established (i) to
the satisfaction of the Indemnifying Party, or (ii) by a final determination of
a court of competent jurisdiction, whereupon the Indemnified Party may pay such
claim and shall be entitled to reimbursement thereof, pursuant to this
Agreement, or (iii) with respect to any tax claims, within seven (7) calendar
days following the earlier of (A) an agreement between New Jersey Insured and
the Acquired Fund seeking indemnification that an indemnity amount is payable,
(B) an assessment of a tax by a taxing authority, or (C) a "determination" as
defined in Section 1313(a) of the Code. For purposes of this Section 12, the
term "assessment" shall have the same meaning as used in Chapter 63 of the Code
and Treasury Regulations thereunder, or any comparable provision under the laws
of the appropriate taxing authority. In the event of any objection by the
Indemnifying Party, the Indemnifying Party promptly shall investigate the claim,
and if it is not satisfied with the validity thereof, the Indemnifying Party
shall conduct the defense against such claim. All costs and expenses incurred by
the Indemnifying Party in connection with such investigation and defense of such
claim shall be borne by it. These indemnification provisions are in addition to,
and not in limitation of, any other rights the parties may have under applicable
law.
13. 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), New Jersey 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 MUNIHOLDINGS NEW JERSEY INSURED FUND, 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 New Jersey
Insured's transfer agent with respect to such shares. Each Acquired Fund will
provide New Jersey Insured on the Exchange Date with the name of
II-21
<PAGE> 148
any stockholder of an Acquired Fund who is to the knowledge of such Acquired
Fund an affiliate of that Acquired Fund 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 made by hand delivery, prepaid
certified mail or overnight service, addressed to any Fund, at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, Attn: Terry K. Glenn, 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 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, and Articles
Supplementary of each Fund 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.
II-22
<PAGE> 149
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.
MUNIHOLDINGS NEW JERSEY INSURED FUND, INC.
By: /s/ DONALD C. BURKE
-------------------------------------------
Donald C. Burke, Vice President and
Treasurer
Attest:
/s/ WILLIAM E. ZITELLI, JR.
------------------------------------------
William E. Zitelli, Jr., Secretary
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
By: /s/ DONALD C. BURKE
-------------------------------------------
Donald C. Burke, Vice President and
Treasurer
Attest:
/s/ WILLIAM E. ZITELLI, JR.
------------------------------------------
William E. Zitelli, Jr., Secretary
MUNIHOLDINGS NEW JERSEY INSURED FUND III, INC.
By: /s/ DONALD C. BURKE
-------------------------------------------
Donald C. Burke, Vice President and
Treasurer
Attest:
/s/ WILLIAM E. ZITELLI, JR.
------------------------------------------
William E. Zitelli, Jr., Secretary
II-23
<PAGE> 150
EXHIBIT III
ECONOMIC AND OTHER CONDITIONS IN NEW JERSEY
The following information is a brief summary of factors affecting the
economy of the state of New Jersey and does not purport to be a complete
description of such factors. Other factors will affect issuers. The summary is
based primarily upon one or more of the most recent publicly available offering
statements relating to debt offerings of New Jersey issuers, however, it has not
been updated nor will it be updated during the year. The Fund has not
independently verified the information.
New Jersey (sometimes referred to herein as the "State") personal income
tax rates were reduced so that beginning with the tax year 1996, personal income
tax rates are, depending upon a taxpayer's level of income and filing status,
30%, 15% or 9% lower than 1993 tax rates.
The State operates on a fiscal year beginning July 1 and ending June 30.
For example, "Fiscal Year 2000" refers to the State's fiscal year beginning July
1, 1999 and ending June 30, 2000.
The General Fund is the fund into which all State revenues, not otherwise
restricted by statute, are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenues, and certain miscellaneous revenue items are recorded in the
General Fund.
The State's undesignated General Fund balance was $442 million for Fiscal
Year 1996, $281 million for Fiscal Year 1997 and $228 million for Fiscal Year
1998. For the Fiscal Year 1999 and the Fiscal Year 2000, the balance in the
undesignated General Fund is estimated to be $207 million and $171 million,
respectively.
The State finances certain capital projects primarily through the sale of
the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. Certain state tax revenues and certain other fees
are pledged to meet the principal payments, interest payments and redemption
premium payments, if any, required to fully pay the debt. No general obligation
debt can be issued by the State without prior voter approval, except that no
voter approval is required for any law authorizing the creation of a debt for
the purpose of refinancing all or a portion of outstanding debt of the State, so
long as such law requires that the refinancing provide a debt service savings.
The State of New Jersey has implemented a plan to address the Year 2000
data processing problem and ensure the continuation of government operations
into the Year 2000 and beyond. Planning for the Year 2000 commenced in 1997 with
the requirement that the various State departments submit comprehensive three
year action plans identifying all year 2000 impacts, strategies and timeframes
for addressing these impacts and estimates of cost. The State imposed a
moratorium during Fiscal Year 1998 on all non-year 2000 related data processing
activities to ensure availability of resources for Year 2000 compliance.
Agencies were directed to review current and ongoing technology initiatives in
light of the moratorium and suspend all those that are not considered mission
critical. This moratorium will remain in effect until each agency can certify
that it is Year 2000 compliant. As of May 31, 1999, the testing, validation and
implementation of 83% of all centrally maintained State systems was complete.
Departmental systems are in varying stages of implementation. The total
estimated cost to the State to achieve Year 2000 compliance is $120 million of
which approximately $81.1 million of expenditures were incurred as of May 31,
1999. Colleges and universities, authorities, municipal, county and local
sub-divisions will address Year 2000 issues separately.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture.
During 1998 a continuation of the national business expansion, a strong
business climate in New Jersey and positive developments in surrounding
metropolitan areas were major sources of State economic growth.
Average employment in 1998 increased by 76.5 thousand jobs compared to
1997. Job gains were spread across a number of industries with particularly
strong growth in business services (20,900) and in wholesale and retail trade
(18,000).
III-1
<PAGE> 151
For the last decade, New Jersey's job growth has been concentrated in five
clusters of economic activity -- high technology, health, financial,
entertainment and logistics. One of every three of the State's workers are in
these sectors, and as a whole these sectors accounted for a 19% increase in
employment over the past decade compared to a 4% employment growth for all other
State industries.
Personal income in New Jersey, spurred by strong labor markets increased by
5.4% in 1998, a rate comparable to the national rate of increase. As a result,
retail sales rose by an estimated 6.2%. Low inflation, now less than 2%,
continues to benefit New Jersey consumers and businesses and low interest rates
boost housing and consumer durable goods expenditures. Home building had its
best year of the decade.
Joblessness fell in terms of both its absolute level and its rate, and by
the end of 1998, New Jersey's unemployment rate was at or below that of the
nation.
The outlook for 1999/2000 is for continued, although more moderate economic
growth. Job gains in the State may be constrained at times by labor shortages in
skilled technical areas, will be in the 50,000 range and personal income growth
will slow to an average of 4.3%.
Major caveats and uncertainties in the economic forecast for 1999/2000 have
increased. The national conditions in energy, agriculture, and manufactured
exports, particularly to Asian markets, are threats to the U.S. economy.
However, these areas of economic activity are under-represented in New Jersey
and hence the State has been able to avoid the immediate and direct effects of
those problems.
Other areas of concern include possible significant shifts in consumer and
investor confidence, unstable and potentially deflationary international
economic conditions, and the prospect of leaner profits for U.S. corporations.
In addition, the restructuring of major industries will continue spurred by the
imperative of cost containment, globalization of competition and deregulation.
Thus, 1999/2000 contains more risk than the recent past, but the momentum and
measures of the State's economic health are favorable.
The New Jersey outlook is based largely on expected national economic
performance and on recent State strategic policy actions aimed at infrastructure
improvements, effective education and training of New Jersey's workforce, and
those maintaining a competitive business climate. Investments in each of these
policy areas are seen as vital to maintaining the long-term health of the
State's economy.
Tort, Contract and Other Claims. At any given time, there are various
numbers of claims and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1,
et. seq.). The State does not formally estimate its reserve representing
potential exposure for these claims and cases. The State is unable to estimate
its exposure for these claims and cases.
The State routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A.
59:1-1, et. seq.). An independent study estimated an aggregate potential
exposure of $87,880,000 for tort and medical malpractice claims pending as of
July 1, 1998. In addition, at any given time, there are various numbers of
contract and other claims against the University of Medicine and Dentistry,
seeking recovery of monetary damages or other relief which, if granted, would
require the expenditure of funds. The State is unable to estimate its exposure
for these claims.
III-2
<PAGE> 152
Buena Regional Commercial Township et al. v. New Jersey Department of
Education et al. This lawsuit was filed in Superior Court, Chancery Division,
Cumberland County. This lawsuit was filed December 9, 1997, on behalf of 17
rural school districts seeking the same type of relief as has been mandated to
be provided to the poor urban school districts in Abbott v. Burke. The
plaintiffs requested a declaratory judgement stating that the chancery court
retain jurisdiction, pending the remanding of the matter to the Commissioner of
Education for a hearing. The petition was then amended to include three more
rural districts for a total of 20. The State and plaintiffs entered into a
consent order to transfer the matter to the Commissioner of Education for
resolution. The chancery court did not retain jurisdiction. Once the matter was
transferred to the Commissioner, plaintiffs moved to amend their pleadings and
have done so three times. With each new pleading, the State has answered with a
motion to dismiss. Decisions on the first two motions to dismiss were rendered
moot by plaintiffs' filing of a subsequent amended pleading. There has been no
decision on the last motion to dismiss filed. The State is unable at this time
to estimate its exposure for this claim and intends to defend this suit
vigorously.
Similar complaints have been filed individually by the school districts of
Dover and Pennsville. The matter concerning Dover is presently pending before
the Commissioner of Education and the parties are awaiting a decision on the
State's motion to dismiss. Pennsville is also pending before the Commissioner of
Education. The State is unable, at this time, to estimate its exposure for these
claims. The State intends to vigorously defend these matters.
Verner Stubaus, et al. v. State of New Jersey, et al. Plaintiffs, 25
middle income school districts, filed a complaint alleging that the State's
system of funding for their schools is violative of the constitutional rights of
equal protection and a thorough and efficient education. The complaint was filed
April 20, 1998. On June 23, 1998, plaintiffs filed an amended complaint removing
one and adding eighteen school district plaintiffs. The State defendants filed a
motion to dismiss the amended complaint on September 18, 1998. The motion was
argued on January 29, 1999 and the court reserved its decision. The State will
vigorously defend this matter. The State is unable, at this time, to estimate
its exposure for these claims.
United Hospitals et al. v. State of New Jersey and William Waldman. These
cases represent challenges by 19 State hospitals to Medicaid hospital
reimbursement since 1995. The matters were filed in the Appellate Division of
the Superior Court of New Jersey. The hospitals challenge all of the following:
(i) whether the State complied with certain federal requirements for Medicaid
reimbursement; (ii) whether the State's reimbursement regulations, N.J.A.C.
10:52-1 et seq., including the regulations' interpretation of marginal loss are
arbitrary, capricious and unreasonable, (iii) whether the Department of Human
Services ("DHS") incorrectly calculated the rates; (iv) whether DHS denied
hospitals a meaningful appeal process; (v) whether the 1996-97 State
Appropriations Act (L.1996, c.42) violates the New Jersey Constitution with
respect to the provision for Medicaid reimbursement to hospitals; and (vi)
whether DHS violated the Medicaid State Plan, filed with the U.S. Department of
Health and Human Services, in implementing hospital rates since 1995. The State
intends to vigorously defend these actions.
Abbott Districts' Early Childhood Plan Appeals. Abbott districts, in
furtherance of the Court's decision in Abbott v. Burke and DOE regulations, have
developed operational plans for the provision of early childhood programs. In
February of 1999, the Department of Education informed each of the districts of
the Department's concerns regarding each district's plan, and asked that amended
plans be submitted to the Department. The Abbott districts have filed individual
petitions of appeal with the Commissioner. Issues on appeal include the quality
of community care providers, the requirement that districts collaborate with
DHS-licensed facilities, the use of certificated teachers, requests for full day
preschool, accreditation of early childhood programs, and as-applied
constitutional challenges to N.J.A.C. 6:19A-1 et seq. In response to the filed
petitions, the State has filed answers or motions in lieu of answers. The
matters are being transmitted to the Office of Administrative Law for further
proceedings. To date, thirteen districts have filed petitions. Additionally, the
Education Law Center has filed petitions on behalf of students in each of the
three State-operated school districts of Newark, Jersey City and Paterson and on
behalf of the students of West New York. The State is unable to estimate its
exposure for these claims and intends to defend the suits vigorously.
III-3
<PAGE> 153
United Healthcare System, Inc. v. Fishman and Guhl. This Chapter 11 case
commenced two years ago when United Hospital closed. Through the adversary
complaint, United seeks to expunge proofs of claim filed in the Chapter 11 case
in 1997 by the Department of Health and Senior Services and the Department of
Human Services. United moreover asserts claims for turnover of the property of
the debtor's estate and declaratory relief. United wants the bankruptcy court to
take jurisdiction of and decide Medicaid reimbursement matters pending in New
Jersey state administrative proceedings or on appeal in the New Jersey appellate
courts. The pending Medicaid matters have an alleged potential exposure of
approximately $90 million. United also seeks turnover of monies collected by the
Department of Health and Senior Services pursuant to a statutory charge of a $10
per adjusted hospital admission in 1995-97 and an assessment of .53% of annual
hospital operating revenue in 1994-97. The State has filed a motion to dismiss.
The State intends to vigorously defend this action and also to oppose federal
bankruptcy court jurisdiction.
Currently, the State's general obligation bonds are rated AA+ by Standard &
Poor's, Aa1 by Moody's and AA+ by Fitch IBCA. From time to time agencies may
change their ratings.
III-4
<PAGE> 154
EXHIBIT IV
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 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 some time 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 a
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aal, Al, Baal, Bal and Bl.
Short-term Notes: The three ratings of Moody's for short-term notes are
MIG 1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best
quality, enjoying strong protection from established cash flows"; MIG 2/VMIG 2
denotes "high quality" with "ample margins of protection"; MIG 3/VMIG 3
instruments are of "favorable quality ... but ... lacking the undeniable
strength of the preceding grades."
IV-1
<PAGE> 155
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment capacity
will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins, in earning coverage of fixed
financial charges and high internal cash generation; and with established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
IV-2
<PAGE> 156
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity of the obligor to meet its financial commitment on
the obligation is extremely strong.
AA Debt rated "AA" differs from the highest-rated issues only in small
degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB
B
CCC
CC
C Debt rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest degree of speculation.
While such debt will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during
such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of similar action if
payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired
unless Standard & Poor's believes that such payments will be made
during such grace period.
IV-3
<PAGE> 157
c The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is
below an investment-grade level and/or the issuer's bonds are
deemed taxable.
p The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
financed by the debt being rated and indicates that payment of the
debt service requirements is largely or entirely dependent upon the
successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high
volatility or high variability in expected returns as a result of
noncredit risks. Examples of such obligations are securities with
principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to such notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
-- Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
IV-4
<PAGE> 158
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have an
adverse impact on these bonds, and therefore impair timely payment.
The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL
A conditional rating is premised on the successful completion of a project
or the occurrence of a specific event.
SUSPENDED
A rating is suspended when Fitch deems the amount of information available
from the issuer to be inadequate for rating purposes.
WITHDRAWN
A rating will be withdrawn when an issue matures or is called or refinanced
and, at Fitch's discretion, when an issuer fails to furnish proper and timely
information.
IV-5
<PAGE> 159
FITCHALERT
Ratings are placed on FitchAlert to notify investors of an occurrence that
is likely to result in a rating change and the likely direction of such change.
These are designated as "Positive," indicating a potential upgrade, "Negative,"
for potential downgrade, or "Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short-term, and should be resolved within three to 12
months.
RATINGS 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
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.
IV-6
<PAGE> 160
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than
issues rated "F-l+".
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-l"
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.
IV-7
<PAGE> 161
EXHIBIT V
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured New Jersey Municipal Bonds and Municipal Bonds
held by the Fund. The Fund has no obligation to obtain any such Policies, and
the terms of any Policies actually obtained may vary significantly from the
terms discussed below.
In determining eligibility for insurance, insurance companies will apply
their own standards. These standards correspond generally to the standards such
companies normally use in establishing the insurability of new issues of New
Jersey Municipal Bonds and Municipal Bonds and are not necessarily the criteria
that would be used in regard to the purchase of such bonds by the Fund. The
Policies do not insure (i) municipal securities ineligible for insurance and
(ii) municipal securities no longer owned by the Fund.
The Policies do not guarantee the market value of the insured New Jersey
Municipal Bonds and Municipal Bonds or the value of the shares of the Fund. In
addition, if the provider of an original issuance insurance policy is unable to
meet its obligations under such policy or if the rating assigned to the
insurance claims-paying ability of any such insurer deteriorates, the insurance
company will not have any obligation to insure any issue held by the Fund that
is adversely affected by either of the above described events. In addition to
the payment of premium, the policies may require that the Fund notify the
insurance company as to all New Jersey Municipal Bonds and Municipal Bonds in
the Fund's portfolio and permit the insurance company to audit their records.
The insurance premiums will be payable monthly by the Fund in accordance with a
premium schedule to be furnished by the insurance company at the time the
Policies are issued. Premiums are based upon the amounts covered and the
composition of the portfolio.
The Fund will seek to utilize insurance companies that have insurance
claims-paying ability ratings of AAA from Standard & Poor's ("S&P") or Fitch
IBCA, Inc. ("Fitch") or Aaa from Moody's Investors Service, Inc. ("Moody's").
There can be no assurance, however, that insurance from insurance carriers
meeting these criteria will be at all times available.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is considered by S&P to be extremely
strong and highly likely to remain so over a long period of time. A Fitch
insurance claims-paying ability rating provides an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by Fitch.
The ability to pay claims is adjudged by Fitch to be extremely strong for
insurance companies with this highest rating. In the opinion of Fitch,
foreseeable business and economic risk factors should not have any material
adverse impact on the ability of these insurers to pay claims. In Fitch's
opinion, profitability, overall balance sheet strength, capitalization and
liquidity are all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment or cyclical events. A Moody's
insurance claims-paying ability rating is an opinion of the ability of an
insurance company to repay punctually senior policyholder obligations and
claims. An insurer with an insurance claims-paying ability rating of Aaa is
considered by Moody's to be of the best quality. In the opinion of Moody's, the
policy obligations of an insurance company with an insurance claims-paying
ability rating of Aaa carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
V-1
<PAGE> 162
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
V-2
<PAGE> 163
[Proxy Card Front]
COMMON STOCK
MUNIHOLDINGS NEW JERSEY INSURED FUND, 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 Terry K. Glenn and William E. Zitelli, Jr.
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 Common Stock of MuniHoldings New Jersey Insured Fund, Inc. (the "Fund")
held of record by the undersigned on October 20, 1999 at the Annual Meeting of
Stockholders of the Fund to be held on December 15, 1999, 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" ITEMS 1, 2 AND 3.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE> 164
[Proxy Card Reverse]
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New Jersey Insured Fund II,
Inc. and MuniHoldings New Jersey Insured Fund III, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY
as marked to the contrary below) to vote for all nominees listed
below
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Kevin A. Ryan,
Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
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 person.
Dated:
X
Signature
X
Signature, if held jointly
SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 165
[Proxy Card Front]
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS NEW JERSEY INSURED FUND, 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 Terry K. Glenn and William E. Zitelli, Jr.
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
the Auction Market Preferred Stock of MuniHoldings New Jersey Insured Fund, Inc.
(the "Fund") held of record by the undersigned on October 20, 1999 at the Annual
Meeting of Stockholders of the Fund to be held on December 15, 1999, 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" ITEMS 1, 2 AND 3.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE> 166
[Proxy Card Reverse]
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New Jersey Insured Fund II,
Inc. and MuniHoldings New Jersey Insured Fund III, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY
as marked to the contrary below) to vote for all nominees listed
below
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C. Reilly,
Kevin A. Ryan, Richard R. West, Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
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.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Stock, in the same proportion as
votes cast by holders of Auction Market Preferred Stock, who have
responded to this proxy solicitation.
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:
X
Signature
X
Signature, if held jointly
SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 167
[Proxy Card Front]
COMMON STOCK
MUNIHOLDINGS NEW JERSEY 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 Terry K. Glenn and William E. Zitelli, Jr.
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 Common Stock of MuniHoldings New Jersey Insured Fund II, Inc. (the
"Fund") held of record by the undersigned on October 20, 1999 at the Annual
Meeting of Stockholders of the Fund to be held on December 15, 1999, 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" ITEMS 1, 2 AND 3.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE> 168
[Proxy Card Reverse]
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New Jersey Insured Fund,
Inc. and MuniHoldings New Jersey Insured Fund III, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY
as marked to the contrary below) to vote for all nominees listed
below
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Kevin A. Ryan,
Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
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 person.
Dated:
X
Signature
X
Signature, if held jointly
SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 169
[Proxy Card Front]
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS NEW JERSEY 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 Terry K. Glenn and William E. Zitelli, Jr.
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
the Auction Market Preferred Stock of MuniHoldings New Jersey Insured Fund II,
Inc. (the "Fund") held of record by the undersigned on October 20, 1999 at the
Annual Meeting of Stockholders of the Fund to be held on December 15, 1999, 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" ITEMS 1, 2 AND 3.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE> 170
[Proxy Card Reverse]
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New Jersey Insured Fund,
Inc. and MuniHoldings New Jersey Insured Fund III, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY
as marked to the contrary below) to vote for all nominees listed
below
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C.
Reilly, Kevin A. Ryan, Richard R. West, Arthur Zeikel
3. Proposal to ratify the selection of Ernst & Young LLP as the independent
auditors of the Fund to serve for the current fiscal year.
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.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Stock, in the same proportion as
votes cast by holders of Auction Market Preferred Stock, who have
responded to this proxy solicitation.
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:
X
Signature
X
Signature, if held jointly
SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 171
[Proxy Card Front]
COMMON STOCK
MUNIHOLDINGS NEW JERSEY INSURED FUND III, 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 Terry K. Glenn and William E. Zitelli, Jr.
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 Common Stock of MuniHoldings New Jersey Insured Fund III, Inc. (the
"Fund") held of record by the undersigned on October 20, 1999 at the Annual
Meeting of Stockholders of the Fund to be held on December 15, 1999, 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" ITEMS 1, 2 AND 3.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE> 172
[Proxy Card Reverse]
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New Jersey Insured Fund,
Inc. and MuniHoldings New Jersey Insured Fund II, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY
as marked to the contrary below) to vote for all nominees listed
below
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Kevin A. Ryan,
Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
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:
X
Signature
X
Signature, if held jointly
SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 173
[Proxy Card Front]
AUCTION MARKET
PREFERRED STOCK
MUNIHOLDINGS NEW JERSEY INSURED FUND III, 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 Terry K. Glenn and William E. Zitelli, Jr.
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
the Auction Market Preferred Stock of MuniHoldings New Jersey Insured Fund III,
Inc. (the "Fund") held of record by the undersigned on October 20, 1999 at the
Annual Meeting of Stockholders of the Fund to be held on December 15, 1999, 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" ITEMS 1, 2 AND 3.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return the card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE> 174
[Proxy Card Reverse]
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK.
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization among the Fund, MuniHoldings New Jersey Insured Fund,
Inc. and MuniHoldings New Jersey Insured Fund II, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY
as marked to the contrary below) to vote for all nominees listed
below
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C. Reilly,
Kevin A. Ryan, Richard R. West, Arthur Zeikel
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal year.
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.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any
uninstructed Auction Market Preferred Stock, in the same proportion as
votes cast by holders of Auction Market Preferred Stock, who have
responded to this proxy solicitation.
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:
X
Signature
X
Signature, if held jointly
SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 175
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 Amended and Restated Articles of Incorporation, a
form of which was previously filed as an exhibit to the Common Stock
Registration Statement (defined below); Article VI of the Registrant's By-Laws,
which was previously filed as an exhibit to the Common Stock Registration
Statement, and the Investment Advisory Agreement, a form of which was previously
filed as an exhibit to the Common Stock Registration Statement, provide for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be provided to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant 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 will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
Reference is made to (i) Section 6 of the Purchase Agreement relating to
the Registrant's Common Stock, a form of which was filed as an exhibit to the
Common Stock Registration Statement, and (ii) Section 7 of the Purchase
Agreement relating to the Registrant's AMPS, a form of which was filed as an
exhibit to the AMPS Registration Statement (defined below), for provisions
relating to the indemnification of the underwriter.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
1 (a) -- Articles of Incorporation of the Registrant, dated
January 27, 1998. (a)
(b) -- Form of Articles Supplementary creating the Series A AMPS
and the Series B AMPS. (c)
(c) -- Form of Articles Supplementary creating the Series C
AMPS, the Series D AMPS.
2 -- By-Laws of the Registrant. (a)
3 -- Not Applicable.
4 -- Form of Agreement and Plan of Reorganization among the
Registrant and MuniHoldings New Jersey Insured Fund II,
Inc., and MuniHoldings New Jersey Insured Fund III, Inc.
(included in Exhibit II to the Proxy Statement and
Prospectus contained in this Registration Statement)
5 (a) -- Copies of instruments defining the rights of
stockholders, including the relevant portions of the
Articles of Incorporation and the By-Laws of the
Registrant. (d)
(b) -- Form of specimen certificate for the Common Stock of the
Registrant. (a)
(c) -- Form of specimen certificate for the AMPS of the
Registrant. (b)
6 -- Form of Investment Advisory Agreement between Registrant
and Fund Asset Management, L.P. (a)
7 (a) -- Form of Purchase Agreement for the Common Stock. (a)
(b) -- Form of Purchase Agreement for the AMPS. (c)
(c) -- Form of Merrill Lynch Standard Dealer Agreement. (a)
8 -- Not applicable.
</TABLE>
C-1
<PAGE> 176
<TABLE>
<S> <C>
9 -- Custodian Contract between the Registrant and The Bank of New York. (b)
10 -- Not applicable.
11 -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
12 -- Private Letter Ruling from the Internal Revenue Service.*
13(a) -- Form of Registrar, Transfer Agency and Service Agreement between the Registrant and The Bank of New
York. (b)
(b) -- Form of Auction Agent Agreement between the Registrant and IBJ Whitehall Bank & Trust Company. (c)
(c) -- Form of Broker-Dealer Agreement. (c)
(d) -- Form of Letter of Representations. (c)
14(a) -- Consent of Ernst & Young LLP, independent auditors for the Registrant and MuniHoldings New Jersey
Insured Fund II, Inc.
15 -- Not applicable.
16 -- Power of Attorney (included on the signature page).
</TABLE>
---------------
* To be filed by amendment.
(a) Incorporated by reference to the Registrant's Registration Statement on Form
N-2 relating to the Registrant's Common Stock (File No. 333-45365) (the
"Common Stock Registration Statement"), filed on January 30, 1998.
(b) Incorporated by reference to Pre-Effective Amendment No. 1 to the Common
Stock Registration Statement, filed on March 6, 1998.
(c) Incorporated by reference to the Registrant's Registration Statement on Form
N-2 relating to the Registrant's Auction Market Preferred Stock (File No.
333-46513) (the "AMPS Registration Statement"), filed on February 18, 1998.
(d) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, previously filed as
Exhibit (1) to the Common Stock Registration Statement, and to Article II,
Article III (sections 1, 2, 3, 5 and 17), Article VI, Article VII, Article
XII, Article XIII and Article XIV of the Registrant's By-Laws previously
filed as Exhibit (2) to the Common Stock Registration Statement. Reference
is also made to the Form of Articles Supplementary filed as Exhibit 1(d) to
the AMPS Registration Statement and as Exhibit 1(e) hereto.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act of 1933, as amended, the
reoffering prospectus will contain information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of securities at
that time shall be deemed to be the initial bona fide offering of them.
(3) The Registrant undertakes to file, by post-effective amendment, either
a copy of the Internal Revenue Service private letter ruling applied for or an
opinion of counsel as to certain tax matters within a reasonable time after
receipt of such ruling or opinion.
C-2
<PAGE> 177
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and State
of New Jersey, on the 4th day of November, 1999.
MUNIHOLDINGS NEW JERSEY INSURED FUND,
INC.
(Registrant)
By: /s/ TERRY K. GLENN
------------------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K. Glenn,
Donald C. Burke and William E. Zitelli, or any of them, as attorney-in-fact, to
sign on his or her 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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ TERRY K. GLENN President & Director (Principal November 4, 1999
------------------------------------------------ Executive Officer)
(Terry K. Glenn)
/s/ DONALD C. BURKE Vice President & Treasurer November 4, 1999
------------------------------------------------ (Principal Financial &
(Donald C. Burke) Accounting Officer)
/s/ RONALD W. FORBES Director November 4, 1999
------------------------------------------------
(Ronald W. Forbes)
/s/ CYNTHIA A. MONTGOMERY Director November 4, 1999
------------------------------------------------
(Cynthia A. Montgomery)
/s/ CHARLES C. REILLY Director November 4, 1999
------------------------------------------------
(Charles C. Reilly)
/s/ KEVIN A. RYAN Director November 4, 1999
------------------------------------------------
(Kevin A. Ryan)
/s/ RICHARD R. WEST Director November 4, 1999
------------------------------------------------
(Richard R. West)
/s/ ARTHUR ZEIKEL Director November 4, 1999
------------------------------------------------
(Arthur Zeikel)
</TABLE>
C-3
<PAGE> 178
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
------- -----------
<S> <C>
1(c) -- Form of Articles Supplementary creating the Series C AMPS
and the Series D AMPS.
11 -- Opinion and Consent of Brown & Wood LLP, counsel for the
Registrant.
14(a) -- Consent of Ernst & Young LLP, independent auditors for
the Registrant and MuniHoldings New Jersey Insured Fund
II, Inc.
</TABLE>
C-4
