<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1998
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] PRE-EFFECTIVE AMENDMENT NO.
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[_] AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
--------------
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
ARTHUR ZEIKEL
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
ALICE A. PELLEGRINO, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
--------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES BEING BEING OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE FEE(2)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par
value)............... 7,705,000 shares $15.00 $115,575,000 $34,095
</TABLE>
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(1) Includes 1,005,000 shares subject to the Underwriter's over-allotment
option.
(2) Previously transmitted to the designated lockbox at Mellon Bank in
Pittsburgh, PA.
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.
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<PAGE>
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
- --------------------- ---------------------
<S> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1.Outside Front Cover Page............ Outside Front Cover Page
2.Inside Front and Outside Back Cover
Pages............................. Inside Front and Outside Back Cover
Pages; Underwriting
3.Fee Table and Synopsis.............. Prospectus Summary; Fee Table
4.Financial Highlights................ Not Applicable
5.Plan of Distribution................ Prospectus Summary; Net Asset Value;
Underwriting
6.Selling Shareholders................ Not Applicable
7.Use of Proceeds..................... Use of Proceeds; Investment Objective
and Policies
8.General Description of the
Registrant........................ Prospectus Summary; The Fund;
Investment Objective and Policies;
Risks and Special Considerations of
Leverage; Investment Restrictions;
Dividends and Distributions; Automatic
Dividend Reinvestment Plan; Mutual Fund
Investment Option
9.Management.......................... Directors and Officers; Investment
Advisory and Management Arrangements;
Custodian; Transfer Agent, Dividend
Disbursing Agent and Registrar
10.Capital Stock, Long-Term Debt, and
Other Securities.................. Description of Capital Stock
11.Defaults and Arrears on Senior
Securities........................ Not Applicable
12.Legal Proceedings................... Not Applicable
13.Table of Contents of the Statement
of Additional Information......... Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14.Cover Page.......................... Not Applicable
15.Table of Contents................... Not Applicable
16.General Information and History..... Not Applicable
17.Investment Objective and Policies... Prospectus Summary; Investment
Objective and Policies; Investment
Restrictions
18.Management.......................... Directors and Officers; Investment
Advisory and Management Arrangements
19.Control Persons and Principal
Holders of Securities............. Investment Advisory and Management
Arrangements
20.Investment Advisory and Other
Services.......................... Investment Advisory and Management
Arrangements; Custodian; Underwriting;
Transfer Agent, Dividend Disbursing
Agent and Registrar; Legal Opinions;
Experts
21.Brokerage Allocation and Other
Practices......................... Portfolio Transactions
22.Tax Status.......................... Taxes; Automatic Dividend Reinvestment
Plan
23.Financial Statements................ Report of Independent Auditors;
Statement of Assets, Liabilities and
Capital
</TABLE>
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 20, 1998
PROSPECTUS
6,700,000 SHARES
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
COMMON STOCK
------------
MuniHoldings New Jersey Insured Fund II, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New Jersey personal income taxes. The Fund 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. The Fund intends to invest in municipal obligations that are rated
investment grade or, if unrated, are considered by Fund Asset Management, L.P.
(the "Investment Adviser") to be of comparable quality. Under normal
circumstances, at least 80% of the Fund's assets will be invested in municipal
obligations with remaining maturities of one year or more that are covered by
insurance guaranteeing the timely payment of principal at maturity and
interest. Investors are advised to read this Prospectus carefully and retain it
for future reference.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. See "Prospectus Summary--Risk Factors and Special
Considerations."
Within approximately three months after completion of the offering of Common
Stock described herein, the Fund intends to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's capital will
actually be issued. INVESTORS SHOULD NOTE THE SPECIAL RISKS ASSOCIATED WITH THE
LEVERAGING OF THE COMMON STOCK. SEE "RISKS AND SPECIAL CONSIDERATIONS OF
LEVERAGE" AND "DESCRIPTION OF CAPITAL STOCK."
(Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO SALES LOAD PROCEEDS TO
PUBLIC (1)(2) FUND(3)
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<S> <C> <C> <C>
Per Share............. $15.00 None $15.00
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Total(4).............. $100,500,000 None $100,500,000
</TABLE>
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- --------------------------------------------------------------------------------
(1) The Investment Adviser or an affiliate will pay the Underwriter a
commission in the amount of % of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby. See
"Underwriting."
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deducting organizational and offering expenses payable by the Fund
estimated at $ .
(4) The Fund has granted the Underwriter an option to purchase up to an
additional 1,005,000 shares to cover over-allotments. If all such shares
are purchased, the total Price to Public and Proceeds to Fund will be
$115,575,000. See "Underwriting."
------------
The shares are offered by the Underwriter, subject to prior sale, when, as
and if issued by the Fund and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares will be made in New York, New York on or about September
, 1998.
------------
MERRILL LYNCH & CO.
------------
The date of this Prospectus is September , 1998.
<PAGE>
(Continued from preceding page)
The Fund may invest all or a portion of its assets in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Fund to an alternative minimum tax. At times, the Fund may
seek to hedge its portfolio through the use of options and futures
transactions. There can be no assurance that the investment objective of the
Fund will be realized. The Fund is designed primarily for long-term investors
and should not be considered a vehicle for trading purposes. The address of
the Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2800.
Prior to this offering, there has been no public market for the Common Stock
of the Fund. The Fund plans to apply to list its shares of Common Stock on the
New York Stock Exchange. However, during an initial period, which is not
expected to exceed two weeks from the date of this Prospectus, the Fund's
Common Stock will not be listed on any securities exchange. During such
period, the Underwriter does not intend to make a market in the Fund's Common
Stock. Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period.
The issuance of the preferred stock will result in leveraging of the Common
Stock. Although the terms of the preferred stock offering will be determined
by the Fund's Board of Directors, it is anticipated that the preferred stock
will pay dividends that will be adjusted over either relatively short-term
periods (generally seven to 28 days) or medium-term periods (up to five years)
and that the dividend rate will be based upon prevailing interest rates for
debt obligations of comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in accordance with the
Fund's investment objective. Because under normal market conditions,
obligations with longer maturities produce higher yields than short-term and
medium-term obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term rates paid
by the Fund and the longer-term rates received by the Fund will provide
holders of Common Stock with a potentially higher yield.
The Underwriter may engage in transactions that stabilize, maintain, or
otherwise affect the price of the Fund's Common Stock. Such transactions may
include stabilizing, the purchase of the Fund's Common Stock to cover short
positions and the imposition of penalty bids. For a description of these
activities, see "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE FUND MuniHoldings New Jersey Insured Fund II, Inc. (the "Fund") is a
newly organized, non-diversified, closed-end management investment
company. See "The Fund."
THE The Fund is offering 6,700,000 shares of Common Stock at an initial
OFFERING offering price of $15.00 per share. The Common Stock is being
offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch" or the "Underwriter"). The Underwriter has been
granted an option, exercisable for 45 days from the date of this
Prospectus, to purchase up to 1,005,000 additional shares of Common
Stock to cover over-allotments. See "Underwriting."
INVESTMENT The investment objective of the Fund is to provide shareholders
OBJECTIVE with current income exempt from Federal income tax and New Jersey
AND personal income taxes. The Fund seeks to achieve its investment
POLICIES 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 ("New Jersey
Municipal Bonds"). The Fund intends to invest in municipal
obligations that are rated investment grade or, if unrated, are
considered by the Investment Adviser to be of comparable quality.
The Fund will seek to achieve its investment objective by seeking
to invest substantially all (a minimum of 80%) of its assets in New
Jersey Municipal Bonds, except at times when, in the judgment of
the Investment Adviser, New Jersey Municipal Bonds of sufficient
quality and quantity are unavailable for investment at suitable
prices by the Fund. At all times, except during interim periods
pending investment of the net proceeds of public offerings of the
Fund's securities and during temporary defensive periods, the Fund
will maintain at least 80% of its assets in New Jersey Municipal
Bonds. Under normal circumstances, at least 80% of the Fund's
assets will be invested in municipal obligations with remaining
maturities of one year or more that are covered by insurance
guaranteeing the timely payment of principal at maturity and
interest. The Fund does not ordinarily intend to realize
significant investment income not exempt from Federal income and
New Jersey personal income taxes. See "Investment Objective and
Policies."
LISTING Prior to this offering, there has been no public market for the
Common Stock of the Fund. The Fund plans to apply to list its
shares of Common Stock on the New York Stock Exchange. However,
during an initial period, which is not expected to exceed two weeks
from the date of this Prospectus, the Fund's shares of Common Stock
will not be listed on any securities exchange. During such period,
the Underwriter does not intend to make a market in the Fund's
shares of Common Stock. Consequently, it is anticipated that an
investment in the Fund will be illiquid during such period. See
"Underwriting."
3
<PAGE>
LEVERAGE The Fund anticipates that it will be substantially invested in
longer-term municipal obligations within approximately three months
after completion of the offering of Common Stock described herein.
To leverage the Common Stock, the Fund intends to offer shares of
preferred stock within three months after completion of this
offering representing approximately 40% of the Fund's capital
immediately after the issuance of such preferred stock. There can
be no assurance, however, that preferred stock representing such
percentage of the Fund's capital will actually be issued. The
issuance of the preferred stock will result in the leveraging of
the Common Stock. Although the terms of the preferred stock
offering will be determined by the Fund's Board of Directors, it is
anticipated that the preferred stock will pay dividends that will
be adjusted over either relatively short-term periods (generally
seven to 28 days) or medium-term periods (up to five years) and
that the dividend rate will be based upon prevailing interest rates
for debt obligations of comparable maturity. The proceeds of the
preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne
by the Fund and will reduce the net asset value of the Common
Stock. Additionally, under certain circumstances, when the Fund is
required to allocate taxable income to holders of preferred stock,
it is anticipated that the terms of the preferred stock will
require the Fund to make an additional distribution to such holders
in an amount approximately equal to the tax liability resulting
from such allocation and such additional distribution (such amount,
an "Additional Distribution").
The use of leverage by the Fund creates an opportunity for
increased net income, but, at the same time, creates special risks.
Because, under normal market conditions, obligations with longer
maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term
rates (and any Additional Distribution) paid by the Fund and the
longer-term rates received by the Fund will provide holders of
Common Stock with a potentially higher yield. Investors should
note, however, that leverage creates certain risks for holders of
Common Stock, including higher volatility of both the net asset
value and market value of the Common Stock. Since any decline in
the value of the Fund's investments will be borne entirely by
holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value than
if the Fund were not leveraged, which would likely be reflected in
a decline in the market price for shares of Common Stock.
Additionally, fluctuations in the dividend rates on, and the amount
of taxable income allocable to, the preferred stock will affect the
yield to holders of Common Stock. See "Risks and Special
Considerations of Leverage." Upon issuance of the preferred stock,
holders of the Common Stock will receive all net income of the Fund
remaining after payment of dividends (and any Additional
Distribution) on the preferred stock and will generally be entitled
to a pro rata share of net realized capital gains. Upon any
liquidation of the Fund, the holders of shares of preferred stock
will be entitled to receive liquidating distributions (expected to
equal the original purchase price per share of preferred stock plus
any accumulated and unpaid dividends thereon and any accumulated
and unpaid Additional Distribution) before any distribution is made
to holders of Common Stock. See "Description of Capital Stock--
Preferred Stock."
4
<PAGE>
Holders of preferred stock, voting as a separate class, will be
entitled to elect two of the Fund's Directors, and holders of
common and preferred stock, voting together as a single class, will
be entitled to elect the remaining Directors. If, at any time,
dividends on the Fund's preferred stock were to be in arrears in an
amount equal to two full years of dividend payments, the holders of
all outstanding shares of preferred stock, voting as a separate
class, would be entitled to elect a majority of the Fund's
Directors. The holders of preferred stock will also vote separately
on certain other matters as required under the Fund's Articles of
Incorporation, the Investment Company Act of 1940, as amended (the
"1940 Act") and Maryland law, but otherwise will have equal voting
rights with holders of Common Stock (one vote per share) and will
vote together with holders of Common Stock as a single class. See
"Description of Capital Stock--Preferred Stock--Voting Rights."
There can be no assurance that the Fund will be able to realize a
higher net return on its investment portfolio than the then current
dividend rate (and any Additional Distribution) on the preferred
stock. Changes in certain factors could cause the relationship
between the short-term and medium-term dividend rates (and any
Additional Distribution) paid by the Fund on the preferred stock
and the long-term rates received by the Fund on its investment
portfolio to change so that such short-term and medium-term rates
(and any Additional Distribution) may substantially increase
relative to rates on the long-term obligations in which the Fund
may be invested. Under such conditions, the benefit of leverage to
holders of Common Stock will be reduced, and the Fund's leveraged
capital structure could result in a lower rate of return to holders
of Common Stock than if the Fund were not leveraged. The Fund will
have the authority to redeem the preferred stock for any reason and
may redeem all or part of the preferred stock if it anticipates
that the Fund's leveraged capital structure will result in a lower
rate of return to holders of the Common Stock than that obtainable
if the Common Stock were unleveraged for any significant amount of
time.
Prior to the time it offers the preferred stock, the Fund intends
to apply for ratings on such stock from one or more nationally
recognized statistical rating organizations ("NRSROs"). The Fund
believes that obtaining a rating for the preferred stock will
enhance the marketability of the preferred stock and thereby reduce
the dividend rate on the preferred stock from that which the Fund
would be required to pay if the preferred stock were not rated.
INVESTMENT Fund Asset Management, L.P. is the Fund's investment adviser and is
ADVISER responsible for the management of the Fund's investment portfolio
and for providing administrative services to the Fund. For its
services, the Fund pays the Investment Adviser a monthly fee at the
annual rate of 0.55 of 1% of the Fund's average weekly net assets,
including any proceeds from the issuance of preferred stock. The
Investment Adviser is an affiliate of Merrill Lynch Asset
Management, L.P. ("MLAM"), which is owned and controlled by Merrill
Lynch & Co., Inc. ("ML & Co."). The Asset Management Group of
ML & Co. (which includes the Investment Adviser), acts as the
investment adviser for over 100 other registered management
investment companies and offers portfolio management services to
individuals and institutions. As of July 1998, the Investment
Adviser and MLAM had a total of approximately $488 billion in
5
<PAGE>
investment company and other portfolio assets under management
(approximately $37 billion of which was invested in municipal
securities). This amount includes assets managed for certain
affiliates of the Investment Adviser. See "Investment Advisory
and Management Arrangements."
DIVIDENDS The Fund intends to pay dividends monthly and to distribute
AND substantially all of its net investment income to holders of
DISTRIBUTIONS Common Stock. From and after issuance of the preferred stock,
monthly distributions to holders of Common Stock will consist
of substantially all net investment income remaining after the
payment of dividends (and any Additional Distribution) on the
preferred stock. It is expected that the Fund will commence
paying dividends to holders of Common Stock within
approximately 90 days from the date of this Prospectus. Net
capital gains, if any, will be distributed at least annually to
holders of Common Stock and, after issuance of the preferred
stock, on a pro rata basis to holders of Common Stock and
preferred stock. When capital gains or other taxable income is
allocated to holders of preferred stock under certain
circumstances, it is anticipated that the terms of the
preferred stock will require the Fund to make an Additional
Distribution. The Fund is not permitted to declare any cash
dividend or other distribution on its Common Stock unless asset
coverage (as defined in the 1940 Act) with respect to the
Fund's preferred stock is at least 200%. If the Fund issues
preferred stock representing 40% of its capital after the time
of issuance, its asset coverage with respect to the preferred
stock will be approximately 250%. If the Fund's ability to make
distributions on its Common Stock is limited, this could under
certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated
investment company, which would have adverse tax consequences
for holders of Common Stock. See "Taxes."
AUTOMATIC All dividend and capital gains distributions will be
DIVIDEND automatically reinvested in additional shares of Common Stock
REINVESTMENT of the Fund unless a shareholder elects to receive cash.
PLAN Shareholders whose shares are held in the name of a broker or
nominee should contact such broker or nominee to confirm that
they may participate in the Fund's dividend reinvestment plan.
See "Automatic Dividend Reinvestment Plan."
MUTUAL Purchasers of shares of Common Stock of the Fund through Merrill
FUND Lynch in this offering will have an investment option
INVESTMENT consisting of the right to reinvest the net proceeds from a
OPTION sale of such shares (the "Original Shares") in Class D initial
sales charge shares of certain Merrill Lynch-sponsored open-end
mutual funds ("Eligible Class D Shares") at their net asset
value, without the imposition of the initial sales charge, if
the conditions set forth below are satisfied. First, the sale of
the Original Shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in
Eligible Class D Shares. Second, the Original Shares must have
been either acquired in this offering or be shares representing
reinvested dividends from shares of Common Stock acquired in
this offering. Third, the Original Shares must have been
continuously maintained in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to be eligible
for the investment option. Class D shares of the mutual funds
are subject to an account maintenance fee at an annual rate of
up to 0.25% of the average daily net asset value of such mutual
fund. See "Mutual Fund Investment Option."
6
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a newly organized, non-diversified, closed-end management
investment company and has no operating history. Shares of closed-end
investment companies frequently trade at a discount from their net asset value.
This risk may be greater for investors expecting to sell their shares in a
relatively short period after completion of the public offering. Accordingly,
the Common Stock of the Fund is designed primarily for long-term investors and
should not be considered a vehicle for trading purposes. The net asset value of
the Fund's shares of Common Stock will fluctuate with interest rate changes as
well as with price changes of the Fund's portfolio securities, and these
fluctuations are likely to be greater in the case of a fund having a leveraged
capital structure, as contemplated for the Fund. See "Risks and Special
Considerations of Leverage."
The Fund intends to invest a substantial portion of its assets in New Jersey
Municipal Bonds and, therefore, it 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. See "Investment Objective and Policies--Special Considerations Relating
to New Jersey Municipal Bonds" and Appendix I, "Economic and Financial
Conditions in New Jersey."
The Fund has registered as a "non-diversified" investment company so that it
will be able to invest more than 5% of its assets in the obligations of any
single issuer, subject to the diversification requirements of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to the
Fund. Since the Fund may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Fund may be more
susceptible than a more widely-diversified fund to any single economic,
political or regulatory occurrence.
The Fund intends to invest in municipal obligations that are rated in the
investment grade rating categories by Standard & Poor's ("S&P"), Moody's
Investors Service, Inc. ("Moody's") or Fitch IBCA, Inc. ("Fitch") or, if not
rated, are considered to be of comparable quality by the Investment Adviser.
Obligations rated in the lowest investment grade category may have certain
speculative characteristics. See "Investment Objective and Policies." The Fund
may invest in certain tax-exempt securities classified as "private activity
bonds" that may subject certain investors in the Fund to the alternative
minimum tax. See "Taxes--General."
The Fund will be subject to certain restrictions on investments imposed by
guidelines of the insurance companies issuing the portfolio insurance and to
guidelines of one or more NRSROs that may issue ratings for the preferred
stock. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. It is
not anticipated that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments that may be characterized as
derivatives. These investments include various types of options transactions
and futures and options thereon. Such investments also may consist of non-
municipal tax-exempt securities and securities the potential investment return
on which is based on the change in particular measurements of value or interest
rates ("indexed securities"), including securities the potential investment
return on which is inversely related to a change in particular measurements of
value or interest rates ("inverse
7
<PAGE>
securities"). Certain of such investments may be made solely for hedging
purposes, not for speculation, and may in some cases require limitations as to
the type of permissible counterparty to the transaction. Investments in indexed
securities, including inverse securities, subject the Fund to the risks
associated with changes in the particular indices, which may include reduced or
eliminated interest payments and losses of invested principal. Derivative
instruments may have certain characteristics that have a similar effect on the
return to Common Stock investors as the leverage transactions discussed under
"Risks and Special Considerations of Leverage;" however, certain derivative
investments will not be taken into account for purposes of calculating the
percentage of leverage of the Fund's portfolio. For a further discussion of the
risks associated with derivative investments, see "Investment Objective and
Policies," "Investment Objective and Policies--Other Investment Policies--
Indexed and Inverse Floating Obligations," "--Call Rights" and "Investment
Objective and Policies--Options and Futures Transactions."
Subject to its investment restrictions, the Fund is authorized to engage in
options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security that is the subject of the hedge and the inability to close futures
transactions under certain conditions. Because of the anticipated leveraged
nature of the Common Stock, hedging transactions will result in a larger impact
on the net asset value of the Common Stock than would be the case if the Common
Stock were not leveraged. Certain OTC options and assets used to cover OTC
options written by the Fund may be considered to be illiquid. The illiquidity
of such options or assets may prevent a successful sale of such options or
assets, result in a delay of sale, or reduce the amount of proceeds that might
be otherwise realized. See "Investment Objective and Policies--Options and
Futures Transactions." The Fund intends to apply for ratings of the preferred
stock from one or more NRSROs. In order to obtain these ratings, the Fund may
be required to limit its use of hedging techniques in accordance with the
specified guidelines of such NRSRO.
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. See "Description of Capital Stock--
Certain Provisions of the Articles of Incorporation."
8
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment Plan Fees....................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to shares of
Common Stock):
Management Fees(a)(b)................................................. 0.55%
Interest Payments on Borrowed Funds................................... None
Other Expenses(b)..................................................... 0.21%
----
Total Annual Expenses(b)............................................ 0.76%
====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
EXAMPLE ---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) total annual expenses
of 0.76% (assuming no leverage) and 1.35 % (assuming
leverage) and (2) a 5% annual return throughout the
periods:
Assuming No Leverage.................................. $ 8 $24 $42 $ 94
Assuming Leverage..................................... $14 $43 $74 $162
</TABLE>
- --------
(a) See "Investment Advisory and Management Arrangements"--page 27.
(b) In the event that the Fund utilizes leverage by issuing preferred stock in
an amount of approximately 40% of the Fund's capital, it is estimated
that, as a percentage of net assets attributable to Common Stock, the
Management Fees would be .92%, Other Expenses would be .43% and Total
Annual Expenses would be 1.35%. See "Risks and Special Considerations of
Leverage."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by the Securities and Exchange Commission regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
9
<PAGE>
THE FUND
MuniHoldings New Jersey Insured Fund II, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company. The Fund
was incorporated under the laws of the State of Maryland on August 17, 1998,
and has registered under the 1940 Act. The Fund's principal office is located
at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone
number is (609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their
securities at the option of the shareholder, whereas open-end companies issue
securities redeemable at net asset value at any time at the option of the
shareholder and typically engage in a continuous offering of their shares.
Accordingly, open-end investment companies are subject to continuous asset in-
flows and out-flows that can complicate portfolio management. Shares of
closed-end investment companies, however, frequently trade at a discount from
their net asset value. This risk may be greater for investors expecting to
sell their shares in a relatively short period after completion of the public
offering.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ (or
approximately $ assuming the Underwriter exercises the over-allotment
option in full) after payment of organizational and offering expenses.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of Common Stock, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-
term, tax-exempt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with current
income exempt from Federal income tax and New Jersey personal income taxes.
The Fund seeks to achieve its investment objective by investing primarily in a
portfolio of long-term, investment grade municipal obligations issued by or on
behalf of the State of New Jersey, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers that pay interest which, in
the opinion of bond counsel to the issuer, is exempt from Federal income tax
and New Jersey personal income taxes. The Fund will seek to achieve its
investment objective by seeking to invest substantially all (a minimum of 80%)
of its assets in New Jersey Municipal Bonds, except at times when, in the
judgment of the Investment Adviser, New Jersey Municipal Bonds of sufficient
quality and quantity are unavailable for investment at suitable prices by the
Fund. At all times, except during interim periods pending investment of the
net proceeds of public offerings of the Fund's securities and during temporary
defensive periods, the Fund will maintain at least 80% of its assets in New
Jersey Municipal Bonds. Under normal circumstances, at least 80% of the Fund's
assets will be invested in municipal obligations with remaining maturities of
one year or more that are covered by insurance guaranteeing the timely payment
of principal at maturity and interest. The investment objective of the Fund is
a fundamental policy that may not be changed without a vote of a majority of
the Fund's outstanding voting securities, as defined below under "Investment
Restrictions." There can be no assurance that the investment objective of the
Fund will be realized. At times the Fund may seek to hedge its portfolio
through the use of futures transactions and options to reduce volatility in
the net asset value of its shares of Common Stock.
10
<PAGE>
The Fund ordinarily does not intend to realize significant investment income
not exempt from Federal income tax and New Jersey personal income taxes. To
the extent that suitable New Jersey Municipal Bonds are not available for
investment by the Fund, as determined by the Investment Adviser, the Fund may
purchase long-term obligations issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions,
agencies and instrumentalities paying interest which, in the opinion of bond
counsel to the issuer, is exempt from Federal income tax but not New Jersey
personal income taxes ("Municipal Bonds"). At all times, except during interim
periods pending investment of the net proceeds of public offerings of the
Fund's securities and during temporary defensive periods, the Fund will have
at least 80% of its assets invested in New Jersey Municipal Bonds and
Municipal Bonds. The Fund may invest all or a portion of its assets in certain
tax-exempt securities classified as "private activity bonds" (in general,
bonds that benefit non-governmental entities) that may subject certain
investors in the Fund to an alternative minimum tax.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may also 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 1940 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. Non-Municipal Tax-
Exempt Securities will be considered "New Jersey Municipal Bonds" or
"Municipal Bonds" for purposes of the Fund's investment objective and
policies.
Investment in shares of Common Stock of the Fund offers several potential
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal income and New Jersey personal income taxes by investing in a
professionally managed portfolio comprised primarily of investment grade
insured New Jersey Municipal Bonds. Investment in the Fund also relieves the
investor of the burdensome administrative details involved in managing a
portfolio of New Jersey Municipal Bonds. Additionally, the Investment Adviser
will seek to enhance the yield on the Common Stock by leveraging the Fund's
capital structure through the issuance of preferred stock. The benefits are at
least partially offset by the expenses involved in operating an investment
company. Such expenses primarily consist of the advisory fee and operational
costs. Additionally, the use of leverage involves certain expenses and special
risk considerations. See "Risks and Special Considerations of Leverage."
The investment grade New Jersey Municipal Bonds and Municipal Bonds in which
the Fund will primarily invest are those New Jersey Municipal Bonds and
Municipal Bonds 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 the Investment Adviser. In the case of long-term debt,
the investment grade rating categories are AAA through BBB for S&P, Aaa
through Baa for Moody's and AAA through BBB for Fitch. In the case of short-
term notes, the investment grade rating categories are SP-1+ through SP-3 for
S&P, MIG-1 through MIG-4 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 fourth highest rating
category (BBB, SP-3 and A-3 for S&P; Baa, MIG-4 and Prime-3 for Moody's; and
BBB and F-3 for Fitch), while considered "investment grade," may have certain
speculative characteristics. There may be sub-categories or gradations
indicating relative standing within the rating categories set forth above. See
Appendix II to this Prospectus for a description of S&P's, Moody's and Fitch's
ratings of Municipal Bonds. In assessing the quality of New Jersey Municipal
Bonds and Municipal
11
<PAGE>
Bonds with respect to the foregoing requirements, the Investment Adviser will
take into account the portfolio insurance as well as the nature of any letters
of credit or similar credit enhancements to which particular New 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, the Investment
Adviser may consider such municipal obligations to be equivalent to AAA- or
Aaa- rated securities, as the case may be, even though such New 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.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations, in the opinion of counsel to the issuer,
that contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short
notice period not to exceed seven days. Participating VRDOs provide the Fund
with a specified undivided interest (up to 100%) in the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Fund has been advised by
its counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can 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, as
proposed for the Fund. See "Risks and Special Considerations of Leverage."
The Fund intends to invest primarily in long-term New Jersey Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term New Jersey Municipal Bonds and Municipal Bonds
with a maturity of between three years and ten years. The Fund may invest in
short-term, tax-exempt securities, short-term U.S. Government securities,
repurchase agreements or cash. Such short-term securities or cash will not
exceed 20% of its total assets except during interim periods pending
investment of the net proceeds of public offerings of the Fund's securities or
in anticipation of the repurchase or redemption of the Fund's securities and
temporary periods when, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. The Fund does not ordinarily intend to
realize significant interest income not exempt from Federal income tax and New
Jersey personal income taxes.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However,
12
<PAGE>
the Fund's investments will be limited so as to qualify the Fund for special
tax treatment afforded regulated investment companies under the Code. See
"Taxes." To qualify, among other requirements, the Fund will limit its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities (other than U.S. Government securities) of a single issuer,
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer. A fund
that elects to be classified as "diversified" under the 1940 Act must satisfy
the foregoing 5% requirement with respect to 75% of its total assets. To the
extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's yield may fluctuate to a greater extent than
that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's assets will be
invested in New 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 Fund
will seek to limit its investments to municipal bonds insured under insurance
policies issued by insurance carriers that have total admitted assets
(unaudited) of at least $75,000,000 and capital and surplus (unaudited) of at
least $50,000,000 and insurance claims-paying ability ratings of AAA from S&P
or Fitch or Aaa from Moody's. There can be no assurance that insurance from
insurance carriers meeting these criteria will be at all times available. See
Appendix III to this Prospectus for a brief description of S&P's, Fitch's and
Moody's insurance claims-paying ability ratings. Currently, it is anticipated
that a majority of the insured New Jersey Municipal Bonds and Municipal Bonds
in the Fund's portfolio will be insured by the following insurance companies
that satisfy the foregoing criteria: AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company, Financial Security Assurance and Municipal Bond
Investors Assurance Corporation. The Fund also may purchase New Jersey
Municipal Bonds and Municipal Bonds covered by insurance issued by any other
insurance company that satisfies the foregoing criteria. It is anticipated
that initially a majority of insured New Jersey Municipal Bonds and Municipal
Bonds held by the Fund will be insured under policies obtained by parties
other than the Fund.
The Fund may purchase, but has no obligation to purchase, separate insurance
policies (the "Policies") from insurance companies meeting the criteria set
forth above that guarantee the payment of principal and interest on specified
eligible New Jersey Municipal Bonds and Municipal Bonds purchased by the Fund.
A New Jersey Municipal Bond or a Municipal Bond will be eligible for coverage
if it meets certain requirements of the insurance company set forth in a
Policy. In the event interest or principal on an insured New Jersey Municipal
Bond and Municipal Bond is not paid when due, the insurer will be obligated
under its Policy to make such payment not later than 30 days after it has been
notified by, and provided with documentation from, the Fund that such
nonpayment has occurred.
The Policies will be effective only as to insured New Jersey Municipal Bonds
and Municipal Bonds beneficially owned by the Fund. In the event of a sale of
any New Jersey Municipal Bonds and Municipal Bonds held by the Fund, the
issuer of the relevant Policy will be liable only for those payments of
interest and principal that are then due and owing. The Policies will not
guarantee the market value of the insured New Jersey Municipal Bonds and
Municipal Bonds or the value of the shares of the Fund.
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities
remain in the Fund's portfolio. In addition, the insurer may not cancel its
Policies for any reason except failure to pay premiums when due. The Board of
Directors of the Fund will reserve the right to terminate any of the Policies
if it determines that the benefits to the Fund of having its portfolio insured
under such policy are not justified by the expense involved.
13
<PAGE>
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. The Investment Adviser estimates that the
cost of the annual premiums for the Policies currently ranges from
approximately .02 of 1% to .15 of 1% of the principal amount of the New Jersey
Municipal Bonds and Municipal Bonds covered by such Policies. The estimate is
based on the expected composition of the Fund's portfolio of New Jersey
Municipal Bonds and Municipal Bonds. Additional information regarding the
Policies is set forth in Appendix III to this Prospectus. In instances in
which the Fund purchases New Jersey Municipal Bonds and Municipal Bonds
insured under policies obtained by parties other than the Fund, the Fund does
not pay the premiums for such policies; rather, the cost of such policies may
be reflected in the purchase price of the New Jersey Municipal Bonds and
Municipal Bonds.
It is the intention of the Investment Adviser to retain any insured
securities that are in default or in significant risk of default and to place
a value on the insurance, which ordinarily will be the difference between the
market value of the defaulted security and the market value of similar
securities that are not in default. In certain circumstances, however, the
Investment Adviser may determine that an alternate value for the insurance,
such as the difference between the market value of the defaulted security and
its par value, is more appropriate. The Investment Adviser's ability to manage
the portfolio may be limited to the extent it holds defaulted securities,
which may limit its ability in certain circumstances to purchase other New
Jersey Municipal Bonds and Municipal Bonds. See "Net Asset Value" below for a
more complete description of the Fund's method of valuing defaulted securities
and securities that have a significant risk of default.
There can be no assurance that insurance with the terms and issued by
insurance carriers meeting the criteria described above will continue to be
available to the Fund. In the event the Board of Directors determines that
such insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may modify the criteria for insurance carriers
or the terms of the insurance, or may 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 the Investment Adviser periodically
reviews the financial condition of each insurer, there can be no assurance
that the insurers will be able to honor their obligations under all
circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured New 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 industrial
development bonds ("IDBs") are issued by or on behalf of public authorities to
finance various privately operated facilities, including certain local
facilities for water supply, gas, electricity, sewage or solid waste disposal.
For purposes of this Prospectus, such obligations are Municipal Bonds if the
interest paid thereon is exempt from Federal income tax and as 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 IDBs
or "private activity bonds" as discussed below. Also, for purposes of this
Prospectus, Non-Municipal Tax-Exempt securities as discussed above will be
considered New Jersey Municipal Bonds or Municipal Bonds.
14
<PAGE>
The two principal classifications of New Jersey Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which
latter category includes IDBs and, for bonds issued after August 15, 1986,
private activity bonds. General obligation bonds (other than those of the
State of New Jersey which has limited taxing powers) are secured by the
issuer's pledge of faith, credit and taxing power for the repayment of
principal and the payment of interest. Revenue or special obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as from the user of the facility being
financed. IDBs are in most cases revenue bonds and do not generally constitute
the pledge of the credit or taxing power of the issuer of such bonds. The
repayment of principal and the payment of interest on such industrial
development bonds depends solely on the ability of the user of the facility
financed by the bonds to meet its financial obligations and the pledge, if
any, of real and personal property so financed as security for such payment.
New 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.
The Fund may purchase New Jersey Municipal Bonds and Municipal Bonds
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities). Interest received on certain tax-exempt securities
that are classified as "private activity bonds" may subject certain investors
in the Fund to an alternative minimum tax. There is no limitation on the
percentage of the Fund's assets that may be invested in New Jersey Municipal
Bonds and Municipal Bonds that may subject certain investors to an alternative
minimum tax. See "Taxes--General." Also included within the general category
of New Jersey Municipal Bonds and Municipal Bonds are participation
certificates issued by government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. The
certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively referred to
as "lease obligations") relating to such equipment, land or facilities.
Although lease obligations do not constitute general obligations of the issuer
for which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is backed by the issuer's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses, which provide that the issuer
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the lease
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more
conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of New Jersey Municipal Bonds and Municipal Bonds for
investment by the Fund.
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL BONDS
The risks and special considerations involved in investments in New Jersey
Municipal Bonds vary with the types of instruments being acquired. Investments
in Non-Municipal Tax-Exempt Securities may present similar risks, depending on
the particular product. Moreover, the Fund ordinarily will invest at least 80%
of its total assets in New Jersey Municipal Bonds and, therefore, it is more
susceptible to factors adversely affecting issuers
15
<PAGE>
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. The
Investment Adviser does not believe that current economic conditions in New
Jersey will have a significant adverse effect on the Fund's ability to invest
prudently in New Jersey Municipal Bonds. As of the date of this Prospectus,
the state's general obligation bonds are rated AA+ by S&P, Aa1 by Moody's and
AA+ by Fitch. See Appendix I, "Economic and Financial Conditions in New
Jersey" and Appendix II, "Ratings of Municipal Bonds."
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known,
as with the issuance of preferred stock, as "leveraging") create an
opportunity for greater total return since the Fund will not be required to
sell portfolio securities to repurchase or redeem shares but, at the same
time, increase exposure to capital risk. In addition, borrowed funds are
subject to interest costs that may offset or exceed the return earned on the
borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell New 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 the Fund
with payment and delivery taking place in the future. The purchase will be
recorded on the date the Fund enters into the commitment, and the value of the
obligation will thereafter be reflected in the calculation of the Fund's net
asset value. The value of the obligation on the delivery day may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or liquid
securities having a market value at all times at least equal to the amount of
the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in New Jersey
Municipal Bonds and Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the 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 the 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, the Fund may invest in so-called "inverse floating
obligations" or "residual interest bonds" on which the interest rates
typically vary inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by reference to a
short-term tax-exempt interest rate index). The Fund may purchase in the
secondary market synthetically-created inverse floating rate bonds evidenced
by custodial or trust receipts. Generally, interest rates on inverse floating
rate bonds will decrease when short-term rates increase, and will increase
when short-term rates decrease. Such securities have the effect of providing a
degree of investment leverage, since they may increase
or decrease in value in response to changes, as an illustration, in market
interest rates at a rate that is a multiple
16
<PAGE>
(typically two) of the rate at which fixed-rate, long-term, tax-exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities generally will be more volatile than the
market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or limitations on the extent to which
the interest rate may vary. The Investment Adviser believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund that allows the Investment Adviser to vary the degree
of investment leverage relatively efficiently under different market
conditions.
Call Rights. The Fund may purchase a New Jersey Municipal Bond or Municipal
Bond issuer's right 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 Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts ("financial futures contracts") and options
thereon. While the Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of the Common Stock, the net asset value of
the Common Stock will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. In addition, because of the
anticipated leveraged nature of the Common Stock, hedging transactions will
result in a larger impact on the net asset value of the Common Stock than
would be the case if the Common Stock were not leveraged. Furthermore, the
Fund will only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in interest rates
occur.
17
<PAGE>
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the preferred stock from one or more NRSROs, the
Fund may be required to limit its use of hedging techniques in accordance with
the specified guidelines of such organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and
risks associated therewith. The investment policies with respect to the
hedging transactions of the Fund are not fundamental policies and may be
modified by the Board of Directors of the Fund without the approval of the
Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to New 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. The Fund writes only covered call options, which
means that so long as the Fund is obligated as the writer of a call option, it
will own the underlying securities subject to the option. The Fund may not
write covered call options on underlying securities in an amount exceeding 15%
of the market value of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the sale
will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities that it intends to purchase. The Fund will not
purchase options on securities if, as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in New Jersey Municipal Bonds and
Municipal Bonds against declines in value and to hedge against increases in
the cost of securities it intends to purchase. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract
or, in the case of index-based futures contracts, to make and accept a cash
settlement, at a specific future time for a specified price. A
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<PAGE>
sale of financial futures contracts may provide a hedge against a decline in
the value of portfolio securities because such depreciation may be offset, in
whole or in part, by an increase in the value of the position in the financial
futures contracts. A purchase of financial futures contracts may provide a
hedge against an increase in the cost of securities intended to be purchased
because such appreciation may be offset, in whole or in part, by an increase
in the value of the position in the futures contracts.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately
5% of the contract amount must be deposited with the broker. This amount is
known as initial margin. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the
financial futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging New Jersey Municipal
Bonds and Municipal Bonds that the Fund holds or anticipates purchasing
against adverse changes in interest rates. The Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and
sell put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the New
Jersey Municipal Bonds and Municipal Bonds in which the Fund invests to make
such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss that will not be
19
<PAGE>
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and New Jersey
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments that have a disparate impact on
the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that
the Fund adheres to certain restrictions. In particular, the Fund may purchase
and sell financial futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes 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 on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Although certain risks are involved in options and futures transactions, the
Investment Adviser believes that, because the Fund will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to New Jersey
Municipal Bond or Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
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<PAGE>
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately three months after the completion of the offering of
shares of Common Stock, the Fund intends to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's capital will
actually be issued. The issuance of the preferred stock will result in the
leveraging of the Common Stock. Although the terms of the preferred stock
offering will be determined by the Fund's Board of Directors, it is
anticipated that the preferred stock will pay dividends that will be adjusted
over either relatively short-term periods (generally seven to 28 days) or
medium-term periods (up to five years) and that the dividend rate will be
based upon prevailing interest rates for debt obligations of comparable
maturity. The proceeds of the preferred stock offering will be invested in
longer-term obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne by the Fund
and will reduce the net asset value of the Common Stock. Additionally, under
certain circumstances, when the Fund is required to allocate taxable income to
holders of preferred stock, it is anticipated that the terms of the preferred
stock will require the Fund to make an additional distribution to such holders
in an amount approximately equal to the tax liability resulting from such
allocation and such additional distribution (such amount, an "Additional
Distribution"). Because under normal market conditions, obligations with
longer maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread inherent in the
difference between the short-term and medium-term rates (and any Additional
Distribution) paid by the Fund as dividends on the preferred stock and the
longer-term rates received by the Fund will provide holders of Common Stock
with a potentially higher yield.
Utilization of leverage, however, involves certain risks to the holders of
Common Stock. For example, issuance of the preferred stock may result in
higher volatility of the net asset value of the Common Stock and
21
<PAGE>
potentially more volatility in the market value of the Common Stock. In
addition, fluctuations in the short-term and medium-term dividend rates on, and
the amount of taxable income allocable to, the preferred stock will affect the
yield to holders of Common Stock. So long as the Fund, taking into account the
costs associated with the preferred stock and the Fund's operating expenses, is
able to realize a higher net return on its investment portfolio than the then
current dividend rate (and any Additional Distribution) of the preferred stock,
the effect of leverage will be to cause holders of Common Stock to realize a
higher current rate of return than if the Fund were not leveraged. Similarly,
since a pro rata portion of the Fund's net realized capital gains on its
investment assets are generally payable to holders of Common Stock if net
capital gains are realized by the Fund, the effect of leverage will be to
increase the amount of such gains distributed to holders of Common Stock.
However, short-term, medium-term and long-term interest rates change from time
to time as does their relationship to each other (i.e., the slope of the yield
curve) depending upon such factors as supply and demand forces, monetary and
tax policies and investor expectations. Changes in any or all of such factors
could cause the relationship between short-term, medium-term and long-term
rates to change (i.e., to flatten or to invert the slope of the yield curve) so
that short-term and medium-term rates may substantially increase relative to
the long-term obligations in which the Fund may be invested. To the extent that
the current dividend rate (and any Additional Distribution) on the preferred
stock approaches the net return on the Fund's investment portfolio, the benefit
of leverage to holders of Common Stock will be reduced, and if the current
dividend rate (and any Additional Distribution) on the preferred stock were to
exceed the net return on the Fund's portfolio, the Fund's leveraged capital
structure would result in a lower rate of return to holders of Common Stock
than if the Fund were not leveraged. Similarly, since both the cost associated
with the issuance of preferred stock and any decline in the value of the Fund's
investments (including investments purchased with the proceeds from any
preferred stock offering) will be borne entirely by holders of Common Stock,
the effect of leverage in a declining market would result in a greater decrease
in net asset value to holders of Common Stock than if the Fund were not
leveraged.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Code. See "Taxes." The Fund intends, however, to
take all measures necessary to continue to make Common Stock dividend payments.
If the Fund's current investment income were not sufficient to meet dividend
requirements on either the Common Stock or the preferred stock, it could be
necessary for the Fund to liquidate certain of its investments. In addition,
the Fund will have the authority to redeem the preferred stock for any reason
and may redeem all or part of the preferred stock if (i) it anticipates that
the Fund's leveraged capital structure will result in a lower rate of return
for any significant amount of time to holders of the Common Stock than that
obtainable if the Common Stock were unleveraged, (ii) the asset coverage for
the preferred stock declines below 200% either as a result of a decline in the
value of the Fund's portfolio investments or as a result of the repurchase of
Common Stock in tender offers, or (iii) in order to maintain the asset coverage
guidelines established by the NRSROs that have rated the preferred stock.
Redemption of the preferred stock or insufficient investment income to make
dividend payments, may reduce the net asset value of the Common Stock and
require the Fund to liquidate a portion of its investments at a time when it
may be disadvantageous, in the absence of such extraordinary circumstances, to
do so.
Assuming the utilization of leverage by the issuance of preferred stock that
pays dividends at a rate that generally will be adjusted every 28 days in an
amount representing approximately 40% of the Fund's capital at an annual
dividend rate of 3.50% payable on such preferred stock based on market rates as
of the date of this Prospectus, the annual return that the Fund's portfolio
must experience (net of expenses) in order to cover such dividend payments
would be 1.40%.
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<PAGE>
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of the leverage obtained by the issuance of
preferred stock representing approximately 40% of the Fund's capital, assuming
hypothetical annual returns on the Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and decreases the return when the portfolio
return is negative. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses).................................. (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return................... (19)% (11)% (2)% 6% 14%
</TABLE>
Leveraging of the Common Stock cannot be fully achieved until preferred
stock is issued and the proceeds of the offering of preferred stock have been
invested in long-term New Jersey Municipal Bonds and Municipal Bonds.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term or medium-term rates or other
change in market conditions to the point where the Fund's leverage could
adversely affect holders of Common Stock as noted above, or in anticipation of
such changes, the Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of Common Stock. The Fund also may attempt to reduce the
degree to which it is leveraged by redeeming preferred stock pursuant to the
provisions of the Fund's Articles Supplementary establishing the rights and
preferences of the preferred stock or otherwise purchasing shares of preferred
stock. Purchases and redemptions of preferred stock, whether on the open
market or in negotiated transactions, are subject to limitations under the
1940 Act. In determining whether or not it is in the best interest of the Fund
and its stockholders to redeem outstanding preferred stock, the Board of
Directors will take into account a variety of factors including market
conditions, the ratio of preferred stock to Common Stock and the expenses
associated with such redemption. If market conditions subsequently change, the
Fund may sell previously unissued shares of preferred stock or shares of
preferred stock that the Fund previously issued but later repurchased or
redeemed.
The Fund intends to apply for ratings of the preferred stock from one or
more NRSROs. In order to obtain these ratings, the Fund may be required to
maintain portfolio holdings meeting specified guidelines of such
organizations. These guidelines may impose asset coverage requirements that
are more stringent than those imposed by the 1940 Act. It is not anticipated
that these guidelines will impede the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies. Ratings on preferred stock issued by the Fund should not be confused
with ratings on obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding
preferred stock (expected to equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated and unpaid Additional Distribution). In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Stock unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or distribution) is at least 200% of the liquidation value of
the outstanding preferred stock. Under the Fund's proposed capital structure,
assuming the sale of shares of preferred
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<PAGE>
stock representing approximately 40% of the Fund's capital, the net asset
value of the Fund's portfolio is expected to be approximately 250% of the
liquidation value of the Fund's preferred stock. To the extent possible, the
Fund intends to purchase or redeem shares of preferred stock from time to time
to maintain coverage of preferred stock of at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred stock, may not be changed without the approval of
the holders of a majority of the Fund's outstanding shares of Common Stock
(which for this purpose and under the 1940 Act means the lesser of (i) 67% of
the shares of Common Stock represented at a meeting at which more than 50% of
the outstanding shares of Common Stock are represented or (ii) more than 50%
of the outstanding shares). Subsequent to the issuance of the preferred stock,
the following investment restrictions may not be changed without the approval
of a majority of the outstanding shares of Common Stock and of the outstanding
shares of preferred stock, voting together as a class, and the approval of a
majority of the outstanding shares of preferred stock, voting separately as a
class. The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase New
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.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned
24
<PAGE>
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.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. Because of the affiliation of Merrill Lynch with the
Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in
which it acts as principal. An exemptive order has been obtained that permits
the Fund to effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such
order. The Fund may consider in the future requesting an order permitting
other principal transactions with Merrill Lynch, but there can be no assurance
that such application will be made and, if made, that such order would be
granted.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (66)--President and Director (1)(2)--Chairman of the
Investment Adviser and MLAM (which terms, as used herein, include their
corporate predecessors) since 1997; President of the Investment Adviser and
MLAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997, Director thereof since 1993 and President from 1993 to
1997; Executive Vice President of ML & Co. since 1990.
Ronald W. Forbes (57)--Director (2)--1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany, since 1989; Consultant, Urban Institute, Washington, D.C.
since 1995.
Cynthia A. Montgomery (46)--Director (2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg
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<PAGE>
Graduate School of Management, Northwestern University from 1985 to 1989;
Assistant Professor, Graduate School of Business Administration, The
University of Michigan from 1979 to 1985; Director, UNUM Corporation since
1990 and Director of Newell Co. since 1995.
Charles C. Reilly (67)--Director (2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania, from 1989
to 1990; Partner, Small Cities Cable Television since 1986.
Kevin A. Ryan (65)--Director (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.
Richard R. West (60)--Director (2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984 and Dean from 1984 to 1993, and currently Dean Emeritus
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).
Terry K. Glenn (57)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of
Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
Vincent R. Giordano (53)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
Donald C. Burke (38)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Kenneth A. Jacob (46)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997.
Robert D. Sneeden (45)--Vice President and Portfolio Manager (1)(2)--
Assistant Vice President and Portfolio Manager of MLAM since 1994.
Robert A. DiMella, CFA (31)--Vice President (1)(2)--Vice President of MLAM
since 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995; Assistant
Portfolio Manager with Prudential Investment Advisers from 1991 to 1993.
Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of PFD since
1981 and Treasurer since 1984.
Alice A. Pellegrino (38)--Secretary (1)(2)--Attorney with MLAM since 1997;
Associate with Kirkpatrick & Lockhart LLP from 1992-1996.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
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<PAGE>
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors,
and the remaining Directors will be elected by all holders of capital stock,
voting as a single class. See "Description of Capital Stock."
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser a fee
of $2,000 per year plus $200 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings.
The Fund also compensates members of its Audit Committee, which consists of
all the non-affiliated Directors, an annual fee of $800. The Chairman of the
Audit Committee receives an additional fee of $1,000 per year.
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31, 1997 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
affiliated Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM FUND FUND EXPENSE DIRECTORS
- ---------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Ronald W. Forbes (1)........ $3,600 None $153,500
Cynthia Montgomery (1)...... $3,600 None $153,500
Charles C. Reilly (1)....... $4,600 None $313,000
Kevin A. Ryan (1)........... $3,600 None $153,500
Richard R. West (1)......... $3,600 None $299,000
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Forbes (33 registered investment
companies consisting of 46 portfolios); Ms. Montgomery (33 registered
investment companies consisting of 46 portfolios); Mr. Reilly (52
registered investment companies consisting of 65 portfolios); Mr. Ryan (33
registered investment companies consisting of 46 portfolios); and Mr. West
(53 registered investment companies consisting of 75 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM and is owned and controlled
by ML & Co. The Investment Adviser will provide the Fund with investment
advisory and management services. The Asset Management Group of ML & Co.
(which includes the Investment Adviser) acts as the investment adviser for
over 100 other registered management investment companies and offers portfolio
management services to individuals and institutions. As of July 1998, the
Investment Adviser and MLAM had a total of approximately $488 billion in
investment company and other portfolio assets under management (approximately
$37 billion of which were invested in municipal securities). This amount
includes assets managed for certain affiliates of the Investment Adviser. The
principal business address of the Investment Adviser is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the supervision of
the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors.
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<PAGE>
The Fund's portfolio manager will consider analyses from various sources
(including brokerage firms with which the Fund does business), make the
necessary investment decisions, and place orders for transactions accordingly.
The Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. Robert D. Sneeden is the
portfolio manager for the Fund and is primarily responsible for the Fund's
day-to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the issuance of
shares of preferred stock, minus the sum of accrued liabilities of the Fund
and accumulated dividends on the shares of preferred stock). For purposes of
this calculation, average weekly net assets are determined at the end of each
month on the basis of the average net assets of the Fund for each week during
the month. The assets for each weekly period are determined by averaging the
net assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, stock certificates and shareholder reports,
charges of the custodian and the transfer and dividend disbursing agent and
registrar, fees and expenses with respect to the issuance of preferred stock,
Securities and Exchange Commission fees, fees and expenses of 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. Accounting services are provided
to the Fund by the Investment Adviser, and the Fund reimburses the Investment
Adviser for its costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes
28
<PAGE>
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on Fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provided supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses
of the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information.
The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal 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 1940 Act, except as permitted by exemptive order, persons affiliated with
the Fund are prohibited from dealing with the Fund as principal in the
purchase and sale of securities. Since transactions in the over-the-counter
market usually involve transactions with dealers acting as principal for their
own account, the Fund will not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions except that,
pursuant to an exemptive order obtained by the Investment Adviser, the Fund
may engage in principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities. See "Investment Restrictions." An
affiliated person of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis.
The Fund may also purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
29
<PAGE>
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons
appears advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances after
the Fund's portfolio is invested in accordance with its investment objective,
will be less than 100%. The portfolio turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by the monthly average of the value of the portfolio securities
owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared and paid monthly to holders of
Common Stock. It is expected that the Fund will commence paying dividends to
holders of Common Stock within approximately 90 days of the date of this
Prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of Common Stock normally will consist of
substantially all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the preferred stock. All net
realized capital gains, if any, will be distributed pro rata at least annually
to holders of Common Stock and any preferred stock. While any shares of
preferred stock are outstanding, the Fund may not declare any cash dividend or
other distribution on its Common Stock, unless at the time of such
declaration, (i) all accumulated preferred stock dividends, including any
Additional Distribution, have been paid, and (ii) the net asset value of the
Fund's portfolio (determined after deducting the amount of such dividend or
other distribution) is at least 200% of the liquidation value of the
outstanding preferred stock (expected to equal the original purchase price of
the outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated but unpaid Additional Distribution). If
the Fund's ability to make distributions on its Common Stock is limited, such
limitation could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company,
which would have adverse tax consequences for holders of Common Stock. See
"Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of Common Stock may be
automatically reinvested in shares of Common Stock of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Fund intends to distribute substantially all of such income. Under
present
30
<PAGE>
New Jersey law, a RIC, such as the Fund, pays a flat tax of $250 per year. The
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.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Fund that are
attributable to interest on tax-exempt obligations and designated by the Fund
as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from Federal tax under Code Section 103(a) and are
properly designated as "exempt-interest dividends" by the Fund, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion,
if any, of a person's social security and railroad retirement benefits subject
to Federal income taxes. The portion of such exempt-interest dividends
properly identified in a year-end statement as directly attributable to
interest on New Jersey Municipal Bonds ("New Jersey exempt-interest
dividends") also will be exempt from New Jersey personal income taxes. In
order to pass through tax-exempt interest for New Jersey personal income tax
purposes, the 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. The 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 the Fund does not so comply,
distributions by the Fund will be taxable to shareholders for New Jersey
personal income tax purposes. Shareholders subject to income taxation by
states other than New Jersey will realize a lower after-tax rate of return
than New Jersey shareholders since the dividends distributed by the Fund
generally will not be exempt, to any significant degree, from income taxation
by such other states. The Fund will inform shareholders annually as to the
portion of the Fund's distributions that constitutes exempt-interest dividends
and the portion that is exempt from New Jersey personal income taxes. 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. Persons who may be "substantial users" (or "related
persons" of substantial users) of facilities financed by industrial
development bonds or private activity bonds held by the Fund should consult
their tax advisers before purchasing Fund shares.
Exempt-interest dividends and gains paid to a corporate shareholder will be
subject to New Jersey corporation business (franchise) tax and, if applicable,
the New Jersey corporation income tax. On February 21, 1997, the Tax Court of
New Jersey ruled against the Director of the Division of Taxation holding
against the
31
<PAGE>
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.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions
will be considered taxable ordinary income for Federal income tax and New
Jersey personal income tax purposes. Distributions, if any, from an excess of
net long-term capital gains over net short-term capital losses derived from
the sale of securities or from certain transactions in futures or options
("capital gain dividends") are taxable as long-term capital gains for Federal
income tax purposes, regardless of the length of time the shareholder has
owned Fund shares and, distributions attributable to gains from the sale of
New Jersey Municipal Bonds will be exempt from New Jersey personal income
taxes. Recent legislation created additional categories of capital gains
taxable at different rates. Additional legislation eliminates the highest 28%
category for most sales of capital assets occurring after December 31, 1997.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any exempt-interest dividends, ordinary income dividends or capital gain
dividends, as well as the amount of capital gain dividends in the different
categories of capital gain referred to above. Distributions by the Fund,
whether from exempt-income, ordinary income or capital gains, will not be
eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January that was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Internal Revenue Service ("Service") has taken the position in a revenue
ruling that if a RIC has two classes of shares, it may designate distributions
made to each class in any year as consisting of no more than such class's
proportionate share of particular types of income, including exempt-interest
income and net long-term capital gains (including the additional categories of
capital gains discussed above). 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 both Common Stock and preferred stock are outstanding, the Fund intends
to designate distributions made to the classes as consisting of particular
types of income in accordance with each class's proportionate share of such
income. Thus, the Fund will designate dividends paid as exempt-interest
dividends in a manner that allocates such dividends between the holders of
Common Stock and preferred stock in proportion to the total dividends paid to
each class during the taxable year, or otherwise as required by applicable
law. Capital gain dividends (including the additional categories of capital
gains discussed above) will similarly be allocated between the two classes in
proportion to the total
32
<PAGE>
dividends paid to each class during the taxable year, or otherwise as required
by applicable law. When capital gain or other taxable income is allocated to
holders of preferred stock pursuant to the allocation rules described above,
the terms of the preferred stock may require the Fund to make an additional
distribution to or otherwise compensate such holders for the tax liability
resulting from such allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and that benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" that could subject certain investors
in such bonds, including shareholders of the Fund, to an increased alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after its taxable year-end the
portion of its dividends declared during the year that constitutes an item of
tax preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay an alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on nontraditional instruments
could be recharacterized as taxable ordinary income.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. Upon any
failure to meet the asset coverage requirements of the 1940 Act, the Fund, in
its sole discretion, may redeem shares of preferred stock in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to qualify as a RIC. There can be no
assurance, however, that any such action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred stock that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such preferred stock
are "preferential" under the Code and, therefore, not eligible for the
dividends paid deduction. The Fund intends to issue preferred stock that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the Service to that effect. If the Fund
ultimately relies solely on a legal opinion when it issues such preferred
stock, there is no assurance that the Service would agree that dividends on
the preferred stock are not preferential. If the Service successfully
disallowed the dividends paid deduction for dividends on the preferred stock,
the Fund could be disqualified as a
33
<PAGE>
RIC. In this case, dividends on the Common Stock would not be exempt from
Federal income taxes. Additionally, the Fund would be subject to the
alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the
Fund's shares) could be viewed as a taxable distribution. If the discount is
viewed as a taxable distribution, it is also possible that the taxable
character of this discount would be allocable to all of the shareholders,
including shareholders who do not participate in the dividend reinvestment
plan. Thus, shareholders who do not participate in the dividend reinvestment
plan might be required to report as ordinary income a portion of their
distributions equal to their allocable share of the discount.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to
the Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may
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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
and 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 New Jersey personal income and corporation business (franchise) tax and
the corporation income tax laws. The Code and the Treasury Regulations, as
well as the New Jersey tax laws, are subject to change by legislative,
judicial or administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of Common Stock otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by , as agent for
shareholders in administering the Plan (the "Plan Agent"), in additional
shares of Common Stock of the Fund. Holders of Common Stock who elect not to
participate in the Plan will receive all distributions in cash paid by check
mailed directly to the shareholder of record (or, if the shares are held in
street or other nominee name, then to such nominee) by , as dividend
paying agent. Such participants may elect not to participate in the Plan and
to receive all distributions of dividends and capital gains in cash by sending
written instructions to , as dividend paying agent, at the address set
forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise, such termination or resumption will be effective with respect
to any subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively, referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares of Common
Stock. The shares will be acquired by the Plan Agent for the participant's
account, depending upon the circumstances described below, either (i) through
receipt of additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market ("open-market purchases") on the New York
Stock Exchange or elsewhere. If on the payment date for the dividend, the net
asset value per share of the Common Stock is equal to or less than the market
price per share of the Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be credited
to the participant's account will be determined by dividing the dollar amount
of the dividend by the net asset value per share on the date the shares are
issued, provided that the maximum discount from the then current market price
per share on the date of issuance may not exceed 5%. If on the dividend
payment date the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Plan Agent
will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, participants in the
Plan will receive any dividends in newly issued shares.
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In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase prices paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in
the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period or if the market discount shifts to a
market premium during the purchase period, the Plan Agent will cease making
open-market purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last purchase
date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
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Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at .
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of Common Stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares (the "Original Shares")
in Class D initial sales charge shares of certain Merrill Lynch-sponsored
open-end mutual funds ("Eligible Class D Shares") at their net asset value,
without the imposition of the initial sales charge, if the conditions set
forth below are satisfied. First, the sale of the Original Shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class D Shares. Second, the Original Shares must have
been either acquired in this offering or be shares representing reinvested
dividends from shares of Common Stock acquired in this offering. Third, the
Original Shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class D shares of the mutual funds are
subject to an account maintenance fee at an annual rate of up to 0.25% of the
average daily net asset value of such mutual fund. The Eligible Class D Shares
may be redeemed at any time at the next determined net asset value, subject in
certain cases to a redemption fee. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, the distributor for the
mutual funds will advise Merrill Lynch Financial Consultants as to those
mutual funds that offer the investment option described above.
NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
p.m., New York time) on the last business day in each week. For purposes of
determining the net asset value of a share of Common Stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The New Jersey Municipal Bonds and Municipal Bonds in which the Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value, the Fund utilizes the valuations of portfolio securities furnished by a
pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. New 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 the Fund under the
general supervision of the Board of Directors. The Board of Directors has
determined in good faith that the use of a pricing service is a fair method of
determining the valuation of portfolio securities. Positions in futures
contracts are valued at closing prices for such contracts established by the
exchange on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Board of Directors.
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The Fund determines and makes available for publication the net asset value
of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify or
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption. Within approximately three months after completion of the offering
of the Common Stock described herein, the Fund intends to reclassify an amount
of unissued Common Stock as preferred stock and at that time to offer shares
of preferred stock representing approximately 40% of the Fund's capital
immediately after the issuance of such preferred stock. There is no assurance
that such preferred stock will be issued.
COMMON STOCK
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred stock are outstanding, holders
of Common Stock will not be entitled to receive any net income of or other
distributions from the Fund unless all accumulated dividends on preferred
stock have been paid and unless asset coverage (as defined in the 1940 Act)
with respect to preferred stock would be at least 200% after giving effect to
such distributions. See "Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 shares of Common Stock of the Fund for $100,005. As of the
date of this Prospectus, the Investment Adviser owned 100% of the outstanding
shares of Common Stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
PREFERRED STOCK
It is anticipated that the Fund's shares of preferred stock will be issued
in one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of Common
Stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of Common Stock have no preemptive right to purchase any
shares of preferred stock that might be issued. It is anticipated that the net
asset value per share of the preferred stock will equal its original purchase
price per share plus accumulated dividends per share.
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The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of Common Stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
stock is likely to achieve the benefits to the holders of Common Stock
described in the Prospectus. Although the terms of the preferred stock,
including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Directors (subject to
applicable law and the Fund's Articles of Incorporation), the initial series
of preferred stock will be structured to carry either a relatively short-term
dividend rate, in which case periodic redetermination of the dividend rate
will be made at relatively short intervals (generally seven or 28 days), or a
medium-term dividend rate, in which case periodic redetermination of the
dividend rate will be made at intervals of up to five years. In either case,
such redetermination of the dividend rate will be made through an auction or
remarketing procedure. Additionally, under certain circumstances, when the
Fund is required to allocate taxable income to holders of the preferred stock,
it is anticipated that the terms of the preferred stock will require the Fund
to make an Additional Distribution (as defined in "Special Leverage
Considerations and Risks--Effects of Leverage") to such holders. The Board
also has indicated that it is likely that the liquidation preference, voting
rights and redemption provisions of the preferred stock will be as stated
below. The Fund's Articles of Incorporation, as amended, together with any
Articles Supplementary, is referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of Common Stock. After payment of
the full amount of the liquidating distribution to which they are entitled,
the preferred stockholders will not be entitled to any further participation
in any distribution of assets by the Fund. A consolidation or merger of the
Fund with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Fund will not be deemed to be a
liquidation, dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this Prospectus and except
as otherwise required by applicable law, holders of shares of preferred stock
will have equal voting rights with holders of shares of Common Stock (one vote
per share) and will vote together with holders of Common Stock as a single
class.
In connection with the election of the Fund's directors, holders of shares
of preferred stock, voting as a separate class, will be entitled to elect two
of the Fund's directors, and the remaining directors will be elected by all
holders of capital stock, voting as a single class. So long as any preferred
stock is outstanding, the Fund will have not less than five directors. If at
any time dividends on shares of the Fund's preferred stock shall be unpaid in
an amount equal to two full years' dividends thereon, the holders of all
outstanding shares of preferred stock, voting as a separate class, will be
entitled to elect a majority of the Fund's directors until all dividends in
default have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.
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Redemption Provisions. It is anticipated that shares of preferred stock will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal
to their liquidation preference plus accumulated but unpaid dividends to the
date of redemption upon the occurrence of certain specified events, such as
the failure of the Fund to maintain asset coverage requirements for the
preferred stock specified by the rating agencies that issue ratings on the
preferred stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A director may be removed
from office with or without cause, but only by vote of the holders of at least
66 2/3% of the votes entitled to be voted on the matter. A director elected by
all the holders of capital stock may be removed only by action of such
holders, and a director elected by the holders of preferred stock may be
removed only by action of such holders.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 66 2/3% of the Fund's shares of capital stock then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations,
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund, unless such action has
been approved, adopted or authorized by the affirmative vote of two-thirds
of the total number of Directors fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's shares of
capital stock is required. Following the proposed issuance of the preferred
stock, it is anticipated that the approval, adoption or authorization of
the foregoing would also require the favorable vote of a majority of the
Fund's shares of preferred stock then entitled to be voted, voting as a
separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by two-thirds of the total number
of Directors fixed in accordance with the by-laws), and, assuming preferred
stock is issued, the affirmative vote of a majority of outstanding shares of
preferred stock of the Fund, voting as a separate class. Such a vote also
would satisfy a separate requirement in the 1940 Act that the change be
approved by the shareholders. Shareholders of an open-end investment company
may require the company to redeem their shares of common stock at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and the
Common Stock would no longer be listed on a stock exchange.
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Conversion to an open-end investment company would also require redemption
of all outstanding shares of preferred stock and would require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the issuance of senior securities, the borrowing of money and the
purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Securities
and Exchange Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 6,700,000 shares of Common Stock
from the Fund. The Underwriter is committed to purchase all of such shares if
any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of Common Stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of Common Stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $ per share on
sales by such dealers. After the initial public offering, the public offering
price and other selling terms may be changed. Investors must pay for shares of
Common Stock purchased in the offering on or before September , 1998.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 1,005,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
Common Stock.
If the Underwriter creates a short position in the shares of Common Stock in
connection with the offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriter may
reduce that short position by purchasing shares of Common Stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of Common Stock
in the open market to reduce the Underwriter's short position or to stabilize
the price of the shares of Common Stock, it may reclaim the amount of the
selling concession from the selling group members who sold those shares of
Common Stock as part of the offering.
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In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of Common Stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for the shares of
the Common Stock. The Fund plans to apply to list its shares of Common Stock
on the New York Stock Exchange. However, during an initial period which is not
expected to exceed two weeks from the date of this Prospectus, the Fund's
Common Stock will not be listed on any securities exchange. Additionally,
during such period, the Underwriter does not intend to make a market in the
Fund's Common Stock, although a limited market may develop. Consequently, it
is anticipated that an investment in the Fund will be illiquid during such
period. In order to meet the requirements for listing, the Underwriter has
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-
term, tax-exempt securities subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of Common Stock of the Fund will be ,
.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New
York, New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of ,
1998 included in this Prospectus and Registration Statement has been audited
by , independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon authority of such firm as experts in accounting and auditing. The
selection of independent auditors is subject to ratification by shareholders
of the Fund.
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ADDITIONAL INFORMATION
The fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Securities
and Exchange Commission (the "Commission"). Any such reports, proxy statements
and other information can be inspected and copied at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: Regional Office, at Seven World Trade Center, Suite 1300, New
York, New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This Prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the
Commission upon the payment of certain fees prescribed by the Commission.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be
adversely affected if the computer systems used by the Investment Adviser or
other Fund service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser has established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the Investment Adviser does not
anticipate that the transition to the Year 2000 will have any material impact
on its ability to continue to service the Fund at current levels. In addition,
the Investment Adviser has sought assurances from the Fund's other service
providers that they are taking all necessary steps to ensure that their
computer systems will accurately reflect the Year 2000, and the Investment
Adviser will continue to monitor the situation. At this time, however, no
assurance can be given that the Fund's other service providers have
anticipated every step necessary to avoid any adverse effect on the Fund
attributable to the Year 2000 Problem.
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder, 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. as of , 1998. This
statement of assets, liabilities and capital is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this
statement of assets, liabilities and capital based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets, liabilities
and capital is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the statement
of assets, liabilities and capital. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall statement of assets, liabilities and capital
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such statement of assets, liabilities and capital referred to
above presents fairly, in all material respects, the financial position of
MuniHoldings New Jersey Insured Fund II, Inc. as of , 1998 in
conformity with generally accepted accounting principles.
February 20, 1998
44
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MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 1998
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Offering costs (Note 1).............................................
Deferred organization costs (Note 1)................................
--------
Total assets......................................................
--------
LIABILITIES
Accrued expenses (Note 1)...........................................
--------
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares
authorized; 6,667 shares issued and outstanding (Note 1)........... $ 667
Paid-in Capital in excess of par.................................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per share of
common stock (Note 1).............................................. $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on August
17, 1998, as a closed-end, non-diversified management investment company and
has had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 6,667 shares for $100,005 on ,
1998. The General Partner of the Investment Adviser is an indirectly wholly-
owned subsidiary of Merrill Lynch & Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a period not exceeding five years beginning with the commencement of
operations of the Fund. Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares. In
accordance with Statement of Position 98-5, unamortized organization costs
existing at June 1, 1999 (start of the Fund's new fiscal year) will be charged
to expense at that date. At the present time, management believes this change
will not have any material impact to the operations of the Fund.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.55 of 1% of
the average weekly net assets of the Fund, including any proceeds from the
issuance of preferred stock. The Investment Adviser or an affiliate will pay
Merrill Lynch, Pierce, Fenner & Smith Incorporated a commission in the amount
of % of the price to the public per share in connection with the initial
public offering of the Fund's Common Stock.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
45
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APPENDIX I
ECONOMIC AND FINANCIAL 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 1999" refers to the State's fiscal year beginning July
1, 1998 and ending June 30, 1999.
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 revenue and certain miscellaneous revenue items are
recorded in the General Fund.
The State's undesignated General Fund balance was $569 million for Fiscal
Year 1995, $442 million for Fiscal Year 1996, and $281 million for Fiscal Year
1997. For the Fiscal Year 1998 and the Fiscal Year 1999, the balance in the
undesignated General Fund is estimated to be $269 million and $144 million,
respectively.
The State finances 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, interest payments and if provided,
redemption premium payments, if any, required to pay the debt fully. 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. All appropriations for capital
projects and all proposals for State bond authorizations are subject to the
review and recommendation of the New Jersey Commission on Capital Budgeting
and Planning.
The State has extensive control over school districts, cities, counties and
local financing authorities. State laws impose specific limitations on local
appropriations, with exemptions subject to state approval. The State shares
the proceeds of a number of taxes, with funds going primarily for local
education programs, homestead rebates, medicaid and welfare programs. Certain
bonds are issued by localities, but supported by direct state payments.
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. After enjoying an extraordinary
boom during the mid-1980s, New Jersey, as well as the rest of the Northeast,
slipped into a slowdown well before the onset of the national recession which
officially began in July 1990 (according to the National Bureau of Economic
Research). By the beginning of the national recession of 1990-1991,
construction activity had already
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been declining in New Jersey for nearly two years, growth had tapered off
markedly in the service sectors and the long-term downward trend of factory
employment had accelerated, partly because of a leveling off of industrial
demand nationally. The onset of recession caused an acceleration of New
Jersey's job losses in construction and manufacturing, as well as an
employment downturn in such previously growing sectors as wholesale trade,
retail trade, finance, utilities, trucking and warehousing. The net effect was
a decline in the State's total nonfarm wage and salary employment from a peak
of 3,689,800 in 1989 to a low of 3,457,900 in 1992. This loss was followed by
an employment gain of 255,600 from May 1992 to June 1997, a recovery of 97.5%
of the jobs lost during the recession.
Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6% during the first quarter of 1989 to a recessionary peak of 8.5%
during 1992 (according to the U.S. Bureau of Labor Statistics and the New
Jersey Department of Labor, Division of Labor Market and Demographic
Research). Since then, the unemployment rate fell to an average of 6.2% in
1996, and 5.5% for the six month period from January 1997 through June 1997.
For the recovery period as a whole, May 1992 to June 1997, service-producing
employment in New Jersey has expanded by 283,500 jobs. Hiring has been
reported by food stores, wholesale distributors, trucking and warehousing
firms, security and commodity brokers, business and engineering/management
service firms, hotels/hotel-casinos, social service agencies and health care
providers other than hospitals. Employment growth was particularly strong in
business services and its personnel supply component with increases of 17,300
and 7,500, respectively, in the 12-month period ended June 1997.
In the manufacturing sector, employment losses slowed between 1992 and 1994.
After an average annual job loss of 33,500 from 1989 through 1992, New
Jersey's factory job losses fell to 13,300 during 1993 and 7,300 during 1994.
During 1995 and 1996, however, manufacturing job losses increased slightly to
10,100 and 13,900, respectively, reflecting a slowdown in national
manufacturing production activity.
Conditions have slowly improved in the construction industry, where
employment has risen by 18,600 since its low in May 1992. Between 1992 and
1996, this sector's hiring rebound was driven primarily by increased
homebuilding and nonresidential projects. During 1996 and the first five
months of 1997, public works projects and homebuilding became the growth
segments while nonresidential construction lessened but remained positive.
Nonresidential construction activity, as measured by contract awards, grew
by 19.6% in 1994, 3.0% in 1995 and 7.0% in 1996. More recently, nonresidential
building construction contracts increased by 45.8% in the first five months of
1997 compared with the same period in 1996.
Residential construction contracts, despite monthly fluctuations, increased
by 17.1% for the first five months of 1997 as compared to the first five
months of 1996 ($989 million and $845 million, respectively). Nonbuilding or
infrastructure construction rose robustly by 64.0% during this period. Helped
by these increases, total construction contracts rose by 41.0% when comparing
the first five months of 1996 and 1997.
The rising economic trend experienced in the State has led to higher retail
sales, which showed steady growth from 1992 through 1996, including a 3.8%
increase from 1995 to 1996. The higher retail sales, in turn, produced steady
increases in retail trade jobs (both full and part time). Retail trade
employment has risen by nearly 49,000 since a May 1992 low point. From
December 1996 to June 1997, the number of retail jobs rose by 8,700.
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<PAGE>
Total new vehicle registrations (new passenger cars and light trucks and
vans) rose in 1994 by 5.8%, declined by 4.4% in 1995, then rose 2.6% in 1996.
Through May 1997 however, total new vehicle registrations rose by 2.8%
compared to the same time period in 1996.
Unemployment in the State through June 1997 has been receding. According to
the U.S. Bureau of Labor Statistics, the jobless rate dropped from 6.8% in
1994 to 6.4% in 1995 and to 6.2% in 1996. Subsequently, it has dropped to 5.5%
for the first six months of 1997.
The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number of workers covered by unemployment
insurance, declined from 3.9% during calendar years 1991 and 1992 to 3.3%
during 1993 and then averaged 3.2% throughout 1994, 1995 and 1996. As of July
1, 1997, the State's unemployment insurance trust fund balance stood at $2.2
billion.
The State has benefited from the national recovery. New Jersey's recovery is
in its sixth year and appears to be sustainable now that the national economy
has "soft landed." While the latest national indicators show that economic
growth accelerated during the first quarter of this year, the inflation rate
remained low.
Business investment expenditures and consumer spending have increased
substantially in the nation as well as in the State. Capital and consumer
spending may very well continue to rise due to the sustained character of the
recovery, although the interest-sensitive homebuilding industry may provide
only a moderate amount of stimulus both nationally and in New Jersey. It is
expected that the employment and income growth that has and is taking place
will lead to further growth in consumer outlays. Reasons for cautious optimism
in New Jersey include increasing employment levels, a low jobless rate, and a
higher-than-national level of per capita personal income.
Even if the nation's economic growth rate slows from the robust 5.9% growth
in the first quarter of 1997, the State's economy should have enough momentum
to keep its trend line pointing upwards. Its growth potential is not yet as
limited by the labor supply constraints affecting some other parts of the
country.
Looking further ahead, prospects for New Jersey appear favorable. While
growth is likely to be slower than in the nation, the locational advantages
that have served New Jersey well for many years will still be there.
Structural changes that have been going on for years can be expected to
continue, with job creation concentrated most heavily in the service
industries.
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
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<PAGE>
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 $90,800,000 for tort and medical malpractice claims pending as of
June 30, 1997. 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.
Abbott v. Burke. On January 6, 1997 the Education Law Center filed a motion
in aid of litigants' rights with the Supreme Court of New Jersey in Abbott v.
Burke. In 1994 the Supreme Court ruled in Abbott v. Burke that the State had
to enact a funding formula that would close the spending gap between poor
urban school districts and wealthy suburban districts by fiscal year 1998. On
December 20, 1996 the Comprehensive Education Improvement and Financing Act
("CEIFA") was enacted. CEIFA is a departure from the mechanisms of previous
funding formulas. The CEIFA is centered upon the Core Curriculum Content
Standards--a comprehensive description of what all students should know and be
able to accomplish upon completion of a thirteen year public education.
On May 14, 1997, the Supreme Court rendered a decision in Abbott v. Burke
and held that the CEIFA was unconstitutional as applied to the 28 Abbott
districts. The Court ordered the State to appropriate additional funds,
beginning in the 1997-98 school year, so that each Abbott district would be
able to spend at the average of the wealthy suburban districts. In addition,
the Court remanded the matter to the Superior Court to oversee a directive to
the Commissioner of Education to study and report on the special educational
needs of students in the Abbott districts and the facilities needs in those
districts.
The Superior Court issued its recommendations to the Supreme Court in its
report on January 22, 1998. In its Report, the Superior Court recommended
additional supplemental programs be implemented at an estimated cost of $312
million and indicated that the facilities needs identified by the Department
of Education were estimated to require between $1.8-$2.4 billion in repairs
and new construction costs. The Supreme Court heard arguments on the matter on
March 2, 1998. The Supreme Court rendered its decision on May 21, 1998. The
Supreme Court determined and directed that the Commissioner implement
substantially all of the Recommendations of the Commissioner of Education as
part of his proposal for whole-school reform. He was further ordered to
prescribe procedures and standards to enable individual schools to adopt
additional or extended supplemental programs and to seek and obtain the funds
necessary to implement these programs for which they have demonstrated a
particularized need. Additionally, the Court directed implementation of the
facilities plan and timetable proposed by the Commissioner; secure funds to
cover the complete cost of remediating identified life-cycle and
infrastructure deficiencies in Abbot school buildings as well as the cost of
providing the space necessary to house Abbott students adequately; and
promptly initiate effective managerial responsibility over school
construction, including necessary funding measures and fiscal reforms, such as
may be achieved through amendment of legislation. The Court did not order any
appropriation of funds.
A related action, Buena Regional Commercial Township et al. v. New Jersey
Department of Education et al., was filed in Superior Court, Chancery
Division, Cumberland County. This lawsuit was filed on December 9,
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<PAGE>
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
have entered into a consent order to transfer the matter to the Commissioner
of Education for resolution. The chancery court will not retain jurisdiction.
The State is unable at this time to estimate its exposure for these claims and
intends to defend both suits vigorously.
Verner Stubaus, et al. v. State of New Jersey, et al. Plaintiffs, 25 middle
income school districts, have 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 on April 20, 1998 and the State defendants have not yet been served. The
State will vigorously defend this matter.
Cleary v. Waldman. This case involves the spousal impoverishment provisions
of the Medicare Catastrophic Coverage Act ("MCCA"). Under this provision, the
spouse of an institutionalized husband or wife, is allowed to have sufficient
funds to live in the community, called the monthly needs allowance.
The State in determining a spouse's monthly needs allowance, uses a system
called the "income first" rule. If a community spouse does not have sufficient
funds to meet the monthly needs allowance, an institutionalized spouse is
allowed to shift his or her income to the community spouse to make up the
difference. If the institutionalized spouse's income is insufficient to meet
the monthly needs allowance, then the institutionalized spouse is allowed to
shift resources to the community spouse to generate income to make up the
difference.
A class action was brought in federal court in which plaintiffs' argue that
the income first rule is disallowed under the MCCA. Rather plaintiffs claim
that the MCCA mandates the use of what is called the "resource-first" rule.
Under this scheme, before income is shifted from the institutionalized spouse
to the community spouse to meet the monthly needs allowance, resources must be
shifted first and income generated from these resources used to meet the
monthly needs allowance.
Estimates of exposure if a court were to find that the MCCA only allows the
"resource-first" rule has been estimated in the area of $50 million per year
from both State and Federal sources combined.
Plaintiffs filed for a preliminary injunction arguing that, under federal
law, only the resource first rule was allowed under the MCCA. The State
opposed the motion and the New Jersey Association of Health Care Facilities
and the New Jersey Association for Non-Profit Homes for the Aging moved for
intervenor status, opposing the plaintiffs' motion. The court granted the
motion of intervention and denied the motion for preliminary injunction,
finding that plaintiffs were unlikely to prevail on the merits since New
Jersey's methodology was at least a permissible application of the federal
law.
Subsequently, plaintiffs filed for class certification which was granted on
March 25, 1996. On March 26, 1997, Plaintiffs filed a Notice of Appeal to the
Court of Appeals for the Third Circuit. Briefing on plaintiffs' application
for preliminary injunction has been completed. The matter was argued before
the Third Circuit on January 27, 1998 and no decision has been rendered. The
State intends to vigorously defend this action.
United Hospitals et al. v. State of New Jersey and William Waldman. This
case represents a challenge by 18 New Jersey hospitals to Medicaid hospital
reimbursement since February, 1995. The matter was filed in the
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Appellate Division of the Superior Court of New Jersey in January, 1997. 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., are arbitrary,
capricious and unreasonable; (iii) whether the Department of Human Services
(DHS) incorrectly calculated the rates; (iv) whether DHS denied hospitals of a
meaningful appeal process; (v) whether the 1996-7 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 in 1995 and 1996. The State
intends to vigorously defend this action.
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.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established
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cash flows"; MIG 2/VMIG2 denotes "high quality" with ample margins of
protection; MIG 3/VMIG3 notes are of "favorable quality . . . but . . .
lacking the undeniable strength of the preceding grades"; MIG 4/VMIG4 notes
are of "adequate quality . . . [p]rotection commonly regarded as required of
an investment security is present . . . there is specific risk."
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 ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ("STANDARD & POOR'S"), MUNICIPAL DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation.
The issue credit 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 obligors or
obtained by Standard & Poor's from other sources it 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.
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The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment
on the obligation is extremely strong.
AA Debt rated "AA" differs from the highest rated obligations 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 to the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
B significant speculative characteristics. "BB" indicates the
CCC least degree of speculation and "C" the highest degree of
CC speculation. While such bonds will likely have some quality and
C protective characteristics, these may be outweighed by large
uncertainties or major 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 a 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.
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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 highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUED CREDIT RATING
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus "+"
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
55
<PAGE>
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS
Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest-preferred
dividends, or repayment of principal, on a timely basis.
Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA'--"BBB' categories; short-term "F1'--
"F3') indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB'--"D'; short-term "B'--"D') either signal a higher probability of default
or that a default has already occurred. Ratings imply no specific prediction
of default probability.
Entities or issues carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.
Fitch credit and other 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 any payments of any security. The 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 or
withdrawn as a result of changes in, or the unavailability of, information or
for other reasons.
INTERNATIONAL CREDIT RATINGS
Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other
corporate entities and the securities they issue, as well as municipal and
other public finance entities, and securities backed by receivables or other
financial assets, and counterparties. When applied to an entity, these long-
and short-term ratings assess its general creditworthiness on a senior basis.
When applied to specific issues and programs, these ratings take into account
the relative preferential position of the holder of the security and reflect
the terms, conditions, and covenants attaching to that security.
ANALYTICAL CONSIDERATIONS
When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as
well as developments in the economic and political environment that might
affect the issuer's financial strength and credit quality.
Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization, as well as other factors. Recoveries do,
however, gain in importance at lower rating levels, because of the greater
likelihood of default, and become the major consideration at the "DDD'
category. Factors that affect recovery expectations include collateral and
seniority relative to other obligations in the capital structure.
56
<PAGE>
Variable rate demand obligations and other securities which contain a demand
feature will have a dual rating, such as "AAA/F1+'. The first rating denotes
long-term ability to make principal and interest payments. The second rating
denotes ability to meet a demand feature in full and on time.
INTERNATIONAL LONG-TERM CREDIT RATINGS
Investment Grade
AAA Highest credit quality. "AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA' ratings denote a very low expectation of
credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
Speculative Grade
BB Speculative. "BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change overtime; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. "B' ratings indicate that significant credit risk
is present, but a limit margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic
environment.
CCC High default risk. Default is a real possibility. Capacity for meeting
CC financial commitments is solely reliant upon sustained, favorable
C business or economic developments. A "CC' rating indicates that default
of some kind appears probable. "C' ratings signal imminent default.
DDD Default. Securities are not meeting current obligations and are
DD extremely speculative. "DDD' designates the highest potential for
D recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, "DD' indicates expected recovery 50%-90% of
such outstandings, and "D' the lowest recovery potential, i.e. below
50%.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
57
<PAGE>
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
- --------
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA' long-term
rating category, to categories below "CCC', or to short-term ratings other
than "F1'.
"NR' indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingWatch: Ratings are placed on RatingWatch to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. RatingWatch is typically resolved over a
relatively short period.
58
<PAGE>
APPENDIX III
PORTFOLIO INSURANCE
Set forth below is further information with respect to the insurance
policies (the "Policies") that the Fund may obtain from several insurance
companies with respect to insured New 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 premiums, 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 ("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.
59
<PAGE>
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can
only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet nonpolicy
obligations (i.e., debt contracts).
The assignment of ratings by S&P, Fitch or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts or guarantees is
a separate process from the determination of claims-paying ability ratings.
The likelihood of a timely flow of funds from the insurer to the trustee for
the bondholders is a key element in the rating determination for such debt
issues.
60
<PAGE>
APPENDIX IV
<TABLE>
<CAPTION>
A TAX-FREE YIELD OF
-----------------------------------
TAXABLE INCOME* 1998
- ------------------------------------ 1998 FEDERAL NEW JERSEY
SINGLE RETURN JOINT RETURN TAX BRACKET TAX BRACKET 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
- ----------------- ----------------- ------------ ----------- ----- ----- ----- ----- ----- -----
IS EQUAL TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,351-$ 35,000 $ 42,351-$ 50,000 28 % 1.750% 7.07 7.77 8.48 9.19 9.90 10.60
-- $ 50,001-$ 70,000 28 % 2.450% 7.12 7.83 8.54 9.25 9.97 10.68
$ 35,001-$ 40,000 $ 70,001-$ 80,000 28 % 3.500% 7.20 7.92 8.64 9.36 10.07 10.79
$ 40,001-$ 61,400 $ 80,001-$102,300 28 % 5.525% 7.35 8.09 8.82 9.56 10.29 11.03
$ 61,401-$ 75,000 $102,301-$150,000 31 % 5.525% 7.67 8.44 9.20 9.97 10.74 11.51
$ 75,001-$128,100 $150,001-$155,950 31 % 6.370% 7.74 8.51 9.29 10.06 10.84 11.61
$128,100-$278,450 $155,951-$278,450 36 % 6.370% 8.34 9.18 10.01 10.85 11.68 12.52
Over $278,450 Over $278,450 39.6% 6.370% 8.84 9.73 10.61 11.49 12.38 13.26
</TABLE>
TAXABLE EQUIVALENT YIELDS FOR 1998
- --------
* An investor's marginal tax rate may exceed the rates shown in the above
table due to the reduction, or possible elimination, of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. For investors who pay alternative minimum tax, tax-free
yields may be equivalent to lower taxable yields than those shown above.
Shareholders subject to income taxation by states other than New Jersey will
realize a lower after-tax return than New Jersey shareholders. This table is
a combination of the Federal and New Jersey taxable income brackets, which
are adjusted annually for inflation. The New Jersey taxable income brackets
have not yet been adjusted for 1998. The New Jersey taxable yields set forth
in the above table presume that taxpayers in each Federal tax bracket are in
the highest New Jersey tax bracket corresponding to that Federal bracket.
The tax rates shown above do not apply to corporate taxpayers subject to the
New Jersey corporation business (franchise) tax and the corporation income
tax. The tax characteristics of the Fund are described more fully elsewhere
in this Prospectus. Consult your tax adviser for further details. This chart
is for illustrative purposes only and cannot be taken as an indication of
anticipated Fund performance.
61
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
STATE OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER
WOULD BE UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 7
Fee Table.................................................................. 9
The Fund................................................................... 10
Use of Proceeds............................................................ 10
Investment Objective and Policies.......................................... 10
Risks and Special Considerations of Leverage............................... 21
Investment Restrictions.................................................... 24
Directors and Officers..................................................... 25
Investment Advisory and Management Arrangements............................ 27
Portfolio Transactions..................................................... 29
Dividends and Distributions................................................ 30
Taxes...................................................................... 30
Automatic Dividend Reinvestment Plan....................................... 35
Mutual Fund Investment Option.............................................. 37
Net Asset Value............................................................ 37
Description of Capital Stock............................................... 38
Custodian.................................................................. 41
Underwriting............................................................... 41
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 42
Legal Opinions............................................................. 42
Experts.................................................................... 42
Additional Information..................................................... 43
Report of Independent Auditors............................................. 44
Statement of Assets, Liabilities and Capital............................... 45
Appendix I................................................................. 46
Appendix II................................................................ 52
Appendix III............................................................... 59
Appendix IV................................................................ 61
</TABLE>
---------------
UNTIL DECEMBER , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,700,000 SHARES
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
SEPTEMBER , 1998
CODE 19044-0998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets, Liabilities and Capital as of , 1998
(2) Exhibits:
(a)--Articles of Incorporation
(b)--By-Laws
(c)--Not applicable
(d)(1)--Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(a)
(d)(2)--Form of specimen certificate for shares of Common Stock of the
Registrant
(e)--Form of Automatic Dividend Reinvestment Plan
(f)--Not applicable
(g)--Form of Investment Advisory Agreement between the Fund and the
Investment Adviser
(h)(1)--Form of Purchase Agreement
(h)(2)--Merrill Lynch Standard Dealer Agreement
(i)--Not applicable
(j)--Form of Custodian Contract between the Fund and *
(k)--Form of Registrar, Transfer Agency and Service Agreement between
the Fund and *
(l)--Opinion and Consent of Brown & Wood LLP*
(m)--Not applicable
(n)--Consent of independent auditors for the Fund*
(o)--Not applicable
(p)--Certificate of Fund Asset Management, L.P.*
(q)--Not applicable
(r)--Not applicable
- --------
(a) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement; and to Article II, Article III
(sections 1, 2, 3, 5 and 17), Article VI, Article VII, Article XII,
Article XIII and Article XIV of the Registrant's By-Laws, filed as Exhibit
(b) to this Registration Statement.
* To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
C-1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees................................................... $ *
*
New York Stock Exchange listing fee................................. *
Printing (other than stock certificates)............................ *
Engraving and printing stock certificates........................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
NASD fees........................................................... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the caption "Investment Advisory and
Management Arrangements" and in Note 1 to the Statement of Assets, Liabilities
and Capital is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which is filed as Exhibit (g)(1) to this
Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to directors, officers
and controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Fund of expenses incurred or paid by a director, officer or controlling
person of the Fund in connection with any successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of MLAM
acts as investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic
C-2
<PAGE>
Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund,
Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
World Income Fund, Inc., and The Municipal Fund Accumulation Program, Inc.,
and for the following closed-end registered investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund Inc.,
MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Florida Fund, MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., and Worldwide
DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund,
Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch Intermediate Government Bond Fund, Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. MLAM also acts as Sub-Adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Portfolio, two investment portfolios
of EQ Advisors Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646.
The address of the Investment Adviser, MLAM, Princeton Funds Distributor, Inc.
("PFD"), Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. also is P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281-1201.
C-3
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of all or substantially all of the investment companies
described in the preceding paragraphs and also hold the same positions with
all or substantially all of the investment companies advised by MLAM as they
do with those advised by the Investment Adviser. Messrs. Giordano, Harvey,
Kirstein and Monagle are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
ML & Co. ....... Limited Partner Financial Services Holding Company; Limited
Partner of MLAM
Princeton General Partner General Partner of MLAM
Services.......
Arthur Zeikel... Chairman Chairman of MLAM; President of MLAM and FAM (from
1977 to 1997); Chairman and Director of Princeton
Services; President of Princeton Services (from
1993 to 1997); Executive Vice President of ML &
Co.
Jeffrey M. Peek. President President of MLAM; President and Director of
Princeton Services; Executive Vice President of ML
& Co.
Terry K. Glenn.. Executive Vice President Executive Vice President of MLAM; Executive Vice
President and Director of Princeton Services;
President and Director of PFD; Director of
Financial Data Services, Inc.; President of
Princeton Administrators, L.P.
Linda L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Federici....... President of Princeton Services
Vincent R. Senior Vice President Senior Vice President of MLAM; Senior Vice
Giordano....... President of Princeton Services
Elizabeth A. Senior Vice President Senior Vice President of MLAM; Senior Vice
Griffin........ President of Princeton Services
Norman R. Senior Vice President Senior Vice President of MLAM; Senior Vice
Harvey......... President of Princeton Services
Michael J. Senior Vice President Senior Vice President and General Counsel of MLAM;
Hennewinkel.... and General Counsel Senior Vice President of Princeton Services
Philip L. Senior Vice President Senior Vice President and Secretary of MLAM;
Kirstein....... and Secretary Senior Vice President, Director and Secretary of
Princeton Services
Ronald M. Kloss. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra Landsman- Senior Vice President Senior Vice President of MLAM; Senior Vice
Yaros.......... President of Princeton Services; Vice President of
PFD
Stephen M. M. Senior Vice President Executive Vice President of Princeton
Miller......... Administrators, L.P.; Senior Vice President of
Princeton Services
Joseph T. Senior Vice President Senior Vice President of MLAM; Senior Vice
Monagle, Jr. .. President of Princeton Services
Michael L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Quinn.......... President of Princeton Services; Managing Director
and First Vice President of Merrill Lynch, Pierce,
Fenner & Smith Incorporated from 1989 to 1995
Richard L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Reller......... President of Princeton Services; Director of PFD
Gerald M. Senior Vice President Senior Vice President and Treasurer of MLAM;
Richard........ and Treasurer Senior Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of PFD
Gregory D. Upah. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Senior Vice President Senior Vice President of MLAM; Senior Vice
Welburn........ President of Princeton Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
C-4
<PAGE>
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10% from its net asset
value per share of Common Stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of Common Stock increases to
an amount greater than its net proceeds as stated in the Prospectus contained
herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 20th day of August, 1998.
MuniHoldings New Jersey Insured Fund
II, Inc.
(Registrant)
By /s/ Alice A. Pellegrino
-----------------------------------
(ALICE A. PELLEGRINO, PRESIDENT)
Each person whose signature appears below hereby authorizes Alice A.
Pellegrino, Bradley J. Lucido or 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 amendment to this Registration Statement (including
post-effective amendments) and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons
in the capacities and on the date indicated.
SIGNATURES TITLE DATE
/s/ Alice A. Pellegrino President (Principal August 20, 1998
- ------------------------------------- Executive Officer)
(ALICE A. PELLEGRINO) and Director
/s/ Bradley J. Lucido Treasurer (Principal August 20, 1998
- ------------------------------------- Financial and
(BRADLEY J. LUCIDO) Accounting Officer)
/s/ William E. Zitelli Director August 20, 1998
- -------------------------------------
(WILLIAM E. ZITELLI)
C-6
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER
--------------
(a)--Articles of Incorporation
(b)--By-laws
(d)(2)--Form of specimen certificate for shares of Common Stock of the
Registrant
(e)--Form of Automatic Dividend Reinvestment Plan
(g)--Form of Investment Advisory Agreement between the Fund and the Investment
Adviser
(h)(1)--Form of Purchase Agreement
(h)(2)--Merrill Lynch Standard Dealer Agreement
<PAGE>
EXHIBIT (a)
ARTICLES OF INCORPORATION
OF
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
THE UNDERSIGNED, ELIZABETH KEELEY, whose post-office address is c/o Brown &
Wood LLP, One World Trade Center, 56th Floor, New York, New York 10048, being at
least eighteen (18) years of age, does hereby act as incorporator, under and by
virtue of the General Laws of the State of Maryland authorizing the formation of
corporations and with the intention of forming a corporation.
ARTICLE I.
NAME
----
The name of the corporation is MUNIHOLDINGS NEW JERSEY INSURED FUND II,
INC. (the "Corporation").
ARTICLE II.
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed is to act as a
closed-end, management investment company under the federal Investment Company
Act of 1940, as amended, and in effect from time to time (the "Investment
Company Act"), and to exercise and enjoy all of the powers, rights and
privileges granted to, or conferred upon, corporations by the General Laws of
the State of Maryland now or hereafter in force.
ARTICLE III.
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post-office address of the resident agent is The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202.
<PAGE>
ARTICLE IV.
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation shall
have authority to issue is 200,000,000 shares, all initially classified as one
class called Common Stock, of the par value of Ten Cents ($0.10) per share, and
of the aggregate par value of Twenty Million Dollars ($20,000,000).
(2) The Board of Directors may classify and reclassify any unissued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series provided, however, that the
total amount of shares of all classes or series shall not exceed the total
number of shares of capital stock authorized in the Charter.
(3) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series.
(4) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that as to any
matter with respect to which a separate vote of any class or series is required
by the Investment Company Act, or any rules, regulations or orders issued
thereunder, or by the Maryland General Corporation Law, such requirement as to a
separate vote by that class or series shall apply in lieu of a general vote of
all classes and series as described above.
2
<PAGE>
(5) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act, and any rules, regulations and orders issued thereunder)
to take such action upon the concurrence of a majority of the votes entitled to
be cast by holders of capital stock of the Corporation (or a majority of the
votes entitled to be cast by holders of a class or series as a separate class or
series) unless a greater proportion is specified in the Charter.
(6) Unless otherwise expressly provided in the Charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation.
(7) Any fractional shares shall carry proportionately all of the rights of
a whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(8) The presence in person or by proxy of the holders of shares entitled to
cast one-third of the votes entitled to be cast shall constitute a quorum at any
meeting of stockholders, except with respect to any matter which requires
approval by a separate vote of one or more classes or series of stock, in which
case the presence in person or by proxy of the holders of shares entitled to
cast one-third of the votes entitled to be cast by each class or series entitled
to vote as a separate class shall constitute a quorum.
(9) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of the Charter and the By-Laws of the
Corporation. As used in the Charter of the Corporation, the terms "Charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
3
<PAGE>
ARTICLE V.
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------------------------
(1) The initial number of directors of the Corporation shall be three (3),
which number may be increased or decreased pursuant to the By-Laws of the
Corporation but shall never be less than the minimum number permitted by the
General Laws of the State of Maryland. The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualify are:
Alice A. Pellegrino
Bradley J. Lucido
William Zitelli
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock of any class
or series, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable, without any action by the stockholders,
subject to such limitations as may be set forth in these Articles of
Incorporation or in the By-Laws of the Corporation or in the General Laws of the
State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
and advanced expenses by the Corporation to the full extent permitted by the
General Laws of the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the full extent permitted by law
subject to the requirements of the Investment Company Act. The foregoing rights
of indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. No amendment of these Articles of
Incorporation or repeal of any provision hereof shall limit or eliminate the
benefits provided to directors and officers
4
<PAGE>
under this provision in connection with any act or omission that occurred prior
to such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State of
Maryland or decisional law, as amended or interpreted, subject to the
requirements of the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation or
repeal of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
(6) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the stockholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act.
(7) A director elected by the holders of capital stock may be removed (with
or without cause), but only by action taken by the holders of at least sixty-six
and two-thirds percent (66 2/3%) of the shares of capital stock then entitled to
vote in an election to fill that directorship.
(8) The enumeration and definition of the particular powers of the Board of
Directors included in the Charter shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereinafter in force.
ARTICLE VI.
DENIAL OF PREEMPTIVE RIGHTS
---------------------------
No stockholder of the Corporation shall by reason of his holding shares of
capital stock have any preemptive or preferential right to purchase or subscribe
to any shares of capital stock of the Corporation, now or hereafter to be
authorized, or any notes, debentures, bonds or other securities convertible into
shares of capital stock, now or hereafter to be authorized, whether or not the
issuance of any such shares, or
5
<PAGE>
notes, debentures, bonds or other securities would adversely affect the dividend
or voting rights of such stockholder; except that the Board of Directors, in its
discretion, may issue shares of any class of the Corporation, or any notes,
debentures, bonds, other securities convertible into shares of any class, either
in whole or in part, to the existing stockholders or holders of any class,
series or type of stock or other securities at the time outstanding to the
exclusion of any or all of the holders of any or all of the classes, series or
types of stock or other securities at the time outstanding.
ARTICLE VII.
DETERMINATION BINDING
---------------------
Any determination made in good faith and consistent with applicable law, so
far as accounting matters are involved, in accordance with accepted accounting
practice by or pursuant to the direction of the Board of Directors, as to the
amount of assets, obligations or liabilities of the Corporation, as to the
amount of net income of the Corporation from dividends and interest for any
period or amounts at any time legally available for the payment of dividends, as
to the amount of any reserves or charges set up and the propriety thereof, as to
the time of or purpose for creating reserves or as to the use, alteration or
cancellation of any reserves or charges (whether or not any obligation or
liability for which such reserves or as to the use, alteration or cancellation
of any reserves or charges shall have been created, shall have been paid or
discharged or shall be then or thereafter required to be paid or discharged), as
to the price of any security owned by the Corporation or as to any other matters
relating to the issuance, sale, redemption or other acquisition or disposition
of securities or shares of capital stock of the Corporation, and any reasonable
determination made in good faith by the Board of Directors as to whether any
transaction constitutes a purchase of securities on "margin," a sale of
securities "short," or an underwriting or the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of, any
securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future, and
shares of the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such determinations
shall be binding as aforesaid. No provision in this Charter shall be effective
to (a) require a waiver of compliance with any provision of the Securities Act
of 1933, as
6
<PAGE>
amended, or the Investment Company Act, or of any valid rule, regulation or
order of the Securities and Exchange Commission thereunder or (b) protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
ARTICLE VIII.
PRIVATE PROPERTY OF STOCKHOLDERS
--------------------------------
The private property of stockholders shall not be subject to the payment of
corporate debts to any extent whatsoever.
ARTICLE IX.
CONVERSION TO OPEN-END COMPANY
------------------------------
Notwithstanding any other provisions of these Articles of Incorporation or
the By-Laws of the Corporation, a favorable vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize an amendment to these Articles of Incorporation of
the Corporation that makes the Common Stock a "redeemable security" (as that
term is defined in section 2(a) (32) the Investment Company Act) unless such
action has previously 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 of the Corporation, in which case the affirmative vote of the
holders of a majority of the outstanding shares of capital stock of the
Corporation entitled to vote thereon shall be required.
ARTICLE X.
MERGER, SALE OF ASSETS, LIQUIDATION
-----------------------------------
Notwithstanding any other provisions of these Articles of Incorporation or
the By-Laws of the Corporation, a favorable vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter shall be required to
approve, adopt or authorize (i) a merger or consolidation or statutory share
exchange of the Corporation with any other corporation, (ii) a sale of all or
substantially all of the
7
<PAGE>
assets of the Corporation (other than in the regular course of its investment
activities), or (iii) a liquidation or dissolution of the Corporation, unless
such action has previously 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 of the Corporation, in which case the affirmative
vote of the holders of a majority of the outstanding shares of capital stock of
the Corporation entitled to vote thereon shall be required.
ARTICLE XI.
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE XII.
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in its Charter, in any manner now or hereafter prescribed by
statute, including any amendment which alters the contract rights, as expressly
set forth in the Charter, of any outstanding stock and substantially adversely
affects the stockholders' rights, and all rights conferred upon stockholders
herein are granted subject to this reservation. Notwithstanding any other
provisions of these Articles of Incorporation or the By-Laws of the Corporation
(and notwithstanding the fact that a lesser percentage may be specified by law,
these Articles of Incorporation or the By-Laws of the Corporation), the
amendment or repeal of Section (5) of Article IV, Section (1), Section (4),
Section (5), Section (6) and Section (7) of Article V, Article VIII, Article IX,
Article X, Article XI or this Article XII, of these Articles of Incorporation
shall require the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66 2/3%) of the outstanding shares of capital stock of the
Corporation entitled to be voted on the matter.
8
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator of MUNIHOLDINGS NEW JERSEY
INSURED FUND II, INC. hereby executes the foregoing Articles of Incorporation
and acknowledges the same to be her act.
Dated this 17th day
of August, 1998
/s/ ELIZABETH KEELEY
--------------------
Elizabeth Keeley
9
<PAGE>
EXHIBIT (b)
BY-LAWS
OF
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
ARTICLE I.
Offices
-------
Section 1. Principal Office. The principal office of the Corporation
----------------
shall be in the City of Baltimore and State of Maryland.
Section 2. Principal Executive Office. The principal executive office
--------------------------
of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices
-------------
in such places as the Board of Directors from time to time may determine.
ARTICLE II.
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. Except as otherwise required by the rules
--------------
of any stock exchange on which the Corporation's shares of stock may be listed,
the Corporation shall not be required to hold an annual meeting of its
stockholders in any year in which the election of directors is not required to
be acted upon under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). In the event that the Corporation shall be required
to hold an annual meeting of stockholders to elect directors under the
Investment Company Act, such meeting shall be held no later than 120 days after
the occurrence of the event requiring the meeting. Any stockholders' meeting
held in accordance with this Section shall for all purposes constitute the
annual meeting of stockholders for the year in which the meeting is held.
In the event an annual meeting is required by the rules of a stock exchange
on which the Corporation's shares of stock are listed, the annual meeting of the
stockholders of the Corporation for the election of directors and for the
transaction of such other business as may properly be brought before the meeting
shall be held on such day and month of each year as shall be designated annually
by the Board of Directors.
Section 2. Special Meetings. Special meetings of the stockholders,
----------------
unless otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the written request of
the holders of at least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with Section 2-
502(b) or (c) of the Maryland General Corporation Law.
<PAGE>
Section 3. Place of Meetings. The annual meeting and any special
-----------------
meeting of the stockholders shall be held at such place within the United States
as the Board of Directors from time to time may determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the place,
------------------------------------
date and time of the holding of each annual and special meeting of the
stockholders and the purpose or purposes of each special meeting shall be given
personally or by mail, not less than ten nor more than 90 days before the date
of such meeting, to each stockholder entitled to vote at such meeting and to
each other stockholder entitled to notice of the meeting. Notice by mail shall
be deemed to be duly given when deposited in the United States mail addressed to
the stockholder at his or her address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who, either
before or after the meeting, shall submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or unless the adjournment is for
more than 120 days after the original record date, notice of such adjourned
meeting need not be given if the time and place to which the meeting shall be
adjourned were announced at the meeting at which the adjournment is taken.
Section 5. Quorum. The presence in person or by proxy of the holders
------
of shares of stock entitled to cast one-third of the votes entitled to be cast
shall constitute a quorum at any meeting of stockholders, except with respect to
any matter which requires approval by a separate vote of one or more classes or
series of stock, in which case the presence in person or by proxy of the holders
of shares entitled to cast one-third of the votes entitled to be cast by each
class or series entitled to vote as a separate class or series shall constitute
a quorum. In the absence of a quorum no business may be transacted, except that
the holders of a majority of the shares of stock present in person or by proxy
and entitled to vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by these By-Laws,
until the holders of the requisite amount of shares of stock shall be so
present. At any such adjourned meeting at which a quorum may be present any
business may be transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by proxy, of
holders of the number of shares of stock of the Corporation in excess of a
majority thereof which may be required by the laws of the State of Maryland, the
Investment Company Act, or other applicable statute, the Charter, or these By-
Laws, for action upon any given matter shall not prevent action at such meeting
upon any other matter or matters which properly may come before the meeting, if
there shall be present thereat, in person or by proxy, holders of the number of
shares of stock of the Corporation required for action in respect of such other
matter or matters.
Section 6. Organization. At each meeting of the stockholders, the
------------
Chairman of the Board (if one has been designated by the Board), or in his or
her absence or inability to act, the President, or in the absence or inability
to act of the Chairman of the Board and the President, a Vice President, shall
act as chairman of the meeting. The Secretary, or in his or her absence or
inability to act, any person appointed by the chairman of the meeting, shall act
as secretary of the meeting and keep the minutes thereof.
2
<PAGE>
Section 7. Order of Business. The order of business at all meetings
-----------------
of the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
------
Charter, each holder of record of shares of stock of the Corporation having
voting power shall be entitled at each meeting of the stockholders to one vote
for every share of such stock standing in his or her name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 9 of this Article or, if such record date shall not have been so fixed,
then at the later of (i) the close of business on the day on which notice of the
meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or her by a proxy signed by
such stockholder or his or her attorney-in-fact. No proxy shall be valid after
the expiration of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Charter or these By-Laws, any corporate
action to be taken by vote of the stockholders (other than the election of
directors, which shall be by a plurality of votes cast) shall be authorized by a
majority of the total votes cast at a meeting of stockholders by the holders of
shares present in person or represented by proxy and entitled to vote on such
action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his or her proxy, if there be such
proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a
---------------------
record date for the purpose of determining stockholders entitled to vote at any
meeting of the stockholders. The record date, which may not be prior to the
close of business on the day the record date is fixed, shall be not more than 90
nor less than ten days before the date of the meeting of the stockholders. All
persons who were holders of record of shares at such time, and not others, shall
be entitled to vote at such meeting and any adjournment thereof.
Section 10. Inspectors. The Board, in advance of any meeting of
----------
stockholders, may appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his or her duties, shall
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his or her
ability. The inspectors shall determine the number of shares outstanding and the
voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, and the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On
3
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request of the chairman of the meeting or any stockholder entitled to vote
thereat, the inspectors shall make a report in writing of any challenge, request
or matter determined by them and shall execute a certificate of any fact found
by them. No director or candidate for the office of director shall act as
inspector of an election of directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as
------------------------------------------
otherwise provided by statute or the Charter, any action required to be taken at
any annual or special meeting of stockholders, or any action which may be taken
at any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if the following are filed
with the records of stockholders' meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder entitled to vote
on the matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III.
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the
--------------
Charter, the business and affairs of the Corporation shall be managed under the
direction of the Board of Directors. All powers of the Corporation may be
exercised by or under authority of the Board of Directors except as conferred on
or reserved to the stockholders by law or by the Charter or these By-Laws.
Section 2. Number of Directors. The number of directors shall be
-------------------
fixed from time to time by resolution of the Board of Directors adopted by a
majority of the entire Board of Directors then in office; provided, however,
that in no event shall the number of directors be less than the minimum
permitted by the General Law of the State of Maryland nor more than 15. Any
vacancy created by an increase in the number of directors may be filled in
accordance with Section 6 of this Article III. No reduction in the number of
directors shall have the effect of removing any director from office prior to
the expiration of his or her term unless such director specifically is removed
pursuant to Section 5 of this Article III at the time of such decrease.
Directors need not be stockholders. As long as any preferred stock of the
Corporation is outstanding, the number of directors shall be not less than five.
Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually at a meeting of stockholders held for that purpose; provided, however,
that if no meeting of the stockholders of the Corporation is required to be held
in a particular year pursuant to Section 1 of Article II of these By-Laws,
directors shall be elected at the next meeting held. The term of office of each
director shall be from the time of his election and qualification until the
election of directors next succeeding his election and until his successor shall
have been elected and shall have qualified, or until his death, or until he
shall have resigned or until December 31 of the year in which he shall have
reached seventy-two years of age, or until he shall have been removed as
hereinafter provided in these By-Laws, or as otherwise provided by statute or by
the Charter.
Section 4. Resignation. A director of the Corporation may resign at
-----------
any time by giving written notice of his or her resignation to the Board or the
Chairman of the Board or the
4
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President or the Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 5. Removal of Directors. Any director of the Corporation may
--------------------
be removed (with or without cause) by the stockholders by a vote of sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of capital stock then
entitled to vote in the election of such director.
Section 6. Vacancies. Subject to the provisions of the Investment
---------
Company Act, any vacancies in the Board of Directors, whether arising from
death, resignation, removal, an increase in the number of directors or any other
cause, shall be filled by a vote of a majority of the Board of Directors then in
office, regardless of whether they constitute a quorum.
Section 7. Place of Meetings. Meetings of the Board may be held at
-----------------
such place as the Board from time to time may determine or as shall be specified
in the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board may be
---------------
held without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be
----------------
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 10. Telephone Meetings. Members of the Board of Directors
------------------
or of any committee thereof may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Subject to
the provisions of the Investment Company Act, participation in a meeting by
these means constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special
--------------------------
meeting of the Board shall be given by the Secretary as hereinafter provided, in
which notice shall be stated the time and place of the meeting. Notice of each
such meeting shall be delivered to each director, either personally or by
telephone or any standard form of telecommunication, at least 24 hours before
the time at which such meeting is to be held, or by first-class mail, postage
prepaid, addressed to him or her at his or her residence or usual place of
business, at least three days before the day on which such meeting is to be
held.
Section 12. Waiver of Notice of Meetings. Notice of any special
----------------------------
meeting need not be given to any director who, either before or after the
meeting, shall sign a written waiver of notice which is filed with the records
of the meeting or who shall attend such meeting. Except as otherwise
specifically required by these By-Laws, a notice or waiver of notice of any
meeting need not state the purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two
-----------------
(unless there is only one director) of the members of the entire Board shall be
present in person at any meeting of the Board in order to constitute a quorum
for the transaction of business at such meeting, and except as otherwise
expressly required by statute, the Charter, these By-Laws, the Investment
Company Act, or other applicable statute, the act of a majority of the directors
present at any meeting at
5
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which a quorum is present shall be the act of the Board. In the absence of a
quorum at any meeting of the Board, a majority of the directors present thereat
may adjourn such meeting to another time and place until a quorum shall be
present thereat. Notice of the time and place of any such adjourned meeting
shall be given to the directors who were not present at the time of the
adjournment and, unless such time and place were announced at the meeting at
which the adjournment was taken, to the other directors. At any adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally called.
Section 14. Organization. The Board, by resolution adopted by a
------------
majority of the entire Board, may designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his or her
absence or inability to act, another director chosen by a majority of the
directors present, shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his or her absence or inability to act, any person appointed
by the Chairman) shall act as secretary of the meeting and keep the minutes
thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting.
-------------------------------------------------
Subject to the provisions of the Investment Company Act, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
the committee, as the case may be, consent thereto in writing, and the writings
or writing are filed with the minutes of the proceedings of the Board or the
committee.
Section 16. Compensation. Directors may receive compensation for
------------
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation at all times
are consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
Prospectus of the Corporation included in the registration statement of the
Corporation relating to the initial public offering of its capital stock, as
filed with the Securities and Exchange Commission (or as such investment
policies and restrictions may be modified by the Board of Directors, or, if
required, by a majority vote of the stockholders of the Corporation in
accordance with the Investment Company Act) and as required by the Investment
Company Act. The Board, however, may delegate the duty of management of the
assets and the administration of its day to day operations to an individual or
corporate management company and/or investment adviser pursuant to a written
contract or contracts which have obtained the requisite approvals, including the
requisite approvals of renewals thereof, of the Board of Directors and/or the
stockholders of the Corporation in accordance with the provisions of the
Investment Company Act.
6
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ARTICLE IV.
Committees
----------
Section 1. Executive Committee. The Board, by resolution adopted by a
-------------------
majority of the entire board, may designate an Executive Committee consisting of
two or more of the directors of the Corporation, which committee shall have and
may exercise all of the powers and authority of the Board with respect to all
matters other than:
(i) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Charter;
(ii) the filling of vacancies on the Board of Directors;
(iii) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive Committee;
(iv) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the
Investment Company Act, or the taking of any other action required to be
taken by the Board of Directors by the Investment Company Act;
(v) the amendment or repeal of these By-Laws or the adoption of new
By-Laws;
(vi) the amendment or repeal of any resolution of the Board which by
its terms may be amended or repealed only by the Board;
(vii) the declaration of dividends and, except to the extent permitted
by law, the issuance of capital stock of the Corporation; and
(viii) the approval of any merger or share exchange which does not
require stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject
to revision or alteration by the Board; provided, however, that third parties
shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors
-----------------------------
from time to time, by resolution adopted by a majority of the whole Board, may
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the Board
of Directors, by resolution, may prescribe.
Section 3. General. One-third, but not less than two, of the members
-------
of any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or
7
<PAGE>
any two members of any committee may fix the time and place of its meetings
unless the Board shall otherwise provide. In the absence or disqualification of
any member of any committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. The Board shall have the power at any time to change the membership of
any committee, to fill all vacancies, to designate alternate members to replace
any absent or disqualified member, or to dissolve any such committee. Nothing
herein shall be deemed to prevent the Board from appointing one or more
committees consisting in whole or in part of persons who are not directors of
the Corporation; provided, however, that no such committee shall have or may
exercise any authority or power of the Board in the management of the business
or affairs of the Corporation except as may be prescribed by the Board.
ARTICLE V.
Officers, Agents and Employees
------------------------------
Section 1. Number of Qualifications. The officers of the Corporation
------------------------
shall be a President, who shall be a director of the Corporation, a Secretary
and a Treasurer, each of whom shall be elected by the Board of Directors. The
Board of Directors may elect or appoint one or more Vice Presidents and also may
appoint such other officers, agents and employees as it may deem necessary or
proper. Any two or more offices may be held by the same person, except the
offices of President and Vice President, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity. Such officers
shall be elected by the Board of Directors each year at its first meeting held
after the annual meeting of stockholders, each to hold office until the next
meeting of the stockholders and until his or her successor shall have been duly
elected and shall have qualified, or until his or her death, or until he or she
shall have resigned, or have been removed, as hereinafter provided in these By-
Laws. The Board from time to time may elect such officers (including one or more
Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents, as may be necessary or desirable for the
business of the Corporation. The President also shall have the power to appoint
such assistant officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) as may be
necessary or appropriate to facilitate the management of the Corporation's
affairs. Such officers and agents shall have such duties and shall hold their
offices for such terms as may be prescribed by the Board or by the appointing
authority.
Section 2. Resignations. Any officer of the Corporation may resign
------------
at any time by giving written notice of resignation to the Board, the Chairman
of the Board, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent
-------------------------------------
or employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or
8
<PAGE>
appointed by the Board of Directors. Such removal shall be without prejudice to
such person's contract rights, if any, but the appointment of any person as an
officer, agent or employee of the Corporation shall not of itself create
contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
---------
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his or her control.
Section 6. Bonds or Other Security. If required by the Board, any
-----------------------
officer,agent or employee of the Corporation shall give a bond or other security
for the faithful performance of his or her duties, in such amount and with such
surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive
---------
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), the President shall preside at all meetings of the stockholders
and of the Board of Directors. He or she shall have, subject to the control of
the Board of Directors, general charge of the business and affairs of the
Corporation. He or she may employ and discharge employees and agents of the
Corporation, except such as shall be appointed by the Board, and he or she may
delegate these powers.
Section 8. Vice President. Each Vice President shall have such powers
--------------
and perform such duties as the Board of Directors or the President from time to
time may prescribe.
Section 9. Treasurer. The Treasurer shall:
---------
(i) have charge and custody of, and be responsible for, all
of the funds and securities of the Corporation, except those which the
Corporation has placed in the custody of a bank or trust company or
member of a national securities exchange (as that term is defined in the
Securities Exchange Act of 1934, as amended) pursuant to a written
agreement designating such bank or trust company or member of a national
securities exchange as custodian of the property of the Corporation;
(ii) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(iii) cause all moneys and other valuables to be deposited to
the credit of the Corporation;
(iv) receive, and give receipts for, moneys due and payable to
the Corporation from any source whatsoever;
(v) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking
proper vouchers therefor; and
9
<PAGE>
(vi) in general, perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be
assigned to him or her by the Board or the President.
Section 10. Secretary. The Secretary shall:
---------
(i) keep or cause to be kept in one or more books provided
for the purpose, the minutes of all meetings of the Board, the
committees of the Board and the stockholders;
(ii) see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law;
(iii) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock certificates of
the Corporation (unless the seal of the Corporation on such certificates
shall be a facsimile, as hereinafter provided) and affix and attest the
seal to all other documents to be executed on behalf of the Corporation
under its seal;
(iv) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and
(v) in general, perform all of the duties incident to the
office of Secretary and such other duties as from time to time may be
assigned to him or her by the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any
--------------------
officer of the Corporation, or for any other reason that the Board may deem
sufficient, the Board may confer for the time being the powers or duties, or any
of them, of such officer upon any other officer or upon any director.
ARTICLE VI.
Indemnification
---------------
Section 1. General Indemnification. Each officer and director of the
-----------------------
Corporation shall be indemnified by the Corporation to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Corporation or
any stockholder thereof to which such person otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. Absent a court
determination that an officer or director seeking indemnification was not liable
on the merits or guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office,
the decision by the Corporation to indemnify such person must be based upon the
reasonable determination of independent legal counsel or the vote of a majority
of a quorum of the directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to the proceeding
("non-party independent directors"), after review of the facts, that such
officer or director is not guilty of willful misfeasance, bad
10
<PAGE>
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him or her in
connection with proceedings to which he or she is a party in the manner and to
the full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Corporation a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met and a written undertaking to repay any such advance, if it ultimately should
be determined that the standard of conduct has not been met, and provided
further that at least one of the following additional conditions is met:
(i) the person seeking indemnification shall provide a security in
form and amount acceptable to the Corporation for his or her undertaking;
(ii) the Corporation is insured against losses arising by reason of
the advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based on a
review of facts readily available to the Corporation at the time the
advance is proposed to be made, that there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland, from liability arising from his or her activities as an
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any officer or director of the Corporation that
protects or purports to protect such person from liability to the Corporation or
to its stockholders to which such officer or director otherwise would be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
Section 2. Other Rights. The indemnification provided by this
------------
Article VI shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of stockholders or
disinterested directors or otherwise, both as to action by a director or officer
of the Corporation in his or her official capacity and as to action by such
person in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such person.
11
<PAGE>
ARTICLE VII.
Capital Stock
-------------
Section 1. Stock Certificates. Each holder of stock of the
------------------
Corporation shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Board, representing the
number of shares of stock of the Corporation owned by him or her, provided,
however, that certificates for fractional shares will not be delivered in any
case. The certificates representing shares of stock shall be signed by or in the
name of the Corporation by the President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
and sealed with the seal of the Corporation. Any or all of the signatures or the
seal on the certificate may be a facsimile. In case any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate shall be issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or registrar were still
in office at the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall
-------------------------------------------
be kept at the principal executive office of the Corporation correct and
complete books and records of account of all the business and transactions of
the Corporation.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
Section 4. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of
-----------------------------------------
any certificates representing shares of stock of the Corporation immediately
shall notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board, in its discretion, may require such owner or his or her legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the
12
<PAGE>
Board in its absolute discretion shall determine, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions.
-------------------------------------------------------
The Board may fix, in advance, a date not more than 90 days preceding the date
fixed for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder
--------------------------------------
of the Corporation or his or her agent may inspect and copy during usual
business hours the Corporation's By-Laws, minutes of the proceedings of its
stockholders, annual statements of its affairs, and voting trust agreements on
file at its principal office.
ARTICLE VIII.
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors, the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX.
Fiscal Year
-----------
The Board of Directors shall have the power from time to time to fix the
fiscal year of the Corporation by a duly adopted resolution.
ARTICLE X.
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be
------------
deposited with such banks or other depositories as the Board of Directors of the
Corporation from time to time may determine.
Section 2. Custodians. All securities and other investments shall be
----------
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation from time to time may determine. Every arrangement
entered into with any bank or other company
13
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for the safekeeping of the securities and investments of the Corporation shall
contain provisions complying with the Investment Company Act, and the general
rules and regulations thereunder.
ARTICLE XI.
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
--------------------------
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution from time to time shall designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds
------------------------------
or other securities at any time owned by the Corporation may be held on behalf
of the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board and,
when so authorized to be held on behalf of the Corporation or sold, transferred
or otherwise disposed of, may be transferred from the name of the Corporation by
the signature of the President or a Vice President or the Treasurer or pursuant
to any procedure approved by the Board of Directors, subject to applicable law.
ARTICLE XII.
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify the
financial statements of the Corporation which are filed with the Securities and
Exchange Commission shall be selected annually by the Board of Directors and
ratified by the stockholders in accordance with the provisions of the Investment
Company Act.
ARTICLE XIII.
Annual Statement
----------------
The books of account of the Corporation shall be examined by an independent
firm of public accountants at the close of each annual period of the Corporation
and at such other times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of record of the Corporation on such date with respect to each
report as may be determined by the Board, at his or her address as the same
appears on the books of the Corporation. Such annual statement also shall be
available at the annual meeting of stockholders and shall be placed on file at
the Corporation's principal office in the State of Maryland, and if no annual
meeting is held pursuant to Article II, Section 1, such annual statement of
affairs shall be placed on file as the Corporation's principal office within 120
days after the end of the Corporation's fiscal year. Each such report shall
show the assets and liabilities of the Corporation as of the close of the period
covered by the report and the securities in which the funds of the Corporation
then were invested. Such report also shall show the Corporation's income and
expenses for the period from the end of the Corporation's preceding fiscal year
to the close of the period covered by the report and any other information
required by
14
<PAGE>
the Investment Company Act, and shall set forth such other matters as the Board
or such firm of independent public accountants shall determine.
ARTICLE XIV.
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed by the
affirmative vote of a majority of the Board of Directors. The stockholders
shall have no power to make, amend, alter or repeal By-Laws.
15
<PAGE>
EXHIBIT (d)(2)
COMMON STOCK COMMON STOCK
PAR VALUE $.10 PAR VALUE $.10
CUSIP
See Reverse For Certain Definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
This certifies that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF MuniHoldings
New Jersey Insured Fund II, Inc. transferable on the books of the Corporation by
the holder in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be subject to all of the provisions of the Articles
of Incorporation and of the By-Laws of the Corporation, and of all the
amendments from time to time made thereto. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
President Secretary
Countersigned and Registered:
STATE STREET BANK AND TRUST COMPANY
Transfer Agent and Registrar
Authorized Signature
<PAGE>
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
The Corporation has the authority to issue stock of more than one class. A
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the shares of each class of stock
which the Corporation is authorized to issue and the differences in the relative
rights and preferences between the shares of each class to the extent that they
have been set, and the authority of the Board of Directors to set the relative
rights and preferences of subsequent classes and series, will be furnished by
the Corporation to any stockholder, without charge, upon request to the
Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--
_______Custodian_______ ------ -------
(Cust) (Minor)
TEN ENT--as tenants by the entireties under Uniform Gifts to Minors Act
-------
(State)
JT TEN --as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------
- -------------------------------------------------------------------------
Please print or typewrite name and address including zip code of assignee
- -------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
- -------------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
2
<PAGE>
Dated:
------------------
Signature:
-----------------------------------
NOTICE: The signature to this assignment must correspond with the
name as written upon the face of the certificate, in every particular,
without alteration or enlargement, or any change whatever.
Signature Guaranteed:
------------------------------------
Signatures must be guaranteed by an "eligible guarantor
institution" as such term is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934.
3
<PAGE>
EXHIBIT (e)
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
TERMS AND CONDITIONS OF
AUTOMATIC DIVIDEND REINVESTMENT PLAN
1. Appointment of Agent. You, __________, will act as Agent for me, and
--------------------
will open an account for me under the Dividend Reinvestment Plan (the "Plan") in
the same name as my present shares of common stock, par value $.10 per share
("Common Stock"), of MuniHolding New Jersey Insured Fund II, Inc. (the "Fund")
are registered, and will automatically put into effect for me the dividend
reinvestment option of the Plan as of the first record date for a dividend or
capital gains distribution (collectively referred to herein as a "dividend"),
payable at the election of shareholders in cash or shares of Common Stock.
2. Dividends Payable in Common Stock. My participation in the Plan
---------------------------------
constitutes an election by me to receive dividends in shares of Common Stock
whenever the Fund declares a dividend. In such event, the dividend amount shall
automatically be made payable to me entirely in shares of Common Stock which
shall be acquired by the Agent for my account, depending upon the circumstances
described in paragraph 3, either (i) through receipt of additional shares of
unissued but authorized shares of Common Stock from the Fund ("newly-issued
shares") as described in paragraph 6 or (ii) by purchase of outstanding shares
of Common Stock on the open market ("open-market purchases") as described in
paragraph 7.
3. Determination of Whether Newly-Issued Shares or Open-Market Purchases.
---------------------------------------------------------------------
If on the payment date for the dividend (the "valuation date"), the net asset
value per share of the Common Stock, as defined in paragraph 8, is equal to or
less than the market price per share of the Common Stock, as defined in
paragraph 8, plus estimated brokerage commissions (such condition being referred
to herein as "market premium"), the Agent shall invest the dividend amount in
newly-issued shares on my behalf as described in paragraph 6. If on the
valuation date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Agent shall
invest the dividend amount in shares acquired on my behalf in open-market
purchases as described in paragraph 7.
4. Purchase Period for Open-Market Purchases. In the event of a market
-----------------------------------------
discount on the valuation date, the Agent shall have until the last business day
before the next ex-dividend date with respect to the shares of Common Stock or
in no event more than 30 days after the valuation date (the "last purchase
date") to invest the dividend amount in shares acquired in open-market purchases
except where temporary curtailment or suspension of purchases is necessary to
comply with applicable provisions of federal securities laws.
5. Failure to Complete Open-Market Purchases During Purchase Period. If
----------------------------------------------------------------
the Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period because the market discount has shifted to a market
premium or otherwise, the Agent will invest the uninvested portion of the
dividend amount in newly-issued shares at the close of business on the last
purchase date as described in paragraph 4; except that the Agent may not acquire
newly-issued shares after the valuation date under the foregoing circumstances
unless it has received a legal opinion that registration of such shares is not
required under the Securities Act of 1933, as amended, or unless the shares to
be issued are registered under such Act.
<PAGE>
6. Acquisition of Newly-Issued Shares. In the event that all or part of
----------------------------------
the dividend amount is to be invested in newly-issued shares, you shall
automatically receive such newly-issued shares of Common Stock, including
fractions, for my account, and the number of additional newly-issued shares of
Common Stock to be credited to my account shall be determined by dividing the
dollar amount of the dividend on my shares to be invested in newly-issued shares
by the net asset value per share of Common Stock on the date the shares are
issued (the valuation date in the case of an initial market premium or the last
purchase date in case the Agent is unable to complete open-market purchases
during the purchase period); provided, that the maximum discount from the then
current market price per share on the date of issuance shall not exceed 5%.
7. Manner of Making Open-Market Purchases. In the event that the dividend
--------------------------------------
amount is to be invested in shares of Common Stock acquired in open-market
purchases, you shall apply the amount of such dividend on my shares (less my pro
rata share of brokerage commissions incurred with respect to your open-market
purchases) to the purchase on the open-market of shares of the Common Stock for
my account. Open-market purchases may be made on any securities exchange where
the Common Stock is traded, in the over-the-counter market or in negotiated
transactions and may be on such terms as to price, delivery and otherwise as you
shall determine. My funds held by you uninvested will not bear interest, and it
is understood that, in any event, you shall have no liability in connection with
any inability to purchase shares within 30 days after the initial date of such
purchase as herein provided, or with the timing of any purchases affected. You
shall have no responsibility as to the value of the Common Stock acquired for my
account. For the purposes of cash investments you may commingle my funds with
those of other shareholders of the Fund for whom you similarly act as Agent, and
the average price (including brokerage commissions) of all shares purchased by
you as Agent in the open market shall be the price per share allocable to me in
connection with open-market purchases.
8. Meaning of Market Price and Net Asset Value. For all purposes of the
-------------------------------------------
Plan: (a) the market price of the Common Stock on a particular date shall be the
last sales price on the New York Stock Exchange (the "Exchange") on that date,
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such stock on the Exchange on such date and
(b) net asset value per share of the Common Stock on a particular date shall be
as determined by or on behalf of the Fund.
9. Registration of Shares Acquired Pursuant to the Plan. You may hold my
----------------------------------------------------
shares of Common Stock acquired pursuant to the Plan, together with the shares
of other shareholders of the Fund acquired pursuant to the Plan, in
noncertificated form in your name or that of your nominee. You will forward to
me any proxy solicitation material and will vote any shares so held for me only
in accordance with the proxy returned by me to the Fund. Upon my written
request, you will deliver to me, without charge, a certificate or certificates
for the full shares held by you for my account.
10. Confirmations. You will confirm to me each acquisition made for my
-------------
account as soon as practicable but not later than 60 days after the date
thereof.
2
<PAGE>
11. Fractional Interests. Although I may from time to time have an
--------------------
undivided fractional interest (computed to three decimal places) in a share of
the Fund, no certificates for a fractional share will be issued. However,
dividends and distributions on fractional shares will be credited to my account.
In the event of termination of my account under the Plan, you will adjust for
any such undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale required
to make such an adjustment.
12. Stock Dividends or Share Purchase Rights. Any stock dividends or
----------------------------------------
split shares distributed by the Fund on shares held by you for me will be
credited to my account. In the event that the Fund makes available to its
shareholders rights to purchase additional shares or other securities, the
shares held for me under the Plan will be added to other shares held by me in
calculating the number of rights to be issued to me.
13. Service Fee. Your service fee for handling capital gains
-----------
distributions or income dividends will be paid by the Fund. I will be charged
for my pro rata share of brokerage commissions on all open market purchases.
14. Termination of Account. I may terminate my account under the Plan by
----------------------
notifying you in writing. Such termination will be effective immediately if my
notice is received by you not less than ten days prior to any dividend or
distribution record date; otherwise such termination will be effective on the
first trading day after the payment date for such dividend or distribution with
respect to any subsequent dividend or distribution. The Plan may be terminated
by you or the Fund upon notice in writing mailed to me at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any termination you will cause a certificate or certificates for the full
shares held for me under the Plan and cash adjustment for any fraction to be
delivered to me without charge. If I elect by notice to you in writing in
advance of such termination to have you sell part or all of my shares and remit
the proceeds to me, you are authorized to deduct brokerage commissions for this
transaction from the proceeds.
15. Amendment of Plan. These terms and conditions may be amended or
-----------------
supplemented by you or the Fund at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to me appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date, thereof, you receive written notice of the
termination of my account under the Plan. Any such amendment may include an
appointment by you in your place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
my account, all dividends and distributions payable on Common Stock of the Fund
held in my name or under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
16. Extent of Responsibility of Agent. You shall at all times act in good
---------------------------------
faith and agree to use your best efforts within reasonable limits to insure the
accuracy of all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall
3
<PAGE>
not be liable for loss or damage due to errors unless such error is caused by
your negligence, bad faith, or willful misconduct or that of your employees.
17. Governing Law. These terms and conditions shall be governed by the
-------------
laws of the State of New York without regard to its conflicts of laws
provisions.
4
<PAGE>
EXHIBIT (g)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of the _____ day of ______, 1998, by and between
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC., a Maryland corporation (the
"Fund"), and FUND ASSET MANAGEMENT, L.P., a Delaware limited partnership (the
"Investment Adviser").
W I T N E S S E T H:
----------------------------
WHEREAS, the Fund is engaged in business as a closed-end, non-diversified,
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, the Investment Adviser is engaged principally in rendering
management and investment advisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Fund desires to retain the Investment Adviser to provide
management and investment advisory services to the Fund in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Investment Adviser is willing to provide management and
investment advisory services to the Fund on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Investment Adviser hereby agree as
follows:
<PAGE>
ARTICLE I
---------
Duties of the Investment Adviser
--------------------------------
The Fund hereby employs the Investment Adviser to act as a manager and
investment adviser of the Fund and to furnish, or arrange for its affiliates to
furnish, the management and investment advisory services described below,
subject to the policies of, review by and overall control of the Board of
Directors of the Fund, for the period and on the terms and conditions set forth
in this Agreement. The Investment Adviser hereby accepts such employment and
agrees during such period, at its own expense, to render, or arrange for the
rendering of, such services and to assume the obligations herein set forth for
the compensation provided for herein. The Investment Adviser and its affiliates
for all purposes herein shall be deemed to be independent contractors and,
unless otherwise expressly provided or authorized, shall have no authority to
act for or represent the Fund in any way or otherwise be deemed agents of the
Fund.
(a) Management and Administrative Services. The Investment Adviser shall
--------------------------------------
perform, or arrange for its affiliates to perform, the management and
administrative services necessary for the operation of the Fund, including
administering shareholder accounts and handling shareholder relations. The
Investment Adviser shall provide the Fund with office space, facilities,
equipment and necessary personnel and such other services as the Investment
Adviser, subject to review by the Board of Directors, from time to time shall
determine to be necessary or useful to perform its obligations under this
Agreement. The Investment Adviser, also on behalf of the Fund, shall conduct
relations with custodians, depositories, transfer agents, pricing agents,
dividend disbursing agents, other shareholder servicing agents, accountants,
attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers,
banks and such other persons in any such other capacity deemed to be necessary
or desirable. The Investment Adviser generally shall monitor the Fund's
compliance with investment policies and restrictions as set forth in
2
<PAGE>
filings made by the Fund under the Federal securities laws. The Investment
Adviser shall make reports to the Board of Directors of its performance of
obligations hereunder and furnish advice and recommendations with respect to
such other aspects of the business and affairs of the Fund as it shall determine
to be desirable.
(b) Investment Advisory Services. The Investment Adviser shall provide,
----------------------------
or arrange for its affiliates to provide, the Fund with such investment
research, advice and supervision as the latter from time to time may consider
necessary for the proper supervision of the assets of the Fund, shall furnish
continuously an investment program for the Fund and shall determine from time to
time which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash, subject always to the
restrictions of the Articles of Incorporation and the By-Laws of the Fund, as
amended from time to time, the provisions of the Investment Company Act and the
statements relating to the Fund's investment objective, investment policies and
investment restrictions as the same are set forth in filings made by the Fund
under the Federal securities laws. The Investment Adviser shall make decisions
for the Fund as to the manner in which voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's portfolio
securities shall be exercised. Should the Board of Directors at any time,
however, make any definite determination as to investment policy and notify the
Investment Adviser thereof in writing, the Investment Adviser shall be bound by
such determination for the period, if any, specified in such notice or until
similarly notified that such determination has been revoked. The Investment
Adviser shall take, on behalf of the Fund, all actions which it deems necessary
to implement the investment policies determined as provided above, and in
particular to place all orders for the purchase or sale of portfolio securities
for the
3
<PAGE>
Fund's account with brokers or dealers selected by it, and to that end, the
Investment Adviser is authorized as the agent of the Fund to give instructions
to the custodian of the Fund as to deliveries of securities and payments of cash
for the account of the Fund. In connection with the selection of such brokers or
dealers and the placing of such orders with respect to assets of the Fund, the
Investment Adviser is directed at all times to seek to obtain execution and
prices within the policy guidelines determined by the Board of Directors and set
forth in filings made by the Fund under the Federal securities laws. Subject to
this requirement and the provisions of the Investment Company Act, the
Securities Exchange Act of 1934, as amended, and other applicable provisions of
law, the Investment Adviser may select brokers or dealers with which it or the
Fund is affiliated.
(c) Notice Upon Change in Partners of the Investment Adviser. The
--------------------------------------------------------
Investment Adviser is a limited partnership and its limited partner is Merrill
Lynch & Co., Inc. and its general partner is Princeton Services, Inc. The
Investment Adviser will notify the Fund of any change in the membership of the
partnership within a reasonable time after such change.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Investment Adviser. The Investment Adviser shall provide the
----------------------
staff and personnel necessary to perform its obligations under this Agreement,
shall assume and pay or cause to be paid all expenses incurred in connection
with the maintenance of such staff and personnel, and, at its own expense, shall
provide the office space, facilities, equipment and necessary personnel which it
is obligated to provide under Article I hereof, and shall pay all compensation
of officers of the Fund and all Directors of the Fund who are affiliated persons
of the Investment Adviser.
4
<PAGE>
(b) The Fund. The Fund assumes, and shall pay or cause to be paid, all
--------
other expenses of the Fund including, without limitation: taxes, expenses for
legal and auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses, charges of the custodian, any sub-
custodian and transfer agent, charges of any auction agent and broker dealers in
connection with preferred stock of the Fund, expenses of portfolio transactions,
Securities and Exchange Commission fees, expenses of registering the shares of
common stock and preferred stock under Federal, state and foreign laws, fees and
actual out-of-pocket expenses of Directors who are not affiliated persons of the
Investment Adviser, accounting and pricing costs (including the daily
calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. It also is understood that the Fund will
reimburse the Investment Adviser for its costs incurred in providing accounting
services to the Fund.
ARTICLE III
-----------
Compensation of the Investment Adviser
--------------------------------------
(a) Investment Advisory Fee. For the services rendered, the facilities
-----------------------
furnished and the expenses assumed by the Investment Adviser, the Fund shall pay
to the Investment Adviser at the end of each calendar month a fee based upon the
average weekly value of the net assets of the Fund at the annual rate of 0.55 of
1.0% (0.55%) of the average weekly net assets of the Fund (i.e., the average
weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund and accumulated dividends on shares of outstanding
preferred stock), commencing on the day following effectiveness hereof. For
purposes of this calculation, average weekly net assets are determined at the
end of each month on the basis of the average net assets of the Fund for each
week during the month. The assets for each weekly period are determined by
averaging
5
<PAGE>
the net assets at the last business day of a week with the net assets at the
last business day of the prior week. It is understood that the liquidation
preference of any outstanding preferred stock (other than accumulated dividends)
is not considered a liability in determining the Fund's average weekly net
assets. If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fee as set forth above. Subject to the
provisions of subsection (b) hereof, payment of the Investment Adviser's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated by subsection (b) hereof. During any
period when the determination of net asset value is suspended by the Board of
Directors, the average net asset value of a share for the last week prior to
such suspension shall for this purpose be deemed to be the net asset value at
the close of each succeeding week until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the Fund,
-------------------
including amounts payable to the Investment Adviser pursuant to subsection (a)
hereof, for any fiscal year ending on a date on which this Agreement is in
effect exceed the expense limitations applicable to the Fund imposed by
applicable state securities laws or regulations thereunder, as such limitations
may be raised or lowered from time to time, the Investment Adviser shall reduce
its management and investment advisory fee by the extent of such excess and, if
required pursuant to any such laws or regulations, will reimburse the Fund in
the amount of such excess; provided, however, to the extent permitted by law,
-------- -------
there shall be excluded from such expenses the amount of any interest, taxes,
distribution fees, brokerage fees and commissions and extraordinary expenses
(including but not limited to legal claims and liabilities and litigation costs
and any indemnification related thereto) paid or payable by the Fund. Whenever
the expenses of the
6
<PAGE>
Fund exceed a pro rata portion of the applicable annual expense limitations, the
estimated amount of reimbursement under such limitations shall be applicable as
an offset against the monthly payment of the fee due to the Investment Adviser.
Should two or more such expense limitations be applicable as at the end of the
last business day of the month, that expense limitation which results in the
largest reduction in the Investment Adviser's fee shall be applicable.
ARTICLE IV
----------
Limitation of Liability of the Investment Adviser
-------------------------------------------------
The Investment Adviser shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Investment Adviser" shall include any affiliates of the
Investment Adviser performing services for the Fund contemplated hereby and
directors, officers and employees of the Investment Adviser and of such
affiliates.
ARTICLE V
---------
Activities of the Investment Adviser
------------------------------------
The services of the Investment Adviser to the Fund are not to be deemed to
be exclusive; the Investment Adviser and any person controlled by or under
common control with the Investment Adviser (for purposes of this Article V
referred to as "affiliates") are free to render services to others. It is
understood that Directors, officers, employees and shareholders of the Fund are
or may become interested in the Investment Adviser and its affiliates, as
directors, officers, employees, partners and shareholders or otherwise, and that
directors, officers,
7
<PAGE>
employees, partners and shareholders of the Investment Adviser and of its
affiliates are or may become similarly interested in the Fund, and that the
Investment Adviser and directors, officers, employees, partners and shareholders
of its affiliates may become interested in the Fund as shareholders or
otherwise.
ARTICLE VI
----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until , 2000, and thereafter, but only so
long as such continuance specifically is approved at least annually by (i) the
Board of Directors of the Fund, or by the vote of a majority of the outstanding
voting securities of the Fund, and (ii) by the vote of a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Board of Directors or by vote of a majority of the outstanding
voting securities of the Fund, or by the Investment Adviser, on sixty (60) days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment.
ARTICLE VII
-----------
Amendment of this Agreement
---------------------------
This Agreement may be amended by the parties only if such amendment
specifically is approved by the vote of (i) a majority of the outstanding voting
securities of the Fund, and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
8
<PAGE>
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE IX
----------
Governing Law
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York and the applicable provisions of the Investment
Company Act. To the extent that the applicable laws of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MUNIHOLDINGS NEW JERSEY INSURED
FUND II, INC.
By: ______________________________
Authorized Signatory
ATTEST:
______________
Secretary
FUND ASSET MANAGEMENT, L.P.
By: ______________________________
Authorized Signatory
ATTEST:
______________
Secretary
10
<PAGE>
EXHIBIT (h)(1)
____________ Shares
MUNIHOLDINGS NEW JERSEY INSURED FUND II, INC.
(a Maryland corporation)
Common Stock
(Par Value $0.10 Per Share)
PURCHASE AGREEMENT
------------------
, 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1201
Dear Sirs and Mesdames:
MuniHoldings New Jersey Insured Fund II, Inc., a Maryland corporation (the
"Fund"), and Fund Asset Management, L.P., a Delaware limited partnership (the
"Adviser"), each confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), with respect to the
sale by the Fund and the purchase by the Underwriter of __________ shares of
common stock, par value $.10 per share, of the Fund (the "Common Stock"), and,
with respect to the grant by the Fund to the Underwriter of the option described
in Section 2 hereof to purchase all or any part of _________ additional shares
of Common Stock to cover over-allotments. The aforesaid __________ shares (the
"Initial Shares"), together with all or any part of the _________ additional
shares of Common Stock subject to the option described in Section 2 hereof (the
"Option Shares"), hereinafter are referred to collectively as the "Shares."
Prior to the purchase and public offering of the Shares by the Underwriter,
the Fund and the Underwriter shall enter into an agreement substantially in the
form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may
take the form of an exchange of any standard form of written telecommunication
between the Fund and the Underwriter and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Shares
will be governed by this Agreement, as supplemented by the Pricing Agreement.
From and after the date of the execution and delivery of the Pricing Agreement,
this Agreement shall be deemed to incorporate the Pricing Agreement.
<PAGE>
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a notification on Form N-8A of registration of the Fund as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and a registration statement on Form N-2 (No.
_________) and a related preliminary prospectus for the registration of the
Shares under the Securities Act of 1933, as amended (the "1933 Act"), the
Investment Company Act, and the rules and regulations of the Commission under
the 1933 Act and the Investment Company Act (together, the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such amended preliminary prospectuses as may have been
required to the date hereof. The Fund will prepare and file such additional
amendments thereto and such amended prospectuses as hereafter may be required.
Such registration statement (as amended at the time it becomes effective, if
applicable) and the prospectus constituting a part thereof (including in each
case the information, if any, deemed to be a part thereof pursuant to Rule
430A(b) or Rule 434 of the Rules and Regulations), as from time to time amended
or supplemented pursuant to the 1933 Act, are referred to hereinafter as the
"Registration Statement" and the "Prospectus," respectively; except that if any
revised prospectus shall be provided to the Underwriter by the Fund for use in
connection with the offering of the Shares which differs from the Prospectus on
file at the Commission at the time the Registration Statement becomes effective
(whether such revised prospectus is required to be filed by the Fund pursuant to
Rule 497(c) or Rule 497(h) of the Rules and Regulations), the term "Prospectus"
shall refer to each such revised prospectus from and after the time it is first
provided to the Underwriter for such use. If the Fund elects to rely on Rule
434 under the Rules and Regulations, all references to the Prospectus shall be
deemed to include, without limitation, the form of prospectus and the term
sheet, taken together, provided to the Underwriter by the Fund in reliance on
Rule 434 under the 1933 Act (the "Rule 434 Prospectus"). If the Fund files a
registration statement to register a portion of the Shares and relies on Rule
462(b) for such registration statement to become effective upon filing with the
Commission (the "Rule 462 Registration Statement"), then any reference to
"Registration Statement" herein shall be deemed to include both the registration
statement referred to above (No. _________) and the Rule 462 Registration
Statement, as each such registration statement may be amended pursuant to the
1933 Act.
The Fund understands that the Underwriter proposes to make a public
offering of the Shares as soon as the Underwriter deems advisable after the
Registration Statement becomes effective and the Pricing Agreement has been
executed and delivered.
SECTION 1. Representations and Warranties. (a) The Fund and the Adviser
each severally represents and warrants to the Underwriter as of the date hereof
and as of the date of the Pricing Agreement (such later date hereinafter being
referred to as the "Representation Date") as follows:
(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act, the Investment
Company Act and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
2
<PAGE>
misleading. At the time the Registration Statement becomes effective, at
the Representation Date and at Closing Time referred to in Section 2, the
Prospectus (unless the term "Prospectus" refers to a prospectus which has
been provided to the Underwriter by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file with the
Commission at the time the Registration Statement becomes effective, in
which case at the time such prospectus first is provided to the Underwriter
for such use) will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Fund in writing by the
Underwriter expressly for use in the Registration Statement or in the
Prospectus.
(ii) The accountants who certified the statement of assets,
liabilities and capital included in the Registration Statement are
independent public accountants as required by the 1933 Act and the Rules
and Regulations.
(iii) The statement of assets, liabilities and capital included in the
Registration Statement presents fairly the financial position of the Fund
as of the date indicated and said statement has been prepared in conformity
with generally accepted accounting principles.
(iv) Since the respective dates as of which information is given in the
Registration Statement and in the Prospectus, except as otherwise stated
therein (A) there has been no material adverse change in the condition,
financial or otherwise, of the Fund, or in the earnings, business affairs
or business prospects of the Fund, whether or not arising in the ordinary
course of business, (B) there have been no transactions entered into by the
Fund which are material to the Fund other than those in the ordinary course
of business and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Fund on any class of its capital stock.
(v) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland with
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement; the Fund
is duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is required;
and the Fund has no subsidiaries.
(vi) The Fund is registered with the Commission under the Investment
Company Act as a closed-end, non-diversified, management investment
company, and no order of suspension or revocation of such registration has
been issued or proceedings therefor initiated or threatened by the
Commission.
(vii) The authorized, issued and outstanding capital stock of the Fund
is as set forth in the Prospectus under the caption "Description of Capital
Stock;" the Shares have been duly authorized for issuance and sale to the
Underwriter pursuant to this Agreement
3
<PAGE>
and, when issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in the Pricing Agreement,
will be validly issued and fully paid and nonassessable; the Shares conform
in all material respects to all statements relating thereto contained in
the Registration Statement; and the issuance of the Shares to be purchased
by the Underwriter is not subject to preemptive rights.
(viii) The Fund is not in violation of its articles of incorporation,
as amended (the "Charter"), or its by-laws, as amended (the "By-Laws"), or
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which it is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement, the Pricing Agreement and the
Investment Advisory Agreement and the Custody Agreement referred to in the
Registration Statement (as used herein, the "Advisory Agreement" and the
"Custody Agreement," respectively) and the consummation of the transactions
contemplated herein and therein have been duly authorized by all necessary
corporate action and will not conflict with or constitute a breach of, or a
default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Fund pursuant to any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Fund is a party or by which it may be bound
or to which any of the property or assets of the Fund is subject, nor will
such action result in any violation of the provisions of the Charter or the
By-Laws of the Fund, or, to the best knowledge of the Fund and the Adviser,
any law, administrative regulation or administrative or court decree; and
no consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Fund of the
transactions contemplated by this Agreement, the Pricing Agreement, the
Advisory Agreement and the Custody Agreement, except such as has been
obtained under the Investment Company Act or as may be required under the
1933 Act or state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriter.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in
the Prospectus and the Fund has not received any notice of proceedings
relating to the revocation or modification of any such licenses, permits,
covenants, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Fund, threatened against or affecting, the Fund, which
might result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Fund, or might
materially and adversely affect the properties or assets of the Fund; and
there are no material contracts or documents of the Fund which are required
to be filed as exhibits to the Registration Statement by the 1933 Act, the
Investment Company Act or the Rules and Regulations which have not been so
filed.
4
<PAGE>
(xi) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required.
(xii) The Fund owns or possesses, or can acquire on reasonable terms,
adequate trademarks, service marks and trade names necessary to conduct its
business as described in the Registration Statement, and the Fund has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, service marks or trade names which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the conduct of the
business, operations, financial condition or income of the Fund.
(b) The Adviser represents and warrants to the Underwriter as of the
date hereof and as of the Representation Date as follows:
(i) The Adviser has been duly organized as a limited
partnership under the laws of the State of Delaware, with power and
authority to conduct its business as described in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Investment
Advisers Act"), and is not prohibited by the Investment Advisers Act or the
Investment Company Act, or the rules and regulations under such acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) This Agreement has been duly authorized, executed and
delivered by the Adviser; the Advisory Agreement has been duly authorized,
executed and delivered by the Adviser and constitutes a valid and binding
obligation of the Adviser, enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization or
other laws relating to or affecting creditors' rights and to general
equitable principles; and neither the execution and delivery of this
Agreement or the Advisory Agreement, nor the performance by the Adviser of
its obligations hereunder or thereunder will conflict with, or result in a
breach of any of the terms and provisions of, or constitute, with or
without the giving of notice or the lapse of time or both, a default under,
any agreement or instrument to which the Adviser is a party or by which it
is bound, or any law, order, rule or regulation applicable to it of any
jurisdiction, court, Federal or state regulatory body, administrative
agency or other governmental body, stock exchange or securities association
having jurisdiction over the Adviser or its respective properties or
operations.
(iv) The Adviser has the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Prospectus.
(v) Any advertisement approved by the Adviser for use in the
public offering of the Shares pursuant to Rule 482 under the Rules and
Regulations (an "Omitting Prospectus") complies with the requirements of
such Rule 482.
5
<PAGE>
(c) Any certificate signed by any officer of the Fund or the Adviser
and delivered to the Underwriter or to counsel to the Fund and the
Underwriter shall be deemed a representation and warranty by the Fund or
the Adviser, as the case may be, to the Underwriter, as to the matters
covered thereby.
SECTION 2. Sale and Delivery to the Underwriter; Closing.
(a) On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the
Fund agrees to sell the Initial Shares to the Underwriter and the
Underwriter agrees to purchase the Initial Shares from the Fund, at the
price per share set forth in the Pricing Agreement.
(i) If the Fund has elected not to rely upon Rule 430A under
the Rules and Regulations, the initial public offering prices and the
purchase price per share to be paid by the Underwriter for the Shares have
been determined and set forth in the Pricing Agreement, dated the date
hereof, and an amendment to the Registration Statement and the Prospectus
will be filed before the Registration Statement becomes effective.
(ii) If the Fund has elected to rely upon Rule 430A under the
Rules and Regulations, the purchase price per share to be paid by the
Underwriter for the Shares shall be an amount equal to the applicable
initial public offering price, less an amount per share to be determined by
agreement between the Underwriter and the Fund. The initial public offering
price per share shall be a fixed price based upon the number of Shares
purchased in a single transaction to be determined by agreement between the
Underwriter and the Fund. The initial public offering price and the
purchase price, when so determined, shall be set forth in the Pricing
Agreement. In the event that such prices have not been agreed upon and the
Pricing Agreement has not been executed and delivered by all parties
thereto by the close of business on the fourth business day following the
date of this Agreement, this Agreement shall terminate forthwith, without
liability of any party to any other party, except as provided in Section 4,
unless otherwise agreed to by the Fund, the Adviser and the Underwriter.
In addition, on the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the Fund
hereby grants an option to the Underwriter to purchase all or any part of the
Option Shares at the price per share set forth above. The option hereby granted
will expire 45 days after the date hereof (or, if the Fund has elected to rely
upon Rule 430A under the Rules and Regulations, 45 days after the execution of
the Pricing Agreement) and may be exercised only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Shares upon notice by the Underwriter to the Fund
setting forth the number of Option Shares as to which the Underwriter is then
exercising the option and the time, date and place of payment and delivery for
such Option Shares. Any such time and date of delivery (a "Date of Delivery")
shall be determined by the Underwriter but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to
Closing Time, as hereinafter defined, unless otherwise agreed upon by the
Underwriter and the Fund.
6
<PAGE>
(b) Payment of the purchase price for, and delivery of certificates
for, the Initial Shares shall be made at the office of Brown & Wood LLP,
One World Trade Center, New York, New York 10048-0557, or at such other
place as shall be agreed upon by the Underwriter and the Fund, at 9:00 A.M.
on the third business day following the date the Registration Statement
becomes effective or, if the Fund has elected to rely upon Rule 430A under
the Rules and Regulations, the third business day after execution of the
Pricing Agreement (or, if pricing takes place after 4:30 P.M. on either the
date the Registration Statement becomes effective or the date of execution
of the Pricing Agreement, as applicable, the fourth business day after such
applicable date), or such other time not later than ten business days after
such date as shall be agreed upon by the Underwriter and the Fund (such
time and date of payment and delivery herein being referred to as "Closing
Time"). In addition, in the event that any or all of the Option Shares are
purchased by the Underwriter, payment of the purchase price for, and
delivery of certificates for, such Option Shares shall be made at the
above-mentioned office of Brown & Wood LLP, or at such other place as shall
be agreed upon mutually by the Fund and the Underwriter, on each Date of
Delivery as specified in the notice from the Underwriter to the Fund.
Payment shall be made to the Fund by a Federal Funds check or checks or
similar same-day funds payable to the order of the Fund, against delivery
to the Underwriter of certificates for the Shares to be purchased by it.
Certificates for the Initial Shares and Option Shares shall be in such
denominations and registered in such names as the Underwriter may request
in writing at least two business days before Closing Time or the Date of
Delivery, as the case may be. The certificates for the Initial Shares and
the Option Shares will be made available by the Fund for examination by the
Underwriter not later than 10:00 A.M. on the last business day prior to
Closing Time or the Date of Delivery, as the case may be.
SECTION 3. Covenants of the Fund. The Fund covenants with the
Underwriter as follows:
(a) The Fund will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and will advise the
Underwriter promptly as to the time at which the Registration Statement and
any amendments thereto (including any post-effective amendment) becomes so
effective and (ii) if required, to cause the issuance of any orders
exempting the Fund from any provisions of the Investment Company Act, and
the Fund will advise the Underwriter promptly as to the time at which any
such orders are granted.
(b) The Fund will notify the Underwriter immediately, and will confirm
the notice in writing (i) of the effectiveness of the Registration
Statement and any amendments thereto (including any post-effective
amendment), (ii) of the receipt of any comments from the Commission, (iii)
of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (v) of the issuance by
the Commission of an order of suspension or revocation of the notification
on Form N-8A of registration of the Fund as an investment company under the
Investment Company Act or the initiation of any proceeding for that
purpose. The Fund will make every reasonable effort to prevent the issuance
of any stop order described in subsection (iv) hereunder or any order of
suspension or revocation described in subsection (v) hereunder and, if any
such stop order or order of suspension or revocation is issued, to obtain
the lifting thereof at the earliest possible
7
<PAGE>
moment. If the Fund elects to rely on Rule 434 under the Rules and
Regulations, the Fund will prepare a term sheet that complies with the
requirements of Rule 434 under the Rules and Regulations and the Fund will
provide the Underwriter with copies of the form of Rule 434 Prospectus, in
such number as the Underwriter may reasonably request by the close of
business in New York on the business day immediately succeeding the date of
the Pricing Agreement.
(c) The Fund will give the Underwriter notice of its intention to file
any amendment to the Registration Statement (including any post-effective
amendment) or any amendment or supplement to the Prospectus (including any
revised prospectus which the Fund proposes for use by the Underwriter in
connection with the offering of the Shares, which differs from the
prospectus on file at the Commission at the time the Registration Statement
becomes effective, whether such revised prospectus is required to be filed
pursuant to Rule 497(c) or Rule 497(h) of the Rules and Regulations or any
term sheet prepared in reliance on Rule 434 of the Rules and Regulations),
whether pursuant to the Investment Company Act, the 1933 Act, or otherwise,
and will furnish the Underwriter with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such amendment or supplement
to which the Underwriter reasonably shall object.
(d) The Fund will deliver to the Underwriter, as soon as practicable,
two signed copies of the notification of registration and registration
statement as originally filed and of each amendment thereto, in each case
with two sets of the exhibits filed therewith, and also will deliver to the
Underwriter a conformed copy of the registration statement as originally
filed and of each amendment thereto (but without exhibits to the
registration statement or any such amendment) for the Underwriter.
(e) The Fund will furnish to the Underwriter, from time to time during
the period when the Prospectus is required to be delivered under the 1933
Act, such number of copies of the Prospectus (as amended or supplemented)
as the Underwriter reasonably may request for the purposes contemplated by
the 1933 Act, or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in
the opinion of counsel to the Fund and the Underwriter, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, the Fund forthwith will amend or supplement the Prospectus by
preparing and furnishing to the Underwriter a reasonable number of copies
of an amendment or amendments of or a supplement or supplements to, the
Prospectus (in form and substance satisfactory to counsel to the Fund and
the Underwriter), so that, as so amended or supplemented, the Prospectus
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading.
(g) The Fund will endeavor, in cooperation with the Underwriter, to
qualify the Shares for offering and sale under the applicable securities
laws of such states and other jurisdictions of the United States as the
Underwriter may designate, and will maintain such qualifications in effect
for a period of not less than one year after the date hereof. The Fund will
file such statements and reports as may be required by the laws of each
jurisdiction in which the Shares have been qualified as above provided.
8
<PAGE>
(h) The Fund will make generally available to its security holders as
soon as practicable, but no later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the Rules and Regulations) covering a twelve-
month period beginning not later than the first day of the Fund's fiscal
quarter next following the "effective" date (as defined in said Rule 158)
of the Registration Statement.
(i) Between the date of this Agreement and the termination of any
trading restrictions or Closing Time, whichever is later, the Fund will
not, without your prior consent, offer or sell, or enter into any agreement
to sell, any equity or equity related securities of the Fund other than the
Shares and shares of Common Stock issued in reinvestment of dividends or
distributions.
(j) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule
430A of the Rules and Regulations, then immediately following the execution
of the Pricing Agreement, the Fund will prepare, and file or transmit for
filing with the Commission in accordance with such Rule 430A and Rule
497(h) of the Rules and Regulations, copies of the amended Prospectus, or,
if required by such Rule 430A, a post-effective amendment to the
Registration Statement (including an amended Prospectus), containing all
information so omitted.
(k) The Fund will use its best efforts to effect the listing of the
Shares on the New York Stock Exchange so that trading on such Exchange will
begin no later than four weeks from the date of the Prospectus.
SECTION 4. Payment of Expenses. The Fund will pay all expenses
incident to the performance of its obligations under this Agreement,
including, but not limited to, expenses relating to (i) the printing and
filing of the registration statement as originally filed and of each
amendment thereto, (ii) the printing of this Agreement and the Pricing
Agreement, (iii) the preparation, issuance and delivery of the certificates
for the Shares to the Underwriter, (iv) the fees and disbursements of the
Fund's counsel and accountants, (v) the qualification of the Shares under
securities laws in accordance with the provisions of Section 3(g) of this
Agreement, including filing fees and any reasonable fees or disbursements
of counsel in connection therewith and in connection with the preparation
of the Blue Sky Survey, (vi) the printing and delivery to the Underwriter
of copies of the registration statement as originally filed and of each
amendment thereto, of the preliminary prospectus, and of the Prospectus and
any amendments or supplements thereto, (vii) the printing and delivery to
the Underwriter of copies of the Blue Sky Survey, (viii) the fees and
expenses incurred with respect to the filing with the National Association
of Securities Dealers, Inc. and (ix) the fees and expenses incurred with
respect to the listing of the Shares on the New York Stock Exchange.
If this Agreement is terminated by the Underwriter in accordance with
the provisions of Section 5 or Section 9(a)(i), the Fund or the Adviser
shall reimburse the Underwriter for all of its reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of counsel to the
Fund and the Underwriter. In the event the transactions contemplated
hereunder are not consummated, the Adviser agrees to pay all of the costs
and expenses set forth in the first paragraph of this Section 4 which the
Fund would have paid if such transactions had been consummated.
9
<PAGE>
SECTION 5. Conditions of Underwriter's Obligations. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Fund and the Adviser herein contained, to the performance by
the Fund and the Adviser of their respective obligations hereunder, and to the
following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 p.m., on the date of this Agreement, or at a later time and date not
later, however, than 5:30 p.m. on the first business day following the date
hereof, or at such later time and date as may be approved by the Underwriter,
and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission. If the Fund has elected to
rely upon Rule 430A of the Rules and Regulations, the price of the Shares and
any price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 497(h) of the Rules and Regulations
within the prescribed time period, and prior to Closing Time the Fund shall have
provided evidence satisfactory to the Underwriter of such timely filing, or a
post-effective amendment providing such information shall have been filed
promptly and declared effective in accordance with the requirements of Rule 430A
of the Rules and Regulations.
(b) At Closing Time, the Underwriter shall have received:
(1) The favorable opinion, dated as of Closing Time, of Brown &
Wood LLP, counsel to the Fund and the Underwriter, to the effect that:
(i) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland.
(ii) The Fund has corporate power and authority to own,
lease and operate its properties and conduct its business as
described in the Registration Statement and in the Prospectus.
(iii) The Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which such qualification is required.
(iv) The Shares have been duly authorized for issuance and
sale to the Underwriter pursuant to this Agreement and, when
issued and delivered by the Fund pursuant to this Agreement
against payment of the consideration set forth in the Pricing
Agreement, will be validly issued and fully paid and
nonassessable; the issuance of the Shares is not subject to
preemptive rights; and the authorized capital stock conforms as to
legal matters in all material respects to the description thereof
in the Registration Statement under the caption "Description of
Capital Stock."
(v) This Agreement and the Pricing Agreement have each been
duly authorized, executed and delivered by the Fund and each
complies with all applicable provisions of the Investment Company
Act.
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<PAGE>
(vi) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop
order suspending the effectiveness of the Registration Statement
has been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission.
(vii) At the time the Registration Statement became effective
and at the Representation Date, the Registration Statement (other
than the financial statements included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the Investment
Company Act and the Rules and Regulations. The Rule 434 Prospectus
conforms to the requirements of Rule 434 in all material respects.
(viii) To the best of their knowledge and information, there
are no legal or governmental proceedings pending or threatened
against the Fund which are required to be disclosed in the
Registration Statement, other than those disclosed therein.
(ix) To the best of their knowledge and information, there are
no contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments of the Fund required to be described
or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to therein
or filed as exhibits thereto, the descriptions thereof are correct
in all material respects, references thereto are correct, and no
default exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, loan agreement, note, lease or
other instrument so described, referred to or filed.
(x) No consent, approval, authorization or order of any court
or governmental authority or agency is required in connection with
the sale of the Shares to the Underwriter, except such as has been
obtained under the 1933 Act, the Investment Company Act or the
Rules and Regulations or such as may be required under state
securities laws; and to the best of their knowledge and
information, the execution and delivery of this Agreement, the
Pricing Agreement, the Advisory Agreement and the Custody
Agreement and the consummation of the transactions contemplated
herein and therein will not conflict with or constitute a breach
of, or a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Fund pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Fund is a
party or by which it may be bound or to which any of the property
or assets of the Fund is subject, nor will such action result in
any violation of the provisions of the Charter or the By-Laws of
the Fund, or any law or administrative regulation, or, to the best
of their knowledge and information, administrative or court
decree.
(xi) The Advisory Agreement and the Custody Agreement have
each been duly authorized and approved by the Fund and comply as
to form in all
11
<PAGE>
material respects with all applicable provisions of the Investment
Company Act, and each has been duly executed by the Fund.
(xii) The Fund is registered with the Commission under the
Investment Company Act as a closed-end, non-diversified management
investment company, and all required action has been taken by the
Fund under the 1933 Act, the Investment Company Act and the Rules
and Regulations to make the public offering and consummate the
sale of the Shares pursuant to this Agreement; the provisions of
the Charter and the By-Laws of the Fund comply as to form in all
material respects with the requirements of the Investment Company
Act; and, to the best of their knowledge and information, no order
of suspension or revocation of such registration under the
Investment Company Act, pursuant to Section 8(e) of the Investment
Company Act, has been issued or proceedings therefor initiated or
threatened by the Commission.
(xiii) The information in the Prospectus under the caption
"Taxes," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by them and is correct in all
material respects.
(2) The favorable opinion, dated as of Closing Time, of Philip L.
Kirstein, Esq., General Counsel to the Adviser, in form and substance
satisfactory to counsel to the Underwriter, to the effect that:
(i) The Adviser has been duly organized as a limited
partnership under the laws of the State of Delaware, with power
and authority to conduct its business as described in the
Registration Statement and in the Prospectus.
(ii) The Adviser is duly registered as an investment
adviser under the Investment Advisers Act and is not prohibited by
the Investment Advisers Act or the Investment Company Act, or the
rules and regulations under such Acts, from acting under the
Advisory Agreement for the Fund as contemplated by the Prospectus.
(iii) This Agreement and the Advisory Agreement have been
duly authorized, executed and delivered by the Adviser, and the
Advisory Agreement constitutes a valid and binding obligation of
the Adviser, enforceable in accordance with its terms, subject, as
to enforcement, to bankruptcy, insolvency, reorganization or other
laws relating to or affecting creditors' rights and to general
equity principles; and, to the best of his knowledge and
information, neither the execution and delivery of this Agreement
or the Advisory Agreement nor the performance by the Adviser of
its obligations hereunder or thereunder will conflict with, or
result in a breach of, any of the terms and provisions of, or
constitute, with or without the giving of notice or the lapse of
time or both, a default under, any agreement or instrument to
which the Adviser is a party or by which the Adviser is bound, or
any law, order, rule or regulation applicable to the Adviser of
any jurisdiction, court, Federal or state regulatory body,
administrative
12
<PAGE>
agency or other governmental body, stock exchange or securities
association having jurisdiction over the Adviser or its properties
or operations.
(iv) To the best of his knowledge and information, the
description of the Adviser in the Registration Statement and in
the Prospectus does not contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading.
(3) In giving their opinion required by subsection (b)(1) of this
Section, Brown & Wood LLP additionally shall state that nothing has come
to their attention that would lead them to believe that the Registration
Statement (other than the financial statements included therein, as to
which no opinion need be rendered), at the time it became effective or
at the Representation Date, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that the
Prospectus (other than the financial statements included therein, as to
which no opinion need be rendered), at the Representation Date (unless
the term "Prospectus" refers to a prospectus which has been provided to
the Underwriter by the Fund for use in connection with the offering of
the Shares which differs from the Prospectus on file at the Commission
at the time the Registration Statement becomes effective, in which case
at the time it first is provided to the Underwriter for such use) or at
Closing Time, included an untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. In giving their opinion, Brown & Wood LLP may rely as to
matters of fact, upon certificates and written statements of officers
and employees of and accountants for the Fund and the Adviser and of
public officials.
(c) At Closing Time (i) the Registration Statement and the Prospectus
shall contain all statements which are required to be stated therein in
accordance with the 1933 Act, the Investment Company Act and the Rules and
Regulations and in all material respects shall conform to the requirements of
the 1933 Act, the Investment Company Act and the Rules and Regulations, and
neither the Registration Statement nor the Prospectus shall 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, and no action, suit or proceeding at law or in equity
shall be pending or, to the knowledge of the Fund or the Adviser, threatened
against the Fund or the Adviser which would be required to be set forth in the
Prospectus other than as set forth therein, (ii) there shall not have been,
since the date as of which information is given in the Prospectus, any material
adverse change in the condition, financial or otherwise, of the Fund or in its
earnings, business affairs or business prospects, whether or not arising in the
ordinary course of business, from that set forth in the Prospectus, (iii) the
Adviser shall have the financial resources available to it necessary for the
performance of its services and obligations as contemplated in the Prospectus,
and (iv) no proceedings shall be pending or, to the knowledge of the Fund or the
Adviser, threatened against the Fund or the Adviser before or by any Federal,
state or other commission, board or administrative agency wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, financial condition or income of either the Fund or the Adviser other
than as set forth in the Prospectus, and the Underwriter shall have received, at
Closing Time, a certificate
13
<PAGE>
of the President or the Treasurer of the Fund and of the President or a Vice
President of the Adviser dated as of Closing Time, evidencing compliance with
the appropriate provisions of this subsection (c).
(d) At Closing Time the Underwriter shall have received certificates,
dated as of Closing Time (i) of the President or the Treasurer of the Fund to
the effect that the representations and warranties of the Fund contained in
Section 1(a) are true and correct with the same force and effect as though
expressly made at and as of Closing Time and, (ii) of the President or a Vice
President of the Adviser to the effect that the representations and warranties
of the Adviser contained in Sections 1(a) and (b) are true and correct with the
same force and effect as though expressly made at and as of Closing Time.
(e) At the time of execution of this Agreement, the Underwriter shall
have received from a letter, dated such date in form and
substance satisfactory to the Underwriter, to the effect that:
(i) they are independent accountants with respect to the Fund
within the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the statement of assets, liabilities
and capital examined by them and included in the Registration Statement
complies as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the Investment Company Act and the Rules
and Regulations; and
(iii) they have performed specified procedures, not
constituting an audit, including a reading of the latest available interim
financial statements of the Fund, a reading of the minute books of the
Fund, inquiries of officials of the Fund responsible for financial
accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that at the
date of the latest available statement of assets, liabilities and capital
read by such accountants, or at a subsequent specified date not more than
three days prior to the date of this Agreement, there was any change in the
capital stock or net assets of the Fund as compared with amounts shown on
the statement of assets, liabilities and capital included in the
Prospectus.
(f) At Closing Time, the Underwriter shall have received from a
letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the "specified date" referred to shall be a date not more
than three days prior to Closing Time.
(g) At Closing Time, counsel to the Underwriter shall have been furnished
with such documents and opinions as they may reasonably require for the purpose
of enabling them to pass upon the issuance and sale of the Shares as herein
contemplated and to pass upon related proceedings, or in order to evidence the
accuracy of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the Fund and
the Adviser in connection with the organization and registration of the Fund
under the
14
<PAGE>
Investment Company Act and the issuance and sale of the Shares as herein and
therein contemplated shall be satisfactory in form and substance to the
Underwriter.
(h) In the event the Underwriter exercises its option provided in Section
2 hereof to purchase all or any portion of the Option Shares, the
representations and warranties of the Fund and the Adviser contained herein and
the statements in any certificate furnished by the Fund and the Adviser
hereunder shall be true and correct as of each Date of Delivery, and the
Underwriter shall have received:
(i) Certificates, dated the Date of Delivery, of the President or
the Treasurer of the Fund and of the President or a Vice President of the
Adviser confirming that the information contained in the certificate
delivered by each of them at Closing Time pursuant to Section 5(c) or 5(d),
as the case may be, remains true as of such Date of Delivery.
(ii) The favorable opinions of Brown & Wood LLP, counsel to the Fund
and the Underwriter and Philip L. Kirstein, Esq., General Counsel of the
Adviser, each in form and substance satisfactory to the Underwriter, dated
such Date of Delivery, relating to the Option Shares and otherwise to the
same effect as the opinions required by Sections 5(b)(1) and (2),
respectively.
(iii) A letter from , in form and substance satisfactory to the
Underwriter and dated such Date of Delivery, substantially the same in
scope and substance as the letter furnished to the Underwriter pursuant to
Section 5(e), except that the "specified date" in the letter furnished
pursuant to this Section 5(h) shall be a date not more than three days
prior to such Date of Delivery.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Underwriter by notice to the Fund at any time at or prior to Closing Time, and
such termination shall be without liability of any party to any other party
except as provided in Section 4.
SECTION 6. Indemnification. (a) The Fund and the Adviser jointly and
severally agree to indemnify and hold harmless the Underwriter and each person,
if any, who controls the Underwriter within the meaning of Section 15 of the
1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the information deemed to be part of
the Registration Statement pursuant to Rule 430A or Rule 434 of the Rules
and Regulations, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
15
<PAGE>
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the indemnifying party; and
(iii) against any and all expense whatsoever (including the fees and
disbursements of counsel chosen by the Underwriter) reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), including the information deemed to be part of the Registration
Statement pursuant to Rule 430A or Rule 434 of the Rules and Regulations, or any
preliminary prospectus or in the Prospectus (or any amendment or supplement
thereto).
Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of the Underwriter
or who controls the Underwriter within the meaning of Section 15 of the 1933 Act
and who, at the date of this Agreement, is a director, officer or controlling
person of the Fund, such indemnity agreement is subject to the undertaking of
the Fund in the Registration Statement.
(b) The Underwriter agrees to indemnify and hold harmless the Fund and the
Adviser, their respective directors, each of the Fund's officers who signed the
Registration Statement, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act, against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or in any preliminary
prospectus or in the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Underwriter expressly for use in the Registration Statement (or any
amendment thereto), including the information deemed to be part of the
Registration Statement pursuant to Rule 430A or Rule 434 of the Rules and
Regulations, or any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto) in reliance upon and in conformity with written
information furnished to the Fund by the Underwriter expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such
16
<PAGE>
indemnifying party from any liability hereunder to the extent it is not
materially prejudicial as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying parties be
liable for the fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6 (a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses incurred by such indemnified party, as incurred (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Fund and the Adviser on the one hand and the Underwriter on the other hand from
the offering of the Shares pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Fund and the Adviser on the one
hand and of the Underwriter on the other hand in connection with the statements
or omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriter on the other hand in connection with the offering of the
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Shares pursuant
to this Agreement (before deducting expenses) received by the Fund, less the
total underwriting commission received by the Underwriter, and the total
underwriting commission received by the Underwriter, in each case as set forth
on the cover of
17
<PAGE>
the Prospectus, or, if Rule 434 is used, the corresponding location on the term
sheet, bear to the aggregate initial public offering price of the Shares as set
forth on such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriter on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund and the Adviser or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriter were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Underwriter, and each officer or director of the
Fund and the Adviser, respectively, each director of the Fund who signed the
Registration Statement, and each person, if any, who controls the Fund and the
Adviser within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Fund.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in the Pricing Agreement, or contained in certificates of officers
of the Fund or of the Adviser submitted pursuant hereto, shall remain operative
and in full force and effect, regardless of any investigation made by or on
behalf of the Underwriter or controlling person, or by or on behalf of the Fund
or the Adviser and shall survive delivery of the Shares to the Underwriter.
SECTION 9. Termination of Agreement. (a) The Underwriter, may
terminate this Agreement by written notice to the Fund, at any time at or prior
to Closing Time (i) if there has
18
<PAGE>
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Fund or the Adviser, whether or
not arising in the ordinary course of business, or (ii) if there has occurred
any material adverse change in the financial markets in the United States,
any outbreak of hostilities or escalation thereof or other calamity or crisis
or any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Underwriter
impracticable to market the Shares or enforce contracts for the sale of the
Shares, or (iii) if trading in the Common Stock has been suspended or
materially limited by the Commission or if trading generally on either the
New York Stock Exchange or the American Stock Exchange or in the NASDAQ
National Market has been suspended or materially limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by any of said exchanges or by such system or
by order of the Commission, the National Association of Securities Dealers,
Inc. or any other governmental authority, or (iv) if a banking moratorium has
been declared by Federal or New York authorities. As used in this subsection
(a), the term "Prospectus" means the Prospectus in the form first used to
confirm sales of the Shares.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except
as provided in Section 4 hereof, and provided further that Sections 1, 6, 7
and 8 shall survive such termination and remain in full force and effect.
SECTION 10. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of written telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated at Merrill Lynch World Headquarters, World Financial
Center, North Tower, New York, New York 10281-1201, Attention: Richard Bruce,
Vice President; notices to the Fund or to the Adviser shall be directed to each
of them at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attention:
Arthur Zeikel, President.
SECTION 11. Parties. This Agreement and the Pricing Agreement shall
inure to the benefit of and be binding upon the Underwriter, the Fund, the
Adviser and their respective successors. Nothing expressed or mentioned in this
Agreement or in the Pricing Agreement is intended or shall be construed to give
any person, firm or corporation, other than the parties hereto and their
respective successors and the controlling persons and officers and directors
referred to in Sections 6 and 7 and their heirs and legal representatives, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. This Agreement and the Pricing Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the parties hereto and thereto and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Shares from the Underwriter shall be deemed to be a
successor merely by reason of such purchase.
19
<PAGE>
SECTION 12. Governing Law and Time. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the laws of the
State of New York applicable to agreements made and to be performed in said
State. Specified times of day refer to New York City time.
20
<PAGE>
If the foregoing is in accordance with your understanding of our Agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a single binding agreement between the
Underwriter and the Fund and the Adviser in accordance with its terms.
Very truly yours,
MUNIHOLDINGS NEW JERSEY INSURED
FUND II, INC.
By:
-----------------------------
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By:
-----------------------------
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-----------------------------
Authorized Signatory
21
<PAGE>
Exhibit A
_________Shares
MuniHoldings New Jersey Insured Fund II, Inc.
(a Maryland corporation)
Common Stock
(Par Value $.10 Per Share)
PRICING AGREEMENT
-----------------
, 1998
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Dear Sirs and Mesdames:
Reference is made to the Purchase Agreement, dated , 1998 (the "Purchase
Agreement"), relating to the purchase by Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter") of the above shares of
common stock, par value $.10 per share (the "Initial Shares"), of MuniHoldings
New Jersey Insured Fund II, Inc. (the "Fund") and relating to the option granted
to the Underwriter to purchase up to an additional __________ shares of common
stock, par value $.10 per share, of the Fund to cover over-allotments in
connection with the sale of the Initial Shares (the "Option Shares"). The
Initial Shares and all or any part of the Option Shares collectively are
referred to herein as the "Shares."
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with the
Underwriter as follows:
1. The initial public offering price per share for the Shares,
determined as provided in said Section 2, and the purchase price per
share for the Shares to be paid by the Underwriter, shall be $15.00.
2. Fund Asset Management, L.P. will pay, or arrange for an affiliate
to pay, a commission to the Underwriter in the amount of $ per
share for the Shares purchased by the Underwriter.
A-1
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Fund a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriter and the Fund in accordance with its terms.
Very truly yours,
MUNIHOLDINGS NEW JERSEY INSURED
FUND II, INC.
By:__________________________
Authorized Officer
FUND ASSET MANAGEMENT, L.P.
By: __________________________
Authorized Officer
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: ______________________________________
Authorized Officer
A-2
<PAGE>
EXHIBIT (h)(2)
[LOGO]
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH WORLD HEADQUARTERS
NORTH TOWER WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
-------------------------
Dear Sirs:
In connection with public offerings of securities underwritten by us, or by
a group of underwriters (the "Underwriters") represented by us, you may be
offered the opportunity to purchase a portion of such securities, as principal,
at a discount from the offering price representing a selling concession or
reallowance granted as consideration for services rendered by you in the sale of
such securities. We request that you agree to the following terms and
provisions, and make the following representations, which, together with any
additional terms and provisions set forth in any wire or letter sent to you in
connection with a particular offering, will govern all such purchases of
securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute your
reaffirmation of this Agreement.
1. When we are acting as representative (the "Representative") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD"). Upon our request, you will advise us
of the identity of any dealer to whom you allow such a discount and any
Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
2. You represent that you are a dealer actually engaged in the investment
banking or securities business and that you are either (i) a member in good
standing of the NASD or (ii) a dealer with its principal place of business
located outside the United States, its territories or possessions and not
registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in the NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its
<PAGE>
territories or its possessions or to persons who are nationals thereof or
residents therein. Non-member foreign dealers and banks agree, in making any
sales, to comply with the NASD's interpretation with respect to free-riding and
withholding. In accepting a selling concession where we are acting as
Representative of the Underwriters, in accepting a reallowance from us whether
or not we are acting as such Representative, and in allowing a discount to any
other person, you agree to comply with the provisions of Rule 2740 of the
Conduct Rules of the NASD, and, in addition, if you are a non-member foreign
dealer or bank, you agree to comply, as though you were a member of the NASD,
with the provisions of Rules 2730 and 2750 of of such Conduct Rules and to
comply with Rule 2420 thereof as that Rule applies to a non-member foreign
dealer or bank. You represent that you are fully familiar with the above
provisions of the Conduct Rules of the NASD.
3. If the securities have been registered under the Securities Act of 1933
(the "1933 Act"), in offering and selling such securities, you are not
authorized to give any information or make any representation not contained in
the prospectus relating thereto. You confirm that you are familiar with the
rules and policies of the Securities and Exchange Commission relating to the
distribution of preliminary and final prospectuses, and you agree that you will
comply therewith in any offering covered by this Agreement. If we are acting as
Representative of the Underwriters, we will make available to you, to the extent
made available to us by the issuer of the securities, such number of copies of
the prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of securities of
an issuer that is not required to file reports under the Securities Exchange Act
of 1934 (the "1934 Act"), you agree that you will not sell any of the securities
to any account over which you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such other place
as we may advise), at the offering price less the concession allowed to you, on
such date as we may advise, by certified or official bank check in New York
Clearing House funds (or such other funds as we may advise), payable to our
order, against delivery of the securities to be purchased by you. We shall have
authority to make appropriate arrangements for payment for and/or delivery
through the facility of The Depository Trust Company or any such other
depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representative of
the Underwriters, you agree to repay to us for the accounts of the Underwriters
the amount of the concession allowed to you plus brokerage commissions and any
transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of securities
covered by this Agreement you will, upon our request as Representative of the
Underwriters, report to us the amount of securities purchased by you which then
remains unsold and will, upon our request, sell to us for the account of one or
more of the Underwriters such amount of such unsold
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<PAGE>
securities as we may designate, at the offering price less an amount to be
determined by us not in excess of the concession allowed to you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities being offered are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell securities in any jurisdiction. We shall have authority to file
with the Department of State of the State of New York a Further State Notice
with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities covered by
this Agreement you will comply with the applicable provisions of the 1933 Act
and the 1934 Act and the applicable rules and regulations of the Securities and
Exchange Commission thereunder, the applicable rules and regulations of the
NASD, and the applicable rules of any securities exchange having jurisdiction
over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
11. Any notice from us shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunications to you at the
above address or at such other address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this Agreement,
the price restrictions contained in Paragraph 1 hereof and the provisions of
Paragraphs 6 and 7 hereof shall terminate as to such offering at the close of
business on the 45th day after the securities are released for sale or, as to
any or all such provisions, at such earlier time as we may advise. All other
provisions of this Agreement shall remain operative and in full force and effect
with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New York.
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<PAGE>
Please confirm your agreement hereto by signing the enclosed duplicate copy
hereof in the place provided below and returning such signed duplicate copy to
us at World Headquarters, North Tower, World Financial Center, New York, N.Y.
10281-1305, Attention: Corporate Syndicate. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
------------------------
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of , 19
- ----------------------------------------
Name of Dealer
- ----------------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
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