<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1999
SECURITIES ACT FILE NO. 333-77537
INVESTMENT COMPANY ACT FILE NO. 811-09315
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 3 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 4 [X]
(Check appropriate box or boxes)
------------------------
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
TERRY K. GLENN
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. HENNEWINKEL, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD LLP
P.O. BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
</TABLE>
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Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<S> <C> <C> <C>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF BEING OFFERING PRICE AGGREGATE
SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE
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Common Stock ($.10 par value)........................... 3,220,000 shares $15.00 $48,300,000
<CAPTION>
<S> <C>
AMOUNT OF
TITLE OF REGISTRATION
SECURITIES BEING REGISTERED FEE(2)
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Common Stock ($.10 par value)........................... $13,428
</TABLE>
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(1) Includes 420,000 shares subject to the underwriter's over-allotment option.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$13,428 was previously paid.
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<PAGE> 2
PROSPECTUS
2,800,000 SHARES
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
COMMON STOCK
------------------------
MuniHoldings New Jersey Insured Fund IV, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company that seeks
to provide shareholders with current income exempt from Federal income tax and
New 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 the Fund's investment adviser
to be of comparable quality. Under normal circumstances, at least 80% of the
Fund's assets will be invested in municipal obligations with remaining
maturities of one year or more that are covered by insurance guaranteeing the
timely payment of principal at maturity and interest.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. The Fund's common stock has been approved for listing on
the American Stock Exchange under the symbol "MHJ." Trading of the Fund's common
stock on the exchange is expected to begin within two weeks of the date of this
prospectus. Before it begins trading, the underwriter does not intend to make a
market in the Fund's shares. Thus, investors may not be able to buy and sell
shares of the Fund during that time.
Within approximately three months after completion of 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. The use of preferred stock to leverage the common stock can create
special risks.
------------------------
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS, WHICH ARE DESCRIBED
IN THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 8 OF
THIS PROSPECTUS.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price.............. $15.00 $42,000,000
Sales Load......................... None None
Proceeds, before expenses, to
fund............................. $15.00 $42,000,000
</TABLE>
The Fund's investment adviser or an affiliate will pay the underwriter a
commission in the amount of 2.00% of the public offering price per share in
connection with the sale of the common stock.
The underwriter may also purchase up to an additional 420,000 shares at the
public offering price within 45 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about July 23, 1999.
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MERRILL LYNCH & CO.
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The date of this Prospectus is July 20, 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 3
Risk Factors and Special Considerations..................... 8
Fee Table................................................... 10
The Fund.................................................... 11
Use of Proceeds............................................. 11
Investment Objective and Policies........................... 11
Risks and Special Considerations of Leverage................ 23
Investment Restrictions..................................... 26
Directors and Officers...................................... 28
Investment Advisory and Management Arrangements............. 30
Portfolio Transactions...................................... 32
Dividends and Distributions................................. 33
Taxes....................................................... 34
Automatic Dividend Reinvestment Plan........................ 39
Mutual Fund Investment Option............................... 41
Net Asset Value............................................. 42
Description of Capital Stock................................ 42
Custodian................................................... 46
Underwriting................................................ 46
Transfer Agent, Dividend Disbursing Agent and Registrar..... 47
Legal Opinions.............................................. 47
Experts..................................................... 47
Additional Information...................................... 47
Independent Auditors' Report................................ 49
Statement of Assets, Liabilities and Capital................ 50
Appendix I-Economic and Other Conditions in New Jersey...... 51
Appendix II-Ratings of Municipal Bonds...................... 55
Appendix III-Portfolio Insurance............................ 63
Appendix IV-Taxable Equivalent Yields for 1999.............. 65
</TABLE>
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INFORMATION ABOUT THE FUND CAN BE REVIEWED AND COPIED AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. CALL 1-800-SEC-0330 FOR INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM. THIS INFORMATION IS ALSO AVAILABLE ON
THE SEC'S INTERNET SITE AT HTTP:// WWW.SEC.GOV AND COPIES MAY BE OBTAINED UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, D.C. 20549-6009.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that the information
appearing on this prospectus is accurate as of the date on the front cover of
this prospectus only. Our business, financial condition, results of operations
and prospects may have changed since that date.
2
<PAGE> 4
PROSPECTUS SUMMARY
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 IV, Inc. is a newly
organized, non-diversified, closed-end management investment
company. See "The Fund."
THE OFFERING The Fund is offering 2,800,000 shares of common stock at an
initial offering price of $15.00 per share. The common stock is
being offered by Merrill Lynch, Pierce, Fenner & Smith
Incorporated as underwriter. The underwriter may also purchase
up to an additional 420,000 shares of common stock within 45
days of the date of this prospectus to cover over-allotments.
INVESTMENT
OBJECTIVE
AND POLICIES The investment objective of the Fund is to provide shareholders
with current income exempt from Federal income tax and New
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.
Investment Grade Municipal Bonds. The Fund intends to invest in
municipal bonds that are rated investment grade by one or more
nationally recognized statistical rating agencies or, if
unrated, are considered by the investment adviser to be of
comparable quality.
New Jersey Municipal Bonds. The Fund will generally invest
substantially all (at least 80%) of its assets in New Jersey
municipal bonds. However, when the Fund's investment adviser
believes that investment grade New Jersey municipal bonds are
not available in sufficient amounts at an appropriate price, the
Fund may invest a lesser amount of its assets in these
securities. At all times, except during periods when the Fund is
in the process of investing its proceeds from a public offering
or during temporary defensive periods, the Fund intends to
invest at least 80% of its assets in New Jersey municipal bonds.
The Fund may buy other long term municipal bonds that will be
exempt from Federal income tax but not New Jersey personal
income tax.
The Fund will normally invest at least 80% of its assets in
insured municipal obligations with remaining maturities of one
year or more. Insured municipal obligations are covered by
insurance that guarantees timely interest payments and the
repayment of principal at maturity.
In general, the Fund does not intend its investments to earn a
large amount of income that is subject to Federal income tax and
New Jersey personal income taxes.
Indexed and Inverse Floating Rate Securities. The Fund may
invest in securities whose potential returns are directly
related to changes in an underlying index or interest rate,
known as indexed securities. The return on indexed securities
will rise when the underlying index or interest rate rises and
fall when the index or
3
<PAGE> 5
interest rate falls. The Fund may also invest in securities
whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will
decrease when short term interest rates increase and increase
when short term interest rates decrease. Investments in inverse
floaters may subject the Fund to the risks of reduced or
eliminated interest payments and losses of principal. In
addition, certain indexed securities and inverse floaters may
increase or decrease in value at a greater rate than the
underlying interest rate, which effectively leverages the Fund's
investment. As a result, the market value of such securities
will generally be more volatile than that of fixed rate, tax
exempt securities. Both indexed securities and inverse floaters
are derivative securities and can be considered speculative.
Options and Futures Transactions. The Fund may seek to hedge
its portfolio against changes in interest rates using options
and financial futures contracts. The Fund's hedging transactions
are designed to reduce volatility, but come at some cost. For
example, the Fund may try to limit its risk of loss from a
decline in price of a portfolio security by purchasing a put
option. However, the Fund must pay for the option, and the price
of the security may not in fact drop. In large part, the success
of the Fund's hedging activities depends on its ability to
forecast movements in securities prices and interest rates. The
Fund does not, however, intend to enter into options and futures
transactions for speculative purposes. The Fund is not required
to hedge its portfolio and may choose not to do so. The Fund
cannot guarantee that any hedging strategies it uses will work.
LEVERAGE Issuance of Preferred Stock. The Fund intends to offer shares
of preferred stock within three months after completion of this
offering. The preferred stock will represent approximately 40%
of the Fund's capital, including the capital raised by issuing
the preferred stock. There can be no assurance, however, that
preferred stock will actually be issued. Issuing preferred stock
will result in the leveraging of the common stock. Although the
Board of Directors has not yet determined the terms of the
preferred stock offering, the Fund expects that the preferred
stock will pay dividends that will be adjusted over either
relatively short-term periods (generally seven to 28 days) or
medium-term periods (up to five years). The preferred stock
dividend rate will be based upon prevailing interest rates for
debt obligations of comparable maturity. The money raised by the
preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment objective.
The expenses of the preferred stock, which will be borne by the
Fund, will reduce the net asset value of the common stock. In
addition, at times when the Fund is required to allocate taxable
income to preferred stockholders, the terms of the preferred
stock may require the Fund to make an additional distribution to
them. The amount of this additional distribution approximately
equals the tax liability resulting from the allocation (an
"Additional Distribution"). During periods when the Fund has
preferred stock outstanding, the Fund will pay fees to the
investment adviser for its services that are higher than if the
Fund did not issue preferred stock because the fees will be
4
<PAGE> 6
calculated on the basis of the Fund's average weekly net assets,
including proceeds from the sale of preferred stock.
Potential Benefits of Leverage. Under normal market conditions,
longer term obligations produce higher yields than short and
medium term obligations. The Fund's investment adviser believes
that the interest income the Fund receives from its long term
investments will exceed the amount of interest the Fund must pay
to the preferred stockholders. Thus, the Fund's use of preferred
stock should provide common stockholders with a higher yield
than they would receive if the Fund were not leveraged.
Risks. This use of leverage creates certain risks for common
stockholders, including higher volatility of both the net asset
value and the market value of the common stock. Since any
decline in the value of the Fund's investments will affect only
the common stockholders, in a declining market the use of
leverage will cause the Fund's net asset value to decrease more
than it would if the Fund were not leveraged. This decrease in
net asset value will likely also cause a decline in the market
price for shares of common stock. In addition, fluctuations in
the dividend rates on, and the amount of taxable income
allocable to, the preferred stock will affect the yield to
common stockholders. There can be no assurance that the Fund
will earn a higher net return on its investments than the then
current dividend rate (and any Additional Distribution) it pays
on the preferred stock. Under certain conditions, the benefits
of leverage of common stockholders will be reduced, and the
Fund's leveraged capital structure could result in a lower rate
of return to common stockholders than if the Fund were not
leveraged.
Distributions. When the Fund issues preferred stock, common
stockholders will receive all of the Fund's net income that
remains after it pays dividends (and any Additional
Distribution) on the preferred stock and generally will be
entitled to a pro rata share of net realized capital gains. If
the Fund is liquidated, preferred stockholders will be entitled
to receive liquidating distributions before any distribution is
made to common stockholders. These liquidating distributions are
expected to equal the original purchase price per share of the
preferred stock plus any accumulated and unpaid dividends and
Additional Distributions.
Redemption of Preferred Stock. The Fund may redeem the
preferred stock for any reason. For example, the Fund may redeem
all or part of the preferred stock if it believes that the
Fund's leveraged capital structure will cause common
stockholders to obtain a lower return than they would if the
common stock were unleveraged for any significant amount of
time.
Voting Rights. Preferred stockholders, voting as a separate
class, will be entitled to elect two of the Fund's Directors.
Common and preferred stockholders, voting together as a single
class, will be entitled to elect the remaining Directors. If the
Fund fails to pay dividends to the preferred stockholders for
two full years, the holders of all outstanding shares of
preferred stock, voting as a separate class,
5
<PAGE> 7
would then be entitled to elect a majority of the Fund's
Directors. Preferred stockholders also will vote separately on
certain other matters as required under the Fund's Articles of
Incorporation, the Investment Company Act of 1940, as amended,
and Maryland law. Otherwise, common and preferred stockholders
will have equal voting rights (one vote per share) and will vote
together as a single class.
Ratings. Before it offers the preferred stock, the Fund intends
to apply to one or more nationally recognized statistical
ratings organizations for ratings on the preferred stock. The
Fund believes that a rating for the preferred stock will make it
easier to market the stock, which should reduce the dividend
rate.
LISTING Currently, there is no public market for the Fund's common
stock. However, the Fund's common stock has been approved for
listing on the American Stock Exchange. Trading of the Fund's
common stock is expected to begin within two weeks of the date
of this prospectus. Before it begins trading, the underwriter
does not intend to make a market in the Fund's shares of common
stock. Thus, investors may not be able to buy and sell shares of
the Fund during that period.
INVESTMENT
ADVISER Fund Asset Management, L.P. is the Fund's investment adviser and
provides investment advisory and management services to the
Fund. For its services, the Fund pays the Investment Adviser a
monthly fee at the annual rate of 0.55% of Fund's average weekly
net assets, including assets acquired from the sale of preferred
stock.
DIVIDENDS
AND
DISTRIBUTIONS The Fund intends to distribute dividends of all or a portion of
its net investment income to common stockholders each month.
Once the Fund issues preferred stock, the monthly dividends to
common stockholders will consist of all or a portion of net
investment income remaining after the payment of dividends (and
any Additional Distribution) on the preferred stock. At times,
in order to maintain a stable level of monthly dividends to
common stockholders, the Fund may pay out less than all of its
net investment income or pay out accumulated undistributed
income in addition to net investment income. The Fund expects to
begin paying dividends to common stockholders within
approximately 90 days from the date of this prospectus. The Fund
will distribute net capital gains, if any, at least annually to
common stockholders and, after it issues the preferred stock, on
a pro rata basis to common stockholders and preferred
stockholders. When the Fund allocates capital gains or other
taxable income to preferred stockholders, under certain
circumstances, the terms of the preferred stock may require the
Fund to make an Additional Distribution. The Fund may not
declare any cash dividend or other distribution on its common
stock unless the preferred stock has asset coverage of at least
200%. If the Fund issues preferred stock representing 40% of its
total capital, the preferred stock's asset coverage will be
approximately 250%. If the Fund's ability to make distributions
on its common stock is limited, the Fund may not be able to
qualify for taxation as a regulated investment company. This
would have adverse tax consequences for common stockholders.
6
<PAGE> 8
YIELD
CONSIDERATIONS The yield on the Fund's common stock will vary from period to
period depending on factors including, but not limited to,
market conditions, the timing of the Fund's investment in
portfolio securities, the securities comprising the Fund's
portfolio, changes in tax-exempt interest rates (which may not
change to the same extent or in the same direction as taxable
rates) including changes in the relationship between short-term
rates and long-term rates, the amount and timing of the issuance
of the Fund's preferred stock, the effects of preferred stock
leverage on the common stock discussed above under "Leverage",
the timing of the investment of preferred stock proceeds in
portfolio securities, the Fund's net assets and its operating
expenses. Consequently, the Fund cannot guarantee any particular
yield on its shares and the yield for any given period is not an
indication or representation of future yields on Fund shares.
The Fund's ability to achieve any particular yield level after
it commences operations depends on future interest rates and
other factors mentioned above and the initial yield and later
yields may be lower. Any statements as to the estimated yield
are as of the date made and no guarantee can be given that the
Fund will achieve or maintain any particular yield level.
AUTOMATIC
DIVIDEND
REINVESTMENT
PLAN Dividend and capital gains distributions generally are used to
purchase additional shares of the Fund's common stock. However,
an investor can choose to receive distributions in cash. Since
not all investors can participate in the automatic dividend
reinvestment plan, you should call your broker or nominee to
confirm that you are eligible to participate in the plan.
MUTUAL FUND
INVESTMENT
OPTION Investors who purchase shares in this offering through the
underwriter and later sell their shares have the option, subject
to certain conditions, to purchase Class D shares of certain
Merrill Lynch Funds with the proceeds of the sale.
7
<PAGE> 9
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity and Market Price of Shares. The Fund is newly organized and has
no operating history or history of public trading. Before the Fund's common
stock is listed on the American Stock Exchange, an investment in the Fund may be
illiquid.
Shares of closed-end funds that trade in a secondary market frequently
trade at a market price that is below their net asset value. This is commonly
referred to as "trading at a discount." Investors who sell their shares within a
relatively short period after completion of the public offering are more likely
to be exposed to this risk. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.
New Jersey Municipal Bonds. The Fund intends to invest the majority of its
portfolio in New Jersey municipal bonds. As a result, the Fund is more exposed
to risks affecting issuers of New Jersey municipal bonds than is a municipal
bond fund that invests more widely. If the Fund invests less than 80% of its
assets in New Jersey municipal bonds, the income provided by the Fund may not be
exempt from New Jersey personal income tax.
Interest Rate and Credit Risk. The Fund invests in municipal bonds, which
are subject to interest rate and credit risk. Interest rate risk is the risk
that prices of municipal bonds generally increase when interest rates decline
and decrease when interest rates increase. Prices of longer term securities
generally change more in response to interest rate changes than prices of
shorter term securities. Credit risk is the risk that the issuer will be unable
to pay the interest or principal when due. The degree of credit risk depends on
both the financial condition of the issuer and the terms of the obligation.
Non-diversification. The Fund is registered as a "non-diversified"
investment company. This means that the Fund may invest a greater percentage of
its assets in a single issuer than a diversified investment company. Since the
Fund may invest a relatively high percentage of its assets in a limited number
of issuers, the Fund may be more exposed to any single economic, political or
regulatory occurrence than a more widely-diversified fund. Even as a
non-diversified fund, the Fund must still meet the diversification requirements
of applicable Federal income tax laws.
Rating Categories. The Fund intends to invest in municipal bonds that are
rated investment grade by Standard & Poor's, Moody's Investors Service, Inc. or
Fitch IBCA, Inc. It may also invest in unrated municipal bonds that the Fund's
investment adviser believes are of comparable quality. Obligations rated in the
lowest investment grade category may have certain speculative characteristics.
Private Activity Bonds. The Fund may invest in certain tax-exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in the Fund to the Federal alternative minimum tax.
Portfolio Insurance and Rating Agencies. The Fund will be subject to
certain investment restrictions imposed by guidelines of the insurance companies
that issue portfolio insurance and to guidelines of one or more nationally
recognized statistical ratings organizations that may issue ratings for the
preferred stock. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the
Investment Company Act of 1940, as amended. The Fund does not expect these
requirements or guidelines to prevent the investment
8
<PAGE> 10
adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
Leverage. The Fund plans to offer shares of preferred stock. The preferred
stock will represent approximately 40% of the Fund's capital, including capital
raised by issuing the preferred stock. Leverage creates certain risks for common
stockholders, including higher volatility of both the net asset value and the
market value of the common stock. Leverage also creates the risk that the
investment return on shares of the Fund's common stock will be reduced to the
extent the dividends paid on preferred stock and other expenses of the preferred
stock exceed the income earned by the Fund on its investments. If the Fund is
liquidated, preferred stockholders will be entitled to receive liquidating
distributions before any distribution is made to common stockholders.
Inverse Floating Obligations. The Fund's investments in "inverse floating
obligations" or "residual interest bonds" provide investment leverage because
their market value increases or decreases in response to market changes at a
greater rate than fixed rate, long term tax exempt securities. The market values
of such securities are more volatile than the market values of fixed rate, tax
exempt securities.
Options and Futures Transactions. The Fund may engage in certain options
and futures transactions to reduce its exposure to interest rate movements. If
the Fund incorrectly forecasts market values, interest rates or other factors,
the Fund's performance could suffer. The Fund also may suffer a loss if the
other party to the transaction fails to meet its obligations. The Fund is not
required to use hedging and may choose not to do so.
Antitakeover Provisions. The Fund's Articles of Incorporation include
provisions that could limit the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors. Such
provisions could limit the ability of shareholders to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund.
9
<PAGE> 11
FEE TABLE
<TABLE>
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SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering
price)................................................ None
Dividend Reinvestment Plan Fees........................ None
ANNUAL EXPENSES (as a percentage of net assets attributable
to shares of Common Stock)
Investment Advisory Fees(a)(b)......................... .92%
Interest Payments on Borrowed Funds.................... None
Other Expenses(a)(b)................................... .57%
------
Total Annual Expenses(a)(b)....................... 1.49%
======
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming total annual expenses of 1.34%
(assuming leverage of 40% of the Fund's total assets) and
a 5% annual return throughout the periods:................ $15 $47 $81 $178
</TABLE>
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(a) Assumes leverage by issuing preferred stock in an amount of approximately
40% of the Fund's capital at a dividend rate of 3.25%. The Fund intends to
use leverage only if the Investment Adviser believes that it would result in
higher income to shareholders over time. See "Risks and Special
Considerations of Leverage." If the Fund does not use leverage, it is
estimated that, as a percentage of net assets attributable to common stock,
the Investment Advisory Fees would be 0.55%, Other Expenses would be 0.30%
and Total Annual Expenses would be 0.85%.
(b) See "Investment Advisory and Management Arrangements" -- page 30.
The Fee Table is intended to assist investors in understanding the costs and
expenses that a shareholder in the Fund will bear directly or indirectly. The
expenses set forth under "Other Expenses" are based on estimated amounts through
the end of the Fund's first fiscal year on an annualized basis. The Example set
forth above assumes reinvestment of all dividends and distributions and uses a
5% annual rate of return as mandated by the Securities and Exchange Commission
regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN
MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
10
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THE FUND
MuniHoldings New Jersey Insured Fund IV, Inc. (the "Fund") is a newly
organized, non-diversified, closed-end management investment company. The Fund
was incorporated under the laws of the State of Maryland on April 5, 1999, and
has registered under the 1940 Act. The Fund's principal office is located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their securities
at the option of the shareholder, whereas open-end companies issue securities
redeemable at net asset value at any time at the option of the shareholder and
typically engage in a continuous offering of their shares. Accordingly, open-end
investment companies are subject to continuous asset in-flows and out-flows that
can complicate portfolio management. Shares of closed-end investment companies,
however, frequently trade at a discount from their net asset value. This risk
may be greater for investors expecting to sell their shares in a relatively
short period after completion of the public offering.
The Board of Directors of the Fund may at any time consider a merger,
consolidation or other form of reorganization of the Fund with one or more other
closed-end investment companies advised by the Fund's investment adviser with
similar investment objectives and policies as the Fund. Any such merger,
consolidation or other form of reorganization would require the prior approval
of the Board of Directors and the stockholders of the Fund. See "Description of
Capital Stock -- Certain Provisions of the Articles of Incorporation."
USE OF PROCEEDS
The net proceeds of this offering will be approximately $41,865,000 (or
approximately $48,165,000 assuming the Underwriter exercises the over-allotment
option in full) after payment of offering expenses estimated to be approximately
$135,000.
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 other qualifying issuers, each of which pays interest
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income tax and New Jersey personal income taxes ("New Jersey Municipal Bonds").
The Fund intends to invest substantially all (at least 80%) of its assets in New
Jersey Municipal Bonds, except at times when the Fund's investment adviser,
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Fund Asset Management, L.P. (the "Investment Adviser"), considers that New
Jersey Municipal Bonds of sufficient quality and quantity are unavailable for
investment at suitable prices by the Fund. To the extent the Investment Adviser
considers that suitable New Jersey Municipal Bonds are not available for
investment, the Fund may purchase other long-term municipal obligations exempt
from Federal income tax, but not New Jersey personal income tax ("Municipal
Bonds"). The Fund will maintain at least 80% of its assets in New Jersey
Municipal Bonds, except during interim periods pending investment of the net
proceeds of public offerings of the Fund's securities and during temporary
defensive periods. Under normal circumstances, at least 80% of the Fund's assets
will be invested in municipal obligations with remaining maturities of one year
or more that are covered by insurance guaranteeing the timely payment of
principal at maturity and interest. If the Fund invests less than 80% of its
assets in New Jersey Municipal Bonds, the income provided by the Fund may not be
exempt from New Jersey personal income tax. The Fund's investment objective is a
fundamental policy that may not be changed without a vote of a majority of the
Fund's outstanding voting securities, as defined below under "Investment
Restrictions." There can be no assurance that the investment objective of the
Fund will be realized. At times the Fund may seek to hedge its portfolio through
the use of futures transactions and options to reduce volatility in the net
asset value of its shares of common stock.
The Fund ordinarily does not intend to realize significant investment
income that is subject to Federal income tax and New Jersey personal income
taxes. The Fund may invest all or a portion of its assets in certain tax-exempt
securities classified as "private activity bonds" (in general, bonds that
benefit non-governmental entities) that may subject certain investors in the
Fund to a Federal 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 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 are
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
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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-3 for Moody's and F-1+ through F-3 for Fitch. In the case of tax-exempt
commercial paper, the investment grade rating categories are A-1+ through A-3
for S&P, Prime-1 through Prime-3 for Moody's and F-1+ through F-3 for Fitch.
Obligations ranked in the lowest investment grade rating category (BBB, SP-3 and
A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody's; and BBB and F-3 for Fitch),
while considered "investment grade," may have certain speculative
characteristics. There may be sub-categories or gradations indicating relative
standing within the rating categories set forth above. See Appendix II to this
Prospectus for a description of S&P's, Moody's and Fitch's ratings of Municipal
Bonds. In assessing the quality of New Jersey Municipal Bonds and Municipal
Bonds with respect to the foregoing requirements, the Investment Adviser will
take into account the portfolio insurance as well as the nature of any letters
of credit or similar credit enhancements to which particular New 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 may invest are
tax-exempt obligations, in the opinion of counsel to the issuer, that contain a
floating or variable interest rate adjustment formula and a right of demand on
the part of the holder thereof to receive payment of the unpaid principal
balance plus accrued interest on a short notice period not to exceed seven days.
Participating VRDOs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDOs from the
financial institution on a specified number of days' notice, not to exceed seven
days. There is, however, the possibility that because of default or insolvency,
the demand feature of VRDOs or Participating VRDOs may not be honored. The Fund
has been advised by its counsel that the Fund should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt obligations
for Federal income tax purposes.
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The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. The
net asset value of the shares of common stock of a closed-end investment
company, such as the Fund, which invests primarily in fixed-income securities,
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio generally can be expected to
rise. Conversely, when interest rates rise, the value of a fixed-income
portfolio generally can be expected to decline. Prices of longer-term securities
generally fluctuate more in response to interest rate changes than do short-
term or medium-term securities. These changes in net asset value are likely to
be greater in the case of a fund having a leveraged capital structure, as
proposed for the Fund. See "Risks and Special Considerations of Leverage."
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 that is subject to 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, 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
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<PAGE> 16
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 Assurance Corporation, Financial Guaranty
Insurance Company, Financial Security Assurance and MBIA Insurance 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.
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.
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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 or other market conditions).
DESCRIPTION OF NEW JERSEY MUNICIPAL BONDS AND MUNICIPAL BONDS
New Jersey Municipal Bonds and Municipal Bonds include debt obligations
issued to obtain funds for various public purposes, including construction of a
wide range of public facilities, refunding of outstanding obligations and
obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of private activity
bonds ("PABs") are issued by or on behalf of public authorities to finance
various privately operated facilities, including, among other things, airports,
public parks mass commuting facilities, multi family housing projects, as well
as facilities for water supply, gas, electricity, sewage or solid waste
disposal. For purposes of this Prospectus, such obligations are Municipal Bonds
if the interest paid thereon is exempt from Federal income tax and are New
Jersey Municipal Bonds if the interest thereon is exempt from Federal income tax
and exempt from New Jersey personal income tax, even though such bonds may be
industrial development bonds or PABs as discussed below. Also, for purposes of
this Prospectus, Non-Municipal Tax-Exempt Securities as discussed above will be
considered New Jersey Municipal Bonds or Municipal Bonds.
The two principal classifications of New Jersey Municipal Bonds and
Municipal Bonds are "general obligation" bonds and "revenue" bonds, which latter
category includes PABs and, for bonds issued on or before August 15, 1986,
industrial development bonds or "IDBs". General obligation bonds (other than
those of the State of New Jersey which has limited taxing powers) are typically
secured by the issuer's pledge of faith, credit and taxing power for the
repayment of principal and the
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payment of interest. Revenue or special obligation bonds are typically payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source such as from the user of the facility being financed. PABs are in
most cases revenue bonds and do not generally constitute the pledge of the
credit or taxing power of the issuer of such bonds. The repayment of principal
and the payment of interest on such 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 PABs or IDBs. Interest received on certain PABs is treated as an
item of "tax preference" for purposes of the Federal alternative minimum tax and
may impact the overall tax liability of certain investors in the Fund. There is
no limitation on the percentage of the Fund's assets that may be invested in New
Jersey Municipal Bonds and Municipal Bonds the interest on which is treated as
an item of "tax preference" for purposes of the Federal alternative minimum tax.
See "Taxes -- General." Also included within the general category of New Jersey
Municipal Bonds and/or Municipal Bonds are certificates of participation
("COPs") executed and delivered for the benefit of government authorities or
entities to finance the acquisition or construction of equipment, land and/or
facilities. COPs represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively referred to
as "lease obligations") relating to such equipment, land or facilities. Although
lease obligations typically do not constitute general obligations of the issuer
for which the issuer's unlimited taxing power is pledged, a lease obligation
frequently is backed by the issuer's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses, which provide that the issuer
has no obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the lease property,
disposition of the property in the event of foreclosure might prove difficult.
Federal tax legislation has limited and may continue to limit the types and
volume of such bonds the interest on which is excludable from income for Federal
income tax purposes. Such legislation may affect the availability of New Jersey
Municipal Bonds and Municipal Bonds for investment by the Fund.
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL BONDS
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 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. Currently, New
Jersey's general obligation bonds are rated AA+ by S&P,
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Aa1 by Moody's and AA+ by Fitch. See Appendix I, "Economic and Other 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, income on inverse floating rate bonds will decrease
when short-term interest rates increase, and will increase when short-term
interest rates decrease. Such securities have the effect of providing a degree
of investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate that is a
multiple (typically two) of the rate at which fixed-rate, long-term, tax-exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities generally will be more volatile than the market
values of fixed-rate tax-exempt securities. To seek to limit the volatility of
these securities,
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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 and New Jersey income tax purposes, repurchase
agreements are treated as collateralized loans secured by the securities "sold."
Therefore, amounts earned under such agreements will not be considered
tax-exempt interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts and options thereon. While the Fund's use of hedging
strategies is intended to reduce the volatility of the net asset value of the
common stock, the net asset value of the common stock will fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective. In
addition, because of the anticipated leveraged nature of the common stock,
hedging transactions will result in a larger impact on the net asset value of
the common stock than would be the case if the common stock were not leveraged.
Furthermore, the Fund may only engage in hedging activities from time to time
and may not necessarily be engaging in hedging activities when movements in
interest rates occur. The Fund has no obligation to enter into hedging
transactions and may choose not to do so.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See
"Taxes -- Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain
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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 sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such
20
<PAGE> 22
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. Use of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the security
that is the subject of the hedge. If the price of the financial futures contract
moves more or less than the price of the security that is the subject of the
hedge, the Fund will experience a gain or loss that will not be completely
offset by movements in the price of such security. There is a risk of imperfect
correlation where the securities underlying financial futures
21
<PAGE> 23
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.
Certain risks are involved in options and futures transactions. The
Investment Adviser believes, however, that, because the Fund will engage in
options and futures transactions only for hedging purposes, the Fund's options
and futures portfolio strategies will not subject the Fund to the risks
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.
22
<PAGE> 24
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 this offering of
shares, the Fund intends to offer shares of preferred stock representing
approximately 40% of the Fund's capital immediately after the issuance of such
preferred stock. There can be no assurance, however, that preferred stock
representing such percentage of the Fund's capital will actually be issued.
Issuing the preferred stock will result in the leveraging of the common stock.
Although the Fund's Board of Directors has not yet determined the terms of the
preferred stock offering, the Fund anticipates that the preferred stock will pay
dividends that will be adjusted over either relatively short-term periods
(generally seven to 28 days) or medium-term periods (up to five years). The
dividend rate will be based upon prevailing interest rates for debt obligations
of comparable maturity. The proceeds of the preferred stock offering will be
invested in longer-term obligations in accordance with the Fund's investment
objective. The expenses of the preferred stock, which will be borne by the Fund,
will reduce the net asset value of the common stock. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to holders
of preferred stock, the Fund anticipates that the terms of the preferred stock
will require the Fund to make an additional distribution to such holders in an
amount approximately equal to the tax liability resulting from such allocation
(an "Additional Distribution"). Because under normal market conditions,
obligations with longer maturities produce higher yields than short-term and
medium-term obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term rates (and any
Additional Distribution) paid by the Fund as dividends on the preferred stock
and the
23
<PAGE> 25
longer-term rates received by the Fund will provide holders of common stock with
a potentially higher yield.
The use of leverage, however, involves certain risks to the holders of
common stock. For example, issuance of the preferred stock may result in higher
volatility of the net asset value of the common stock and potentially more
volatility in the market value of the common stock. In addition, changes in the
short-term and medium-term dividend rates on, and the amount of taxable income
allocable to, the preferred stock will affect the yield to holders of common
stock. Leverage will allow holders of common stock to realize a higher current
rate of return than if the Fund were not leveraged as long as the Fund, while
accounting for its costs and operating expenses, is able to realize a higher net
return on its investment portfolio than the then current dividend rate (and any
Additional Distribution) paid on the preferred stock. Similarly, since a pro
rata portion of the Fund's net realized capital gains are generally payable to
holders of common stock, the use of leverage will increase the amount of such
gains distributed to holders of common stock. However, short-term, medium-term
and long-term interest rates change from time to time as 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 decreased. If the current dividend rate (and any Additional
Distribution) on the preferred stock were to exceed the net return on the Fund's
portfolio, holders of common stock would receive a lower rate of return than if
the Fund were not leveraged. Similarly, since both the cost of issuing the
preferred stock and any decline in the value of the Fund's investments
(including investments purchased with proceeds from any preferred stock
offering) will be borne entirely by holders of common stock, the effect of
leverage in a declining market would result in a greater decrease in net asset
value to holders of common stock than if the Fund were not leveraged. If the
Fund is liquidated, holders of preferred stock will be entitled to receive
liquidating distributions before any distribution is made to holders of common
stock.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the common stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Federal tax laws. See "Taxes." However, the Fund
intends to take all measures necessary to continue to make common stock dividend
payments. If the Fund's current investment income is ever insufficient to meet
dividend payments on either the common stock or the preferred stock, the Fund
may have to liquidate certain of its investments. In addition, the Fund will
have the authority to redeem the preferred stock for any reason and may redeem
all or part of the preferred stock under the following circumstances:
- if it anticipates that the leveraged capital structure will result in a
lower rate of return for any significant amount of time to holders of the
common stock than it can obtain if the common stock were not leveraged,
24
<PAGE> 26
- if the asset coverage for the preferred stock declines below 200% either
as a result of a decline in the value of the Fund's portfolio investments
or as a result of the repurchase of common stock in tender offers, or
- in order to maintain the asset coverage guidelines established by the
nationally recognized statistical rating organizations ("NRSROs") that
have rated the preferred stock.
Redemption of the preferred stock or insufficient investment income to make
dividend payments, may reduce the net asset value of the common stock and
require the Fund to liquidate a portion of its investments at a time when it may
be disadvantageous to do so.
As discussed under "Investment Advisory and Management Arrangements,"
during periods when the Fund has preferred stock outstanding, the fees paid to
the Investment Adviser for investment advisory and management services will be
higher than if the Fund did not issue preferred stock because the fees paid will
be calculated on the basis of the Funds average weekly net assets, including
proceeds from the sale of preferred stock.
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 3.25% payable on such preferred stock based on market rates as
of the date of this Prospectus, the annual return that the Fund's portfolio must
experience (net of expenses) in order to cover such dividend payments would be
1.30%.
The following table is designed to illustrate the effect on the return to a
holder of 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% 15%
</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
If short-term or medium-term rates increase or other changes in market
conditions occur to the point where the Fund's leverage could adversely affect
holders of common stock as noted above (or in anticipation of such changes), the
Fund may attempt to shorten the average maturity of its investment portfolio in
order to offset the negative impact of leverage. The Fund also may attempt to
reduce the degree to which it is leveraged by redeeming preferred stock pursuant
to the Fund's Articles Supplementary, which establish the rights and preferences
of the preferred stock, or otherwise 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
25
<PAGE> 27
redeem outstanding preferred stock, the Board of Directors will take into
account a variety of factors including the following:
- market conditions,
- the ratio of preferred stock to common stock and
- the expenses associated with such redemption.
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. The Fund does not anticipate that these
guidelines will impede the Investment Adviser from managing the Fund's portfolio
in accordance with the Fund's investment objective and policies. Ratings on
preferred stock issued by the Fund should not be confused with ratings on
obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
stock (expected to equal the original purchase price of the outstanding shares
of preferred stock plus any accumulated and unpaid dividends thereon and any
accumulated and unpaid Additional Distribution). In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its common stock
unless, at the time of such declaration, the net asset value of the Fund's
portfolio (determined after deducting the amount of such dividend or
distribution) is at least 200% of the liquidation value of the outstanding
preferred stock. Under the Fund's proposed capital structure, assuming the sale
of shares of preferred stock representing approximately 40% of the Fund's
capital, the net asset value of the Fund's portfolio is expected to be
approximately 250% of the liquidation value of the Fund's preferred stock. To
the extent possible, the Fund intends to purchase or redeem shares of preferred
stock from time to time to maintain coverage of preferred stock of at least
200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and,
prior to issuance of the preferred stock, may not be changed without the
approval of the holders of a majority of the Fund's outstanding shares of common
stock (which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the shares of common stock represented at a meeting at which more than 50% of
the outstanding shares of common stock are represented or (ii) more than 50% of
the outstanding shares). Subsequent to the issuance of the preferred stock, the
following investment restrictions may not be changed without the approval of a
majority of the outstanding shares of common stock and of the outstanding shares
of preferred stock, voting together as a class, and the approval of a majority
of the outstanding shares of preferred stock, voting separately as a class. The
Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
26
<PAGE> 28
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 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 the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch &
Co. ("ML&Co."). Because of the affiliation of Merrill Lynch with the Investment
Adviser, the Fund is prohibited from engaging in
27
<PAGE> 29
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
managers of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio managers is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
TERRY K. GLENN (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Merrill Lynch Asset Management, L.P.
("MLAM") (which terms as used herein include their corporate predecessors) since
1983; Executive Vice President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of Princeton Funds Distributor,
Inc. ("PFD") since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
RONALD W. FORBES (58) -- 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 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.
KEVIN A. RYAN (66) -- 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 (61) -- 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., Vornado Realty Trust, Inc.,
Vornado Operating Company and Alexander's Inc.
ARTHUR ZEIKEL (66) -- Director(1)(2) -- Chairman of the Investment Adviser
and MLAM from 1997 to 1999; President of the Investment Adviser and MLAM from
1977 to 1997; Chairman
28
<PAGE> 30
of Princeton Services from 1997 to 1999, Director thereof from 1993 to 1999 and
President thereof from 1993 to 1997; Executive Vice President of ML & Co. from
1990 to 1999.
VINCENT R. GIORDANO (54) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
KENNETH A. JACOB (48) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of the
Investment Adviser since 1984.
ROBERT A. DIMELLA, CFA (32) -- Vice President and Portfolio
Manager(1)(2) -- Vice President of MLAM since 1997; Assistant Vice President of
MLAM from 1995 to 1997; Assistant Portfolio Manager of MLAM from 1993 to 1995.
ROBERTO W. ROFFO (33) -- Vice President and Portfolio Manager(1)(2) -- Vice
President of MLAM since 1996; Portfolio Manager with MLAM since 1992.
DONALD C. BURKE (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President of
PFD since 1999; First Vice President of MLAM from 1997 to 1999; Vice President
of MLAM from 1990 to 1997; Director of Taxation of MLAM since 1990.
WILLIAM E. ZITELLI, JR. (30) -- Secretary(1)(2) -- Attorney associated with
the Investment Adviser since 1998; Attorney associated with Pepper Hamilton LLP
from 1997 to 1998; Attorney associated with Reboul, MacMurray, Hewitt, Maynard
and Kristol from 1994 to 1997.
- ------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors, and
the remaining Directors will be elected by all holders of capital stock, voting
as a single class. See "Description of Capital Stock."
COMPENSATION OF DIRECTORS
Pursuant to an Investment Advisory Agreement with the Fund, the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all the Directors who are affiliated persons of ML & Co. or its
subsidiaries.
The Fund pays each Director not affiliated with the Investment Adviser
(each a "non-affiliated Director") a fee of $2,000 per year plus $200 per
meeting attended, and pays all Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of the Board's
audit and nominating committee (the "Committee"), which consists of all the non-
affiliated Directors, an annual fee of $800. The Chairman of the Committee
receives an additional annual 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, 1998 the aggregate
compensation paid by all investment companies advised by
29
<PAGE> 31
the Investment Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to
the non-affiliated Directors.
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
AGGREGATE BENEFITS FAM/MLAM
COMPENSATION ACCRUED AS PART OF ADVISED FUNDS PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSE TO DIRECTORS
---------------- ------------ ------------------ ------------------
<S> <C> <C> <C>
Ronald W. Forbes(1)...................... $3,600 None $192,567
Cynthia A. Montgomery(1)................. $3,600 None $192,567
Charles C. Reilly(1)..................... $4,600 None $362,858
Kevin A. Ryan(1)......................... $3,600 None $192,567
Richard R. West(1)....................... $3,600 None $334,125
</TABLE>
- ------------
(1) In addition to the Fund, the Directors serve on the boards of other FAM/MLAM
Advised Funds as follows: Mr. Forbes (37 registered investment companies
consisting of 50 portfolios); Ms. Montgomery (37 registered investment
companies consisting of 50 portfolios); Mr. Reilly (56 registered investment
companies consisting of 69 portfolios); Mr. Ryan (37 registered investment
companies consisting of 50 portfolios); and Mr. West (58 registered
investment companies consisting of 83 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM and is owned and controlled
by ML & Co., a financial services holding company and the parent of Merrill
Lynch, provides the Fund with investment advisory and management services. The
Asset Management Group of ML & Co. (which includes the Investment Adviser) acts
as the investment adviser to more than 100 other registered management
investment companies and offers portfolio management services to individuals and
institutions. As of June 1999, the Asset Management Group had a total of
approximately $516 billion in investment company and other portfolio assets
under management (approximately $36 billion of which were invested in municipal
securities). This amount includes assets managed for certain affiliates of the
Investment Adviser. The Investment Adviser is a limited partnership, the
partners of which are ML & Co. and Princeton Services. The principal business
address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
The Investment Advisory Agreement provides that, subject to the supervision
of the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. Robert A. DiMella and
Roberto W. Roffo are the portfolio managers for the Fund and are 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
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<PAGE> 32
assets (i.e., the average weekly value of the total assets of the Fund,
including proceeds from the issuance of shares of preferred stock, minus the sum
of accrued liabilities of the Fund and accumulated dividends on the shares of
preferred stock). For purposes of this calculation, average weekly net assets
are determined at the end of each month on the basis of the average net assets
of the Fund for each week during the month. The assets for each weekly period
are determined by averaging the net assets at the last business day of a week
with the net assets at the last business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing fees,
if any, stock certificates and shareholder reports, charges of the custodian and
the transfer and dividend disbursing agent and registrar, fees and expenses with
respect to the issuance of preferred stock, Securities and Exchange Commission
fees, fees and expenses of non-interested Directors, accounting and pricing
costs, insurance, interest, brokerage costs, litigation and other extraordinary
or non-recurring expenses, mailing and other expenses properly payable by the
Fund. Accounting services are provided to the Fund by the Investment Adviser,
and the Fund reimburses the Investment Adviser for its costs in connection with
such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940 Act)
of any such party. Such contract is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an advisory
client when other clients are selling the same security. If purchases or sales
of securities by the Investment Adviser for the Fund or other funds for which it
acts as investment adviser or for 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. Transactions effected by the Investment Advisor (or its affiliates) on
behalf of more than one of its clients during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
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 significantly restrict the
personal investing activities of all employees of the
31
<PAGE> 33
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 investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for transactions
by the Fund. Research information provided to the Investment Adviser by
securities firms is supplemental. It does not replace or reduce the level of
services performed by the Investment Adviser and the expenses of the Investment
Adviser will not be reduced because it receives supplemental research
information.
The Fund invests in securities traded in the over-the-counter markets, and
the Fund intends to deal directly with 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, including Merrill Lynch, are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principal for their own account, the Fund
does not deal with Merrill Lynch and its affiliates in connection with such
transactions except that, pursuant to exemptive orders obtained by the
Investment Adviser, the Fund may engage in principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities. See "Investment
Restrictions." An affiliated person of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis.
32
<PAGE> 34
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.
PORTFOLIO TURNOVER
The Fund may dispose of securities without regard to the time they have
been held when such action, for defensive or other reasons, appears advisable to
the Investment Adviser. While it is not possible to predict turnover rates with
any certainty, presently it is anticipated that the Fund's annual portfolio
turnover rate, under normal circumstances, should be less than 100%. (The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
A high portfolio turnover rate results in greater transaction costs, which are
borne directly by the Fund and also has certain tax consequences for
stockholders.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute dividends of all or a portion of its net
investment income monthly to holders of common stock. It is expected that the
Fund will commence paying dividends to holders of common stock within
approximately 90 days of the date of this Prospectus. From and after issuance of
the preferred stock, monthly dividends to holders of common stock normally will
consist of all or a portion of its net investment income remaining after the
payment of dividends (and any Additional Distribution) on the preferred stock.
The Fund may at times pay out less than the entire amount of net investment
income earned in any particular period and may at times pay out such accumulated
undistributed income in addition to net investment income earned in other
periods in order to permit the Fund to maintain a more stable level of dividends
to holders of common stock. As a result, the dividend paid by the Fund to
holders of common stock for any particular period may be more or less than the
amount of net investment income earned by the Fund during such period. For
Federal tax purposes, the Fund is required to distribute substantially all of
its net investment income for each year. All net realized capital gains, if any,
will be distributed pro rata at least annually to holders of common stock and
any preferred stock. While any shares of preferred stock are outstanding, the
Fund may not declare any cash dividend or other distribution on its common
stock, unless at the time of such declaration, (i) all accumulated preferred
stock dividends, including any Additional Distribution, have been paid, and (ii)
the net asset value of the Fund's portfolio (determined after deducting the
amount of such dividend or other distribution) is at least 200% of the
liquidation value of the outstanding preferred stock (expected to equal the
original purchase price of the outstanding shares of preferred stock plus any
accumulated and unpaid dividends thereon and any accumulated but unpaid
Additional Distribution). If the Fund's ability to make distributions on its
common stock is limited, such limitation could under certain circumstances
impair the ability of the Fund to maintain its qualification for taxation as a
regulated investment company, which would have adverse tax consequences for
holders of common stock. See "Taxes."
33
<PAGE> 35
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.
The yield on the Fund's common stock will vary from period to period
depending on factors including, but not limited to, market conditions, the
timing of the Fund's investment in portfolio securities, the securities
comprising the Fund's portfolio, changes in tax-exempt interest rates (which may
not change to the same extent or in the same direction as taxable rates)
including changes in the relationship between short-term rates and long-term
rates, the amount and timing of the issuance of the Fund's preferred stock, the
effects of preferred stock leverage on the common stock discussed above under
"Risks and Special Considerations of Leverage", the timing of the investment of
preferred stock proceeds in portfolio securities, the Fund's net assets and its
operating expenses. Consequently, the Fund cannot guarantee any particular yield
on its shares and the yield for any given period is not an indication or
representation of future yields on Fund shares.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, in any taxable
year in which it distributes at least 90% of its taxable net income and 90% of
its tax-exempt net income (see below), the Fund (but not its shareholders) will
not be subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Fund intends to distribute
substantially all of such income. Under present 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 the interest on which is excludable from gross income
for Federal income tax purpose ("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
34
<PAGE> 36
distributed to the Fund's shareholders are derived from interest income
excludable from gross income for Federal income tax purposes under Code Section
103(a) and are properly designated as exempt-interest dividends, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends are included, however, in determining the portion, if
any, of a person's social security and railroad retirement benefits subject to
Federal income taxes. Each shareholder is advised to consult a tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Code
Section 103(a) if such shareholder would be treated as a "substantial user" or
"related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of PABs or IDBs, if any, held by the Fund.
The portion of the Fund's exempt-interest dividends properly identified in
a year-end statement as directly attributable to interest on New Jersey
Municipal Bonds and the portion of distributions attributable to gains from New
Jersey Municipal Bonds ("New Jersey exempt-interest dividends") also will be
exempt from New Jersey personal income 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 may be taxable to
shareholders for New Jersey personal income tax purposes. However, regardless of
whether the Fund meets the 80% Test, all distributions attributable to interest
earned on Federal obligations will be exempt from New Jersey personal income
tax. 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.
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. Accordingly, investors in the Fund,
including, in particular, corporate investors which may be subject to the New
Jersey corporation business (franchise) tax and, if applicable, the New Jersey
corporation income tax, should consult their tax advisors with respect to the
application of such taxes to an investment in the Fund, to the receipt of the
Fund dividends and as to their New Jersey tax situation in general.
On February 21, 1997, the Tax Court of New Jersey ruled against the
Director of the Division of Taxation holding against the New Jersey requirement
that fund investors pay state taxes on interest their funds earned from U.S.
government securities if the 80% Test was not met. As a result of the court
decision, the State of New Jersey could be forced to pay substantial amounts in
tax
35
<PAGE> 37
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 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. Certain categories of
capital gains are taxable at different rates for Federal income tax purposes.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating any amounts of
any exempt-interest dividends or capital gain dividends, as well as any amount
of capital gain dividends in the different categories of capital gain referred
to above. Distributions by the Fund, whether from exempt-income, ordinary income
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 for
Federal income tax purposes 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 or more 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. A class's proportionate
share of a particular type of income is determined according to the percentage
of total dividends paid by the RIC during such year that was paid to such class.
Consequently, when common stock and one or more series of preferred stock are
outstanding, the Fund intends to designate distributions made to the classes as
consisting of particular types of income in accordance with each class's
proportionate share of such income. Thus, the Fund will designate dividends paid
as exempt-interest dividends in a manner that allocates such dividends among the
holders of common stock and series of preferred stock in proportion to the total
dividends paid to each class during the taxable year, or otherwise as required
by applicable law. Capital gain dividends will similarly be allocated among the
classes in proportion to the total dividends paid to each class during the
taxable year, or otherwise as required by applicable law. When capital gain or
other taxable income is allocated to holders of preferred stock
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<PAGE> 38
pursuant to the allocation rules described above, the terms of the preferred
stock may require the Fund to make an additional distribution to or otherwise
compensate such holders for the tax liability resulting from such allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The Federal alternative minimum
tax applies to interest received on certain "private activity bonds" issued
after August 7, 1986. Private activity bonds are bonds that, although
tax-exempt, are used for purposes other than those 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," which could subject certain
investors in such bonds, including shareholders of the Fund, to an increased
Federal alternative minimum tax. The Fund intends to purchase such "private
activity bonds" and will report to shareholders within 60 days after calendar
year-end the portion of its dividends declared during the year that constitutes
an item of tax preference for Federal alternative minimum tax purposes. The Code
further provides that corporations are subject to a Federal alternative minimum
tax based, in part, on certain differences between taxable income as adjusted
for other tax preferences and the corporation's "adjusted current earnings,"
which more closely reflect a corporation's economic income. Because an
exempt-interest dividend paid by the Fund will be included in adjusted current
earnings, a corporate shareholder may be required to pay a Federal alternative
minimum tax on exempt-interest dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on nontraditional instruments
could be recharacterized as taxable ordinary income.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of common stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. If the
Fund were to fail to qualify as a RIC, some or all of the distributions paid by
the Fund would be fully taxable for Federal income tax and New Jersey income tax
purposes. Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund, in its sole discretion, may redeem shares of preferred stock in
order to maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a RIC.
There can be no assurance, however, that any such action would achieve such
objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction under the Code.
Some types of preferred stock that the Fund currently contemplates issuing may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code 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
37
<PAGE> 39
dividend and may seek a private letter ruling from the Service to that effect.
If the Fund ultimately relies solely on a legal opinion when it issues such
preferred stock, there is no assurance that the Service would agree that
dividends on the preferred stock are not preferential. If the Service
successfully disallowed the dividends paid deduction for dividends on the
preferred stock, the Fund could be disqualified as a RIC. In this case,
dividends on the common stock would not be exempt from Federal income taxes.
Additionally, the Fund would be subject to the Federal alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market value
than the amount of cash reinvested, it is possible that all or a portion of such
discount (which may not exceed 5% of the fair market value of the Fund's shares)
could be viewed as a taxable distribution. If the discount is viewed as a
taxable distribution, it is also possible that the taxable character of this
discount would be allocable to all of the shareholders, including shareholders
who do not participate in the dividend reinvestment plan. Thus, shareholders who
do not participate in the dividend reinvestment plan, as well as dividend
reinvestment plan participants, might be required to report as ordinary income a
portion of their distributions equal to their allocable share of the discount.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding are those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to the
Fund or an exception applies, such options and financial futures contracts that
are "Section 1256 contracts" will be "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
38
<PAGE> 40
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest rates
with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New 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 income 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 State Street Bank and Trust
Company, 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 State Street Bank
and Trust Company, 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 State Street Bank and
Trust Company, 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 American Stock
39
<PAGE> 41
Exchange (the "AMEX") 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
AMEX, participants in the Plan will receive any dividends in newly issued
shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that the
Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of common stock exceeds the
net asset value per share, the average per share purchase prices paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
40
<PAGE> 42
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.
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 225 Franklin Street, Boston, Massachusetts 02110.
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 AMEX, the
distributor for the mutual funds will advise Merrill Lynch Financial Consultants
as to those mutual funds that offer the investment option described above.
41
<PAGE> 43
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, the New
York Stock Exchange closes at 4:00 p.m., Eastern time) on the last business day
in each week. For purposes of determining the net asset value of a share of
common stock, 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.
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.
42
<PAGE> 44
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.
The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of common stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred stock
is likely to achieve the benefits to the holders of common stock described in
the Prospectus. Although the terms of the preferred stock, including its
dividend rate, voting rights, liquidation preference and redemption provisions
will be determined by the Board of Directors (subject to applicable law and the
Fund's Articles of Incorporation), the initial series of preferred stock will be
structured to carry either a relatively short-term dividend rate, in which case
periodic redetermination of the dividend rate will be made at relatively short
intervals (generally seven or 28 days), or a medium-term dividend rate, in which
case periodic redetermination of the dividend rate will be made at intervals of
up to five years. In either case, such redetermination of the dividend rate will
be made through an auction or remarketing procedure. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to holders
of the preferred stock, it is anticipated that the terms of the preferred stock
will require the Fund to make an Additional Distribution (as defined in "Risks
and Special Considerations of Leverage-Effects of Leverage") to such holders.
The Board also has indicated that it is likely that the liquidation preference,
voting rights and redemption provisions of the preferred stock will be as stated
below. The Fund's Articles of Incorporation, as amended, together with any
Articles Supplementary, is referred to below as the "Charter."
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<PAGE> 45
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.
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
44
<PAGE> 46
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:
- a merger or consolidation or statutory share exchange of the Fund with
other corporations,
- a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities), or
- a liquidation or dissolution of the Fund, unless such action has been
approved, adopted or authorized by the affirmative vote of two-thirds of
the total number of Directors fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's shares of
capital stock is required. Following the proposed issuance of the
preferred stock, it is anticipated that the approval, adoption or
authorization of the foregoing would also require the favorable vote of a
majority of the Fund's shares of preferred stock then entitled to be
voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter, voting
as a single class (or a majority of such shares if the amendment was previously
approved, adopted or authorized by two-thirds of the total number of Directors
fixed in accordance with the by-laws), and, assuming preferred stock is issued,
the affirmative vote of a majority of outstanding shares of preferred stock of
the Fund, voting as a separate class. Such a vote also would satisfy a separate
requirement in the 1940 Act that the change be approved by the shareholders.
Shareholders of an open-end investment company may require the company to redeem
their shares of common stock at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption.
All redemptions will be made in cash. If the Fund is converted to an open-end
investment company, it could be required to liquidate portfolio securities to
meet requests for redemption, and the common stock would no longer be listed on
a stock exchange.
Conversion to an open-end investment company would also require redemption
of all outstanding shares of preferred stock and would require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the issuance of senior securities, the borrowing of money and the
purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of shareholders generally.
Reference should be made to the Charter on file with the Securities and Exchange
Commission for the full text of these provisions.
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<PAGE> 47
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110.
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 2,800,000 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 $.30 per share. Such
payment is equal to 2.00% 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 $.30 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 July 23, 1999.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase 420,000 additional shares of common stock to
cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
common stock.
If the Underwriter creates a short position in the shares of common stock
in connection with the offering, i.e., if it sells more shares of common stock
than are set forth on the cover page of this Prospectus, the Underwriter may
reduce that short position by purchasing shares of common stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of common stock in
the open market to reduce the Underwriter's short position or to stabilize the
price of the shares of common stock, it may reclaim the amount of the selling
concession from the selling group members who sold those shares of common stock
as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares
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<PAGE> 48
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 common
stock. The Fund's common stock have been approved for listing on the AMEX.
However, during an initial period which is not expected to exceed two weeks from
the date of this prospectus, the Fund's common stock will not be listed on any
securities exchange. Additionally, before it begins trading, the Underwriter
does not intend to make a market in the Fund's common stock, although a limited
market may develop. Thus, it is anticipated that investors may not be able to
buy and sell shares of the Fund during such period. In order to meet the
requirements for listing, the Underwriter has undertaken to sell lots of 100 or
more shares to a minimum of 400 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 State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts, 02110.
LEGAL OPINIONS
Certain legal matters in connection with the common stock offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New
York, New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund as of June 15,
1999 included in this prospectus has been so included in reliance on the report
of Deloitte & Touche LLP, independent auditors, and on their authority as
experts in auditing and accounting. The selection of independent auditors is
subject to ratification by shareholders of the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Any such reports, proxy statements and
other information can be inspected and copied at the public reference facilities
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549,
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<PAGE> 49
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 American Stock Exchange, 980 Washingtonian Boulevard,
Gaithersburg, Maryland 20878.
Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including amendments, exhibits and schedules thereto,
relating to such shares filed by the Fund with the Commission in Washington,
D.C. This Prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the fund and the shares offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Investment Adviser or other Fund
service providers do not properly address this problem before January 1, 2000.
The Investment Adviser expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Investment Adviser that they
also expect to resolve the Year 2000 Problem, and the Investment Adviser will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the issuers of securities
in which the Fund invests, and this could hurt the Fund's investment returns.
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<PAGE> 50
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder,
MuniHoldings New Jersey Insured Fund IV, Inc.:
We have audited the accompanying statement of assets, liabilities and capital of
MuniHoldings New Jersey Insured Fund IV, Inc. as of June 15, 1999. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniHoldings New
Jersey Insured Fund IV, Inc. as of June 15, 1999 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 19, 1999
49
<PAGE> 51
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
JUNE 15, 1999
<TABLE>
<S> <C>
ASSETS
Cash................................................... $100,005
Offering costs (Note 1)................................ 110,000
--------
Total assets...................................... 210,005
--------
LIABILITIES
Liabilities and accrued expenses (Note 1).............. 110,000
--------
NET ASSETS.................................................. $100,005
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000
shares authorized; 6,667 shares issued and outstanding
(Note 1).............................................. $ 667
Paid-in Capital in excess of par....................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per
share of Common Stock (Note 1)........................ $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on April
5, 1999, as a closed-end, non-diversified management investment company and has
had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 6,667 shares of Common Stock for
$100,005 on June 15, 1999. The General Partner of the Investment Adviser is an
indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
The Investment Adviser, on behalf of the Fund, will incur organization
costs estimated at $26,250. Direct costs relating to the public offering of the
Fund's shares will be charged to capital at the time of issuance of shares.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at 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 2.00%
of the price to the public in connection with the initial public offering of the
Fund's common stock.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.
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APPENDIX I
ECONOMIC AND OTHER CONDITIONS IN NEW JERSEY
The following information is a brief summary of factors affecting the
economy of the State of New Jersey and does not purport to be a complete
description of such factors. Other factors will effect issuers. The summary is
based primarily upon one or more of the most recent publicly available offering
statements relating to debt offerings of New Jersey issuers, however, it has not
been updated nor will it be updated during the year. The Fund has not
independently verified the information.
New Jersey (sometimes referred to herein as the "State") personal income
tax rates were reduced so that beginning with the tax year 1996, personal income
tax rates are, depending upon a taxpayer's level of income and filing status,
30%, 15% or 9% lower than 1993 tax rates.
The State operates on a fiscal year beginning July 1 and ending June 30.
For example, "Fiscal Year 2000" refers to the State's fiscal year beginning July
1, 1999 and ending June 30, 2000.
The General Fund is the fund into which all State revenues, not otherwise
restricted by statute, are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenues, and certain miscellaneous revenue items are recorded in the
General Fund.
The State's undesignated General Fund balance was $442 million for Fiscal
Year 1996, $281 million for Fiscal Year 1997 and $228 million for Fiscal Year
1998. For the Fiscal Year 1999 and the Fiscal Year 2000, the balance in the
undesignated General Fund is estimated to be $311 million and $113 million,
respectively.
The State finances certain capital projects primarily through the sale of
the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. Certain state tax revenues and certain other fees
are pledged to meet the principal, interest payments and redemption premium
payments, if any, required to fully pay the bonds. No general obligation debt
can be issued by the State without prior voter approval, except that no voter
approval is required for any law authorizing the creation of a debt for the
purpose of refinancing all or a portion of outstanding debt of the State, so
long as such law requires that the refinancing provide a debt service savings.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture.
In its seventh year of expansion, the State has benefited and will continue
to benefit from national growth. While the latest national indicators show that
economic growth strongly accelerated during the first quarter of 1998, the
inflation rate remained low. After very robust economic growth of 5.5% in the
first quarter of 1998, inflation-adjusted gross domestic product slowed to 1.4%
in the second quarter. This second quarter pace was slower, but was positive and
more sustainable.
Business investment expenditures and consumer spending have increased
substantially in the nation as well as in the State. Capital and consumer
spending may continue to rise due to the sustained character of economic growth
and the interest-sensitive homebuilding industry may
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continue to provide 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 continued optimism in New Jersey
include increasing employment levels and a higher-than-national level of per
capita personal income. Also, several expansions of existing hotel-casinos and
plans for several new casinos in Atlantic City will mean additional job
creation.
In addition, the State's growth potential is not yet as limited by labor
supply constraints affecting some other parts of the country. The region's
manufacturers and trade-related service sectors could also get a lift from
continued recovery in Western Europe and Mexico and from relatively high
economic growth in South America. At the same time, the State appears to be less
dependent on exports to East Asian countries that currently have financial
difficulties than many other states, especially on the West Coast.
The State of New Jersey has implemented a plan to address the Year 2000
data processing problem and ensure the continuation of government operations
into the Year 2000 and beyond. Planning for the Year 2000 commenced in 1997 with
the requirement that the various State departments submit comprehensive three
year action plans identifying all year 2000 impacts, strategies and timeframes
for addressing these impacts and estimates of cost. The State imposed a
moratorium during Fiscal Year 1998 on all non-year 2000 related data processing
activities to ensure availability of resources for Year 2000 compliance.
Agencies were directed to review current and ongoing technology initiatives in
light of the moratorium and suspend all those that are not considered mission
critical. This moratorium will remain in effect until each agency can certify
that it is Year 2000 compliant. As of December 31, 1998, the testing, validation
and implementation of 75 percent of all centrally maintained state systems was
complete. Departmental systems are in varying stages of remediation. The total
estimated cost to the State to achieve Year 2000 compliance is $120 million of
which approximately $66 million of expenditures have been incurred as of
December 31, 1998. Colleges and universities, authorities, municipal, county and
local sub-divisions will address Year 2000 issues separately.
Looking further ahead, prospects for New Jersey are 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.
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In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A.
59:1-1, et seq.). An independent study estimated an aggregate potential exposure
of $85,300,000 for tort and medical malpractice claims pending as of December
31, 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.
Buena Regional Commercial Township et al. v. New Jersey Department of
Education et al. This lawsuit was filed in Superior Court, Chancery Division,
Cumberland County. This lawsuit was filed December 9, 1997, on behalf of 17
rural school districts seeking the same type of relief as has been mandated to
be provided to the poor urban school districts in Abbott v. Burke. The
plaintiffs requested a declaratory judgement stating that the chancery court
retain jurisdiction, pending the remanding of the matter to the Commissioner of
Education for a hearing. The petition was then amended to include three more
rural districts for a total of 20. The State and plaintiffs entered into a
consent order to transfer the matter to the Commissioner of Education for
resolution. The chancery court did not retain jurisdiction. Once the matter was
transferred to the Commissioner, plaintiffs moved to amend their pleadings and
have done so three times. With each new pleading, the State has answered with a
motion to dismiss. Decisions on the first two motions to dismiss were rendered
moot by plaintiffs' filing of a subsequent amended pleading. There has been no
decision on the last motion to dismiss filed. The State is unable at this time
to estimate its exposure for this claim and intends to defend this suit
vigorously.
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
April 20, 1998. On June 23, 1998, plaintiffs filed an amended complaint removing
one and adding eighteen school district plaintiffs. The State defendants filed a
motion to dismiss the amended complaint on September 18, 1998. The motion was
argued and the court reserved its decision until March 12, 1999, pending the
submission of additional briefs by the parties. The time to answer the complaint
has not yet run and a response to the amended complaint has not yet been filed.
The State will vigorously defend this matter. The State is unable, at this time,
to estimate its exposure for these claims.
United Hospitals et. al. v. State of New Jersey and William Waldman. This
case represents a challenge by 19 New Jersey hospitals to Medicaid hospital
reimbursement since 1995. The matters were filed in the Appellate Division of
the Superior Court of New Jersey. The hospitals challenge all of the following:
(i) whether the State complied with certain federal requirements for Medicaid
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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
since 1995. The State intends to vigorously defend these actions.
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.
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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 three ratings of Moody's for short-term notes are
MIG 1/VMIG1, MIG 2/VMIG2 and MIG 3/VMIG3; MIG 1/VMIG1 denotes "best quality . .
. strong protection by established 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".
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
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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.
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
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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.
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:
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.
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".
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
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years will most likely receive a long-term debt rating. The following criteria
will be used in making that assessment.
-- Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
-- Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus "+" designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not
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quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of
satisfactory-credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within three to 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
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The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout
the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the
D basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance
for timely payment.
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F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
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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
63
<PAGE> 65
ability rating is an opinion of the ability of an insurance company to repay
punctually senior policyholder obligations and claims. An insurer with an
insurance claims-paying ability rating of Aaa is considered by Moody's to be of
the best quality. In the opinion of Moody's, the policy obligations of an
insurance company with an insurance claims-paying ability rating of Aaa carry
the smallest degree of credit risk and, while the financial strength of these
companies is likely to change, such changes as can be visualized are most
unlikely to impair the company's fundamentally strong position.
An insurance claims-paying ability rating of S&P, Fitch or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
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.
64
<PAGE> 66
APPENDIX IV
TAXABLE EQUIVALENT YIELDS FOR 1999
<TABLE>
<CAPTION>
1999
TAXABLE INCOME* NEW JERSEY A TAX-FREE YIELD OF
- ------------------------------------ 1999 FEDERAL TAX ---------------------------------------------
SINGLE RETURN JOINT RETURN TAX BRACKET 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>
$ 25,751-$ 35,000 $ 43,051-$ 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-$ 62,450 $ 80,001-$104,050 28% 5.525% 7.35 8.09 8.82 9.56 10.29 11.03
$ 62,451-$ 75,000 $104,051-$150,000 31% 5.525% 7.67 8.44 9.20 9.97 10.74 11.51
$ 75,001-$130,250 $150,001-$158,550 31% 6.370% 7.74 8.51 9.29 10.06 10.84 11.61
$130,251-$283,150 $158,551-$283,150 36% 6.370% 8.34 9.18 10.01 10.85 11.68 12.52
Over $283,150 Over $283,150 39.6% 6.370% 8.84 9.73 10.61 11.49 12.38 13.26
</TABLE>
- ------------
* 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 Federal 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 taxable income brackets, which are adjusted
annually for inflation and New Jersey taxable income brackets which have not
been adjusted for 1999. 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.
65
<PAGE> 67
(This page intentionally left blank.)
<PAGE> 68
(This page intentionally left blank.)
<PAGE> 69
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including October 18, 1999 (the 90th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
2,800,000 SHARES
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
JULY 20, 1999
CODE 19063-0799
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 70
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of June 15, 1999
Notes to Statement of Assets, Liabilities and Capital as of June 15,
1999
(2) Exhibits:
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<S> <C> <C>
(a)(1) -- Articles of Incorporation of the Fund(a)
(b) -- By-Laws of the Fund(a)
(c) -- Not applicable.
(d)(1) -- Portions of the Articles of Incorporation and By-Laws of the
Fund defining the rights of holders of shares of common
stock of the Fund(b)
(d)(2) -- Form of specimen certificate for shares of common stock of
the Fund(c)
(e) -- Form of Dividend Reinvestment Plan(c)
(f) -- Not applicable
(g) -- Form of Investment Advisory Agreement between the Fund and
Fund Asset Management, L.P.(c)
(h)(1) -- Form of Purchase Agreement between the Fund and Merrill
Lynch, Pierce, Fenner & Smith Incorporated(c)
(h)(2) -- Merrill Lynch Standard Dealer Agreement(c)
(i) -- Not applicable
(j) -- Form of Custodian Contract between the Fund and State Street
Bank and Trust Company
(k) -- Form of Registrar, Transfer Agency and Service Agreement
between the Fund and State Street Bank and Trust Company
(l) -- Opinion and Consent of Brown & Wood LLP.
(m) -- Not applicable
(n)(2) -- Consent of Deloitte & Touche LLP, independent auditors for
the Fund
(o) -- Not applicable
(p) -- Certificate of Fund Asset Management, L.P.
(q) -- Not applicable
(r) -- Not applicable
</TABLE>
- ---------------
(a) Filed on April 30, 1999 as an exhibit to the Registrant's Registration
Statement on Form N-2 (File No. 333-77537).
(b) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit (a) to
this Registration Statement; and to Article II, Article III (sections 1, 2,
3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and Article
XIV of the Registrant's By-Laws, filed as Exhibit (b) to this Registration
Statement.
(c) Filed on May 18, 1999 as an exhibit to the Registrant's Registration
Statement on Form N-2 (File No. 333-77537).
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibits (h)(1) and (2).
C-1
<PAGE> 71
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........................................... $ 13,428
American Stock Exchange listing fee......................... 22,500
Printing (other than stock certificates).................... 35,000
Engraving and printing stock certificates................... 20,000
Legal fees and expenses..................................... 35,000
NASD fees................................................... 5,330
Miscellaneous............................................... 3,742
--------
Total............................................. $135,000
========
</TABLE>
- ---------------
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Stock-Common Stock" and
in Note 1 to the Statement of Assets, Liabilities and Capital is incorporated
herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment Advisory
Agreement, a form of which is filed as Exhibit (g)(1) to this Registration
Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value 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
C-2
<PAGE> 72
Lynch World Income Fund, Inc., and The Municipal Fund Accumulation Program,
Inc., and for the following closed-end registered investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund
II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings California Insured Fund IV,
Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Florida Insured Fund III, MuniHolding's Florida Insured Fund IV,
MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund II, Inc.,
MuniHoldings Insured Fund III, Inc., MuniHoldings Michigan Insured Fund Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund
II, Inc., MuniHoldings New Jersey Insured Fund III, Inc., MuniHoldings New York
Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York
Insured Fund II, Inc., MuniHolding's New York Insured Fund III, Inc.,
MuniHoldings Pennsylvania Insured Fund, MuniInsured Fund, Inc., MuniVest Florida
Fund, MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., and
Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities Fund,
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch 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., Merrill Lynch
Senior Floating Rate Fund, Inc., and Merrill Lynch Senior Floating Rate Fund II,
Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy Portfolio and
Merrill Lynch Basic Equity Portfolio, two investment portfolios of EQ Advisors
Trust.
The address of each of these registered 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 02111-2665.
The address of the Investment Adviser, MLAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Princeton Funds Distributor,
Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD") is
C-3
<PAGE> 73
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML&Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281-1201.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged for
the past two years for his or her or its own account or in the capacity of
director, officer, employee, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Vice President and Treasurer of all or substantially
all of the investment companies described in the first two paragraphs of this
Item 30 and also hold the same positions with all or substantially all of the
investment companies advised by MLAM as they do with those advised by the
Investment Adviser. Messrs. Giordano and Monagle are officers of one or more of
such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- -----------------------------------
<S> <C> <C>
ML&Co................................ Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services................... General Partner General Partner of MLAM
Jeffrey M. Peek...................... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Management Director and
Co-Head of the Investment Banking
Division and Co-Head of the
Investment Banking Division of
Merrill Lynch in 1997.
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 FDS; President of
Princeton Administrators, L.P.
Donald C. Burke...................... Senior Vice President and Senior Vice President, Treasurer
Treasurer and Director of Taxation of MLAM;
Senior Vice President and Treasurer
of Princeton Services; Vice
President of PFD; First Vice
President of MLAM from 1997 to
1999; Vice President of MLAM from
1990 to 1997
Michael G. Clark..................... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Treasurer and Director of
PFD; First Vice President of MLAM
from 1997 to 1999; Vice President
of MLAM from 1996 to 1997
Linda L. Federici.................... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano.................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
C-4
<PAGE> 74
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- -----------------------------------
<S> <C> <C>
Michael J. Hennewinkel............... Senior Vice President, Senior Vice President of MLAM;
General Counsel and Senior Vice President, Director and
Secretary Secretary of Princeton Services
Philip L. Kirstein................... Senior Vice President Senior Vice President of MLAM;
Senior Vice President General
Counsel, Director and Secretary of
Princeton Services
Ronald M. Kloss...................... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services;
Debra W. Landsman-Yaros.............. Senior Vice President Vice President of PFD
Joseph T. Monagle, Jr................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Brian A. Murdock..................... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services Senior Vice President and
Treasurer of MLAM;
Gregory D. Upah...................... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
promulgated thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of common
stock covered hereby until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of common stock declines more than 10% from its net asset value
per share of common stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of 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> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to its 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 20(th) day of July, 1999.
MUNIHOLDINGS NEW JERSEY INSURED FUND
IV, INC.
(Registrant)
By: /s/ TERRY K. GLENN
--------------------------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K. Glenn,
Donald C. Burke or William E. Zitelli, Jr., or any of them, as attorney-in-fact,
to sign on his or her behalf, individually and in each capacity stated below,
any amendment to this Registration Statement (including post-effective
amendments) and to file the same, with all exhibits thereto, with the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ TERRY K. GLENN President (Principal Executive July 20, 1999
- --------------------------------------------------- Officer) and Director
(Terry K. Glenn)
/s/ DONALD C. BURKE Treasurer (Principal Financial and July 20, 1999
- --------------------------------------------------- Accounting Officer)
(Donald C. Burke)
/s/ RONALD W. FORBES Director July 20, 1999
- ---------------------------------------------------
(Ronald W. Forbes)
/s/ CYNTHIA A. MONTGOMERY Director July 20, 1999
- ---------------------------------------------------
(Cynthia A. Montgomery)
/s/ CHARLES C. REILLY Director July 20, 1999
- ---------------------------------------------------
(Charles C. Reilly)
/s/ KEVIN A. RYAN Director July 20, 1999
- ---------------------------------------------------
(Kevin A. Ryan)
/s/ RICHARD R. WEST Director July 20, 1999
- ---------------------------------------------------
(Richard R. West)
/s/ ARTHUR ZEIKEL Director July 20, 1999
- ---------------------------------------------------
(Arthur Zeikel)
</TABLE>
C-6
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
(j) Form of Custodian Contract between the Fund and State Street
Bank and Trust Company.
(k) Form of Registrar, Transfer Agency and Service Agreement
between the Fund and State Street Bank and Trust Company.
(l) Opinion and Consent of Brown & Wood LLP.
(n)(2) Consent of Deloitte & Touche LLP, independent auditors for
the Fund.
(p) Certificate of Fund Asset Management, L.P.
</TABLE>
C-7
<PAGE> 1
EXHIBIT (j)
CUSTODIAN CONTRACT
Between
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
and
STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
1. Employment of Custodian and Property to be Held By
It......................................................... 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States 1
2.1 Holding Securities................................... 1
2.2 Delivery of Securities............................... 2
2.3 Registration of Securities........................... 4
2.4 Bank Accounts........................................ 4
2.5 Availability of Federal Funds........................ 4
2.6 Collection of Income................................. 4
2.7 Payment of Fund Monies............................... 5
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased...................... 6
2.9 Appointment of Agents................................ 6
2.10 Deposit of Fund Assets in Securities System.......... 6
2.10A Fund Assets Held in the Custodian's Direct
Paper System......................................... 7
2.11 Segregated Account................................... 8
2.12 Ownership Certificates for Tax Purposes.............. 9
2.13 Proxies.............................................. 9
2.14 Communications Relating to Portfolio Securities...... 9
2.15 Reports to Fund by Independent Public Accountants.... 9
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States 9
3.1 Appointment of Foreign Sub-Custodians................ 9
3.2 Assets to be Held.................................... 10
3.3 Foreign Securities Systems........................... 10
3.4 Agreements with Foreign Banking Institutions......... 10
3.5 Access of Independent Accountants of the Fund........ 10
3.6 Reports by Custodian................................. 10
3.7 Transactions in Foreign Custody Account.............. 11
3.8 Liability of Foreign Sub-Custodians.................. 11
3.9 Liability of Custodian............................... 11
3.10 Reimbursement for Advances........................... 12
3.11 Monitoring Responsibilities.......................... 12
3.12 Branches of U.S. Banks............................... 12
3.13 Tax Law.............................................. 12
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
4. Proper Instructions..................................................... 13
5. Actions Permitted Without Express Authority............................. 13
6. Evidence of Authority................................................... 13
7. Duties of Custodian With Respect to the Books of Account and Calculation
of Net Asset Value and Net Income....................................... 14
8. Records................................................................. 14
9. Opinion of Fund's Independent Accountants............................... 14
10. Compensation of Custodian............................................... 15
11. Responsibility of Custodian............................................. 15
12. Effective Period, Termination and Amendment............................. 16
13. Successor Custodian..................................................... 16
14. Interpretive and Additional Provisions.................................. 17
15. Massachusetts Law to Apply.............................................. 17
16. Prior Contracts......................................................... 17
17. Shareholder Communications Election..................................... 18
</TABLE>
<PAGE> 3
This Contract between MuniHoldings New Jersey Insured Fund IV, Inc., a
corporation organized and existing under the laws of Maryland, having its
principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey
08536 hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian", in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Fund, including securities which the Fund desires to be held in places
within the United States ("domestic securities") and securities it desires to
be held outside the United States ("foreign securities") pursuant to the
provisions of the Articles of Incorporation. For purposes of this Contract,
"domestic securities" and "foreign securities" each shall include agreements
representing corporate loans and interests therein. The Fund agrees to deliver
to the Custodian all securities and cash of the Fund, and all payments of
income, payments of principal or capital distributions received by it with
respect to all securities owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock
of the Fund ("Shares") as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of the Fund held or
received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 4),
the Custodian shall on behalf of the Fund from time to time employ one or more
sub-custodians, located in the United States but only in accordance with an
applicable vote by the Board of Directors of the Fund. The Custodian covenants
with the Fund that each agreement whereby the Custodian employs any such
sub-custodian shall provide that the sub-custodian will be liable to the
Custodian for losses and liabilities caused by the negligence, misfeasance, or
willful misconduct of the sub-custodian. The Fund agrees that, so long as the
Custodian has complied with its obligation set forth in the preceding sentence,
the Custodian shall have no more or less responsibility or liability to the
Fund on account of any actions or omissions of any U.S. sub-custodian employed
by it on behalf of the Fund than any such sub-custodian has to the Custodian.
The Custodian may employ as sub-custodian for the Fund's foreign securities the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury (collectively
referred to herein as "Securities System") and (b) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian (the "Direct Paper System") pursuant
to Section 2.10A.
<PAGE> 4
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Fund, which may be continuing instructions
when deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim
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<PAGE> 5
receipts or temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any
loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or responsible
for the delivery of securities owned by the Fund prior to the receipt
of such collateral except as may arise from the Custodian's own
negligence or willful misconduct;
11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any contract
market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund; and
14) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified copy of a
resolution of the Board of Directors or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of the Fund to be
delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
the Fund has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any
agent appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to
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<PAGE> 6
Article 1. All securities accepted by the Custodian on behalf of the Fund
under the terms of this Contract shall be in "street name" or other good
delivery form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize all reasonable
efforts to timely collect income due the Fund on such securities and to
notify the Fund of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established
and used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for the Fund may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions from the Fund, make federal funds available to the Fund as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of the
Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which the
Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such Fund's
custodian account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other
income items requiring presentation as and when they become due and shall
collect interest when due on securities held hereunder. Income due the
Fund on securities loaned pursuant to the provisions of Section 2.2(10)
shall be the responsibility of the Fund. The Custodian will have no duty
or responsibility in connection therewith, other than to exercise
reasonable care in providing the Fund with such information or data as may
be necessary to assist the Fund in arranging for the timely delivery to
the Custodian of the income to which the Fund is properly entitled.
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<PAGE> 7
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund, which may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out monies of the Fund in the following
cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the Fund but only (a) against the
delivery of such securities or evidence of title to such options,
futures contracts or options on futures contracts to the Custodian
(or any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has been
designated by the Custodian as its agent for this purpose) registered
in the name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for transfer; (b)
in the case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.10 hereof; (c)
in the case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2.10A hereof; (d)
in the case of repurchase agreements entered into between the Fund
and the Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the Fund of
securities owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from the
Fund or (e) for transfer to a time deposit account of the Fund in any
bank, whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions as defined in Article
4;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account
of the Fund: interest, taxes, management, accounting, transfer agent
and legal fees, and operating expenses of the Fund whether or not
such expenses are to be in whole or part capitalized or treated as
deferred expenses;
4) For the payment of any dividends on Shares of the Fund declared
pursuant to the governing documents of the Fund;
5) For payment of the amount of dividends received in respect of
securities sold short;
6) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions from the Fund, a certified copy of a
resolution of the Board of Directors or of the Executive Committee of
the Fund signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the amount of such
payment, setting forth the purpose for which such payment is to be
made, declaring
5
<PAGE> 8
such purpose to be a proper purpose, and naming the person or persons
to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of
the Fund is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund to
so pay in advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had been
received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such of
the provisions of this Article 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Fund in a Securities System
provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the Fund
which are maintained in a Securities System shall identify by book-
entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the account of
the Fund upon (i) receipt of advice from the Securities System that
such securities have been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The Custodian
shall transfer securities sold for the account of the Fund upon (i)
receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making
of an entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all advices from
the Securities System of transfers of securities for the account of
the Fund shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. Upon request,
the Custodian shall furnish the
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<PAGE> 9
Fund confirmation of each transfer to or from the account of the Fund
in the form of a written advice or notice and shall furnish to the
Fund copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the Securities System;
5) The Custodian shall have received from the Fund the initial or annual
certificate, as the case may be, required by Article 12 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their officers or employees or from
failure of the Custodian or any such agent to enforce effectively
such rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may have as
a consequence of any such loss or damage if and to the extent that
the Fund has not been made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities sold for the
account of the Fund upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for the
account of the Fund;
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5) The Custodian shall furnish the Fund confirmation of each transfer to
or from the Fund, in the form of a written advice or notice, of
Direct Paper on the next business day following such transfer and
shall furnish to the Fund copies of daily transaction sheets
reflecting each day's transaction in the Securities System for the
account of the Fund;
6) The Custodian shall provide the Fund with any report on its system of
internal accounting control as the Fund may reasonably request from
time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or accounts may
be transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Fund, (ii) for purposes of segregating cash or government securities
in connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the
Fund, (iii) for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any subsequent
release or releases of the Securities and Exchange Commission relating to
the maintenance of segregated accounts by registered investment companies
and (iv) for other proper corporate purposes, but only, in the case of
clause (iv), upon receipt of, in addition to Proper Instructions from the
Fund, a certified copy of a resolution of the Board of Directors or of the
Executive Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes
of such segregated account and declaring such purposes to be proper
corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Portfolio Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including,
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without limitation, pendency of calls and maturities of domestic
securities and expirations of rights in connection therewith and notices
of exercise of call and put options written by the Fund and the maturity
of futures contracts purchased or sold by the Fund) received by the
Custodian from issuers of the securities being held for the Fund. With
respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian
from issuers of the securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange offer or
any other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian shall
provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including securities
deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports,
shall be of sufficient scope and in sufficient detail, as may reasonably
be required by the Fund to provide reasonable assurance that any material
inadequacies would be disclosed by such examination, and, if there are no
such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon receipt
of "Proper Instructions", as defined in Section 4 of this Contract,
together with a certified resolution of the Fund's Board of Directors, the
Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Fund may instruct the Custodian to cease the employment
of any one or more such sub-custodians for maintaining custody of the
Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions
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serving as sub-custodians pursuant to the terms hereof. Where possible,
such arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the assets of the Fund
will not be subject to any right, charge, security interest, lien or claim
of any kind in favor of the foreign banking institution or its creditors
or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership for the assets of the Fund will
be freely transferable without the payment of money or value other than
for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to the Fund; (d) officers of or
auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public
accountants for the Fund, will be given access to the books and records of
the foreign banking institution relating to its actions under its
agreement with the Custodian; and (e) assets of the Fund held by the
foreign sub-custodian will be subject only to the instructions of the
Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use all reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a foreign sub-
custodian insofar as such books and records relate to the performance of
such foreign banking institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian indicating, as to securities
acquired for the Fund, the identity of the entity having physical
possession of such securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise provided
in paragraph (b) of this Section 3.7, the provision of Sections 2.2 and
2.7 of this Contract shall apply, mutatis mutandis to the foreign
securities of the Fund held outside the United States by foreign
sub-custodians; (b) notwithstanding any provision of this Contract to the
contrary, settlement and payment for securities received for the account of
the Fund and delivery of securities maintained for the account of the Fund
may be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including, without
limitation, delivering securities to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) against a receipt with
the expectation of receiving later payment for such securities from such
purchaser or dealer; and (c) Securities maintained in the custody of a
foreign sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this Contract,
and the Fund agrees to hold any such nominee harmless from any liability as
a holder of record of such securities.
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3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent if such acts
or omissions were those of the Custodian directly, provided that,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S.
bank as contemplated by paragraph 3.12 hereof, the Custodian shall not be
liable for any loss, damage, cost, expense, liability or claim resulting
from nationalization, expropriation, currency restrictions, or acts of war
or terrorism, acts of God, or other occurrences beyond the sub-custodian's
reasonable control. Notwithstanding the foregoing provisions of this
paragraph 3.9, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund's assets to the extent necessary to obtain
reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar
in kind and scope to that furnished to the Fund in connection with the
initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign
11
<PAGE> 14
sub-custodian not the subject of an exemptive order from the Securities
and Exchange Commission is notified by such foreign sub-custodian that
there appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent thereof)
or that its shareholders' equity has declined below $200 million (in each
case computed in accordance with generally accepted U.S. accounting
principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of the
Fund's assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment Company
Act of 1940 meeting the qualification set forth in Section 26(a) of said
Act. The appointment of any such branch as a sub-custodian shall be
governed by paragraph 1 of this Contract. (b) Cash held for the Fund in
the United Kingdom shall be maintained in an interest bearing account
established for the Fund with the Custodian's London branch, which account
shall be subject to the direction of the Custodian, State Street London
Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or
any state or political subdivision thereof except for liabilities arising
from the Custodian's failure to exercise reasonable care in the execution
of any instructions received from the Fund with respect to withholding or
payment of taxes. It shall be the responsibility of the Fund to notify
the Custodian of the obligations imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of jurisdictions other than those
mentioned in the above sentence, including responsibility for withholding
and other taxes, assessments or other governmental charges, certifications
and governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist the
Fund with respect to any claim for exemption or refund under the tax law
of jurisdictions for which the Fund has provided such information.
4. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Directors
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such instructions with
respect to the transaction involved. The Fund shall cause all oral instructions
to be confirmed in writing. Upon receipt of a certificate of the Secretary or
an Assistant Secretary as to the authorization by the Board of Directors of the
Fund accompanied by a detailed description of procedures approved by the Board
of Directors, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Directors and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
5. Actions Permitted without Express Authority
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<PAGE> 15
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
the Fund and provided that the Fund shall not object to such
payments;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection checks, drafts and other negotiable
instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors of the Fund.
6. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Directors of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Directors pursuant to the Articles of
Incorporation as described in such vote, and such vote may be considered as in
full force and effect until receipt by the Custodian of written notice to the
contrary.
7. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of
the outstanding Shares of the Fund or, if directed in writing to do so by the
Fund, shall itself keep such books of account and/or compute such net asset
value per share. If so directed, the Custodian shall also calculate weekly the
net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent weekly of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the weekly income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
8. Records
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<PAGE> 16
The Custodian shall with respect to the Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company
Act of 1940, as amended, with particular attention to Section 31 thereof and
Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of
the Fund and shall at all times during the regular business hours of the
Custodian be open for inspection by duly authorized officers, employees or
agents of the Fund and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by the Fund and held by the Custodian and shall,
when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
9. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-2, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
10. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
11. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract,
but shall be kept indemnified by and shall be without liability to the Fund for
any action taken or omitted by it in good faith without negligence, misfeasance
or willful misconduct. It shall be entitled to rely on and may act upon advice
of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 as
provided in Section 3.9 hereof and, regardless of whether assets are maintained
in the custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank as contemplated by paragraph 3.12 hereof,
the Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from, or caused by nationalization, expropriation,
currency restrictions, or acts of war or terrorism, acts of God, or other
occurrences beyond the Custodian's or sub-custodian's reasonable control.
14
<PAGE> 17
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Fund, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) for the benefit of the Fund including the purchase or sale of
foreign exchange or of contracts for foreign exchange or in the event that the
Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the Fund shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund's assets to the
extent necessary to obtain reimbursement.
12. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary of the Fund that the Board of Directors of the Fund has approved the
initial use of a particular Securities System by the Fund, as required by Rule
17f-4 under the Investment Company Act of 1940, as amended, and that the
Custodian shall not act under Section 2.10A hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary of the Fund
that the Board of Directors of the Fund has approved the initial use of the
Direct Paper System by the Fund; provided further, however, that the Fund shall
not amend or terminate this Contract in contravention of any applicable federal
or state regulations, or any provision of the Articles of Incorporation, and
further provided, that the Fund may at any time by action of its Board of
Directors (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
13. Successor Custodian
15
<PAGE> 18
If a successor custodian for the Fund shall be appointed by the Board of
Directors of the Fund, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian, duly endorsed and in the
form for transfer, all securities of the Fund then held by it hereunder and
shall transfer to an account of the successor custodian all of the securities
of the Fund held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors of the Fund shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, as amended, doing business in Boston, Massachusetts, of its own
selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of the
Fund and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract on behalf of the Fund and to transfer
to an account of such successor custodian all of the securities of each the
Fund held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors of the Fund to appoint a successor custodian, the
Custodian shall be entitled to fair compensation for its services during such
period as the Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
14. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
15. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
16
<PAGE> 19
16. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
17
<PAGE> 20
17. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian
"no", the Custodian will not provide this information to requesting companies.
If the Fund tells the Custodian "yes" or does not check either "yes" or "no"
below, the Custodian is required by the rule to treat the Fund as consenting to
disclosure of this information for all securities owned by the Fund or any
funds or accounts established by the Fund. For the Fund's protection, this
rule prohibits the requesting company from using the Fund's name and address
for any purpose other than corporate communications. Please indicate below
whether the Fund consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
18
<PAGE> 21
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed as of the_____________day
of______________, 1999.
ATTEST MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
- - ------------------ By:
Name: -------------------------------------------
Name:
Title:
ATTEST STATE STREET BANK AND TRUST COMPANY
- - ------------------ By:
Name: -------------------------------------------
Ronald E. Logue
Executive Vice President
<PAGE> 22
ADDENDUM TO CUSTODIAN CONTRACT
WHEREAS, the Board of Directors (the "Board") of MuniHoldings California
Insured Fund V, Inc. (the "Fund") has adopted a resolution appointing the
Custodian as Foreign Custody Manager of the Fund pursuant to the Rule 17f-5
Procedures and Guidelines previously adopted by the Board (the "Procedures and
Guidelines"), a copy of which is attached hereto as Exhibit A, MuniHoldings New
Jersey Insured Fund II, Inc. (the "Fund") and State Street Bank and Trust
Company (the "Custodian") hereby enter into this Addendum to the Custody
Contract dated ______________, 1999 between the Fund and the Custodian (the
"Contract");
WHEREAS, each party wishes to enter into this Addendum to the Contract;
NOW, THEREFORE, for such good and valuable consideration as is recited in the
Contract, the Fund and the Custodian agree that:
Article III of the Contract is hereby amended, revised and superceded to the
extent that such Article is inconsistent with the Procedures and Guidelines.
Each of the Fund and the Custodian acknowledge that they are currently
developing further mutually agreeable contract procedures and provisions
pursuant to the Procedures and Guidelines.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and on its behalf by its duly authorized representative as
of the ___________ day of ___________, 1999 .
ATTEST MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
By:
- --------------------- ---------------------------
Name: Name:
---------------------
Title:
--------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
By:
- --------------------------- ------------------------------
Name: Marc L. Parsons Ronald E. Logue
Title: Associate Counsel Executive Vice President
<PAGE> 1
REGISTRAR,
TRANSFER AGENCY AND SERVICE AGREEMENT
between
MUNIHOLDINGS NEW JERSEY INSURED
FUND IV, INC.
and
STATE STREET BANK AND TRUST COMPANY
closed/trust
2B193
================================================================================
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK 3
ARTICLE 2 FEES AND EXPENSES 5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK 5
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND 6
ARTICLE 5 DATA ACCESS AND PROPRIETARY INFORMATION 6
ARTICLE 6 INDEMNIFICATION 9
ARTICLE 7 STANDARD OF CARE 10
ARTICLE 8 COVENANTS OF THE FUND AND THE BANK 10
ARTICLE 9 TERMINATION OF AGREEMENT 11
ARTICLE 10 ASSIGNMENT 12
ARTICLE 11 AMENDMENT 12
ARTICLE 12 MASSACHUSETTS LAW TO APPLY 12
ARTICLE 13 FORCE MAJEURE 13
ARTICLE 14 CONSEQUENTIAL DAMAGES 13
ARTICLE 15 MERGER OF AGREEMENT 13
ARTICLE 16 SURVIVAL 13
ARTICLE 17 SEVERABILITY 13
ARTICLE 18 COUNTERPARTS 14
</TABLE>
2
<PAGE> 3
REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT
------------------------------------------------
AGREEMENT made as of the ____ day of ___, 1999, by and between
MuniHoldings New Jersey Insured Fund IV, Inc. a Maryland corporation, having its
principal office and place of business at 800 Scudders Mill Road, Plainsboro, NJ
08536 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts
trust company having its principal office and place of business at 225 Franklin
Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its registrar,
transfer agent, dividend disbursing agent and agent in connection with certain
other activities and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK
1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints the Bank to act as, and the Bank agrees to
act as registrar, transfer agent for the Fund's authorized and issued shares of
its common stock ("Shares"), dividend disbursing agent and agent in connection
with any dividend reinvestment plan as set out in the prospectus of the Fund,
corresponding to the date of this Agreement.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and the Bank, the Bank shall:
(i) Issue and record the appropriate number of Shares as
authorized and hold such Shares in the appropriate Shareholder account;
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<PAGE> 4
(ii) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate documentation;
(iii) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(iv) Act as agent for Shareholders pursuant to the dividend
reinvestment and cash purchase plan as amended from time to time in
accordance with the terms of the agreement to be entered into between
the Shareholders and the Bank in substantially the form attached as
Exhibit A hereto;
(v) Issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon receipt by the Bank
of indemnification satisfactory to the Bank and protecting the Bank and
the Fund, and the Bank at its option, may issue replacement
certificates in place of mutilated stock certificates upon presentation
thereof and without such indemnity.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: (i) perform all
of the customary services of a registrar, transfer agent, dividend disbursing
agent and agent of the dividend reinvestment and cash purchase plan as described
in Article 1 consistent with those requirements in effect as of the date of this
Agreement. The detailed definition, frequency, limitations and associated costs
(if any) set out in the attached fee schedule, include but are not limited to:
maintaining all Shareholder accounts, preparing Shareholder meeting lists,
mailing proxies, and mailing Shareholder reports to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts where
applicable, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all registered Shareholders.
(c) The Bank shall provide additional services on behalf of the Fund
(i.e., escheatment services) which may be agreed upon in writing between the
Fund and the Bank.
4
<PAGE> 5
ARTICLE 2 FEES AND EXPENSES
2.01 For the performance by the Bank pursuant to this Agreement, the
Fund agrees to pay the Bank an annual maintenance fee as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the Fund
agrees to reimburse the Bank for out-of-pocket expenses, including but not
limited to confirmation production, postage, forms, telephone, microfilm,
microfiche, tabulating proxies, records storage, or advances incurred by the
Bank for the items set out in the fee schedule attached hereto. In addition, any
other expenses incurred by the Bank at the request or with the consent of the
Fund, will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within
five days following the receipt of the respective billing notice. Postage and
the cost of materials for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to the Bank by the Fund
at least seven (7) days prior to the mailing date of such materials.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the Commonwealth
of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
5
<PAGE> 6
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Bank that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is a closed-end, diversified investment company registered
under the Investment Company Act of 1940, as amended.
4.05 To the extent required by federal securities laws a registration
statement under the Securities Act of 1933, as amended is currently effective
and appropriate state securities law filings have been made with respect to all
Shares of the Fund being offered for sale; information to the contrary will
result in immediate notification to the Bank.
4.06 It shall make all required filings under federal and state
securities laws.
ARTICLE 5 DATA ACCESS AND PROPRIETARY INFORMATION
5.01 The Fund acknowledges that the data bases, computer programs,
screen formats, report formats, interactive design techniques, and other
information furnished to the Fund by the Bank are provided solely in connection
with the services rendered under this Agreement and constitute copyrighted trade
secrets or proprietary information of substantial value to the Bank. Such
databases, programs, formats, designs, techniques and other information are
collectively referred to below as "Proprietary Information." The Fund agrees
that it shall treat all Proprietary Information as proprietary to the Bank and
further agrees that it shall not divulge any
6
<PAGE> 7
Proprietary Information to any person or organization except as expressly
permitted hereunder. The Fund agrees for itself and its employees and agents:
(a) to use such programs and databases (i) solely on the Fund
computers, or (ii) solely from equipment at the locations agreed to
between the Fund and the Bank and (iii) in accordance with the Bank's
applicable user documentation;
(b) to refrain from copying or duplicating in any way (other
than in the normal course of performing processing on the Funds'
computers) any part of any Proprietary Information;
(c) to refrain from obtaining unauthorized access to any
programs, data or other information not owned by the Fund, and if such
access is accidentally obtained, to respect and safeguard the same
Proprietary Information;
(d) to refrain from causing or allowing information
transmitted from the Bank's computer to the Funds' terminal to be
retransmitted to any other computer terminal or other device except as
expressly permitted by the Bank (such permission not to be unreasonably
withheld);
(e) that the Fund shall have access only to those authorized
transactions as agreed to between the Fund and the Bank; and
(f) to honor reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in Proprietary
Information at common law and under applicable statutes.
5.02 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder information
or other information, then in such event the Bank shall be entitled to rely on
the validity and authenticity of such instruction without undertaking any
further inquiry as long as such instruction is undertaken in conformity with
security procedures established by the Bank from time to time.
7
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Article 6 Indemnification
6.01 The Bank shall not be responsible for, and the Fund shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or willful
misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services which (i)
are received by the Bank or its agents or subcontractors, and (ii) have
been prepared, maintained or performed by the Fund or any other person
or firm on behalf of the Fund including but not limited to any previous
transfer agent registrar.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the
securities laws or regulations of any state that such Shares be
registered in such state or in violation of any stop order or other
determination or ruling by any federal agency or any state with respect
to the offer or sale of such Shares in such state.
6.02 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. The Bank,
its agents and subcontractors shall be protected and indemnified in acting
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upon any paper or document furnished by or on behalf of the Fund, reasonably
believed to be genuine and to have been signed by the proper person or persons,
or upon any instruction, information, data, records or documents provided the
Bank or its agents or subcontractors by telephone, in person, machine readable
input, telex, CRT data entry or other similar means authorized by the Fund, and
shall not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or former registrar, or of a
co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained in this
Article 6 shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Bank, the Bank shall promptly notify the Fund in
writing of such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option to
participate with the Bank in the defense of such claim or to defend against said
claim in its own name or in the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the Fund may be
required to indemnify the Bank except with the Fund's prior written consent.
ARTICLE 7 STANDARD OF CARE
7.01 The Bank shall at all times act in good faith and agrees to use
its best efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall not be
liable for loss or damage due to errors unless said errors are caused by its
negligence, bad faith, or willful misconduct of that of its employees.
ARTICLE 8 COVENANTS OF THE FUND AND THE BANK
8.01 The Fund shall promptly furnish to the Bank the following:
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(a) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of the Bank and the
execution and delivery of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for
safekeeping of stock certificates, check forms and facsimile signature
imprinting devices, if any; and for the preparation or use, and for
keeping account of, such certificates, forms and devices.
8.03 The Bank shall keep records relating to the services to
be performed hereunder, in the form and manner as it may deem
advisable. To the extent required by Section 31 of the Investment
Company Act of 1940, as amended, and the Rules thereunder, the Bank
agrees that all such records prepared or maintained by the Bank
relating to the services to be performed by the Bank hereunder are the
property of the Fund and will be preserved, maintained and made
available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party
which are exchanged or received pursuant to the negotiation or the
carrying out of this Agreement shall remain confidential, and shall not
be voluntarily disclosed to any other person, except as may be
requested by a governmental entity or as may be required by law.
8.05 In cases of any requests or demands for the inspection of
the Shareholder records of the Fund, the Bank will endeavor to notify
the Fund and to secure instructions from an authorized officer of the
Fund as to such inspection. The Bank reserves the right, however, to
exhibit the Shareholder records to any person whenever it is advised by
its counsel that it may be held liable for the failure to exhibit the
Shareholder records to such person.
ARTICLE 9 TERMINATION OF AGREEMENT
9.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days' written notice to the other.
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9.02 Should the Fund exercise its right to terminate, all out-of-
pocket expenses associated with the movement of records and material will be
borne by the Fund. Additionally, the Bank reserves the right to charge for any
other reasonable expenses associated with such termination and/or a charge
equivalent to the average of three (3) months' fees.
ARTICLE 10 ASSIGNMENT
10.01 Except as provided in Section 10.03 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
10.03 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston EquiServe Limited
Partnership, a Massachusetts limited partnership ("Boston EquiServe"), which is
duly registered as a transfer agent pursuant to Section 17A(c)(2) of the
Securities Exchange Act of 1934 ("Section 17A(c)(2)"), or (ii) a Boston
EquiServe affiliate duly registered as a transfer agent pursuant to Section
17A(c)(2), provided, however, that the Bank shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is for its own acts
and omissions.
ARTICLE 11 AMENDMENT
11.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Directors of the Fund.
ARTICLE 12 MASSACHUSETTS LAW TO APPLY
12.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
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ARTICLE 13 FORCE MAJEURE
13.01 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
ARTICLE 14 CONSEQUENTIAL DAMAGES
14.01 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
ARTICLE 15 MERGER OF AGREEMENT
15.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
ARTICLE 16 SURVIVAL
16.01 All provisions regarding indemnification, warranty, liability and
limits thereon, and confidentiality and/or protection of proprietary rights and
trade secrets shall survive the termination of this Agreement.
ARTICLE 17 SEVERABILITY
17.01 If any provision or provisions of this Agreement shall be held to
be invalid, unlawful, or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
ARTICLE 18 COUNTERPARTS
18.01 This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
BY:__________________________________________
ATTEST:
____________________________________
State Street Bank and Trust Company
BY:___________________________________________
ATTEST:
______________________________________
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Exhibit (L)
July 23, 1999
MuniHoldings New Jersey Insured Fund IV, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
This opinion is being furnished in connection with the registration by
MuniHoldings New Jersey Insured Fund IV, Inc., a Maryland corporation (the
"Fund"), of shares of common stock, par value $0.10 per share (the "Shares"),
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
the Fund's registration statement on Form N-2, as amended (the "Registration
Statement"), under the Securities Act, in the amount set forth under "Amount
Being Registered" on the facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-laws of the Fund, and such other documents as we
have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement, will
be legally issued, fully paid and non-assessable shares of common stock of the
Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus constituting
a part thereof.
Very truly yours,
/s/ BROWN & WOOD LLP
<PAGE> 1
EXHIBIT (n)(2)
INDEPENDENT AUDITORS' CONSENT
MuniHoldings New Jersey Insured Fund IV, Inc.
We consent to the use in Pre-Effective Amendment No. 3 to Registration Statement
No. 333-77537 of our report dated July 19, 1999 and to the reference to us under
the caption "Experts" both of which appear in the Prospectus, which is a part of
such Registration Statement.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
July 19, 1999
<PAGE> 1
EXHIBIT (P)
CERTIFICATE OF THE SOLE STOCKHOLDER OF
MUNIHOLDINGS NEW JERSEY INSURED FUND IV, INC.
Fund Asset Management, L.P. ("FAM"), the holder of 6,667 shares of common
stock, par value $0.10 per share, of MuniHoldings New Jersey Insured Fund IV,
Inc. (the "Fund"), a Maryland corporation, does hereby confirm to the Fund its
representation that it purchased such shares for investment purposes, with no
present intention of redeeming or reselling any portion thereof, and further
agrees that if it redeems (by tender offer or otherwise) any portion of such
shares prior to the amortization of the Fund's organizational expenses, the
proceeds thereof will be reduced by the proportionate amount of unamortized
organizational expenses which the number of shares being redeemed bears to the
number of shares initially purchased and outstanding at the time of redemption.
FAM further agrees that, in the event such shares are sold or otherwise
transferred to any other party, prior to such sale or transfer FAM will obtain
on behalf of the Fund an agreement from such other party to comply with the
foregoing as to the reduction of redemption proceeds and to obtain a similar
agreement from any transferee of such party.
FUND ASSET MANAGEMENT, L.P.
By: /s/ Donald C. Burke
--------------------------------
Name: Donald C. Burke
Title: Senior Vice President
Dated: July 23, 1999
