As filed with the Securities and Exchange Commission on November 24, 1999
Securities Act File No. 333-39839
Investment Company Act File No. 811-6156
POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT AS STATED BELOW
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 11 [X]
(Check appropriate box or boxes)
------------------
Merrill Lynch High Income Municipal Bond Fund, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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
Merrill Lynch High Income Municipal Bond Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
------------------
Copies to:
Thomas R. Smith, Jr., Esq. William E. Zitelli, Jr., Esq.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey 08543-9011
------------------
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. [X]
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 delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. [ ]
--------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
Pursuant to Rule 429 under the Securities Act, the Prospectus in this
Registration Statement is a combined Prospectus and relates to Registration
Statement No. 33-50861, as amended, previously filed by the Registrant on Form
N-2. This Registration Statement also constitutes Post-Effective Amendment No. 3
to Registration Statement No. 33-50861, and such Post-Effective Amendment shall
hereafter become effective concurrently with the effectiveness of this
Registration Statement and in accordance with Section 8(C) of the Securities
Act. The Registration Statement and the Registration Statement amended hereby
are collectively referred to hereunder as the "Registration Statement."
===============================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not use this prospectus to sell securities until the registration statement
containing this prospectus, which has been filed with the Securities and
Exchange Commission, is effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 24, 1999
PROSPECTUS
- ----------
December , 1999
Merrill Lynch High Income Municipal Bond Fund, Inc.
Common Stock
------------
Merrill Lynch High Income Municipal Bond Fund, Inc. (the "Fund") is a
continuously offered, non-diversified, closed-end management investment company.
The Fund seeks to provide shareholders with high current income exempt from
Federal income taxes by investing primarily in a portfolio of medium to lower
grade or unrated municipal obligations with remaining maturities of greater than
one year, the interest on which, in the opinion of bond counsel to the issuer,
is exempt from Federal income taxes. The Fund may invest in certain tax-exempt
securities that are classified as "private activity bonds," which may subject
certain investors to a Federal alternative minimum tax. At times, the Fund may
seek to hedge its portfolio using options and futures transactions. There can be
no assurance that the investment objective of the Fund will be realized.
Investments in lower rated municipal obligations (sometimes referred to as
"junk bonds") generally provide a higher yield than higher rated municipal
obligations of similar maturity but are also subject to greater market and
credit risk. As a result, an investment in the Fund is speculative in that it
involves a high degree of risk and should not constitute a complete investment
program. Investors should carefully consider the risks before investing.
Currently, there is no secondary market for the Fund's common stock. To
provide liquidity, the Fund generally makes quarterly tender offers for its
shares. In a tender offer, the Fund repurchases outstanding shares at the Fund's
net asset value on the last day of the offer. If the Fund does not make a tender
offer, investors may not be able to sell their shares.
Shares of common stock of the Fund are offered on a best efforts basis at a
price equal to the next determined net asset value per share without a front-end
sales charge. As of the date of this Prospectus, net asset value per share is
$___. Shares may be purchased from Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., from selected other securities dealers,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated.
------------
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. The Securities and Exchange Commission has not approved or
disapproved these securities or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
======================================================================================================
Price to Sales Proceeds to
Public (1) Load (2) Fund (3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ None $
- ------------------------------------------------------------------------------------------------------
Total (3) $ None $
======================================================================================================
</TABLE>
(1) Net asset value ranged from $ to $ per share between November 2, 1990
(commencement of operations) to the date of this prospectus.
(2) The Distributor pays all offering expenses (other than registration fees)
and sales commissions to selected dealers (primarily Merrill Lynch) from
its own assets. Therefore, all of the proceeds of this offering will be
available to the Fund for investment in portfolio securities.
(3) These amounts (a) do not take into account prepaid registration fees,
(approximately $ ), which are being charged to income as the related
shares are issued, and (b) assume all shares currently registered are sold
in the continuous offering.
------------
Merrill Lynch Funds Distributor -- Distributor
Merrill Lynch Asset Management -- Investment Adviser
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus.
The Fund Merrill Lynch High Income Municipal Bond Fund,
Inc. is a continuously offered, non-diversified,
closed-end fund.
The Offering Shares of common stock of the Fund are offered
by the Distributor and selected other securities
dealers, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated.
The Fund offers its common stock at a price
equal to net asset value per share without a
front-end sales charge. The minimum initial
purchase is $1,000 and the minimum subsequent
purchase is $50. The Fund reserves the right to
waive or modify the initial and subsequent
minimum investment requirements at any time. Any
order may be rejected by the Distributor or the
Fund.
Investment Objective and
Policies The Fund seeks to provide shareholders with high
current income exempt from Federal income taxes
by investing primarily in a portfolio of medium
to lower grade municipal bonds. The Fund
generally will maintain at least 75% of its
portfolio in municipal bonds rated in the medium
and lower rating categories (Baa or lower by
Moody's Investors Service, Inc. or BBB or lower
by Standard & Poor's or Fitch IBCA, Inc.) or in
unrated bonds that the Investment Adviser
believes are of comparable quality.
High Yield or "Junk" Bonds. The Fund will invest
a substantial portion of its assets in municipal
bonds rated in lower, non-investment grade
categories (Ba or lower by Moody's or BB or
lower by Standard & Poor's or Fitch) or
comparable unrated bonds. These so-called "junk
bonds" have the potential to generate high
current income for shareholders, but also
subject the Fund and its shareholders to greater
credit and overall market risk. The Fund seeks
to reduce these risks by:
o investing in multiple issuers
o credit analysis and monitoring current
developments regarding the debtor
o monitoring trends in both the economy and
financial markets.
Municipal Bonds. The general term "municipal
bonds" encompasses a broad variety of debt
obligations issued by political subdivisions or
public agencies in the United States to obtain
funds for public purposes. Certain municipal
bonds are supported by the issuer's full faith,
credit and taxing power, while others are
payable only from a specific revenue source.
Still others are issued to finance various
privately-operated facilities
2
<PAGE>
and are generally supported only by the credit
of the user of the facility. The Fund invests in
high yield municipal bonds of one or more of the
following types, among others:
o General Obligation Bonds
o Health Care Revenue Bonds
o Housing Bonds
o Transportation Revenue Bonds
o Water and Sewage Revenue Bonds
o Solid Waste and Resource Recovery Bonds
o Pollution Control Facility Revenue Bonds
o Educational Facility Revenue Bonds
o Tax Increment Bonds
o Commercial Facility Revenue Bonds
o Private Activity Bonds
Each type of investment carries unique risks as
well as the risks inherent in investing in high
yield municipal bonds generally.
Indexed and Inverse Floating Obligations. The
Fund may invest in municipal bonds yielding
returns based on a particular index of value or
interest rates. The Fund also may invest in
"inverse floating obligations" or "residual
interest bonds." These securities generally pay
interest at floating interest rates that decline
as short-term market rates increase and increase
as short-term market rates decline. The
Investment Adviser believes that investing in
indexed and inverse floating obligations allows
the Fund to vary the degree of investment
leverage relatively efficiently under different
market conditions.
Higher-Rated Bonds and Short-Term Investments.
The Fund may invest as much as 25% of its assets
in municipal bonds rated in the higher rating
categories (A or higher by Moody's, Standard &
Poor's or Fitch). In addition, the Fund may
temporarily invest in short-term tax-exempt
obligations or taxable money market securities
when prevailing market conditions warrant.
Options and Futures Transactions. The Fund may
hedge its portfolio against fluctuations 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
limit its risk of loss from a decline in price
of a portfolio security by purchasing a put
option. However, the
3
<PAGE>
price of the security may not in fact drop, but
the Fund still has to pay for the option it
purchased. 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,
enter options and futures transactions for
speculative purposes.
Investment Adviser and Merrill Lynch Asset Management, L.P., the
Administrator Investment Adviser, provides investment advisory
and administrative services to the Fund. For
advisory services, the Fund pays the Investment
Adviser a monthly fee at the annual rate of
0.95% of the Fund's average daily net assets.
For administrative services, the Fund pays the
Investment Adviser a monthly fee at the annual
rate of 0.25% of the Fund's average daily net
assets. While the combined advisory and
administrative fees are higher than that paid by
most funds, they are similar to those paid by
other continuously offered closed-end funds.
Tender Offers Currently, there is no secondary market for the
Fund's common stock, and it is not expected that
a secondary market will develop. To provide
liquidity, the Board of Directors considers, on
a quarterly basis, whether the Fund should make
a tender offer for its shares. In a tender
offer, the Fund repurchases outstanding shares
at the Fund's net asset value on the last day of
the offer.
Early Withdrawal Charge Tendered shares of common stock held for less
than three years at the date of tender are
subject to an early withdrawal charge in most
cases. The charge varies with the amount of time
the shares have been held. It is based on the
lesser of cost or net asset value of the
tendered shares.
Dividends and Distributions The Fund intends to distribute any net
investment income monthly, and any net realized
capital gains, if any, at least annually.
Automatic Dividend Dividend and capital gains distributions
Reinvestment Plan 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.
4
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Illiquidity of Shares. The Fund is designed primarily for long-term
investors and should not be considered a vehicle for trading purposes.
Currently, there is no secondary market for the Fund's common stock, and it is
not expected that a secondary market will develop. To provide liquidity to
shareholders, the Board of Directors of the Fund intends to consider making
tender offers on a quarterly basis to repurchase the Fund's shares at net asset
value. However, the Fund's shares are less liquid than shares of funds traded on
a stock exchange, and shareholders who tender Fund shares held for less than
three years will pay an early withdrawal charge. The Fund's Board is not
obligated to authorize any tender offer, and there may be quarters in which no
tender offer is made. If the Board does not authorize a tender offer,
shareholders may be unable to sell their shares. Merrill Lynch and other
selected dealers are prohibited from making a market in the Fund's common stock
while the Fund either is offering its shares or is making a tender offer.
Closed-end funds that do trade in a secondary market are subject to the
risk that the net asset value of the shares may be higher than the market price,
commonly referred to as "trading at a discount." As long as there is no
secondary market for the Fund's shares, the Fund is not subject to this risk.
Interest Rate and Credit Risk. The Fund invests in municipal bonds, which
are subject to interest rate and credit risk. Interest rate 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.
High Yield or "Junk" Bonds. The Fund invests primarily in a portfolio of
high yielding, medium to lower grade and unrated municipal bonds. Investments in
high yield securities entail a higher level of credit risk (loss of income
and/or principal) than investments in higher-rated securities. Securities rated
in the lower rating categories are considered to be predominantly speculative
with respect to capacity to pay interest and repay principal. Securities rated
in the medium category may have some speculative characteristics as well.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. New issuers also may be
inexperienced in managing their debt burden. The issuer's ability to service its
debt obligations may be adversely affected by business developments unique to
the issuer, the issuer's inability to meet specific projected business
forecasts, or the inability of the issuer to obtain additional financing. High
yield securities may be unsecured and may be subordinated to other creditors of
the issuer.
High yield securities also tend to be more sensitive to economic conditions
than investment grade securities. The financial condition of a high yield issuer
is usually more susceptible to a general economic downturn or a sustained period
of rising interest rates.
High yield securities may have call or redemption features that permit an
issuer to repurchase the securities from the Fund. If a call were exercised by
an issuer during a period of declining interest rates, the Fund likely would
have to replace such called securities with lower yielding securities, thus
decreasing the net investment income to the Fund and dividends to shareholders.
There is no established trading market for many high yield securities. If a
market exists, it is usually thinly traded and not as liquid as the secondary
market for higher-rated securities. The Fund anticipates that high yield
securities can be sold only to a limited number of dealers or institutional
investors. Illiquidity may impair the
5
<PAGE>
Fund's ability to realize the full value of its investments in high yield
municipal bonds if the Fund must dispose of them quickly.
Adverse publicity and investor perceptions also may reduce the value and
liquidity of high yield securities. When the market value of high yield
securities goes down, the Fund's net asset value is also likely to decrease. In
addition, the Fund may incur additional expenses if it is forced to seek
recovery upon a default of a portfolio holding or if it participates in the
restructuring of the obligation.
Non-Diversified Status. The Fund is registered as a non-diversified
investment company. This means that the Fund may invest a greater percentage of
its assets in the obligations of a single issuer than a diversified investment
company. By concentrating in a smaller number of issuers, the Fund's risk is
increased because developments affecting an individual issuer have a greater
impact on the Fund's performance. Even as a non-diversified fund, the Fund must
still meet the diversification requirements of the Federal income tax laws.
Focus on Specific Regions or Projects. The Fund may invest a large portion
of its assets in municipal bonds issued by entities that may be located in the
same geographic area, or that may pay their interest obligations from the
revenues derived from similar projects such as hospitals, multi-family housing,
nursing homes, continuing care facilities, commercial facilities (including
hotels), electric utility systems or industrial companies. A focus on any
particular type of investment will make the Fund more susceptible to any
economic, political, or regulatory occurrences affecting that type of
investment. Also, the Fund may invest in municipal bonds issued by entities or
secured by facilities with a relatively short operating history.
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.
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.
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 applicable
factors, the Fund's performance could suffer. The Fund also may suffer a loss if
the other party to the transaction defaults. The Fund is not required to use
hedging and may not do so.
Antitakeover Provisions. The Fund's charter includes 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
discourage a third party from seeking to obtain control of the Fund.
6
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) ........................ None
Dividend Reinvestment Plan Fees ....................................... None
Early Withdrawal Charge (as a percentage of original purchase price
or net asset value at the time of repurchase)(a) .................... 3.0% during the first year,
decreasing 1.0% annually
thereafter to 0.0%
after the third year
Annual Expenses (as a percentage of average net assets)
Investment Advisory Fee(b) ............................................ 0.95%
Other Expenses(c) ..................................................... 0.51%
----
Total Annual Expenses ................................................. 1.46%
====
</TABLE>
- ------------
(a) See "Early Withdrawal Charge" -- page 24.
(b) See "Investment Advisory and Administrative Arrangements" -- page 27.
(c) Includes administrative fees, which are payable to the Investment Adviser
by the Fund at the rate of 0.25% of net assets attributable to common
shares. See "Investment Advisory and Administrative Arrangements" -- page
27.
Example
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) total annual
expenses of 1.46%, (2) a 5% annual return throughout
the periods and (3) tender at the end of the period ........ $45* $56* $80 $175
An investor would pay the following expenses on a
$1,000 investment assuming no tender at the end
of the period .............................................. $15 $46 $80 $175
</TABLE>
- ---------------
* Reflects the early withdrawal charge.
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 current fiscal year. The example set forth above
assumes reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by Securities and Exchange Commission (the
"Commission") regulations. The example should not be considered a representation
of past or future expenses or annual rates of return, and actual expenses or
annual rates of return may be more or less than those assumed for purposes of
the Example. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") may charge its customers a processing fee (presently $5.35) for
confirming purchases and repurchases. Purchases and repurchases made directly
through Financial Data Services, Inc. (the "Transfer Agent") are not subject to
the processing fee.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the fiscal
year ended August 31, 1999 and the independent auditors' report thereon appear
in the annual report of the Fund for the fiscal year ended August 31, 1999,
which is incorporated by reference herein. Further information about the
performance of the Fund is contained in the annual report, which may be
obtained, without charge, by calling or by writing the Fund at the address on
the front cover of this Prospectus or by calling (609) 282-2800.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
For the Period
November 2,
For the Year Ended August 31, 1990+ to
------------------------------------------------------------------------------ August 31,
1999 1998 1997 1996 1995 1994 1993 1992 1991
----- ----- ----- ----- ----- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease)
in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning
of period $ 11.46 $ 11.34 $ 10.94 $ 10.97 $ 10.92 $ 11.44 $ 10.74 $ 10.29 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income -- net .55 .61 .65 .66 .65 .65 .68 .71 .63
-------- -------- -------- -------- -------- -------- -------- -------- --------
Realized and unrealized gain
(loss) on investments -- net (.89) .32 .44 (.03) .23 (.45) .75 .50 .29
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations (.34) .93 1.09 .63 .88 .20 1.43 1.21 .92
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less Dividends and
Distributions:
Investment income -- net (.55) (.61) (.65) (.66) (.65) (.65) (.68) (.71) (.63)
Realized gain on
investments -- net (.18) (.20) (.04) -- (.15) (.07) (.05) (.05) --
In excess of realized gain
on investments -- net (.15) -- -- -- (.03) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions. (.88) (.81) (.69) (.66) (.83) (.72) (.73) (.76) (.63)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of period $ 10.24 $ 11.46 $ 11.34 $ 10.94 $ 10.97 $ 10.92 $ 11.44 $ 10.74 $ 10.29
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Investment Return*:
Based on net asset
value per share (3.16)% 8.43% 10.20% 5.81% 8.68% 1.75% 13.83% 12.29% 9.43%++
======== ======== ======== ======== ======== ======== ======== ======== ========
Ratios To Average Net Assets:
Expenses, net of
reimbursement 1.46% 1.48% 1.44% 1.50% 1.52% 1.48% 1.37% 1.30% .84%**
======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses 1.46% 1.48% 1.44% 1.50% 1.52% 1.48% 1.47% 1.55% 1.76%**
======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income -- net 5.07% 5.37% 5.83% 5.90% 6.11% 5.81% 6.17% 6.85% 7.43%**
======== ======== ======== ======== ======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of
period (in thousands) $201,574 $233,713 $ 211,620 $ 199,552 $ 198,575 $212,958 $216,922 $170,735 $114,628
======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover 39.53% 36.45% 43.07% 28.54% 21.28% 28.51% 28.74% 31.74% 75.92%
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------------
* Total investment returns exclude the effects of the early withdrawal
charge, if any. The Fund is a continuously offered closed-end fund, the
shares of which are offered at net asset value. Therefore, no separate
market exists.
** Annualized.
+ Commencement of Operations.
++ Aggregate total investment return.
8
<PAGE>
THE FUND
Merrill Lynch High Income Municipal Bond Fund, Inc. is a continuously
offered non-diversified, closed-end, management investment company. The Fund was
incorporated under the laws of the State of Maryland on August 16, 1990, and has
registered as an investment company under the Investment Company Act of 1940
(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.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with high
current income exempt from Federal income taxes. The Fund seeks to achieve its
objective by investing primarily in a portfolio of medium to lower grade or
unrated municipal obligations issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies or
instrumentalities and other qualifying issuers, each of which pays interest
that, in the opinion of bond counsel to the issuer, is exempt from Federal
income taxes ("Municipal Bonds"). The Fund will maintain at least 80% of its
assets in Municipal Bonds, except during temporary defensive periods, in a
portfolio of obligations with remaining maturities of greater than one year. The
Fund at all times, except during temporary defensive periods, will maintain at
least 75% of its assets in Municipal Bonds that are rated in any one of the
medium and lower rating categories of a nationally recognized statistical rating
organization or are unrated but considered by the Investment Adviser to be of
comparable quality. In the case of Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's ("S&P") or Fitch IBCA, Inc. ("Fitch"), these ratings are
currently Baa (Moody's) or BBB (S&P or Fitch) or lower, respectively. These are
fundamental policies of the Fund and, therefore, may not be changed without a
vote of a majority of the outstanding shares of the Fund. The Fund presently
contemplates that it will not invest more than 25% of its total assets (taken at
market value) in Municipal Bonds whose issuers are located in the same state.
There can be no assurance that the investment objective of the Fund will be
realized.
The Fund ordinarily does not intend to realize significant interest income
that is subject to Federal 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 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
interest in one or more long-term Municipal Bonds. Certain Non-Municipal
Tax-Exempt Securities may be characterized as derivative instruments.
Non-Municipal Tax-Exempt Securities are considered "Municipal Bonds" for
purposes of the Fund's investment objective and policies.
Investment in shares of the Fund offers several potential benefits. The
Fund offers investors the opportunity to receive income exempt from Federal
income taxes by investing in a professionally managed portfolio of high yielding
Municipal Bonds. Additionally, investment research and credit analysis relating
to the municipal securities in which the Fund seeks to invest are not readily
available. Moreover, many of these securities are not widely traded and the
execution of transactions in such securities requires expertise. Consequently,
the professional portfolio management that is provided by the Investment Adviser
is particularly important in the
9
<PAGE>
sector of the municipal securities market in which the Fund invests. The Fund
also relieves the investor of the burdensome administrative details involved in
managing a portfolio of Municipal Bonds. These benefits are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the investment advisory and administrative fees
and operational costs.
Investments in lower rated Municipal Bonds generally provide a higher yield
and are less affected by interest rate fluctuations than higher rated tax-exempt
securities of similar maturity but are subject to greater overall market risk
and are also subject to a greater degree of risk with respect to the ability of
the issuer to meet its principal and interest obligations. See the Appendix to
this Prospectus for a description of Moody's, S&P and Fitch's ratings of
Municipal Bonds.
The Fund seeks to reduce risk through investing in multiple issuers, credit
analysis and monitoring of current developments regarding the obligor and trends
in both the economy and financial markets. The Investment Adviser will use
various means to research the stability and/or potential for improvement of
various municipal issuers in connection with the proposed purchase of their
securities by the Fund. Evaluation of each Municipal Bond may include the
analysis of financial performance, debt structure, economic factors and the
administrative structure of the issuer. Additionally, the priority of liens and
the overall structure of the particular issue may be factors that will determine
suitability for purchase. Further investigation may be performed and may
include, among other things, discussions with project management, corporate
officers and industry experts as well as site inspections, area analysis, and
project and financial projection analysis. All purchases and sales also may be
subject to the review of market data, economic projections and the performance
of the financial markets. Certain economic indicators also may be monitored.
Additionally, the Investment Adviser will vary the average maturity of the
Fund's portfolio securities based upon the Investment Adviser's assessment of
economic and market conditions.
The Fund expects that there will be no secondary market for its common
stock. Moreover, Merrill Lynch and other selected dealers are prohibited under
applicable law from making a market in the Fund's common stock while the Fund is
making either a public offering of or a tender offer to purchase its common
stock. To the extent a secondary market does develop, however, investors should
be aware that the shares of closed-end investment companies frequently trade at
a discount from their net asset value. The net asset value of the shares of a
closed-end investment company, such as the Fund, which invests primarily in
fixed income, tax-exempt securities, changes as the general levels of interest
rates fluctuate. When interest rates decline, the value of a fixed income
portfolio can be expected to rise. Conversely, when interest rates rise, the
value of a fixed income portfolio can be expected to decline.
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 as a "regulated
investment company" for purposes of Federal tax laws. See "Taxes." Requirements
for qualification include limiting 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 net asset
value 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.
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Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction and equipping of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for general
operating expenses and loans to other public or private institutions for the
construction of 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 airports, public parks, mass commuting
facilities, multifamily housing projects, as well as facilities for water
supply, gas, electricity, sewage or solid waste disposal and pollution control
facilities. For purposes of this prospectus, such obligations are Municipal
Bonds if the interest paid thereon is exempt from Federal income tax, even
though such bonds may be industrial development bonds or PABs as discussed
below.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds, which latter
category includes PABs and, for bonds issued on or before August 15, 1986,
industrial development bonds or "IDBs." General obligation bonds are typically
secured by the issuer's pledge of faith, credit, and taxing power for the
repayment of principal and the payment of interest. The taxing power of any
governmental entity may be limited, however, by provisions of state
constitutions or laws, and an entity's credit will depend on many factors,
including potential erosion of the tax base due to population declines, natural
disasters, declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax base,
state legislative proposals or voter initiatives to limit ad valorem real
property taxes, and the extent to which the entity relies on Federal or state
aid, access to capital markets or other factors beyond the state's or entity's
control. Revenue or special obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as from the user of the facility being financed. PABs are in most cases revenue
bonds and generally are not secured by a pledge of the credit or taxing power of
the issuer of such bonds. The repayment of the principal and the payment of
interest on such bonds depend 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.
Municipal Bonds also may include "moral obligation" bonds, which normally are
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 Municipal Bonds classified as PABs. Interest received
on certain PABs is treated as an item of "tax preference" for purposes of the
Federal alternative minimum tax and may impact the overall tax liability of
investors in the Fund. There is no limitation on the percentage of the Fund's
assets that may be invested in Municipal Bonds the interest on which is treated
as an item of "tax preference" for purposes of the Federal alternative minimum
tax. See "Taxes."
Also included within the general category of 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. The COPs represent participations in a lease,
an installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") relating to such equipment, land or
facilities. Although lease obligations do not constitute general obligations of
the issuer for which the issuer's unlimited taxing power is pledged, a lease
obligation is frequently backed by the issuer's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses 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
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basis. Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult.
Indexed and Inverse Floating Obligations. The Fund may invest in Municipal
Bonds (and Non-Municipal Tax-Exempt Securities) yielding a return based on a
particular index of value or interest rates. For example, the Fund may invest in
Municipal Bonds that pay interest based on an index of Municipal Bond interest
rates. The principal amount payable upon maturity of certain Municipal Bonds
also may be based on the value of an index. The Fund's return on these types of
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to
risk with respect to the value of the particular index, including reduced or
eliminated interest payments and losses of invested principal. The Fund also 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 synthetically created inverse floating rate bonds evidenced by
custodial or trust receipts. Generally, interest rates on inverse floating rate
bonds will decrease when short-term rates increase, and will increase when
short-term rates decrease. Such securities have the effect of providing a degree
of investment leverage, since they may increase or decrease in value in response
to changes 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 will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations that have shorter term maturities
or that contain 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.
Federal tax legislation has limited the types and volume of bonds
qualifying for the Federal income tax exemption of interest. As a result, this
legislation and legislation that may be enacted in the future may affect the
availability of Municipal Bonds for investment by the Fund.
The Fund may invest a relatively high percentage of its assets in Municipal
Bonds issued by entities with a relatively short operating history that may be
located in the same geographic area, or that may pay their interest obligations
from the revenues derived from similar projects such as hospitals, multi-family
housing, nursing homes, continuing care facilities, commercial facilities
(including hotels), electric utility systems or industrial companies. This may
make the Fund more susceptible to economic, political, or regulatory occurrences
affecting similar investments. As the similarity in issuers increases, the
potential for fluctuation of the net asset value of shares of the Fund also
increases. Therefore, investors should also be aware of the risks which these
investments might entail, as discussed below.
Health Care Revenue Bonds. These securities include Municipal Bonds issued
to finance hospitals, nursing homes and continuing care facilities and that are
generally secured by the revenues of particular facilities. The ability of the
issuers of such securities to meet their obligations is dependent upon, among
other things, the revenues, costs and occupancy levels of the subject facilities
and the competitive nature of these industries. In addition, a major portion of
hospital and nursing home revenues typically is derived from Federal or state
programs such as Medicare and Medicaid and from various insurers. Changes in the
compensation and reimbursement formulae of these governmental programs or in the
rates paid by insurers may reduce revenues available for the payment of
principal of or interest on such bonds. New governmental legislation or
regulations and other factors, such as the inability to obtain sufficient
malpractice insurance, may also adversely affect the
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<PAGE>
revenues or costs of these issuers. Moreover, in the case of life care
facilities, since a portion of housing, medical care and other services may be
financed by an initial lump sum deposit paid by occupants of the facility, there
may be risk if the facility does not maintain adequate financial resources to
secure estimated actuarial liabilities.
A number of legislative proposals concerning health care have been
introduced in Congress in recent years or have been reported to be under
consideration. These proposals span a wide range of topics, including cost
controls, national health insurance, incentives for competition in the provision
of health care services, tax incentives and penalties related to health care
insurance premiums, and promotion of prepaid health care plans. The Fund cannot
predict the effect of any of these proposals, if enacted.
Single Family Housing Bonds and Multifamily Housing Bonds. Single family
housing bonds and multifamily housing bonds are obligations of state and local
housing authorities that have been issued in connection with a variety of single
and multifamily housing projects. Economic developments, including fluctuations
in interest rates, increasing construction and operating costs, increasing real
estate taxes and declining occupancy rates, and real estate investment risks may
have an adverse effect upon the revenues of such projects and such housing
authorities. Multifamily housing bonds may be subject to mandatory redemption
prior to maturity, including redemption from non-completion of the project or
upon receipt of FHA or certain other insurance proceeds. Bonds issued by state
or local units or authorities and payable from revenues from single family
residential mortgages may be subject to mandatory redemption prior to maturity,
including redemption from mortgage loan prepayments and undisbursed bond
proceeds reserved for the purpose of purchasing mortgage loans. Housing bonds
may also be subject to changes in creditworthiness due to potential weaknesses
of mortgage insurance companies providing various policies; fluctuations in the
valuation of invested funds and the strengths of banks and other entities that
may provide investment agreements; and smaller than expected mortgage portfolios
due to the inability to originate mortgages. To the extent the Fund invests in
housing bonds issued by an entity or entities located in the same geographic
area, the Fund may be subject to the risks associated with the general economy
of such area.
Public Power Revenue Bonds. General problems of the electric utility
industry include difficulty in financing large construction programs during an
inflationary period; restrictions on operations and increased costs and delays
attributable to environmental considerations; the difficulty of the capital
markets in absorbing utility debt and equity securities; the availability of
fuel for electric generation at reasonable prices, including among other
considerations the potential rise in fuel costs and the costs associated with
conversion to alternate fuel sources such as coal; technical cost factors and
other problems associated with construction, licensing, regulation and operation
of nuclear facilities for electric generation, including among other
considerations the problems associated with the use of radioactive materials and
the disposal of radioactive waste; and the effects of energy conservation.
Certain of the issuers of these bonds may own or operate nuclear generating
facilities. Federal, state and municipal governmental authorities may from time
to time review and revise existing requirements and impose additional
requirements governing the licensing, construction and operation of nuclear
power plants. In addition, the licensing of certain nuclear power plants nearing
completion of construction or for which construction is complete has been
delayed indefinitely by the refusal of state and local officials to cooperate in
emergency planning exercises that are a prerequisite to licensing. Each of the
problems referred to above could adversely affect the ability of the issuer of
public power revenue bonds to make payments of principal and/or interest on such
bonds. Certain municipal utilities or agencies may have entered into contractual
arrangements with investor-owned utilities and large industrial users and
consequently may be dependent in varying degrees on the performance of such
contracts for payment of bond debt service. Also, the enforceability against
municipalities of "take-and-pay" and "take-or-pay" contracts which contracts
secure bonds issued by other municipal issuers has been successfully challenged
in recent years.
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Transportation Revenue Bonds. Bonds in this category include bonds issued
for airport facilities, bridges, turnpikes, port facilities, railroad systems,
or mass transit systems. Generally, airport facility revenue bonds are payable
from and secured by the revenues derived from the ownership and operation of a
particular airport. Payment on other transportation bonds is often dependent
primarily or solely on revenues from financed facilities, including user fees,
charges, tolls and rents. Such revenues may be adversely affected by increased
construction and maintenance costs or taxes, decreased use, competition from
alternate facilities, scarcity of fuel, reduction or loss of rents or the impact
of environmental considerations. Other transportation bonds may be dependent
primarily or solely on Federal, state or local assistance including motor fuel
and motor vehicle taxes, fees and licenses, and therefore may be subject to
fluctuations in such assistance.
Water and Sewage Revenue Bonds. Bonds in this category include securities
issued to finance public water supply, treatment and distribution facilities,
and sewage collection, treatment and disposal facilities. Repayment of these
bonds is dependent primarily on revenues derived from the billing of
residential, commercial and industrial customers for water and sewer services,
as well as, in some instances, connection fees and hook-up charges. Such revenue
bonds may be adversely affected by the lack of availability of Federal and state
grants and by decisions of Federal and state regulatory bodies and courts.
Solid Waste and Resource Recovery Revenue Bonds. Bonds in this category
include securities issued to finance facilities for removal and disposal of
solid waste. Repayment of these bonds is dependent on factors that may include
revenues from appropriations from a governmental entity, the financial condition
of the private project corporation* and revenues derived from the collection of
charges for disposal of solid waste. In addition, construction of such
facilities may be subject to cost overruns and the actual costs of operating
such facilities may exceed the costs anticipated at the time the bonds were
issued. Repayment of resource recovery bonds also may be dependent to various
degrees on revenues from the sale of electric energy or steam. Bonds in this
category may be subject to mandatory redemption in the event of project
noncompletion, if the project is rendered uneconomical, if the project fails to
meet certain performance criteria, or if it is considered an environmental
hazard.
Pollution Control Facility Revenue Bonds. Bonds in the pollution control
facilities category include securities issued on behalf of private corporations
including utilities, to provide facilities for the treatment of air, water and
solid waste pollution. Repayment of these bonds is dependent upon income from
the specified pollution control facility and/or the financial condition of the
project corporation. In addition, governmental entities may from time to time
impose additional restrictions or regulations that could adversely affect the
cost or operation of the facility. The Fund will not acquire more than 5% of the
outstanding voting securities of more than one public utility company as defined
by the Public Utility Holding Company Act of 1935.
Educational Facility Revenue Bonds. Educational facility revenue bonds
include debt of state and private colleges, universities and systems, and
parental and student loan obligations for dormitories, classrooms, libraries,
research and training facilities and student aid. The ability of universities
and colleges to meet their obligations is dependent on various factors,
including the revenues, costs and enrollment levels of the institutions. In
addition, their ability may be affected by declines in Federal, state and alumni
financial support, fluctuations in interest rates and construction costs,
increased maintenance and energy costs, failure or inability to raise tuition or
room charges and adverse results of endowment fund investments.
Tax Increment Bonds. Tax increment bonds are issued to finance various
public improvements and redevelopment projects in blighted areas. Interest on
such bonds is payable from increases in real property taxes
- -------------
* For purposes of the description of users of facilities, all references to
"corporations" shall be deemed to include any other nongovernmental person or
entity.
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<PAGE>
attributable to increases in assessed value resulting from the redevelopment of
the blighted project area. Repayment risks include, among other things, a
reduction in taxable value in the project areas, reduction in tax rates,
delinquencies in tax payments or a general shortfall in forecasted tax revenues.
Commercial Facility Revenue Bonds. The Fund also may invest in bonds for
other commercial facilities (including hotels) and industrial enterprises. The
viability of such facilities depends on, among other things, general economic
factors affecting those industries and affecting those geographic areas in which
such facilities are situated, as well as the ability of the individual
management of those facilities to maximize earnings and to remain competitive
within the service area.
Private Activity Bonds. PABs are secured primarily by revenues derived from
loan repayments or lease payments due from the corporation which may or may not
be guaranteed by a parent company or otherwise secured. In view of this, an
investor should be aware that repayment of such bonds depends on the revenues of
a private corporation and be aware of the risks that such an investment may
entail. Continued ability of a corporation to generate sufficient revenues for
the payment of principal and interest on such bonds will be affected by many
factors including the size of the corporation, capital structure, demand for
products or services, competition, general economic conditions, government
regulation and the corporation's dependence for revenues on the operation of the
particular facility being financed.
PABs are often issued to provide funds for corporations from the industries
described above and, consequently, are subject to similar risks. PABs are also
issued to provide funds to industrial companies. Investment in particular
industries may expose the Fund to risks associated with such industries.
Other Investment Policies
The Fund has the authority to invest as much as 25% of its assets in
Municipal Bonds in the higher rating categories of nationally recognized
statistical rating organizations (ratings of A or higher by Moody's, S&P or
Fitch).
In addition, the Fund may invest in short-term tax-exempt obligations or
taxable money market securities (including short-term U.S. government
securities, commercial paper, certificates of deposit, repurchase agreements and
cash) (such short-term securities or cash will not exceed more than 20% of the
Fund's total assets except during interim periods pending investment of the net
proceeds of sales of its common stock and temporary defensive periods) when, in
the opinion of the Investment Adviser, prevailing market or financial conditions
warrant. The Fund does not ordinarily intend to realize significant interest
income that is subject to Federal income taxes. Taxable commercial paper must be
rated A-1+ through A-3 by S&P, Prime-1 through Prime-3 by Moody's, F-1+ through
F-3 by Fitch or have credit characteristics equivalent to such ratings in the
opinion of the Investment Adviser. The short-term tax-exempt obligations also
will be in the highest rating categories as determined either by Moody's
(currently, MIG-1 through MIG-3 for notes and Prime-1 through Prime-3 for
commercial paper), S&P (currently, SP-1+ through SP-2 for notes and A-1+ through
A-3 for commercial paper), or Fitch (currently, F-1 and F-2 for notes and F-1
for commercial paper). Certificates of deposit must be issued by depository
institutions with total assets of at least $1 billion, except that the Fund may
invest in certificates of deposit of smaller institutions if such certificates
of deposit are Federally insured. See "Appendix -- Ratings of Municipal Bonds."
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
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<PAGE>
formula and an unconditional right of demand on the part of the holder thereof
to receive payment of the unpaid principal balance plus accrued interest on a
short notice period not to exceed seven days. Participating VRDOs provide the
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is, however,
the possibility that because of default or insolvency, the demand feature of
VRDOs or Participating VRDOs may not be honored. The Fund has been advised by
its counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The Fund also has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to
33 1/3% of the value of its total assets at the time of such borrowings to
finance the purchase of its own shares pursuant to tender offers, if any, or
for temporary, extraordinary or emergency purposes. Borrowings by the Fund
(commonly known as "leveraging") create an opportunity for greater total return
since the Fund will not be required to sell portfolio securities to purchase
tendered 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 Municipal Bonds on a delayed delivery basis or 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 date 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 forward commitment.
Call Rights. The Fund may purchase a Municipal Bond issuer's right to call
all or a portion of such Municipal Bond for mandatory tender for purchase (a
"Call Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security.
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. This results in a fixed rate of return insulated from market
fluctuations during such period. 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
disposal of the underlying securities. In general, for Federal income tax
purposes, repurchase agreements are treated as collateralized loans secured by
the securities "sold." Therefore, amounts earned under such agreements will not
be considered tax-exempt interest.
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<PAGE>
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 Fund
shares, the Fund's net asset value will fluctuate. There can be no assurance
that the Fund's hedging transactions will be effective. Furthermore, the Fund
engages 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 not do so.
Gains from transactions in options and futures contracts distributed to
shareholders are taxable as ordinary income or, in certain circumstances, as
long-term capital gains to shareholders. See "Taxes -- Tax Treatment of Options
and Futures Transactions."
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 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 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 receives a premium from writing a call option that 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 Municipal Bonds
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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 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 U.S. Treasury bills 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 futures contract fluctuates making the
long and short positions in the 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 recently issued tax-exempt bonds, and purchase and sell put and call
options on such futures contracts for the purpose of hedging 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
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, Treasury notes, GNMA Certificates and three-month U.S.
Treasury bills.
Subject to policies adopted by the Directors, the Fund also may engage in
transactions in other financial futures contracts transactions and options
thereon, such as financial futures contracts or options on other municipal bond
indices that may become available if the Investment Adviser and the Directors of
the Fund should determine that there is normally a sufficient correlation
between the prices of such futures contracts and the 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. 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. Over-the-counter options ("OTC
options") transactions are two-party contracts with price 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 engages in OTC options only with
member banks of the Federal Reserve System and primary dealers in U.S.
Government securities or with affiliates of such banks or dealers that have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million. OTC options and assets used to cover OTC
options written by the Fund may be considered to be illiquid. The illiquidity of
such options or assets may prevent a successful sale of such options or assets,
result in a delay of sale, or reduce the amount of proceeds that might otherwise
be realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts and movements in the price of the security that is
the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that
18
<PAGE>
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 futures contracts
have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation may
be affected by additions to or deletions from the index that serves as a basis
for a financial futures contract. Finally, in the case of futures contracts on
U.S. Government securities and options on such futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the futures or options and Municipal Bonds may be
adversely affected by economic, political, legislative or other developments
which have a disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission (the
"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 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 position and premiums paid for outstanding options would
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 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
short-term high-grade fixed-income 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 futures contract, thereby ensuring that the use of such futures contract
is unleveraged.
Although certain risks are involved in options and futures transactions,
the Investment Adviser believes that, because the Fund engages in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund do not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to 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.
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 or, in the case of OTC options, the
Investment Adviser believes the Fund can receive on each business day at least
two independent bids or offers. 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 whom the Fund has an open position in an options or futures contract.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a 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.
19
<PAGE>
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 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 only engages in hedging transactions from time to time and
may not necessarily be engaging in hedging transactions when movements in
interest rates occur.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (which for this purpose and under the 1940 Act
means the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter's or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than 10% of the Fund's total assets would be invested
in such securities.
3. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein and the Fund may purchase and sell financial futures
contracts and options thereon.
4. Issue senior securities or borrow money, except as permitted by
Section 18 of the 1940 Act.
5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
6. Make loans to other persons except that the Fund may purchase
Municipal Bonds and other debt securities and enter into repurchase
agreements in accordance with its investment objective, policies and
limitations.
7. 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).
8. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on Municipal Bonds, U.S.
Government obligations and related indices or otherwise in connection with
bona fide hedging activities.
20
<PAGE>
9. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single
industry. (For the purposes of this restriction, tax-exempt securities
issued by states, municipalities and their political subdivisions are not
considered to be part of any industry.)
Additional investment restrictions adopted by the Fund, that may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:
a. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the Municipal Bonds of any one state.
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 (4) above
or except as may be necessary in connection with transactions in financial
futures contracts and options thereon.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
The Investment Adviser and Merrill Lynch share a common parent, Merrill
Lynch & Co., Inc. ("ML & Co."). Because of the affiliation of Merrill Lynch with
the Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in which
it acts as principal. An exemptive order has been obtained that permits the Fund
to effect principal transactions with Merrill Lynch in high quality, short-term,
tax-exempt securities subject to conditions set forth in such order. The Fund
may consider in the future requesting an order permitting other principal
transactions with Merrill Lynch, but there can be no assurance that such
application will be made and, if made, that such order would be granted. See
"Portfolio Transactions."
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the distributor of shares of common stock of the Fund. The Fund
is engaged in a continuous offering of its shares on a best efforts basis
through the Distributor and other selected securities dealers that have entered
into agreements with the Distributor, including Merrill Lynch. Shares of the
Fund may be purchased from the Distributor or selected dealers, including
Merrill Lynch, or by mailing a purchase order directly to the Transfer Agent.
The minimum initial purchase is $1,000 and the minimum subsequent purchase is
$50. The Fund reserves the right to waive or modify the initial and subsequent
minimum investment requirements at any time.
To permit the Fund to invest the net proceeds from the sale of its shares
of common stock in an orderly manner, the Fund may, from time to time, suspend
the sale of its shares of common stock, except for sales to existing holders of
common stock and dividend reinvestments.
Due to the administrative complexities associated with the continuous
offering, administrative errors may result in the Distributor or an affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of
21
<PAGE>
the shares of common stock) of shares of common stock that it may wish to
resell. Such shares of common stock are not subject to any investment
restriction and may be resold pursuant to this Prospectus.
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share without a front-end sales charge. The
applicable offering price for purchase orders is based on the net asset value of
the Fund next determined after receipt of the purchase order by the Distributor.
As to purchase orders received by securities dealers prior to the close of
business on the New York Stock Exchange (the "NYSE") (generally, the NYSE closes
at 4:00 p.m., Eastern time), which includes orders received after the close of
business on the previous day, the applicable offering price is based on the net
asset value determined after the close of business on the NYSE on that day
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE on that day, such orders are deemed received
on the next business day. Any order may be rejected by the Distributor or the
Fund. The Fund or the Distributor may suspend the continuous offering of the
Fund's shares to the general public at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. The Distributor is
required to advise the Fund promptly of all purchase orders and cause payments
for shares of common stock to be delivered promptly to the Fund. Merrill Lynch
charges its customers a processing fee (presently $5.35) to confirm a purchase
of shares by such customers. Purchases made directly through the Fund's Transfer
Agent are not subject to the processing fee.
The Distributor compensates Merrill Lynch and other selected dealers at a
rate of 3.0% of amounts purchased. In addition, the Distributor compensates
Merrill Lynch and such dealers at an annual rate equal to 0.25% of the value of
Fund shares that remain outstanding after one year from the date of their
original purchase sold by Merrill Lynch and such dealers. The payments made by
the Distributor will be made from its own assets and will not be an expense
borne by the Fund, although the Distributor may recover some of these payments
by imposing an early withdrawal charge (as described below) against shareholders
who tender shares owned less than three years. See "Early Withdrawal Charge."
Total compensation paid to Merrill Lynch, other selected dealers and the
Distributor, including the compensation paid at the time of purchase, the 0.25%
annual payments mentioned above and the early withdrawal charge, if any, will
not exceed the applicable limit (presently, 8%), as determined from time to time
by the National Association of Securities Dealers, Inc. For the fiscal years
ended August 31, 1997, 1998 and 1999 the Distributor paid approximately
$689,503, $1,102,026 and $406,489 respectively, to Merrill Lynch in connection
with the sale of shares of common stock of the Fund.
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholder's name will be opened
automatically, without charge, at the Fund's transfer agent, dividend disbursing
agent and shareholder servicing agent. Shareholders should be aware that it may
not be possible to transfer their shares from Merrill Lynch to another brokerage
firm or financial institution unless such brokerage firm or financial
institution has entered into an agreement with Merrill Lynch. Shareholders
interested in transferring their brokerage accounts from Merrill Lynch and who
do not wish to have an account maintained for such shares at the transfer agent
must tender the shares for repurchase by the Fund as described under "Tender
Offers" so that the cash proceeds can be transferred to the account at the new
firm.
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<PAGE>
TENDER OFFERS
In recognition of the possibility that a secondary market for the Fund's
shares will not exist, the Fund takes certain actions that provide liquidity to
shareholders. Since the Fund's inception, it has made tender offers to purchase
its shares of common stock from all beneficial holders at a price per share
equal to the net asset value per share determined at the close of business on
the day an offer terminates. Commencing with the second quarter of Fund
operations, the Board of Directors has considered making tender offers on a
quarterly basis, and the Board of Directors intends to continue this practice.
There can be no assurance, however, that the Board of Directors will undertake
the making of any tender offer. Subject to the Fund's investment restriction
with respect to borrowings, the Fund may borrow money to finance the repurchase
of shares pursuant to any tender offers. See "Investment Restrictions."
The Fund expects that ordinarily there will be no secondary market for the
Fund's common stock and that periodic tenders will be the only source of
liquidity for Fund shareholders. Nevertheless, if a secondary market develops
for the common stock of the Fund, the market price of the shares may vary from
net asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the Fund,
especially as it affects the yield on and net asset value of the common stock of
the Fund. A tender offer for shares of common stock of the Fund at net asset
value is expected to reduce any spread between net asset value and market price
that may otherwise develop. However, there can be no assurance that such action
would result in the Fund's common stock trading at a price that equals or
approximates net asset value.
Although the Board of Directors believes that the tender offers generally
are beneficial to shareholders, the acquisition of shares of common stock by the
Fund will decrease the total assets of the Fund. Tender offers are therefore
likely to increase the Fund's expense ratio (assuming such acquisition is not
offset by the issuance of additional shares of common stock). Furthermore, if
the Fund borrows to finance the making of tender offers, interest on such
borrowing will reduce the Fund's net investment income.
It is the Board's announced policy, which may be changed by the Board, not
to purchase shares pursuant to a tender offer if (1) such purchases would impair
the Fund's status as a regulated investment company under the Federal tax laws
(which would make the Fund a taxable entity, causing the Fund's income to be
taxed at the corporate level in addition to the taxation of shareholders who
receive dividends from the Fund); (2) the Fund would not be able to liquidate
portfolio securities in a manner that is orderly and consistent with the Fund's
investment objective and policies in order to purchase common stock tendered
pursuant to the tender offer; or (3) there is, in the Board's judgment, any (a)
legal action or proceeding instituted or threatened challenging the tender offer
or otherwise materially adversely affecting the Fund, (b) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by banks in the United States or New York State, that is material to the Fund,
(c) limitation imposed by Federal or state authorities on the extension of
credit by lending institutions, (d) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States that is material to the Fund, or (e) other event or condition that
would have a material adverse effect on the Fund or its shareholders if shares
of common stock tendered pursuant to the tender offer were purchased. Thus,
there can be no assurance that the Board will proceed with any tender offer. The
Board of Directors may modify these conditions in light of circumstances
existing at the time. If the Board of Directors determines to purchase the
Fund's shares of common stock pursuant to a tender offer, such purchases could
reduce significantly the asset coverage of any borrowing or outstanding senior
securities. The Fund may not purchase shares of common stock to the extent such
purchases would result in the asset coverage with respect to such borrowing or
senior securities being reduced below the asset coverage requirement set forth
in the 1940 Act. Accordingly, in order to purchase all shares of common stock
tendered, the Fund may have to repay all or part of
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<PAGE>
any then outstanding borrowing or redeem all or part of any then outstanding
senior securities to maintain the required asset coverage. See "Other Investment
Policies--Leverage." In addition, the amount of shares of common stock for
which the Fund makes any particular tender offer may be limited for the reasons
set forth above or in respect of other concerns related to liquidity of the
Fund's portfolio.
In the event that circumstances arise under which the Fund does not conduct
the tender offers regularly, the Board of Directors will consider alternate
means of providing liquidity for shareholders. Such action would include
evaluating any secondary market that then exists for the common stock and
determining whether it provides liquidity for shareholders. If the Board of
Directors determines that such market, if any, fails to provide liquidity for
the shareholders, the Board plans to consider alternative means of providing
liquidity. Among the alternatives that the Board of Directors may consider is
listing of the Fund's common stock on a major domestic stock exchange or on the
Nasdaq National Market. The Board of Directors also may consider causing the
Fund to repurchase its shares from time to time in open-market or private
transactions when it can do so on terms that represent a favorable investment
opportunity. In any event, the Board of Directors plans to cause the Fund to
take whatever action it deems necessary or appropriate to provide liquidity for
shareholders in light of the facts and circumstances existing at such time.
Consummating a tender offer may require the Fund to liquidate portfolio
securities, and realize gains or losses, at a time when the Investment Adviser
would otherwise consider it disadvantageous to do so.
Each tender offer is made and shareholders notified in accordance with the
requirements of the Securities Exchange Act of 1934 (the "1934 Act") and the
1940 Act, either by publication or mailing or both. The offering documents
contain information prescribed by such laws and the rules and regulations
promulgated thereunder. The repurchase of tendered shares by the Fund is a
taxable event. See "Taxes." The Fund pays all costs and expenses associated with
making any tender offer. An early withdrawal charge (as described below) is
imposed on most shares accepted for tender that have been held for less than
three years. See "Early Withdrawal Charge." In addition, Merrill Lynch charges
its customers a processing fee (presently, $5.35) to confirm a repurchase of
shares from such customers pursuant to a tender offer. Tenders made directly
through the Transfer Agent are not subject to the processing fee.
EARLY WITHDRAWAL CHARGE
An early withdrawal charge to recover distribution expenses incurred by the
Distributor is charged against the shareholder's investment account and paid to
the Distributor in connection with most shares of common stock held for less
than three years that are repurchased pursuant to a tender offer. The early
withdrawal charge is imposed on those shares of common stock accepted for tender
based on an amount equal to the lesser of the then current net asset value or
the cost of the shares. Accordingly, the early withdrawal charge is not imposed
on increases in the net asset value above the initial purchase price. In
addition, the early withdrawal charge is not imposed on shares acquired by
reinvesting dividends or capital gains distributions. The early withdrawal
charge imposed varies depending on the length of time the common stock has been
owned since purchase (separate purchases shall not be aggregated for these
purposes), as set forth in the following table:
Year of Repurchase After Purchase Early Withdrawal Charge
- --------------------------------- -----------------------
First ........................................... 3.0%
Second .......................................... 2.0%
Third ........................................... 1.0%
Fourth and following ............................ 0%
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<PAGE>
In determining whether an early withdrawal charge is applicable to a tender
of shares of common stock, the calculation is determined in the manner that
results in the lowest possible amount being charged. It is assumed that the
shareholder first tenders shares held for over three years and shares acquired
by reinvesting dividends or distributions, followed by shares of common stock
held longest during the three-year period. The Fund waives the early withdrawal
charge on shares tendered following the death of all beneficial owners of such
shares, provided the shares are tendered within one year of death (a death
certificate and other applicable documents may be required). At the time of
tender, the record or succeeding beneficial owner must notify the Transfer Agent
either directly or indirectly through the Distributor that the early withdrawal
charge should be waived. Upon confirmation of the owner's entitlement, the
waiver will be granted; otherwise, the waiver will be lost.
Example:
Assume an investor purchased 1,000 shares of common stock (at a cost of
$10,000). Two years after purchase, the net asset value per share is $12.00 and,
during the two year period, the investor has acquired 100 additional shares by
reinvesting dividends. If the investor first tenders 500 shares at this time
(proceeds of $6,000), 100 shares will not be subject to the early withdrawal
charge because they were acquired by reinvesting dividends. With respect to the
remaining 400 shares tendered, the early withdrawal charge is applied only to
the original cost of $10 per share (and not to the increase in net asset value
of $2.00 per share). Therefore, $4,000 of the $6,000 redemption proceeds will be
charged at a rate of 2.0% (the applicable rate in the second year after
purchase).
For the fiscal years ended August 31, 1997, 1998 and 1999, the amount of
early withdrawal charges paid to the Distributor amounted to $44,647, $50,316
and $81,349, respectively.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
managers of the Fund, including their ages and their principal occupations for
at least the last five years is set forth below. Unless otherwise noted, the
address of each portfolio manager and of each Director and executive officer is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
TERRY K. GLENN (59) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Fund Asset Management, L.P. ("FAM")
(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 (59) -- 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 (47) -- 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 Provident Corporation since 1990 and Director of Newell
Rubbermaid Co. since 1995.
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<PAGE>
CHARLES C. REILLY (68) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.
KEVIN A. RYAN (67) -- Director(2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and Director Emeritus of The Boston
University Center for the Advancement of Ethics and Character and Director
thereof until 1999; Currently Professor Emeritus of Education at Boston
University and Professor thereof from 1982 to 1999; 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 (67) -- Director(1)(2) -- Chairman of the Investment Adviser
and FAM from 1997 to 1999; President of the Investment Adviser and FAM from 1977
to 1997; Chairman of Princeton Services from 1993 to 1999 and President thereof
from 1993 to 1997; Executive Vice President of ML & Co. from 1990 to 1999.
VINCENT R. GIORDANO (55) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and FAM since 1984; Senior Vice President of
Princeton Services since 1993.
DONALD C. BURKE (38) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President of
PFD since 1999; First Vice President of the Investment Adviser from 1997 to
1999; Vice President of the Investment Adviser from 1990 to 1997; Director of
Taxation of the Investment Adviser since 1990.
KENNETH A. JACOB (48) -- Vice President(1)(2) -- First Vice President of
the Investment Adviser since 1997; Vice President of the Investment Adviser from
1984 to 1997.
THEODORE R. JAECKEL, JR. (40) -- Vice President and Portfolio Manager(1)(2)
- -- Director (Municipal Tax-Exempt Fund Management) of the Investment Adviser
since 1997; Vice President of the Investment Adviser since 1991.
JOHN M. LOFFREDO, CFA (35) -- Vice President and Portfolio Manager(1)(2) --
First Vice President of the Investment Adviser since 1997; Vice President of the
Investment Adviser from 1991 to 1997.
WILLIAM E. ZITELLI, JR. (31) -- 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.
At October 1, 1999, the Directors and officers of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding common stock of
the Fund. At such date, Mr. Glenn, an officer and Director of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML & Co.
- ------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee, officer or member of the
advisory board of certain other investment companies for which the
Investment Adviser or FAM acts as investment adviser.
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<PAGE>
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 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-interested Director") a fee of $3,000 per year plus $300
per meeting attended and pays all Director's actual out-of-pocket expenses
relating to attendance at meetings. The Fund also pays members of the Board's
Audit and Nominating Committee (the "Committee"), which consists of all of the
non-interested Directors, an annual fee of $900. The Chairman of the Committee
receives an additional annual fee of $1,000. For the fiscal year ended August
31, 1999, fees and expenses paid to the non-interested Directors that were
allocated to the Fund aggregated $27,231.
The following table sets forth the compensation earned by non-interested
Directors from the Fund for the fiscal year ended August 31, 1999 and, for the
calendar year ended December 31, 1998, the aggregate compensation paid by all
registered investment companies advised by the Investment Adviser and its
affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested Directors.
<TABLE>
<CAPTION>
Aggregate
Compensation
From Fund and
Pension or Retirement MLAM/FAM Advised
Compensation Benefits Accrued As Part Funds Paid To
Name of Director From Fund of Fund Expense Directors (1)
- --------------- ------------ ------------------------ -------------------
<S> <C> <C> <C>
Ronald W. Forbes ................................. $4,800 None $192,567
Cynthia A. Montgomery ............................ $4,800 None $192,567
Charles C. Reilly ................................ $5,800 None $362,858
Kevin A. Ryan .................................... $4,800 None $192,567
Richard R. West .................................. $4,800 None $346,125
</TABLE>
- -------------
(1) The Directors serve on the Boards of other MLAM/FAM Advised Funds as
follows: Mr. Forbes (42 registered investment companies consisting of 55
portfolios); Ms. Montgomery (42 registered investment companies consisting
of 55 portfolios); Mr. Reilly (60 registered investment companies
consisting of 73 portfolios); Mr. Ryan (42 registered investment companies
consisting of 55 portfolios); and Mr. West (62 registered investment
companies consisting of 86 portfolios).
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
The Investment Adviser, which 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 administrative services. The Asset Management
Group of ML & Co. (which includes the Investment Adviser) acts as the investment
adviser to more than 100 registered investment companies and offers portfolio
management services to individuals and institutional accounts. As of September
1999, the Asset Management Group had a total of approximately $514.2 billion in
investment company and other portfolio assets under management (approximately
$38.5 billion of which were invested in municipal securities). This amount
includes assets managed for certain affiliates of the Investment Adviser. The
Investment Adviser is a limited partnership, the partners of which are ML & Co.
and Princeton Services, Inc. The principal business address of the Investment
Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Fund's Investment Advisory Agreement provides that, subject to the
direction of the Board of Directors of the Fund, the Investment Adviser is
responsible for the actual management of the Fund's portfolio. The
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<PAGE>
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 also will be responsible for the performance of certain
management services for the Fund. Theodore R. Jaeckel, Jr. and John M. Loffredo,
CFA serve as the portfolio managers of the Fund and are primarily responsible
for the Fund's day-to-day management.
For investment advisory services, the Fund pays the Investment Adviser a
monthly fee at an annual rate of 0.95% of the Fund's average daily net assets
(i.e., the average daily value of the total assets of the Fund, minus the sum of
accrued liabilities of the Fund and accumulated dividends on the shares of
preferred stock, if any). For purposes of this calculation, average daily net
assets are determined at the end of each month on the basis of the average net
assets of the Fund for each day during the month.
Under the terms of an Administration Agreement with the Fund, the
Investment Adviser performs or arranges for the performance of the
administrative services (i.e., services other than investment advice and related
portfolio activities) necessary for the operation of the Fund, including paying
all compensation of and furnishing 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 ML & Co. or its subsidiaries.
For administrative services, the Fund pays the Investment Adviser a monthly
fee at an annual rate of 0.25% of the Fund's average daily net assets determined
in the same manner as the fee payable by the Fund under the Investment Advisory
Agreement. The combined advisory and administration fees are greater than the
advisory fees paid by most funds, but are similar in amount to the fees paid by
other continuously offered, closed-end funds.
For the fiscal years ended August 31, 1997, 1998 and 1999, the fee paid by
the Fund to the Investment Adviser pursuant to the Investment Advisory Agreement
was $1,950,602, $2,144,677 and $2,138,848, respectively, and the fee paid by the
Fund pursuant to the Administration Agreement was $513,316, $564,389 and
$562,855, respectively (based on average daily net assets of approximately
$205.9 million, $226.4 million and $225.1 million, respectively).
The Fund pays all other expenses incurred in its operations, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, stock certificates and shareholder reports, charges of the
Fund's custodian and transfer agent, expenses of registering the shares under
Federal and state securities laws, fees and expenses with respect to the
issuance of preferred shares or any borrowing. 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. For the fiscal years ended August 31, 1997, 1998 and 1999, the
reimbursement for such services aggregated $52,907, $60,910 and $74,013,
respectively.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the 1940 Act
because of their ownership of its voting securities and their power to exercise
a controlling influence over its management or policies.
28
<PAGE>
Unless earlier terminated as described below, the Investment Advisory and
Administrative Agreements remain in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund 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 contracts are 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 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 Adviser (or its affiliate) on
behalf of more than one of its clients during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
causing an adverse effect on price.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 of 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 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 in
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. For the
years ended August 31, 1997, 1998 and 1999, the Fund did not pay any brokerage
commissions.
29
<PAGE>
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to providing the best
price and execution, securities firms that provide 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 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 principals for their own accounts, 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." For the fiscal years ended August 31, 1997, 1998 and 1999, the
Fund engaged in no transactions pursuant to such order. However, affiliated
persons of the Fund, including Merrill Lynch, serve as its brokers in certain
over-the-counter transactions conducted on an agency basis.
The Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the 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 length of 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, it is presently anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, will be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average value of the portfolio securities owned by the Fund during the
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 shareholders. For the fiscal
years ended August 31, 1998 and 1999, the Fund's portfolio turnover rate was
36.45% and 39.53%, respectively.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to continue to distribute all its net investment income.
Dividends from such net investment income are paid monthly. All net realized
capital gains, if any, will be distributed to the Fund's shareholders at least
annually. See "Automatic Dividend Reinvestment Plan" for information concerning
the manner in which dividends and distributions may be automatically reinvested
in shares of the Fund. Dividends and distributions are taxable to shareholders
as discussed below whether they are reinvested in shares of the Fund or received
in cash. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
30
<PAGE>
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 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 continue 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.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest" dividends as defined
in Section 852(b)(5) of the Code. Under such section, if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund will be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60 days
after the close of its taxable year. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income exempt
from Federal income tax 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
benefits and railroad retirement benefits subject to Federal income taxes.
Interest on indebtedness incurred or continued to purchase or carry shares of a
RIC paying exempt-interest dividends, such as the Fund, will not be deductible
by the investor for Federal income tax purposes, to the extent attributable to
exempt-interest dividends. Shareholders are advised to consult their tax
advisers 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.
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
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<PAGE>
distributions are considered 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. Generally not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders with
a written notice designating the amounts of any exempt-interest dividends and
capital gain dividends as well as the amounts of any capital gain dividends in
the different categories of capital gain referred to above. Distributions by the
Fund, whether from exempt-interest income, ordinary income or capital gains, are
not eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of 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 which 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 RIC and
received by its shareholders on December 31 of the year in which such dividend
was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. This 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 a Federal alternative minimum tax.
The Fund intends to purchase such "private activity bonds" and will report to
shareholders within 60 days after its taxable year end the portion of its
dividends declared during the year which constitutes an item of tax preference
for alternative minimum tax purposes. The Code further provides that
corporations are subject to a Federal alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax preferences
and the corporation's "adjusted current earnings," which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by 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 high yield securities, as described herein.
Furthermore, the Fund may also 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 such high yield securities
and/or nontraditional instruments could be recharacterized as taxable ordinary
income.
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<PAGE>
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The 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 which 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 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 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 shareholders may be subject to a 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 person 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.
Tender Offers
Under current law, a shareholder who, pursuant to any tender offer, tenders
all of its shares and who, after such tender offer, is not considered to own any
shares under attribution rules contained in the Code will realize a taxable gain
or loss depending upon such shareholder's basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares are held as capital assets
and will be long-term if the shares have been held for more than one year.
Different tax consequences may apply to tendering and nontendering shareholders
in connection with a tender offer, and these consequences will be disclosed in
the related offering documents. For example, if a shareholder tenders less than
all shares owned by or attributed to such shareholder, and if the distribution
to such shareholder does not otherwise qualify as a sale or exchange, the
proceeds received will be treated as a taxable dividend or, if the Fund has
insufficient earnings and profits, a return of capital or capital gain,
depending on the shareholder's basis in the tendered shares. Also, there is a
remote risk that non-tendering shareholders may be considered to have received a
deemed distribution that may be a taxable dividend in whole or in part.
Shareholders may wish to consult their tax advisers prior to tendering.
Likewise, if shareholders
33
<PAGE>
whose shares are acquired by the Fund in the open market sell less than all
shares owned by or attributed to them, a risk exists that these shareholders
will be subject to taxable dividend treatment and a remote risk exists that the
remaining shareholders may be considered to have received a deemed distribution.
Tax Treatment of Options and Futures Transactions
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). 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
such Section 1256 contracts will be 60% long-term and 40% short-term capital
gain or loss. Application of the mark-to-market 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.
State and Local Taxes
The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in an exemption for such dividends under the income or
other tax laws of any state or local taxing authority. Shareholders are advised
to consult their own tax advisers concerning state and local tax matters.
------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by request to his Merrill Lynch Financial Consultant or by
written notification to Merrill Lynch if the shareholder's account is maintained
with Merrill Lynch or by written notification or by telephone (1-800-MER-FUND)
to the Transfer Agent if the shareholder's account is maintained with the
Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date (provided that, in the event
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<PAGE>
that a payment on an account maintained at the Transfer Agent would amount to
$10 or less, a shareholder will not receive such payment in cash and such
payment will be automatically reinvested in additional shares). Cash payments
can also be directly deposited to the shareholder's bank account. No early
withdrawal charge will be imposed upon redemption of shares issued as a result
of the automatic reinvestment of dividends or capital gains distributions.
The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
The automatic reinvestment of dividends and distributions does not relieve
participants of any Federal income tax that may be payable (or required to be
withheld) on such dividends or distributions. See "Taxes."
MUTUAL FUND INVESTMENT OPTION
Shareholders have an investment option consisting of the right to reinvest
the net proceeds from a sale of shares (the "Original Shares") in a tender offer
by the Fund in Class D shares of certain MLAM-sponsored open-end funds
("Eligible Class D Shares"), without the imposition of an initial sales charge,
if the conditions set forth below are satisfied. First, net proceeds from the
sale of the Original Shares in the tender offer must be immediately reinvested
in Eligible Class D Shares. Second, the investment option is available only with
respect to the proceeds of shares as to which no early withdrawal charge (as
described below) is applicable. Shareholders who already own Class A shares of
the fund in which they wish to invest proceeds of the Original Shares, in the
same account into which they will purchase the additional shares, may purchase
Class A rather than Class D shares so long as all the other requirements of this
paragraph are met. Class D shares are subject to an ongoing account maintenance
fee at an annual rate of up to 0.25% of the average daily net asset value of the
applicable fund. Before taking advantage of this investment option, shareholders
should obtain a currently effective prospectus of the fund in which they intend
to invest and should consult their Merrill Lynch Financial Consultant.
NET ASSET VALUE
The net asset value per share of common stock is determined once daily
Monday through Friday after the close of business on the NYSE on each day the
NYSE is open for trading. The NYSE generally closes at 4:00 p.m. Eastern time.
The NYSE is not open on New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. 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 and dividends accrued but not yet received)
minus all liabilities (including accrued expenses) is divided by the total
number of shares of common stock outstanding at such time, rounded to the
nearest cent. Expenses, including the fees payable to the Investment Adviser and
Distributor, are accrued daily.
The 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. Market illiquidity may make it difficult for the Fund to obtain
accurate quotations for its holdings of high yield Municipal Bonds. Municipal
Bonds for which
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<PAGE>
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. Obligations with remaining maturities of 60 days or less
are valued at amortized cost, unless this method no longer produces fair
valuations. Positions in futures contracts are valued at closing prices for such
contracts established by the exchange on which they are traded, or if market
quotations are not readily available, are valued at fair value on a consistent
basis using methods determined in good faith by the Board of Directors.
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 and reclassify
any unissued shares of each class or series of capital stock by setting or
changing in any one or more respects the designation and number of shares of any
such class or series, and the nature, rates, amounts and times at which and the
conditions under which dividends shall be payable on, and the voting,
conversion, redemption and liquidation rights of, such class or series and any
other preferences, rights, restrictions and qualifications applicable thereto.
Shares of common stock, when issued and outstanding, are 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.
The Fund sends unaudited reports at least semi-annually and audited
financial statements to all of its shareholders of record. The following table
sets forth the authorized shares of the Fund, the number of shares held by the
Fund for its own account and the total number of shares outstanding as of
September 30, 1999, exclusive of that held by the Fund.
<TABLE>
<CAPTION>
Amount
Outstanding As of
September 30, 1999
Amount Held (Exclusive of Amount
Amount By Fund On Held By Fund
Class of Shares Authorized Own Account For Own Account)
- ------------- ---------- ------------- ------------------
<S> <C> <C> <C>
Common stock ...................................... 200,000,000 0 19,768,148.876
</TABLE>
Certain Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director elected by holders of capital
stock may be removed from office only for cause by vote of the holders of at
least 662/3% of the shares of capital stock of the Fund entitled to be voted on
the matter.
36
<PAGE>
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 75% 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:
o a merger or consolidation or statutory share exchange of the Fund
with other corporations;
o 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
o 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.
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 Articles of Incorporation on file with the
Commission for the full text of these provisions.
PERFORMANCE DATA
From time to time the Fund may include its yield, tax equivalent yield,
and/or total return for various specified time periods in advertisements or
information furnished to present or prospective shareholders.
The yield of the Fund refers to the income generated by an investment in
the Fund over a stated period. Yield is calculated by annualizing the
distribution over a stated period and dividing the product by the average per
share net asset value. For the fiscal year ended August 31, 1999, the Fund
earned $0.553 per share income dividends, representing a net annualized yield of
5.40%, based on a month-end per share net asset value of $10.24. Tax-equivalent
yield quotations will be computed by dividing (a) the part of the Fund's yield
that is tax-exempt by (b) one minus a stated tax rate and (c) adding the result
to that part, if any, of the Fund's yield that is not tax-exempt. The
tax-equivalent yield for the fiscal year ended August 31, 1999 (based on a
Federal income tax rate of 28%) was 7.50%.
The Fund also may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the value of such investment at the end of
the period. For the fiscal year ended August 31, 1999, the annual total return
of the Fund was (3.16)%, based on the change in per share net asset value from
$11.46 to $10.24, and assuming reinvestment of $0.616 per share income dividends
and $0.263 per share capital gains distributions.
The calculation of yield, tax-equivalent yield, and total return does not
reflect the imposition of any early withdrawal charges or the amount of any
shareholder's tax liability.
Yield, tax-equivalent yield, and total return figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's yield is expected to fluctuate, and its total return
varies depending on market conditions, the Municipal Bonds and other securities
comprising the Fund's portfolio, the
37
<PAGE>
Fund's operating expenses and the amount of net realized and unrealized capital
gains or losses during the period.
On occasion, the Fund may compare its yield and tax-equivalent yield to
yield data published by Lipper Analytical Services, Inc. or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News & World
Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and
Fortune Magazine. Yield comparisons should not be considered indicative of the
Fund's yield and tax-equivalent yield or relative performance for any future
period.
CUSTODIAN
The Fund's securities and cash are held under a custody agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT
The transfer agent for the shares of the Fund is Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, a subsidiary
of ML & Co.
Pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement with the Fund (the "Transfer Agency Agreement"), the
transfer agent is responsible for the issuance, transfer and tender of shares
and the opening and maintenance of shareholder accounts. The transfer agent
receives an annual fee of $14.00 per shareholder account, and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. Additionally, a $.20 monthly
closed account charge is assessed on all accounts that close during the calendar
year. Application of this fee commences the month following the month the
account is closed and terminates at the end of the calendar year. For purposes
of the Transfer Agency Agreement, the term "account" includes a shareholder
account maintained directly by the Transfer Agent and any other account
representing the beneficial interest of a person in the relevant share class on
a recordkeeping system, provided the recordkeeping system is maintained by a
subsidiary of ML & Co. For the year ended August 31, 1999, the Fund's payments
to the transfer agent pursuant to the Transfer Agency Agreement, including
reimbursement for out-of-pocket expenses, aggregated $113,992.
Shareholder Reports. Only one copy of each shareholder report and certain
shareholder communications will be mailed to each identified shareholder
regardless of the number of accounts such shareholder has. If a shareholder
wishes to receive separate copies of each report and communication for each of
the shareholder's related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Financial Data Services, Inc. at 800-637-3863.
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<PAGE>
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the 1934 Act and
the 1940 Act and in accordance therewith is required to file reports and other
information with the Commission. Any such reports and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C 20549, and
at the following regional offices of the Commission: Regional Office, at Seven
World Trade Center, Suite 1300, New York, New York 10048; Pacific Regional
Office, at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036;
and Midwest Regional Office, at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can
be obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports and information
statements and other information regarding registrants, including the Fund, that
file electronically with the Commission.
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 prior to 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.
LEGAL OPINIONS
Certain legal matters in connection with the common stock offered hereby
will be passed upon for the Fund by Brown & Wood LLP, One World Trade Center,
New York, New York 10048-0557.
39
<PAGE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this
prospectus by reference to its 1999 annual report to shareholders. You may
request a copy of the annual report at no charge by calling 1-800-456-4587 ext.
789 between 8:00 a.m. and 8:00 p.m. on any business day.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 116-300 Village Boulevard, Princeton, New Jersey
08540-6400, have been selected as the independent auditors of the Fund. The
selection of independent auditors is subject to ratification by the shareholders
of the Fund. The independent auditors are responsible for auditing the financial
statements of the Fund.
40
<PAGE>
APPENDIX
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payment and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic category.
41
<PAGE>
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 related 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 municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers or other
forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
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<PAGE>
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 the 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 on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative
B characteristics."BB" indicates the least degree of speculation and
"C" the highest degree of
CCC speculation. While such bonds will likely have some quality and
protective characteristics, these
CC may be outweighed by large uncertainties or major exposures to
adverse conditions.
C
D Debt rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during
such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or Minus ( - ): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
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" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high a for issues designated "A-1."
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<PAGE>
A-3 Issues carrying this designation have an adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
Description of Standard & Poor's Short-Term Issue Credit Ratings
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
o 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.
44
<PAGE>
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have
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.
45
<PAGE>
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 twelve months.
Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can
be identified which could assist the obligor in satisfying its
debt service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the basis
D 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.
46
<PAGE>
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than
issues rated "F-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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<PAGE>
-----------------------------
POTENTIAL
INVESTORS
Open an account (two options)
-----------------------------
(1) (2)
- -------------------------- --------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
or SECURITIES DEALER Financial Data Services, Inc.
4800 Deer Lake Drive East
Advises shareholders on Jacksonville, Florida 32246-6484
their Fund investments.
- -------------------------- Performs recordkeeping and
reporting services.
--------------------------------
-----------------------------------------------
DISTRIBUTOR
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
-----------------------------------------------
- ------------------------------ ----------------------------
COUNSEL CUSTODIAN
Brown & Wood LLP The Bank of New York
One World Trade Center 90 Washington Street
New York, New York 10048-0557 12th Floor
New York, New York 10286
Provides legal advice --------------
to the Fund. THE FUND Holds the Fund's assets
- ------------------------------ for safekeeping.
The Board of ----------------------------
Directors
oversees the Fund.
------------------
- ----------------------------------- ------------------------------------
INDEPENDENT AUDITORS
Investment Adviser
Merrill Lynch Asset Management, L.P.
Deloitte & Touche LLP
116-300 Village Boulevard
Princeton, New Jersey 08540-6400
ADMINISTRATIVE OFFICES
Audits the financial 800 Scudders Mill Road
statements of the Fund on behalf of Plainsboro, New Jersey 08536
the shareholders.
- ----------------------------------- MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's
day-to-day activities.
------------------------------------
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
<PAGE>
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. No
one is authorized to provide you with information that is different from
information contained in this prospectus.
--------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ............................ 2
Risk Factors and Special Considerations ....... 5
Fee Table ..................................... 7
Financial Highlights .......................... 8
The Fund ...................................... 9
Investment Objective and Policies ............. 9
Investment Restrictions ....................... 20
Purchase of Shares ............................ 21
Tender Offers ................................. 23
Early Withdrawal Charge ....................... 24
Directors and Officers ........................ 25
Investment Advisory and Administrative
Arrangements ................................ 27
Portfolio Transactions ........................ 29
Dividends and Distributions ................... 30
Taxes ......................................... 31
Automatic Dividend Reinvestment Plan .......... 34
Mutual Fund Investment Option ................. 35
Net Asset Value ............................... 35
Description of Capital Stock .................. 36
Performance Data .............................. 37
Custodian ..................................... 38
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent ............. 38
Additional Information ........................ 39
Legal Opinions ................................ 39
Financial Statements .......................... 40
Independent Auditors .......................... 40
Appendix -- Ratings of Municipal Bonds ........ 41
Code #11263-1299
[LOGO] Merrill Lynch
Merrill Lynch
High Income Municipal
Bond Fund, Inc.
[Artwork of circular compass and
graph paper appears here]
Prospectus
December , 1999
Distributor:
Merrill Lynch
Funds Distributor,
a division of
Princeton Funds
Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(1) Financial Statements:
Part A:
Financial Highlights for each of the years in the eight-year period
ended August 31, 1999 and for the period November 2, 1990 (commencement of
operations) to August 31, 1991.
Incorporated by reference in Part B:
Schedule of Investments as of August 31, 1999.*
Statement of Assets and Liabilities as of August 31, 1999.*
Statement of Operations for the year ended August 31, 1999.*
Statements of Changes in Net Assets for each of the years in the
two-year period ended August 31, 1999.*
Financial Highlights for each of the years in the five-year period ended
August 31, 1999.*
- ------------
* Included in the Registrant's 1999 Annual Report to shareholders filed with
the Securities and Exchange Commission for the year ended August 31, 1999
pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as
amended (the "1940 Act").
(2) Exhibits:
Exhibit
Number Description
------- ----------
(a) -- Articles of Incorporation of Registrant.(a)
(b) -- Form of By-Laws of Registrant.(a)
(c) -- Not applicable.
(d) (1) -- Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant.(b)
(2) -- Specimen certificate for shares of Common Stock of
Registrant.(a)
(e) -- Not applicable.
(f) -- Not applicable.
(g) (1) -- Investment Advisory Agreement between Registrant and Merrill
Lynch Asset Management, L.P.(a)
(2) -- Administration Agreement between Registrant and Merrill Lynch
Asset Management, L.P.(a)
(h) (1) -- Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
(2) -- Form of Selected Dealer Agreement.(a)
(i) -- Not applicable.
(j) -- Custodian Contract between Registrant and The Bank of New
York.(a)
(k) (1) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc. now known as Financial Data
Services, Inc.(a)
(2) -- Agreement between Merrill Lynch & Co., Inc. and Registrant
relating to the use by Registrant of the Merrill Lynch Name.(a)
(l) -- Not applicable.
(m) -- Not applicable.
(n) -- Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
(o) -- Not applicable.
(p) -- Certificate of Merrill Lynch Asset Management, L.P.(a)
(q) -- Not applicable.
(r) -- Financial data schedule.
- -------------
(a) Filed on November 6, 1995, as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement (No. 33-50861).
(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
the Registrant's Registration Statement under the Securities Act of 1933, as
amended (the "Registration Statement"); and to Article II, Article III
(Sections 1, 3, 5 and 17), Article VI, Article VII, Article XII, Article
XIII and Article XIV of the Registrant's By-Laws, filed as Exhibit (b) to
the Registrant's Registration Statement.
C-1
<PAGE>
Item 25. Marketing Arrangements.
Previously provided as Exhibits h(1) and h(2) to the Registrant's
Registration Statement.
Item 26. Other Expenses of Issuance and Distribution.
Not applicable.
Item 27. Persons Controlled by or Under Common Control with Registrant.
None.
Item 28. Number of Holders of Securities.
<TABLE>
<CAPTION>
Number of
Holders
Title of Class September 30, 1999
-------------- ------------------
<S> <C>
Shares of common stock, par value $0.10 per share ......................... 6,209
</TABLE>
- ------------
Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
ITEM 29. Indemification.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution Agreement. Article VI of the
By-Laws provides that each officer and director of the Registrant shall be
indemnified by the Registrant to the full extent permitted under the General
Laws of the State of Maryland, except that such indemnity shall not protect any
such person against any liability to the Registrant or any stockholder thereof
to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. Absent a court determination that an
officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a defense
to the action, including costs connected with the preparation of a settlement;
(ii) advances may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to receive from
the Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Directors, or an independent legal
counsel in a written opinion shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify Merrill Lynch Funds
Distributor, Inc. (the "Distributor") and each person, if any, who
C-2
<PAGE>
controls the Distributor within the meaning of the Securities Act of 1933 (the
"Act"), against certain types of civil liabilities arising in connection with
the Registration Statement or Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 30. Business and Other Connections of Investment Adviser.
Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or "MLAM"),
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 Financial Services Fund,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund
for Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund., Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch Index Fund, Inc., 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 U.S. Treasury Money Fund, Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by
Hotchkis and Wiley, a division of MLAM); and for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as
sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser, acts as the 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 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.,
C-3
<PAGE>
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
California Insured Fund V, Inc., MuniHoldings Florida Insured Fund, MuniHoldings
Florida Insured Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings
Florida Insured Fund IV, MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New Jersey Insured
Fund III, Inc., MuniHoldings New Jersey Insured Fund IV, Inc., MuniHoldings
Insured Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Insured
Fund III, Inc., MuniHoldings Insured Fund IV, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniHoldings New York Insured Fund III, Inc., MuniHoldings New
York Insured Fund IV, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest Florida Fund, 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, Senior High Income Portfolio, Inc. and
WorldWide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Intermediate Government Bond Fund is
One Financial Center, 23rd Floor, Boston, Massachusetts 02110-2665. The address
of the Investment Adviser, FAM, 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 Merrill
Lynch Funds Distributor ("MLFD") is 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, 250 Vesey Street, New York, New York 10281-1201. The address of
Financial Data Services, Inc. ("FDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
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 has been engaged for the past
two years for his, 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.
Messrs. Glenn and Burke also hold the same position with all or substantially
all of the investment companies advised by FAM as they do with those advised by
the Investment Adviser. Messrs. Doll, Giordano and Monagle are directors or
officers of one or more of such companies.
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Manager 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 FAM
Jeffrey M. Peek .............. President President of FAM since 1997; President and Director of
Princeton Services since 1997; Executive Vice President of
ML & Co.; Managing Director and Co-Head of the Investment
Banking Division of Merrill Lynch in 1997; Senior Vice
President and Director of the Global Securities and Economic
Division of Merrill Lynch from 1995 to 1997
Terry K. Glenn .............. Executive Vice President Executive Vice President of FAM; Executive Vice President
and Director of Princeton Services; President and
Director of PFD; Director of FDS, Inc.; President of
Princeton Administrators, L.P.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Manager Profession, Vocation or Employment
- ----- -------------------- ----------------------------------
<S> <C> <C>
Gregory A. Bundy Chief Operating Officer Executive Vice President of FAM; Executive Vice
and Managing Director President and Director of Princeton Services;
President and Director of PFD; Director of FDS;
President of Princeton Adminstrators
Donald C. Burke Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of Princeton
Services; Vice President and Treasurer of PFD
Michael G. Clark Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services; Treasurer and Director of PFD;
First Vice President of the Investment Adviser
from 1997 to 1999
Robert C. Doll Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Chief Investment Officer of
Oppenheimer Funds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999
Linda L. Federici Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services
Vincent R. Giordano Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services
Michael J. Hennewinkel Senior Vice President, Senior Vice President, General Counsel and
General Counsel Secretary of FAM; Senior Vice President
and Secretary of Princeton Services
Philip L. Kirstein Senior Vice President Senior Vice President of FAM; Senior Vice
President, Director and Secretary
of Princeton Services
Debra W. Landsman-Yaros Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services; Senior Vice President of PFD
Stephen M.M. Miller Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Brian A. Murdock Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services;
Director of PFD
Gregory D. Upah Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
Item 31. Location of Accounts 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
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536 and FDS, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Item 32. Management Services.
Not Applicable.
C-5
<PAGE>
Item 33. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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 hereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the 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 24th day of November, 1999.
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
(Registrant)
By /s/ TERRY K. GLENN
------------------------------------
(Terry K. Glenn, President)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ TERRY K. GLENN President (Principal Executive November 24, 1999
- --------------------------------------- Officer) and Director
(Terry K. Glenn)
DONALD C. BURKE* Treasurer (Principal Financial
- --------------------------------------- and Accounting Officer)
(Donald C. Burke)
RONALD W. FORBES* Director
- ---------------------------------------
(Ronald W. Forbes)
CYNTHIA A. MONTGOMERY* Director
- ---------------------------------------
(Cynthia A. Montgomery)
CHARLES C. REILLY* Director
- ---------------------------------------
(Charles C. Reilly)
KEVIN A. RYAN* Director
- ---------------------------------------
(Kevin A. Ryan)
RICHARD R. WEST* Director
- ---------------------------------------
(Richard R. West)
ARTHUR ZEIKEL* Director
- ---------------------------------------
(Arthur Zeikel)
*By: /s/Terry K. Glenn November 24, 1999
---------------------------------------
(Terry K. Glenn, Attorney-in-Fact)
</TABLE>
C-7
<PAGE>
POWER OF ATTORNEY
The undersigned Directors/Trustees and officers of each of the registered
investment companies listed below hereby authorize Terry K. Glenn, Donald C.
Burke and Joseph T. Monagle, Jr., or any of them, as attorney-in-fact, to sign
on his or her behalf in the capacities indicated any Registration Statement or
amendment thereto (including post-effective amendments) for each of the
following registered investment companies and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission: CBA Money Fund,
CMA Government Securities Fund, CMA Money Fund, CMA Tax-Exempt Fund, CMA
Treasury Fund, CMA Multi-State Municipal Series Trust, Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc. Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch High Income Municipal
Bond Fund, Inc., Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Municipal Intermediate Term Fund of Merrill Lynch Municipal Series Trust,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Municipal Strategy Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Senior
Floating Rate Fund II, Inc., Merrill Lynch Utility Income Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured Fund,
Inc., MuniHoldings California Insured Fund, 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 IV, MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New Jersey
Insured Fund III, Inc., MuniHoldings New York Insured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., Senior High Income Portfolio, Inc., The Corporate
Fund Accumulation Program, Inc., and The Municipal Fund Accumulation Program,
Inc.
Dated: March 30, 1999
/s/ TERRY K. GLENN
- --------------------------------------------------------
Terry K. Glenn
(President/Principal Executive Officer/Director/Trustee)
/s/ RONALD W. FORBES
- --------------------------------------------------------
Ronald W. Forbes
(Director/Trustee)
/s/ CYNTHIA A. MONTGOMERY
- --------------------------------------------------------
Cynthia A. Montgomery
(Director/Trustee)
/s/ CHARLES C. REILLY
- --------------------------------------------------------
Charles C. Reilly
(Director/Trustee)
/s/ KEVIN A. RYAN
- --------------------------------------------------------
Kevin A. Ryan
(Director/Trustee)
/s/ RICHARD R. WEST
- --------------------------------------------------------
Richard R. West
(Director/Trustee)
/s/ ARTHUR ZEIKEL
- --------------------------------------------------------
Arthur Zeikel
(Director/Trustee)
/s/ DONALD C. BURKE
- --------------------------------------------------------
Donald C. Burke
(Vice President/Treasurer/Principal Financial Officer)
C-8
<PAGE>
EXHIBIT INDEX
Exhibit
Numbers Description
- -------- ----------
(n) -- Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
27 -- Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<INVESTMENTS-AT-COST> 202,052,157
<INVESTMENTS-AT-VALUE> 200,295,256
<RECEIVABLES> 10,505,379
<ASSETS-OTHER> 166,363
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 210,966,998
<PAYABLE-FOR-SECURITIES> 8,524,447
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 868,809
<TOTAL-LIABILITIES> 9,393,256
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 206,481,505
<SHARES-COMMON-STOCK> 19,682,514
<SHARES-COMMON-PRIOR> 20,400,072
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (3,150,862)
<ACCUM-APPREC-OR-DEPREC> (1,756,901)
<NET-ASSETS> 201,573,742
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,701,467
<OTHER-INCOME> 0
<EXPENSES-NET> (3,282,206)
<NET-INVESTMENT-INCOME> 11,419,261
<REALIZED-GAINS-CURRENT> (569,093)
<APPREC-INCREASE-CURRENT> (17,755,283)
<NET-CHANGE-FROM-OPS> (6,905,115)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,419,261)
<DISTRIBUTIONS-OF-GAINS> (6,793,063)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,231,384
<NUMBER-OF-SHARES-REDEEMED> (2,680,943)
<SHARES-REINVESTED> 732,001
<NET-CHANGE-IN-ASSETS> (32,139,166)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,211,294
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,138,848
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,282,206
<AVERAGE-NET-ASSETS> 225,141,902
<PER-SHARE-NAV-BEGIN> 11.46
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> (.89)
<PER-SHARE-DIVIDEND> (.55)
<PER-SHARE-DISTRIBUTIONS> (.33)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.24
<EXPENSE-RATIO> 1.46
</TABLE>
Exhibit n
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch High Income Municipal Bond Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 2 to this Registration Statement No. 333-39839 on Form N-2 of our report
dated October 5, 1999 appearing in the annual report to shareholders of Merrill
Lynch High Income Municipal Bond Fund, Inc. for the year ended August 31, 1999,
and to the reference to us under the caption "Financial Highlights" in the
Prospectus, which is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
November 23, 1999
