AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1994
REGISTRATION NO. 33-
811-7642
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO.
(check appropriate box or boxes)
------------------------
MUNIASSETS FUND, INC.
(Exact name of Registrant as Specified in Charter)
------------------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-2000
(Registrant's Telephone Number, including Area Code)
------------------------
MARK B. GOLDFUS
MUNIASSETS FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
------------------------
Copies to:
<TABLE>
<S> <C>
THOMAS R. SMITH, JR., ESQ. LEONARD B. MACKEY, JR., ESQ.
BROWN & WOOD ROGERS & WELLS
ONE WORLD TRADE CENTER 200 PARK AVENUE
NEW YORK, NEW YORK 10048 NEW YORK, NEW YORK 10166
</TABLE>
------------------------
Approximate date of proposed public offering: As soon as practicable after
the effective date of this Registration Statement.
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE (1) FEE
Common Stock ($.10 par
value) 6,610,098 $12.0625 $79,734,307 $27,495.00
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, based on the
average of the high and low sales prices reported on the New York Stock
Exchange on August 30, 1994.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
<TABLE><CAPTION>
ITEM NO. ITEM CAPTION JOINT PROXY STATEMENT--PROSPECTUS CAPTION
- ---------- --------------------------------- ------------------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Beginning of Registration
Statement and Outside Front
Cover Page of Prospectus....... Cover Page
Item 2. Beginning and Outside Back Cover
Page of Prospectus............... Table of Contents; Available Information
Item 3. Synopsis and Risk Factors........ Summary; Special Considerations Regarding the Reorganization
Item 4. Information about the
Transaction...................... Proposal No. 1--The Reorganization
Item 5. Information about the
Registrant....................... Available Information; The Reorganization; Election of Directors;
Additional Information About the Funds; Management of the Funds
Item 6. Information about the Company
Being
Acquired....................... Available Information; The Reorganization; Election of Directors;
Additional Information About the Funds; Management of the Funds
Item 7. Voting Information............... The Annual Meetings; The Reorganization; Election of Directors
Item 8. Interest of Certain Persons and
Experts.......................... Not Applicable
Item 9. Additional Information Required
for Reoffering by Persons
Deemed to be Underwriters...... Not Applicable
PART B JOINT PROXY STATEMENT PROSPECTUS CAPTION(1)
------------------------------------------------------------------
Cover Page....................... Not Applicable
Item 10.
Table of Contents................ Not Applicable
Item 11.
Additional Information about the
Item 12. Registrant....................... Election of Directors; Additional Information About the Funds;
Management of the Funds; Experts; Index to Financial Statements
Additional Information about the
Item 13. Company Being Acquired......... Election of Directors; Additional Information About the Funds;
Management of the Funds; Experts; Index to Financial Statements
Financial Statements.............
Item 14.
PART C
</TABLE>
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
- ---------------
(1) All of the information required to be included in Part B is contained in the
Joint Proxy Statement Prospectus. Accordingly, there is no separate
Statement of Additional Information.
<PAGE>
MUNIASSETS FUND, INC.
September , 1994
Dear Stockholder:
We are pleased to invite you to the Annual Meeting of the Stockholders of
the MuniAssets Fund, Inc. The meeting is scheduled for [Friday, October 21,]
1994 at 9:00 a.m. at the offices of Merrill Lynch Asset Management, 800 Scudders
Mill Road, Plainsboro, New Jersey. We hope you will be able to attend.
At the meeting you will be asked to consider and approve a very important
proposal. Subject to stockholder approval, your Fund would acquire substantially
all the assets and assume substantially all the liabilities of the MuniBond
Income Fund, Inc. in exchange for newly issued shares of the Fund's Common
Stock, which would then be distributed to MuniBond stockholders. The MuniBond
Income Fund, Inc. is similar to your Fund in virtually every respect: both are
exchange-traded, non-diversified, closed-end management investment companies and
have the same investment objectives and comparable investment portfolios. The
Board of Directors of each Fund has unanimously approved the transaction and
recommends stockholders vote for the proposal.
The combination of the two Funds should lead to efficiencies of scale, such
as reduced administrative expenses, resulting in lower expenses per share and
increased net earnings rates, greater efficiency and flexibility in portfolio
management and a more liquid trading market. The combination strengthens
management's ability to maintain tax-free dividends that you seek.
YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN. AFTER REVIEWING
THE ENCLOSED MATERIALS, PLEASE TAKE A MOMENT TO COMPLETE, DATE AND SIGN YOUR
PROXY CARD AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE TODAY. IF YOU PLAN TO
ATTEND THE MEETING, WE LOOK FORWARD TO SEEING YOU ON [OCTOBER 21].
We appreciate your continued support and confidence, and I thank you for
your goodwill.
Very truly yours,
ARTHUR ZEIKEL
Chairman of the Board
<PAGE>
MUNIBOND INCOME FUND, INC.
September , 1994
Dear Stockholder:
We are pleased to invite you to the Annual Meeting of the Stockholders of
the MuniBond Income Fund, Inc. The meeting is scheduled for [Friday, October
21], 1994 at 9:00 a.m. at the offices of Merrill Lynch Asset Management, 800
Scudders Mill Road, Plainsboro, New Jersey. We hope you will be able to attend.
At the meeting you will be asked to consider and approve a very important
proposal. Subject to stockholder approval, your Fund would transfer
substantially all its assets and liabilities to the MuniAssets Fund, Inc. in
exchange for newly issued shares of that Fund, which would then be distributed
to MuniBond stockholders. If the transfer is approved, you will become a
stockholder of MuniAssets Fund, Inc., which is similar to your Fund in virtually
every respect: both are exchange-traded, non-diversified, closed-end management
investment companies and have the same investment objectives and comparable
investment portfolios. The Board of Directors of each Fund has unanimously
approved the transaction and recommends stockholders vote for the proposal.
The combination of the two Funds should lead to efficiencies of scale, such
as reduced administrative expenses, resulting in lower expenses per share and
increased net earnings rates, greater efficiency and flexibility in portfolio
management and a more liquid trading market. The combination strengthens
management's ability to maintain the tax-free dividends that you seek.
YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN. AFTER REVIEWING
THE ENCLOSED MATERIALS, PLEASE TAKE A MOMENT TO COMPLETE, DATE AND SIGN YOUR
PROXY CARD AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE TODAY. IF YOU PLAN TO
ATTEND THE MEETING, WE LOOK FORWARD TO SEEING YOU ON [OCTOBER 21].
We appreciate your continued support and confidence, and I thank you for
your goodwill.
Very truly yours,
ARTHUR ZEIKEL
Chairman of the Board
<PAGE>
MUNIASSETS FUND, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OCTOBER 21, 1994
------------------------
TO THE STOCKHOLDERS OF MUNIASSETS FUND, INC.:
Notice is hereby given that the 1994 Annual Meeting of Stockholders (the
"Meeting") of MuniAssets Fund, Inc. (the "Fund") will be held at the offices of
Merrill Lynch Asset Management, 800 Scudders Mill Road, Plainsboro, New Jersey,
on Friday, October [21], 1994 at 9:00 A.M. for the following purposes:
(1) To approve or disapprove the issuance of up to 6,610,098 shares of
the Fund's common stock, par value $0.10, in connection with an Agreement
and Plan of Reorganization between the Fund and MuniBond Income Fund, Inc.
(the "Acquired Fund") whereby the Fund would acquire substantially all of
the assets, and assume substantially all of the liabilities, of the
Acquired Fund.
(2) To elect a Board of Directors to serve for the ensuing year.
(3) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche to serve as independent auditors of the Fund for its
current fiscal year.
(4) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on August 26, 1994
as the record date for the determination of stockholders entitled to notice
of and to vote at the Meeting or any adjournment thereof.
A complete list of the stockholders of the Fund entitled to vote at the
Meeting will be available and open to the examination of any stockholder of the
Fund for any purpose germane to the Meeting during ordinary business hours from
and after , 1994, at the office of the Fund, 800 Scudders Mill
Road, Plainsboro, New Jersey. You are cordially invited to attend the Meeting.
Stockholders who do not expect to attend the Meeting in person are requested to
complete, date and sign the enclosed form of proxy and return it promptly in the
envelope provided for this purpose. The enclosed proxy is being solicited on
behalf of the Board of Directors of the Fund.
By Order of the Board of Directors
MARK B. GOLDFUS
Secretary
Plainsboro, New Jersey
Dated: September , 1994
<PAGE>
MUNIBOND INCOME FUND, INC.
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OCTOBER 21, 1994
------------------------
TO THE STOCKHOLDERS OF MUNIBOND INCOME FUND, INC.:
Notice is hereby given that the 1994 Annual Meeting of Stockholders (the
"Meeting") of MuniBond Income Fund, Inc. (the "Fund") will be held at the
offices of Merrill Lynch Asset Management, 800 Scudders Mill Road, Plainsboro,
New Jersey, on [Friday, October 21], 1994 at 9:00 A.M. for the following
purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization
between the Fund and MuniAssets Fund, Inc. (the "Acquiring Fund") whereby
the Acquiring Fund would acquire substantially all of the assets, and
assume substantially all of the liabilities, of the Fund.
(2) To elect a Board of Directors to serve for the ensuing year.
(3) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche to serve as independent auditors of the Fund for its
current fiscal year.
(4) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on August 26, 1994
as the record date for the determination of stockholders entitled to notice of
and to vote at the Meeting or any adjournment thereof.
A complete list of the stockholders of the Fund entitled to vote at the
Meeting will be available and open to the examination of any stockholder of the
Fund for any purpose germane to the Meeting during ordinary business hours from
and after , 1994, at the office of the Fund, 800 Scudders Mill
Road, Plainsboro, New Jersey. You are cordially invited to attend the Meeting.
Stockholders who do not expect to attend the Meeting in person are requested to
complete, date and sign the enclosed form of proxy and return it promptly in the
envelope provided for this purpose. The enclosed proxy is being solicited on
behalf of the Board of Directors of the Fund.
By Order of the Board of Directors
MARK B. GOLDFUS
Secretary
Plainsboro, New Jersey
Dated: September , 1994
<PAGE>
SUBJECT TO COMPLETION--DATED SEPTEMBER 1, 1994
MUNIASSETS FUND, INC.
AND
MUNIBOND INCOME FUND, INC.
JOINT PROXY STATEMENT
ANNUAL MEETINGS OF STOCK HOLDERS TO BE HELD [OCTOBER 21], 1994
------------------------
MUNIASSETS FUND, INC.
PROSPECTUS
------------------------
This Joint Proxy Statement--Prospectus is being furnished to the
stockholders of MuniAssets Fund, Inc. (the "Acquiring Fund") in connection with
the solicitation of proxies by the Board of Directors of the Acquiring Fund from
holders of the Acquiring Fund's outstanding shares of common stock for use at
the Annual Meeting of Stockholders of the Acquiring Fund (the "Acquiring Fund
Annual Meeting") to be held on [Friday, October 21], 1994, at 9:00 a.m., and
at any and all adjournments thereof. At the Acquiring Fund Annual Meeting,
stockholders of the Acquiring Fund will be asked to approve a proposal to issue
up to 6,610,098 shares of common stock, $.10 par value per
(cover continued on following page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT--PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT--PROSPECTUS IS , 1994.
<PAGE>
(cover continued from previous page)
share, in connection with an Agreement and Plan of Reorganization, dated
September , 1994 (the "Agreement"), between the Acquiring Fund and MuniBond
Income Fund, Inc. (the "Acquired Fund" and, together with the Acquiring Fund,
the "Funds") whereby the Acquiring Fund would acquire substantially all of the
assets, and assume substantially all of the liabilities, of the Acquired Fund.
The number of shares of the Acquiring Fund to be issued to the Acquired Fund
would be that number having an aggregate net asset value equal to the aggregate
value of the net assets of the Acquired Fund transferred to the Acquiring Fund.
This Joint Proxy Statement Prospectus is also being furnished to stockholders of
the Acquired Fund in connection with the solicitation of proxies by the Board of
Directors of the Acquired Fund from holders of the Acquired Fund's outstanding
shares of common stock for use in the Annual Meeting of Stockholders of the
Acquired Fund (the "Acquired Fund Annual Meeting" and, together with the
Acquiring Fund Annual Meeting, the "Annual Meetings") to be held on [Friday,
October 21], 1994 at 9:00 a.m., and at any and all adjournments thereof. At the
Acquired Fund Annual Meeting, stockholders will be asked to approve the
Reorganization (as defined below).
Following receipt of the Acquiring Fund Shares, the Acquired Fund would be
dissolved and the Acquiring Fund Shares would be distributed pro rata to the
stockholders of the Acquired Fund. This transaction, consisting of the transfer
to the Acquiring Fund of substantially all of the assets of the Acquired Fund in
exchange for the Acquiring Fund Shares and the Acquiring Fund's assumption of
substantially all of the liabilities of the Acquired Fund, and the subsequent
distribution of the Acquiring Fund Shares in dissolution of the Acquired Fund,
is referred to herein as the "Reorganization."
The terms and conditions of the Reorganization and related transactions are
more fully described in this Joint Proxy Statement--Prospectus and in the
Agreement, a copy of which is attached as Annex A hereto.
In addition, at the Annual Meetings, stockholders of each Fund will be
asked to consider and vote upon the election of directors and the ratification
of independent accountants for their respective Fund. The stockholders of the
Acquired Fund are being asked to vote on these additional matters in case the
Reorganization is not approved and the Acquired Fund remains a separate entity;
if the Reorganization is approved, the Acquired Fund's directors will cease to
serve, and its Investment Management Agreement will terminate, upon the
dissolution of the Acquired Fund pursuant to the Agreement.
The Funds are substantially similar non-diversified, closed-end management
investment companies having identical objectives; the investment objective of
both Funds is high current income exempt from Federal income taxes by investing
in a portfolio of medium to lower grade or unrated municipal obligations the
interest on which, in the opinion of bond counsel to the issuer, is exempt from
Federal income taxes. Fund Asset Management, L.P. acts as the investment adviser
and manager for both Funds, and the same individuals constitute the Boards of
Directors of both Funds.
The principal executive office of each Fund is located at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.
This Joint Proxy Statement--Prospectus sets forth concisely the information
that stockholders of the Funds should know before voting on the proposals
described above and should be retained for future reference.
ii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
iii
<PAGE>
TABLE OF CONTENTS
PAGE
---------
AVAILABLE INFORMATION.......................... 1
SUMMARY........................................ 2
THE ANNUAL MEETINGS............................ 7
General...................................... 7
Voting; Proxies.............................. 7
THE REORGANIZATION............................. 9
General...................................... 9
Reasons for the Proposed Reorganization...... 11
Vote Required................................ 12
Description of Shares To Be Issued by the
Acquiring Fund................................. 13
General................................... 13
Dividend and Distributions................ 13
Automatic Dividend Reinvestment Plan...... 13
Certain Provisions in the Acquiring Fund's
Articles of Incorporation...................... 15
Comparison of Rights of Holders of Shares of
the Acquiring Fund and the Acquired
Fund........................................... 16
Surrender and Exchange of Acquired Fund Share
Certificates................................... 16
Expenses Associated with the
Reorganization................................. 17
Federal Income Tax Consequences of the
Reorganization................................. 18
Pro Forma Financial Information.............. 19
ELECTION OF DIRECTORS.......................... 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS......................................... 30
ADDITIONAL INFORMATION ABOUT THE FUNDS......... 31
Financial Highlights......................... 31
General Information and History.............. 33
INVESTMENT OBJECTIVE AND POLICIES.............. 35
Description of Municipal Bonds............... 36
Other Investment Policies.................... 41
Options and Futures Transactions............. 42
INVESTMENT RESTRICTIONS........................ 46
DIRECTORS AND OFFICERS......................... 49
INVESTMENT ADVISORY AND MANAGEMENT
ARRANGEMENTS................................... 49
PORTFOLIO TRANSACTIONS......................... 50
Portfolio Turnover........................... 51
DIVIDENDS AND DISTRIBUTIONS.................... 51
TAXES.......................................... 52
General...................................... 52
Tax Treatment of Options and Futures
Transactions................................... 54
State and Local Taxes........................ 55
NET ASSET VALUE................................ 56
DESCRIPTION OF CAPITAL STOCK................... 56
Certain Provisions of the Articles of
Incorporation.................................. 57
CUSTODIAN...................................... 57
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
REGISTRAR...................................... 57
LEGAL PROCEEDINGS.............................. 57
LEGAL OPINIONS................................. 58
EXPERTS........................................ 58
STOCKHOLDER PROPOSALS.......................... 59
INDEX TO FINANCIAL STATEMENTS.................. 60
iii
<PAGE>
PAGE
---------
INDEPENDENT AUDITORS' REPORT................... F-1
FINANCIAL STATEMENTS OF MUNIASSETS FUND,
INC............................................ F-2
MUNIASSETS FUND, INC. STATEMENT OF
OPERATIONS..................................... F-3
MUNIASSETS FUND, INC. STATEMENT OF CHANGES IN
NET ASSETS..................................... F-4
INDEPENDENT AUDITORS' REPORT................... F-5
FINANCIAL STATEMENTS OF MUNIBOND INCOME FUND,
INC............................................ F-6
MUNIBOND INCOME FUND, INC. STATEMENT OF
OPERATIONS..................................... F-7
MUNIBOND INCOME FUND, INC. STATEMENT OF
CHANGES IN NET ASSETS.......................... F-8
FINANCIAL STATEMENTS OF MUNIASSETS FUND,
INC............................................ F-9
APPENDIX I
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL
PAPER.......................................... A-1
PART C--OTHER INFORMATION...................... C-1
SIGNATURES..................................... C-3
iv
<PAGE>
AVAILABLE INFORMATION
Both Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the Investment
Company Act of 1940, as amended (the "1940 Act"), and in accordance therewith
are required to file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Any such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W. Washington, D.C. 20549, and at the Commission's New York Regional
Office, Seven World Trade Center, New York, New York 10048 and Chicago Regional
Office, Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such materials can be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Shares
of both Funds are listed on the New York Stock Exchange (the "NYSE"), and such
reports, proxy statements and other information concerning the Funds can also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Acquiring Fund has filed with the Commission a registration statement
on Form N-14 (herein, together with all amendments and exhibits, referred to as
the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Joint Proxy Statement Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Acquiring Fund Shares issuable pursuant
to the Reorganization, reference is hereby made to the Registration Statement.
The information in this Joint Proxy Statement--Prospectus concerning the
Acquiring Fund has been furnished by the Acquiring Fund, and the information
concerning the Acquired Fund has been furnished by the Acquired Fund. This Joint
Proxy Statement--Prospectus constitutes a prospectus of the Acquiring Fund with
respect to the shares of the Acquiring Fund to be issued in connection with the
Reorganization.
1
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement--Prospectus. This summary is qualified in its
entirety by the more detailed information contained herein. Stockholders should
read the entire Joint Proxy Statement--Prospectus. Certain capitalized terms in
this summary are defined elsewhere in this Joint Proxy Statement--Prospectus.
THE ANNUAL MEETINGS
This Joint Proxy Statement--Prospectus is being furnished to the
stockholders of the Acquiring Fund and the Acquired Fund in connection with the
solicitation by the Boards of Directors of the Funds of proxies to be voted at
the Funds' Annual Meetings to be held on [Friday, October 21], 1994 at the
offices of Merrill Lynch Asset Management, 800 Scudders Mill Road, Plainsboro,
New Jersey. Holders of record of shares of each Fund as of the close of business
on August 26, 1994 will be entitled to notice of and to vote at their Fund's
Annual Meeting, as described elsewhere in this Joint Proxy
Statement--Prospectus.
Stockholders of the Acquiring Fund will be asked to vote on the approval of
the issuance of additional shares of the Acquiring Fund in connection with the
Reorganization, on the election of five nominees for director and on the
ratification of the Acquiring Fund's selection of independent accountants.
Stockholders of the Acquired Fund will be asked to vote on the approval of
the Reorganization, on the election of five nominees for director and on the
ratification of the Acquired Fund's selection of independent accountants.
Stockholders of the Acquired Fund will be asked to vote on these additional
matters in the event the Reorganization is not approved and the Acquired Fund
remains a separate entity.
The details of each proposal to be voted on by the stockholders of each
Fund and the vote required for approval of each proposal (other than the
ratification of the Funds' selections of independent accountants) are set forth
under the description of each proposal in this Joint Proxy Statement--
Prospectus.
THE REORGANIZATION
The Boards of Directors of the Acquiring Fund and the Acquired Fund, which
consist of the same individuals, have approved the proposed Reorganization
pursuant to which the Acquiring Fund would acquire substantially all of the
assets of the Acquired Fund in exchange for the issuance of Acquiring Fund
Shares and the assumption by the Acquiring Fund of substantially all of the
Acquired Fund's liabilities. Following receipt of the Acquiring Fund Shares, the
Acquired Fund would be dissolved and the Acquiring Fund Shares received would be
distributed the stockholders of the Acquired Fund. The number of Acquiring Fund
Shares to be issued to the Acquired Fund would be that number having an
aggregate net asset value equal to the aggregate value of the Acquired Fund's
assets transferred to, net of the liabilities assumed by, the Acquiring Fund as
of the time such assets and liabilities are transferred
2
<PAGE>
and assumed (such time being referred to as the "Exchange Date"). If approved by
the Funds' stockholders, the Exchange Date is expected to be the close of
business on [October 21], 1994. The Agreement may be terminated and the
Reorganization abandoned, whether before or after approval by the Funds'
stockholders, at any time prior to the Exchange Date (a) by the mutual written
consent of the Boards of Directors of the Funds or (b) by either Fund if the
conditions to that Fund's obligations have not been satisfied or waived.
As a result of the Reorganization, the assets of the Funds would be
combined and the stockholders of the Acquired Fund would become stockholders of
the Acquiring Fund. The investment objectives and policies, directors, officers
and general portfolio characteristics of the larger combined entity would be
virtually identical to that of each of the separate Funds.
The Board of Directors of each Fund, including the directors of each Fund
who are not "interested persons" as that term is defined by the 1940 Act, has
concluded that the Reorganization would be in the best interests of the
stockholders of each respective Fund and that the interests of those
stockholders would not be diluted as a result of the Reorganization.
Each Board of Directors approved the Reorganization because it believes
that the Reorganization should result in lower administrative expenses for the
combined Fund than is currently the case for either of the separate Funds,
greater efficiency and flexibility in portfolio management and a more liquid
trading market for the shares of the combined Fund. The Boards also recognized
the substantial similarities between the Funds. The Funds have virtually
identical investment objectives and policies; common directors, officers and
investment managers; and similar portfolio composition and trading histories.
Based on these factors, the Boards concluded that the Reorganization presents no
significant risks that would outweigh the benefits of the Reorganization.
ACCORDINGLY, THE BOARD OF EACH FUND RECOMMENDS THAT STOCKHOLDERS OF THE FUND
VOTE FOR THE APPROVAL OF THE PROPOSAL RELATING TO THE REORGANIZATION. See "The
Reorganization" and "Additional Information About the Funds."
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The Funds have jointly requested a revenue ruling from the Internal Revenue
Service (the "IRS") with respect to the Reorganization to the effect that, among
other things, no stockholder of either Fund will recognize taxable gain or loss
upon the issuance of Acquiring Fund Shares in the Reorganization. The
consummation of the Reorganization is subject to receipt of such ruling.
Accordingly, neither Fund will recognize gain or loss in connection with the
Reorganization. In addition, stockholders of the Acquired Fund who receive
Acquiring Fund Shares pursuant to the Reorganization will recognize no gain or
loss, except with respect to the cash received for a fractional share interest,
if any. See "The Reorganization--Federal Income Tax Consequences of the
Reorganization."
3
<PAGE>
COMPARISON OF THE ACQUIRING FUND AND THE ACQUIRED FUND
GENERAL
The Acquiring Fund and the Acquired Fund are both non-diversified,
closed-end management investment companies organized under the laws of the State
of Maryland. The shares of the Acquiring Fund and of the Acquired Fund are
listed and trade on the NYSE under the symbols MUA and MBD, respectively. The
shares of the Funds are identical. All of the shares of both Funds have equal
non-cumulative voting rights and equal rights with respect to dividends, assets
and dissolution. The Funds' shares are fully paid and non-assessable and have no
preemptive, conversion or exchange rights. For more detailed information about
the general business and management of the Funds, see "Additional Information
About the Funds." For financial information regarding the Funds, see "Index to
Financial Statements."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Funds are virtually identical.
Each Fund's investment objective is to provide stockholders with high current
income exempt from Federal income tax by investing primarily in a portfolio of
medium to lower rated or comparable unrated municipal obligations, the interest
on which, in the opinion of bond counsel to issuer, is exempt from Federal
income taxes.
Each Fund seeks to achieve its investment objective by investing at least
80% of its total assets, except during temporary defensive periods, in a
portfolio of obligations issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies or
instrumentalities and paying interest which, in the opinion of bond counsel to
the issuer, is exempt from Federal income taxes ("Municipal Bonds"). The
Acquired Fund seeks to achieve its objective by investing in Municipal Bonds
with remaining maturities of greater than one year, while the Acquiring Fund is
not subject to any such maturity limitations.
Each Fund at all times, except during temporary defensive periods, will
maintain at least 65% of its total assets in Municipal Bonds which are rated in
any one of the medium and lower rating categories of a nationally recognized
statistical rating organization or are unrated securities of comparable quality.
In the case of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch"), these ratings
are currently Baa (Moody's) or BBB (S&P or Fitch) or lower, respectively. There
can be no assurance that the investment objective of each Fund will be realized.
See "Additional Information About the Funds--Investment Objective and Policies."
MANAGEMENT OF THE FUNDS
The Acquiring Fund and the Acquired Fund have the same directors and the
same officers. In addition, Fund Asset Management, L.P. (the "Investment
Adviser" or "FAM") acts as the investment adviser for, and manages the
investment and reinvestment of the assets of, both Funds. Pursuant to the
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Investment Management Agreements between the Adviser and each of the Funds, each
Fund has agreed to pay the Adviser a monthly fee at an annual rate of 0.55% of
each Fund's average weekly net assets for the services and facilities furnished
by the Adviser. See "Management of the Funds-- Investment Adviser."
DIVIDENDS AND DISTRIBUTIONS
The Funds have identical dividend policies. Each Fund's present policy,
which may be changed by its Board of Directors, is to pay dividends monthly and
to distribute substantially all of its net investment income to holders of
common stock. Net capital gains, if any, will be distributed annually to holders
of common stock. See "The Reorganization--Description of Shares To Be Issued by
the Acquiring Fund--Distributions" and "Additional Information About the
Funds--Federal Income Tax Matters Associated with Investment in the Funds."
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividend and capital gain distributions will be reinvested
automatically in additional shares unless a stockholder elects to receive cash.
Stockholders whose shares are held in the name of a broker or nominee should
contact such broker or nominee to confirm that they may participate in each
Fund's dividend reinvestment plan. See "The Reorganization--Automatic
Description of Shares To Be Issued by the Acquiring Fund--Automatic Dividend
Reinvestment Plan."
SPECIAL CONSIDERATIONS REGARDING THE REORGANIZATION
The close identity between the Acquiring Fund and the Acquired Fund that
results from both Funds having the same investment objective and investment
adviser and similar portfolio composition and yield should minimize any risks
that might otherwise be associated with the Reorganization. Nevertheless, the
following factors should be taken into consideration by stockholders of each
Fund in their evaluation of the Reorganization:
1. Although the investment portfolios of both Funds must satisfy the
same standards of credit quality and diversification, the actual securities
owned by each Fund are different, as a result of which there are certain
differences in the composition of the two investment portfolios. Of the
securities owned by the Acquiring Fund as of May 31, 1994, % were rated
in the medium grades by Moody's or Standard and Poor's, % were rated in
the lowest grades and % were unrated. The comparable percentages for
the Acquired Fund were % in the medium grades, % in the lowest
grades and % unrated.
2. There are small differences in concentration among the categories
of issuers of the securities held in the portfolios of the Funds. For the
Acquiring Fund, as of May 31, 1994, the highest concentration of securities
was in the , and
categories, accounting for %, % and % of the Fund's portfolio,
respectively, whereas for the Acquired Fund, the highest concentration was
in the ,
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and categories, accounting for %,
% and % of the portfolio.
3. During the periods since the inception of the Funds, shares of both
Funds have generally traded at prices [close to net asset value, with small
premiums or discounts to net asset value] being reflected in the market
value of the shares from time to time. Since the termination of share price
stabilization following each Fund's initial public offering, share prices
for the Acquiring Fund have fluctuated between a maximum premium of 10.71%
and a maximum discount of 6.16%, and Share prices for the Acquired Fund
have fluctuated between a maximum premium of 5.35% and a maximum discount
of 10.85%. Although there is no reason to believe that this pattern should
be affected by the Reorganization, it is not possible to state whether
shares of the Acquiring Fund will trade at a premium or discount to net
asset value following the Reorganization, or what the extent of any such
premium or discount might be.
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THE ANNUAL MEETINGS
GENERAL
This Joint Proxy Statement--Prospectus is furnished in connection with the
solicitation by the Boards of Directors of the Acquiring Fund and the Acquired
Fund of proxies to be voted at the Acquiring Fund Annual Meeting and the
Acquired Fund Annual Meeting, respectively, each to be held at the offices of
Merrill Lynch Asset Management, 800 Scudders Mill Road, Plainsboro, New Jersey,
on [Friday, October 21], 1994 at 9:00 a.m., and at any and all adjournments of
such meetings. The cost of preparing, printing and mailing the enclosed proxy,
accompanying notice and Joint Proxy Statement--Prospectus, and all other costs
in connection with the solicitation of proxies, will be paid by the Funds pro
rata, based on their relative assets. Additional solicitation may be made by
letter, telephone or telegraph by officers of the Funds, by officers or
employees of Merrill Lynch & Co. or the Investment Adviser, or by dealers and
their representatives. The Funds have engaged Tritech Services, an affiliate
of ML&Co., to assist in the solicitation of proxies at a total estimated
cost of $3,000 for the Acquiring Fund and $3,000 for the Acquired Fund.
The Board of Directors of each Fund has fixed the close of business on
August 26, 1994 as the record date (the "Record Date") for determining holders
of that Fund's shares of common stock entitled to notice of and to vote at each
respective Fund's Annual Meeting. Each stockholder will be entitled to one vote
for each Share held. At the close of business on the Record Date, there were
outstanding 4,787,055 Shares of the Acquiring Fund and 5,752,965 Shares of the
Acquired Fund. This Joint Proxy Statement--Prospectus is first being mailed to
stockholders of the Funds on or about September , 1994.
VOTING; PROXIES
The Shares of the Acquiring Fund that are entitled to vote at the Acquiring
Fund Annual Meeting and that are represented by properly executed proxies will,
unless such proxies have been revoked, be voted in accordance with the
stockholder's instructions indicated on such proxies. If no contrary
instructions are indicated, such shares will be voted FOR approval of the
issuance of additional shares of the Acquiring Fund in connection with the
Reorganization, FOR the election of the six nominees for director and FOR
ratification of the Acquiring Fund's selection of independent accountants, as
described in this Joint Proxy Statement--Prospectus.
The Shares of the Acquired Fund that are entitled to vote at the Acquired
Fund Annual Meeting and that are represented by properly executed proxies will,
unless such proxies have been revoked, be voted in accordance with the
stockholder's instructions indicated on such proxies. If no contrary
instructions are indicated, such Shares will be voted FOR approval of the
Reorganization, FOR the election of the six nominees for director and FOR
ratification of the Acquired Fund's selection of independent accountants, as
described in this Joint Proxy Statement--Prospectus.
A quorum of stockholders is required to take action at each Annual Meeting.
A majority of the shares entitled to vote at each Annual Meeting, represented in
person or by proxy, will constitute a quorum of stockholders at that Annual
Meeting. Votes cast by proxy or in person at each Annual Meeting will be
tabulated by the inspectors of elections appointed for that Annual Meeting. The
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inspectors of election will determine whether or not a quorum is present at the
annual Meeting. The inspectors of election will treat abstentions as shares that
are present and entitled to vote for purposes of determining a quorum.
For purposes of determining the approval of the matters submitted to the
stockholders for a vote, abstentions will be treated as shares voted against
approval of the proposal relating to the Reorganization and against ratification
of each Fund's selection of independent accountants. Broker non-votes will have
the same effect as a vote against the proposal relating to the Reorganization.
The details of each proposal to be voted on by the stockholders of each Fund and
the vote required for approval of each proposal (other than the ratification of
the Fund's selection of independent accountants) are set forth under the
description of each proposal below. Stockholders of either Fund who execute
proxies may revoke them at any time before they are voted by filing with their
Fund a written notice of revocation, by delivering a duly executed proxy bearing
a later date, or by attending the meeting and voting in person.
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THE REORGANIZATION
The terms and conditions under which the proposed Reorganization may be
consummated are set forth in the Agreement and Plan of Reorganization.
Significant provisions of the Agreement are summarized below; however, this
summary is qualified in its entirety by reference to the Agreement, a copy of
which is attached as Annex A to this Joint Proxy Statement Prospectus.
GENERAL
The Agreement contemplates a proposed Reorganization under which (a) the
Acquiring Fund would acquire substantially all of the assets of the Acquired
Fund in exchange for the Acquiring Fund's assumption of substantially all of the
liabilities of the Acquired Fund and the issuance of Acquiring Fund Shares to
the Acquired Fund; (b) the Acquiring Fund Shares would be distributed to the
stockholders of the Acquired Fund; and (c) the Acquired Fund would be dissolved
and liquidated and its registration under the 1940 Act would be terminated. The
assets of the Acquired Fund to be acquired by the Acquiring Fund consist
primarily of Municipal Bonds, cash and other securities held in the Acquired
Fund's portfolio. The number of Acquiring Fund Shares to be issued to the
Acquired Fund would be that number having an aggregate net asset value equal to
the aggregate value of the Acquired Fund's assets transferred to, net of the
liabilities assumed by, the Acquiring Fund as of the time such assets and
liabilities are transferred and assumed (the "Exchange Date"). If the proposals
relating to the Reorganization are approved, the Exchange Date is expected to be
the close of business on October [21], 1994, the date of the Annual Meetings.
If the Reorganization is approved, the assets of the Funds would be
combined and the investment objective and policies and general portfolio
characteristics of the larger combined entity would be virtually identical to
that of each of the separate Funds. The Boards of Directors of the Funds believe
that this will provide benefits to stockholders of both Funds as described below
under "Reasons for the Proposed Reorganization."
The result of the Reorganization would be that (a) the Acquiring Fund would
add to its gross assets substantially all of the assets of the Acquired Fund,
other than cash to be used to pay expenses of the Acquired Fund and to make a
final distribution of ordinary income and capital gains to the stockholders of
the Acquired Fund as of the Exchange Date and (b) the stockholders of the
Acquired Fund as of the Exchange Date would become stockholders of the Acquiring
Fund. See "Description of Shares To Be Issued by the Acquiring Fund" and
"Comparison of Rights of Holders of Shares of the Acquiring Fund and the
Acquired Fund" for a description of the rights of such stockholders. For Federal
income tax reasons, the Acquired Fund must distribute all of its income and
capital gains prior to the end of its fiscal year, which would occur at the
Exchange Date.
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If the stockholders of the Funds approve the proposals relating to the
Reorganization, the assets of the Acquired Fund to be acquired by the Acquiring
Fund will include without limitation all cash (except as necessary to pay the
liabilities retained by the Acquired Fund or described in the next sentence),
cash equivalents, Municipal Bonds and other securities, receivables and other
property owned by the Acquired Fund. The Acquiring Fund will assume from the
Acquired Fund all debts, liabilities, obligations and duties of the Acquired
Fund, other than (a) certain expenses incurred by the Acquired Fund in
connection with the Reorganization and (b) the Acquired Fund's obligation to
distribute any ordinary income and capital gains accrued as of the Exchange
Date.
The value of the Acquired Fund's assets to be acquired and the liabilities
to be assumed by the Acquiring Fund and the net asset value per share for the
shares to be issued by the Acquiring Fund will be determined by [The Bank of New
York ("BONY")], the custodian for both of the Funds, as of the Exchange Date. To
determine the net asset value per share for the Funds, the value of the
securities held by each Fund plus any cash or other assets (including interest
and dividends accumulated but no yet received) minus all liabilities (including
accrued expenses) is divided by the total number of shares outstanding at such
time. Expenses, including the fees payable to the Investment Adviser, are
accrued daily. [The number of Acquiring Fund Shares to be issued to the Acquired
Fund pursuant to the Reorganization will be calculated based on the
determinations of [BONY].]
As soon as practicable after the Exchange Date, the Acquired Fund would
dissolve and distribute the Acquiring Fund Shares received by it pro rata to its
stockholders of record in exchange for such stockholders' interests in the
Acquired Fund. Such dissolution and distribution would be accomplished by
opening accounts on the books of the Acquiring Fund in the names of the
stockholders of the Acquired Fund and transferring to those stockholder accounts
the Acquiring Fund Shares previously credited on those books to the account of
the Acquired Fund. Each stockholder account would represent the respective pro
rata number of Acquiring Fund Shares (rounded down, in the case of fractional
Shares, to the next largest number of whole Shares) due such Acquired Fund
stockholder. No fractional Shares will be issued. In lieu thereof, the Acquired
Fund's transfer agent, The Bank of New York, will aggregate all fractional
shares and sell the resulting whole shares on the NYSE for the account of all
holders of fractional interests, and each such holder will be entitled to his or
her pro rata share of the proceeds of such sale upon surrender of his or her
Acquired Fund Share certificates. See "Surrender and Exchange of Acquired Fund
Share Certificates" for a description of the procedures to be followed by
Acquired Fund stockholders to obtain their Acquiring Fund Shares (and cash in
lieu of fractional Shares, if any).
Accordingly, as a result of the Reorganization, every stockholder of the
Acquired Fund would own Acquiring Fund Shares that, except for cash payments
received in lieu of fractional shares, would have an aggregate net asset value
immediately after the Exchange Date equal to the aggregate net asset value of
that stockholder's Acquired Fund Shares immediately prior to the Exchange Date.
Since the Acquiring Fund Shares would be issued at net asset value in exchange
of net assets of the Acquired Fund having a value equal to the aggregate net
asset value of those shares, the net asset value per share of the Acquiring Fund
Shares should remain virtually unchanged by the Reorganization. Thus, the
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Reorganization should result in virtually no dilution of net asset value of any
stockholder's holdings, other than to reflect the cost to effect the
Reorganization. See "Pro Forma Financial Information." However, as a result of
the Reorganization, a stockholder of either Fund would likely hold a reduced
percentage of ownership in the larger combined entity than he or she did in
either of the constituent Funds.
The Agreement may be terminated and the Reorganization abandoned, whether
before or after approval by the Funds' stockholders, at any time prior to the
Exchange Date (a) by the mutual written consent of the Boards of Directors of
the Funds or (b) by either Fund if the conditions to that Fund's obligations
under the Agreement have not been satisfied or waived and it reasonably appears
that such conditions will not be satisfied. Under Maryland law and each Fund's
Articles of Incorporation/By-Laws, stockholders of the Funds do not have
appraisal rights with respect to the Reorganization.
REASONS FOR THE PROPOSED REORGANIZATION
The Board of Directors of the Acquiring Fund and the Board of Directors of
the Acquired Fund, which consist of the same directors, each believes that the
Reorganization is in the best interests of the stockholders of its respective
Fund and unanimously recommends that the stockholders of that Fund vote FOR
approval of the proposal relating to the Reorganization.
In approving the Reorganization, the Boards identified certain benefits
that are likely to result from combining the Funds, including lower expenses per
share, greater efficiency and flexibility in portfolio management and a more
liquid trading market for the shares of the combined Fund. The Boards also
considered the possible risks and costs of combining the Funds and determined
that the Reorganization is likely to provide benefits to the stockholders of
both Funds that outweigh the costs and that there are no significant risks.
The larger Fund that would result from the Reorganization would have a much
larger asset base than either Fund has currently. Based on data presented by the
Investment Adviser, the Boards believe that administrative expenses for a larger
combined Fund will be less than the aggregate expenses for the two smaller
Funds, resulting in a lower expense ratio for the combined Fund and higher
earnings for stockholders.
Management projections estimate that the Acquiring Fund will have net
assets in excess of $150 million upon completion of the Reorganization. A larger
asset base should provide benefits in portfolio management. The Acquiring Fund
after the Reorganization should be able to purchase large amounts of Municipal
Bonds at more favorable prices than either of the Funds separately and, with
this greater purchasing power, request improvements in the terms of Municipal
Bonds (e.g., added indenture provisions covering call protection, sinking funds,
audits for the benefit of large holders) prior to purchase.
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In approving the Reorganization, the Boards of Directors of the Funds
determined that the interests of existing stockholders of the Funds would not be
diluted as a result of the Reorganization. See "Pro Forma Financial
Information." Although the Reorganization is expected to result in a reduction
in net asset value per Acquiring Fund Share (and per Acquired Fund Share
equivalent) of approximately $ as a result of the estimated costs of the
Reorganization, management of the Funds advised the Boards that it expects that
such costs will be recovered within 18 months after the Exchange Date. See
"Expenses Associated with the Reorganization."
In approving the Reorganization, the Boards considered the fact that the
Reorganization should not be expected to have an adverse effect on the financial
status and ongoing performance of each Fund. The Boards also examined the
relative credit strength, maturity characteristics, mix of type and purpose, and
yield of the Funds' portfolios of Municipal Bonds and the costs involved in a
transaction such as the Reorganization. The Boards noted the many similarities
between the Funds, including their virtually identical investment objectives and
investment policies, their common management and their similar portfolios of
Municipal Bonds. Based on these factors, the Boards concluded that the
Reorganization presents no significant risks and minimal costs (including
relatively minor legal, accounting and administrative costs, most of which have
already been incurred in evaluating and analyzing the Reorganization) that would
outweigh the benefits discussed above.
VOTE REQUIRED
Consummation of the Reorganization requires the approval of the
stockholders of both Funds. Stockholders of the Acquiring Fund are being asked
to approve the issuance of additional Shares of the Acquiring Fund in connection
with the Reorganization. Adoption of this proposal will require the affirmative
vote of the holders of at least a majority of the Acquiring Fund Shares voting
on the proposal, provided that the total vote cast on the proposal represents
over 50% in interest of all shares of the Acquiring Fund entitled to vote on the
proposal.
Stockholders of the Acquired Fund are being asked to approve the
Reorganization, whereby (a) the Acquired Fund would transfer substantially all
of its assets to the Acquiring Fund in exchange for shares of the Acquiring Fund
and the assumption of substantially all of the Acquired Fund's liabilities by
the Acquiring Fund; and (b) the Acquiring Fund Shares received by the Acquired
Fund would be distributed to stockholders of the Acquired Fund in dissolution of
the Acquired Fund. Adoption of this proposal will require the affirmative vote
of the holders of at least a majority of the Shares of the Acquired Fund
entitled to vote on the proposal.
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DESCRIPTION OF SHARES TO BE ISSUED BY THE ACQUIRING FUND
GENERAL
The Articles of Incorporation of the Acquiring Fund (the "Acquiring Fund's
Articles") authorizes the issuance of 200,000,00 shares of capital stock in a
single class, par value $.10 per share. As of August , 1994, there were issued
and outstanding Acquiring Fund Shares. If the Reorganization is
approved, at the Exchange Date the Acquiring Fund will issue additional
Acquiring Fund Shares. The number of such additional Acquiring Fund Shares will
be based on the relative net asset values of the Funds as of the Exchange Date;
based on the relative net asset values as of , 1994, the Acquiring
Fund would have issued approximately additional Acquiring Fund Shares if
the Reorganization had occurred as of that date. The terms of the Shares to be
issued pursuant to the Reorganization will be identical to the terms of the
Acquiring Fund Shares that are outstanding. All of the Acquiring Fund's Shares
have equal non-cumulative voting rights and equal rights with respect to
dividends, assets and dissolution. The Acquiring Fund Shares are fully paid and
non-assessable and have no preemptive, conversion or exchange rights.
DIVIDEND AND DISTRIBUTIONS
It is the Acquiring Fund's present policy, which may be changed by the
Board of Directors, to pay dividends monthly and to distribute substantially all
of its net investment income to holders of common stock. Net capital gains, if
any, will be distributed annually to holders of common stock. [The Acquiring
Fund's distribution level is determined by the Board of Directors of the
Acquiring Funds after giving consideration to a number of factors, including the
Acquiring Fund's undistributed net investment income and historical and
projected investment income and expenses. Net income of the Acquiring Fund
consists of all interest income accrued on portfolio assets, less all expenses
of the Acquiring Fund. Expenses of the Acquiring Fund are accrued each day.]
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Acquiring Fund's Automatic Dividend Reinvestment Plan (the
"Plan"), unless a stockholder otherwise elects, all dividend and capital gain
distributions will be automatically reinvested by The Bank of New York, as agent
for stockholders in administering the Plan (the "Plan Agent"), in additional
shares of Common Stock of Fund. Stockholders who elect not to participate in the
Plan will receive all distributions in cash paid by check mailed directly to the
stockholder of record (or, if the shares are held in street or other nominee
name then to such nominee) by The Bank of New York, as dividend paying agent.
Whether such participants may elect not to participate in the Plan is completely
voluntary and may be terminated or resumed at any time without penalty by
written notice if received by the Plan Agent not less than ten days prior to any
dividend record date; otherwise such termination will be effective with respect
to any subsequently declared dividend or distribution.
Whenever the Acquiring Fund declares an income dividend or a capital gains
distribution (collectively referred to as "dividends") payable either in shares
or in cash, non-participants in the Plan will receive cash and participants in
the Plan will receive the equivalent in shares of Common Stock. The shares will
be acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional unissued
but authorized shares
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of Common Stock from the Fund ("newly issued shares") or (ii) by purchase of
outstanding shares of Common Stock on the open market ("open-market purchases")
on the NYSE or elsewhere. If on the payment date for the dividend, the net asset
value per share of the Common Stock is equal to or less than the market price
per share of the Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the participant.
The number of newly issued shares of Common Stock to be credited to the
participant's account will be determined by dividing the dollar amount of the
dividend by the net asset value per share on the date the shares are issued,
provided that the maximum discount from the then current market price per share
on the date of issuance may not exceed 5%. If on the dividend payment date the
net asset value per share is greater than the market value (such condition being
referred to herein as "market discount"), the Plan Agent will invest the
dividend amount in shares acquired on behalf of the participant in open-market
purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that the
Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date.
The Plan Agent maintains all stockholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each stockholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of stockholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
record stockholders as representing the total amount registered in the record
stockholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly
by the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant
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will pay a pro rata share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of
dividends.
Stockholders participating in the Plan may receive benefits not available
to stockholders not participating in the Plan. If the market price plus
commissions of each Fund's shares is above the net asset value, participants in
the Plan will receive shares of each Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions on shares with a net asset value greater than the value of any
cash distributions they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since each Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, each Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 101 Barclay Street, New York, New York 10286.
CERTAIN PROVISIONS IN THE ACQUIRING FUND'S ARTICLES OF INCORPORATION
The Acquiring 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 Acquiring Fund or to change the composition of its Board
of Directors and could have the effect of depriving stockholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Acquiring Fund.
A director may be removed from office with or without cause and only by a vote
of the holders of at least 66 2/3 of the votes entitled to be voted on the
matter.
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66 2/3 of the Acquiring Fund's shares of capital stock,
then entitled to be voted, voting as a single class, to approve, adopt or
authorize the following:
(i) a merger or consolidation or statutory share exchange of the
Acquiring Fund with other corporations,
(ii) a sale of all or substantially all of the Acquiring Fund's assets
(other than in the regular course
(iii) a liquidation or dissolution of the Acquiring Fund, unless such
action has been approved, adopted or authorized by the affirmative vote of
at least two-thirds of the total number of Directors fixed in accordance
with the by-laws in which case the affirmative vote of a majority of the
Acquiring Fund's shares of capital stock is required.
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In addition, the conversion of the Acquiring Fund to an open-end investment
company would require an amendment to the Acquiring Fund's Articles of
Incorporation. The amendment would have to be declared advisable by to the Board
of Directors prior to its submission to stockholders. Such an amendment would
require the favorable vote of the holders of at least 66 2/3 of the Acquiring
Fund's outstanding shares of capital stock entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by at least two-thirds of the total
number of Directors fixed in accordance with the by-laws). Such a vote also
would satisfy a separate requirements in the 1940 Act that the change be
approved by the stockholders. Stockholders of an open-end investment company may
require the company to redeem their shares of common stock at any time (except
in certain circumstance as authorized by or under the 1940 Act) at their net
asset value, less such redemption charge, if any, as might be in effect at the
time of a redemption. All redemptions will be made in cash. If the Acquiring
Fund is converted to an open-end investment company, it could be required to
liquidate portfolio securities to meet requests for redemption and the Common
Stock would no longer be listed on a stock exchange.
The Board of Directors has determined that the 66 2/3 voting requirements
described under "Certain Provisions of the Articles of Incorporation," which are
greater than the minimum requirements under Maryland law or the 1940 Act, are in
the best interests of stockholders generally. Reference should be made to the
Acquiring Fund's Articles of Incorporation on file with the Securities and
Exchange Commission for the full text of these provisions.
COMPARISON OF RIGHTS OF HOLDERS OF SHARES
OF THE ACQUIRING FUND AND THE ACQUIRED FUND
The terms of the Acquiring Fund Shares to be issued in the Reorganization,
as described above, are identical to the terms of the outstanding shares of the
Acquired Fund. Moreover, each of the Funds is organized as a management
investment company under the laws of the State of Maryland pursuant to virtually
identical Articles of Incorporation. Therefore, the rights of holders of the
Acquiring Fund Shares to be received by Acquired Fund stockholders in the
Reorganization will be identical to their rights as holders of Acquired Fund
Shares. The shares will simply represent an equity ownership in a larger
combined entity after the Reorganization. The full text of each Fund's Articles
of Incorporation is on file with the Commission and may be obtained as described
under "Available Information." The terms of the Acquiring Fund's Automatic
Dividend Reinvestment Plan also are identical to the terms of the Acquired
Fund's Automatic Dividend Reinvestment Plan.
SURRENDER AND EXCHANGE OF ACQUIRED FUND SHARE CERTIFICATES
After the Exchange Date, each holder of an outstanding certificate or
certificates formerly representing shares of the Acquired Fund will be entitled
to receive, upon surrender of his or her certificates, a certificate or
certificates representing the number of Acquiring Fund Shares distributable with
respect to such holder's shares of the Acquired Fund, together with cash in lieu
of any fractional Shares. Promptly after the Exchange Date, the Transfer Agent
will mail to each holder of certificates formerly representing shares of the
Acquired Fund a letter of transmittal for use in surrendering his or
16
<PAGE>
her certificates for certificates representing shares of the Acquiring Fund and
cash in lieu of any fractional shares.
PLEASE DO NOT SEND IN ANY SHARE CERTIFICATES AT THIS TIME. UPON
CONSUMMATION OF THE REORGANIZATION, ACQUIRED FUND STOCKHOLDERS WILL BE FURNISHED
INSTRUCTIONS FOR EXCHANGING THEIR ACQUIRED FUND SHARE CERTIFICATES FOR ACQUIRING
FUND SHARE CERTIFICATES AND, IF APPLICABLE, CASH IN LIEU OF FRACTIONAL SHARES.
From and after the Exchange Date, certificates formerly representing shares
of the Acquired Fund will be deemed for all Fund purposes to evidence ownership
of the number of full Acquiring Fund Shares distributable with respect to such
shares of the Acquired Fund in the Reorganization, provided that until such
Acquired Fund certificates have been so surrendered, no dividends payable to the
holders of record of Acquiring Fund Shares as of any date subsequent to the
Exchange Date will be paid to the holders of such outstanding Acquired Fund
Share certificates. Dividends payable on Acquiring Fund Shares to holders of
record as of any date after the Exchange Date and prior to the exchange of
certificates by any Acquired Fund stockholder will be paid to such stockholder,
without interest, at the time such stockholder surrenders his or her Acquired
Fund Share certificates for exchange.
From and after the Exchange Date, there will be no transfers on the stock
transfer books of the Acquired Fund. If, after the Exchange Date, certificates
representing shares of the Acquired Fund are presented to the Acquired Fund,
they will be cancelled and exchanged for certificates representing the Acquiring
Fund Shares and the cash in lieu of fractional shares, if any, distributable
with respect to such Acquired Fund Shares in the Reorganization.
EXPENSES ASSOCIATED WITH THE REORGANIZATION
In evaluating the proposed Reorganization, management of the Funds
estimated the amount of additional expenses the Funds would incur, including
additional NYSE listing fees, Commission registration fees, legal and accounting
fees and increased proxy and distribution costs. These estimates were based in
part on information provided by the Funds' independent accountants, as well as
historical expense information regarding expenses incurred by other funds
managed by the Fund's management in preparation for previous stockholder
meetings. The aggregate amount of estimated merger expenses, excluding
Commission registration fees and annual NYSE fees which will be borne by the
Acquiring Fund after the Reorganization, was then allocated to the Acquired Fund
and the Acquiring Fund based on their respective asset size.
Reorganization expenses of the Acquiring Fund and the Acquired Fund have
been or will be expensed prior to the Exchange Date. Management of the Funds
expects that reduced administrative expenses resulting from the Reorganization
should allow the Acquiring Fund to recover the projected costs of the
Reorganization within approximately 18 months after the Exchange Date.
17
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The Funds have jointly requested a revenue ruling from the IRS with respect
to the Reorganization to the effect that, among other things, no stockholder of
either Fund will recognize taxable gain or loss upon the issuance of Acquiring
Fund Shares in the Reorganization. The consummation of the Reorganization is
subject to receipt of such ruling. [Based upon representations by the Acquired
Fund that the Acquired Fund has qualified, and by the Acquiring Fund that the
Acquiring Fund has qualified, as a regulated investment company under the Code,
for the taxable period up to and including the business day prior to the date on
which the Reorganization takes place, such ruling also shall state that the
status of each Fund as a regulated investment company will not be affected as a
result of the Reorganization, except that upon the liquidation of the Acquired
Fund in connection with the Reorganization its regulated investment company
status will terminate.] The following discussion summarizes the anticipated
federal income tax treatment to stockholders of the Acquired Fund.
Exchange of Acquired Fund Shares Solely for Acquiring Fund Shares. A
stockholder of the Acquired Fund who receives Acquiring Fund Shares pursuant to
the Reorganization will recognize no gain or loss, except with respect to the
cash received for a fractional share interest, if any. See "Fractional Share
Interests" below.
The aggregate basis of the Acquiring Fund Shares received by a stockholder
of the Acquired Fund (including any fractional share interest to which he or she
may be entitled) will be the same as the stockholder's aggregate basis in the
Acquired Fund Shares surrendered in exchange therefor, decreased by any cash
received and increased by the amount of gain recognized on the exchange.
The holding period of the Acquiring Fund Shares received by a stockholder
of the Acquired Fund (including any fractional share interest to which he or she
may be entitled) will include the period during which the stockholder's Acquired
Fund Shares were held, provided such Acquired Fund Shares were held as a capital
asset at the Exchange Date.
Fractional Share Interests. No fractional Acquiring Fund Shares will be
issued in the Reorganization. Cash payments received by Acquired Fund
stockholders in lieu of a fractional Acquiring Fund Share will be treated as
received by such stockholders as a distribution in redemption by the Acquiring
Fund of that fractional share interest and will be treated as a distribution in
full payment in exchange for the fractional share interest, resulting in a
capital gain or loss assuming the Acquired Fund Shares exchanged for cash in
lieu of the fractional shares were held as a capital asset at the Exchange Date.
THE FOREGOING IS INTENDED TO BE ONLY A SUMMARY OF THE PRINCIPAL FEDERAL
INCOME TAX CONSEQUENCES OF THE REORGANIZATION AND SHOULD NOT BE CONSIDERED TO BE
TAX ADVICE. THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE SERVICE WILL
CONCUR ON ALL OR ANY OF THE ISSUES DISCUSSED ABOVE. ACQUIRED FUND STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL, STATE AND
LOCAL TAX CONSEQUENCES WITH RESPECT TO THE FOREGOING MATTERS AND ANY OTHER
CONSIDERATIONS WHICH MAY BE APPLICABLE TO THEM.
18
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following tables set forth the unaudited capitalization, net asset
value per Share and income of the Funds as of and for the period ending May 31,
1994 and as adjusted to give effect to the Reorganization discussed herein.
PRO-FORMA CAPITALIZATION AS OF MAY 31, 1994
<TABLE><CAPTION>
ACQUIRING FUND ACQUIRED FUND ACQUIRING FUND
(ACTUAL) (ACTUAL) (AS ADJUSTED)(1)
-------------- -------------- ----------------
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY:
Common Shares, $0.10 par value per share; number of shares
authorized, 4,787,055 shares and 6,654,055 shares
outstanding for Acquiring Fund (Actual) and Acquired Fund
(Actual), respectively; 11,397,153 shares outstanding for
Acquiring Fund (As Adjusted)................................... $ 478,706 $ 665,405 $ 1,139,715(2)
Paid-in capital in excess of par............................. 67,187,000 93,445,808 160,637,204(3)
Undistributed investment income - net........................ 358,479 465,369 -- (4)
Accumulated realized capital losses - net.................... (370,296) 322,512 (370,296)(5)
Unrealized depreciation on investments - net ................ (3,499,834) (6,020,513) (9,520,347)
-------------- -------------- ----------------
Net Assets $ 64,154,055 $ 88,878,581 $ 151,886,276
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
- ---------------
(1) The adjusted balances are presented as if the Reorganization were effective
as of May 31, 1994 for information purposes only. The actual Exchange Date
of the Reorganization is expected to be [October 21], 1994, at which time
the results would be reflective of the actual composition of stockholders'
equity at that date.
(2) Assumes the issuance of 6,610,098 Acquiring Fund Shares in exchange for the
net assets of the Acquired Fund, which number is based on the net asset
value of the Acquiring Fund Shares, and the net asset value of the Acquired
Fund, as of May 31, 1994, after adjustment for the distributions referred to
in(4) and (5) below. The issuance of such number of Acquiring Fund Shares
would result in the distribution of .993394 Acquiring Fund Shares for each
Acquired Fund Share upon liquidation of the Acquired Fund.
(3) Includes the impact of estimated Reorganization costs of $200,000.
(4) Assumes the Acquired Fund distributes all its undistributed net investment
income and capital gains to its stockholders and the Acquiring Fund
distributes all of its undistributed net investment income to
its stockholders.
(5) Assumes the Acquired Fund distributes its entire balance of net realized
gains (losses) from investment transactions to its stockholders prior to the
Exchange Date.
19
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
AS OF MAY 31, 1994 (UNAUDITED)
<TABLE><CAPTION>
ACQUIRING
ACQUIRING FUND ACQUIRED FUND PRO FORMA FUND
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Investments, at value............................ $ 62,935,655 $ 87,445,499 $ (1,076,638)(1) $ 149,304,516
Cash............................................. 27,617 83,754 (2) 111,371
Other assets less liabilities.................... 1,190,783 1,349,328 (69,722) 2,470,389
-------------- -------------- ------------- -------------
Net assets....................................... $ 64,154,055 $ 88,878,581 $ (1,146,360)(3) $ 151,886,276
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Shares Outstanding............................... 4,787,055 6,654,055 (43,957) 11,397,153
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Net asset value per share:
As of May 31, 1994............................. $ 13.40 $ 13.36 $ $ 13.33
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
After distribution of ordinary income and
capital gains.................................... $ 13.37 $ 13.24 $ $
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
After Reorganization-related expenses.......... $ 13.33 $ 13.24 $ $
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
- ---------------
(1) See note (1) to Pro Forma Capitalization table on preceding page as to time
of Reorganization. Assumes sales of investments in municipal securities and
temporary investments to provide additional cash needed to make
distributions of ordinary income and capital gains and to pay estimated
Reorganization-related expenses.
(2) Net effect on cash after payment of Reorganization-related expenses.
(3) See note (1) to Pro Forma Capitalization table. Based on the issuance of
6,610,098 additional Acquiring Fund Shares and the cancellation of 6,654,055
Acquired Fund Shares.
20
<PAGE>
PRO FORMA CONDENSED INCOME STATEMENT
INCEPTION(1) THROUGH MAY 31, 1994 (UNAUDITED)
<TABLE><CAPTION>
ACQUIRING FUND ACQUIRED FUND PRO FORMA ACQUIRING FUND
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Investment Income:
Interest income............................... $ 4,043,883 $ 2,976,799 $ $ 7,020,682
-------------- -------------- ------------ --------------
Expenses
Management fees............................ 351,471 298,995 184,909 835,375
All other expenses......................... 190,475 134,394 (78,668)(2) 246,201
-------------- -------------- ------------ --------------
Total expenses........................ 541,946 433,389 106,241 1,081,576
-------------- -------------- ------------ --------------
Total Expenses after reimbursement.............. 126,556 15,454 248,251
-------------- -------------- ------------ --------------
Net investment income........................... 3,917,327 2,961,345 6,772,431
-------------- -------------- ------------ --------------
Realized Net Gain - (Loss) on Investments:
Net realized gain from investments............ 365,341 322,512 687,853
Net unrealized depreciation of
investments..................................... (3,499,834) (6,020,513) (9,520,347)
-------------- -------------- ------------ --------------
Net increase (decrease) in net assets from
operations.................................... $ 782,834 $ (2,736,656) $ $ (2,060,063)
-------------- -------------- ------------ --------------
-------------- -------------- ------------ --------------
</TABLE>
- ---------------
EXPLANATORY NOTES
(1) The Acquiring Fund was organized in April 1993 and commenced operations on
June 25, 1993. The Acquired Fund was organized in August 1993 and commenced
operations on October 29, 1993.
(2) Represents estimated reduction in operating expenses, including audit,
legal, custodian, stock exchange and report printing. The Acquiring Fund (As
Adjusted) would have a much larger asset base than either Fund currently
has. Certain operating expenses would have been reduced had they been
applied to the larger asset base for one Fund, rather than to two smaller
separate Funds.
21
<PAGE>
PRO FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1994
(UNAUDITED)
MUNIASSETS FUND, INC. (MUA)
PRINCIPAL MARKET
AMOUNT DESCRIPTION RATINGS* VALUE
- ----------- ------------- ----------- ---------
22
<PAGE>
Summary Ratings*
Portfolio of Investments (Excluding Temporary Investments):
<TABLE><CAPTION>
NUMBER MARKET
STANDARD & POOR'S MOODY'S OF ISSUES VALUE PERCENT
- ------------------------- --------------------------- --------- --------- -----------
<S> <C> <C> <C> <C>
A or Better A or Better $ %
BBB+, BBB, BBB- Baa1, Baa, Baa2, Baa3
BB+, BB, BB- Ba1, Ba, Ba2, Ba3
B+, B, B- B1, B, B2, B3
Rated Lower Than B Rated Lower Than B
Non-rated Non-rated
- ------------------------- --------------------------- --------- --------- -----
Total $ 100%
- ------------------------- --------------------------- --------- --------- -----
- ------------------------- --------------------------- --------- --------- -----
</TABLE>
- ---------------
* Ratings: Using the higher of Standard & Poor's or Moody's rating.
N/R--Investment is not rated.
(p) Rating is provisional. A provisional rating assumes the successful
completion of the project being financed by the issuance of the bonds being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion of the project.
+ The security has a maturity of more than one year but has variable rate and
demand features which qualify it as a short-term security. The rate
disclosed is that currently in effect. This rate changes periodically based
on market conditions or a specified market index.
See accompanying notes to financial statements.
23
<PAGE>
ELECTION OF DIRECTORS
At the Meeting, the Board of Directors of each of the Funds will be elected
to serve for terms ending on the dates of subsequent Annual Meetings of
Stockholders as follows--Class I in 1995, Class II in 1996, and Class III in
1997--or until their successors are duly elected and qualified, or in the case
of the Acquired Fund, until the earlier dissolution of the Acquired Fund. It is
the intention of the persons named in the accompanying form of Proxy to vote, on
behalf of the stockholders, for the election of the six nominees listed below as
Directors of each Fund, divided into three classes as follows:
CLASS I CLASS II CLASS III
- ---------------- ---------------- -------------------------
Arthur Zeikel Joe Grills Melvin R. Seiden
Harry Woolf Walter Mintz Stephen B. Swensrud
All of the Directors have been members of the Board of Directors since each
Fund's initial public offering in 1993, except Joe Grills, who has been a member
of the Board of Directors of the Acquiring Fund since January 1994. Each of the
nominees for Director has consented to be named in this Proxy Statement and to
serve as a Director if elected. The members of the Board of Directors and the
nominees for election to the Board are the same for both Funds. The Board of
Directors knows of no reason why any of these nominees will be unable to serve,
but in the event of any such unavailability, the proxies received will be voted
for such substitute nominee or nominees as the Board of Directors may recommend.
If the Reorganization is approved, the Directors of the Acquired Fund will cease
to serve as Directors of the Acquired Fund upon the dissolution of the Acquired
Fund pursuant to the Agreement.
24
<PAGE>
Certain information concerning the nominees is set forth as follows:
<TABLE><CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED AT
JULY 31, 1994
------------------------
PRINCIPAL OCCUPATIONS THE THE
NAME AND ADDRESS DURING PAST FIVE YEARS AND DIRECTOR ACQUIRING ACQUIRED
OF NOMINEES AGE PUBLIC DIRECTORSHIPS SINCE FUND FUND
- ------------------------------------ ----------- ------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Arthur Zeikel(1)(3)................. 62 President, Director and Chief 1993 0 0
P.O. Box 9011 Investment Officer of Fund Asset
Princeton, New Jersey Management, L.P. ("FAM") since
08543-9011 1977; President of MLAM since 1977
and Director and Chief Investment
Officer since 1976; Executive Vice
President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990;
Executive Vice President of
Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill
Lynch") since 1990; Senior Vice
President of Merrill Lynch from
1985 to 1990; Director of Merrill
Lynch Funds Distributor, Inc.
("MLFD").
Walter Mintz(1)(2).................. 65 Special Limited Partner of 1993 0 0
1114 Avenue of the Americas Cumberland Partners since
New York, New York 1982.
10036
Melvin R. Seiden(1)(2).............. 63 President of Silbanc Properties, Inc 1993 0 0
780 Third Avenue since 1987;
New York, New York Chairman and President
10017 of Seiden & de Cuevas, Inc.
from 1964 to 1987.
Stephen B. Swensrud(1)(2)........... 61 Principal of Fernwood Associates; 1993 0 0
24 Federal Street Director,
Boston, Massachusetts Hitchiner Manufacturing
02110 Company.
Joe Grills.......................... 59 Member of the Committee on 1994 0 0
183 Soundview Lane Investment of Employee Benefits
New Canaan, Connecticut Assets of the Financial Executives
06840 Institute ("CIEBA") since
1986, member of CIEBA's
Executive Committee since
1988 and its Chairman from
1991 to 1992; Assistant
</TABLE>
25
<PAGE>
<TABLE><CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED AT
JULY 31, 1994
------------------------
PRINCIPAL OCCUPATIONS THE THE
NAME AND ADDRESS DURING PAST FIVE YEARS AND DIRECTOR ACQUIRING ACQUIRED
OF NOMINEES AGE PUBLIC DIRECTORSHIPS SINCE FUND FUND
- ------------------------------------ ----------- ------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Treasurer of International
Business Machines
Corporation ("IBM") and
Chief Investment Officer of
the IBM Retirement Funds
from 1986 until 1992.
Harry Woolf(1)(2)................... 71 Professor and former Director of the 1993 0 0
Institute for Advanced Institute for Advanced Study since
Study 1976;
Olden Lane Director, Alex. Brown
Princeton, New Jersey 08540 Funds, Flag Investors Funds
and Advanced Technology
Laboratories and Space
Labs Medical.
</TABLE>
- ---------------
(1) Each of the nominees is a director, trustee or member of an advisory board
of certain other investment companies for which FAM or MLAM acts as
investment adviser. See "Merrill Lynch Investment Company Directorships"
below.
(2) Member of Audit Committee of the Board of Directors.
(3) Interested person, as defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act"), of the Fund.
Committees and Board of Directors' Meetings. Each Fund has a standing Audit
Committee, which consists of the Directors who are not "interested persons" of
the Fund within the meaning of the Investment Company Act. The principal purpose
of the Audit Committee is to review the scope of the annual audit conducted by
the Fund's independent auditors and the evaluation by such auditors of the
accounting procedures followed by the Fund. The members of the audit committee
for both Funds are Messrs. Grills, Mintz, Seiden, Woolf and Swensrud. The
non-interested Directors have retained independent legal counsel to assist them
in connection with these duties. Neither Fund has a nominating committee.
During the fiscal year ended May 31, 1994, the Board of Directors of each
Fund held four meetings and the respective Audit Committee held four meetings.
Each of the Directors attended at least 75% of the total number of meetings of
the Board of Directors held while he was a Director during such period. All
members of the Audit Committee attended at least 75% of the meetings of the
Audit Committee held while he was a Director during such period.
Interested Persons. The Fund considers Mr. Zeikel to be an "interested
person" of the Fund within the meaning of Section 2(a)(19) of the Investment
Company Act as a result of the position he holds with FAM and its affiliates.
Mr. Zeikel is the President of both Funds and the President and a Director of
FAM and MLAM.
26
<PAGE>
Compensation of Directors. Fund Asset Management, L.P. ("FAM"), the
investment adviser, pays all compensation of all officers and Directors of
the Funds who are affiliated with ML & Co. or its subsidiaries. Prior to
January 19, 1994, the Acquiring Fund and the Acquired Fund paid each Director
not affiliated with the investment adviser a fee of $2,500 per year plus $500
per regular meeting attended, together with such Director's actual out-of-
pocket expenses relating to attendance at meetings. Also prior to January 19,
1994, the Acquiring Fund and the Acquired Fund paid each member of its Audit
Committee a fee of $250 per year plus $125 per meeting attended, together with
such Director's actual out-of-pocket expenses relating to attendance at
meetings. As of January 19, 1994, each Fund pays each Director not affiliated
with the investment adviser a fee of $2,600 per year, plus $250 per regular
meeting attended. The Funds also pay each member of its Audit Committee an
annual fee of $800 plus a fee of $150 for each Audit Committee meeting attended
together with such Director's actual out-pocket-expenses. For the fiscal period
ended May 31, 1994, these fees and expenses aggregated $19,565 for the Acquiring
Fund and $18,960 for the Acquired Fund.
Merrill Lynch Investment Company Directorships. FAM and its parent, MLAM,
act as the investment adviser for more than 90 other registered investment
companies. Mr. Zeikel is a trustee or director of each of these companies except
for Merrill Lynch Series Fund, Inc., Merrill Lynch Institutional Intermediate
Fund, and Merrill Lynch Funds for Institutions Series. Messrs. Grills, Mintz,
Seiden, Swensrud and Wolf are trustees or directors of Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Financial Institutions Series Trust, Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Retirement
Series Trust, Merrill Lynch Variable Series Fund, Inc., MuniAssets Fund, Inc.,
MuniBond Income Fund, Inc., MuniInsured Fund, Inc., and MuniYield Insured Fund,
Inc.
Officers of the Funds. The Acquiring Fund and the Acquired Fund have the
same executive officers. The Board of Directors has elected seven officers of
the Funds. The principal business address of each officer is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536. The following sets forth information
concerning each of these officers:
<TABLE><CAPTION>
OFFICER
NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE
- -------------------------------------------------------------------------------- ----------------- --------- ---------
<S> <C> <C> <C>
Arthur Zeikel................................................................... President 62 1993
President, Director and Chief Investment Officer of FAM since 1977; President
of MLAM since 1977 and Director and Chief Investment Officer since 1976;
Executive Vice President of ML & Co. since 1990; Executive Vice President of
Merrill Lynch since 1990; Senior Vice President from 1985 to 1990; Director of
MLFD since 1991.
Terry K. Glenn.................................................................. Executive Vice 53 1993
Executive Vice President of FAM and MLAM President since 1983; President of
MLFD since 1986 and Director since 1991.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C>
Vincent R. Giordano............................................................. Senior Vice 49 1993
Senior Vice President of FAM and MLAM since 1984 and Vice President of MLAM President
from 1980 to 1984; Portfolio Manager of FAM and MLAM since 1977.
Kenneth A. Jacob................................................................ Vice President 43 1993
Vice President of FAM and MLAM since 1984; employed by MLAM since 1978;
Portfolio Manager of the Fund since 1993.
Donald C. Burke................................................................. Vice President 34 1993
Vice President of MLAM since 1990; Accountant at Deloitte & Touche from 1982
to 1990.
Gerald M. Richard............................................................... Treasurer 45 1993
Senior Vice President and Treasurer of FAM and MLAM since 1984; Treasurer of
MLFD since 1984 and Vice President since 1981.
Mark B. Goldfus................................................................. Secretary 47 1993
Vice President of FAM and MLAM since 1985.
</TABLE>
Stock Ownership. At July 31, 1994, the Directors and officers of the Fund
as a group (twelve persons) owned an aggregate of less than 1/4 of 1% of the
Common Stock of the Fund outstanding at such date. At such date, Mr. Zeikel, a
Director of the Fund, and the officers of the Fund owned an aggregate of less
than 1/4 of 1% of the outstanding shares of common stock of ML & Co.
Section 30(f) of the 1940 Act and Section 16(a) of the Exchange Act require
the Funds' officers and Directors, investment adviser, affiliated persons of the
investment adviser and persons who own more than ten percent of a registered
class of either Fund's equity securities to file forms reporting their
affiliation with that Fund and reports of ownership and changes in ownership of
that Fund's Shares with the Commission and the NYSE. These persons and entities
are required by Commission regulation to furnish each Fund with copies of all
Section 16(a) forms they file. Based on a review of these forms furnished to
each Fund, both of the Funds believe that for the period from each Fund's
respective date of organization through May 31, 1994, all Section 16(a) filing
requirements applicable to the Funds' officers and trustees, investment adviser
and affiliated persons of the investment adviser were complied with. [To the
knowledge of each Fund, there are no greater than ten-percent stockholders of
either Fund.]
28
<PAGE>
SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of each Fund, including a majority of the Directors
who are not interested persons of the Funds, has selected the firm of Deloitte &
Touche ("D&T"), Independent Auditors, to examine the financial statements of
each Fund for the current fiscal year. The Funds know of no direct or indirect
financial interest of D&T in each Fund. Such appointment is subject to
ratification or rejection by the stockholders of the Funds. Unless a contrary
specification is made, the accompanying proxy will be voted in favor of
ratifying the selection of such auditors.
D&T also acts as independent auditors for ML & Co. and all of its
subsidiaries and for most other investment companies for which FAM or MLAM acts
as investment adviser. The fees received by D&T from these other entities are
substantially greater, in the aggregate, than the total fees received by it from
the Fund. The Board of Directors of the Fund considered the fact that D&T has
been retained as the independent auditors for ML & Co. and the other entities
described above in its evaluation of the independence of D&T with respect to the
Funds.
Representatives of D&T are expected to be present at the meeting and will
have the opportunity to make a statement if they so desire and to respond to
questions from stockholders.
29
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Acquiring Fund's management, no person owned
beneficially more than five percent of the Acquiring Fund's outstanding shares
at August 26, 1994.
30
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUNDS
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a share of
Acquiring Fund Stock and Acquired Fund Stock outstanding throughout each period
presented. This information is derived from the financial and accounting records
of each Fund.
The selected per share data and ratios of the Acquiring Fund for the period
from June 25, 1993 to May 31, 1994 have been audited by Deloitte & Touche,
independent accountants, whose report thereon was unqualified. The report of
independent accountants of the Acquiring Fund for the fiscal year ended May 31,
1994 is attached hereto on page F-1.
The selected per share data and ratios of the Acquired Fund for the period
from October 29, 1993 to May 31, 1994 have been audited by Deloitte & Touche,
independent accountants, whose report thereon was unqualified. The report of
independent accountants of the Acquired Fund for the fiscal year ended May 31,
1994 is attached hereto on page F-5.
The information should be read in conjunction with the financial statements
and notes contained in each Fund's Annual Report which are available from the
Fund's Transfer Agent, The Bank of New York, upon request.
31
<PAGE>
SELECTED PER SHARE DATA AND RATIOS
(FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE><CAPTION>
ACQUIRING FUND ACQUIRED FUND
----------------- ------------------
FOR THE PERIOD FOR THE PERIOD
JUNE 25, 1993** TO OCTOBER 29, 1993**
MAY 31, 1994 TO MAY 31, 1994
----------------- ------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period...................................... 14.18 14.18
-------- ----------
Net Investment Income.................................................. .81 .45
-------- ----------
Net Losses on Securities (Both Realized
and Unrealized)...................................................... (.66) (.86)
-------- ----------
Total From Investment Operations.......................................... .15 (.41)
-------- ----------
Less Distributions:
Dividends (from Net Investment Income)................................. (.74) (.38)
Distributions (from Capital Gains)..................................... (.15) --
Returns of Capital..................................................... -------- -----------
Total Distributions....................................................... (.89) (.38)
-------- ----------
Organization and Offering Costs........................................... (.04) (.03)
-------- ----------
Net Asset Value, End of Period............................................ $ 13.40 $ 13.36
-------- ----------
-------- ----------
Per Share Market Value, End of Period..................................... $ 12.25 $ 12.125
======== ==========
Total Investment Return***................................................ 0.83% (3.07%)
======== ==========
Ratios/Supplemental Data:
Net Assets, End of Period (In Thousands).................................. $ 64,154 $ 88,879
======== ==========
Ratio Expenses, Net of Reimbursement, to Average Net Assets............... 0.20%* 0.30%*
======== ==========
Ratio of Expenses to Average Net Assets................................... 0.85%* 0.80%*
======== ==========
Ratio of Net Investment Income to Average Net Assets...................... 6.12%* 5.44%*
-------- ----------
Portfolio Turnover Rate..................................................... 101.59% 37.15%
======== ==========
</TABLE>
- ---------------
* Annualized
** Commencement of operations
*** Based on net asset value per share
32
<PAGE>
GENERAL INFORMATION AND HISTORY
The Acquiring Fund and the Acquired Fund are both non-diversified,
closed-end management investment companies organized under the laws of the State
of Maryland on April 15, 1993 and on August 24, 1993, respectively. Both of the
Funds are registered under the 1940 Act. The principal office of the Acquiring
Fund and the Acquired Fund is located at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536 and their telephone number is (609) 282-2000.
In June 1993, the Acquiring Fund issued 4,588,800 shares of common stock,
$.10 par value per share, pursuant to the initial public offering thereof and
commenced operations.
In October 1993, the Acquired Fund issued 6,400,000 Shares, $.10 par value
per share, pursuant to the initial public offering thereof and commenced
operations.
The following table sets forth the number of outstanding shares of each
Fund as of May 31, 1994.
<TABLE><CAPTION>
(3) (4)
AMOUNT HELD BY AMOUNT OUTSTANDING
(1) (2) FUND FOR ITS EXCLUSIVE OF AMOUNT
TITLE OF CLASS AMOUNT AUTHORIZED OWN ACCOUNT SHOW UNDER(3)
- -------------------------------------------------------- ------------------ --------------- -------------------
<S> <C> <C> <C>
Acquiring Fund Shares of Common Stock................... 200,000,000 [-0-] 4,787,055
Acquired Fund Shares of Common Stock.................... 200,000,000 [-0-] 6,654,055
</TABLE>
The shares of the Acquiring Fund are listed and trade on the NYSE under the
symbol MUA. The shares of the Acquired Fund are listed and trade on the NYSE
under the symbol MBD. The following tables set forth the high and low sales
prices for each Fund's Shares as reported on the consolidated transaction
reporting system for the periods indicated.
PER SHARE DATA FOR ACQUIRING FUND STOCK TRADED ON THE NEW YORK STOCK EXCHANGE
<TABLE><CAPTION>
MARKET PRICE NET ASSET VALUE
-------------------- --------------------
FOR THE PERIOD HIGH LOW HIGH LOW
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
June 25, 1993* to August 31, 1993..................................... $ 15.00 $ 14.25 $ 14.74 $ 14.12
September 1, 1993 to November 30, 1993................................ 14.875 13.75 14.99 14.42
December 1, 1993 to February 28, 1994................................. 14.375 13.25 14.76 14.25
March 1, 1994 to May 31, 1994......................................... 13.875 12.125 14.22 12.97
</TABLE>
- ---------------
* Commencement of operations
33
<PAGE>
PER SHARE DATA FOR ACQUIRED FUND STOCK TRADED ON THE NEW YORK STOCK EXCHANGE
<TABLE><CAPTION>
MARKET PRICE NET ASSET VALUE
-------------------- --------------------
FOR THE PERIOD HIGH LOW HIGH LOW
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
October 29, 1993* to November 30, 1993................................. $ 14.875 $ 14.75 $ 14.18 $ 14.05
December 1, 1993 to February 28, 1994.................................. 14.875 13.00 14.48 14.07
March 1, 1994 to May 31, 1994.......................................... 13.625 12.00 14.00 12.90
</TABLE>
- ---------------
* Commencement of operations
During the period since the inception of the Funds, the Acquiring Fund
Stock and the Acquired Fund Stock have traded at premiums and discounts to net
asset value. Although there is no reason to believe that this pattern should be
affected by the Reorganization, it is not possible to state whether shares of
the Acquiring Fund will trade at a premium or discount to net asset value
following the Reorganization, or the extent of any such premium or discount.
On , 1994, the closing sale prices of shares of the Acquiring Fund
and shares of the Acquired Fund were $ and $ , respectively. These
prices represent a [premium] to net asset of the Acquiring Fund of % and
a [premium] to net asset value of the Acquired Fund of %.
34
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Each Fund's investment objective is to provide its stockholders with high
current income exempt from Federal income taxes by investing primarily in a
portfolio of medium to lower grade or unrated municipal obligations the interest
on which, in the opinion of bond counsel to the issuer, is exempt from Federal
income taxes. Each Fund seeks to achieve its objective by investing at least 80%
of its assets, except during temporary defensive periods, in a portfolio of
obligations, issued by or on behalf of states, territories and possessions of
the United States and their political subdivisions, agencies or
instrumentalities paying interest which, in the opinion of bond counsel to the
issuer, is exempt from Federal income taxes ("Municipal Bonds"). While the
Acquiring Fund is not restricted as to the duration of Municipal Bonds it may
invest in, the Acquired Fund's investment objective restricts its investment in
Municipal Bonds to those who have remaining maturities of greater than one year.
Each Fund, at all times, except during temporary defensive periods, maintains at
least 65% of its assets in Municipal Bonds which are rated in any one of the
medium and lower rating categories of a nationally recognized statistical rating
organization or are unrated. For the Acquiring Fund, if such Municipal Bonds are
unrated, they will possess creditworthiness comparable, in the opinion of the
Investment Adviser, to securities rated in the medium and lower categories. In
the case of Moody's, S&P or Fitch, these ratings are currently Baa (Moody's) or
BBB (S&P or Fitch) or lower, respectively. These are fundamental policies of
each Fund and, therefore, may not be changed without a vote of a majority of the
outstanding shares of each Fund. Neither Fund presently contemplates that it
will invest more than 25% of its total assets (taken at market value) in
Municipal Bonds whose issuers are located in the same state. However, the
Acquired Fund may invest 25% or more of its total assets in obligations of
issuers in the health care industry. There can be no assurance that the
investment objective of each Fund will be realized.
Investments in lower rated or comparable unrated Municipal Bonds generally
provide a higher yield than higher rated tax-exempt securities of similar
maturity but are subject to greater 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 Appendix I to this Prospectus for a
description of Moody's, S&P's and Fitch's ratings of Municipal Bonds.
Each Fund seeks to reduce risk through diversification, credit analysis and
monitoring of current developments and trends in both the economy and financial
markets. The Investment Adviser uses various means to research the stability
and/or potential for improvement of various municipal issuers in connection with
the purchase of their securities by each 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 which 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 may vary
the average maturity of each Fund's portfolio securities, or may
35
<PAGE>
engage in hedging transactions, based upon the Investment Adviser's assessment
of economic and market conditions.
Each Fund is classified as non-diversified within the meaning of the 1940
Act, which means that each 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
Funds' investments will be limited so as to qualify each Fund as a "regulated
investment company" for purposes of the Code. See "Taxes." To qualify, among
other requirements, each Fund will limit its investments so that, at the close
of each quarter of the taxable year, (i) not more than 25% of the market value
of its 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 which 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 each Fund assumes large
positions in the securities of a small number of issuers, its 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.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include primarily 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. For the Acquired Fund, the
Municipal Bonds it invests in have remaining maturities of greater than one
year. In addition, certain types of industrial development bonds are issued by
or on behalf of public authorities to finance various privately operated
facilities and certain local facilities, including 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 "private activity bonds" as discussed below.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special obligation" bonds. General obligation
bonds are secured by the issuer's pledge of faith, credit and taxing power for
the payment of principal and 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. Industrial development bonds 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 payment of the principal and interest on
such industrial development bonds depends solely on the ability
36
<PAGE>
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 Funds may purchase Municipal Bonds classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities which are classified as "private
activity bonds" may subject certain investors in the Fund to an alternative
minimum tax. There is no limitation on the percentage of the Fund's assets that
may be invested in Municipal Bonds which may subject certain investors to an
alternative minimum tax. See "Taxes."
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 which may be enacted in the future may affect the
availability of Municipal Bonds for investment by the Funds.
Each Fund may invest a relatively high percentage of its assets in
Municipal Bonds issued by entities which may be located in the same geographic
area, or which may pay their interest obligations from the revenues derived from
similar projects such as hospitals, multifamily housing, nursing homes,
continuing care facilities, commercial facilities (including hotels), electric
utility systems or industrial companies. This may make the Funds more
susceptible to similar economic, political or regulatory occurrences. As the
similarity in issuers increases, the potential for fluctuation of the net asset
value of shares of the Funds also increases. Also, it is anticipated that a
significant percentage of the Municipal Bonds in each Fund's portfolio will be
issued by entities or secured by facilities with a relatively short operating
history. Therefore, investors should also be aware of the risks which these
investments might entail, as discussed below. See also "Industrial Development
Bonds" below.
Health Care Revenue Bonds. These securities include Municipal Bonds issued
to finance hospitals, nursing homes and continuing care facilities and which 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 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. In addition, the Clinton administration
37
<PAGE>
has proposed a comprehensive health care plan. These proposals include 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 Funds are unable to 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 of 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 which
may provide investment agreements; and smaller than expected mortgage portfolios
due to the inability to originate mortgages. To the extent the Funds invest in
housing bonds issued by an entity or entities located in the same geographic
area, the Funds 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; technical costs 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 constructed 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
38
<PAGE>
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.
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
alternative 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 which 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 may also 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 which could adversely affect the
cost or operation of the facility.
- ---------------
* For purposes of the description of users of facilities, all references to
"corporations" are deemed to include any other nongovernmental person or
entity.
39
<PAGE>
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 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 Funds may also 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 its service area.
Industrial Development Bonds ("IDBs"). Each Fund reserves the right to
invest a portion of its assets in IDBs. IDBs are tax-exempt securities issued by
states, municipalities or public authorities and are issued to provide funds,
usually through a loan or lease arrangement, to a private corporation for the
purpose of financing construction or improvement of a facility to be used by the
corporation. Such bonds 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.
IDBs are often issued to provide funds for corporations from the industries
described above and, consequently, are subject to similar risks. IDBs are also
issued to provide funds to industrial companies. Investment in particular
industries may expose the Fund to risks associated with such industries.
Lease Obligations. Also included within the general category of Municipal
Bonds are participation certificates issued by government authorities or
entities to finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an installment
purchase contract or a conditional sales contract (hereinafter collectively
called "lease obligations") relating to such equipment, land or facilities.
Although lease obligations do not constitute general
40
<PAGE>
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 basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of financing
that has not yet developed the depth of marketability associated with more
conventional securities.
Non-Municipal Tax-Exempt Securities. Each Fund may also invest in
securities not issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if it nevertheless believes such securities to be
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities could include trust certificates or other
instruments evidencing interests in one or more long-term municipal securities.
Non-Municipal Tax-Exempt Securities also 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 INVESTMENT POLICIES
Each Fund has the authority to invest as much as 35% 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, each Fund reserves the right to temporarily invest more
than 20% of its assets in short-term municipal securities, or short-term taxable
money market securities (including commercial paper, certificates of deposit and
repurchase agreements) for defensive purposes when, in the opinion of the
Investment Adviser, prevailing market or financial conditions warrant. Taxable
commercial paper must be rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
F-1+ or F-1 by Fitch or have credit characteristics equivalent to such ratings
in the opinion of the Investment Adviser. The short-term tax-exempt municipal
obligations will also be in the highest rating categories as determined either
by Moody's (currently, MIG1 and MIG2 for notes and P-1 for commercial paper),
S&P (currently, SP-1 and SP-2 for notes and A-1 for commercial paper), or Fitch
(currently, F-1 and F-2 for notes and F-1 for commercial paper), except that
each Fund may invest in lower rated or unrated short-term tax-exempt obligations
to the extent that such investments do not exceed 20% of its assets.
Certificates of deposit must be issued by depository institutions with total
assets of at least $1 billion, except that the Funds may invest in certificates
of deposit of smaller institutions if such certificates of deposit are Federally
insured.
When-Issued Securities and Delayed Delivery Transactions. The Funds may
purchase or sell Municipal Bonds on a delayed basis or when-issued basis at
fixed purchase or sale terms. These transactions arise when securities are
purchased or sold by the Funds with payment and delivery taking place in the
future. The purchase will be recorded on the date a Fund enters into the
commitment and the value of the obligation will thereafter be reflected in the
calculation of its net asset value. The value of the obligation on the delivery
day may be more or less than its purchase price. A separate account of each Fund
will be established with its custodian consisting of cash, cash equivalents or
liquid high grade
41
<PAGE>
Municipal Bonds having a market value at all times at least equal to the amount
of the forward commitment.
Indexed and Inverse Floating Obligations. The Funds may invest in Municipal
Bonds the return on which is based on a particular index of value or interest
rates. For example, each Fund may invest in Municipal Bonds that pay interest
based on an index of Municipal Bond interest rates or based on the value of gold
or some other product. The principal amount payable upon maturity of certain
Municipal Bonds also may be based on the value of an index. To the extent each
Fund invests in Municipal Bonds of these sorts, its return on such Municipal
Bonds will be subject to risk with respect to the value of the particular index.
Also, the Funds 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 Funds may purchase original issue inverse floating
rate bonds in both the primary and secondary markets and may also purchase in
the secondary market synthetically created inverse floating rate bonds evidenced
by custodial or trust receipts. Generally, interest rates on inverse floating
rate bonds will decrease when short-term rates increase, and will increase when
short-term rates decrease. Such securities have the effect of providing a degree
of investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate which 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 Funds may purchase inverse floating obligations with
shorter term maturities or which 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 Funds which allows the Investment Adviser to vary the degree of investment
leverage relatively efficiently under different market conditions.
Call Rights. The Funds 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 during the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both a Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security.
OPTIONS AND FUTURES TRANSACTIONS
Each Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of certain financial futures
contracts ("financial futures contracts") and options thereon. While the Funds'
use of hedging strategies is intended to reduce the volatility of the net asset
value of shares of the Funds' Common Stock, the net asset value of such shares
will fluctuate. There can be no assurance that a Fund's hedging transactions
will be effective. Furthermore, the Funds only engage in hedging activities when
movements in interest rates occur from time to time and not necessarily when
movements in interest rates occur.
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Certain Federal income tax requirements may limit the Funds' ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to stockholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to stockholders. See
"Taxes--Tax Treatment of Options and Futures Transactions."
The following is a description of the transactions involving financial
futures contracts or options thereon in which the Funds may engage, limitations
on the use of such transactions and risks associated therewith. The investment
policies with respect to the hedging transactions of each Fund are not
fundamental policies and may be modified by the Board of Directors of each Fund
without the approval of its stockholders.
Writing Covered Call Options. Each 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
it at the stated exercise price until the option expires. Each Fund writes only
covered options, which means that so long as it is obligated as the writer of a
call option, it will own the underlying securities subject to the option. The
Funds may not write covered call options on underlying securities in an amount
exceeding 15% of the market value of their total assets.
The Funds will receive a premium from writing a call option, which
increases their return on the underlying security in the event the option
expires unexercised or is closed out at profit. By writing a call, each 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 its
obligation as a writer continues. Covered call options serve as a partial hedge
against a decline in the price of the underlying security. Each Fund may engage
in closing transactions in order to terminate outstanding options that it has
written.
Purchase of Options. The Funds 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
terminated by entering into a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options, or on securities which it intends to purchase. 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 Thereon. 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 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
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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 financial futures contracts or
options thereon. Distributions, if any, of net long-term capital gains from
certain transactions in futures or options are taxable at long-term capital
gains rates for Federal income tax purposes, regardless of the length of time
the stockholder has owned the Fund shares. See "Taxes."
The purchase or sale of a financial futures contract or option thereon
differs from the purchase or sale of a security in that no price or premium is
paid or received. Instead, an amount of cash or securities acceptable to the
broker equal to approximately 5% of the contract amount must be deposited with
the broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the price
of the futures contract fluctuates making the long and short positions in the
futures contract more or less valuable.
The Funds 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
which each Fund holds or anticipates purchasing against adverse changes in
interest rates. The Funds 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, U.S. Treasury notes, GNMA Certificates and three-month U.S.
Treasury bills.
Subject to policies adopted by its Board of Directors, each Fund may also
engage in transactions in other financial futures contracts and options thereon,
such as financial futures contracts or options on other municipal bond indices
which may become available, if the Investment Adviser should determine that
there is normally sufficient correlation between the prices of such futures
contracts and the Municipal Bonds in which it invests to make such hedging
appropriate.
Over-the-Counter Options. The Funds may engage in options and futures
transactions on exchanges and in 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 Funds engage 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 which have
capital of at least $50 million or whose obligations are guaranteed by an
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entity having capital of at least $50 million. OTC options and assets used to
cover OTC options written by the Funds are considered by the staff of the
Securities and Exchange Commission 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 a sale, or reduce the amount of proceeds that might
otherwise be realized.
Risk Factors in Options and Futures Transactions. Utilization of financial
futures transactions and options thereon involve the risk of imperfect
correlation in movements in the price of financial futures contracts or options
thereon and movements in the price of the security which is the subject of the
hedge. If the price of the financial futures contract or option thereon moves
more or less than the price of the security that is the subject of the hedge,
the Fund will experience a gain or loss which will not be completely offset by
movements in the price of such security. There is a risk of imperfect
correlation where the securities underlying financial futures contracts have
different maturities, ratings, geographic compositions or other characteristics
than the security being hedged. In addition, the correlation may be affected by
additions to or deletions from the index which serves as a basis for a financial
futures contract or option thereon. Finally, in the case of futures contracts on
U.S. Government securities and options on such financial futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the financial 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 ("CFTC"), the
futures trading activities described herein will not result in the Funds being
deemed a "commodity pool," as defined under such regulations, provided that each
Fund adheres to certain restrictions. In particular, each Fund may (1) purchase
and sell financial futures contracts and options thereon solely for bona fide
hedging purposes, as defined under CFTC regulations, and, in addition (2)
purchase or sell any other financial futures contracts or options if,
immediately thereafter, the sum of the amount of initial margin deposit on its
existing futures position and premiums paid for outstanding options, if any, not
entered for hedging purposes would not exceed 5% of the market value of its net
assets. Margin deposits may consist of cash or securities acceptable to the
broker and the relevant contract market.
When each Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of cash,
cash equivalents (e.g., commercial paper and daily tender adjustable notes) or
short-term, high-grade, fixed-income securities in a segregated account with its
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
futures contract, thereby ensuring that the use of such futures contract is
unleveraged.
Although certain risks are involved in financial futures contracts and
options thereon the Investment Adviser believes that, because the Funds engage
in options and futures transactions only for hedging purposes, the options and
futures portfolio strategies of the Funds do not subject the Funds to certain
risks frequently associated with speculation in financial futures contracts and
options thereon. The Funds must meet certain Federal income tax requirements
under the Code in order to qualify for the special tax treatment afforded
regulated investment companies, including a requirement that less
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than 30% of its gross income in each taxable year be derived from the sale or
other disposition of securities held for less than three months. See "Taxes--Tax
Treatment of Options and Futures Transactions."
The volume of trading on 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 Funds intend to enter into options and financial futures transactions,
on an exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close a financial futures transaction or the related
option. The inability to close financial futures positions or the related option
also could have an adverse impact on a Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by each Fund of margin deposits or
collateral in the event of bankruptcy of a broker with which it has an open
position in an option or futures contract.
The liquidity of a secondary market in a financial futures contract or
option thereon may be adversely affected by "daily price fluctuations limits"
established by commodity exchanges which limit the amount of fluctuation in a
financial futures contract or option price during a single trading day. Once the
daily limit has been reached in the contract or option, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
financial futures positions or related options. Prices have in the past moved
beyond the daily limit on a number of consecutive trading days.
If it is not possible to close a financial futures position or related
option entered into by a Fund, the Fund would be required to make daily cash
payments of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by a Fund
or moves in a direction opposite to that anticipated, the Fund may realize a
loss on the hedging transaction which is not fully or partially offset by an
increase in the value of portfolio securities. As a result, its total return for
such period may be less than if it had not engaged in the hedging transaction.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of each Fund and may
not be changed without the approval of the holders of a majority of each 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).
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Neither Fund may:
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 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, real estate limited partnerships,
commodities or commodity contracts; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies that invest in real estate or interests therein and the Fund may
purchase and sell financial futures contracts and options thereon.
4. Issue senior securities or borrow amounts in excess of 5% of its
total assets taken at market value.
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. 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
except that the Fund will invest 25% or more of its assets in Municipal
Bonds issued to finance projects in the health care industry. (For purposes
of this restriction, states, municipalities and their political
subdivisions are not considered to be part of any industry.)
Additional investment restrictions adopted by each Fund, which may be
changed by its Board of Directors, provide that each Fund may not:
1. 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.
2. 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.
3. 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).
4. 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
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hedging activities and may purchase and sell Call Rights to require a
mandatory tender for the purchase of related Municipal Bonds.
If a percentage restriction on investment policies or the investment on use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.
The Investment Adviser and Merrill Lynch share a common parent, Merrill
Lynch & Co. Because of the affiliation of Merrill Lynch with the Funds, the
Funds are prohibited from engaging in certain transactions involving Merrill
Lynch except pursuant to an exemptive order of the Securities and Exchange
Commission 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
which permits the Funds to effect principal transactions with Merrill Lynch in
high quality, short-term, tax-exempt securities subject to conditions set forth
in such order. See "Portfolio Transactions."
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DIRECTORS AND OFFICERS
The Acquiring Fund and the Acquired Fund have the same six Directors, five
of whom are not "interested persons," as defined in the 1940 Act, of either
Fund. The Directors are responsible for the overall supervision of the
operations of the Funds and perform various duties imposed on the directors of
investment companies by the 1940 Act and under applicable Maryland law. The
Acquiring Fund and the Acquired Fund also have the same executive officers. For
further information regarding the Directors and officers of each Fund, see
"Election of Directors."
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM, and an indirect
wholly-owned subsidiary of Merrill Lynch & Co. The Investment Adviser provides
the Acquiring Fund and the Acquired Fund with investment advisory, management
and administrative services. The Investment Adviser, or MLAM, acts as the
investment adviser for over 90 other registered investment companies. The
Investment Adviser also offers portfolio management and portfolio analysis
services to individuals and institutions. As of August 31, 1994, the Investment
Adviser and MLAM had a total of approximately $ billion in investment
company and other portfolio assets under management (approximately $
billion of which were invested in municipal securities), including accounts of
certain affiliates of the Investment Adviser. The principal business address of
the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreements between the Investment Adviser and each
of the Funds (the "Investment Advisory Agreements") provide that, subject to the
direction of the Board of Directors of each Fund, the Investment Adviser is
responsible for the actual management of each Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Acquiring
Fund and the Acquired Fund. Such portfolio management considers analyses from
various sources (including brokerage firms with which each Fund does business),
makes the necessary investment decisions, and places orders for transactions
accordingly. The Investment Adviser also is responsible for the performance of
certain administrative and management services for each of the Funds.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, each Fund currently pays a monthly fee at an annual rate of
0.55% of its average weekly net assets (i.e., the average weekly value of its
total assets, minus the sum of its accrued liabilities). For purposes of this
calculation, average weekly net assets is determined at the end of each month on
the basis of the average net assets of each Fund for each week during the month.
The assets for each weekly period are determined by averaging the net assets at
the last business day of a week with the net assets at the last business day of
the prior week.
The Investment Advisory Agreements obligate the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Acquiring Fund and the Acquired
Fund connected with investment and economic research, trading
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and investment management of each Fund, as well as the compensation of all
Directors of each Fund who are affiliated persons of the Investment Adviser or
any of its affiliates. Each Fund pays all other expenses incurred in its
operation, including, among other things, expenses for legal and auditing
services, taxes, costs of printing proxies, listing fees, stock certificates and
stockholder reports, charges of the Custodian and the Transfer Agent, Dividend
Disbursing Agent and Registrar expenses of portfolio transactions, fees and
expenses with respect to any issuance of preferred stock or any borrowing,
Securities and Exchange Commission fees, fees and expenses of unaffiliated
Directors, accounting and pricing costs (including the weekly calculation of the
net asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, mailing and other expenses properly
payable by each Fund. Accounting services will be provided to each Fund by the
Investment Adviser, and each Fund will reimburse the Investment Adviser for its
costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreements with the Acquiring Fund and the Acquired Fund will remain in effect
until June 18, 1995 and July 31, 1995, respectively, and from year to year
thereafter if approved annually (a) by each Fund's Board of Directors or by a
majority of the outstanding shares of each Fund and (b) by a majority of the
Directors who are not parties to such contract or interested persons (as defined
in the 1940 Act) of any such party. Such contract is not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the vote of the stockholders of each Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by each Fund's Board of Directors, the
Investment Adviser is primarily responsible for the execution of each Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for each Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Funds do not necessarily pay the lowest commission or spread available.
The Funds have no obligation to deal with any broker or dealer in execution
of transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provided supplemental investment research to
the Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Funds. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
The securities in which the Funds primarily invest are traded in the
over-the-counter markets, and the Funds deal directly with the dealers who make
markets in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Under the 1940 Act, except as
permitted by exemptive order, persons affiliated with either Fund are prohibited
from dealing with that Fund as principal in the purchase and sale of securities.
Since transactions in the over-the-counter
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market usually involve transactions with dealers acting as principal for their
own account, the Funds do not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions except that,
pursuant to an exemptive order from the Securities and Exchange Commission
obtained by the Investment Adviser, the Funds may engage in principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities. See "Investment Restrictions." Affiliated persons of either Fund may
serve as its broker in over-the-counter transactions conducted on an agency
basis.
No brokerage commissions were paid by the Acquiring Fund for the period
from commencement of investment operations on June 25, 1993 to May 31, 1993.
The Funds may also purchase securities from tax-exempt issuers in
individually negotiated transactions with the issuer. Because an active trading
market may not exist for such securities, the price that the Funds may pay for
these securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
PORTFOLIO TURNOVER
Generally, the Funds do not purchase securities for short-term trading
profits. However, the Funds may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to the Investment Adviser. [Each Fund's annual portfolio turnover
rate, under normal circumstances is less than 100%.] The portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value of
the portfolio securities owned by each of the Funds during the particular fiscal
year. For purposes of determining this rate, all securities whose maturities at
the time of acquisition are one year or less are excluded.
DIVIDENDS AND DISTRIBUTIONS
The Acquiring Fund and the Acquired Fund intend to distribute substantially
all of their net investment income. Dividends from such net investment income
are declared and paid monthly. All net realized long-or short-term capital
gains, if any, are distributed to each Fund's stockholders 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 Common Stock of each Fund. Dividends and distributions may be taxable
to stockholders under certain circumstances as discussed below, whether they are
reinvested in shares of each Fund or received in cash.
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TAXES
GENERAL
[The Funds qualify for the special tax treatment afforded regulated
investment companies ("RICs") under the Internal Revenue Code of 1986, as
amended (the "Code"). So qualifying, 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), each Fund is not subject to Federal income tax to the extent that it
distributes its net investment income and realized capital gains. The Funds
currently distribute substantially all of such income.
The Funds 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), each Fund shall be qualified to pay exempt-interest
dividends to its stockholders. Exempt-interest dividends are dividends or any
part thereof (other than a capital gain dividend) paid by a 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 stockholders
within 60 days after the close of its taxable year. In general, exempt-interest
dividends may be treated by stockholders for all purposes as items of interest
excludable from their gross income under Code Section 103(a). The Code provides
that every stockholder required to file a tax return must include for
information purposes on such return the amount of exempt-interest dividends
received from the Fund during the taxable year. Stockholders are advised to
consult their tax adviser, however, with respect to whether exempt-interest
dividends retain the exclusion under Code Section 103(a) if such stockholders
would be treated as "substantial users" or "related persons" under Code Section
147(a) with respect to some or all of the tax-exempt obligations held by the
Funds. The Code provides that interest on indebtedness used to purchase or carry
shares of the Funds is not deductible to the extent attributable to
exempt-interest dividends. Since the Funds will not invest in the stock of
domestic corporations, stockholders will not be entitled to the dividends
received deduction for corporations. At present, the highest marginal Federal
income tax rate for individuals is 31%; however, under proposals made by the
Clinton administration the highest marginal Federal tax rate would increase to
39.6%, with corresponding increases in the highest combined Federal, state and
local marginal tax rates.
The Funds may realize capital gains, which will constitute taxable income.
To the extent that the Funds' 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, such distributions will be considered ordinary income
for Federal income tax purposes. In order to avoid taxation on its net long-term
capital gains, the Funds may elect to distribute "capital gain dividends" to its
stockholders. Distributions, if any, of net long-term capital gains from the
sale of securities or from certain transactions in futures or options designated
as capital gain dividends in a written notice mailed to stockholders not later
than 60 days after the close of the taxable year are taxable at long-term
capital gains rates for Federal income tax purposes, regardless of the length of
time the stockholder has owned Fund shares. For Federal income tax purposes, any
loss upon the sale or exchange of Fund shares held for six months or less will
be treated as long-term capital loss to the extent of any long-term capital
gains distributions received by
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the stockholder. In addition, such loss will be disallowed to the extent of any
exempt-interest dividends received by the stockholder. If Fund pays a dividend
in January which was declared in the previous October, November or December to
stockholders of record on a specified date in one of such months, then such
dividend or distribution will be treated for tax purposes as being paid by that
Fund and received by its stockholders on December 31 of the year in which the
dividend was declared.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute 98% of its investment company taxable income, with
certain adjustments, 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, will
generally not apply to the tax-exempt income of RICs such as the Funds that pay
exempt-interest dividends. The Fund anticipates that it will make sufficient
timely distributions of taxable income so as to avoid imposition of the excise
tax.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will apply
to interest received on "private activity bonds" issued after August 7, 1986.
Income received on such bonds is classified as an item of tax preference which
could subject investors in such bonds, including stockholders of the Funds, to
an alternative minimum tax. However, an individual stockholder filing a joint
return who does not have any tax preference items subject to the alternative
minimum tax other than income received from the Funds derived from private
activity bonds would have to receive more than $40,000 of such income before
becoming subject to the alternative minimum tax. The Funds intend to purchase
such "private activity bonds" and will report to stockholders within 60 days
after its taxable year-end the portion of the Funds' 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 an alternative
minimum tax based, in part, on certain differences between taxable income as
adjusted for other tax preferences and the corporation's "adjusted current
earnings" (which more closely reflects a corporation's economic income). Because
an exempt-interest dividend paid by the Funds will be included in adjusted
current earnings, whether or not such dividend is attributable to private
activity bonds, a corporate stockholder may be required to pay an alternative
minimum tax on exempt-interest dividends paid by the Fund.
In addition, the Code imposes a deductible tax (the "Environmental Tax") on
a corporation's alternative minimum taxable income (computed without regard to
the alternative tax net operating loss deduction or the environmental tax
deduction) at a rate of $12 per $10,000 (0.12%) of alternative minimum taxable
income in excess of $2,000,000. The Environmental Tax will be imposed for
taxable years beginning after December 31, 1986 and before January 1, 1996. The
Environmental Tax will be imposed even if the corporation is not required to pay
an alternative minimum tax, because the corporation's regular income tax
liability exceeds its minimum tax liability. The Code provides, however, that
RICs, such as the Funds, are not subject to the Environmental Tax. However,
exempt-interest dividends paid by the Funds that increase alternative minimum
taxable income for corporate stockholders (as described above) will be included
in the Environmental Tax calculation.
53
<PAGE>
The value of shares acquired pursuant to the Funds' 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 Funds'
shares are trading at a premium over net asset value, the Funds issue 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 stockholders, including stockholders who
do not participate in the dividend reinvestment plan. Thus, stockholders who do
not participate in the dividend reinvestment plan might be required to report as
ordinary income a portion of their distributions equal to their allocable share
of the discount.
Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on reportable dividends, capital gains distributions and
redemption payments ("backup withholding"). Backup withholding is not required
with respect to dividends representing "exempt interest." Generally, taxpayers
subject to backup withholding will be those for whom a taxpayer identification
number is not on file with the Funds or who, to the Funds' 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 subject to backup withholding.
Distributions of ordinary income and short-term capital gains to
stockholders who are non-resident aliens 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. Non-resident stockholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Funds may write, purchase or sell municipal bond index futures
contracts and interest rate futures contracts on U.S. Government securities
("financial futures contracts"). The Funds may also purchase and write call and
put options on such financial futures contracts. Unless the Funds are eligible
to make and makes a special election, such options and 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 option or futures contract
will be treated as sold for its fair market value on the last day of the taxable
year. In general, unless the special election referred to in the previous
sentence is made, gain or loss from transactions in options and futures
contracts will be 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Funds' transactions in options and futures contracts. Under
Section 1092, the Funds may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures.
One of the requirements for qualifications as RICs is that less than 30% of
the Funds' gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Funds may be restricted in effecting closing transactions within three months
54
<PAGE>
after entering into an option of futures contract. Proposed legislation, if
enacted in its current form, would eliminate this requirement.
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. Stockholders are advised
to consult their own tax advisers concerning state and local tax matters.
Depending upon the extent of the Funds' activities in those states and
localities in which its offices are maintained or in which its agents are
located, the Funds may be subject to the tax laws of such states or localities.
------------------------
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 these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Stockholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes.]
55
<PAGE>
NET ASSET VALUE
Net asset value per share of Common Stock of the Acquiring Fund and the
Acquired Fund is determined at 4:15 P.M., New York time, on the last business
day in each week. For purposes of determining the net asset value of a share of
Common Stock, the value of the securities held by the Funds plus any cash or
other assets (including interest and dividends accumulated 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. Expenses, including
the fees payable to the Investment Adviser, are accrued daily.
The Municipal Bonds in which the Funds invest are traded primarily in the
over-the-counter markets. In determining net asset value, the Funds utilize 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. Municipal Bonds for which quotations are not readily available are
valued at fair market value on a consistent basis as determined by the pricing
service using a matrix system to determine valuations. The procedures of the
pricing service and its valuations are reviewed by the officers of each Fund
under the general supervision of the Board of Directors. The Board of Directors
of each Fund has determined in good faith that the use of a pricing service is a
fair method of determining the valuation of portfolio securities. Bonds 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 of each Fund.
The Funds determine and make available for publication the net asset value
of their Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities are
published in Barron's, the Monday edition of The Wall Street Journal and the
Monday edition of The New York Times.
DESCRIPTION OF CAPITAL STOCK
The Funds are each 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. Each Fund's Board of Directors is authorized, however, to classify or
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption.
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Stockholders are entitled to share pro rata in the net assets of
each Fund available for distribution to stockholders upon liquidation of a Fund.
Stockholders are entitled to one vote for each share held.
Each Fund will send unaudited reports at least semi-annually and audited
financial statements to all of its stockholders.
56
<PAGE>
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
Each Fund's Articles of Incorporation include identical provisions that
could have the effect of limiting the ability of other entities or persons to
acquire control of each Fund or to change the composition of its Board of
Directors and could have the effect of depriving stockholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Fund. For a description of
these provisions of the Acquiring Fund, which are identical to those of the
Acquired Fund, see "The Reorganization--Certain Provisions in the Acquiring
Fund's Articles of Incorporation."
Reference should be made to the Funds' Articles of Incorporation on file
with the Securities and Exchange Commission for the full text of these
provisions.
CUSTODIAN
The Acquiring Fund's and the Acquired Fund's securities and cash will be
held under a Custodial Agreement with The Bank of New York, 90 Washington
Street, 12th Floor, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of Common Stock of the Acquiring Fund and the Acquired Fund is The Bank of New
York, 101 Barclay Street, 12W, New York, New York 10286.
LEGAL PROCEEDINGS
There are no material legal proceedings to which the Acquiring Fund or the
Acquired Fund is a party.
57
<PAGE>
LEGAL OPINIONS
Certain legal matters in connection with the Acquiring Fund Shares to be
issued pursuant to the Reorganization will be passed upon by Rogers & Wells, New
York, New York. Rogers & Wells will rely as to matters of Maryland law on the
opinion of Ginsburg, Feldman and Bress, Chartered, Washington, D.C.
EXPERTS
The statement of assets, liabilities and capital of the Funds included in
this Joint Proxy Statement-Prospectus has been so included in reliance on the
report of Deloitte & Touche, independent auditors, and on their authority as
experts in auditing and accounting. The principal business address of Deloitte &
Touche is 117 Campus Drive, Princeton, New Jersey 08540.
58
<PAGE>
STOCKHOLDER PROPOSALS
If a stockholder intends to present a proposal at the 1995 Annual Meeting
of Stockholders of either Fund, which is anticipated to be held in September
1995, and desires to have the proposal included in the Fund's proxy statement
and form of proxy for that meeting, the stockholder must deliver the proposal to
the offices of the Fund by May , 1995.
By Order of the Board of Directors
MARK B. GOLDFUS
Secretary
Date: September , 1994
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors of the Acquiring Fund...................................................... F-1
Audited Statement of Net Assets of the Acquiring Fund..................................................... F-2
Audited Statement of Operations of the Acquiring Fund..................................................... F-3
Audited Balance Sheet of the Acquiring Fund............................................................... F-4
Report of Independent Auditors of the Acquired Fund....................................................... F-5
Audited Statement of Net Assets of the Acquired Fund...................................................... F-6
Audited Statement of Operations of the Acquired Fund...................................................... F-7
Audited Balance Sheet of the Acquired Fund................................................................ F-8
Pro Forma Financial Statement for the Combined Funds...................................................... F-9
Report of Independent Auditors of the Investment Adviser.................................................. F-10
</TABLE>
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MUNIASSETS FUND, INC.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of MuniAssets Fund, Inc. as of May 31,
1994, the related statements of operations and changes in net assets, and the
financial highlights for the period June 25, 1993 (commencement of operations)
to May 31, 1994. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at May 31,
1994 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniAssets Fund,
Inc. as of May 31, 1994, the results of its operations, the changes in its net
assets, and the financial highlights for the period June 25, 1993 to May 31,
1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Princeton, New Jersey
July 13, 1994
F-1
<PAGE>
FINANCIAL STATEMENTS
OF
MUNIASSETS FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
MAY 31, 1994
<TABLE><CAPTION>
MUNIASSETS FUND, INC.
-----------------------------
<S> <C> <C>
ASSETS:
Investments, at value ............................................................. 62,935,655
Cash............................................................................... 27,617
Receivables:
Securities Sold.................................................................. $ 2,969,056
Interest......................................................................... 1,201,037
Investment Adviser............................................................... 63,919 4,234,012
-------------
Deferred Organization Expenses .................................................... 61,892
Prepaid expenses and other assets.................................................. 22,543
--------------
Total Assets....................................................................... 67,281,719
--------------
LIABILITIES:
Payables:
Securities purchased............................................................. 2,884,461
Capital shares redeemed.......................................................... 157,015 3,041,476
Accrued Expenses and Other Liabilities............................................. 86,188
--------------
Total Liabilities.................................................................. 3,127,664
--------------
NET ASSETS:
Net Assets......................................................................... $ 64,154,055
--------------
--------------
CAPITAL:
Common Stock, par value $0.10 per share; 200,000,000 shares authorized; 4,787,055
shares issued and outstanding...................................................... $ 478,706
Paid-in Capital in excess of par................................................... 67,187,000
Undistributed investment income--net............................................... 358,479
Accumulated realized capital losses--net........................................... (370,296)
Unrealized depreciation on investments............................................. (3,499,834)
--------------
Total Capital--Equivalent to $13.40 net asset value per share of Common Stock
(market price - $12.25).......................................................... $ 64,154,055
--------------
</TABLE>
F-2
<PAGE>
MUNIASSETS FUND, INC.
STATEMENT OF OPERATIONS
<TABLE><CAPTION>
JUNE 25, 1993*
TO
MAY 31, 1994
----------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest and amortization of premium discount....................................... $ 4,043,883
EXPENSES:
Investment Advisory fees............................................................ $ 351,471
Professional fees................................................................... 40,898
Accounting services................................................................. 37,016
Directors' fees and expenses........................................................ 19,565
Printing and shareholder reports.................................................... 16,462
Transfer agent fees................................................................. 15,149
Amortization of organization expenses............................................... 14,212
Listing fees........................................................................ 13,968
Custodian fees...................................................................... 7,834
Other............................................................................... 25,371
------------
Total expenses before reimbursement................................................. 541,946
Reimbursement of expenses........................................................... (415,390)
------------
Total expenses after reimbursement.................................................. 126,556
--------------
Investment income--net.............................................................. 3,917,327
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET
Realized gain on investments........................................................ 365,341
Unrealized depreciation on investments--net......................................... (3,499,834)
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 782,834
--------------
--------------
- -------------------
* Commencement of operations
</TABLE>
F-3
<PAGE>
MUNIASSETS FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
JUNE 25, 1993*
TO
MAY 31, 1994
--------------
<S> <C>
OPERATIONS:
Net investment income............................................................................. $ 3,917,327
Net realized gain on investments.................................................................. 365,341
Net unrealized depreciation on investments........................................................ (3,499,834)
--------------
Net increase in net assets resulting from operations.............................................. 782,834
--------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................................................................. (3,558,848)
Realized gain on investments...................................................................... (735,637)
--------------
COMMON STOCK TRANSACTIONS
Net proceeds from issuance of common stock........................................................ 67,756,500
Offering and underwriting costs resulting from issuance of common stock........................... (190,799)
--------------
Net increase in net assets derived from common stock transactions................................. 67,565,701
--------------
NET ASSETS:
Total increase in net assets.................................................................... 64,054,050
Beginning of period............................................................................. 100,005
--------------
End of period*.................................................................................. $ 64,154,055
--------------
Undistributed net investment income*.............................................................. $ 358,479
--------------
--------------
- -------------------
* Commencement of operations
</TABLE>
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
MUNIBOND INCOME FUND, INC.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of MuniBond Income Fund, Inc. as of May
31, 1994, the related statements of operations and changes in net assets, and
the financial highlights for the period October 29, 1993 (commencement of
operations) to May 31, 1994. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at May 31,
1994 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniBond Income
Fund, Inc. as of May 31, 1994, the results of its operations, the changes in its
net assets, and the financial highlights for the period October 29, 1993 to May
31, 1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Princeton, New Jersey
July 13, 1994
F-5
<PAGE>
FINANCIAL STATEMENTS
OF
MUNIBOND INCOME FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
MAY 31, 1994
<TABLE><CAPTION>
MUNIBOND INCOME FUND, INC.
-----------------------------
<S> <C> <C>
ASSETS:
Investments, at value.............................................................. $ 87,445,499
Cash............................................................................... 83,754
Receivables:
Interest......................................................................... $ 1,417,392
Securities Sold.................................................................. 967,160
Investment Adviser............................................................... 118,940 2,503,492
Deferred Organization Expenses..................................................... ------------ 69,721
--------------
Total Assets....................................................................... 90,102,466
--------------
LIABILITIES:
Payables:
Securities purchased............................................................. 962,917
Dividends to Shareholders........................................................ 181,511 1,144,428
Accrued expenses and other liabilities............................................. ------------ 79,457
--------------
Total Liabilities.................................................................. 1,223,885
NET ASSETS: --------------
Net Assets......................................................................... $ 88,878,581
--------------
--------------
CAPITAL:
Common Stock, par value $0.10 per share; 200,000,000 shares authorized; 6,654,055
shares issued and outstanding...................................................... $ 665,405
Paid-in Capital in excess of par................................................... 93,445,808
Undistributed investment income--net............................................... 465,369
Undistributed realized capital gains--net.......................................... 322,512
Unrealized depreciation on investments--net........................................ (6,020,513)
--------------
Total Capital--Equivalent to $13.36 net asset value per share of Common Stock
(market price - $12.125)......................................................... $ 88,878,581
--------------
--------------
</TABLE>
F-6
<PAGE>
MUNIBOND INCOME FUND, INC.
STATEMENT OF OPERATIONS
<TABLE><CAPTION>
OCTOBER 29, 1993*
TO
MAY 31, 1994
----------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest and amortization of premium discount ...................................... $ 2,976,799
EXPENSES:
Investment Advisory fees............................................................ $ 298,995
Accounting services................................................................. 28,463
Professional fees................................................................... 23,024
Directors' fees and expenses........................................................ 18,960
Printing and shareholder reports.................................................... 13,380
Transfer agent fees................................................................. 11,839
Listing fees........................................................................ 8,546
Amortization of organization expenses............................................... 7,528
Custodian fees...................................................................... 6,496
Other............................................................................... 16,158
------------
Total expenses before reimbursement................................................. 433,389
Reimbursement of expenses........................................................... (417,935)
------------
Total expenses after reimbursement.................................................. 15,454
--------------
Investment income--net.............................................................. 2,961,345
--------------
REALIZED GAIN AND UNREALIZED LOSS ON INVESTMENTS--NET
Realized gain on investments--net................................................... 322,512
Unrealized depreciation on investments--net......................................... (6,020,513)
--------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................ $ (2,736,656)
--------------
--------------
- -------------------
* Commencement of operations
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
MUNIBOND INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
OCTOBER 29, 1993*
TO
MAY 31, 1994
----------------
<S> <C>
OPERATIONS:
Net investment income........................................................................... $ 2,961,345
Net realized gain on investments................................................................ 322,512
Net unrealized depreciation on investments...................................................... (6,020,513)
----------------
Net decrease in net assets resulting from operations.......................................... (2,736,656)
----------------
DIVIDENDS TO SHAREHOLDERS
Investment income--net.......................................................................... (2,495,976)
----------------
Net decrease in net assets resulting from dividends to shareholders............................. (2,495,976)
----------------
COMMON STOCK TRANSACTIONS
Net proceeds from issuance of common shares..................................................... 94,221,225
Offering and underwriting costs resulting from the issuance of common stock..................... (210,017)
Net increase in net assets derived from common stock transactions............................... 94,011,208
----------------
NET ASSETS:
Total increase in net assets.................................................................... 88,778,576
Beginning of period............................................................................. 100,005
End of period................................................................................... $ 88,878,581
----------------
----------------
Undistributed investment income--net............................................................ $ 465,369
----------------
----------------
- -------------------
* Commencement of operations
</TABLE>
F-8
<PAGE>
FINANCIAL STATEMENTS
OF
MUNIASSETS FUND, INC.
COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
MAY 31, 1994
<TABLE><CAPTION>
PRO FORMA FOR
COMBINED FUND
-------------------
(UNAUDITED)
<S> <C>
ASSETS:
Cash......................................................................................... $ (189,290)
Receivable for Securities Sold............................................................... 4,236,876
Interest Receivable.......................................................................... 2,621,437
Receivable from Investment Adviser........................................................... 251,476
Stocks and Bonds Book Value.................................................................. 159,901,501
Unrealized Depreciation on Investments....................................................... (9,520,347)
Prepaid Expenses and other Assets............................................................ 61,892
Organizational Expenses...................................................................... 22,543
-------------------
Total Assets............................................................................ 157,386,088
LIABILITIES:
Payable for Securities Purchased............................................................. 3,847,377
Payable for Advisory Fees.................................................................... 68,617
Accrued Expenses and Other Liabilities....................................................... 368,654
Payable for Dividends to Shareholders........................................................ 1,215,164
-------------------
Total Liabilities....................................................................... 5,499,812
NET ASSETS:
Total Net Assets............................................................................. $ 151,886,276
-------------------
-------------------
CAPITAL:
Common Stock, par value $0.10 per share; 200,000,000 shares authorized; 11,397,153 shares
issued and outstanding (Note 4).............................................................. $ 1,139,715
Paid-in Capital in excess of par............................................................. 160,637,204
Accumulated realized capital losses - net.................................................... (370,296)
Unrealized depreciation on investments - net................................................. (9,520,347)
Total Capital--Equivalent to $13.33 net asset value per share
of Common Stock............................................................................ $ 151,886,276
-------------------
-------------------
</TABLE>
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
FUND ASSET MANAGEMENT, L.P.:
We have audited the accompanying balance sheet of Fund Asset Management,
L.P. (the "Company") as of December 31, 1993. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company at December 31, 1994 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Parsippany, New Jersey
February 28, 1994
F-10
<PAGE>
FUND ASSET MANAGEMENT, L.P.
BALANCE SHEET, DECEMBER 31, 1993
<TABLE>
<S> <C>
ASSETS
Cash........................................................................................... $ 996,680
Receivable from affiliated companies:
Lease transactions........................................................................... 24,501,523
Sale of leased investment.................................................................... 48,312,532
Fund management fees receivable................................................................ 28,927,938
Investments in Leases:
Leveraged leases............................................................................. 57,431,668
Sales-type lease............................................................................. 3,362,521
Investments in affiliated investment companies at the lower of cost or market (market:
$19,731,088)................................................................................... 18,181,262
Investment in affiliated Limited Partnership................................................... 31,109,264
TOTAL ASSETS................................................................................... $ 212,823,388
-----------------
-----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Payable to Merrill Lynch & Co., Inc. and affiliates............................................ $ 21,554,955
Deferred income taxes:
Arising from leveraged leases................................................................ 52,938,886
Arising from sales-type lease................................................................ 1,351,622
Other........................................................................................ 15,838,124
Other.......................................................................................... 8,501
-----------------
Total liabilities.............................................................................. 91,692,088
-----------------
STOCKHOLDER'S EQUITY:
Common stock, par value $1.00 per share authorized 25,000 shares; outstanding 1,000 shares..... 1,000
Additional paid-in capital..................................................................... 686,215,876
Retained earnings.............................................................................. 119,029,472
Proceeds receivable from ML & Co. from sale of subsidiary...................................... (684,115,048)
-----------------
Total stockholder's equity..................................................................... 121,131,300
-----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..................................................... $ 212,823,388
-----------------
-----------------
</TABLE>
See notes to balance sheet.
F-11
<PAGE>
FUND ASSET MANAGEMENT, L.P.
NOTES TO BALANCE SHEET
DECEMBER 31, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--Fund Asset Management, L.P. (the "Company"), a wholly-owned
subsidiary of Merrill Lynch Investment Management, Inc. (the "Parent"), which is
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
serves as an investment adviser to various registered open-end investment
companies. The Company is also a lessor participant in certain leveraged and
sales-type lease agreements.
Income Taxes--The results of the operations of the Company are included in
the consolidated Federal and combined state and local income tax returns filed
by ML & Co. It is the policy of ML & Co. to allocate the tax associated with
such operating results to each respective subsidiary in a manner which
approximates the separate company method. Effective in the first quarter of
1992, ML & Co. adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") which requires an asset and liability
method in recording income taxes on all transactions that have been recognized
in the financial statements. SFAS 109 provides that deferred taxes be adjusted
to reflect tax rates at which future tax liabilities or assets are expected to
be settled or realized. Previously, the Company accounted for income taxes in
accordance with SFAS 96. The current year's impact on adopting SFAS 109 was
minimal.
2. TRANSACTIONS WITH AFFILIATES
The Company serves as an investment adviser for certain affiliated
investment companies. The Company maintains investments in certain of these
investment companies. Such investments are carried at the lower of cost or
market value. Market value is determined based upon quoted market prices.
During 1992, the Company sold its investment in Merrill Lynch Interfunding,
Inc., an investor in select credit instruments, and Merlease Leasing Corp., a
lessor participant in lease agreements, to an affiliate at book value, resulting
in a receivable from ML & Co. This receivable is reflected as a reduction to
stockholder's equity.
The Company has an arrangement with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S") which provides that the Company, which receives revenue
as investment adviser to certain investment companies (the "Funds"), reimburse
MLPF&S for certain costs incurred in processing transactions involving shares of
the Funds.
F-12
<PAGE>
FUND ASSET MANAGEMENT, L.P.
NOTES TO BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1993
The "Receivable from affiliated companies" arising from lease transactions
is summarized as follows:
<TABLE>
<S> <C>
Monies advanced to fund lease transactions............................... $ (103,476,954)
Tax benefits allocated to the Company by ML & Co......................... 88,699,254
Other.................................................................... 39,279,223
-----------------
Total.................................................................... $ 24,501,523
-----------------
-----------------
</TABLE>
The Company has a 49 percent limited partnership interest in ML Plainsboro
Limited Partnership ("MLP") whose general partner is an affiliate. Profits and
losses are allocated to the Company based on its percentage interest.
ML & Co. is the holder of the Company's excess cash, which is available on
demand to meet current liabilities. ML & Co. credits the Company for interest,
at a floating rate approximating ML & Co.'s average borrowing rate, based on the
Company's average daily balances due to/from ML & Co.
3. INVESTMENTS IN LEASES
The Company is a lessor participant in leveraged leases. The Company's net
investment in leveraged leases is summarized as follows:
<TABLE>
<S> <C>
Rentals receivable (net of principal and interest on nonrecourse debt)..... $ 66,075,030
Estimated residual values of leased assets................................. 18,964,143
Less:
Unearned and deferred income............................................. (26,617,505)
Allowance for uncollectables............................................. (990,000)
---------------
Investment in leveraged leases............................................. 57,431,668
Less deferred taxes arising from leveraged leases.......................... (52,938,886)
---------------
Net investment in leveraged leases......................................... $ 4,492,782
---------------
---------------
</TABLE>
F-13
<PAGE>
FUND ASSET MANAGEMENT, L.P.
NOTES TO BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1993
Pertinent information relating to the Company's investments in leveraged
leases is summarized as follows:
<TABLE><CAPTION>
LENGTH OF ESTIMATED
LEASE EQUITY RESIDUAL VALUE OF
TYPE OF PROPERTY (YEARS) INVESTMENT LEASED PROPERTY
- -------------------------------------------------- ----------- ----------- -----------------
<S> <C> <C> <C>
Generating plant.................................. 24-25 34.06% 15.0%
</TABLE>
Financing beyond the Company's equity interest in the purchase price of the
properties was furnished by outside parties in the form of long-term debt that
provides for no recourse against the Company and is secured by a first lien on
the properties and related rentals. At the end of the respective lease terms,
ownership of the properties remains with the Company.
The Company's investment in the sales-type leases consisted of the
following elements at December 31, 1993.
<TABLE>
<S> <C>
Minimum lease payments receivable............................................. $ 3,672,000
Less:
Unearned income............................................................. (59,479)
Allowance for uncollectables................................................ (250,000)
-------------
Investment in sales-type financing leases..................................... $ 3,362,521
-------------
-------------
</TABLE>
At December 31, 1993 minimum lease payments receivable are $3,672,000 for
1994.
For Federal income tax purposes, the Company receives the investment tax
credit and has the benefit of tax deductions for (i) depreciation on the entire
amount of leased assets and (ii) interest on the outstanding long-term debt. For
state and local tax purposes, the Company also receives the benefits of tax
deductions from (i) and (ii) above. Since, during the early years of the leases,
those deductions exceed the Company's lease rental income, substantial excess
deductions are available to be applied against the Company's other income and
the consolidated income of ML & Co. In the later years of these leases, rental
income will exceed the related deductions and taxes will be payable (to the
extent that net deductions arising from additional leveraged lease transactions
do not offset such net lease income). Deferred taxes have been provided to
reflect these temporary differences.
4. INCOME TAXES
As part of the consolidated group, the Company transfers its current
Federal and state tax liabilities to MLIM. No such amounts were due to MLIM at
December 31, 1993.
F-14
<PAGE>
FUND ASSET MANAGEMENT, L.P.
NOTES TO BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1993
5. PENSION PLAN
The Company participates in the ML & Co. Comprehensive Retirement Program
(the "Program") consisting of the Retirement Accumulation Plan ("RAP") and the
Employee Stock Ownership Plan (the "ESOP"). Under the program, cash
contributions made by the Company and the ML & Co. stock held by the ESOP will
be allocated quarterly to participants' accounts. Allocations will be based on
years of service, age and eligible compensation. Actuarial data regarding the
Company's Plan participants is not separately available.
6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits for
retired employees. The Company reserves the right to amend or terminate this
program at any time. Substantially all of the Company's employees become
eligible for these benefits upon attainment of age 55 and completion of 10 years
of service. The cost of these benefits is expensed as claims are paid.
In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions ("SFAS 106"). SFAS 106, effective
for fiscal year 1993, will require that the Company change its method of
accounting for postretirement health care and life insurance benefits from
expensing these costs on a pay-as-you-go basis to an accrual basis. This change
in accounting will require the recognition of a transition obligation which
represents the actuarial present value of benefits attributed to prior employee
service. The Company has not yet determined what effect the adoption of SFAS 106
will have on its financial condition, results of operations or liquidity.
7. NAME CHANGE
Effective December 28, 1991, The Parent, through an amendment of its
certificate of incorporation, changed its name to Merrill Lynch Investment
Management, Inc. ("MLIM"). MLIM will do business under the name "Merrill Lynch
Asset Management."
F-15
<PAGE>
APPENDIX I
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes 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 payment 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 bonds 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.
Rating Refinements: Moody's may apply numerical modifiers, l, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the
A-1
<PAGE>
security 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 rating category.
Short-term Notes. The four ratings of Moody's for short-term notes are
MIG-1, MIG-2, MIG-3, and MIG-4; MIG-1 denotes "best quality, enjoying strong
protection by established cash flows"; MIG-2 denotes "high quality" with ample
margins of protection; MIG-3 notes are of "favorable quality ... but lacking the
undeniable strength of the preceding grades"; MIG-4 notes are of "adequate
quality, carrying specific risk but having protection ... and not distinctly or
predominantly speculative".
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and 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 capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity 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 the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representations and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
A-2
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded 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.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or
A-3
<PAGE>
economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-rating.
B--Debt rated "B" has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
CCC--Debt rated "CCC" has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B-rating.
CC--The rating "CC" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
C--The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed but debt
service payments are continued.
CI--The rating "CI" is reserved to income bonds on which no interest is
being paid.
D--Debt rated "D" is in default. The D rating category is also used when
interest payments or principal repayments are expected to be in default at the
payment date, and payment of interest and/or repayment of principal is in
arrears. The D rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating persons to the principal amount
of those bonds to the extent that the underlying deposit collateral is insured
by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance
Corp. and interest is adequately collateralized.
*: Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
A-4
<PAGE>
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
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 four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The three designations in the "A"
category are as follows:
A--Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with the designation 1, 2 and 3 to indicate the relative degree of
safety.
A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess extremely strong safety characteristics are denoted
with a "+" designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as
for issues designated "A-1".
A-3--Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
The 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 and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
A-5
<PAGE>
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of less
than three years. The new note ratings and symbols are:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given a "+"
designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate issues with a maturity greater than
three years in accordance with the same rating scale currently employed for
municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Standard & Poor's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF FITCH INVESTOR SERVICE, 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 ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current condition and
operating performance of the issuer and of any guarantor, as well as the
economic and political environment that might affect the issuer's future
financial strength and credit quality.
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.
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.
A-6
<PAGE>
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.
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.
Trend Indicator: Trend indicators show whether credit fundamentals are
improving, stable, declining, or uncertain as follows:
Improving
Stable
Declining
Uncertain
Trend indicators are not predictions that any rating change will occur.
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.
Withdrawn. A rating may be withdrawn when an issue matures or is called or
refinanced or, at Fitch's discretion, when an issuer fails to furnish proper and
timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive" indicating a potential
upgrade; "Negative" for potential downgrade, or "Evolving" where ratings may be
raised or lowered. FitchAlert is relatively short-term, and should be resolved
within 12 months. Once Fitch completes its analysis of the event, appropriate
rating action will be taken and the issue will be removed from FitchAlert.
Ratings will also be placed on FitchAlert to notify investors of an upcoming
event that is likely to result in a rating change (e.g., court or regulatory
action that could result in material liability of an issuer or impair the
enforceability of debt obligations). In these instances, FitchAlert will
indicate the effect that various possible results might have on the rating.
A-7
<PAGE>
DESCRIPTION OF FITCH HIGH YIELD BOND RATINGS
Fitch high yield bond ratings provide a guide to investors in determining
the credit risk associated with a security. The rating is an assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. Bonds in default are rated
"DDD", "DD", or "D".
The rating takes into consideration special features of the issue, the
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.
It should be noted that revenues that have the same rating are of similar
but not necessarily identical credit quality since rating categories cannot
fully reflect the differences in degrees of credit risk.
<TABLE>
<S> <C>
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 that could assist the obligor in satisfying its
debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are currently meeting
debt service requirements, the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to
default. The ability to meet obligations requires an advantageous business and economic
environment.
CC Bonds are minimally protected. Default in payment of interest and/or principal seems
probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in actual or imminent default of interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. "DDD" represents the
highest potential for recovery on these bonds, and "D" represents the lowest potential
recovery.
</TABLE>
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the investment grade short-term rating places greater emphasis than bond ratings
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
A-8
<PAGE>
Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
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 carrying 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-4 Weak Credit Quality. Issues carrying this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in financial 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.
INS The symbol "INS" indicates that the rating is based on an insurance policy or financial guaranty issued by
an insurance company.
</TABLE>
A-9
<PAGE>
PART C--OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Acquiring Fund's Bylaws and the Investment Advisory Agreement
provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be provided to directors, officers and
controlling persons of the Acquiring Fund, pursuant to the foregoing provisions
or otherwise, the Acquiring Fund has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Acquiring Fund of expenses incurred or paid by a director, officer or
controlling person of the Fund in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Acquiring Fund will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Reference is made to Section 6 of the Purchase Agreement, a form of which
is filed as Exhibit (7)(a) hereto, for provisions relating to the
indemnification of the Underwriter.
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
(1) (a) --Articles of Incorporation*
(b) --Amendment to Articles of Incorporation**
(2) --By-Laws***
(3) --Not applicable
(4) --Agreement and Plan of Reorganization****
(5) --Specimen certificate for Common Stock, par value $.10 per share***
(6) --Form of Investment Advisory Agreement between the Fund and the Investment Adviser***
(7) (a) --Form of Purchase Agreement**
(b) --Form of Merrill Lynch Standard Dealer Agreement**
(8) --Not applicable
(9) --Form of Custodian Agreement between the Fund and The Bank of New York***
(10) --Not applicable
(11) --Opinion and consent of Rogers & Wells*****
(12) --Consent of Deloitte & Touche, independent accountants for the Fund*****
(13) --Form of Transfer Agency and Service Agreement between the Fund and The Bank of New York***
(14) --Not applicable
(15) --Not applicable
(16) --[Powers of Attorney]
</TABLE>
- ---------------
* Incorporated by reference to the Fund's Registration Statement on Form
N-2 (File Nos. 33-61150; 811-7642) filed on April 16, 1993.
** Incorporated by reference to Pre-Effective Amendment No. 1 to the Fund's
Registration Statement on Form N-2 (File Nos. 33-61150; 811-7642) filed
on May 13, 1993.
C-1
<PAGE>
*** Incorporated by reference to Pre-Effective Amendment No. 2 to the Fund's
Registration Statement on Form N-2 (File Nos. 33-61150; 811-7642) filed on
June 18, 1993.
**** Filed herewith.
***** To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) Registrant undertakes to suspend offering of the shares of Common Stock
covered hereby until it amends its Prospectus contained herein if (1) subsequent
to the effective date of this Registration Statement, its net asset value per
share of Common Stock declines more than 10 percent from its net asset value per
share of Common Stock as of the effective date of this Registration Statement,
or (2) its net asset value per share of Common Stock increases to an amount
greater than its net proceeds as stated in the Prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 497(h) under
the Securities Act shall be deemed to be part of the registration statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the 1st day of
September, 1994.
MUNIASSETS FUND, INC.
By /s/ ARTHUR ZEIKEL
...................................
(Arthur Zeikel, President)
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES MARK B.
GOLDFUS, GERALD M. RICHARD AND TERRY K. GLENN OR ANY OF THEM, AS
ATTORNEY-IN-FACT, TO SIGN ON HIS BEHALF, INDIVIDUALLY AND IN EACH CAPACITY
STATED BELOW, ANY AMENDMENTS TO THIS REGISTRATION STATEMENT (INCLUDING
POST-EFFECTIVE AMENDMENTS) AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, WITH
THE SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS TO THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE><CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ ------------------------------------ ---------------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Director September 1, 1994
................................................ (Principal Executive
(Arthur Zeikel) Officer)
/s/ JOE GRILLS Director September 1, 1994
................................................
(Joe Grills)
/s/ WALTER MINTZ Director September 1, 1994
................................................
(Walter Mintz)
/s/ MELVIN R. SEIDEN Director September 1, 1994
................................................
(Melvin R. Seiden)
/s/ HARRY WOOLF Director September 1, 1994
................................................
(Harry Woolf)
/s/ STEPHEN B. SWENSRUD Director September 1, 1994
................................................
(Stephen B. Swensrud)
/s/ GERALD M. RICHARD Treasurer (Principal September 1, 1994
................................................ Financing and
(Gerald M. Richard) Accounting Officer)
</TABLE>
C-3
EXHIBIT (4)
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as
of the ___ day of __________, 1994, by and between MuniBond Income Fund,
Inc., a Maryland corporation ("MuniBond"), and MuniAssets Fund, Inc., a
Maryland corporation ("MuniAssets").
PLAN OF REORGANIZATION
----------------------
The reorganization will comprise the acquisition by MuniAssets of
substantially all of the assets, and the assumption of all of the
liabilities, of MuniBond in exchange solely for an equal aggregate value of
MuniAssets's shares of common stock, with a par value of $0.10 per share
("MuniAssets Common Stock"), and the subsequent distribution to MuniBond
stockholders in liquidation of MuniBond of all of the MuniAssets Common Stock
received in exchange for their corresponding shares of common stock of
MuniBond, with a par value of $0.10 per share ("MuniBond Common Stock"), upon
and subject to the terms hereinafter set forth (the "Reorganization").
In the course of the Reorganization, MuniAssets Common Stock will be
distributed to MuniBond stockholders as follows: each holder of MuniBond
Common Stock will be entitled to receive the number of shares of MuniAssets
Common Stock to be received by MuniBond equal to the aggregate net asset
value of the MuniBond Common Stock owned by such stockholder on the Exchange
Date (as defined in Section 7 of this Agreement). In consideration therefor,
on the Exchange Date MuniAssets shall assume all of MuniBond's obligations
and liabilities then existing, whether absolute, accrued, contingent or
otherwise. It is intended that the Reorganization described in this Plan
shall be a reorganization within the meaning of Section 368(a) (l) (D) of the
Internal Revenue Code of 1986, as amended (the "Code"), and any successor
provision.
As promptly as practicable after the liquidation of MuniBond pursuant to
the Reorganization, MuniBond shall be dissolved in accordance with the laws
of the State of Maryland and will terminate its registration under the
Investment Company Act of 1940, as amended (the "1940 Act").
AGREEMENT
---------
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and
intending to be legally bound, MuniBond and MuniAssets hereby agree as
follows:
1. Representations and Warranties of MuniBond. MuniBond represents
------------------------------------------
and warrants to, and agrees with, MuniAssets that:
(a) MuniBond is a corporation duly organized, validly existing and
in good standing in conformity with the laws of the State of Maryland, and
has the power to own all of its assets and to carry out this Agreement.
MuniBond has all necessary Federal, state and local authorizations to carry
on its business as it is now being conducted and to carry out this Agreement.
(b) MuniBond is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-_____),
and such registration has not been revoked or rescinded and is in full force
and effect. MuniBond has elected to qualify and has qualified as a
<PAGE>
regulated investment company under Sections 851-855 of the Code as of its
taxable year ended May 31, 1994, has been a regulated investment company at
all times since its inception and meets the requirements for and intends to
continue to qualify as a regulated investment company for its taxable year
ending upon the liquidation of MuniBond.
(c) As used in this Agreement, the term "Investments" shall mean
(i) the investments of MuniBond shown on the schedule of its investments as
of the Valuation Time (as defined in Section 3(c) of this Agreement)
furnished to MuniAssets, with such additions thereto and deletions therefrom
as may have arisen in the course of MuniBond's business up to the Valuation
Time; and (ii) all other assets owned by MuniBond or liabilities incurred as
of the Valuation Time, except that MuniBond shall retain cash, bank deposits
or cash equivalent securities in an estimated amount necessary to (1)
discharge its unpaid liabilities on its books at the Valuation Time
(including, but not limited to, its income dividends and capital gains
distributions, if any, payable for the period prior to the Valuation Time),
and (2) pay such contingent and other liabilities as the Directors of
MuniBond reasonably shall deem to exist against the Fund, if any, at the
Valuation Time, for which contingent and other liabilities appropriate
liability reserves shall be established on MuniBond's books. MuniBond also
shall retain any and all rights which it may have over and against any other
person which may have accrued up to and the Valuation Time. Any unexpended
portion of the foregoing funds so retained by MuniBond shall be disbursed by
MuniBond pro rata to its stockholders upon dissolution of the Fund as a final
liquidating dividend.
(d) MuniBond has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors, and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) MuniAssets has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of MuniBond, each as of
May 31, 1994, said financial statements having been audited by Deloitte &
Touche, independent public accountants. An unaudited statement of assets,
liabilities and capital of MuniBond and an unaudited schedule of investments
of MuniBond, each as of the Valuation Time, will be furnished to MuniAssets
at or prior to the Date for the purpose of determining the number of shares
of MuniAssets Common Stock to be issued pursuant to Section 4 of this
Agreement; and each will fairly present the financial position of MuniBond as
of the Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.
[(f) MuniAssets has been furnished with MuniBond's
Semi-Annual Report to Stockholders for the six months ended __________, 1994,
and the unaudited financial statements appearing therein fairly present the
financial position of MuniBond as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.]
(g) MuniAssets has been furnished with (i) the prospectus of
MuniBond, dated October 22, 1993, relating to the MuniBond Common Stock (the
"MuniBond Common Stock Prospectus") and
2
<PAGE>
said prospectus does not contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(h) There are no material legal, administrative or other
proceedings pending or, to the knowledge of MuniBond, threatened against
MuniBond which assert liability on the part of MuniBond or which materially
affect its financial condition or its ability to consummate the
Reorganization. MuniBond is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which MuniBond
is a party that have not been disclosed in the N-14 Registration Statement
(as defined in subsection (p) below) or will not otherwise be disclosed to
MuniAssets prior to the Valuation Time.
(j) MuniBond is not a party to or obligated under any provision of
its Articles of Incorporation, as amended, or its by-laws, as amended, or any
contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under
this Agreement.
(k) MuniBond has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since May 31, 1994
and those incurred in connection with the Reorganization. As of the
Valuation Time, MuniBond will advise MuniAssets in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time.
(l) MuniBond has filed, or has obtained extensions to file, all
Federal, state and local tax returns which are required to be filed by it,
and has paid or has obtained extensions to pay, all Federal, state and local
taxes shown on said returns to be due and owing and all assessments received
by it, up to and including the taxable year in which the Exchange Date
occurs. All tax liabilities of MuniBond have adequately been provided for on
its books, and no tax deficiency or liability of MuniBond has been asserted
and no question with respect thereto has been raised by the Internal Revenue
Service or by any state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which the Exchange Date
occurs.
(m) At both the Valuation Time and the Exchange Date, MuniBond
will have full right, power and authority to sell, assign, transfer and
deliver the Investments. At the Exchange Date, subject only to the delivery
of the Investments as contemplated by this Agreement, MuniBond will have good
and marketable title to all of the Investments, and MuniAssets will acquire
all of the Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except
those imposed by the Federal or state securities laws and those imperfections
of title or encumbrances as do not materially detract from the value or use
of the Investments or materially affect title thereto).
3
<PAGE>
(n) No registration under the Securities Act of 1933, as amended
(the "1933 Act"), of any of the Investments would be required if they were,
as of the time of such transfer, the subject of a public distribution by
MuniAssets.
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniBond of the
Reorganization, except such as may be required under the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940
Act or state securities laws (which term as used herein shall include the
laws of the District of Columbia and Puerto Rico).
(p) The registration statement filed by MuniAssets on Form N-14
relating to the MuniAssets Common Stock to be issued pursuant to this
Agreement, and any supplement or amendment thereto or to the documents
therein (as amended, the "N-14 Registration Statement"), on the effective
date of the N-14 Registration Statement, at the time of the stockholders'
meetings referred to in Section 6(a) of this Agreement and on the Exchange
Date, insofar as it relates to MuniBond (i) complied or will comply in all
material respects with the provisions of the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder, and (ii) did not or will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and the prospectus and statement of
additional information included therein did not or will not contain any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
-------- -------
representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by MuniBond for
use in the N-14 Registration Statement as provided in Section 7 of this
Agreement.
(q) MuniBond is authorized to issue 200,000,000 shares of capital
stock, par value $0.10 per share, each outstanding share of which is fully
paid, nonassessable and has full voting rights.
(r) All of the issued and outstanding shares of MuniBond Common
Stock were offered for sale and sold in conformity with all applicable
Federal and state securities laws.
(s) The books and records of MuniBond made available to MuniAssets
and/or its counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of MuniBond.
(t) MuniBond will not sell or otherwise dispose of any of the
shares of MuniAssets to be received in the Reorganization, except in
distribution to the stockholders of MuniBond.
2. Representations and Warranties of MuniAssets. MuniAssets
---------------------------------------------
represents and warrants to, and agrees with, MuniBond that:
(a) MuniAssets is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland,
and has the power to own all of its assets and to carry out this Agreement.
MuniAssets has all necessary Federal, state and local authorizations to carry
on its business as it is now being conducted and to carry out this Agreement.
4
<PAGE>
(b) MuniAssets is duly registered under the 1940 Act as a non-
diversified, closed-end management investment company (File No. 811-7642),
and such registration has not been revoked or rescinded and is in full force
and effect. MuniBond has elected to qualify and has qualified as a regulated
investment company under Sections 851-855 of the Code as of its taxable year
ending May 31, 1994, and has been a regulated investment company at all times
since its inception.
(c) MuniBond has been furnished with a statement of assets,
liabilities and capital and a schedule of investments of MuniAssets, each as
of May 31, 1994, said financial statements having been examined by Deloitte &
Touche, independent public accountants. An unaudited statement of assets,
liabilities and capital of MuniAssets and an unaudited schedule of
investments of MuniAssets, each as of the Valuation Time, will be furnished
to MuniBond at or prior to the Exchange Date for the purpose of determining
the number of shares of MuniAssets Common Stock to be issued pursuant to
Section 4 of this Agreement; each will fairly present the financial position
of MuniAssets as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(d) MuniBond has been furnished with (i) the prospectus of
MuniAssets, dated June 18, 1993, relating to the MuniAssets Common Stock (the
"MuniAssets Common Stock Prospectus") and said prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(e) MuniAssets has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(f) There are no material legal, administrative or other
proceedings pending or, to the knowledge of MuniAssets, threatened against
MuniAssets which assert liability on the part of MuniAssets or which
materially affect its financial condition or its ability to consummate the
Reorganization. MuniAssets is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.
(g) MuniAssets is not a party to or obligated under any provision
of its Articles of Incorporation, as amended, or its by-laws, as amended, or
any contract or other commitment or obligation, and is not subject to any
order or decree which would be violated by its execution of or performance
under this Agreement.
(h) There are no material contracts outstanding to which
MuniAssets is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to MuniAssets prior to the
Valuation Time.
5
<PAGE>
(i) MuniAssets has no known liabilities of a material amount,
contingent or otherwise, other than those shown on MuniAssets's statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since May 31, 1994
and those incurred in connection with the Reorganization. As of the
Valuation Time, MuniAssets will advise MuniBond in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the ordinary
course of business, existing or accrued as of such time.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniAssets of the
Reorganization, except such as may be required under the 1933 Act, the 1934
Act, the 1940 Act or state securities laws.
(k) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 6(a) of this
Agreement and at the Exchange Date, insofar as it relates to MuniAssets (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
prospectus and statement of additional information included therein did not
or will not contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
--------
however, that the representations and warranties in this subsection only
-------
shall apply to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information furnished
by MuniAssets for use in the N-14 Registration Statement as provided in
Section 7 of this Agreement.
(l) MuniAssets is authorized to issue 200,000,000 shares of
capital stock, par value $0.10 per share, each outstanding share of which is
fully paid, nonassessable and has full voting rights.
(m) The MuniAssets Common Stock to be issued to MuniBond pursuant
to this Agreement will have been duly authorized and, when issued and
delivered pursuant to this Agreement, will be legally and validly issued and
will be fully paid and nonassessable and will have full voting rights, and no
stockholder of MuniAssets will have any preemptive right of subscription or
purchase in respect thereof.
(n) At or prior to the Exchange Date, the MuniAssets Common Stock
to be transferred to MuniBond on the Exchange Date will be duly qualified for
offering to the public in all states of the United States in which the sale
of shares of MuniAssets presently are qualified, and there are a sufficient
number of such shares registered under the 1933 Act and with each pertinent
state securities commission to permit the transfers contemplated by this
Agreement to be consummated.
(o) At or prior to the Exchange Date, MuniAssets will have
obtained any and all regulatory, Director and stockholder approvals necessary
to issue the MuniAssets Common Stock to MuniBond.
3. The Reorganization. (a) Subject to the requisite approvals of the
------------------
stockholders of each of MuniBond and MuniAssets being given, and to the other
terms and conditions contained herein,
6
<PAGE>
MuniBond agrees to convey, transfer and deliver to MuniAssets for the
benefit of MuniAssets, and MuniAssets agrees to acquire from MuniBond for
the benefit of MuniAssets, on the Exchange Date all of the Investments
(including interest accrued as of the Valuation Time on debt instruments)
of MuniBond, and assume all of the liabilities of MuniBond, in exchange
solely for that number of shares of MuniAssets Common Stock provided in
Section 4 of this Agreement. Pursuant to this Agreement, as soon as
practicable MuniBond will distribute all MuniAssets Common Stock received
by it to its stockholders in exchange for their corresponding MuniBond
Common Stock. Such distribution shall be accomplished by the opening of
stockholder accounts on the stock ledger records of MuniAssets in the
amounts due the stockholders of MuniBond based on their respective holdings
in MuniBond as of the Valuation Time.
(b) MuniBond will pay or cause to be paid any interest it receives
on or after the Exchange Date with respect to the Investments transferred to
MuniAssets hereunder.
(c) The Valuation Time shall be [4:00 P.M.], New York time, on
__________, 1994, or such earlier or later day and time as mutually may be
agreed upon in writing (the "Valuation Time").
(d) MuniAssets will acquire substantially all of the assets of,
and assume all of the known liabilities of, MuniBond, except that recourse
for such liabilities will be limited to MuniAssets. The known liabilities of
MuniBond as of the Valuation Time shall be confirmed in writing to MuniAssets
by MuniBond pursuant to Section 1(g) of this Agreement.
4. Issuance and Valuation of MuniAssets Common Stock in the
--------------------------------------------------------
Reorganization. Full MuniAssets Common Stock of an aggregate net asset value
--------------
or liquidation preference, as the case may be, equal (to the nearest one ten
thousandth of one cent) to the value of the assets of MuniBond acquired
determined as hereinafter provided, reduced by the amount of liabilities
assumed by MuniAssets, shall be issued by MuniAssets in exchange for such
assets of MuniBond. The assets of MuniBond and MuniAssets shall be
determined in accordance with the procedures described in the MuniAssets
Common Stock Prospectus as of the Valuation Time, and no formula will be used
to adjust the net asset value so determined of either MuniBond or MuniAssets
to take into account differences in realized and unrealized gains and losses.
Values in all cases shall be determined as of the Valuation Time. The value
of the Investments of MuniBond to be transferred to MuniAssets shall be
determined by MuniAssets pursuant to the procedures utilized by MuniAssets in
valuing its own assets and determining its own liabilities for purposes of
the Reorganization. Such valuation and determination shall be made by
MuniAssets in cooperation with MuniBond and shall be confirmed in writing to
MuniAssets by MuniBond. The net asset value per share of the MuniAssets
Common Stock shall be determined in accordance with such procedures and
MuniAssets shall certify the computations involved. MuniAssets shall issue to
MuniBond separate certificates or share deposit receipts for the MuniAssets
Common Stock registered in the name of MuniBond. MuniBond then shall
distribute the MuniAssets Common Stock to its corresponding stockholders of
MuniBond Common Stock by redelivering the certificates or share deposit
receipts evidencing ownership of the MuniAssets Common Stock to The Bank of
New York, as the transfer agent and registrar for the MuniAssets Common
Stock. With respect to any MuniBond stockholder holding certificates
evidencing ownership of the MuniBond Common Stock as of the Exchange Date,
and subject to MuniAssets being informed thereof in writing by MuniBond,
MuniAssets will not permit such stockholder to receive new certificates
evidencing ownership of the
7
<PAGE>
MuniAssets Common Stock, exchange MuniAssets Common Stock credited to such
stockholder's account for shares of other investment companies managed by
Merrill Lynch Asset Management, L.P. or any of its affiliates, or pledge or
redeem such MuniAssets Common Stock, in any case, until notified by MuniBond
or its agent that such stockholder has surrendered his or her outstanding
certificates evidencing ownership of the MuniBond Common Stock or, in the
event of lost certificates, posted adequate bond. MuniBond, at its own
expense, will request its stockholders to surrender their outstanding
certificates evidencing ownership of the MuniBond Common Stock, as the case
may be, or post adequate bond therefor.
5. Payment of Expenses. (a) With respect to expenses incurred in
-------------------
connection with the Reorganization, MuniAssets shall pay, subsequent to the
Exchange Date, all expenses incurred in connection with the Reorganization,
including, but not limited to, all costs related to the preparation and
distribution of the N-14 Registration Statement and the fees of special
counsel to the Reorganization. Such fees and expenses shall include legal,
accounting and state securities or blue sky fees, printing costs, filing
fees, stock exchange fees, portfolio transfer taxes (if any), and any similar
expenses incurred in connection with the Reorganization. Neither MuniBond
nor MuniAssets shall pay any expenses of its respective stockholders arising
out of or in connection with the Reorganization.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.
6. Covenants of MuniBond and MuniAssets. (a) MuniBond and MuniAssets
------------------------------------
each agrees to call a meeting of its respective stockholders as soon as is
practicable after the effective date of the N-14 Registration Statement for
the purpose of considering the Reorganization as described in this Agreement.
As a condition to the obligations of each of the parties hereto, the holders
of (i) more than fifty percent of the shares of MuniBond Common Stock, and
(ii) more than fifty percent of the MuniAssets Common Stock in each case
issued and outstanding and entitled to vote thereon, shall have approved this
Agreement at such a meeting at or prior to the Valuation Time.
(b) MuniBond and MuniAssets each covenants to operate its
respective business as presently conducted between the date hereof and the
Exchange Date.
(c) MuniBond agrees that following the consummation of the
Reorganization, it will liquidate and dissolve in accordance with the laws of
the State of Maryland and any other applicable law, it will not make any
distributions of any MuniAssets Common Stock other than to the stockholders
of MuniBond and without first paying or adequately providing for the payment
of all of MuniBond's liabilities not assumed by MuniAssets, if any, and on
and after the Exchange Date it shall not conduct any business except in
connection with its liquidation and dissolution.
(d) MuniBond undertakes that if the Reorganization is consummated,
it will file an application pursuant to Section 8(f) of the 1940 Act for an
order declaring that MuniBond has ceased to be a registered investment
company.
(e) MuniBond and MuniAssets jointly will file the N-14
Registration Statement with the Securities and Exchange Commission (the
"Commission") and will use their best efforts to provide that the N-14
Registration Statement becomes effective as promptly as practicable.
MuniBond and MuniAssets
8
<PAGE>
agree to cooperate fully with each other, and each will furnish to the other
the information relating to itself to be set forth in the N-14 Registration
Statement as required by the 1933 Act, 1934 Act, the 1940 Act, and the rules
and regulations thereunder and the state securities or blue sky laws.
(f) MuniAssets agrees to advise MuniBond promptly in writing if at
any time prior to the Exchange Date the assets of MuniBond include any assets
which MuniAssets is not permitted, or reasonably believes to be unsuitable
for it, to acquire, including without limitation any security which, prior to
its acquisition by MuniBond, MuniAssets has informed MuniBond is unsuitable
for MuniAssets to acquire. Moreover, MuniAssets has no plan or intention to
sell or otherwise dispose of the assets of MuniBond to be acquired in the
Reorganization, except for dispositions made in the ordinary course of
business.
(g) MuniBond and MuniAssets each agrees that by the Exchange Date
all of its Federal and other tax returns and reports required to be filed on
or before such date shall have been filed and all taxes shown as due on said
returns either have been paid or adequate liability reserves have been
provided for the payment of such taxes. In connection with this covenant,
the funds agree to cooperate with each other in filing any tax return,
amended return or claim for refund, determining a liability for taxes or a
right to a refund of taxes or participating in or conducting any audit or
other proceeding in respect of taxes. MuniAssets agrees to retain for a
period of ten years following the Exchange Date all returns, schedules and
work papers and all material records or other documents relating to tax
matters of MuniBond for its taxable period first ending after the Exchange
Date and for all prior taxable periods. Any information obtained under this
subsection shall be kept confidential except as otherwise may be necessary in
connection with the filing of returns or claims for refund or in conducting
an audit or other proceeding. After the Exchange Date, MuniBond shall
prepare, or cause it agents to prepare, any Federal, state or local tax
returns, including any Forms 1099, required to be filed by MuniBond with
respect to MuniBond's final taxable year ending with its complete liquidation
and for any prior periods or taxable years and further shall cause such tax
returns and Forms 1099 to be duly filed with the appropriate taxing
authorities. Notwithstanding the aforementioned provisions of this
subsection, any expenses incurred by MuniBond (other than for payment of
taxes) in connection with the preparation and filing of said tax returns and
Forms 1099 after the Exchange Date shall be borne by MuniBond to the extent
such expenses have been accrued by MuniBond in the ordinary course without
regard to the Reorganization; any excess expenses shall be borne by Fund
Asset Management, L.P. ("FAM") at the time such tax returns and Forms 1099
are prepared.
(h) MuniBond and MuniAssets each agrees to mail to each of its
respective stockholders of record entitled to vote at the meeting of
stockholders at which action is to be considered regarding this Agreement, in
sufficient time to comply with requirements as to notice thereof, a combined
Proxy Statement and Prospectus which complies in all material respects with
the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a)
of the 1940 Act, and the rules and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, MuniAssets
expects to stay in existence and continue its business as a closed-end
management investment company registered under the 1940 Act.
9
<PAGE>
7. Exchange Date. (a) Delivery of the assets of MuniBond to be
-------------
transferred, together with any other Investments, and the MuniAssets Common
Stock to be issued, shall be made at the offices of Rogers & Wells, 200 Park
Avenue, New York, New York 10166, at [10:00 A.M.] on the next full business
day following the Valuation Time, or at such other place, time and date
agreed to by MuniBond and MuniAssets, the date and time upon which such
delivery is to take place being referred to herein as the "Exchange Date".
To the extent that any Investments, for any reason, are not transferable on
the Exchange Date, MuniBond shall cause such Investments to be transferred to
MuniAssets's account with The Bank of New York at the earliest practicable
date thereafter.
(b) MuniBond will deliver to MuniAssets on the Exchange Date
confirmations or other adequate evidence as to the tax basis of each of the
Investments delivered to MuniAssets hereunder, certified by Deloitte &
Touche.
(c) MuniAssets shall have made prior arrangements for the delivery
on the Exchange Date of the Investments to The Bank of New York as the
custodian for MuniAssets.
(d) As soon as practicable after the close of business on the
Exchange Date, MuniBond shall deliver to MuniAssets a list of the names and
addresses of all of the stockholders of record of MuniBond on the Exchange
Date and the number of shares of MuniBond Common Stock owned by each such
stockholder, certified by its transfer agent for the MuniBond Common Stock,
as applicable or by its President to the best of their knowledge and belief.
8. MuniBond Conditions. The obligations of MuniBond hereunder shall
-------------------
be subject to the following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the
holders of (i) more than fifty percent of the MuniAssets Common Stock, issued
and outstanding and entitled to vote thereon; and that MuniAssets shall have
delivered to MuniBond a copy of the resolution approving this Agreement
adopted by MuniAssets's Board of Directors, certified by the Secretary of
MuniAssets.
(b) That MuniAssets shall have furnished to MuniBond a statement
of MuniAssets's assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of its
investments, all as of the Valuation Time, certified on MuniBond's behalf by
its President (or any Vice President) and its Treasurer, and a certificate
signed by MuniAssets's President (or any Vice President) and its Treasurer,
dated as of the Exchange Date, certifying that as of the Valuation Time and
as of the Exchange Date there has been no material adverse change in the
financial position of MuniAssets since May 31, 1994, other than changes in
its portfolio securities since that date or changes in the market value of
its portfolio securities.
(c) That MuniAssets shall have furnished to MuniBond a certificate
signed by MuniAssets's President (or any Vice President) and its Treasurer,
dated as of the Exchange Date, certifying that all representations and
warranties of MuniAssets made in this Agreement are true and correct in all
material respects with the same effect as if made at and as of the Exchange
Date, and that MuniAssets has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied at
or prior to such date.
10
<PAGE>
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That MuniBond shall have received an opinion of Gallan,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to MuniBond, in form
satisfactory to MuniBond and dated the Exchange Date, to the: effect that (i)
MuniAssets is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) the
MuniAssets Common Stock to be delivered to MuniBond stockholders as provided
for by this Agreement are duly authorized and, upon delivery, will be validly
issued and outstanding and fully paid and nonassessable by MuniAssets, and no
stockholder of MuniAssets has any preemptive right to subscription or
purchase in respect thereof (pursuant to the Articles of Incorporation, as
amended, or the by-laws of MuniAssets or, to the best of such counsel's
knowledge, otherwise); (iii) this Agreement has been duly authorized,
executed and delivered by MuniAssets, and represents a valid and binding
contract, enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto; provided, that such counsel shall express no opinion with
--------
respect to the application of equitable principles in any proceeding, whether
at law or in equity; (iv) the execution and delivery of this Agreement did
not, and the consummation of the Reorganization will not, violate the
Articles of Incorporation, as amended, or the by-laws of MuniAssets; (v) no
consent, approval, authorization or order of any Maryland court or
governmental authority is required for the consummation by MuniBond of the
Reorganization, except such as have been obtained under Maryland law; and
(vi) such opinion is solely for the benefit of MuniBond and its Directors and
officers.
(f) That MuniBond shall have received an opinion of Rogers &
Wells, as counsel to MuniAssets, in form satisfactory to MuniBond and dated
the Exchange Date, to the effect that (i) no consent, approval, authorization
or order of any United States Federal court or governmental authority is
required for the consummation by MuniBond and MuniAssets of the
Reorganization, except such as have been obtained under the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder and such as may be required under state securities or
blue sky laws; (ii) the N-14 Registration Statement has become effective
under the 1933 Act, no stop order suspending the effectiveness of the N-14
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the 1933 Act, and
the N-14 Registration Statement, and each amendment or supplement thereto,
as of their respective effective dates, appear on their face to be
appropriately responsive in all material respects to the requirements of
the 1933 Act, the 1934 Act and the 1940 Act and the published rules and
regulations of the Commission thereunder; (iii) the descriptions in the N-14
Registration Statement of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the
information required to be shown; and (iv) such counsel do not know of any
statutes, legal or governmental proceedings or contracts or other documents
related to the Reorganization of a character required to be described in the
N-14 Registration Statement which are not described therein or, if required
to be filed, filed as required; (v) the execution and delivery of this
Agreement does not, and the consummation of the Reorganization will not,
violate any material provision of any agreement (known to such counsel) to
which
11
<PAGE>
MuniAssets is a party or by which MuniAssets is bound; (vi) MuniAssets, to
the knowledge of such counsel, is not required to qualify to do business as
a foreign corporation in any jurisdiction except as may be required by state
securities or blue sky laws, and except where it has so qualified or the
failure so to qualify would not have a material adverse effect on MuniAssets,
or its stockholders; (vii) such counsel does not have actual knowledge of
any material suit, action or legal or administrative proceeding pending or
threatened against MuniAssets, the unfavorable outcome of which would
materially and adversely affect MuniAssets; and (viii) all corporate actions
required to be taken by MuniAssets to authorize this Agreement and to effect
the Reorganization have been duly authorized by all necessary corporate
actions on the part of MuniAssets. Such opinion also shall state that (x)
while such counsel cannot make any representation as to the accuracy or
completeness of statements of fact in the N-14 Registration Statement or any
amendment or supplement thereto, nothing has come to their attention that
would lead them to believe that, on the respective effective dates of the
N-14 Registration Statement and any amendment or supplement thereto, (1) the
N-14 Registration Statement or any amendment or supplement thereto contained
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading; and (2) the prospectus and statement of additional
information included in the N-14 Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and (y) such counsel do not express
any opinion or belief as to the financial statements, other financial data,
statistical data or information relating to MuniAssets contained or
incorporated by reference in the N-14 Registration Statement. In giving the
opinion set forth above, Rogers & Wells may state that it is relying on
certificates of officers of MuniAssets with regard to matters of fact and
certain certificates and written statements of governmental officials with
respect to the good standing of MuniAssets and on the opinion of Gallan,
Kharasch, Morse & Garfinkle, P.C. as to matters of Maryland law.
(g) That MuniBond shall have received either (a) a private letter
ruling from the Internal Revenue Service or (b) an opinion of Rogers & Wells,
to the effect that for Federal income tax purposes (i) the transfer of
substantially all of the Investments of MuniBond to MuniAssets in exchange
solely for MuniAssets Common Stock as provided in this Agreement will
constitute a reorganization within the meaning of Section 368(a) (I) (C) of
the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss
will be recognized to MuniBond as a result of the Reorganization; (iii) no
gain or loss will be recognized to MuniAssets as a result of the
Reorganization; (iv) in accordance with Section 354(a) (I) of the Code, no
gain or loss will be recognized to the stockholders of MuniBond on the
distribution to them by MuniBond of MuniAssets Common Stock in exchange for
their corresponding MuniBond Common Stock, and in accordance with Section
356(a) of the Code gain, if any, will be recognized with respect to any cash
or property other than MuniAssets Common Stock received; (v) in accordance
with Section 1032 of the Code, no gain or loss will be recognized by the
stockholders of MuniAssets upon the issuance of MuniAssets Common Stock and
the distribution of such MuniAssets Common Stock to MuniBond stockholders in
the Reorganization; (vi) in accordance with Section 362(b) of the Code, the
basis to MuniAssets of the Investments will be the same as the basis of the
Investments in the hands of
12
<PAGE>
MuniBond immediately prior to the consummation of the Reorganization, except
for any necessary adjustment on account of cash or property received; (vii)
in accordance with Section 1223 of the Code, a stockholder's holding period
for his MuniAssets Common Stock will be determined by including the period
for which he or she held the MuniBond Common Stock exchanged therefor,
provided that he or she held such MuniBond shares as a capital asset;
--------
(viii) in accordance with Section 1223 of the Code, MuniAssets's holding
period with respect to the Investments will include the period for which
such Investments were held by MuniBond; and (ix) no gain or loss will be
recognized to MuniBond or its stockholders upon the liquidation of MuniBond
in connection with the Reorganization. In addition, such opinion shall
state that, without any independent investigation having been made with
respect to the qualification of either MuniBond or MuniAssets as a regulated
investment company under the Code and based upon certain representations by
MuniBond and MuniAssets, the status of MuniBond and MuniAssets as regulated
investment companies under Sections 851-855 of the Code will not be affected
as a result of the Reorganization, except that upon the liquidation of
MuniBond in connection with the Reorganization its regulated investment
company status will terminate.
(h) That all proceedings taken by MuniAssets and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to MuniBond.
(i) That the N-14 Registration Statement shall have become
effective under the 1933 Act, and no stop order suspending such effectiveness
shall have been instituted or, to the knowledge of MuniAssets, contemplated
by the Commission.
(j) That MuniBond shall have received from Deloitte & Touche a
letter dated as of the effective date of the N-14 Registration Statement and
a similar letter dated within five days prior to the Exchange Date, in form
and substance satisfactory to MuniBond, to the effect that (i) they are
independent public accountants with respect to MuniAssets within the meaning
of the 1933 Act and the applicable published rules and regulations
thereunder; (ii) in their opinion, the' financial statements and
supplementary information of MuniAssets included or incorporated by reference
in the N-14 Registration Statement and reported on by them comply as to form
in all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder; (iii) on the
basis of limited procedures agreed upon by MuniBond and described in such
letter (but not an examination in accordance with generally accepted auditing
standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of MuniAssets included in
the N-14 Registration Statement, and inquiries of certain officials of
MuniAssets responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as
to form in all material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity with
generally accepted accounting principles, applied on a basis substantially
consistent with that of the audited financial statements, or (c) such
unaudited supplementary information is not fairly stated in all material
respects in relation to the unaudited financial
13
<PAGE>
statements taken as a whole; and (iv) on the basis of limited procedures
agreed upon by MuniBond and described in such letter (but not an examination
in accordance with generally accepted auditing standards), the information
relating to MuniAssets appearing in the N-14 Registration Statement, which
information is expressed in dollars (or percentages derived from such
dollars) (with the exception of performance comparisons, if any), if any,
has been obtained from the accounting records of MuniAssets or from
schedules prepared by officials of MuniAssets having responsibility for
financial and reporting matters and such information is in agreement with
such records, schedules or computations made therefrom.
(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of
the Reorganization under Section 25(c) of the 1940 Act, no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniAssets or would
prohibit the Reorganization.
(j) That MuniBond shall have received from the Commission such
orders or interpretations as Brown & Wood, as counsel to MuniBond, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided that such counsel shall have
--------
requested such orders as promptly as practicable, and all such orders shall
be in full force and effect.
9. MuniAssets Conditions. The obligations of MuniAssets hereunder
---------------------
shall be subject to the following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the
holders of (i) more than fifty percent of the MuniAssets Common Stock issued
and outstanding and entitled to vote thereon; and that MuniBond shall have
delivered to MuniAssets a copy of the resolution approving this Agreement
adopted by MuniBond's Board of Directors, certified by the Secretary of
MuniBond.
(b) That MuniBond shall have furnished to MuniAssets a statement
of MuniBond's assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of
investments with their respective dates of acquisition and tax costs, all as
of the Valuation Time, certified on MuniBond's behalf by its President (or
any Vice President) and its Treasurer, and a certificate of both such
officers, dated the Exchange Date, certifying that there has been no material
adverse change in the financial position of MuniBond since May 31, 1994,
other than changes in the Investments since that date or changes in the
market value of the Investments.
(c) That MuniBond shall have furnished to MuniAssets a certificate
signed by MuniBond's President (or any Vice President) and its Treasurer,
dated the Exchange Date, certifying that as of the Valuation Time and as of
the Exchange Date all representations and warranties of MuniBond made in this
Agreement are true and correct in all material respects as if made at and as
of such date and MuniBond has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied at
or prior to such dates.
14
<PAGE>
(d) That MuniBond shall have delivered to MuniAssets a letter from
Deloitte & Touche, dated the Exchange Date, stating that such firm has
performed a limited review of the Federal, state and local income tax returns
of MuniBond for the period ended May 31, 1994 (which returns originally were
prepared and filed by MuniBond), and that based on such limited review,
nothing came to their attention which caused them to believe that such
returns did not properly reflect, in all material respects, the Federal,
state and local income taxes of MuniBond for the period covered thereby; and
that for the period from May 31, 1994 to and including the Exchange Date
such firm has performed a limited review to ascertain the amount of
applicable Federal, state and local taxes, and has determined that either
such amount has been paid or reserves established for payment of such taxes,
this review to be based on unaudited financial data; and that based on such
limited review, nothing has come to their attention which caused them to
believe that the taxes paid or reserves set aside for payment of such taxes
were not adequate in all material respects for the satisfaction of Federal,
state and local taxes for the period from May 31, 1994 to and including the
Exchange Date and for any taxable year of MuniBond ending upon the
liquidation of MuniBond or that MuniBond would not continue to qualify as a
regulated investment company for Federal income tax purposes.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That MuniAssets shall have received an opinion of Gallan,
Kharasch, Morse & Garfinkle, P.C., Maryland counsel to MuniAssets, in form
satisfactory to MuniAssets and dated the Exchange Date, to the effect that
(i) MuniBond is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) this
Agreement has been duly authorized, executed and delivered by MuniBond, and
represents a valid and binding contract, enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar laws relating to or affecting creditors'
rights generally and court decisions with respect thereto, provided, that
--------
such counsel shall express no opinion with respect to the application of
equitable principles in any proceeding, whether at law or in equity; (iii)
MuniBond has the power to sell, assign, transfer and deliver the assets
transferred by it hereunder and, upon consummation of the Reorganization in
accordance with the terms of this Agreement, MuniBond will have duly
transferred such assets and liabilities in accordance with this Agreement;
(iv) the execution and delivery of this Agreement does not, and the
consummation of the Reorganization will not, violate the Articles of
Incorporation, as amended, or the by-laws of MuniBond; (v) no consent,
approval, authorization or order of any Maryland court or governmental
authority is required for the consummation by MuniBond of the Reorganization,
except such as have been obtained under Maryland law; and (vi) such opinion
is solely for the benefit of MuniAssets and its Directors and officers.
(g) That MuniAssets shall have received an opinion of Brown &
Wood, as counsel to MuniBond, in form satisfactory to MuniAssets and dated
the Exchange Date, with respect to the matters specified in Section 8(f) of
this Agreement and such other matters as MuniAssets reasonably may deem
necessary or desirable.
15
<PAGE>
(h) That MuniAssets shall have received a private letter ruling
from the Internal Revenue Service or opinion of Rogers & Wells with respect
to the matters specified in Section 8(g) of this Agreement.
(i) That MuniAssets shall have received from Deloitte & Touche a
letter dated as of the effective date of the N-14 Registration Statement and
a similar letter dated within five days prior to the Exchange Date, in form
and substance satisfactory to MuniAssets, to the effect that (i) they are
independent public accountants with respect to MuniBond within the meaning of
the 1933 Act and the applicable published rules and regulations thereunder;
(ii) in their opinion, the financial statements and supplementary information
of MuniBond included or incorporated by reference in the N-14 Registration
Statement and reported on by them comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder; (iii) on the basis of limited procedures
agreed upon by MuniAssets and described in such letter (but not an
examination in accordance with generally accepted auditing standards)
consisting of a reading of any unaudited interim financial statements and
unaudited supplementary information of MuniBond included in the N-14
Registration Statement, and inquiries of certain officials of MuniBond
responsible for financial and accounting matters, nothing came to their
attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as
to form in all material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity with
generally accepted accounting principles, applied on a basis substantially
consistent with that of the audited financial statements, or (c) such
unaudited supplementary information is not fairly stated in all material
respects in relation to the unaudited financial statements taken as a whole;
and (iv) on the basis of limited procedures agreed upon by MuniAssets and
described in such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to MuniBond appearing
in the N-14 Registration Statement, which information is expressed in dollars
(or percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records
of MuniBond or from schedules prepared by officials of MuniBond having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
(j) That the Investments to be transferred to MuniAssets shall not
include any assets or liabilities which MuniAssets, by reason of charter
limitations or otherwise, may not properly acquire or assume.
(k) That the N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order suspending such effectiveness
shall have been instituted or, to the knowledge of MuniBond, contemplated by
the Commission.
(l) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, no other legal,
16
<PAGE>
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniBond or would prohibit
the Reorganization.
(m) That MuniAssets shall have received from the Commission such
orders or interpretations as Rogers & Wells, as counsel to MuniAssets, deems
reasonably necessary or desirable under the 1933 Act and the 1940 Act in
connection with the Reorganization, provided that such counsel shall have
--------
requested such orders as promptly as practicable, and all such orders shall
be in full force and effect.
(n) That all proceedings taken by MuniBond and its counsel in
connection with the Reorganization and all documents incidental thereto shall
be satisfactory in form and substance to MuniAssets.
(o) That prior to the Exchange Date, MuniBond shall have declared
a dividend or dividends which, together with all previous such dividends,
shall have the effect of distributing to its stockholders all of its net
investment company taxable income for the period from November 1, 1993 to and
including the Exchange Date, if any (computed without regard to any deduction
or dividends paid), and all of its net capital gain, if any, realized for the
period from November 1, 1993 to and including the Exchange Date.
10. Termination, Postponement and Waivers.
-------------------------------------
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the Reorganization abandoned
at any time (whether before or after adoption thereof by the stockholders of
each of MuniBond and MuniAssets) prior to the Exchange Date, or the Exchange
Date may be postponed, (i) by mutual consent of the Boards of Directors of
MuniBond and MuniAssets; (ii) by the Board of Directors of MuniBond if any
condition of MuniBond's obligations set forth in Section 8 of this Agreement
has not been fulfilled or waived by such Board; or (iii) by the Board of
Directors of MuniAssets if any condition of MuniAssets's obligations set
forth in Section 9 of this Agreement has not been fulfilled or waived by such
Board.
(b) If the transactions contemplated by this Agreement have not
been consummated by December 31, 1994, this Agreement automatically shall
terminate on that date, unless a later date is mutually agreed to by the
Boards of Directors of MuniBond and MuniAssets.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either MuniBond or MuniAssets
or persons who are their directors, trustees, officers, agents or
stockholders in respect of this Agreement.
(d) At any time prior to the Exchange Date, any of the terms or
conditions of this Agreement may be waived by the Board of Directors of
either MuniBond or MuniAssets, respectively (whichever is entitled to the
benefit thereof), if, in the judgment of such Board after consultation with
its counsel, such action or waiver will not have a material adverse effect on
the benefits intended under this Agreement to the stockholders of their
respective fund, on behalf of which such action is taken. In addition, the
Board of Directors of both MuniBond and MuniAssets hereby delegate to FAM the
ability to make non-
17
<PAGE>
material changes to the transaction if it deems it to be in the best
interests of both MuniBond and MuniAssets to do so.
(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement shall expire with, and be terminated by,
the consummation of the Reorganization, and neither MuniBond nor MuniAssets
nor any of their officers, directors or trustees, agents or stockholders
shall have any liability with respect to such representations or warranties
after the Exchange Date. This provision shall not protect any officer,
director or trustee, agent or stockholder of MuniBond or MuniAssets against
any liability to the entity for which that officer, director or trustee,
agent or stockholder so acts or to its stockholders to which that officer,
director or trustee, agent or stockholder otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose any
terms or conditions which are determined by action of the Boards of Directors
of MuniBond and MuniAssets to be acceptable, such terms and conditions shall
be binding as if a part of this Agreement without further vote. or approval
of the stockholders of MuniBond and MuniAssets, unless such terms and
conditions shall result in a change in the method of computing the number of
shares of MuniAssets Common Stock to be issued to MuniBond in which event,
unless such terms and conditions shall have been included in the proxy
solicitation materials furnished to the stockholders of MuniBond and
MuniAssets prior to the meeting at which the Reorganization shall have been
approved, this Agreement shall not be consummated and shall terminate unless
MuniBond and MuniAssets promptly shall call special meetings of stockholders
at which such conditions so imposed shall be submitted for approval.
11. Indemnification. (a) MuniBond hereby agrees to indemnify and hold
---------------
MuniAssets harmless from all loss, liability and expense (including
reasonable counsel fees and expenses in connection with the contest of any
claim) which MuniAssets may incur or sustain by reason of the fact that (i)
MuniAssets shall be required to pay any corporate obligation of MuniBond,
whether consisting of tax deficiencies or otherwise, based upon a claim or
claims against MuniBond which were omitted or not fairly reflected in the
financial statements to be delivered to MuniAssets in connection with the
Reorganization; (ii) any representations or warranties made by MuniBond in
this Agreement should prove to be false or erroneous in any material respect;
(iii) any covenant has been breached in any material respect; or (iv) any
claim is made alleging that (a) the N-14 Registration Statement included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or (b) the Proxy Statement and Prospectus delivered to the
stockholders of MuniBond and forming a part of the N-14 Registration
Statement included any untrue statement of a material fact or omitted to
state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, except
insofar as such claim is based on written information furnished to MuniBond
by MuniAssets.
(b) MuniAssets hereby agrees to indemnify and hold MuniBond
harmless from all loss, liability and expenses (including reasonable counsel
fees and expenses in connection with the contest of any claim) which MuniBond
may incur or sustain by reason of the fact that (i) any representations or
18
<PAGE>
warranties made in this Agreement should prove false or erroneous in any
material respect, (ii) any covenant has been breached in any material
respect, or (iii) any claim is made alleging that (a) the N-14 Registration
Statement included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein, not misleading or (b) the Proxy Statement and
Prospectus delivered to the stockholders of MuniAssets and forming a part of
the N-14 Registration Statement included any untrue statement of a material
fact or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such claim is based on written information
furnished to MuniAssets by MuniBond.
(c) In the event that any claim is made against MuniAssets in
respect of which indemnity may be sought by MuniAssets from MuniBond under
Section 11(a) of this Agreement, or in the event that any claim is made
against MuniBond in respect of which indemnity may be sought by MuniBond from
MuniAssets under Section 11(b) of this Agreement, then the party seeking
indemnification (the Indemnified Party"), with reasonable promptness and
before payment of such claim, shall give written notice of such claim to the
other party (the "Indemnifying Party"). If no objection as to the validity
of the claim is made in writing to the Indemnified Party by the Indemnifying
Party within thirty (30) days after the giving of notice hereunder, then the
Indemnified Party may pay such claim and shall be entitled to reimbursement
therefor, pursuant to this Agreement. If, prior to the termination of such
thirty-day period, objection in writing as to the validity of such claim is
made to the Indemnified Party, the Indemnified Party shall withhold payment
thereof until the validity of such claim is established (i) to the
satisfaction of the Indemnifying Party, or (ii) by a final determination of a
court of competent jurisdiction, whereupon the Indemnified Party may pay such
claim and shall be entitled to reimbursement thereof, pursuant to this
Agreement, or (iii) with respect to any tax claims, within seven calendar
days following the earlier of (A) an agreement between MuniBond and
MuniAssets that an indemnity amount is payable, (B) an assessment of a tax by
a taxing authority, or (C) a "determination" as defined in Section 1313(a) of
the Code. For purposes of this Section 13, the term "assessment" shall have
the same meaning as used in Chapter 63 of the Code and Treasury Regulations
thereunder, or any comparable provision under the laws of the appropriate
taxing authority. In the event of any objection by the Indemnifying Party,
the Indemnifying Party promptly shall investigate the claim, and if it is not
satisfied with the validity thereof, the Indemnifying Party shall conduct the
defense against such claim. All costs and expenses incurred by the
Indemnifying Party in connection with such investigation and defense of such
claim shall be borne by it. These indemnification provisions are in addition
to, and not in limitation of, any other rights the parties may have under
applicable law.
12. Other Matters. (a) Pursuant to Rule 145 under the 1933 Act, and in
-------------
connection with the issuance of any shares to any person who at the time of
the Reorganization is, to its knowledge, an affiliate of a party to the
Reorganization pursuant to Rule 145(c), MuniAssets will cause to be affixed
upon the certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF
19
<PAGE>
COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION
IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to MuniAssets's
transfer agent with respect to such shares. MuniBond will provide MuniAssets
on the Exchange Date with the name of any MuniBond stockholder who is to the
knowledge of MuniBond an affiliate of it on such date.
(b) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant to this
Agreement shall be deemed to have been material and relied upon by each of
the parties, notwithstanding any investigation made by them or on their
behalf.
(c) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be deemed to have
been given if delivered or mailed, first class postage prepaid, addressed to
MuniBond or MuniAssets, in either case at 800 Scudders Mill Road, Plainsboro,
New Jersey 08536, Attn: Arthur Zeikel, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, of
MuniBond and MuniAssets are on file with the Department of Assessments and
Taxation of the State of Maryland and notice is hereby given that this
instrument is executed on behalf of the Directors of each fund.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MUNIBOND INCOME FUND, INC.
By:
Witness:
MUNIASSETS FUND, INC.
By:
Witness:
20
<PAGE>
COMMON STOCK
MUNIASSETS FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints each of Mark B. Goldfus,
Terry K. Glenn and Gerald M. Richard as proxies, each with
the power to appoint his substitute, and authorizes each of
them to represent and to vote, as designated on the reverse
hereof, all the common stock of MuniAssets Fund, Inc.
(the "Fund") held of record by the undersigned on August 26,
1994 at the special meeting of stockholders of the Fund to
be held on October 21, 1994 or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1,
2 AND 3.
(Continued and to be signed on the reverse side)
<TABLE>
<S> <C>
1. To consider and act upon a proposal to approve the Agreement and Plan FOR / / AGAINST / / ABSTAIN / /
of Reorganization between the Fund and MuniBond Income Fund, Inc. WITHHOLD AUTHORITY
to vote for all nominees listed below / /
2. To consider and act upon a FOR all nominees listed below
proposal to elect the following (except as marked to the contrary below) / /
persons as Directors of the Fund:
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THAT PARTICULAR NOMINEE'S NAME IN THE LIST BELOW.)
CLASS I TO SERVE UNTIL 1995. CLASS II TO SERVE UNTIL 1996. CLASS III TO SERVE UNTIL 1997.
HARRY WOOLF JOE GRILLS MELVIN R. SEIDEN
ARTHUR ZEIKEL WALTER MINTZ STEPHEN B. SWENSRUD
3. To consider and act upon a proposal to ratify the selection of Deloitte & Touche FOR / / AGAINST / / ABSTAIN / /
as the independent auditors of the Fund to serve for the current fiscal year.
4. In the discretion of such proxies, upon such other business as may properly come
before the meeting or any adjournment thereof.
Please sign this proxy in the space provided below.
Execution by stockholders who are not individuals
must be made by an authorized signatory.
Dated: _____________________________________, 1994
X ________________________________________________
Name of Stockholder
X ________________________________________________
Signature
</TABLE>
PLEASE MARK BOXES / / OR /X/ IN BLUE OR BLACK INK. PLEASE
SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE>
COMMON STOCK
MUNIBOND INCOME FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints each of Mark B. Goldfus,
Terry K. Glenn and Gerald M. Richard as proxies, each with
the power to appoint his substitute, and authorizes each of
them to represent and to vote, as designated on the reverse
hereof, all the common stock of MuniBond Income Fund, Inc.
(the "Fund") held of record by the undersigned on August 26,
1994 at the special meeting of stockholders of the Fund to
be held on October 21, 1994 or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1,
2 AND 3.
(Continued and to be signed on the reverse side)
<TABLE>
<S> <C>
1. To consider and act upon a proposal to approve the Agreement and Plan FOR / / AGAINST / / ABSTAIN / /
of Reorganization between the Fund and MuniAssets Fund, Inc. WITHHOLD AUTHORITY
to vote for all nominees listed below / /
2. To consider and act upon a FOR all nominees listed below
proposal to elect the following (except as marked to the contrary below) / /
persons as Directors of the Fund:
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THAT PARTICULAR NOMINEE'S NAME IN THE LIST BELOW.)
CLASS I TO SERVE UNTIL 1995. CLASS II TO SERVE UNTIL 1996. CLASS III TO SERVE UNTIL 1997.
HARRY WOOLF JOE GRILLS MELVIN R. SEIDEN
ARTHUR ZEIKEL WALTER MINTZ STEPHEN B. SWENSRUD
3. To consider and act upon a proposal to ratify the selection of Deloitte & Touche FOR / / AGAINST / / ABSTAIN / /
as the independent auditors of the Fund to serve for the current fiscal year.
4. In the discretion of such proxies, upon such other business as may properly come
before the meeting or any adjournment thereof.
Please sign this proxy in the space provided below.
Execution by stockholders who are not individuals
must be made by an authorized signatory.
Dated: _____________________________________, 1994
X ________________________________________________
Name of Stockholder
X ________________________________________________
Signature
</TABLE>
PLEASE MARK BOXES / / OR /X/ IN BLUE OR BLACK INK. PLEASE
SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
