<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1994
SECURITIES ACT FILE NO. 33-
INVESTMENT COMPANY ACT FILE NO. 811-07203
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM N-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. / /
___________________
MUNILEVERAGE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
___________________
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ARTHUR ZEIKEL
MUNILEVERAGE 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:
MARK B. GOLDFUS, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. BROWN & WOOD
BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, N.J. 08543-9011 NEW YORK, NEW YORK 10048
___________________
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box./x/
___________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed Proposed
Amount Maximum Maximum
Being Offering Aggregate Amount of
Title of Securities Registered Price Offering Registrati
Being Registered (1) Per Unit Price (1) on Fee
<S> <C> <C> <C> <C>
Common Stock ($.10 par 100,000 shs. $10.00 $1,000,000 $344.83
value)
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
1
<PAGE>
MUNILEVERAGE FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
- --------------------- ---------------------
Part A -- INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover Page Cover Page
2. Inside Front and Outside Back Cover Pages Cover Page; Underwriting
3. Fee Table and Synopsis Fee Table
4. Financial Highlights Not Applicable
5. Plan of Distribution Underwriting
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant The Fund; Investment
Objective and Policies
9. Management Investment Advisory and
Management Arrangements Directors and Officers
10. Capital Stock, Long-Term Debt, and
Other Securities Description of Capital
Stock
11. Defaults and Arrears on Senior
Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of
Additional Information Not Applicable
Part B -- INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page Not Applicable
15. Table of Contents Not Applicable
16. General Information and History Not Applicable
17. Investment Objective and Policies Investment Objective and
Policies; Other
Investment Policies;
Investment Restrictions
18. Management Directors and Officers;
Investment Advisory and
Management Arrangements
19. Control Persons and Principal Holders
of Securities Investment Advisory and
Management Arrangements
20. Investment Advisory and Other Services Investment Advisory and
Management Arrangements;
Custodian; Underwriting;
Transfer Agent, Dividend
Disbursing Agent and
Registrar; Experts
21. Brokerage Allocation and Other Practices Portfolio Transactions
22. Tax Status Taxes
23. Financial Statements Financial Statements
Part C - OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
2
<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 such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 20, 1994
PROSPECTUS
- ----------
_______________, 1994
MUNILEVERAGE FUND, INC.
COMMON STOCK
___________________
MuniLeverage Fund, Inc. (the "Fund") is a newly organized,
continuously offered, non-diversified, closed-end management investment
company seeking to provide shareholders with as high a level of current
income exempt from Federal income taxes as is consistent with its investment
policies and prudent investment management. The Fund seeks to achieve its
investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations the interest on which is exempt from
Federal income taxes in the opinion of bond counsel to the issuer. The Fund
intends to maintain at least 75% of its total assets in municipal obligations
which are rated investment grade or, if unrated, are considered by Fund Asset
Management, L.P. (the "Investment Adviser") to be of comparable quality. The
Fund may invest up to 25% of its total assets in municipal obligations which
are rated below investment grade or, if unrated, are considered by the
Investment Adviser to be of comparable quality. The Fund may invest in
certain tax-exempt securities classified as "private activity bonds" that may
subject certain investors in the Fund to an alternative minimum tax. At
times, the Fund may seek to hedge its portfolio through the use of options
and futures transactions. There can be no assurance that the investment
objective of the Fund will be realized.
Within approximately three months after completion of the
subscription offering of Common Stock described herein, the Fund intends to
offer shares of preferred stock representing up to approximately 35% of the
Fund's capital. There can be no assurance, however, that preferred stock
representing such percentage of the Fund's capital will actually be issued.
INVESTORS SHOULD NOTE THE SPECIAL RISKS ASSOCIATED WITH THE LEVERAGING OF THE
COMMON STOCK. SEE "SPECIAL LEVERAGE CONSIDERATIONS AND RISKS" AND
"DESCRIPTION OF CAPITAL STOCK."
(Continued on page 2)
Shares of Common Stock of the Fund will be offered at $10.00 per
share without a front-end sales charge during a subscription offering period
expected to end on _____________, 1994, unless extended. On the fifth
business day after the conclusion of this subscription offering period, the
subscriptions will be payable, the Common Stock will be issued and the Fund
will commence operations. After the completion of the subscription offering
period, the Fund expects to engage in a continuous offering of its Common
Stock at a price equal to the next determined net asset value per share
without a front-end sales charge. The minimum initial purchase during the
subscription and continuous offering periods is $1,000 and the minimum
subsequent purchase in the continuous offering is $50. See "Purchase of
Shares."
No market presently exists for the Fund's Common Stock and it is
not currently expected that a secondary market will develop. Since the
Fund's Common Stock may not be considered readily marketable, the Board of
Directors of the Fund presently intends to make tender offers on a quarterly
basis to purchase all or a portion of the Common Stock of the Fund from
shareholders at the net asset value per share. In the event that tender
offers are not made, however, shareholders may find that their shares of
Common Stock are not marketable. See "Tender Offers." Shares of Common
Stock purchased by the Fund pursuant to tender offers which have been held
for less than three years will be subject to an "Early Withdrawal Charge"
which will not exceed 3.0% of the original purchase amount for such Common
Stock, which will be paid to the Fund's distributor. See "Early Withdrawal
Charge."
___________________
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 UPON THE ACCURACY OR ADEQUACY OF
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION> PRICE TO SALES PROCEEDS TO
PUBLIC (1) LOAD (2) FUND (3)
<S> <C> <C> <C>
Per Share $10.00 None $10.00
Total (3) $____________ None $_____________
</TABLE>
(1) The Common Stock is offered on a best efforts basis at a price equal to
net asset value, which is initially $10.00 per share.
(2) Because Merrill Lynch Funds Distributor, Inc. will pay all offering
expenses (other than registration fees) and sales commissions to
selected dealers (primarily Merrill Lynch, Pierce, Fenner & Smith
Incorporated) from its own assets, all of the proceeds of the offering
will be available to the Fund for investment in portfolio securities.
See "Purchase of Shares."
(3) These amounts (a) do not take into account (i) organizational expenses
of the Fund, estimated to be $_______, which will be amortized over a
five-year period and charged as expenses against the income of the Fund
or (ii) prepaid registration fees, in the amount of $_________, which
will be charged to income as the related shares are issued, and (b)
assume all shares currently registered are sold pursuant to a continuous
offering.
___________________
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
1
<PAGE>
(Continued from page 1)
The Fund is designed primarily for long-term investors and should not be
considered a vehicle for trading purposes. The address of the Fund is 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800. This Prospectus sets forth concisely information about the
Fund that a prospective investor ought to know before purchasing shares.
Investors are advised to read this Prospectus carefully and retain it for
future reference.
The issuance of the preferred stock will result in leveraging of the
Common Stock. Although the terms of the preferred stock offering will be
determined by the Fund's Board of Directors, it is anticipated that the
preferred stock will pay dividends that will be adjusted over either
relatively short-term periods (generally seven to 28 days) or medium-term
periods (up to five years) and that the dividend rate will be based upon
prevailing interest rates for debt obligations of comparable maturity. The
proceeds of the preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment objective. Because
under normal market conditions, obligations with longer maturities produce
higher yields than short-term and medium-term obligations, the Investment
Adviser believes that the spread inherent in the difference between the
short-term and medium-term rates paid by the Fund and the longer-term rates
received by the Fund will provide holders of Common Stock with a potentially
higher yield.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus.
THE FUND MuniLeverage Fund, Inc. (the "Fund") is a newly organized,
continuously offered, non-diversified, closed-end management
investment company. See "The Fund."
THE OFFERING Merrill Lynch Funds Distributor, Inc. (the "Distributor"), and
other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
will solicit subscriptions for Common Stock of the Fund during
a period expected to end on ____________, 1994, unless
extended. On the fifth business day after the conclusion of
this subscription period, the subscriptions will be payable,
the Common Stock will be issued and the Fund will commence
operations. The public offering price of the Common Stock
during the subscription offering will be $10.00 per share
without a front-end sales charge.
After the completion of the initial subscription offering, the
Fund expects to engage in a continuous offering of its Common
Stock at a price equal to the next determined net asset value
per share without a front-end sales charge. The minimum
initial purchase during the subscription and continuous
offering periods is $1,000 and the minimum subsequent purchase
in the continuous offering is $50. The Fund reserves the
right to waive or modify the initial and subsequent minimum
investment requirements at any time. See "Purchase of
Shares."
INVESTMENT The investment objective of the Fund is to provide
OBJECTIVES shareholders with as high a level of current income exempt
AND POLICIES from Federal income taxes as is consistent with its investment
policies and prudent investment management. The Fund will
seek to achieve its investment objective by investing
primarily in a portfolio of long-term, investment grade
municipal obligations the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal income
taxes. The Fund intends to maintain at least 75% of its total
assets in municipal obligations which are rated investment
grade or, if unrated, are considered by the Investment Adviser
to be of comparable quality. The Fund may invest up to 25% of
its total assets in municipal obligations which are rated
below investment grade or, if unrated, are considered by the
Investment Adviser to be of comparable quality. Such lower
quality municipal obligations (also commonly referred to as
"junk bonds") are frequently traded only in markets where the
number of potential purchasers and sellers, if any, is very
limited. See "Investment Objective and Policies."
TENDER OFFERS No market presently exists for the Fund's Common Stock and it
is not currently anticipated that a secondary market will
develop. In view of this, the Board of Directors of the Fund
intends to make tender offers on a quarterly basis to purchase
Common Stock of the Fund from shareholders at a price per
share equal to the net asset value per share of the Common
Stock determined at the close of business on the day an offer
terminates. Although the Board of Directors currently intends
to make quarterly tender offers for the Common Stock, it is
under no obligation to do so and no assurance can be given
that in any particular quarter a tender offer will be made.
If a tender offer is not
3
<PAGE>
made, shareholders may be unable to sell their shares. Shares
of Common Stock which have been held for less than three years
and which are purchased by the Fund pursuant to tender offers
will be subject to an early withdrawal charge. See "Early
Withdrawal Charge." In addition, Merrill Lynch charges its
customers a processing fee (presently, $4.85) to confirm a
repurchase of shares from such customers pursuant to a Tender
Offer. Tenders made directly through the Fund's Transfer
Agent are not subject to the processing fee.
LEVERAGE The Fund anticipates that it will be substantially invested in
longer-term municipal obligations within approximately three
months after completion of the subscription offering of Common
Stock described herein. To leverage the Common Stock, the
Fund intends to offer shares of preferred stock within three
months after completion of the subscription offering
representing up to approximately 35% of the Fund's capital.
There can be no assurance, however, that preferred stock
representing such percentage of the Fund's capital will
actually be issued. The issuance of the preferred stock will
result in the leveraging of the Common Stock. Although the
terms of the preferred stock offering will be determined by
the Fund's Board of Directors, it is anticipated that the
preferred stock will pay dividends that will be adjusted over
either relatively short-term periods (generally seven to 28
days) or medium-term periods (up to five years) and that the
dividend rate will be based upon prevailing interest rates for
debt obligations of comparable maturity. The proceeds of the
preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment
objective. Issuance and ongoing expenses of the preferred
stock will be borne by the Fund and will reduce the net asset
value of the Common Stock. Additionally, under certain
circumstances, when the Fund is required to allocate taxable
income to holders of preferred stock, it is anticipated that
the terms of the preferred stock will require the Fund to make
an additional distribution to such holders in an amount
approximately equal to the tax liability resulting from such
allocation and such additional distribution (such amount, an
"Additional Distribution").
The use of leverage by the Fund creates an opportunity for
increased net income, but, at the same time, creates special
risks. Because under normal market conditions obligations
with longer maturities produce higher yields than short-term
and medium-term obligations, the Investment Adviser believes
that the spread inherent in the difference between the short-
term and medium-term rates (and any Additional Distribution)
paid by the Fund and the longer-term rates received by the
Fund will provide holders of Common Stock with a potentially
higher yield. Investors should note, however, that leverage
creates certain risks for holders of Common Stock, including
higher volatility of both the net asset value and market value
of the Common Stock. Since any decline in the value of the
Fund's investments will be borne entirely by holders of Common
Stock, the effect of leverage in a declining market would
result in a greater decrease in net asset value than if the
Fund were not leveraged, which would likely be reflected in a
decline in the market price for shares of Common Stock.
Additionally, fluctuations in the dividend rates on, and the
amount of taxable income allocable to, the preferred stock
will affect the yield to holders of Common Stock. See
"Special Leverage Considerations and Risks." Upon issuance of
the preferred stock, holders of the Common Stock will receive
all net income of the Fund remaining after payment of
dividends (and any Additional Distribution) on the preferred
stock and will generally be
4
<PAGE>
entitled to a pro rata share of net realized capital gains.
Upon any liquidation of the Fund, the holders of shares of
preferred stock will be entitled to receive liquidating
distributions (expected to equal the original purchase price
per share of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated and unpaid Additional
Distribution) before any distribution is made to holders of
Common Stock. See "Description of Capital Stock--Preferred
Stock." Until the preferred stock is issued, the Common Stock
will not be leveraged, and the special leverage considerations
described herein will not apply.
Holders of preferred stock, voting as a separate class, will
be entitled to elect two of the Fund's Directors, and holders
of common and preferred stock, voting together as a single
class, will be entitled to elect the remaining Directors. If
at any time dividends on the Fund's preferred stock were to be
in arrears in an amount equal to two full years of dividend
payments, the holders of all outstanding shares of preferred
stock, voting as a separate class, would be entitled to elect
a majority of the Fund's Directors. The holders of preferred
stock will also vote separately on certain other matters as
required under the Fund's Articles of Incorporation and the
Investment Company Act of 1940, as amended (the "1940 Act"),
and Maryland law but otherwise will have equal voting rights
with holders of Common Stock (one vote per share) and will
vote together with holders of Common Stock as a single class.
See "Description of Capital Stock--Preferred Stock--Voting
Rights."
There can be no assurance that the Fund will be able to
realize a higher net return on its investment portfolio than
the then current dividend rate (and any Additional
Distribution) on the preferred stock. Changes in certain
factors could cause the relationship between the short-term
and medium-term dividend rates (and any Additional
Distribution) paid by the Fund on the preferred stock and the
long-term rates received by the Fund on its investment
portfolio to change so that such short-term and medium-term
rates (and any Additional Distribution) may substantially
increase relative to rates on the long-term obligations in
which the Fund may be invested. Under such conditions, the
benefit of leverage to holders of Common Stock will be
reduced, and the Fund's leveraged capital structure could
result in a lower rate of return to holders of Common Stock
than if the Fund were not leveraged. The Fund will have the
authority to redeem the preferred stock for any reason and may
redeem all or part of the preferred stock if it anticipates
that the Fund's leveraged capital structure will result in a
lower rate of return to holders of the Common Stock than that
obtainable if the Common Stock were unleveraged for any
significant amount of time or in order to maintain asset
coverage required by the 1940 Act and any nationally
recognized rating agency rating the preferred stock. The
leveraging of the Common Stock would be eliminated during any
period that preferred stock is not outstanding.
Prior to the time it offers the preferred stock, the Fund
intends to apply for ratings on such stock from one or more
nationally recognized rating agencies. The Fund believes that
obtaining a rating for the preferred stock will enhance the
marketability of the preferred stock and thereby reduce the
dividend rate on the preferred stock from that which the Fund
would be required to pay if the preferred stock were not
rated.
5
<PAGE>
INVESTMENT Fund Asset Management, L.P. is the Fund's investment adviser
ADVISER (the "Investment Adviser") and is responsible for the
management of the Fund's investment portfolio and for
providing administrative services to the Fund. For its
services, the Fund pays the Investment Adviser a monthly fee
at the annual rate of ___ of 1% of the Fund's average weekly
net assets. The Investment Adviser is an affiliate of Merrill
Lynch Asset Management, L.P. ("MLAM"), which is owned and
controlled by Merrill Lynch & Co., Inc. ("ML & Co."). The
Investment Adviser or MLAM acts as the investment adviser for
over 90 other registered management investment companies. The
Investment Adviser also offers portfolio management and
portfolio analysis services to individuals and institutions.
As of May 31, 1994, the Investment Adviser and MLAM had a
total of approximately $163.3 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. See "Investment Advisory and Management
Arrangements."
DISTRIBUTIONS The Fund intends to pay dividends monthly and to distribute
substantially all of its net investment income to holders of
Common Stock. From and after issuance of the preferred stock,
monthly distributions to holders of Common Stock will consist
of substantially all net investment income remaining after the
payment of dividends (and any Additional Distribution) on the
preferred stock. It is expected that the Fund will commence
paying dividends to holders of Common Stock within
approximately 90 days from the date of this Prospectus. Net
capital gains, if any, will be distributed at least annually
to holders of Common Stock and, after issuance of the
preferred stock, on a pro rata basis to holders of Common
Stock and preferred stock. When capital gains or other
taxable income is allocated to holders of preferred stock
under certain circumstances, it is anticipated that the terms
of the preferred stock will require the Fund to make an
Additional Distribution. The Fund is not permitted to declare
any cash dividend or other distribution on its Common Stock
unless asset coverage (as defined in the 1940 Act) with
respect to the Fund's preferred stock is at least 200%. If
the Fund issues preferred stock representing 35% of its
capital after the time of issuance, its asset coverage with
respect to the preferred stock will be approximately 285%. If
the Fund's ability to make distributions on its Common Stock
is limited, this could under certain circumstances impair the
ability of the Fund to maintain its qualification for taxation
as a regulated investment company, which would have adverse
tax consequences for holders of Common Stock. See "Taxes."
AUTOMATIC All dividend and capital gains distributions will be
DIVIDEND automatically reinvested in additional shares of Common Stock
REINVESTMENT of the Fund unless a shareholder elects to receive cash. PLAN
Shareholders whose shares are held in the name of a broker or
nominee should contact such broker or nominee to confirm that
they may participate in the Fund's dividend reinvestment plan.
See "Automatic Dividend Reinvestment Plan."
SPECIAL As a newly organized entity, the Fund has no operating
CONSIDERATIONS history. See "The Fund". The Fund expects that there will
AND RISK be no secondary market for its Common Stock. Moreover,
FACTORS Merrill Lynch and other selected dealers are prohibited under
applicable law from making a market in the Fund's Common Stock
while the Fund is making either a public offering of or a
tender offer to purchase its Common Stock. To the extent a
secondary market does develop, however, investors should be
aware that the shares of closed-end funds
6
<PAGE>
frequently trade in the secondary market at a discount.
Should there be a secondary market for the Fund's shares of
Common Stock, the market price of the shares may vary from net
asset value.
Because of the lack of a secondary market and the early
withdrawal charge, the Fund is designed primarily for long-
term investors and should not be considered a vehicle for
trading purposes.
The net asset value of the Fund's shares of Common Stock will
fluctuate with interest rate changes as well as with price
changes of the Fund's portfolio securities, and these
fluctuations are likely to be greater in the case of a fund
having a leveraged capital structure, as contemplated for the
Fund. See "Special Leverage Considerations and Risks."
The Fund has registered as a "non-diversified" investment
company so that it will be able to invest more than 5% of its
assets in the obligations of any single issuer, subject to the
diversification requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable to
the Fund. Since the Fund may invest a relatively high
percentage of its assets in the obligations of a limited
number of issuers, the Fund may be more susceptible than a
more widely-diversified fund to any single economic, political
or regulatory occurrence.
The Fund intends to invest at least 75% of its total assets in
municipal obligations that are rated in the investment grade
rating categories by Standard & Poor's Corporation, Moody's
Investors Service, Inc. or Fitch Investors Service, Inc. or,
if not rated, are considered to be of comparable quality by
the Investment Adviser. Obligations rated in the lowest
investment-grade category may have certain speculative
characteristics. Additionally, the Fund may invest up to 25%
of its total assets in municipal obligations which are rated
below investment grade or, if not rated, considered by the
Investment Adviser to be of comparable quality. These
securities are regarded as predominantly speculative and
investments therein entail certain risks. See "Investment
Objective and Policies." The Fund may invest in certain tax-
exempt securities classified as "private activity bonds" that
may subject certain investors in the Fund to the alternative
minimum tax. See "Taxes--General."
The Fund will be subject to certain restrictions on
investments imposed by guidelines of one or more nationally
recognized rating agencies which may issue ratings for the
preferred stock. These guidelines may impose asset coverage
or portfolio composition requirements that are more stringent
than those imposed by the 1940 Act. It is not anticipated
that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with
the Fund's investment objective and policies.
Subject to its investment restrictions, the Fund is authorized
to engage in options and futures transactions on exchanges and
in the over-the counter markets ("OTC options") for hedging
purposes with certain specified entities meeting the criteria
of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect
correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of
the hedge and the inability to close futures transactions
under certain conditions. Because of the anticipated
leveraged nature of the Common Stock, hedging transactions
will result in a larger impact
7
<PAGE>
on the net asset value of the Common Stock than would be the
case if the Common Stock were not leveraged. OTC options and
assets used to cover OTC options written by the Fund 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 sale, or reduce the amount of
proceeds that might be otherwise realized. See "Investment
Objective and Policies--Options and Futures Transactions."
The Fund intends to apply for ratings of the preferred stock
from one or more nationally recognized rating agencies. In
order to obtain these ratings, the Fund may be required to
limit its use of hedging techniques in accordance with the
specified guidelines of such rating agencies.
The Fund's Articles of Incorporation include provisions that
could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund or to
change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to
sell their shares at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control
of the Fund. See "Description of Capital Stock--Certain
Provisions of the Articles of Incorporation."
8
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(A)
Maximum Sales Load (as a percentage of offering price) . . . . . . . None
Dividend Reinvestment Plan Fees . . . . . . . . . . . . . . . . . . None
ANNUAL EXPENSES (as a percentage of net assets attributable to common
shares) (b)(c)
Investment Advisory Fee . . . . . . . . . . . . . . . . . . . . . . ___%
Administrative Fee . . . . . . . . . . . . . . . . . . . . . . . . . ___%
Shareholder Servicing Fee . . . . . . . . . . . . . . . . . . . . . ___%
Interest Payments on Borrowed Funds . . . . . . . . . . . . . . . . None
Other Expenses ___%
Total Annual Expenses . . . . . . . . . . . . . . . . . . . . . . . . . %
</TABLE>
_____________
(a) Shareholders tendering shares within three years of their purchase may
be subject to the Early Withdrawal Charge. See "Early Withdrawal
Charge"--page __.
(b) The expenses set forth in this table do not include expenses associated
with preferred stock, since the costs associated with preferred stock
could not be determined at the date of this Prospectus. See "Special
Leverage Considerations and Risks"--page __.
(c) See "Investment Advisory and Administrative Arrangements"--page __.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5
YEARS 10
YEARS
<C>
An investor would pay the following expenses on a $1,000
investment, including the maximum sales load of $_____ and
assuming (1) total annual expenses of ___% and (2) a 5% <C> <C> <C> <C>
annual return throughout the periods: $___* $___* $___ $___
</TABLE>
___________
* Reflects the Early Withdrawal Charge.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by the Securities and Exchange Commission regulations. Also, the
Example does not take into account the issuance of any preferred stock by the
Fund. The Example should not be considered a representation of future
expenses or annual rate of return, and actual expenses or annual rate of
return may be more or less than those assumed for purposes of the Example.
9
<PAGE>
THE FUND
MuniLeverage Fund, Inc. (the "Fund") is a newly organized, continuously
offered, non-diversified, closed-end management investment company. The Fund
was incorporated under the laws of the State of Maryland on July 13, 1994,
and has registered under the 1940 Act. The Fund's principal office is
located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2800.
USE OF PROCEEDS
Assuming all shares of Common Stock currently registered are sold in the
initial offering, it is estimated that the net proceeds from the sale of the
Common Stock offered hereby will be $____________ after payment of
organizational and offering expenses by the Fund and will be invested in
accordance with the Fund's investment objective and policies as soon as
practicable after the closing of the subscription offering of Common Stock,
but in no event, under normal market conditions, longer than six months from
such closing date. Pending such investment, it is anticipated that the
proceeds will be invested in short-term, tax-exempt securities. See
"Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as
high a level of current income exempt from Federal income taxes as is
consistent with its investment policies and prudent investment management.
The Fund seeks to achieve its investment objective by investing primarily in
a portfolio of long-term, investment grade municipal obligations, the
interest on which is exempt from Federal income taxes in the opinion of bond
counsel to the issuer. The investment objective of the Fund is a fundamental
policy that may not be changed without a vote of a majority of the Fund's
outstanding voting securities, as defined below under "Investment
Restrictions." There can be no assurance that the investment objective of
the Fund will be realized. At times the Fund may seek to hedge its portfolio
through the use of futures transactions and options to reduce volatility in
the net asset value of its shares of Common Stock.
The Fund, at all times, except during temporary defensive periods, will
invest at least 80% of its total assets 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"). The Fund, at all times, except
during temporary defensive periods, will maintain at least 75% of its total
assets in Municipal Bonds rated investment grade by a nationally recognized
statistical rating organization or, if unrated, are considered to be of
comparable quality by the Investment Adviser. Additionally, the Fund may
invest up to 25% of its total assets in Municipal Bonds which are rated below
investment grade by a nationally recognized statistical rating organization
or, if unrated, are considered to be of comparable quality by the Investment
Adviser. Such lower quality Municipal Bonds are frequently traded only in
markets where the number of potential purchasers and sellers, if any, is very
limited. The Fund may invest in certain tax-exempt securities classified as
"private activity bonds" (in general, bonds that benefit non-governmental
entities) that may subject certain investors in the Fund to an alternative
minimum tax. The Fund will not invest more than 25% of its total assets
(taken at market value) in Municipal Bonds whose issuers are located in the
same state.
Investment in shares of Common Stock of the Fund offers several
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal income taxes by investing in a professionally managed portfolio
comprised primarily of investment grade Municipal Bonds. The Fund also
relieves the investor of the burdensome administrative details involved in
managing a portfolio of Municipal Bonds. Additionally, the Investment
Adviser will seek to enhance the yield on the Common Stock by leveraging the
Fund's capital structure through the issuance of preferred stock. The
benefits are at least partially offset by the expenses involved in operating
an investment company. Such expenses primarily consist of the advisory fee,
administrative fee and operational costs. Additionally, the use of leverage
involves certain expenses and special risk considerations. See "Special
Leverage Considerations and Risks."
The investment grade Municipal Bonds in which the Fund will invest are
those Municipal Bonds rated at the date of purchase in the four highest
rating categories of Standard & Poor's Corporation ("S&P"), Moody's Investors
Service, Inc. ("Moody's") or Fitch Investors Service, Inc. ("Fitch") or, if
unrated, are considered to be of comparable quality by the Investment
Adviser. In the case of long-term debt, the investment grade rating
categories are AAA through BBB for S&P, Aaa through Baa for Moody's and AAA
through BBB for Fitch. In the case of short-term notes, the investment grade
rating categories are SP-1+ through SP-3 for S&P, MIG-1 through MIG-4 for
Moody's and F-1+
10
<PAGE>
through F-3 for Fitch. In the case of tax-exempt commercial paper, the
investment grade rating categories are A-1+ through A-3 for S&P, Prime-1
through Prime-3 for Moody's and F-1+ through F-3 for Fitch. Obligations
ranked in the fourth highest rating category (BBB, SP-3 and A-3 for S&P; Baa,
MIG-4 and Prime-3 for Moody's; and BBB, F-3 and F-3 for Fitch), while
considered "investment grade," may have certain speculative characteristics.
There may be sub-categories or gradations indicating relative standing within
the rating categories set forth above. See Appendix I to this Prospectus for
a description of S&P's, Moody's and Fitch's ratings of Municipal Bonds. In
assessing the quality of Municipal Bonds with respect to the foregoing
requirements, the Investment Adviser will take into account the nature of any
letters of credit or similar credit enhancement to which particular Municipal
Bonds are entitled and the creditworthiness of the financial institution
which provided such credit enhancement.
As noted above, the Fund may invest up to 25% of its assets in Municipal
Bonds which are rated below investment grade or, if unrated, are considered
to be of comparable quality by the Investment Adviser. These high yield
bonds are commonly referred to as "junk bonds" and are regarded as
predominantly speculative as to the issuer's ability to make payments of
principal and interest. Consequently, although such bonds can be expected to
provide higher yields, they may be subject to greater market price
fluctuations and risk of loss of principal than lower yielding, higher rated
fixed income securities. Such securities are particularly vulnerable to
adverse changes in the issuer's industry and in general economic conditions.
Issuers of high yield bonds may be highly leveraged and may not have
available to them more traditional methods of financing. The risk of loss
due to default by the issuer is significantly greater for the holders of
these bonds because such securities may be unsecured and may be subordinated
to other creditors of the issuer. In addition, while the high yield bonds in
which the Fund may invest normally will not include securities which, at the
time of investment, are in default or the issuers of which are in bankruptcy,
there can be no assurance that such events will not occur after the Fund
purchases a particular security, in which case the Fund may experience losses
and incur costs.
High yield bonds frequently have call or redemption features that permit
an issuer to repurchase such bond from the Fund, which may decrease the net
investment income to the Fund and dividends to shareholders in the event that
the Fund is required to replace a called security with a lower yielding
security. The Fund may have difficulty disposing of certain high yield bonds
because there may be a thin trading market for such securities. Reduced
secondary market liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular issues when necessary to meet the
Fund's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations are generally available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution, typically a commercial bank. The VRDOs in which the Fund will
invest are tax-exempt obligations in the opinion of counsel to the issuer
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short
notice period not to exceed seven days. Participating VRDOs provide the Fund
with a specified undivided interest (up to 100%) of the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDOs from the financial institution on a
specified number of days' notice, not to exceed seven days. There is,
however, the possibility that because of default or insolvency, the demand
feature of VRDOs or Participating VRDOs may not be honored. The Fund has
been advised by its counsel that the Fund should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt
obligations.
The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions.
The net asset value of the shares of common stock of a closed-end investment
company, such as the Fund, which invests primarily in fixed-income
securities, changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected
to rise. Conversely, when interest rates rise, the value of a fixed-income
portfolio can be expected to decline. Prices of longer-term securities
generally fluctuate more in response to interest rate changes than do short-
term or medium-term securities. These changes in net asset value are likely
to be greater in the case of a fund having a leveraged capital structure, as
proposed for the Fund. See "Special Leverage Considerations and Risks."
On a temporary basis, the Fund may invest in short-term, tax-exempt
securities, short-term U.S. Government securities, repurchase agreements or
cash. Such securities or cash will not exceed 20% of its total assets except
during interim periods pending investment of the net proceeds of public
offerings of the Fund's securities and temporary defensive periods when, in
the opinion of the Investment Adviser, prevailing market or economic
conditions warrant. The Fund does not ordinarily intend to realize
significant interest income not exempt from Federal income tax.
11
<PAGE>
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion
of its assets that it may invest in securities of a single issuer. However,
the Fund's investments will be limited so as to qualify the Fund as a
"regulated investment company" for purposes of the Code. See "Taxes." To
qualify, among other requirements, the Fund will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer. A
fund 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 the Fund assumes large positions in the securities of a
small number of issuers, the Fund's yield may fluctuate to a greater extent
than that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to finance various privately
operated 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. 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 do not generally constitute the 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
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 may also include "moral
obligation" bonds which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
The Fund may purchase 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--General." 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 referred to as "lease
obligations") relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the 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.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may
affect the availability of Municipal Bonds for investment by the Fund.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
12
<PAGE>
Borrowings. The Fund is authorized to borrow money in amounts of up to
5% of the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise, to redeem or repurchase shares of preferred stock or for
temporary, extraordinary or emergency purposes. Borrowings by the Fund
(commonly known as "leveraging") create an opportunity for greater total
return since the Fund will not be required to sell portfolio securities to
purchase tendered shares but, at the same time, increase exposure to capital
risk. In addition, borrowed funds are subject to interest costs that may
offset or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Municipal Bonds on a delayed delivery basis or when-issued
basis at fixed purchase or sale terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund
enters into the commitment, and the value of the obligation will thereafter
be reflected in the calculation of the Fund's net asset value. The value of
the obligation on the delivery day may be more or less than its purchase
price. A separate account of the Fund will be established with its custodian
consisting of cash, cash equivalents or liquid Municipal Bonds having a
market value at all times at least equal to the amount of the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in
Municipal Bonds the return on which is based on a particular index of value
or interest rates. For example, the Fund may invest in Municipal Bonds that
pay interest based on an index of Municipal Bond interest rates 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 the Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index. Also, the Fund may invest in so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically vary inversely with a short-term floating rate
(which may be reset periodically by a dutch auction, a remarketing agent, or
by reference to a short-term tax-exempt interest rate index). The Fund may
purchase in the secondary market synthetically-created inverse floating rate
bonds evidenced by custodial or trust receipts. Generally, interest rates on
inverse floating rate bonds will decrease when short-term rates increase, and
will increase when short-term rates decrease. Such securities have the
effect of providing a degree of investment leverage, since they may increase
or decrease in value in response to changes, as an illustration, in market
interest rates at a rate 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
generally will be more volatile than the market values of fixed-rate tax-
exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities
or 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 Fund
which allows the Investment Adviser to vary the degree of investment leverage
relatively efficiently under different market conditions.
Call Rights. The Fund may purchase a Municipal Bond issuer's right to
call all or a portion of such Municipal Bond for mandatory tender for
purchase (a "Call Right"). A holder of a Call Right may exercise such right
to require a mandatory tender for the purchase of related Municipal Bonds,
subject to certain conditions. A Call Right that is not exercised prior to
the maturity of the related Municipal Bond will expire without value. The
economic effect of holding both the Call Right and the related Municipal Bond
is identical to holding a Municipal Bond as a non-callable security.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of Common Stock, the
net asset value of the Common Stock will fluctuate. There can be no
assurance that the Fund's hedging transactions will be effective. In
addition, because of the anticipated leveraged nature of the Common Stock,
hedging transactions will result in a larger impact on the net asset value of
the Common Stock than would be the case if the Common Stock was not
leveraged. Furthermore, the Fund will only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and
futures contracts distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to
shareholders. See "Taxes--Tax Treatment of Options and Futures
Transactions." In addition, in order to obtain ratings of the preferred
stock from one or more rating agencies, the Fund may be required to limit its
use of hedging techniques in accordance with the specified guidelines of such
rating agencies.
13
<PAGE>
The following is a description of the options and futures transactions
in which the Fund may engage, limitations on the use of such transactions and
risks associated therewith. The investment policies with respect to the
hedging transactions of the Fund are not fundamental policies and may be
modified by the Board of Directors of the Fund without the approval of the
Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered
call options with respect to Municipal Bonds it owns, thereby giving the
holder of the option the right to buy the underlying security covered by the
option from the Fund at the stated exercise price until the option expires.
The Fund writes only covered call options, which means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option. The Fund may not write covered call
options on underlying securities in an amount exceeding 15% of the market
value of its total assets.
The Fund will receive a premium from writing a call option, which
increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. By writing a call,
the Fund limits its opportunity to profit from an increase in the market
value of the underlying security above the exercise price of the option for
as long as the Fund's obligation as a writer continues. Covered call options
serve as a partial hedge against a decline in the price of the underlying
security. The Fund may engage in closing transactions in order to terminate
outstanding options that it has written.
Purchase of Options. The Fund may purchase put options in connection
with its hedging activities. By buying a put the Fund has a right to sell
the underlying security at the exercise price, thus limiting the Fund's risk
of loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the put option plus the related transaction costs. A
closing sale transaction cancels out the Fund's position as the purchaser of
an option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the
Fund may purchase call options on securities held in its portfolio on which
it has written call options or on securities 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. The Fund is authorized to
purchase and sell certain financial futures contracts ("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
purchaser of a contract to take delivery of the type of financial instrument
covered by the contract or, in the case of index-based futures contracts, to
make and accept a cash settlement, at a specific future time for a specified
price. A sale of financial futures contracts may provide a hedge against a
decline in the value of portfolio securities because such depreciation may be
offset, in whole or in part, by an increase in the value of the position in
the financial futures contracts. A purchase of financial futures contracts
may provide a hedge against an increase in the cost of securities intended to
be purchased because such appreciation may be offset, in whole or in part, by
an increase in the value of the position in the futures contracts.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead,
an amount of cash or 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 Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value
of 40 large tax-exempt issues, and purchase and sell put and call options on
such futures contracts for the purpose of hedging Municipal Bonds which the
Fund holds or anticipates purchasing against adverse changes in interest
rates. The Fund also may purchase and sell financial futures contracts on
U.S. Government securities and purchase and sell put and call options on such
futures contracts for such hedging purposes. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-
term U.S. Treasury bonds, Treasury notes, GNMA Certificates and three-month
U.S. Treasury bills. Subject to policies adopted by the Board of Directors,
the Fund also may engage in transactions in other financial futures contracts
and options, such as financial futures contracts and options on other
municipal bond indices which may
14
<PAGE>
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 the Fund invests to make such hedging
appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC
options"). In general, exchange-traded contracts are third-party contracts
(i.e., performance of the parties' obligations is guaranteed by an exchange
or clearing corporation) with standardized strike prices and expiration
dates. OTC option transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in
OTC options only with 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 entity having capital of at least $50 million. OTC options
and assets used to cover OTC options written by the Fund 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 sale, or reduce the amount of
proceeds that might otherwise be realized.
Risk Factors in Options and Futures Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements
in the price of futures contracts and movements in the price of the security
which is the subject of the hedge. If the price of the futures contract
moves more or less than the price of the security that is the subject of the
hedge, the Fund will experience a gain or loss 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 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. Finally, in the case of futures
contracts on U.S. Government securities and options on such futures
contracts, the anticipated correlation of price movements between the U.S.
Government securities underlying the futures or options and Municipal Bonds
may be adversely affected by economic, political, legislative or other
developments which have a disparate impact on the respective markets for such
securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes
if, immediately thereafter, the sum of the amount of initial margin deposits
on the Fund's existing futures positions and option premiums entered into for
non-hedging purposes do not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist
of cash or securities acceptable to the broker and the relevant contract
market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
short-term, high-grade, fixed-income securities in a segregated account with
the Fund's custodian so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker equals the
market value of the futures contract, thereby ensuring that the use of such
futures contract is unleveraged.
Although certain risks are involved in options and futures transactions,
the Investment Adviser believes that, because the Fund will engage in options
and futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The Fund may be restricted in engaging in options and futures transactions
due to the requirement that less 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 in the exchange markets with respect to Municipal
Bond options may be limited, and it is impossible to predict the amount of
trading interest that may exist in such options. In addition, there can be
no assurance that viable exchange markets will continue.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures
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transaction. The inability to close options and futures positions also could
have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with which the Fund has an
open position in an option or futures contract.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges which limit the amount of fluctuation in a futures
contract price during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.
If it is not possible to close a financial futures position entered into
by the Fund, the Fund would continue to be required to make daily cash
payments of variation margin in the event of adverse price movements. In
such a situation, if the Fund has insufficient cash, it may have to sell
portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so.
The successful use of these transactions also depends on the ability of
the Investment Adviser to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the extent these rates
remain stable during the period in which a futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may
realize a loss on the hedging transaction which is not fully or partially
offset by an increase in the value of portfolio securities. As a result, the
Fund's total return for such period may be less than if it had not engaged in
the hedging transaction. Furthermore, the Fund will only engage in hedging
transactions from time to time and may not necessarily be engaging in hedging
transactions when movements in interest rates occur.
SPECIAL LEVERAGE CONSIDERATIONS AND RISKS
EFFECTS OF LEVERAGE
Within approximately three months after the completion of the
subscription offering of shares of Common Stock, the Fund intends to offer
shares of preferred stock representing up to approximately 35% of the Fund's
capital. There can be no assurance, however, that preferred stock
representing such percentage of the Fund's capital will actually be issued.
The issuance of the preferred stock will result in the leveraging of the
Common Stock. Although the terms of the preferred stock offering will be
determined by the Fund's Board of Directors, it is anticipated that the
preferred stock will pay dividends that will be adjusted over either
relatively short-term periods (generally seven to 28 days) or medium-term
periods (up to five years) and that the dividend rate will be based upon
prevailing interest rates for debt obligations of comparable maturity. The
proceeds of the preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment objective. Issuance and
ongoing expenses of the preferred stock will be borne by the Fund and will
reduce the net asset value of the Common Stock. Additionally, under certain
circumstances, when the Fund is required to allocate taxable income to
holders of preferred stock, it is anticipated that the terms of the preferred
stock will require the Fund to make an additional distribution to such
holders in an amount approximately equal to the tax liability resulting from
such allocation and such additional distribution (such amount, an "Additional
Distribution"). Because under normal market conditions, obligations with
longer maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread inherent in the
difference between the short-term and medium-term rates (and any Additional
Distributions) paid by the Fund as dividends on the preferred stock and the
longer-term rates received by the Fund will provide holders of Common Stock
with a potentially higher yield.
Utilization of leverage, however, involves certain risks to the holders
of Common Stock. For example, issuance of the preferred stock may result in
higher volatility of the net asset value of the Common Stock and potentially
more volatility in the market value of the Common Stock. In addition,
fluctuations in the short-term and medium-term dividend rates on, and the
amount of taxable income allocable to, the preferred stock will affect the
yield to holders of Common Stock. So long as the Fund, taking into account
the costs associated with the preferred stock and the Fund's operating
expenses, is able to realize a higher net return on its investment portfolio
than the then current dividend rate (and any Additional Distribution) of the
preferred stock, the effect of leverage will be to cause holders of Common
Stock to realize a higher current rate of return than if the Fund were not
leveraged. Similarly, since a pro rata portion of the Fund's net realized
capital gains on its investment assets are generally payable to holders of
Common Stock, if net capital gains are realized by the Fund, the effect of
leverage will be to increase the amount of such gains distributed to holders
of Common Stock. However, short-term, medium-term and long-term interest
rates change from time to time as does their relationship to each other
(i.e., the slope of the yield curve) depending upon such factors as supply
and demand
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<PAGE>
forces, monetary and tax policies and investor expectations. Changes in such
factors could cause the relationship between short-term, medium-term and
long-term rates to change (i.e., to flatten or to invert the slope of the
yield curve) so that short-term and medium-term rates may substantially
increase relative to the long-term obligations in which the Fund may be
invested. To the extent that the current dividend rate (and any Additional
Distribution) on the preferred stock approaches the net return on the Fund's
investment portfolio, the benefit of leverage to holders of Common Stock will
be reduced, and if the current dividend rate (and any Additional
Distribution) on the preferred stock were to exceed the net return on the
Fund's portfolio, the Fund's leveraged capital structure would result in a
lower rate of return to holders of Common Stock than if the Fund were not
leveraged. Similarly, since both the costs associated with the issuance of
preferred stock and any decline in the value of the Fund's investments
(including investments purchased with the proceeds from any preferred stock
offering) will be borne entirely by holders of Common Stock, the effect of
leverage in a declining market would result in a greater decrease in net
asset value to holders of Common Stock than if the Fund were not leveraged.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended. See
"Taxes." The Fund intends, however, to take all measures necessary to
continue to make Common Stock dividend payments. If the Fund's current
investment income were not sufficient to meet dividend requirements on either
the Common Stock or the preferred stock, it could be necessary for the Fund
to liquidate certain of its investments. In addition, the Fund will have the
authority to redeem the preferred stock for any reason and may redeem all or
part of the preferred stock if (i) it anticipates that the Fund's leveraged
capital structure will result in a lower rate of return for any significant
amount of time to holders of the Common Stock than that obtainable if the
Common Stock were unleveraged, (ii) the asset coverage for the preferred
stock declines below 200%, either as a result of a decline in the value of
the Fund's portfolio investments or as a result of the repurchase of Common
Stock in tender offers, or (iii) in order to maintain the asset coverage
guidelines established by nationally recognized rating agencies rating the
preferred stock. Redemption of the preferred stock or insufficient
investment income to make dividend payments may reduce the net asset value of
the Common Stock and require the Fund to liquidate a portion of its
investments at a time when it may be disadvantageous, in the absence of such
extraordinary circumstances, to do so.
Until the preferred stock is issued, the Fund's Common Stock will not be
leveraged, and the special leverage considerations described in this
Prospectus will not apply. Such leveraging of the Common Stock cannot be
fully achieved until the proceeds of the offering of preferred stock have
been invested in long-term Municipal Bonds. In addition, the leveraging of
the Common Stock would be eliminated during any period that preferred stock
is not outstanding.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term or medium-term rates or other
change in market conditions to the point where the Fund's leverage could
adversely affect holders of Common Stock as noted above, or in anticipation
of such changes, the Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of Common Stock. The Fund also may attempt to reduce the
degree to which it is leveraged by redeeming preferred stock pursuant to the
provisions of the Fund's Articles Supplementary establishing the rights and
preferences of the preferred stock or otherwise purchasing shares of
preferred stock. Purchases and redemptions of preferred stock, whether
through redemptions, on the open market or in negotiated transactions, are
subject to limitations under the 1940 Act. If market conditions subsequently
change, the Fund may sell previously unissued shares of preferred stock or
shares of preferred stock that the Fund previously issued but later
repurchased or redeemed.
The Fund intends to apply for ratings of the preferred stock from one or
more nationally recognized rating agencies. In order to obtain these
ratings, the Fund may be required to maintain portfolio holdings meeting
specified guidelines of such rating agencies. These guidelines may impose
asset coverage requirements that are more stringent than those imposed by the
1940 Act. It is not anticipated that these guidelines will impede the
Investment Adviser from managing the Fund's portfolio in accordance with the
Fund's investment objective and policies.
Under the 1940 Act, the Fund is not permitted to issue shares of
preferred stock unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred stock (expected to equal the original purchase price of
the outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated and unpaid Additional Distribution).
In addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Stock unless, at the time of such declaration,
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<PAGE>
the net asset value of the Fund's portfolio (determined after deducting the
amount of such dividend or distribution) is at least 200% of such liquidation
value. Under the Fund's proposed capital structure, assuming the sale of
shares of preferred stock representing approximately 35% of the Fund's
capital, the net asset value of the Fund's portfolio is expected to be
approximately 285% of the liquidation value of the Fund's preferred stock.
To the extent possible, the Fund intends to purchase or redeem shares of
preferred stock from time to time to maintain coverage of preferred stock of
at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and,
prior to issuance of the preferred stock, may not be changed without the
approval of the holders of a majority of the Fund's outstanding shares of
Common Stock (which for this purpose and under the 1940 Act means the lesser
of (i) 67% of the shares of Common Stock represented at a meeting at which
more than 50% of the outstanding shares of Common Stock are represented or
(ii) more than 50% of the outstanding shares). Subsequent to the issuance of
the preferred stock, the following investment restrictions may not be changed
without the approval of a majority of the outstanding shares of Common Stock
and of the outstanding shares of preferred stock, voting together as a class,
and the approval of a majority of the outstanding shares of preferred stock,
voting separately by class. The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except to
the extent that such purchases are permitted by applicable law.
3. Purchase or sell real estate, real estate limited
partnerships, commodities or commodity contracts; provided that the Fund
may invest in securities directly or indirectly 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 money, except as permitted
by Section 18 of the 1940 Act.
5. Underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
selling portfolio securities.
6. Make loans to other persons, except that the Fund may purchase
Municipal Bonds and other debt securities 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; provided that, for purposes of this restriction,
states, municipalities and their political subdivisions are not
considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors, provide that the Fund may not:
1. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund
except as may be necessary in connection with borrowings mentioned in
investment restriction (4) above or except as may be necessary in
connection with transactions in financial futures contracts and options
thereon.
2. 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).
3. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund
may writer, purchase and sell options and futures on Municipal Bonds,
U.S. Government obligations and related indices or otherwise in
connection with bona fide hedging activities and may purchase and sell
Call Rights to require mandatory tender for the purchase of related
Municipal Bonds.
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If a percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentages resulting from changing values will
not be considered a violation.
The Investment Adviser of the Fund and Merrill Lynch are subsidiaries of
Merrill Lynch & Co., Inc. Because of the affiliation of Merrill Lynch with
the Fund, the Fund is prohibited from engaging in certain transactions
involving Merrill Lynch except pursuant to an exemptive order or otherwise in
compliance with the provisions of the 1940 Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases
from or sales to Merrill Lynch of securities in transactions in which it acts
as principal. An exemptive order has been obtained which permits the Fund to
effect principal transactions with Merrill Lynch in high quality, short-term,
tax-exempt securities subject to conditions set forth in such order. The
Fund may consider in the future requesting an order permitting other
principal transactions with Merrill Lynch, but there can be no assurance that
such application will be made and, if made, that such order would be granted.
PURCHASE OF SHARES
SUBSCRIPTION OFFERING
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary
of MLAM and an affiliate of the Investment Adviser, acts as the distributor
of shares of Common Stock of the Fund.
The Distributor, and other securities dealers which have entered into
selected dealer agreements with the Distributor, including Merrill Lynch,
will solicit subscriptions for shares of the Fund during a period expected to
end on __________, 1994. The subscription period may be extended for up to
an additional 30 days upon agreement between the Fund and the Distributor.
On the fifth business day after the conclusion of the subscription period,
the subscriptions will be payable, the shares will be issued and the Fund
will commence operations. The subscription offering may be terminated by the
Fund or the Distributor any time, in which event no shares will be issued
(and, therefore, the Fund will not commence operations, no amounts will be
payable by subscribers, any payments by subscribers will be refunded in full
without interest) or a limited number of shares will be issued.
The public offering price of the shares during the subscription offering
is $10.00 without a front-end sales charge. The minimum initial purchase for
shares of Common Stock during the subscription offering is $1,000.
The proceeds per share to the Fund from the sale of all shares sold
during the subscription period will be $10.00. As set forth below, the
Distributor may make payments to Merrill Lynch or other selected dealers from
its own assets.
Due to the administrative complexities associated with the subscription
offering, administrative errors may result in the Distributor or affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of the
shares of Common Stock) of shares of Common Stock which it may wish to
resell. Such shares of Common Stock will not be subject to any investment
restriction and may be resold pursuant to this Prospectus.
CONTINUOUS OFFERING
After completion of the subscription offering, the Fund expects to
engage in a continuous offering of its shares of Common Stock through the
Distributor and other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch. During the
continuous offering, shares of the Fund may be purchased from the Distributor
or selected dealers, including Merrill Lynch, or by mailing a purchase order
directly to the Transfer Agent. The minimum initial purchase during the
continuous offering is $1,000 and the minimum subsequent purchase is $50.
To permit the Fund to invest the net proceeds from the sale of its
shares of Common Stock in an orderly manner, the Fund may delay the
commencement of the continuous offering of its shares of Common Stock or,
from time to time, suspend the sale of its shares of Common Stock, except for
sales to existing holders of Common Stock and dividend reinvestments. The
Fund is offering its shares of Common Stock during the continuous offering at
a public offering price equal to the next determined net asset value per
share without a front-end sales charge. The applicable offering price for
purchase orders is based on the net asset value of the Fund next determined
after receipt of the purchase order by the
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Distributor. As to purchase orders received by securities dealers prior to
4:15 P.M., New York time, which includes orders received after the
determination of net asset value on the previous day, the applicable offering
price will be based on the net asset value determined as of 4:15 P.M. on the
day the order is placed with the Distributor, provided the order is received
by the Distributor prior to 4:30 P.M., New York time, on that day. If the
purchase orders are not received by the Distributor prior to 4:30 P.M., New
York time, such orders shall be deemed received on the next business day.
Any order may be rejected by the Distributor or the Fund. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares to the
general public at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to
time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. The Distributor is
required to advise the Fund promptly of all purchase orders and cause
payments for shares of Common Stock to be delivered promptly to the Fund.
Merrill Lynch charges its customers a processing fee (presently, $4.85) to
confirm a purchase of shares by such customers. Purchases directly through
the Fund's Transfer Agent are not subject to the processing fee.
The Distributor compensates Merrill Lynch and other selected dealers at
a rate of (3.0%) of amounts subscribed for during the subscription period or
purchased during the continuous offering. If the shares remain outstanding
after one year from the date of their original purchase, the Distributor will
compensate Merrill Lynch and such dealers at an annual rate equal to (0.25%)
of the value of Fund shares sold by Merrill Lynch and such dealers and
remaining outstanding. These amounts do not represent an expense to the Fund
and its shareholders since the payments made by the Distributor will be made
from its own assets, which may include amounts received by the Distributor as
early withdrawal charges. See "Early Withdrawal Charge." The compensation
paid to selected dealers and the Distributor, including the compensation paid
at the time of purchase, the quarterly payments mentioned above and the early
withdrawal charge, if any, will not in the aggregate exceed the applicable
limit (presently, 8%), as determined from time to time by the National
Association of Securities Dealers, Inc. ("NASD").
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholder's name will be opened
automatically, without charge, at the Fund's transfer agent, dividend
disbursing agent and shareholder servicing agent. Shareholders should be
aware that it will not be possible to transfer their shares from Merrill
Lynch to another brokerage firm or financial institution. Shareholders
interested in transferring their brokerage accounts from Merrill Lynch and
who do not wish to have an account maintained for such shares at the Fund's
transfer agent must tender the shares for repurchase by the Fund as described
under "Tender Offers" so that the cash proceeds can be transferred to the
account at the new firm.
TENDER OFFERS
In recognition of the possibility that a secondary market for the Fund's
shares will not exist, the Fund may take actions which will provide liquidity
to shareholders. The Fund may from time to time make offers to purchase its
shares of Common Stock from all beneficial holders of the Fund's Common Stock
at a price per share equal to the net asset value per share of the Common
Stock determined at the close of business on the day an offer terminates
("Tender Offer"). The Board of Directors presently intends to make Tender
Offers on a quarterly basis, commencing with the second quarter of Fund
operations. There can be no assurance, however, that the Board of Directors
will decide to undertake the making of a Tender Offer. Subject to the Fund's
investment restriction with respect to borrowings, the Fund may borrow money
to finance the repurchase of shares pursuant to any Tender Offers. See
"Investment Restrictions."
The Fund expects that ordinarily there will be no secondary market for
the Fund's Common Stock and that periodic tenders will be the only source of
liquidity for Fund shareholders. Nevertheless, if a secondary market
develops for the Common Stock of the Fund, the market price of the shares may
vary from net asset value from time to time. Such variance may be affected
by, among other factors, relative demand and supply of shares and the
performance of the Fund, especially as it affects the yield on and net asset
value of the Common Stock of the Fund. A Tender Offer for shares of Common
Stock of the Fund at net asset value is expected to reduce any spread between
net asset value and market price that may otherwise develop. However, there
can be no assurance that such action would result in the Fund's Common Stock
trading at a price which equals or approximates net asset value.
Although the Board of Directors believes that the Tender Offers
generally would be beneficial to the Fund's holders of Common Stock, the
acquisition of shares of Common Stock by the Fund will decrease the total
assets of the Fund and therefore have the likely effect of increasing the
Fund's expense ratio. Furthermore, if the Fund borrows to finance the making
of Tender Offers, interest on such borrowing will reduce the Fund's net
investment income.
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It is the Board's announced policy, which may be changed by the Board,
not to purchase shares pursuant to a Tender Offer if (1) such purchases would
impair the Fund's status as a regulated investment company under the Code
(which would make the Fund a taxable entity, causing the Fund's income to be
taxed at the corporate level in addition to the taxation of shareholders who
receive dividends from the Fund); (2) the Fund would not be able to liquidate
portfolio securities in a manner which is orderly and consistent with the
Fund's investment objective and policies in order to purchase Common Stock
tendered pursuant to the Tender Offer; or (3) there is, in the Board's
judgment, any (a) legal action or proceeding instituted or threatened
challenging the Tender Offer or otherwise materially adversely affecting the
Fund, (b) declaration of banking moratorium by Federal or state authorities
or any suspension of payment by banks in the United States or New York State,
which is material to the Fund, (c) limitation imposed by Federal or state
authorities on the extension of credit by lending institutions, (d)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States which is material
to the Fund, or (e) other event or condition which would have a material
adverse effect on the Fund or its shareholders if shares of Common Stock
tendered pursuant to the Tender Offer were purchased. Thus, there can be no
assurance that the Board will proceed with any Tender Offer. The Board of
Directors may modify these conditions in light of circumstances existing at
the time. If the Board of Directors determines to purchase the Fund's shares
of Common Stock pursuant to a Tender offer, such purchases could
significantly reduce the asset coverage of any borrowing or outstanding
senior securities, including any preferred stock. The Fund may not purchase
shares of Common Stock to the extent such purchases would result in the asset
coverage with respect to such borrowing or senior securities, including any
preferred stock, being reduced below the asset coverage requirement set forth
in the 1940 Act or, with respect to preferred stock, the asset coverage
requirements of any nationally recognized statistical rating agency rating
the preferred stock. Accordingly, in order to purchase all shares of Common
Stock tendered, the Fund may have to repay all or part of any then
outstanding borrowing or redeem all or part of any then outstanding senior
securities, including any preferred stock, to maintain the required asset
coverage. See "Other Investment Policies--Leverage." In addition, the
amount of shares of Common Stock for which the Fund makes any particular
Tender Offer may be limited for the reasons set forth above or in respect of
other concerns related to liquidity of the Fund's portfolio.
The Fund intends to seek an exemption from the Securities and Exchange
Commission relating to Tender Offers which will include representations by
the Fund that no secondary market for shares of the Fund's Common Stock is
expected to develop. If issued, the Fund expects that the exemption will be
conditioned on the absence of a secondary market. In the event that
circumstances arise under which the Fund does not conduct the Tender Offers
regularly, the Board of Directors would consider alternative means of
providing liquidity for holders of Common Stock. Such action would include
an evaluation of any secondary market that then existed and a determination
of whether such market provided liquidity for holders of Common Stock. If
the Board of Directors determines that such market, if any, fails to provide
liquidity for the holders of Common Stock, the Board expects that it will
consider all then available alternative to provide such liquidity. Among the
alternatives which the Board of Directors may consider is the listing of the
Fund's Common shares on a major domestic stock exchange or on the NASDAQ
National Market System in order to provide such liquidity. The Board of
Directors also may consider causing the Fund to repurchase its shares from
time to time in open-market or private transactions when it can do so on
terms that represent a favorable investment opportunity. In any event, the
Board of Directors expects it will cause the Fund to take whatever action it
deems necessary or appropriate to provide liquidity for the holders of Common
Stock in light of the facts and circumstances existing at such time.
To consummate a Tender Offer in order to repurchase its shares of Common
Stock, the Fund may be required to liquidate portfolio securities, and
realize gains or losses, at a time when the Investment Adviser would
otherwise consider it disadvantageous to do so. In such event gains may be
realized on securities held for less than three months. In order to qualify
as a regulated investment company under the Code, the Fund must limit such
gains and, accordingly, the amount of gain that the Fund could realize in the
ordinary course of its portfolio management from sales of other securities
held for less than three months would be reduced. This may adversely affect
the Fund's yield. See "Taxes."
Each Tender Offer will be made and shareholders notified in accordance
with the requirements of the Securities Exchange Act of 1934 and the 1940
Act, either by publication or mailing or both. The offering documents will
contain such information as is prescribed by such laws and the rules and
regulations promulgated thereunder. The repurchase of tendered shares by the
Fund is a taxable event. See "Taxes." The Fund will pay all costs and
expenses associated with the making of any Tender Offer. An Early Withdrawal
Charge will be imposed on most shares accepted for tender which have been
held for less than three years. See "Early Withdrawal Charge." In addition,
Merrill Lynch charges its customers a processing fee (presently, $4.85) to
confirm a repurchase of shares from such customers pursuant to a Tender
Offer. Tenders made directly through the Fund's Transfer Agent are not
subject to the processing fee.
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EARLY WITHDRAWAL CHARGE
An Early Withdrawal Charge to recover distribution expenses incurred by
the Distributor will be charged against the shareholder's investment account
and paid to the Distributor in connection with most shares of Common Stock
held for less than three years which are accepted by the Fund for repurchase
pursuant to a Tender Offer in the manner described below. The Early
Withdrawal Charge will be imposed on those shares of Common Stock accepted
for tender based on an amount equal to the lesser of the then current net
asset value of the shares of Common Stock or the cost of the shares of Common
Stock being tendered. Accordingly, the Early Withdrawal Charge is not
imposed on increases in the net asset value above the initial purchase price.
In addition, the Early Withdrawal Charge is not imposed on shares derived
from reinvestments of dividends or capital gains distributions. In
determining whether an Early Withdrawal Charge is payable, it is assumed that
the acceptance of an offer to repurchase pursuant to a Tender Offer would be
made from the earliest purchase of shares of Common Stock. The Early
Withdrawal Charge imposed will vary depending on the length of time the
Common Stock has been owned since purchase (separate purchases shall not be
aggregated for these purposes), as set forth in the following table:
Year of Repurchase Early
After Purchase Withdrawal Charge
First . . . . . . . . . . . . . . . . . . . . . .
Second . . . . . . . . . . . . . . . . . . . . . 2.0%
Third . . . . . . . . . . . . . . . . . . . . . . 1.0%
Fourth and following . . . . . . . . . . . . . . 0%
In determining whether an Early Withdrawal Charge is applicable to a
tender of shares of Common Stock, the calculation will be determined in the
manner that results in the lowest possible amount being charged. Therefore,
it will be assumed that the tender is first of shares of Common Stock held
for over three years and shares of Common Stock acquired pursuant to
reinvestment of dividends or distributions and then of shares of Common Stock
held longest during the three-year period. The Early Withdrawal Charge will
not be applied to dollar amounts representing an increase in the net asset
value since the time of purchase.
Example:
Assume an investor purchased 1,000 shares of Common Stock (at a cost of
$10,000) and in the second year after purchase, the net asset value per share
is $12.00 and, during such time, the investor has acquired 100 additional
shares of Common Stock upon dividend reinvestment. If at such time the
investor makes his first redemption of 500 shares of Common Stock (proceeds
of $6,000), 100 shares will not be subject to the Early Withdrawal Charge
because of dividend reinvestment. With respect to the remaining 400 shares
of Common Stock, the Early Withdrawal Charge is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2.00 per
share. Therefore, $4,000 of the $6,000 redemption proceeds will be charged
at a rate of 2.0% (the applicable rate in the second year after purchase).
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations during the last five years are set forth below. Unless otherwise
noted, the address of each Director and executive officer is 800 Scudders
Mill Road, Plainsboro, New Jersey 08536.
ARTHUR ZEIKEL--President and Director(1)(2)--President, Director and
Chief Investment Officer of the Investment Adviser and Merrill Lynch Asset
Management, L.P. ("MLAM"); President and Director of Princeton Services, Inc.
since 1993; Executive Vice President of Merrill Lynch & Co., Inc. since 1990;
Executive Vice President of Merrill Lynch since 1990 and a Senior Vice
President thereof from 1985 to 1990; Director of the Distributor.
(Other Directors to come)
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President
of the Investment Adviser and MLAM since 1983; President of the Distributor
since 1986 and Director thereof since 1991.
VINCENT R. GIORDANO--Vice President(1)(2)--Senior Vice President of the
InvestmentAdviser and MLAM since1984; Vice Presidentof MLAM from1980 to 1984.
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KENNETH A. JACOB--Vice President(1)(2)--Vice President of MLAM since
1984; employed by MLAM since 1978.
GERALD M. RICHARD--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and MLAM since 1984; Treasurer of the Distributor
since 1984 and Vice President since 1981.
MARK B. GOLDFUS--Secretary(1)(2)--Vice President of the Investment
Adviser and MLAM since 1985.
______________
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee, officer or member of
the advisory board of one or more investment companies for which the
Investment Adviser or MLAM acts as investment adviser.
The Fund pays each Director not affiliated with the Investment Adviser
an annual fee of $ per year plus $ per meeting attended, together with
such Director's actual out-of-pocket expenses relating to attendance at
meetings. The Fund also compensates members of its audit committee, which
consists of all of the Directors not affiliated with the Investment Adviser.
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM, which is owned and
controlled by Merrill Lynch & Co., Inc. The Investment Adviser will provide
the Fund with investment advisory and management 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 May 31, 1994, the Investment Adviser and MLAM had a total of
approximately $163.3 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 Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of
the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the
Investment Adviser, subject to review by the Board of Directors.
The Investment Adviser provides the portfolio management for the Fund.
Such portfolio management will consider analyses from various sources
(including brokerage firms with which the Fund does business), make the
necessary investment decisions, and place orders for transactions
accordingly. The Investment Adviser will also be responsible for the
performance of certain administrative and management services for the Fund.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of ____
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, minus the sum of accrued liabilities of the
Fund and accumulated dividends on the shares of preferred stock). 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 the Fund for each
week during the month. The assets for each weekly period are determined by
averaging the net assets at the last business day of a week with the net
assets at the last business day of the prior week.
Under the terms of an administration agreement with the Fund (the
"Administration Agreement"), the Investment Adviser also performs or arranges
for the performance of the administrative services (i.e., services other than
investment advice and related portfolio activities) necessary for the
operation of the Fund, including paying all compensation of and furnishing
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well
as the compensation of all Directors of the Fund who are affiliated persons
of the Investment Adviser or any of its affiliates. The Fund pays all other
expenses incurred in the operation of the Fund, including, among other
things, expenses for legal and auditing services, taxes, costs of printing
proxies, listing fees, if any, stock certificates and shareholder reports,
charges of the Custodian and the Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent, expenses of registering the shares under
Federal and state securities laws, fees and expenses with respect to any
issuance of preferred shares or any borrowing, Securities and Exchange
Commission fees, fees and expenses of unaffiliated Directors, accounting and
pricing costs, insurance, interest, brokerage
23
<PAGE>
costs, litigation and other extraordinary or non-recurring expenses, mailing
and other expenses properly payable by the Fund. Accounting services are
provided to the Fund by the Investment Adviser, and the Fund reimburses the
Investment Adviser for its costs in connection with such services.
For the administrative services rendered to the Fund and the facilities
furnished, the Fund pays the Investment Adviser a monthly fee at an annual
rate of ____ of 1% of the Fund's average daily net assets determined in the
same manner as the fee payable by the Fund under the Investment Advisory
Agreement. The combined advisory and administration fees are greater than
the advisory fees paid by most funds, but are similar in amount to the fees
paid by other continuously offered, closed-end funds.
Certain states impose limitations on the expenses of the Fund.
California's limitations require that the Investment Adviser reimburse the
Fund in an amount necessary to prevent the ordinary operating expenses of the
Fund (excluding interest, taxes, distribution fees, brokerage fees and
commissions and extraordinary charges such as litigation costs) from
exceeding 2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the next $70 million of average daily net assets and 1.5% of the
remaining average daily net assets. Under Ohio's limitations, the Investment
Adviser must reimburse the Fund in an amount necessary to prevent the Fund's
aggregate annual expenses (subject to the exclusions set forth above with the
exception of distribution fees) from exceeding 2.0% of the Fund's average
daily net assets. The Investment Adviser's obligation to reimburse the Fund
is limited to the amount of the investment advisory fee. No fee payment will
be made to the Investment Adviser during any fiscal year which will cause
such expenses to exceed the most restrictive expense limitation applicable at
the time of such payment.
Unless earlier terminated as described below, the Investment Advisory
and Administrative Agreements will remain in effect until _________, 1996 and
from year to year thereafter if approved annually (a) by the Board of
Directors of the Fund or by a majority of the outstanding shares of the Fund
and (b) by a majority of the Directors who are not parties to such contracts
or interested persons (as defined in the 1940 Act) of any such party. Such
contracts are not assignable and may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of
the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliate act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for advisory clients
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Investment Adviser or its affiliate
during the same period may increase the demand for securities being purchased
or the supply of securities being sold, there may be an adverse effect on
price.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), which is a wholly-owned subsidiary of Merrill Lynch & Co., Inc.,
acts as the Fund's transfer agent for the Common Stock pursuant to a transfer
agency, dividend disbursing agency and shareholder servicing agency agreement
(the Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement,
the Transfer Agent is responsible for the issuance, transfer and tender of
shares of Common Stock and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Fund pays the
Transfer Agent an annual fee of ($12.00) per shareholder account, and the
Transfer Agent is entitled to certain nominal miscellaneous charges and
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund,
the Investment Adviser is primarily responsible for the execution of the
Fund's portfolio transactions. In executing such transactions, the
Investment Adviser seeks to obtain the best results for the Fund, taking into
account such factors as price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved and the firm's risk in positioning a block of
securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay the lowest
commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms which provided supplemental
investment research to
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<PAGE>
the Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment
Adviser under the Investment Advisory Agreement, and the expenses of the
Investment Adviser will not necessarily be reduced as a result of the receipt
of such supplemental information.
The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.
Under the 1940 Act, except as permitted by exemptive order, persons
affiliated with the Fund are prohibited from dealing with the Fund as
principal in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own account, the Fund will not deal with affiliated
persons, including Merrill Lynch and its affiliates, in connection with such
transactions except that, pursuant to an exemptive order obtained by the
Investment Adviser, the Fund may engage in principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities. See
"Investment Restrictions." An affiliated person of the Fund may serve as its
broker in over-the-counter transactions conducted on an agency basis.
The Fund may also make loans to tax-exempt borrowers in individually
negotiated transactions with the borrower. Because an active trading market
may not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons,
appears advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances after
the Fund's portfolio is invested in accordance with its investment objective,
will be less than 100%. The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Fund during the particular fiscal year. For purposes
of determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends
from such net investment income will be declared and paid monthly to holders
of Common Stock. It is expected that the Fund will commence paying dividends
to holders of Common Stock within approximately 90 days of the date of this
Prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of Common Stock normally will consist of
substantially all net investment income remaining after the payment of
dividends on the preferred stock (including any Additional Distribution).
All net realized long- or short-term capital gains, if any, will be
distributed at least annually to holders of Common Stock and, after issuance
of the preferred stock, pro rata to holders of Common Stock and preferred
stock. While any shares of preferred stock are outstanding, the Fund may not
declare any cash dividend or other distribution on its Common Stock, unless
at the time of such declaration, (1) all accumulated preferred stock
dividends, including any Additional Distribution, have been paid, and (2) the
net asset value of the Fund's portfolio (determined after deducting the
amount of such dividend or other distribution) is at least 200% of the
liquidation value of the outstanding preferred stock (expected to equal the
original purchase price of the outstanding shares of preferred stock plus any
accumulated and unpaid dividends thereon and any accumulated but unpaid
Additional Distribution). This limitation on the Fund's ability to make
distributions on its Common Stock could under certain circumstances impair
the ability of the Fund to maintain its qualification for taxation as a
regulated investment company. See "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning
the manner in which dividends and distributions to holders of Common Stock
may be automatically reinvested in shares of Common Stock of the Fund.
Dividends and distributions may be taxable to shareholders under certain
circumstances as discussed below, whether they are reinvested in shares of
the Fund or received in cash.
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<PAGE>
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, in any taxable
year in which it distributes at least 90% of its taxable net income and 90%
of its tax-exempt net income (see below), the Fund (but not its shareholders)
will not be subject to Federal income tax to the extent that it distributes
its net investment income and net realized capital gains. The Fund intends
to distribute substantially all of such income.
The Fund intends to qualify to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the
close of each quarter of its taxable year, at least 50% of the value of its
total assets consists of obligations exempt from Federal income tax ("tax-
exempt obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Fund which
are attributable to interest on tax-exempt obligations and designated by the
Fund as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. Exempt-
interest dividends may be treated by shareholders as items of interest
excludable from their gross income under Code Section 103(a). Exempt-
interest dividends are included, however, in determining what portion, if
any, of a person's Social Security and railroad retirement benefits are
subject to Federal income taxes. Interest on indebtedness incurred or
continued to purchase or carry fund shares is not deductible for Federal
income tax purposes. Each shareholder is advised to consult a tax adviser
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if such shareholder would be treated as a "substantial
user" or "related person" under Code Section 147(a) with respect to property
financed with the proceeds of an issue of "industrial development bonds" or
"private activity bonds," if any, held by the Fund.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains
over net long-term capital losses ("ordinary income dividends"), such
distributions will be considered ordinary income for Federal income tax
purposes. Such distributions are not eligible for the dividends-received
deduction for corporations. Distributions, if any, of net long-term capital
gains from the sale of securities or from certain transactions in futures or
options ("capital gain dividends") are taxable as long-term capital gains for
Federal income tax purposes, regardless of the length of time the shareholder
has owned Fund shares. Under the Revenue Reconciliation Act of 1993, all or
a portion of the Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for
six months or less will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder. In addition, such
loss will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. If the Fund pays a dividend in January which
was declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend or
distribution will be treated for tax purposes as being paid by the RIC and
received by its shareholders on December 31 of the year in which such
dividend was declared.
The Internal Revenue Service has taken the position in a revenue ruling
that if a RIC has two classes of shares, it may designate distributions made
to each class in any year as consisting of no more than such class's
proportionate share of particular types of income, including exempt interest
and net long-term capital gains. A class's proportionate share of a
particular type of income is determined according to the percentage of total
dividends paid by the RIC during such year that was paid to such class.
Consequently, when both Common Stock and preferred stock are oustanding, the
Fund intends to designate distributions made to the classes as consisting of
particular types of income in accordance with the classes' proportionate
shares of such income. Thus, the Fund will designate dividends paid as
exempt-interest dividends in a manner that allocates such dividends between
the holders of Common Stock and preferred stock in proportion to the total
dividends paid to each class during the taxable year, or otherwise as
required by applicable law. Capital gain dividends will similarly be
allocated between the two classes in proportion to the total dividends paid
to each class during the taxable year, or otherwise as required by applicable
law. When capital gain or other taxable income is allocated to holders of
preferred stock pursuant to the allocation rules described above, the terms
of the preferred stock may require the Fund to make an additional
distribution to or otherwise compensate such holders for the tax liability
resulting from such allocation.
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The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year-end, plus certain
undistributed amounts from previous years. The required distributions,
however, are based only on the taxable income of a RIC. The excise tax,
therefore, generally will not apply to the tax-exempt income of a RIC, such
as the Fund, that pays exempt-interest dividends. While the Fund intends to
distribute its income and capital gains in the manner necessary to avoid the
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In such event, the Fund will be
liable for the tax only on the amount by which it does not meet the foregoing
distribution requirements.
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. Private activity bonds are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" which could subject investors in
such bonds, including shareholders of the Fund, to an alternative minimum
tax. The Fund intends to purchase such "private activity bonds" and will
report to shareholders within 60 days after its taxable year-end the portion
of its dividends declared during the year which constitutes an item of tax
preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to 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 Fund will be included in adjusted current
earnings, a corporate shareholder may be required to pay an alternative
minimum tax on exempt-interest dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax
brackets of 36% and 39.6% for individuals and has created a graduated
structure of 26% and 28% for the alternative minimum tax applicable to
individual taxpayers. These rate increases may affect an individual
investor's after-tax return from an investment in the Fund as compared with
such investor's return from taxable investments.
If at any time when shares of preferred stock are outstanding the Fund
does not meet the asset coverage requirements of the 1940 Act, the Fund will
be required to suspend distributions to holders of Common Stock until the
asset coverage is restored. See "Dividends and Distributions." This may
prevent the Fund from distributing at least 90% of its net income, and may
therefore jeopardize the Fund's qualification for taxation as a RIC. Upon
any failure to meet the asset coverage requirements of the 1940 Act, the Fund
may, in its sole discretion, redeem shares of preferred stock in order to
maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a RIC.
There can be no assurance, however, that any such action would achieve such
objectives.
As noted above, the Fund must distribute annually at least 90% of its
net taxable and tax-exempt interest income. A distribution will only be
counted for this purpose if it qualifies for the dividends-paid deduction
under the Code. Some types of preferred stock that the Fund currently
contemplates issuing may raise an issue as to whether distributions on such
preferred stock are "preferential" under the Code and therefore not eligible
for the dividends-paid deduction. The Fund intends to issue preferred stock
that counsel advises will not result in the payment of a preferential
dividend and may seek a private letter ruling from the Internal Revenue
Service to that effect. If the Fund ultimately relies solely on a legal
opinion when it issues such preferred stock, there is no assurance that the
Internal Revenue Service would agree that dividends on the preferred stock
are not preferential. If the Internal Revenue Service successfully
disallowed the dividends-paid deduction for dividends on the preferred stock,
the Fund could be disqualified as a RIC. In this case, dividends on the
Common Stock would not be exempt from Federal income taxes. Additionally,
the Fund would be subject to the alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend
reinvestment plan will generally be excluded from gross income to the extent
that the cash amount reinvested would be excluded from gross income. If,
when the Fund's shares are trading at a premium over net asset value, the
Fund issues shares pursuant to the dividend reinvestment plan which have a
greater fair market value than the amount of cash reinvested, it is possible
that all or a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable distribution.
If the discount is viewed as a taxable distribution, it is also possible that
the taxable character of this discount would be allocable to all the
shareholders, including shareholders who do not participate in the dividend
reinvestment plan. Thus, shareholders who do not participate in the dividend
reinvestment plan might be required to report as ordinary income a portion of
their distributions equal to their allocable share of the discount.
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The foregoing description relates only to Federal income taxes;
investors should consult with their tax advisers as to the availability of
any exemptions from state or local taxes.
Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on certain ordinary income and dividends, capital gain
dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Fund or who, to
the Fund's knowledge, have furnished an incorrect number. When establishing
an account, an investor must certify under penalty of perjury that such
number is correct and that such investor is not otherwise subject to backup
withholding.
Ordinary income dividends paid by the Fund to shareholders who are non-
resident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
The Code provides that every shareholder required to file a tax return
must include for information purposes on such return the amount of exempt-
interest dividends received from all sources (including the Fund) during the
taxable year.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative minimum tax net operating loss deduction and the
deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of
alternative minimum taxable income in excess of $2,000,000. The
Environmental Tax is imposed for taxable years beginning after December 31,
1986, and before January 1, 1996. The Environmental Tax is 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 a RIC, such as the Fund, is not subject to
the Environmental Tax. However, exempt-interest dividends paid by the Fund
that create alternative minimum tax preferences for corporate shareholders
(as described above) may subject corporate shareholders of the Fund to the
Environmental Tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put
options on such financial futures contracts. In general, unless an election
is available to the Fund or an exception applies, such options and financial
futures contracts that are "Section 1256 contracts" will be "marked to
market" for Federal income tax purposes at the end of each taxable year,
i.e., each option or financial futures contract will be treated as sold for
its fair market value on the last day of the taxable year and any gain or
loss attributable to Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of
distributions to shareholders.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in financial futures contracts and
related options. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing
transactions in financial futures contracts or related options.
One of the requirements for qualification as a RIC is that less than 30%
of the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or financial futures contract.
STATE AND LOCAL TAXES
The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in an exemption for such dividends under the income or
other tax laws of any state or local taxing authority. Shareholders are
advised to consult their own tax advisers concerning state and local tax
matters.
______________________________
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The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the
Treasury Regulations are subject to change by legislative or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions on the Common Stock of the
Fund are reinvested automatically in full and fractional shares of Common
Stock of the Fund at the net asset value per share next determined on the
payable date of such dividend or distribution. A shareholder may at any
time, by request to his Merrill Lynch financial consultant or by written
notification to the Transfer Agent, elect to have subsequent dividends or
capital gains distributions, or both, paid in cash, rather than reinvested,
in which event payment will be mailed on or about the payment date.
The automatic reinvestment of dividends and distributions will not
relieve participants of any Federal income tax that may be payable (or
required to be withheld) on such dividends or distributions. See "Taxes".
NET ASSET VALUE
Net asset value per share of Common Stock 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 Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The Municipal Bonds in which the Fund invests are traded primarily in
the over-the-counter markets. In determining net asset value, the Fund
utilizes the valuations of portfolio securities furnished by a pricing
service approved by the Board of Directors. The pricing service typically
values portfolio securities at the bid price of 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 the Fund under the general supervision of the
Board of Directors. The Board of Directors has determined in good faith that
the use of a pricing service is a fair method of determining the valuation of
portfolio securities. Obligations with remaining maturities of 60 days or
less are valued at amortized cost, unless this method no longer produces fair
valuations. Positions in futures contracts are valued at closing prices for
such contracts established by the exchange on which they are traded, or if
market quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Directors.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify or
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption. Within approximately three months after completion of the
offering of Common Stock described herein, the Fund intends to reclassify an
amount of unissued Common Stock as preferred stock and at that time to offer
shares of preferred stock representing up to approximately 35% of the Fund's
capital.
COMMON STOCK
Shares of Common Stock, when issued and outstanding, will be fully paid
and non-assessable. Shareholders are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders upon
liquidation of the Fund. Shareholders are entitled to one vote for each
share held.
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So long as any shares of the Fund's preferred stock are outstanding,
holders of Common Stock will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on
preferred stock have been paid and unless asset coverage (as defined in the
1940 Act) with respect to preferred stock would be at least 200% after giving
effect to such distributions. See "Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
PREFERRED STOCK
It is anticipated that the Fund's shares of preferred stock will be
issued in one or more series, with rights as determined by the Board of
Directors, by action of the Board of Directors without the approval of the
holders of Common Stock. Under the 1940 Act, the Fund is permitted to have
outstanding more than one series of preferred stock so long as no single
series has a priority over another series as to the distributions of assets
of the Fund or the payment of dividends. Holders of Common Stock have no
preemptive right to purchase any shares of preferred stock that might be
issued. It is anticipated that the net asset value per share of the
preferred stock will equal its original purchase price per share plus
accumulated dividends per share.
The Fund's Board of Directors has indicated its intention to authorize
an offering of shares of preferred stock (representing up to approximately
35% of the Fund's capital) within approximately three months after completion
of the offering of Common Stock, subject to market conditions and to the
Board's continuing to believe that leveraging the Fund's capital structure
through the issuance of preferred stock is likely to achieve the benefits to
the holders of Common Stock described in the Prospectus. Although the terms
of the preferred stock, including its dividend rate, voting rights,
liquidation preference and redemption provisions will be determined by the
Board of Directors (subject to applicable law and the Fund's Articles of
Incorporation), the initial series of preferred stock will be structured to
carry either a relatively short-term dividend rate, in which case periodic
redetermination of the dividend rate will be made at relatively short
intervals (generally seven or 28 days), or a medium-term dividend rate, in
which case periodic redetermination of the dividend rate will be made at
intervals of up to five years. In either case, such redetermination of the
dividend rate will be made through an auction or remarketing procedure.
Additionally, under certain circumstances, when the Fund is required to
allocate taxable income to holders of the preferred stock, it is anticipated
that the terms of the preferred stock will require the Fund to make an
Additional Distribution (as defined in "Special Leverage Considerations and
Risks--Effects of Leverage") to such holders. The Board also has indicated
that it is likely that the liquidation preference, voting rights and
redemption provisions of the preferred stock will be as stated below. The
Fund's Articles of Incorporation, as amended, together with any Articles
Supplementary, is referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of Common Stock. After payment of
the full amount of the liquidating distribution to which they are entitled,
the preferred stockholders will not be entitled to any further participation
in any distribution of assets by the Fund. A consolidation or merger of the
Fund with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Fund will not be deemed to be a
liquidation, dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this Prospectus and
except as otherwise required by applicable law, holders of shares of
preferred stock will have equal voting rights with holders of shares of
Common Stock (one vote per share) and will vote together with holders of
Common Stock as a single class.
In connection with the election of the Fund's directors, holders of
shares of preferred stock, voting as a separate class, will be entitled to
elect two of the Fund's directors, and the remaining directors will be
elected by all holders of capital stock, voting as a single class. So long
as any preferred stock is outstanding, the Fund will have not less than five
directors. If at any time dividends on shares of the Fund's preferred stock
shall be unpaid in an amount equal to two full years' dividends thereon, the
holders of all outstanding shares of preferred stock, voting as a separate
class, will be entitled to elect a majority of the Fund's directors until all
dividends in default have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding
shares of the preferred stock, voting as a separate class, will be required
to (i) authorize, create or issue, or increase the authorized or issued
amount of, any class or series of stock ranking prior to or on a parity with
any series of preferred stock with respect to payment of dividends
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or the distribution of assets on liquidation, or increase the authorized
amount of preferred stock or (ii) amend, alter or repeal the provisions of
the Charter, whether by merger, consolidation or otherwise, so as to
adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.
Redemption Provisions. It is anticipated that shares of preferred stock
generally will be redeemable at the option of the Fund at a price equal to
their liquidation preference plus accumulated but unpaid dividends to the
date of redemption plus, under certain circumstances, a redemption premium.
Shares of preferred stock will also be subject to mandatory redemption at a
price equal to their liquidation preference plus accumulated but unpaid
dividends to the date of redemption upon the occurrence of certain specified
events, such as the failure of the Fund to maintain asset coverage
requirements for the preferred stock specified by the rating agencies which
issue ratings on the preferred stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors
and could have the effect of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund. A director may be
removed from office with or without cause but only by vote of the holders of
at least 66 2/3% of the votes entitled to be voted on the matter. A director
elected by all the holders of capital stock may be removed only by action of
such holders, and a director elected by the holders of preferred stock may be
removed only by action of such holders.
In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66 2/3% of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or
authorize the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations,
(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the
affirmative vote of two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of the Fund's shares of capital stock is required. Following the proposed
issuance of the preferred stock, it is anticipated that the approval,
adoption or authorization of the foregoing would also require the favorable
vote of a majority of the Fund's shares of preferred stock then entitled to
be voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company
would require an amendment to the Fund's Articles of Incorporation. The
amendment would have to be declared advisable by the Board of Directors prior
to its submission to shareholders. Such an amendment would require the
favorable vote of the holders of at least 66 2/3% of the Fund's outstanding
shares of capital stock (including any preferred stock) entitled to be voted
on the matter, voting as a single class (or a majority of such shares if the
amendment was previously approved, adopted or authorized by two-thirds of the
total number of Directors fixed in accordance with the by-laws), and,
assuming preferred stock is issued, the affirmative vote of a majority of
outstanding shares of preferred stock of the Fund, voting as a separate
class. Such a vote also would satisfy a separate requirement in the 1940 Act
that the change be approved by the shareholders. Shareholders of an open-end
investment company may require the company to redeem their shares of common
stock at any time (except in certain circumstances as authorized by or under
the 1940 Act) at their net asset value, less such redemption charge, if any,
as might be in effect at the time of a redemption. All redemptions will be
made in cash. If the Fund is converted to an open-end investment company, if
could be required to liquidate portfolio securities to meet requests for
redemption, and the Common Stock would no longer be listed on a stock
exchange. Conversion to an open-end investment company would also require
redemption of all outstanding shares of preferred stock and would require
changes in certain of the Fund's investment policies and restrictions, such
as those relating to the issuance of senior securities, the borrowing of
money and the purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the
Securities and Exchange Commission for the full text of these provisions.
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PERFORMANCE DATA
From time to time the Fund may include its yield and/or total return on
its Common stock for various specified time periods in advertisements or
information furnished to present or prospective shareholders. The yield of
the Fund refers to the income generated by an investment in the Fund over a
stated period. Yield is calculated by annualizing the distribution over a
stated period and dividing the product by the average per share net value.
The Fund also may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and
any capital gains or losses on portfolio investments over such periods) that
would equate the initial amount invested to the value of such investment at
the end of the period.
The calculation of yield and total return does not reflect the
imposition of any Early Withdrawal Charges or the amount of any shareholder's
tax liability.
Yield and total return figures are based on the Fund's historical
performance and are not intended to indicate further performance. The Fund's
yield is expected to fluctuate, and its total return will vary depending on
market conditions, the Municipal Bonds and other securities comprising the
Fund's portfolio, the Fund's operating expenses and the amount of net
realized and unrealized capital gains or losses during the period.
On occasion, the Fund may compare its yield and tax-equivalent yield to
yield data published by Lipper Analytical Services, Inc. or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News &
World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine
and Fortune Magazine. Yield comparisons should not be considered
representative of the Fund's yield and tax-equivalent yield or relative
performance for any future period.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with
______________________________
________________________.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT
The Transfer Agent for the shares of Common Stock of the Fund is
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida, 32246-6484, a wholly owned subsidiary of Merrill Lynch & Co., Inc.
Shareholder Reports. Only one copy of each shareholder report and
certain shareholder communications will be mailed to each identified
shareholder regardless of the number of accounts such shareholder has. If a
shareholder wishes to receive separate copies of each report and
communication for each of the shareholder's related accounts the shareholder
should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, Florida 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Financial Data Services, Inc. at 800-637-3863.
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LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
will be passed on for the Fund by Brown & Wood, One World Trade Center, New
York, New York 10048-0557. Brown & Wood will rely as to matters of Maryland
law on the opinion of ________________________________.
EXPERTS
____________________, have been selected as the independent auditors of
the Fund. The selection of independent auditors is subject to ratification
by the shareholders of the Fund. The independent auditors are responsible
for auditing the financial statements of the Fund.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
MuniLeverage Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital
of MuniLeverage Fund, Inc. as of __________, 1994. This financial statement
is the responsibility of the Fund's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniLeverage
Fund, Inc. as of ________________, 1994 in conformity with generally accepted
accounting principles.
_________________, 1994
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MUNILEVERAGE FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
___________, 1994
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Prepaid registration fees (Note 1) . . . . . . . . . . . .
Deferred organization expenses (Note 1) . . . . . . . . . $
--------
Total assets . . . . . . . . . . . . . . . . . . . .
LIABILITIES
Accrued expenses (Note 1) . . . . . . . . . . . . . . . .
--------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares authorized;
______ shares issued and outstanding (Note 1) . . . . . $
Paid in Capital in excess of par . . . . . . . . . . . . .
-------
Total Capital--Equivalent to $______ net asset value per share of
common
stock (Note 1) . . . . . . . . . . . . . . . . . . . $
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on
July 13, 1994 as a closed-end, non-diversified management investment company
and has had no operations other than the sale to Fund Asset Management, L.P.
of an aggregate of _______ shares for $_________ on _________, 1994.
Prepaid registration fees are charged to income as the related shares
are issued. Deferred organization costs will be amortized on a straight-line
basis over a five-year period beginning with the commencement of operations
of the Fund.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged Fund Asset Management, L.P. (the "Investment
Adviser") to provide investment advisory and administrative services to the
Fund. The Investment Adviser will receive an annual fee in an amount equal
to 0.__ of 1% of the average weekly net assets of the Fund and an annual fee
for administrative services, in an amount equal to 0.___ of 1% of the average
daily net assets of the Fund.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as
such (and by complying with the applicable provisions of the Internal Revenue
Code of 1986, as amended) will not be subject to Federal income tax on
taxable income (including realized capital gains) that is distributed to
shareholders.
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APPENDIX I
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 payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Con. (...)--Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
statute upon completion of construction or elimination of basis of condition.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes and Variable Rate Demand Obligations: The four ratings
of Moody's for short-term notes and VRDOs are MIG-1/VMIG-1, MIG-2/VMIG-2,
MIG-3/VMIG-3, and MIG-4/VMIG-4; MIG-1/VMIG-1 denotes "best quality, enjoying
strong protection from established cash flows"; MIG-2/VMIG-2 denotes "high
quality" with "ample margins of protection"; MIG-3/VMIG-3 instruments are of
"favorable quality...but lacking the undeniable strength of the preceding
grades"; MIG-4/VMIG-4 instruments are of "adequate quality, carrying specific
risk but having protection...and not distinctly or predominantly
speculative."
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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 with 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 effects 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.
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 to, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
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.
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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.
BB, B, CCC, CC, C--Debt rated "BB", "B", "CCC", "CC" and "C" is
regarded, on balance, as predominately speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest 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 issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or 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
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
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 currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment 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 that 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.
C1--The rating "C1" is reserved for income bonds on which no
interest is being paid.
D--Debt rated "D" is in payment default. The "D" rating category
is used when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into several categories, ranging from
"A-1" for the highest quality obligations to "D" for the lowest. The three
designations in the "A" category are as follows:
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a "+"
designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
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A-3--Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B--Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C--This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category
is used when interest payments or principal payments are not made on the
date due, even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard
& Poor's by the issuer or obtained from other sources it considers reliable.
The ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information.
A Standard & Poor's municipal note rating reflects the liquidity
concerns and market access risks unique to such notes. Notes due in three
years or less will likely receive a note rating. Notes maturing beyond three
years will most likely receive a long-term debt rating. The following
criteria will be used in making that assessment.
Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 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.
DESCRIPTION OF FITCH INVESTORS 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
rating represents Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any
guarantor, as well as the economic and political environment that might
affect the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
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<PAGE>
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving
Stable
Declining
Uncertain
Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
NR indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called
or refinanced and, at Fitch's discretion, when an issuer fails to furnish
proper and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive" indicating a
potential upgrade, "Negative" for potential downgrade, or "Evolving" where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within three to 12 months.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings ("BB" to "C") represent Fitch's assessment of the likelihood of
timely payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the rating
("DDD" to "D") is an assessment of the ultimate recovery value through
reorganization or liquidation. The rating takes into consideration special
features of the issue, its relationship to other obligations of the issuer,
the current and prospective financial condition and operating performance of
the issuer and any guarantor, as well as the economic and political
environment that might affect the issuer's future financial strength.
40
<PAGE>
Bonds 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.
BB--Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of
the obligor. "DDD" represents the highest potential for recovery on these
bonds, and "D" represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH'S INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
41
<PAGE>
<TABLE>
APPENDIX II
TAXABLE EQUIVALENT YIELDS FOR 1994
<CAPTION>
Taxable Income* A Tax-Exempt Yield of
Single Joint 1994 Federal
Return Return Tax Bracket 6.25% 6.50% 6.75% 7.00% 7.25%
is equal to a taxable yield of
<S> <C> <C> <C> <C> <C> <C> <C>
$22,100- $36,900- 28.00% 8.68% 9.03% 9.38% 9.72% 10.07%
$53,500 $89,150
$53,501- $89,151- 31.00% 9.06% 9.42% 9.78% 10.14% 10.51%
$115,000 $140,000
$115,001- $140,001- 36.00% 9.77% 10.16% 10.55%
$250,000 $250,000 10.94% 11.33%
Over Over
$250,000 $250,000 39.60% 10.35% 10.76% 11.18% 11.59% 12.00%
</TABLE>
____________
* An investor's marginal tax rates may exceed the rates shown in the
above table due to the reduction, or possible elimination, of the
personal exemption deduction for high-income taxpayers and an overall
limit on itemized deductions. Income also may be subject to certain
state and local taxes. For investors who pay alternative minimum tax,
tax-exempt yields may be equivalent to lower taxable yields than those
shown above. The tax rates shown above do not apply to corporate
taxpayers. The tax characteristics of the Fund are described more
fully elsewhere in this Prospectus. Consult your tax adviser for
further details. This chart is for illustrative purposes only and
cannot be taken as an indication of anticipated Fund performance.
42
<PAGE>
MUNILEVERAGE FUND, INC. AUTHORIZATION FORM
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase ____________ shares of MuniLeverage
Fund, Inc. and establish an Investment Account as described in the
Prospectus.
Basis for establishing an Investment Account:
I enclose a check for $____________ payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000). (Subsequent investments
$50 or more). I understand that this purchase will be executed at the
applicable offering price next to be determined after this Application is
received by you.
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Distribution Elect / / reinvest dividends Elect / / reinvest capital gains
Options One / / Pay dividends in One / / pay capital gains in
cash cash
IF NO ELECTION IS MADE, DIVIDENDS AND CAPITAL GAINS WILL BE
-------------------------
REINVESTED AUTOMATICALLY AT NET ASSET VALUE WITHOUT SALES CHARGE.
------------------------
(PLEASE PRINT)
Name ------------------------------- --------------
First Name Initial Last Name Social Security No.
or Taxpayer Identification
No.
Name of Co-Owner (if any)
--------------------------------
First Name Initial Last Name
Address ------------------------------ ---------------- 19--
------------------------------ Date
(Zip Code)
Under penalty of perjury, I certify (1) that the number set forth above
is my correct Social Security No. or Taxpayer Identification No. and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or
the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE
BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-
REPORTING, AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP
WITHHOLDING HAS BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING
OF THIS CERTIFICATION TO OTHER MERRILL LYNCH-SPONSORED INVESTMENT COMPANIES.
Signature of -------------- Signature of (if any) ----------------------
Owner Co-Owner
In the case of co-owners, a joint tenancy with right
of survivorship will be presumed unless otherwise specified.
2. FOR DEALER ONLY
Branch Office, Address, We guarantee the Shareholder's Signature.
Stamp
----------------------------------------
Dealer Name and Address
By:-------------------------------------
Authorized Signature of Dealer
------ -------- ---------------
Branch Code F/C No. F/C Last Name
-----------------------
Dealer's Customer A/C No.
This form when completed should be mailed to:
MuniLeverage Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, FL 32232-5289
43
<PAGE>
No person has been authorized to
give any information or to make Prospectus
any representations not contained
in this Prospectus and, if given
or made, such information or
representation must not be relied
upon as having been authorized.
This Prospectus does not
constitute an offering of any (Artwork)
securities other than the
registered securities to which it
relates or an offer to any person
in any State or jurisdiction of
the United States or any country
where such offer would be
unlawful.
______________
TABLE OF CONTENTS
Page MUNILEVERAGE
--- FUND, INC.
-
Prospectus Summary . . . . . 3
Fee Table . . . . . . . . . . 9
The Fund . . . . . . . . . 10
Use of Proceeds . . . . . . 10
Investment Objective and
Policies . . . . . . . . 10
Special Leverage Considerations
and Risks . . . . . . . . 16
Investment Restrictions . . 18
Purchase of Shares . . . . 19
Tender Offers . . . . . . . 20
Early Withdrawal Charge . . 22
Directors and Officers . . 22
Investment Advisory and
Administrative Arrangements 23
Portfolio Transactions . . 24
Dividends and Distributions 25
Taxes . . . . . . . . . . . 26 Shares of Common Stock
Automatic Dividend , 1994
Reinvestment Plan . . . . 29
Net Asset Value . . . . . . 29 Distributor:
Description of Capital Stock 29 Merrill Lynch
Performance Data . . . . . 32 Funds Distributor, Inc.
Custodian . . . . . . . . . 32
Transfer Agent, Dividend This Prospectus should be
Disbursing Agent and retained for future reference.
Shareholder Servicing Agent 32
Legal Opinions . . . . . . 33
Experts . . . . . . . . . . 33
Independent Auditors' Report 34
Statement of Assets,
Liabilities and Capital . 35
Appendix I - Ratings of
Municipal Bonds and
Commercial Paper . . . . 36
Appendix II - Taxable
Equivalent Yields for 1994 42
Authorization Form . . . . 43
Code #
44
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Auditors' Opinion
Statement of Assets, Liabilities and Capital as of
_________, 1994
(2) Exhibits:
(a) --Articles of Incorporation
(b) --By-Laws*
(c) --Not applicable
(d) --Form of specimen certificate for Common Stock*
(e) --Form of Dividend Reinvestment Plan*
(f) --Not applicable
(g)(1)--Form of Investment Advisory Agreement
between the Fund and the Investment Adviser*
(2)--Form of Administration Agreement between the
Fund and the Administrator*
(h)(1)--Form of Distribution Agreement
(2)--Form of Selected Dealer Agreement
(i) --Not applicable
(j) --Custodian Contract between the Fund and
________________*
(k) --Transfer Agency, Dividend Disbursing Agency
and Shareholder Servicing Agency Agreement
between the Fund and ______________*
(l) --Opinion and Consent of Brown & Wood,
counsel to the Fund*
(m) --Not applicable
(n) --Consent of ____________, independent
auditors for the Fund*
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.*
(q) --Not applicable
__________
* To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Registration fees $
Printing (other than stock certificates)
Engraving and printing stock certificates
Fees and expenses of qualifications under state
securities laws (including fees of
counsel).
Legal fees and expenses
Accounting fees and expenses
NASD fees
Miscellaneous
-------
Total $ *
____________
* To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the caption "Investment Advisory
and Management Arrangements" and in Note 1 to the Statement of Assets and
Liabilities is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Fund's By-Laws and the Investment Advisory Agreement filed
as Exhibit (g) provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be provided to directors, officers and controlling persons of
the Fund, pursuant to the foregoing provisions or otherwise, the Fund has
been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Fund of expenses
incurred or paid by a director, officer or controlling person of the Fund in
connection with any successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Fund will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Reference is made to Section 9 of the Distribution Agreement, a form of
which is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser"), acts as
investment adviser for the following registered investment companies: Apex
Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund,
Inc., Financial Institutions Series Trust, Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Institutional Tax-Exempt
Fund, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Multi-
State Limited Maturity Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
2
<PAGE>
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund,
Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Michigan Insured Fund, Inc., MuniVest
New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona
Fund II, Inc., MuniYield California Fund, Inc., MuniYield California Insured
Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida
Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured
Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc.,
MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund,
Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior
High Income Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc. The address
of each of these investment companies is Box 9011, Princeton, New Jersey
08543-9011, except that the address of Merrill Lynch Funds for Institutions
Series and Merrill Lynch Institutional Tax-Exempt Fund is One Financial
Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of the
Investment Adviser and its affiliate, Merrill Lynch Asset Management, L.P.
("MLAM"), also is Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower, World Financial
Center, 250 Vesey Street, New York, New York 10281-1213.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicated each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his own account or in the capacity of
director, officer, employee, partner or trustee. In addition, Mr. Zeikel is
President, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President
of all or substantially all of the investment companies described in the
preceding paragraph and also hold the same positions with all or
substantially all of the investment companies advised by MLAM as they do with
those advised by the Investment Adviser. Messrs. Durnin, Giordano, Harvey,
Hewitt and Monagle are directors or officers of one or more of such
companies.
Officers and Partners of FAM are set forth below as follows:
<TABLE> Other Substantial
Position(s) with the Business, Profession,
Name Investment Adviser Vocation or Employment
<CAPTION>
<S> <C> <C>
ML & Co. . . . . . . . . . . . . . . Limited Partner Financial Services Holding Company
Fund Asset Management, Inc. . . . . . Limited Partner Investment Advisory Services
Princeton Services, Inc.
("Princeton Services") . . . . . . General Partner General Partner of MLAM
Arthur Zeikel . . . . . . . . . . . . President President and Director of MLAM;
President and Director of Princeton
Services; Director of Merrill Lynch
Funds Distributor, Inc. ("MLFD");
Executive Vice President of ML &
Co.; Executive Vice President of
Merrill Lynch
Terry K. Glenn . . . . . . . . . . . Executive Vice President Executive Vice President of MLAM;
and Director Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
President of Princeton
Administrators, L.P., Director of
Financial Data Services, Inc.
Bernard J. Durnin . . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Elizabeth Griffin . . . . . . . . . . Senior Vice President Senior Vice President of MLAM
Norman R. Harvey . . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
N. John Hewitt . . . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Philip L. Kirstein . . . . . . . . . Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM;
Secretary Senior Vice President, General
Counsel, Director of Princeton
Services; Director of MLFD
Ronald M. Kloss . . . . . . . . . . . Senior Vice President Senior Vice President and Controller
and Controller of MLAM; Senior Vice President and
Controller of Princeton Services
3
Joseph T. Monagle . . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Other Substantial
Position(s) with the Business, Profession,
Name Investment Adviser Vocation or Employment
Gerald M. Richard . . . . . . . . . . Senior Vice President and Senior Vice President and Treasurer
Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Richard L. Rufener . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Vice President of MLFD
Ronald L. Welburn . . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Anthony Wiseman . . . . . . . . . . . Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promul-
gated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment
advisor (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and its
custodian and transfer agent.
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
Registrant undertakes:
(1) To file during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
C-4
<PAGE>
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent individually or in the aggregate represent a
fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information
in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein and the offering of such securities at that time shall
be deemed to be the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
C-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW
JERSEY, ON THE 19TH DAY OF JULY, 1994.
MUNILEVERAGE FUND, INC.
(REGISTRANT)
BY: /S/ PHILIP L. KIRSTEIN
----------------------
(PHILIP L. KIRSTEIN, PRESIDENT)
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES PHILIP L.
KIRSTEIN, MARK B. GOLDFUS OR IRA SHAPIRO, 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 IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
/S/ PHILIP L. KIRSTEIN PRESIDENT AND DIRECTOR JULY 19, 1994
- ----------------------
(PHILIP L. KIRSTEIN) (PRINCIPAL EXECUTIVE
OFFICER)
/S/ MARK B. GOLDFUS TREASURER AND DIRECTOR JULY 19, 1994
- --------------------
(MARK B. GOLDFUS) (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
/S/ IRA SHAPIRO DIRECTOR JULY 19, 1994
- ---------------
(IRA SHAPIRO)
C-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Description
- ----------- --------------------
(a) Articles of Incorporation
(h)(1) Form of Distribution Agreement
(h)(2) Form of Selected Dealer Agreement
<PAGE>
ARTICLES OF INCORPORATION
OF
MUNILEVERAGE FUND, INC.
ARTICLE I
THE UNDERSIGNED, ANDREW S. NOVAK, whose post-office address is c\o Brown
& Wood, One World Trade Center, 56th Floor, New York, New York 10048, being
at least eighteen (18) years of age, does hereby act as an incorporator,
under and by virtue of the General Laws of the State of Maryland authorizing
the formation of corporations and with the intention of forming a
corporation.
ARTICLE II
NAME
----
The name of the corporation is MUNILEVERAGE FUND, INC. (the
"Corporation").
ARTICLE III
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed is to act as
a closed-end, management investment company under the federal Investment
Company Act of 1940, as amended, and to exercise and enjoy all of the powers,
rights and privileges granted to, or conferred upon, corporations by the
General Laws of the State of Maryland now or hereafter in force.
1
<PAGE>
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is The Corporation Trust Incorporated, a
corporation of this State, and the post-office address of the resident agent
is The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland
21202.
ARTICLE V
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Hundred Million (200,000,000) shares,
all of one class called Common Stock, of the par value of Ten Cents ($0.10)
per share and of the aggregate par value of Twenty Million Dollars
($20,000,000).
(2) The Board of Directors may classify and reclassify any unissued
shares of capital stock into one or more additional or other classes or
series as may be established from time to time by setting or changing in any
one or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock
and pursuant to such classification or reclassification to increase
2
<PAGE>
or decrease the number of authorized shares of any existing class or series.
(3) The Board of Directors may classify and reclassify any issued
shares of capital stock, of any class or series, into one or more additional
or other classes or series as may be established from time to time by setting
or changing in any one or more respects the designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares
of stock and pursuant to such classification or reclassification to increase
or decrease the number of authorized shares of any existing class or series;
provided, however, that any such classification or reclassification shall not
substantially adversely affect the rights of holders of such issued shares.
(4) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, the holders of each class or series of capital stock
shall be entitled to dividends and distributions in such amounts and at such
times as may be determined by the Board of Directors, and the dividends and
distributions paid with respect to the various classes or series of capital
stock may vary among such classes and series.
(5) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, on each matter submitted to
3
<PAGE>
a vote of stockholders, each holder of a share of capital stock of the
Corporation shall be entitled to one vote for each share standing in such
holder's name on the books of the Corporation, irrespective of the class or
series thereof, and all shares of all classes and series shall vote together
as a single class; provided, however, that as to any matter with respect to
which a separate vote of any class or series is required by the Investment
Company Act of 1940, as amended, and in effect from time to time, or any
rules, regulations or orders issued thereunder, or by the Maryland General
Corporation Law, such requirement as to a separate vote by that class or
series shall apply in addition to a general vote of all classes and series as
described above.
(6) Notwithstanding any provision of the Maryland General Corporation
Law requiring a greater proportion than a majority of the votes of all
classes or series of capital stock of the Corporation (or of any class or
series entitled to vote thereon as a separate class or series) to take or
authorize any action, the Corporation is hereby authorized (subject to the
requirements of the Investment Company Act of 1940, as amended, and in effect
from time to time, and any rules, regulations and orders issued thereunder)
to take such action upon the concurrence of a majority of the aggregate
number of shares of capital stock of the Corporation entitled to vote thereon
(or a majority of the aggregate number of shares of a class or series
entitled to vote thereon as a separate class or series).
4
<PAGE>
(7) Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders
of all classes and series of capital stock of the Corporation shall be
entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation, to share ratably in the remaining net assets
of the Corporation.
(8) Any fractional shares shall carry proportionately all the rights of
a whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and
the right to receive dividends.
(9) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of the charter and By-Laws of the
Corporation. As used in the charter of the Corporation, the terms "charter"
and "Articles of Incorporation" shall mean and include the Articles of
Incorporation of the Corporation as amended, supplemented and restated from
time to time by Articles of Amendment, Articles Supplementary, Articles of
Restatement or otherwise.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE DIRECTORS
AND STOCKHOLDERS
-------------------------------------
5
<PAGE>
(1) The number of directors of the Corporation shall be three (3),
which number may be changed pursuant to the By-Laws of the Corporation but
shall never be less than three (3). The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualify are:
Philip L. Kirstein
Ira Shapiro
Mark B. Goldfus
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether
now or hereafter authorized, for such consideration as the Board of Directors
may deem advisable, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the
General Laws of the State of Maryland.
(3) Each director and each officer of the Corporation shall be
indemnified by the Corporation to the full extent permitted by the General
Laws of the State of Maryland, subject to the requirements of the Investment
Company Act of 1940, as amended. No amendment of these Articles of
Incorporation or repeal of any provision hereof shall limit or eliminate the
benefits provided to directors and officers under this provision in
connection with any act or omission that occurred prior to such amendment or
repeal.
(4) To the fullest extent permitted by the General Laws of the State of
Maryland, subject to the requirements of the
6
<PAGE>
Investment Company Act of 1940, as amended, no director or officer of the
Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of these Articles of Incorporation
or repeal of any provision hereof shall limit or eliminate the benefits
provided to directors and officers under this provision in connection with
any act or omission that occurred prior to such amendment or repeal.
(5) The Board of Directors of the Corporation may make, alter or repeal
from time to time any of the By-Laws of the Corporation except any particular
By-Law which is specified as not subject to alteration or repeal by the Board
of Directors, subject to the requirements of the Investment Company Act of
1940, as amended.
(6) A director elected by the holders of capital stock may be removed
(with or without cause), but only by action taken by the holders of at least
sixty-six and two-thirds percent
(66 2/3%) of the shares of capital stock then entitled to vote in an election
to fill that directorship.
ARTICLE VII
DENIAL OF PREEMPTIVE RIGHTS
---------------------------
No stockholder of the Corporation shall by reason of his holding shares
of capital stock have any preemptive or preferential right to purchase or
subscribe to any shares of capital stock of the Corporation, now or hereafter
to be
7
<PAGE>
authorized, or any notes, debentures, bonds or other securities convertible
into shares of capital stock, now or hereafter to be authorized, whether or
not the issuance of any such shares, or notes, debentures, bonds or other
securities would adversely affect the dividend or voting rights of such
stockholder; and the Board of Directors may issue shares of any class of the
Corporation, or any notes, debentures, bonds, other securities convertible
into shares of any class, either whole or in part, to the existing
stockholders.
ARTICLE VIII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to
the direction of the Board of Directors, as to the amount of assets,
obligations or liabilities of the Corporation, as to the amount of net income
of the Corporation from dividends and interest for any period or amounts at
any time legally available for the payment of dividends, as to the amount of
any reserves or charges set up and the propriety thereof, as to the time of
or purpose for creating reserves or as to the use, alteration or cancellation
of any reserves or charges (whether or not any obligation or liability for
which such reserves or charges shall have been created, shall have been paid
or discharged or shall be then or thereafter required to be paid or
discharged), as to the price of any security owned by the
8
<PAGE>
Corporation or as to any other matters relating to the issuance, sale,
redemption or other acquisition or disposition of securities or shares of
capital stock of the Corporation, and any reasonable determination made in
good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities
"short," or an underwriting of the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of,
any securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future,
and shares of the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of capital
stock or acceptance of share certificates, that any and all such
determinations shall be binding as aforesaid. No provision of these Articles
of Incorporation shall be effective to (a) require a waiver of compliance
with any provision of the Securities Act of 1933, as amended, or the
Investment Company Act of 1940, as amended, or of any valid rule, regulation
or order of the Securities and Exchange Commission thereunder or (b) protect
or purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
9
<PAGE>
ARTICLE IX
PERPETUAL EXISTENCE
--------------------
The duration of the Corporation shall be perpetual.
ARTICLE X
PRIVATE PROPERTY OF STOCKHOLDERS
--------------------------------
The private property of stockholders shall not be subject to the payment
of corporate debts to any extent whatsoever.
ARTICLE XI
CONVERSION TO OPEN-END COMPANY
------------------------------
Notwithstanding any other provisions of these Articles of Incorporation
or the By-Laws of the Corporation, a favorable vote of the holders of at
least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
capital stock of the Corporation entitled to be voted on the matter shall be
required to approve, adopt or authorize an amendment to these Articles of
Incorporation of the Corporation that makes the Common Stock a "redeemable
security" (as that term is defined in section 2(a)(32) the Investment Company
Act of 1940, as amended) unless such action has previously been approved,
adopted or authorized by the affirmative vote of at least two-thirds of the
total number of directors fixed in accordance with the By-Laws of the
Corporation, in which case the affirmative vote of the holders of a majority
of the outstanding shares of capital stock of the Corporation entitled to
vote thereon shall be required.
10
<PAGE>
ARTICLE XII
MERGER, SALE OF ASSETS, LIQUIDATION
-----------------------------------
Notwithstanding any other provisions of these Articles of Incorporation
or the By-Laws of the Corporation, a favorable vote of the holders of at
least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
capital stock of the Corporation entitled to be voted on the matter shall be
required to approve, adopt or authorize (i) a merger or consolidation or
statutory share exchange of the Corporation with any other corporation, (ii)
a sale of all or substantially all of the assets of the Corporation (other
than in the regular course of its investment activities), or (iii) a
liquidation or dissolution of the Corporation, unless such action has
previously been approved, adopted or authorized by the affirmative vote of at
least two-thirds of the total number of directors fixed in accordance with
the By-Laws of the Corporation, in which case the affirmative vote of the
holders of a majority of the outstanding shares of capital stock of the
Corporation entitled to vote thereon shall be required.
ARTICLE XIII
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by statute, including any amendment which alters the
contract
11
<PAGE>
rights, as expressly set forth in the charter, of any outstanding stock and
substantially adversely affects the stockholders' rights and all rights
conferred upon stockholders herein are granted subject to this reservation.
Notwithstanding any other provisions of these Articles of Incorporation or
the By-Laws of the Corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, these Articles of Incorporation or the
By-Laws of the Corporation), the amendment or repeal of Section (6) of
Article V, Section (1), Section (3), Section (4), Section (5) and Section (6)
of Article VI, Article IX, Article X, Article XI, Article XII, or this
Article XIII, of these Articles of Incorporation shall require the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares of capital stock of the Corporation
entitled to be voted on the matter.
IN WITNESS WHEREOF, the undersigned incorporator of MuniLeverage Fund,
Inc. hereby executes the foregoing Articles of Incorporation and acknowledges
the same to be his act and further acknowledges that, to the best of his
knowledge, the matters and facts set forth therein are true in all material
respects under the penalties of perjury.
Dated the 12th day
of July, 1994.
/s/ Andrew S. Novak
-----------------------
Andrew S. Novak
12
<PAGE>
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of _________ ____, between
MUNILEVERAGE FUND, INC., a Maryland corporation (the "Fund"), and MERRILL
LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as a closed-end,
non-diversified, management investment company and it is affirmatively in the
interest of the Fund to offer its shares for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Fund's shares
in order to promote the growth of the Fund and facilitate the distribution of
its shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints
------------------------------
the Distributor as the principal underwriter and distributor of the Fund to
sell shares of common stock of the Fund (sometimes herein referred to as the
"shares") to the public and hereby agrees during the term of this Agreement
to sell
1
<PAGE>
shares of the Fund to the Distributor on the terms and conditions herein set
forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
--------------------------
exclusive representative of the Fund to act as principal underwriter and
distributor of the shares, except that:
(a) The Fund may, on written notice to the Distributor, from time to
time designate other principal underwriters and distributors of its shares
with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such.
If such designation is deemed exclusive, the right of the Distributor under
this Agreement to sell shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive rights granted to the Distributor to purchase shares
from the Fund shall not apply to shares of the Fund issued in connection with
the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding shares of any such
company by the Fund.
(c) Such exclusive rights also shall not apply to shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions.
2
<PAGE>
Section 3. Purchase of Shares from the Fund.
--------------------------------
(a) Prior to the continuous offering of the shares, commencing on a
date agreed on by the Fund and the Distributor, it is contemplated that the
Distributor will solicit subscriptions for shares during a subscription
period which shall last for such period as may be agreed upon by the parties
hereto. The subscriptions will be payable within five business days after
the termination of the subscription period, at which time the Fund will
commence operations.
(b) After the Fund commences operations, the Fund will commence an
offering of its shares and thereafter the Distributor shall have the right to
buy from the Fund the shares needed, but not more than the shares needed
(except for clerical errors in transmission) to fill unconditional orders for
shares of the Fund placed with the Distributor by investors or securities
dealers. The price which the Distributor shall pay for the shares so
purchased from the Fund shall be the net asset value, determined as set forth
in Section 3(d) hereof.
(c) The shares are to be resold by the Distributor to investors at net
asset value, as set forth in Section 3(d) hereof, or to securities dealers
having agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
(d) The net asset value of shares of the Fund shall be determined by
the Fund or any agent of the Fund in accordance
3
<PAGE>
with the method set forth in the prospectus of the Fund and guidelines
established by the Board of Directors.
(e) The Fund shall have the right to suspend the sale of its shares at
times when repurchase is suspended pursuant to the conditions set forth in
Section 4(b) hereof. The Fund shall also have the right to suspend the sale
of its shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by Federal or New
York authorities, or if there shall have been some other event, which, in the
judgment of the Fund, makes it impracticable or inadvisable to sell the
shares.
(f) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for shares received by
the Distributor. Any order may be rejected by the Fund; provided, however,
that the Fund will not arbitrarily or without reasonable cause refuse to
accept or confirm orders for the purchase of shares. The Fund (or its agent)
will confirm orders upon their receipt, will make appropriate book entries
and, upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such shares pursuant to the
instructions of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such payment and
such instructions to be delivered promptly to the Fund (or its agent).
4
<PAGE>
Section 4. Repurchase of Shares by the Fund.
--------------------------------
(a) Any of the outstanding shares may be tendered for repurchase
pursuant to a tender offer made by the Fund, and the Fund agrees to
repurchase the shares so tendered in accordance with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules thereunder and the
applicable tender offer provisions set forth in the prospectus of the Fund.
The price to be paid to repurchase the shares shall be equal to the net asset
value calculated in accordance with the provisions of Section 3(d) hereof,
less the Early Withdrawal Charge (as defined in the prospectus of the Fund),
if any, set forth in the prospectus of the Fund. All payments by the Fund
hereunder shall be made in the manner set forth below.
The Fund shall pay the total amount of the repurchase price as defined
in the above paragraph pursuant to the instructions of the Distributor or
return the tendered shares promptly following the termination or withdrawal
of the tender offer. The proceeds of any repurchase of shares shall be paid
by the Fund as follows: (i) any applicable Early Withdrawal Charge shall be
paid to the Distributor and (ii) the balance shall be paid to or for the
account of the shareholder, in each case in accordance with the applicable
provisions of the prospectus.
(b) Repurchases of shares pursuant to a tender offer or payment may be
suspended at such times as may be determined by
5
<PAGE>
the Board of Directors of the Fund as set forth in the prospectus of the
Fund.
Section 5. Duties of the Fund.
------------------
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of shares of
the Fund, and this shall include, upon request by the Distributor, one
certified copy of all financial statements prepared for the Fund by
independent auditors. The Fund shall make available to the Distributor such
number of copies of its prospectus as the Distributor shall reasonably
request.
(b) The Fund shall take, from time to time, but subject to the
necessary approval of the shareholders, all necessary action to fix the
number of authorized shares and such steps as may be necessary to register
the same under the Securities Act of 1933, as amended (the "Securities Act"),
to the end that there will be available for sale such number of shares as the
Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its shares for sale under the
securities laws of such states as the Distributor and the Fund may approve.
Any such qualification may be withheld, terminated or withdrawn by the Fund
at any time in its discretion. As provided in Section 8(c) hereof, the
expense
6
<PAGE>
of qualification and maintenance of qualification shall be borne by the Fund.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualification.
(d) The Fund will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
-------------------------
(a) The Distributor shall devote reasonable time and effort to effect
sales of shares of the Fund, but shall not be obligated to sell any specific
number of shares. The services of the Distributor to the Fund hereunder are
not to be deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other investment
companies so long as the performance of its obligations hereunder is not
impaired thereby.
(b) In selling the shares of the Fund, the Distributor shall use its
best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer nor any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the registration statement or related prospectus and any sales
literature specifically approved by the Fund.
7
<PAGE>
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may
be necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealer Agreements.
--------------------------
(a) The Distributor shall have the right to enter into selected dealer
agreements with securities dealers of its choice ("selected dealers") for the
sale of the shares; provided, that the Fund shall approve the forms of
agreements with dealers. Shares sold to selected dealers shall be for resale
by such dealers only at net asset value determined as set forth in Section
3(d) hereof. The form of agreement with selected dealers to be used during
the subscription period described in Section 3(a) is attached hereto as
Exhibit A and the initial form of agreement with selected dealers to be used
in the continuous offering of the shares is attached hereto as Exhibit B.
(b) Within the United States, the Distributor shall offer and sell
shares only to such selected dealers as are members in good standing of the
NASD.
8
<PAGE>
Section 8. Payment of Expenses.
-------------------
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses under the Investment Company Act and the Securities Act, and all
amendments and supplements thereto, and in connection with any fees and
expenses incurred with respect to any filings with the NASD and preparing and
mailing annual and interim reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
registration statements, prospectuses, annual or interim reports or proxy
materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments
of sales commissions to financial consultants. In addition, after the
prospectuses and annual and interim reports have been prepared and set in
type, the Distributor shall bear the costs and expenses of printing and
distributing any copies thereof which are to be used in connection with the
offering of shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering
of
9
<PAGE>
the shares for sale to the public and any expenses of advertising incurred by
the Distributor in connection with such offering.
(c) The Fund shall bear the cost and expenses of qualification of the
shares for sale pursuant to this Agreement, and, if necessary or advisable in
connection therewith, of qualifying the Fund as a broker or dealer, in such
states of the United States or other jurisdictions as shall be selected by
the Fund and the Distributor pursuant to Section 5(c) hereof and the cost and
expenses payable to each such state for continuing qualification therein
until the Fund decides to discontinue such qualification pursuant to Section
5(c) hereof.
Section 9. Indemnification.
---------------
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and
reasonable counsel fees incurred in connection therewith), as incurred,
arising by reason of any person acquiring any shares, which may be based on
the Securities Act, or on any other statute or at common law, on the ground
that the registration statement or related prospectus, as from time to time
amended and supplemented, or an annual or interim report to shareholders of
the Fund, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
10
<PAGE>
statements therein not misleading, unless such statement or omission was made
in reliance upon, and in conformity with, information furnished to the Fund
in connection therewith by or on behalf of the Distributor; provided,
however, that in no case (i) is the indemnity of the Fund in favor of the
Distributor and any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any liability to
the Fund or its shareholders to which the Distributor or any such controlling
persons would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of their duties or by reason of
the reckless disregard of their obligations and duties under this Agreement;
or (ii) is the Fund to be liable under its indemnity agreement contained in
this paragraph with respect to any claim made against the Distributor or any
such controlling persons, unless the Distributor or such controlling persons,
as the case may be, shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve it from any liability which it may have to the person against whom
such action is brought otherwise than on account of its indemnity
11
<PAGE>
agreement contained in this paragraph. The Fund will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the
Fund elects to assume the defense, such defense shall be conducted by counsel
chosen by it and satisfactory to the Distributor or such controlling person
or persons, defendant or defendants in the suit. In the event the Fund
elects to assume the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or defendants in
the suit, shall bear the fees and expenses, as incurred, of any additional
counsel retained by them, but, in case the Fund does not elect to assume the
defense of any such suit, it will reimburse the Distributor or such
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses, as incurred, of any counsel retained by them.
The Fund shall promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or Directors in
connection with the issuance or sale of any of the shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each
of its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense, as incurred, described
in the foregoing indemnity contained in subsection (a) of this Section, but
only with respect to statements or omissions made in reliance upon,
12
<PAGE>
and in conformity with, information furnished to the Fund in writing by or on
behalf of the Distributor for use in connection with the registration
statement or related prospectus, as from time to time amended, or the annual
or interim reports to shareholders. In case any action shall be brought
against the Fund or any person so indemnified, in respect of which indemnity
may be sought against the Distributor, the Distributor shall have the rights
and duties given to the Fund, and the Fund and each person so indemnified
shall have the rights and duties given to the Distributor by the provisions
of subsection (a) of this Section 9.
Section 10. Duration and Termination of this Agreement.
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until _________, ____ and thereafter, but only so
long as such continuance is specifically approved at least annually by (i)
the Directors, or by the vote of a majority of the outstanding voting
securities of the Fund, and (ii) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor on sixty days' written notice
to the other party.
13
<PAGE>
This Agreement shall automatically terminate in the event of its assignment.
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 11. Amendments of this Agreement. This Agreement may be
----------------------------
amended by the parties only if such amendment is specifically approved by (i)
the Directors, or by the vote of a majority of outstanding voting securities
of the Fund, and (ii) by the vote of a majority of those Directors of the
Fund who are not parties to this Agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval.
Section 12. Governing Law. The provisions of this Agreement shall be
-------------
construed and interpreted in accordance with the laws of the State of New
York as at the time in effect and the applicable provisions of the Investment
Company Act. To the extent that the applicable law of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of
the Investment Company Act, the latter shall control.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MUNILEVERAGE FUND, INC.
By
--------------------------------
ATTEST:
- -----------------------
Secretary
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
--------------------------------
ATTEST:
- -------------------------
Secretary
15
<PAGE>
EXHIBIT A
---------
MUNILEVERAGE FUND, INC.
SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
FOR SUBSCRIPTION PERIOD
-----------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with MuniLeverage Fund, Inc., a Maryland corporation (the "Fund"),
pursuant to which it acts as the distributor for the sale of shares of common
stock, par value $0.10 per share (herein referred to as "shares"), of the
Fund, and as such has the right to distribute shares of the Fund for resale.
The Fund is a closed-end investment company registered under the Investment
Company Act of 1940, as amended, and its shares being offered to the public
are registered under the Securities Act of 1933, as amended. Such shares and
certain of the terms on which they are being offered are more fully described
in the enclosed Prospectus. You have received a copy of the Distribution
Agreement (the "Distribution Agreement") between ourself and the Fund and
reference is made herein to certain provisions of such Distribution
Agreement. This Agreement relates solely to the subscription period
described in Section 3(a) of such Distribution Agreement. Subject to the
foregoing, as principal, we offer to sell to you, as a member of the Selected
Dealers Group, shares of the Fund upon the following terms and conditions:
1. The subscription period referred to in Section 3(a) of the
Distribution Agreement will continue through _________ __, ____. The
subscription period may be extended upon agreement between the Fund and the
Distributor. Subject to the provisions of such Section and the conditions
contained herein, we will sell to you on the fifth business day following the
termination of the subscription period, or such other date as we may advise
(the "Closing Date"), such number of shares as to which you have placed
orders with us not later than 5:00 P.M. on the second full business day
preceding the Closing Date.
2. In all sales of these shares to the public you shall act as dealer
for your own account, and in no transaction shall you have any authority to
act as agent for the Fund, for us or for any other member of the Selected
Dealers Group.
1
<PAGE>
3. With respect to each sale of shares by you to the public, the
Distributor shall pay you, from its own assets, a fee at the rate of ___% of
the amount purchased. If shares sold by you remain outstanding after one
year from the date of their original purchase, the Distributor will
compensate you at an annual rate, paid quarterly, equal to ____% of the
average daily net asset value of shares sold by you and remaining
outstanding.
4. You shall not place orders for any of the shares unless you have
already received purchase orders for such shares at the applicable public
offering prices and subject to the terms hereof and of the Distribution
Agreement. All orders are subject to acceptance by the Distributor or the
Fund in the sole discretion of either. The minimum initial and subsequent
purchase requirements are as set forth in the Prospectus, as amended from
time to time.
5. You agree that you will not offer or sell any of the shares except
under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and
offers to sell shares you will furnish to each person to whom any such sale
or offer is made a copy of the Prospectus (as then amended or supplemented)
and will not furnish to any person any information relating to the shares of
the Fund which is inconsistent in any respect with the information contained
in the Prospectus (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund. You further agree that you
shall not make a market in the Fund's shares while the Fund is making a
public offering of such shares.
6. Payment for shares purchased by you is to be made by certified or
official bank check at the office of Merrill Lynch Funds Distributor, Inc.,
Box 9011, Princeton, New Jersey 08543-9011, on such date as we may advise, in
New York Clearing House funds payable to the order of Merrill Lynch Funds
Distributor, Inc. against delivery by us of non-negotiable share deposit
receipts ("Receipts") issued by Financial Data Services, Inc., as shareholder
servicing agent, acknowledging the deposit with it of the shares so purchased
by you. You agree that as promptly as practicable after the delivery of such
shares you will issue appropriate written transfer instructions to the Fund
or to the shareholder servicing agent as to the purchasers to whom you sold
the shares.
7. No person is authorized to make any representations concerning
shares of the Fund except those contained in the current Prospectus of the
Fund and in such printed information subsequently issued by us or the Fund as
information supplemental
2
<PAGE>
to such Prospectus. In purchasing shares through us you shall rely solely on
the representations contained in the Prospectus and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's prospectus, periodic reports and proxy solicitation material are our
sole responsibility and not the responsibility of the Fund, and you agree
that the Fund shall have no liability or responsibility to you in these
respects unless expressly assumed connection therewith.
8. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus at or prior to the time of
offering or sale and you agree thereafter to deliver to such purchasers
copies of the annual and interim reports and proxy solicitation materials of
the Fund. You further agree to endeavor to obtain Proxies from such
purchasers. Additional copies of the Prospectus, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
9. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of the shares entirely. Each party hereto has
the right to cancel this Agreement upon notice to the other party.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering.
We shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of compliance
with any provision of the Securities Act of 1933, as amended, or of the rules
and regulations of the Securities and Exchange Commission issued thereunder.
11. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United
States, we both hereby agree to abide by the Rules of Fair Practice of such
Association, including in particular, the provisions of Article III, Sections
8, 24, 25 and 36 of such Rules, to the extent applicable.
12. Upon application to us, we will inform you as to the states in
which we believe the shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but
we assume no responsibility or obligation as to your right to sell shares in
any jurisdiction. We will file with the Department of State in
3
<PAGE>
New York a Further State Notice with respect to the shares, if necessary.
13. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
14. You agree that you will not sell any shares of the Fund to any
account over which you exercise discretionary authority.
15. This Agreement shall terminate at the close of business on the
Closing Date, unless earlier terminated, provided, however, this Agreement
shall continue after termination for the purpose of settlement of accounts
hereunder.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
----------------------------------
By:
-----------------------------------------
Address:
------------------------------------
---------------------------------------------
Date:
---------------------------------------
4
<PAGE>
EXHIBIT B
---------
MUNILEVERAGE FUND, INC.
SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
-------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with MuniLeverage Fund, Inc., a Maryland corporation (the "Fund"),
pursuant to which it acts as the distributor for the sale of shares of common
stock, par value $0.10 per share (herein referred to as the "shares"), of the
Fund, and as such has the right to distribute shares of the Fund for resale.
The Fund is a closed-end investment company registered under the Investment
Company Act of 1940, as amended, and its shares being offered to the public
are registered under the Securities Act of 1933, as amended. You have
received a copy of the Distribution Agreement (the "Distribution Agreement")
between ourself and the Fund and reference is made herein to certain
provisions of such Distribution Agreement. The term "Prospectus" as used
herein refers to the prospectus on file with the Securities and Exchange
Commission which is part of the most recent effective registration statement
pursuant to the Securities Act of 1933, as amended. As principal, we offer
to sell to you, as a member of the Selected Dealers Group, shares of the Fund
upon the following terms and conditions:
1. In all sales of these shares to the public you shall act as dealer
for your own account, and in no transaction shall you have any authority to
act as agent for the Fund, for us or for any other member of the Selected
Dealers Group.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus of the Fund. The procedure relating to the handling of orders
shall be subject to Section 5 hereof and instructions which we or the Fund
shall forward from time to time to you. All orders are subject to acceptance
or rejection by the Distributor or the Fund in the sole discretion of either.
The minimum initial and subsequent purchase requirements are as set forth in
the current Prospectus of the Fund.
3. With respect to each sale of shares by you to the public, the
Distributor shall pay you, from its own assets, a fee at the rate of ___% of
the amount purchased. If shares sold by
1
<PAGE>
you remain outstanding after one year from the date of their original
purchase, the Distributor will compensate you at an annual rate, paid
quarterly, equal to ____% of the average daily net asset value of shares sold
by you and remaining outstanding.
4. You shall not place orders for any of the shares unless you have
already received purchase orders for such shares at the applicable public
offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and
offers to sell shares you will furnish to each person to whom any such sale
or offer is made a copy of the Prospectus (as then amended or supplemented)
and will not furnish to any person any information relating to the shares of
the Fund, which is inconsistent in any respect with the information contained
in the Prospectus (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund. You further agree that you
shall not make a market in the Fund's shares while the Fund is making either
a public offering of or a tender offer to purchase its shares.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of
orders by us set forth in Section 3 of the Distribution Agreement, and (ii)
to tender shares directly to the Fund or its agent for redemption subject to
the applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
6. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change
in the "net asset value" from that used in determining the offering price to
your customers.
7. No person is authorized to make any representations concerning
shares of the Fund except those contained in the current Prospectus of the
Fund and in such printed information subsequently issued by us or the Fund as
information supplemental to such Prospectus. In purchasing shares through us
you shall rely solely on the representations contained in the Prospectus and
supplemental information above mentioned. Any printed information which we
furnish you other than the Fund's Prospectus, periodic reports and proxy
solicitation material are our sole responsibility and not the responsibility
of the Fund, and you agree that the Fund shall have no liability or
2
<PAGE>
responsibility to you in these respects unless expressly assumed in
connection therewith.
8. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus at or prior to the time of
offering or sale and you agree thereafter to deliver to such purchasers
copies of the annual and interim reports and proxy solicitation materials of
the Fund. You further agree to endeavor to obtain proxies from such
purchasers. Additional copies of the Prospectus, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
9. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of the shares entirely. Each party hereto has
the right to cancel this Agreement upon notice to the other party.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering.
We shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of compliance
with any provision of the Securities Act of 1933, as amended, or of the rules
and regulations of the Securities and Exchange Commission issued thereunder.
11. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any Sales in the United States,
we both hereby agree to abide by the Rules of Fair Practice of such
Association, including in particular, the provisions of Article III, Sections
8, 24, 25 and 36 of such Rules, to the extent applicable.
12. Upon application to us, we will inform you as to the states in
which we believe the shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but
we assume no responsibility or obligation as to your right to sell shares in
any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the shares, if necessary.
13. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
3
<PAGE>
14. Your first order placed pursuant to this Agreement for the purchase
of shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
----------------------------------
By:
-----------------------------------------
Address:
------------------------------------
---------------------------------------------
Date:
---------------------------------------
4
<PAGE>
EXHIBIT A
---------
MUNILEVERAGE FUND, INC.
SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
FOR SUBSCRIPTION PERIOD
-----------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with MuniLeverage Fund, Inc., a Maryland corporation (the "Fund"),
pursuant to which it acts as the distributor for the sale of shares of common
stock, par value $0.10 per share (herein referred to as "shares"), of the
Fund, and as such has the right to distribute shares of the Fund for resale.
The Fund is a closed-end investment company registered under the Investment
Company Act of 1940, as amended, and its shares being offered to the public
are registered under the Securities Act of 1933, as amended. Such shares and
certain of the terms on which they are being offered are more fully described
in the enclosed Prospectus. You have received a copy of the Distribution
Agreement (the "Distribution Agreement") between ourself and the Fund and
reference is made herein to certain provisions of such Distribution
Agreement. This Agreement relates solely to the subscription period
described in Section 3(a) of such Distribution Agreement. Subject to the
foregoing, as principal, we offer to sell to you, as a member of the Selected
Dealers Group, shares of the Fund upon the following terms and conditions:
1. The subscription period referred to in Section 3(a) of the
Distribution Agreement will continue through _________ __, ____. The
subscription period may be extended upon agreement between the Fund and the
Distributor. Subject to the provisions of such Section and the conditions
contained herein, we will sell to you on the fifth business day following the
termination of the subscription period, or such other date as we may advise
(the "Closing Date"), such number of shares as to which you have placed
orders with us not later than 5:00 P.M. on the second full business day
preceding the Closing Date.
2. In all sales of these shares to the public you shall act as dealer
for your own account, and in no transaction shall you have any authority to
act as agent for the Fund, for us or for any other member of the Selected
Dealers Group.
1
<PAGE>
3. With respect to each sale of shares by you to the public, the
Distributor shall pay you, from its own assets, a fee at the rate of ___% of
the amount purchased. If shares sold by you remain outstanding after one
year from the date of their original purchase, the Distributor will
compensate you at an annual rate, paid quarterly, equal to ____% of the
average daily net asset value of shares sold by you and remaining
outstanding.
4. You shall not place orders for any of the shares unless you have
already received purchase orders for such shares at the applicable public
offering prices and subject to the terms hereof and of the Distribution
Agreement. All orders are subject to acceptance by the Distributor or the
Fund in the sole discretion of either. The minimum initial and subsequent
purchase requirements are as set forth in the Prospectus, as amended from
time to time.
5. You agree that you will not offer or sell any of the shares except
under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and
offers to sell shares you will furnish to each person to whom any such sale
or offer is made a copy of the Prospectus (as then amended or supplemented)
and will not furnish to any person any information relating to the shares of
the Fund which is inconsistent in any respect with the information contained
in the Prospectus (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund. You further agree that you
shall not make a market in the Fund's shares while the Fund is making a
public offering of such shares.
6. Payment for shares purchased by you is to be made by certified or
official bank check at the office of Merrill Lynch Funds Distributor, Inc.,
Box 9011, Princeton, New Jersey 08543-9011, on such date as we may advise, in
New York Clearing House funds payable to the order of Merrill Lynch Funds
Distributor, Inc. against delivery by us of non-negotiable share deposit
receipts ("Receipts") issued by Financial Data Services, Inc., as shareholder
servicing agent, acknowledging the deposit with it of the shares so purchased
by you. You agree that as promptly as practicable after the delivery of such
shares you will issue appropriate written transfer instructions to the Fund
or to the shareholder servicing agent as to the purchasers to whom you sold
the shares.
7. No person is authorized to make any representations concerning
shares of the Fund except those contained in the current Prospectus of the
Fund and in such printed information subsequently issued by us or the Fund as
information supplemental
2
<PAGE>
to such Prospectus. In purchasing shares through us you shall rely solely on
the representations contained in the Prospectus and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's prospectus, periodic reports and proxy solicitation material are our
sole responsibility and not the responsibility of the Fund, and you agree
that the Fund shall have no liability or responsibility to you in these
respects unless expressly assumed connection therewith.
8. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus at or prior to the time of
offering or sale and you agree thereafter to deliver to such purchasers
copies of the annual and interim reports and proxy solicitation materials of
the Fund. You further agree to endeavor to obtain Proxies from such
purchasers. Additional copies of the Prospectus, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
9. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of the shares entirely. Each party hereto has
the right to cancel this Agreement upon notice to the other party.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering.
We shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of compliance
with any provision of the Securities Act of 1933, as amended, or of the rules
and regulations of the Securities and Exchange Commission issued thereunder.
11. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United
States, we both hereby agree to abide by the Rules of Fair Practice of such
Association, including in particular, the provisions of Article III, Sections
8, 24, 25 and 36 of such Rules, to the extent applicable.
12. Upon application to us, we will inform you as to the states in
which we believe the shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but
we assume no responsibility or obligation as to your right to sell shares in
any jurisdiction. We will file with the Department of State in
3
<PAGE>
New York a Further State Notice with respect to the shares, if necessary.
13. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
14. You agree that you will not sell any shares of the Fund to any
account over which you exercise discretionary authority.
15. This Agreement shall terminate at the close of business on the
Closing Date, unless earlier terminated, provided, however, this Agreement
shall continue after termination for the purpose of settlement of accounts
hereunder.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
----------------------------------
By:
-----------------------------------------
Address:
------------------------------------
---------------------------------------------
Date:
---------------------------------------
4
<PAGE>
EXHIBIT B
---------
MUNILEVERAGE FUND, INC.
SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
-------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with MuniLeverage Fund, Inc., a Maryland corporation (the "Fund"),
pursuant to which it acts as the distributor for the sale of shares of common
stock, par value $0.10 per share (herein referred to as the "shares"), of the
Fund, and as such has the right to distribute shares of the Fund for resale.
The Fund is a closed-end investment company registered under the Investment
Company Act of 1940, as amended, and its shares being offered to the public
are registered under the Securities Act of 1933, as amended. You have
received a copy of the Distribution Agreement (the "Distribution Agreement")
between ourself and the Fund and reference is made herein to certain
provisions of such Distribution Agreement. The term "Prospectus" as used
herein refers to the prospectus on file with the Securities and Exchange
Commission which is part of the most recent effective registration statement
pursuant to the Securities Act of 1933, as amended. As principal, we offer
to sell to you, as a member of the Selected Dealers Group, shares of the Fund
upon the following terms and conditions:
1. In all sales of these shares to the public you shall act as dealer
for your own account, and in no transaction shall you have any authority to
act as agent for the Fund, for us or for any other member of the Selected
Dealers Group.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus of the Fund. The procedure relating to the handling of orders
shall be subject to Section 5 hereof and instructions which we or the Fund
shall forward from time to time to you. All orders are subject to acceptance
or rejection by the Distributor or the Fund in the sole discretion of either.
The minimum initial and subsequent purchase requirements are as set forth in
the current Prospectus of the Fund.
3. With respect to each sale of shares by you to the public, the
Distributor shall pay you, from its own assets, a fee at the rate of ___% of
the amount purchased. If shares sold by
1
<PAGE>
you remain outstanding after one year from the date of their original
purchase, the Distributor will compensate you at an annual rate, paid
quarterly, equal to ____% of the average daily net asset value of shares sold
by you and remaining outstanding.
4. You shall not place orders for any of the shares unless you have
already received purchase orders for such shares at the applicable public
offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and
offers to sell shares you will furnish to each person to whom any such sale
or offer is made a copy of the Prospectus (as then amended or supplemented)
and will not furnish to any person any information relating to the shares of
the Fund, which is inconsistent in any respect with the information contained
in the Prospectus (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund. You further agree that you
shall not make a market in the Fund's shares while the Fund is making either
a public offering of or a tender offer to purchase its shares.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of
orders by us set forth in Section 3 of the Distribution Agreement, and (ii)
to tender shares directly to the Fund or its agent for redemption subject to
the applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
6. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change
in the "net asset value" from that used in determining the offering price to
your customers.
7. No person is authorized to make any representations concerning
shares of the Fund except those contained in the current Prospectus of the
Fund and in such printed information subsequently issued by us or the Fund as
information supplemental to such Prospectus. In purchasing shares through us
you shall rely solely on the representations contained in the Prospectus and
supplemental information above mentioned. Any printed information which we
furnish you other than the Fund's Prospectus, periodic reports and proxy
solicitation material are our sole responsibility and not the responsibility
of the Fund, and you agree that the Fund shall have no liability or
2
<PAGE>
responsibility to you in these respects unless expressly assumed in
connection therewith.
8. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus at or prior to the time of
offering or sale and you agree thereafter to deliver to such purchasers
copies of the annual and interim reports and proxy solicitation materials of
the Fund. You further agree to endeavor to obtain proxies from such
purchasers. Additional copies of the Prospectus, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
9. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of the shares entirely. Each party hereto has
the right to cancel this Agreement upon notice to the other party.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering.
We shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of compliance
with any provision of the Securities Act of 1933, as amended, or of the rules
and regulations of the Securities and Exchange Commission issued thereunder.
11. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any Sales in the United States,
we both hereby agree to abide by the Rules of Fair Practice of such
Association, including in particular, the provisions of Article III, Sections
8, 24, 25 and 36 of such Rules, to the extent applicable.
12. Upon application to us, we will inform you as to the states in
which we believe the shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but
we assume no responsibility or obligation as to your right to sell shares in
any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the shares, if necessary.
13. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
3
<PAGE>
14. Your first order placed pursuant to this Agreement for the purchase
of shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
----------------------------------
By:
-----------------------------------------
Address:
------------------------------------
---------------------------------------------
Date:
---------------------------------------
4
