<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 17, 1997
SECURITIES ACT FILE NO. 33-54655
INVESTMENT COMPANY ACT FILE NO. 811-07203
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE
SECURITIES EXCHANGE ACT OF 1934)
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
(Name of Issuer)
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
(Name of Person(s) Filing Statement)
SHARES OF COMMON STOCK, PAR VALUE $.10 PER SHARE
(Title of Class of Securities)
59020H 10 4
(CUSIP Number of Class of Securities)
ARTHUR ZEIKEL
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(609) 282-2800
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of Person(s) Filing Statement)
COPIES TO:
<TABLE>
<S> <C>
THOMAS R. SMITH, JR., ESQ. PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
JANUARY 17, 1997
(Date Tender Offer First Published,
Sent or Given to Security Holders)
</TABLE>
CALCULATION OF FILING FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRANSACTION VALUATION: $10,180,000 (a) AMOUNT OF FILING FEE: $2,036
(b)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) Calculated as the aggregate estimated maximum purchase price to be paid for
1,000,000 shares in the offer, based upon the net asset value per share
($10.18) at January 14, 1997.
(b) Calculated as 1/50th of 1% of the Transaction Valuation.
/ /
Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and
identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: _____________________________________________________
Form or Registration No.: ___________________________________________________
Filing Party: _______________________________________________________________
Filing Date: ________________________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer is Merrill Lynch Municipal Strategy Fund, Inc., a
closed-end investment company organized as a Maryland corporation (the "Fund").
The principal executive offices of the Fund are located at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
(b) The title of the securities being sought is shares of common stock, par
value $0.10 per share (the "Shares"). As of December 31, 1996 there were in
excess of 8.4 million Shares issued and outstanding.
The Fund is seeking tenders for 1,000,000 Shares (the "Offer"), at net asset
value per Share calculated on the day the tender offer terminates, less any
"Early Withdrawal Charge," upon the terms and subject to the conditions set
forth in the Offer to Purchase dated January 17, 1997 (the "Offer to Purchase").
A copy of each of the Offer to Purchase and the related Letter of Transmittal is
attached hereto as Exhibit (a)(1)(ii) and Exhibit (a)(2), respectively.
Reference is hereby made to the Cover Page and Section 1 "Price; Number of
Shares" of the Offer to Purchase, which are incorporated herein by reference.
The Fund has been informed that no Directors, officers or affiliates of the Fund
intend to tender Shares pursuant to the Offer.
(c) The Shares are not currently traded on an established trading market.
(d) Not Applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) Reference is hereby made to Section 9 "Source and Amount of Funds"
of the Offer to Purchase, which is incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
Reference is hereby made to Section 7 "Purpose of the Offer," Section 8
"Certain Effects of the Offer" and Section 9 "Source and Amount of Funds" of the
Offer to Purchase, which are incorporated herein by reference. The Fund
currently is engaged in a continuous public offering of its Shares. The Fund
otherwise has no plans or proposals which relate to or would result in (a) the
acquisition by any person of additional securities of the Fund or the
disposition of securities of the Fund; (b) an extraordinary corporate
transaction, such as a merger, reorganization or liquidation, involving the
Fund; (c) a sale or transfer of a material amount of assets of the Fund; (d) any
change in the present Board of Directors or management of the Fund, including,
but not limited to, any plans or proposals to change the number or the term of
Directors, or to fill any existing vacancy on the Board or to change any
material term of the employment contract of any executive officer; (e) any
material change in the present dividend rate or policy, or indebtedness or
capitalization of the Fund; (f) any other material change in the Fund's
corporate structure or business, including any plans or proposals to make any
changes in its investment policy for which a vote would be required by Section
13 of the Investment Company Act of 1940, as amended; or (g) changes in the
Fund's articles of incorporation, bylaws or instruments corresponding thereto or
other actions which may impede the acquisition of control of the Fund by any
person. Paragraphs (h) through (j) of this Item 3 are not applicable.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
There have not been any transactions involving the Shares of the Fund that
were effected during the past 40 business days by the Fund, any executive
officer or Director of the Fund, any person controlling the Fund, any executive
officer or Director of any corporation ultimately in control of the Fund or by
any associate or subsidiary of any of the foregoing including any executive
officer or Director of any such subsidiary, except that within the past 40
business days, pursuant to a continuous public offering of its Shares, the Fund
has sold approximately 256,390 Shares at a price equal to the net asset value
("NAV") of the Fund on the date of each such sale.
i
<PAGE>
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO
THE ISSUER'S SECURITIES.
The Fund does not know of any contract, arrangement, understanding or
relationship relating directly or indirectly, to the Offer (whether or not
legally enforceable) between the Fund, any of the Fund's executive officers or
Directors, any person controlling the Fund or any executive officer or Director
of any corporation ultimately in control of the Fund and any person with respect
to any securities of the Fund (including, but not limited to, any contract,
arrangement, understanding or relationship concerning the transfer or the voting
of any such securities, joint ventures, loan or option arrangements, puts or
calls, guarantees of loans, guarantees against loss, or the giving or
withholding of proxies, consents or authorizations).
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
No persons have been employed, retained or are to be compensated by the Fund
to make solicitations or recommendations in connection with the Offer.
ITEM 7. FINANCIAL INFORMATION.
(a) Reference is hereby made to the financial statements attached hereto as
Exhibit (g) which are incorporated herein by reference.
(b) Not applicable.
ITEM 8. ADDITIONAL INFORMATION.
(a) None.
(b) Reference is made to Section 11 "Certain Information About the Fund" of
the Offer to Purchase, which is incorporated herein by reference.
(c) Not applicable.
(d) None.
(e) The Offer to Purchase, attached hereto as Exhibit (a)(1)(ii), is
incorporated herein by reference in its entirety.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<C> <C> <S>
(a)(1) (i) --Advertisement to be printed in THE WALL STREET JOURNAL.
(ii) --Offer to Purchase.
(a)(2) --Form of Letter of Transmittal.
(a)(3) --Letter to Stockholders.
(c)-(f) --Not Applicable
(g) --Audited Financial Statements of the Fund for the period November 3, 1995
(commencement of operations) to October 31, 1996.
</TABLE>
ii
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
MERRILL LYNCH MUNICIPAL
STRATEGY FUND, INC.
By /s/ TERRY K. GLENN
...................................
Terry K. Glenn,
EXECUTIVE VICE PRESIDENT
Date: January 17, 1997
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -----------
<S> <C> <C>
(a)(1)(i) Advertisement to be printed in THE WALL STREET JOURNAL
(a)(1)(ii) Offer to Purchase
(a)(2) Form of Letter of Transmittal
(a)(3) Letter to Stockholders
(g) Audited Financial Statements of the Fund for the period November 3, 1995 (commencement of
operations) to October 31, 1996.
</TABLE>
<PAGE>
EXHIBIT (a)(1)(i)
<PAGE>
THIS ANNOUNCEMENT IS NOT AN OFFER TO PURCHASE OR A SOLICITATION OF AN OFFER TO
SELL SHARES. THE OFFER IS
MADE ONLY BY THE OFFER TO PURCHASE DATED JANUARY 17, 1997, AND THE RELATED
LETTER OF TRANSMITTAL. THE
OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF,
HOLDERS OF SHARES IN ANY
JURISDICTION IN WHICH MAKING OR ACCEPTING THE OFFER WOULD VIOLATE THAT
JURISDICTION'S LAWS.
----------------------------------------------
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
NOTICE OF OFFER TO PURCHASE FOR CASH 1,000,000 OF ITS
ISSUED AND OUTSTANDING SHARES AT NET ASSET VALUE PER SHARE
THE EXPIRATION DATE AND THE WITHDRAWAL DEADLINE ARE 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON FRIDAY, FEBRUARY 14, 1997, UNLESS EXTENDED.
Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is offering to
purchase 1,000,000 of its issued and outstanding shares of common stock par
value $.10 per share (the "Shares") at a price equal to their net asset value
("NAV") less any applicable early withdrawal charge as of the close of the New
York Stock Exchange on the Expiration Date, February 14, 1997, unless extended,
upon the terms and conditions set forth in the Offer to Purchase dated January
17, 1997 (the "Offer"). The NAV on January 14, 1997, was $10.18 per share. The
purpose of the Offer is to provide liquidity to stockholders since the Fund is
unaware of any secondary market which exists for the Shares. The Offer is not
conditioned upon the tender of any minimum number of Shares.
If more than 1,000,000 Shares are duly tendered prior to the expiration of
the Offer, assuming no changes in the factors originally considered by the Board
of Directors when it determined to make the Offer, the Fund will either extend
the Offer period, if necessary, and increase the number of Shares that the Fund
is offering to purchase to an amount which it believes will be sufficient to
accommodate the excess Shares tendered, as well as any Shares tendered during
the extended Offer period, or purchase 1,000,000 Shares (or such larger number
of Shares sought) on a pro rata basis.
Shares tendered pursuant to the Offer may be withdrawn at any time prior to
12:00 midnight, New York City time, on Friday, February 14, 1997, unless the
Offer is extended, and, if not yet accepted for payment by the Fund, Shares may
also be withdrawn after March 17, 1997.
The information required to be disclosed by paragraph (d)(1) of Rule 13e-4
under the Securities Exchange Act of 1934, as amended, is contained in the Offer
to Purchase and is incorporated herein by reference.
The Offer to Purchase and the related Letter of Transmittal contain
important information that should be read carefully before any decision is made
with respect to the Offer.
Questions and requests for assistance, for current NAV quotations or for
copies of the Offer to Purchase, Letter of Transmittal, and any other tender
offer documents, may be directed to the Merrill Lynch Response Center at the
address and telephone number below. Copies will be furnished promptly at no
expense to you and also may be obtained by completing and returning the coupon
below to the Merrill Lynch Response Center. Stockholders who do not own Shares
directly should effect a tender through their broker, dealer, or nominee. For
example, stockholders who purchased shares through Merrill Lynch, Pierce, Fenner
& Smith Incorporated should effect tenders through their Financial Consultant.
1-800-MERRILL, EXT. 1354
1-800-637-7455
<TABLE>
<S>
- -----------------------------------
MAIL TO: MERRILL LYNCH
RESPONSE CENTER
P.O. BOX 30200, NEW
BRUNSWICK, NJ 08989-0200
/ / PLEASE SEND ME MERRILL
LYNCH MUNICIPAL STRATEGY
FUND, INC. TENDER OFFER
MATERIALS.
<CAPTION>
NAME
ADDRESS
<S> <C>
BUSINESS PHONE () CITY
HOME PHONE () STATE ZIP
MERRILL LYNCH CLIENTS, PLEASE GIVE THE NAME AND OFFICE
ADDRESS OF YOUR FINANCIAL CONSULTANT:
1354
January 17, 1997
</TABLE>
[LOGO]
<PAGE>
EXHIBIT (a)(1)(ii)
<PAGE>
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
OFFER TO PURCHASE FOR CASH 1,000,000
OF ITS ISSUED AND OUTSTANDING SHARES
AT NET ASSET VALUE PER SHARE
THE EXPIRATION DATE AND THE WITHDRAWAL DEADLINE IS 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON FEBRUARY 14, 1997, UNLESS EXTENDED.
To the Holders of Shares of
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.:
The Fund is offering to purchase up to 1,000,000 of its shares of common
stock, par value $.10 per share (the "Shares"), for cash at a price equal to
their net asset value ("NAV"), less any applicable Early Withdrawal Charge, as
of the close of the New York Stock Exchange on February 14, 1997, the expiration
date, unless extended, upon the terms and conditions set forth in this Offer to
Purchase (the "Offer") and the related Letter of Transmittal. The Shares are not
currently traded on an established secondary market. The NAV on January 14, 1997
was $10.18 per Share. You can obtain current NAV quotations from your Merrill
Lynch Financial Consultant or the Merrill Lynch, Pierce, Fenner & Smith
Incorporated Response Center (the "Merrill Lynch Response Center") (see Section
1). The Fund presently intends each quarter to consider making a tender offer
for its Shares at a price equal to their then current NAV.
If more than 1,000,000 Shares are duly tendered prior to the expiration of
the Offer, assuming no changes in the factors originally considered by the Board
of Directors when it determined to make the Offer, the Fund will either (i)
extend the Offer period, if necessary, and increase the number of Shares that
the Fund is offering to purchase to an amount which it believes will be
sufficient to accommodate the excess Shares tendered as well as any Shares
tendered during the extended Offer period or (ii) purchase 1,000,000 Shares (or
such larger number of Shares sought) on a pro rata basis.
THIS OFFER IS BEING MADE TO ALL STOCKHOLDERS OF THE FUND AND IS NOT
CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING TENDERED.
IMPORTANT
If you desire to tender all or any portion of your Shares, you should either
(1) request your broker, dealer, commercial bank, trust company or other nominee
to effect the transaction for you or (2) if you own your Shares directly,
complete and sign the Letter of Transmittal and mail or deliver it along with
any Share certificate(s) and any other required documents to the Fund's transfer
agent, Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"). If
your Shares are registered in the name of a broker, dealer, commercial bank,
trust company or other nominee, you must contact such broker, dealer, commercial
bank, trust company or other nominee if you desire to tender your Shares. Shares
held in your Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") brokerage account are registered in the name of Merrill Lynch and are
not held by you directly. Merrill Lynch may charge its customers a $4.85
processing fee to confirm a repurchase of Shares from such customers pursuant to
the Offer.
NEITHER THE FUND NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY
STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES. EACH
STOCKHOLDER MUST MAKE HIS OWN DECISION WHETHER TO TENDER SHARES, AND IF SO, HOW
MANY SHARES TO TENDER.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
FUND AS TO WHETHER STOCKHOLDERS SHOULD TENDER SHARES PURSUANT TO THE OFFER. NO
PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER OTHER THAN THOSE CONTAINED HEREIN
OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION AND SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND.
<PAGE>
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Questions and requests for assistance may be directed to your Merrill Lynch
Financial Consultant or other nominee, or to the Transfer Agent at the address
and telephone number set forth below. Requests for additional copies of this
Offer to Purchase and the Letter of Transmittal should be directed to the
Merrill Lynch Response Center.
January 17, 1997 MERRILL LYNCH MUNICIPAL
STRATEGY FUND, INC.
Merrill Lynch Response Center
Transfer Agent: Merrill Lynch
Financial Data
P.O. Box 30200
Services, Inc.
New Brunswick, New Jersey
08989-0200
Attn: Merrill Lynch Municipal
Attn: Merrill Lynch Municipal
Strategy Fund, Inc.
Strategy Fund, Inc.
P.O. Box 45289
(800) 637-7455, ext. 1354
Jacksonville, Florida 32232-5289
(800) 637-3863
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTIONS PAGE
- ------------- -----
<C> <S> <C>
1. Price; Number of Shares.......................................................................... 3
2. Procedure for Tendering Shares................................................................... 3
3. Early Withdrawal Charge.......................................................................... 4
4. Withdrawal Rights................................................................................ 5
5. Payment for Shares............................................................................... 5
6. Certain Conditions of the Offer.................................................................. 6
7. Purpose of the Offer............................................................................. 6
8. Certain Effects of the Offer..................................................................... 6
9. Source and Amount of Funds....................................................................... 6
10. Summary Financial Information.................................................................... 7
11. Certain Information About the Fund............................................................... 8
12. Additional Information........................................................................... 8
13. Certain Federal Income Tax Consequences.......................................................... 8
14. Extension of Tender Period; Termination; Amendments.............................................. 9
15. Miscellaneous.................................................................................... 10
</TABLE>
2
<PAGE>
1. PRICE; NUMBER OF SHARES. The Fund will, upon the terms and subject to
the conditions of the Offer, purchase up to 1,000,000 of its issued and
outstanding Shares which are tendered and not withdrawn prior to 12:00 midnight,
New York City time, on February 17, 1997 (such time and date being hereinafter
called the "Initial Expiration Date"), unless it determines to accept none of
them. The purchase price of the Shares will be their NAV as of the close of the
New York Stock Exchange on the Expiration Date. An Early Withdrawal Charge to
recover distribution expenses will be assessed on Shares accepted for purchase
(see Section 3). The Fund reserves the right to extend the Offer (see Section
14). The later of the Initial Expiration Date or the latest time and date to
which the Offer is extended is herein referred to as the "Expiration Date."
The Offer is being made to all stockholders of the Fund and is not
conditioned upon any number of Shares being tendered. If more than 1,000,000
Shares are duly tendered prior to the Initial Expiration Date, assuming no
changes in the factors originally considered by the Board of Directors when it
initially determined to make the Offer, the Fund will either extend the Offer
period, if necessary, and increase the number of Shares that the Fund is
offering to purchase to an amount which it believes will be sufficient to
accommodate the excess Shares tendered as well as any Shares tendered during the
extended Offer period or purchase 1,000,000 Shares (or such larger number of
Shares sought) on a pro rata basis.
As of December 31, 1996, there were in excess of 8.4 million Shares issued
and outstanding and there was one holder of record of Shares (in addition,
Merrill Lynch maintains accounts for 32,229 beneficial owners of Shares). The
Fund has been informed that none of the Directors, officers or affiliates of the
Fund intends to tender any Shares pursuant to the Offer. The Shares currently
are not traded on any established secondary market. The following table sets
forth information relating to the Fund's NAV for the indicated periods:
<TABLE>
<CAPTION>
NET ASSET VALUE
--------------------
<S> <C> <C>
HIGH LOW
--------- ---------
Quarter ended:
December 31, 1995*................................................. $ 10.28 $ 9.99
March 31, 1996..................................................... 10.35 9.71
June 30, 1996...................................................... 9.86 9.58
September 30, 1996................................................. 10.16 9.61
December 31, 1996.................................................. 10.37 10.05
</TABLE>
- ------------------------
* For the period November 3, 1995 (commencement of operations) to December 31,
1995.
Current NAV quotations for the Shares can be obtained from your Merrill Lynch
Financial Consultant or from the Merrill Lynch Response Center at (800)
637-7455, ext. 1354.
2. PROCEDURE FOR TENDERING SHARES. In order for you to tender any of your
Shares pursuant to the Offer, you may either: (a) request your broker, dealer,
commercial bank, trust company or other nominee to effect the transaction for
you, in which case a Letter of Transmittal is not required or (b) if the Shares
are registered in your name, send to the Transfer Agent, at the address set
forth on page 2, any certificates for such Shares, a properly completed and
executed Letter of Transmittal and any other documents required therein. Please
contact the Merrill Lynch Response Center at (800) 637-7455, ext. 1354 as to any
additional documents which may be required.
A. PROCEDURES FOR BENEFICIAL OWNERS HOLDING SHARES THROUGH MERRILL LYNCH OR
OTHER BROKERS OR NOMINEES.
If your Shares are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee, you must contact such broker, dealer,
commercial bank, trust company or other nominee if you desire to tender your
Shares. You should contact such broker or other nominee in sufficient time to
3
<PAGE>
permit notification of your desire to tender to reach the Transfer Agent by the
Expiration Date. No brokerage commission will be charged on the purchase of
Shares by the Fund pursuant to the Offer. However, a broker or dealer may charge
a fee for processing the transaction on your behalf. Merrill Lynch may charge
its customers a $4.85 processing fee to confirm a purchase of Shares pursuant to
the Offer.
B. PROCEDURES FOR REGISTERED STOCKHOLDERS.
If you will be mailing or delivering the Letter of Transmittal and any other
required documents to the Transfer Agent in order to tender your Shares, they
must be received on or prior to the Expiration Date by the Transfer Agent at its
address set forth on page 2 of this Offer to Purchase.
Signatures on the Letter of Transmittal MUST be guaranteed by a member firm
of a national securities exchange or a commercial bank or trust company having
an office, branch or agency in the United States ("Eligible Institution").
Notarized signatures are not sufficient.
Payment for Shares tendered and purchased will be made only after receipt by
the Transfer Agent on or before the Expiration Date of a properly completed and
duly executed Letter of Transmittal and any other required documents. If your
Shares are evidenced by certificates, those certificates must also be received
by the Transfer Agent on or prior to the Expiration Date.
THE METHOD OF DELIVERY OF ANY DOCUMENTS, INCLUDING CERTIFICATES FOR SHARES,
IS AT THE ELECTION AND RISK OF THE PARTY TENDERING THE SHARES. IF DOCUMENTS ARE
SENT BY MAIL, IT IS RECOMMENDED THAT THEY BE SENT BY REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED.
C. DETERMINATIONS OF VALIDITY.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tenders will be determined by the Fund, in its sole
discretion, whose determination shall be final and binding. The Fund reserves
the absolute right to reject any or all tenders determined by it not to be in
appropriate form or the acceptance of or payment for which would, in the opinion
of counsel for the Fund, be unlawful. The Fund also reserves the absolute right
to waive any of the conditions of the Offer or any defect in any tender with
respect to any particular Shares or any particular stockholder, and the Fund's
interpretations of the terms and conditions of the Offer will be final and
binding. Unless waived, any defects or irregularities in connection with tenders
must be cured within such times as the Fund shall determine. Tenders will not be
deemed to have been made until the defects or irregularities have been cured or
waived. Neither the Fund, its investment adviser and administrator, Fund Asset
Management, L.P. ("FAM"), nor the Transfer Agent, nor any other person shall be
obligated to give notice of any defects or irregularities in tenders, nor shall
any of them incur any liability for failure to give such notice.
D. TENDER CONSTITUTES AN AGREEMENT.
A tender of Shares made pursuant to any one of the procedures set forth
above will constitute an agreement between the tendering stockholder and the
Fund in accordance with the terms and subject to the conditions of the Offer.
3. EARLY WITHDRAWAL CHARGE. The Fund will assess an Early Withdrawal
Charge on Shares accepted for purchase. The charge will be paid to Merrill Lynch
Funds Distributor, Inc., an affiliate of FAM and the distributor of the Shares,
to recover distribution expenses. The Early Withdrawal Charge will be imposed on
those Shares accepted for tender based on an amount equal to the lesser of the
NAV of the Shares on the Expiration Date or the cost of the Shares 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. The Early Withdrawal Charge imposed
will vary depending on the length of time the Shares
4
<PAGE>
have been owned since purchase (separate purchases shall not be aggregated for
these purposes), as set forth in the following table:
<TABLE>
<CAPTION>
EARLY
YEAR OF TENDER AFTER PURCHASE WITHDRAWAL CHARGE
- --------------------------------------------------------------------- -----------------------
<S> <C>
First................................................................ 3.0%
Second............................................................... 2.0%
Third................................................................ 1.0%
Fourth and following................................................. 0%
</TABLE>
In determining whether an Early Withdrawal Charge is applicable to a tender
of Shares, 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 acquired through dividend reinvestment and of Shares
held for over three years and then of Shares 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.
4. WITHDRAWAL RIGHTS. You may withdraw Shares tendered at any time prior
to the Expiration Date and, if the Shares have not yet been accepted for payment
by the Fund, at any time after March 17, 1997.
Stockholders whose accounts are maintained through Merrill Lynch should
notify their Financial Consultant prior to the Expiration Date if they wish to
withdraw Shares. Stockholders whose accounts are maintained through another
broker, dealer, commercial bank, trust company or other nominee should notify
such nominee prior to the Expiration Date. Stockholders whose accounts are
maintained directly through the Transfer Agent should submit written notice to
the Transfer Agent.
To be effective, any notice of withdrawal must be timely received by the
Transfer Agent at the address set forth on page 2 of this Offer to Purchase. Any
notice of withdrawal must specify the name of the person having deposited the
Shares to be withdrawn, the number of Shares to be withdrawn, and, if the
certificates representing such Shares have been delivered or otherwise
identified to the Transfer Agent, the name of the registered holder(s) of such
Shares as set forth in such certificates and the number of Shares to be
withdrawn. If the certificates have been delivered to the Transfer Agent, then,
prior to the release of such certificates, you must also submit the certificate
numbers shown on the particular certificates evidencing such Shares and the
signature on the notice of the withdrawal must be guaranteed by an Eligible
Institution. All questions as to the form and validity (including time of
receipt) of notices of withdrawal will be determined by the Fund in its sole
discretion, whose determination shall be final and binding. Shares properly
withdrawn shall not thereafter be deemed to be tendered for purposes of the
Offer. However, withdrawn Shares may be retendered by following one of the
procedures described in Section 2 prior to the Expiration Date.
5. PAYMENT FOR SHARES. For purposes of the Offer, the Fund will be deemed
to have accepted for payment (and thereby purchased) Shares which are tendered
as, if and when it gives oral or written notice to the Transfer Agent of its
election to purchase such Shares.
Payment for Shares will be made promptly by the Transfer Agent to tendering
stockholders as directed by the Fund. Certificates for Shares not purchased (see
Sections 1 and 6), or for Shares not tendered included in certificates forwarded
to the Transfer Agent, will be returned promptly following the termination,
expiration or withdrawal of the Offer, without expense to the tendering
stockholder.
The Fund will pay all transfer taxes, if any, payable on the transfer to it
of Shares purchased pursuant to the Offer. If tendered certificates are
registered in the name of any person other than the person signing the Letter of
Transmittal, the amount of any such transfer taxes (whether imposed on the
registered holder or such other person) payable on account of the transfer to
such person of such Shares will be deducted
5
<PAGE>
from the purchase price unless satisfactory evidence of the payment of such
taxes, or exemption therefrom, is submitted. The Fund will not pay any interest
on the purchase price under any circumstances.
As noted above, Merrill Lynch may charge its customers a $4.85 processing
fee to confirm a purchase of Shares from such customers pursuant to the Offer.
6. CERTAIN CONDITIONS OF THE OFFER. The Fund shall not be required to
accept for payment or pay for any Shares tendered, and may terminate or amend
the Offer or may postpone the acceptance for payment of or payment for Shares
tendered, if: (1) such purchases would impair the Fund's status as a regulated
investment company under the Internal Revenue 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 stockholders 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 Shares tendered pursuant to the Offer; or (3)
there is, in the Board of Directors' judgment, any (a) legal action or
proceeding instituted or threatened challenging the Offer or otherwise
materially adversely affecting the Fund, (b) declaration of a banking moratorium
by Federal or state authorities or any suspension of payment by banks in the
United States or New York State, 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 stockholders if Shares tendered
pursuant to the Offer were purchased.
If the Fund determines to amend the Offer or to postpone the acceptance for
payment of or payment for Shares tendered, it will, to the extent necessary,
extend the period of time during which the Offer is open as provided in Section
14. Moreover, in the event any of the foregoing conditions are modified or
waived in whole or in part at any time, the Fund will promptly make a public
announcement of such waiver and may, depending on the materiality of the
modification or waiver, extend the Offer period as provided in Section 14.
7. PURPOSE OF THE OFFER. The Fund does not currently believe there will be
an active secondary market for its Shares. The Board of Directors has determined
that it would be in the best interest of stockholders for the Fund to take
action to attempt to provide liquidity to stockholders. To that end, the
Directors presently intend each quarter to consider the making of a tender offer
to purchase the Shares at NAV. The Fund will at no time be required to make any
such tender offer.
8. CERTAIN EFFECTS OF THE OFFER. The purchase of Shares pursuant to the
Offer will have the effect of increasing the proportionate interest in the Fund
of stockholders who do not tender their Shares. If you retain your Shares,
however, you will be subject to any increased risks that may result from the
reduction in the Fund's aggregate assets resulting from payment for the Shares,
including, for example, the potential for greater volatility due to decreased
diversification and higher expenses. However, the Fund believes that those risks
will be reduced to the extent new Shares of the Fund are sold. All Shares
purchased by the Fund pursuant to the Offer will be retired by the Board of
Directors of the Fund.
9. SOURCE AND AMOUNT OF FUNDS. The price to be paid by the Fund for shares
tendered in the Offer will equal their NAV as of the close of the New York Stock
Exchange on the Expiration Date, less any applicable Early Withdrawal Charge.
Based on the NAV on January 14, 1997, the aggregate purchase price if 1,000,000
Shares are tendered and accepted for payment pursuant to the Offer would be
approximately $10,180,000. The Fund anticipates that the purchase price for any
Shares acquired pursuant to the Offer will first be derived from cash on hand,
and then from the proceeds from the sale of cash equivalents held by the Fund.
Although the Fund is authorized to borrow money to finance the purchase of
Shares pursuant to tender offers, the Board of Directors believes that the Fund
currently has sufficient liquidity to repurchase the Shares without such
borrowing. However, if, in the judgment of the Directors, there is not
6
<PAGE>
sufficient liquidity of the assets of the Fund to pay for tendered Shares, the
Fund may, within the limits set forth in the Prospectus, borrow money as
described above or may terminate the Offer.
10. SUMMARY FINANCIAL INFORMATION. Set forth below is a summary of
selected financial information for the Fund for the period November 3, 1995
(commencement of operations) to October 31, 1996. The information with respect
to the period November 3, 1995 (commencement of operations) to October 31, 1996
has been excerpted from the Fund's audited financial statements. More
comprehensive financial information is included in such financial statements
(copies of which have been filed as an exhibit to the Schedule 13E-4 filed with
the Securities and Exchange Commission (the "Commission") and may be obtained
from the Transfer Agent) and the summary of selected financial information set
forth below is qualified in its entirety by reference to such document and the
financial information, the notes thereto and related matter contained therein.
SUMMARY FINANCIAL INFORMATION
(IN 000'S EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
NOVEMBER 3, 1995*
TO OCTOBER 31,
1996
------------------
<S> <C>
INCOME STATEMENT
Investment income........................................................................... $ 5,319
Total expenses before reimbursement......................................................... 1,129
Reimbursement of expenses................................................................... (651)
Total expenses after reimbursement.......................................................... 478
--------
Investment income--net...................................................................... $ 4,841
--------
--------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized loss on investments--net........................................................... $ (461)
Unrealized appreciation on investments--net................................................. 1,935
FINANCIAL HIGHLIGHTS (AT END OF PERIOD)
Total assets................................................................................ 123,063
Total liabilities........................................................................... 1,490
--------
Net assets.................................................................................. $ 121,573
--------
--------
Net assets, net of Preferred Stock.......................................................... $ 83,573
--------
--------
Preferred Stock outstanding................................................................. $ 38,000
--------
--------
Net asset value per share of common stock................................................... $ 10.17
Shares of common stock outstanding.......................................................... 8,219
PER SHARE
Investment income--net...................................................................... $ 0.68
Dividends from net investment income to common stockholders................................. $ 0.59
RATIOS
Total expenses, net of reimbursement, to average net assets................................. .53%**
Total expenses to average net assets........................................................ 1.26%**
Investment income--net, to average net assets............................................... 5.40%**
</TABLE>
- ------------------------
* Commencement of operations
** Annualized.
7
<PAGE>
11. CERTAIN INFORMATION ABOUT THE FUND. The Fund was incorporated under
the laws of the State of Maryland on July 13, 1994 and is a non-diversified,
closed-end, management investment company registered under the Investment
Company Act of 1940, as amended. The investment objective of the Fund is to
provide stockholders with high current income exempt from Federal income taxes
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 will seek to achieve its
objective by investing at least 80% of its assets, except during temporary
defensive periods, in a portfolio of obligations issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies or instrumentalities paying interest which, in the
opinion of bond counsel to the issuer, is exempt from Federal income taxes
("Municipal Bonds"). FAM, an affiliate of Merrill Lynch, acts as investment
adviser and administrator for the Fund.
There have not been any transactions involving the Shares of the Fund that
were effected during the past 40 business days by the Fund, any executive
officer or Director of the Fund, any person controlling the Fund, any executive
officer or Director of any corporation ultimately in control of the Fund or by
any associate or subsidiary of any of the foregoing including any executive
officer or Director of any such subsidiary, except that within the past 40
business days, pursuant to a continuous public offering of its Shares, the Fund
has sold approximately 256,390 Shares at the NAV per Share on the date of each
such sale.
The Fund has been granted an exemption by the Securities and Exchange
Commission (the "Commission") relating to tender offers which is based on
representations by the Fund that no secondary market for the Fund's Shares is
expected to develop. The exemption is conditioned on (1) the absence of a
secondary market, (2) the Fund suspending the offering of its Shares during the
five business days preceding the termination of a tender offer and (3) the Fund
refraining from purchasing non-investment grade and unrated Municipal Bonds in
secondary market transactions during such five business day period.
The principal executive offices of the Fund are located at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
12. ADDITIONAL INFORMATION. The Fund has filed a statement on Schedule
13E-4 with the Commission which includes certain additional information relating
to the Offer. Such material may be inspected and copied at prescribed rates at
the Commission's public reference facilities at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549; Seven World Trade Center, New York, New
York 10048; and Room 3190, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained by mail at
prescribed rates from the Public Reference Branch of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549.
13. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a
general summary of the Federal income tax consequences of a sale of Shares
pursuant to the Offer. You should consult your own tax adviser for a complete
description of the tax consequences to you of a sale of Shares pursuant to the
Offer.
The sale of Shares pursuant to the Offer will be a taxable transaction for
Federal income tax purposes, either as a "sale or exchange," or under certain
circumstances, as a "dividend." In general, the transaction should be treated as
a sale or exchange of the Shares under Section 302 of the Internal Revenue Code
of 1986, as amended (the "Code"), if the receipt of cash (a) is "substantially
disproportionate" with respect to the stockholder, (b) results in a "complete
redemption" of the stockholder's interest in the Fund, or (c) is "not
essentially equivalent to a dividend" with respect to the stockholder. A
"substantially disproportionate" distribution generally requires a reduction of
at least 20% in the stockholder's proportionate interest in the Fund after all
Shares are tendered. A "complete redemption" of a stockholder's interest
generally requires that the stockholder dispose of all Shares directly owned or
attributed to the stockholder under Section 318 of the Code. A distribution "not
essentially equivalent to a dividend" requires that there be a "meaningful
reduction" in the stockholder's interest, which should be the case if the
stockholder has a
8
<PAGE>
minimal interest in the Fund, exercises no control over Fund affairs and suffers
a reduction in proportionate interest in the Fund.
If any of these three tests for "sale or exchange" treatment is met, you
will recognize gain or loss equal to the difference between the amount of cash
received pursuant to the Offer and the adjusted tax basis of the Shares sold.
Such gain or loss will be a capital gain or loss if the Shares sold have been
held by you as a capital asset. In general, capital gain or loss with respect to
Shares sold will be long-term capital gain or loss if the holding period for
such Shares is more than one year.
If none of the Code Section 302 tests are met, you may be treated as having
received, in whole or in part, a dividend, return of capital or capital gain,
depending on (i) whether the Fund has sufficient earnings and profits to support
a dividend and (ii) your tax basis in the Shares. The tax basis in the Shares
tendered to the Fund will be transferred to any remaining Shares held by you. In
addition, if the sale of Shares pursuant to the Offer is treated as a "dividend"
to a tendering stockholder, a Code Section 305(c) constructive dividend may
result to a non-tendering stockholder whose proportionate interest in the
earnings and assets of the Fund has been increased as a result of such tender.
Accordingly, the differentiation between "dividend" and "sale or exchange"
treatment is important with respect to the amount and character of income that
tendering stockholders are deemed to receive. In addition, while the marginal
tax rates for dividends and capital gains are the same for corporate
stockholders, currently under the Code the top income tax rate on ordinary
income of individuals (39.6%) exceeds the maximum marginal tax rate on long-term
capital gains (28%).
The Transfer Agent will be required to withhold 31% of the gross proceeds
paid to a stockholder or other payee pursuant to the Offer unless either: (a)
the stockholder has provided the stockholder's taxpayer identification
number/social security number and certifies under penalties of perjury: (i) that
such number is correct, and (ii) either that (A) the stockholder is exempt from
backup withholding, (B) the stockholder is not otherwise subject to backup
withholding as a result of a failure to report all interest or dividends, or (C)
the Internal Revenue Service has notified the stockholder that the stockholder
is no longer subject to backup withholding; or (b) an exception applies under
applicable law and Treasury regulations. Foreign stockholders may be required to
provide the Transfer Agent with a completed Form W-8, available from the
Transfer Agent, in order to avoid 31% backup withholding.
Unless a reduced rate of withholding or a withholding exemption is available
under an applicable tax treaty, a stockholder who is a nonresident alien or a
foreign entity may be subject to a 30% United States withholding tax on the
gross proceeds received by such stockholder, if the proceeds are treated as a
"dividend" under the rules described above. Foreign stockholders should consult
their tax advisers regarding application of these withholding rules.
14. EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENTS. The Fund reserves
the right, at any time and from time to time, to extend the period of time
during which the Offer is pending by making a public announcement thereof. In
the event that the Fund so elects to extend the tender period, the NAV for the
Shares tendered will be determined as of the close of the New York Stock
Exchange on the Expiration Date, as extended. During any such extension, all
Shares previously tendered and not purchased or withdrawn will remain subject to
the Offer. The Fund also reserves the right, at any time and from time to time
up to and including the Expiration Date, to (a) terminate the Offer and not to
purchase or pay for any Shares, and (b) amend the Offer in any respect by making
a public announcement. Such public announcement will be issued no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date and will disclose the approximate number of Shares
tendered as of that date. Without limiting the manner in which the Fund may
choose to make a public announcement of extension, termination or amendment,
except as provided by applicable law (including Rule 13e-4(e)(2)), the Fund
shall have no obligation to publish, advertise or otherwise communicate any such
public announcement, other than by making a release to the Dow Jones News
Service.
9
<PAGE>
15. MISCELLANEOUS. The Offer is not being made to, nor will tenders be
accepted from, stockholders in any jurisdiction in which the Offer or its
acceptance would not comply with the securities or Blue Sky laws of such
jurisdiction. The Fund is not aware of any jurisdiction in which the Offer or
tenders pursuant thereto would not be in compliance with the laws of such
jurisdiction. However, the Fund reserves the right to exclude stockholders from
the Offer in any jurisdiction in which it is asserted that the Offer cannot
lawfully be made. The Fund believes such exclusion is permissible under
applicable tender offer rules, provided the Fund makes a good faith effort to
comply with any state law deemed applicable to the Offer. In any jurisdiction
the securities or Blue Sky laws of which require the Offer to be made by a
licensed broker or dealer the Offer shall be deemed to be made on the Fund's
behalf by Merrill Lynch.
MERRILL LYNCH MUNICIPAL
STRATEGY FUND, INC.
January 17, 1997
10
<PAGE>
EXHIBIT (a)(2)
<PAGE>
LETTER OF TRANSMITTAL
TO BE USED TO TENDER SHARES OF
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
PURSUANT TO THE OFFER TO PURCHASE
DATED JANUARY 17, 1997
-------------------
THE EXPIRATION DATE AND THE WITHDRAWAL DEADLINE IS 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON FRIDAY, FEBRUARY 14, 1997, UNLESS EXTENDED
-------------------
TRANSFER AGENT:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
ATTENTION: MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289
TELEPHONE INFORMATION NUMBER: (800) 637-3863
DELIVERY TO AN ADDRESS OTHER THAN THAT SHOWN ABOVE DOES NOT CONSTITUTE VALID
DELIVERY.
THIS LETTER OF TRANSMITTAL IS TO BE USED ONLY IF THE STOCKHOLDER IS A RECORD
OWNER OF SHARES WHO DESIRES TO EFFECT THE TENDER OFFER TRANSACTION HIMSELF BY
TRANSMITTING THE NECESSARY DOCUMENTS TO THE FUND'S TRANSFER AGENT AND DOES NOT
INTEND TO REQUEST HIS BROKER OR DEALER TO EFFECT THE TRANSACTION FOR HIM. A
STOCKHOLDER WHO HOLDS SHARES IN A MERRILL LYNCH ACCOUNT OR THROUGH ANOTHER
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE IS NOT THE
RECORD OWNER AND SHOULD INSTRUCT HIS FINANCIAL CONSULTANT OR SUCH OTHER NOMINEE
TO EFFECT THE TENDER ON HIS BEHALF.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Gentlemen:
The undersigned hereby tenders to the Merrill Lynch Municipal Strategy Fund,
Inc., a closed-end investment company incorporated under the laws of the State
of Maryland (the "Fund"), the shares described below of its common stock, par
value $.10 per share (the "Shares"), at a price equal to the net asset value per
Share ("NAV") calculated on the Expiration Date (as defined in the Offer to
Purchase), in cash, less any applicable Early Withdrawal Charge, upon the terms
and conditions set forth in the Offer to Purchase dated January 17, 1997,
receipt of which is hereby acknowledged, and in this Letter of Transmittal
(which together constitute the "Offer").
The undersigned hereby sells to the Fund all Shares tendered hereby that are
purchased pursuant to the Offer and hereby irrevocably constitutes and appoints
the Transfer Agent as attorney in fact of the undersigned, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), to present such Shares and any Share certificates for
cancellation of such Shares on the Fund's books. The undersigned hereby warrants
that the undersigned has full authority to sell the Shares tendered hereby and
that the Fund will acquire good title thereto, free and clear of all liens,
charges, encumbrances, conditional sales agreements or other obligations
relating to the sale thereof, and not subject to any adverse claim, when and to
the extent the same are purchased by it. Upon request, the undersigned will
execute and deliver any additional documents necessary to complete the sale in
accordance with the terms of the Offer.
The undersigned recognizes that under certain circumstances set forth in the
Offer to Purchase, the Fund may not be required to purchase any or all of the
Shares tendered hereby. In that event, the undersigned understands that, in the
case of Shares evidenced by certificates, the certificate(s) for any Shares not
purchased will be returned to the undersigned at the address indicated below. In
the case of Shares not evidenced by certificates and held in an Investment
Account, the Transfer Agent will cancel the tender order for any Shares not
purchased and only the purchased Shares will be withdrawn from the Account.
The check for the purchase price for the tendered Shares purchased will be
issued to the order of the undersigned and mailed to the address indicated in
the "Description of Shares Tendered" table below.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and the obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Except as stated in the Offer, this tender is
irrevocable.
<PAGE>
DESCRIPTION OF SHARES TENDERED
(SEE INSTRUCTIONS 3 AND 4)
<TABLE>
<CAPTION>
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE FILL IN EXACTLY THE NAME(S) IN WHICH SHARES ARE SHARES TENDERED
REGISTERED) (ATTACH ADDITIONAL SCHEDULE IF NECESSARY)
NO. OF SHARES
CERTIFICATE LISTED NO. OF SHARES
NO.(S)* ON CERTIFICATE* TENDERED**
<S> <C> <C> <C>
Account No. Total Shares Tendered...........
</TABLE>
* Need not be completed by stockholders whose Shares are not evidenced by
certificates.
** To be completed by all tendering stockholders, whether or not your Shares
are evidenced by certificates. If you desire to tender fewer than all
Shares held in your account or evidenced by a certificate listed above,
please indicate in this column the number you wish to tender. Otherwise all
Shares evidenced by such certificate or held in your account will be deemed
to have been tendered.
SIGNATURE FORM
--SIGN HERE--
(SEE INSTRUCTIONS 1, 5 AND 8)
Social Security No.
or Taxpayer Identification No. ................
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) either
(A) that I am exempt from backup withholding or (B) that I am not subject to
backup withholding either because I have not been notified that I am subject
thereto as a result of 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
underreporting and you have not received a notice from the IRS that backup
withholding has been terminated.
...........................................................................
...........................................................................
(SIGNATURE(S) OF OWNER(S) EXACTLY AS REGISTERED)
Date ................ , 1997
Name(s) and Address(es) ....................................................
...........................................................................
(PLEASE PRINT)
Telephone Number ( ) ................
Signature(s) Guaranteed ....................................................
....................................................
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal
must be guaranteed by a member firm of a registered national securities
exchange, or a commercial bank or trust company having an office, branch or
agency in the United States. This Letter of Transmittal is to be used only if
you may effect the tender offer transaction yourself and do not intend to
request your broker or dealer to effect the transaction for you.
2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. Certificates for all
tendered Shares, together with a properly completed and duly executed Letter of
Transmittal, should be mailed or delivered to the Transfer Agent on or prior to
the Expiration Date at the appropriate address set forth herein and must be
received by the Transfer Agent prior to the Expiration Date.
THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES FOR SHARES,
IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER.
3. INADEQUATE SPACE. If the space provided is inadequate, the certificate
numbers and number of Shares should be listed on a separate signed schedule
attached hereto.
4. PARTIAL TENDERS. If fewer than all of the Shares in your Investment
Account or evidenced by any certificate submitted are to be tendered, fill in
the number of Shares which are to be tendered in the column entitled "No. of
Shares Tendered." If applicable, a new certificate for the remainder of the
Shares evidenced by your old certificate(s) will be sent to you as soon as
practicable after the Expiration Date of the Offer. All Shares represented by
each certificate listed or in your Investment Account are deemed to have been
tendered unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL, AUTHORIZATION AND ENDORSEMENTS.
(a) If the Letter of Transmittal is signed by the registered holder(s) of
the Shares tendered hereby, the signature(s) must correspond with the name(s) in
which the Shares are registered.
(b) If the Shares are held of record by two or more joint holders, all such
holders must sign this Letter of Transmittal.
(c) If any tendered Shares are registered in different names it will be
necessary to complete, sign and submit as many separate Letters of Transmittal
as there are different registrations of Shares.
(d) When this Letter of Transmittal is signed by the registered holder(s) of
the Shares listed and, if applicable, of the certificates transmitted hereby, no
endorsements of certificates or separate authorizations are required.
(e) If this Letter of Transmittal or any certificates or authorizations are
signed by trustees, executors, administrators, guardians, attorneys in fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and must submit proper
evidence satisfactory to the Fund of their authority so to act.
6. TRANSFER TAXES. The Fund will pay all the taxes, if any, payable on the
transfer to it of Shares purchased pursuant to the Offer. If tendered
certificates are registered in the name of any person other than the person(s)
signing this Letter of Transmittal, the amount of any transfer taxes (whether
imposed on the registered holder or such other person) payable on account of the
transfer to such person of such Shares will be deducted from the purchase price
unless satisfactory evidence of the payment of such taxes, or exemption
therefrom, is submitted.
7. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt) and acceptance of any tender of Shares will be
determined by the Fund, whose determinations shall be final and binding. The
Fund reserves the absolute right to reject any or all tenders determined by it
not to be in appropriate form or the acceptance of or payment for which would,
in the opinion of counsel for the Fund, be unlawful. The Fund also reserves the
absolute right to waive any of the conditions of the Offer or any defect in any
tender with respect to any particular Shares or any particular stockholder, and
the Fund's interpretations of the terms and conditions of the Offer (including
these instructions) will be final and binding. Unless waived, any defects or
irregularities in connection with tenders must be cured within such time as the
Fund shall determine. Tenders will not be deemed to have been made until all
defects and irregularities have been cured or waived. Neither the Fund, Fund
Asset Management, L.P. nor the Transfer Agent, nor any other person shall be
obligated to give notice of defects or irregularities in tenders, nor shall any
of them incur any liability for failure to give any such notice.
8. IMPORTANT TAX INFORMATION. Under Federal income tax law, a stockholder
whose tendered Shares are accepted for payment generally is required by law to
provide the Transfer Agent (as payer) with his correct taxpayer identification
number, which is accomplished by completing and signing the Signature Form.
<PAGE>
EXHIBIT (a)(3)
<PAGE>
[LOGO]
Dear Stockholder:
As you requested, we are enclosing a copy of the Merrill Lynch Municipal
Strategy Fund, Inc. (the "Fund") Offer to Purchase dated January 17, 1997 (the
"Offer to Purchase") 1,000,000 issued and outstanding shares (the "Shares"). The
Offer to Purchase is for cash at Net Asset Value ("NAV") per Share as of the
expiration date of the Offer, less any Early Withdrawal Charge. Together with
the Offer to Purchase we are sending you a Letter of Transmittal (the "Letter")
for use by holders of record of Shares which you should read carefully. Certain
selected financial information with respect to the Fund is set forth in the
Offer to Purchase.
If, after reviewing the information set forth in the Offer to Purchase and
Letter, you wish to tender Shares for purchase by the Fund, please either
contact your Merrill Lynch Financial Consultant or other broker, dealer or
nominee to effect the tender for you or, if you are the record owner of the
Shares, you may follow the instructions contained in the Offer to Purchase and
Letter.
Neither the Fund nor its Board of Directors is making any recommendation to
any holder of Shares as to whether to tender Shares. Each stockholder is urged
to consult his or her broker or tax adviser before deciding whether to tender
any Shares.
The Fund's distribution rate for the period November 22, 1996 through
January 1, 1997 based on the amounts actually distributed by the Fund, was 5.66%
based on the January 1, 1997 NAV of $10.27 per share. For the quarter ended
December 31, 1996, the Fund's highest NAV was $10.37 per share and its lowest
NAV was $10.05 per share. The Fund's NAV on January 14, 1997 was $10.18 per
share. The Fund publishes its NAV each week in BARRON'S. It appears in the
"Investment Company Institute List" under the sub-heading "Closed-End Bond
Funds" within the listings of mutual funds and closed-end funds.
Requests for current NAV quotations or for additional copies of the Offer to
Purchase, the Letter and any other tender offer documents may be directed to the
Merrill Lynch Response Center at (800) 637-7455, ext. 1354.
Should you have any other questions on the enclosed material, please do not
hesitate to contact your Merrill Lynch Financial Consultant or other broker or
dealer or call the Fund's Transfer Agent, Merrill Lynch Financial Data Services,
Inc., at (800) 637-3863. We appreciate your continued interest in Merrill Lynch
Municipal Strategy Fund, Inc.
Yours truly,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
<PAGE>
EXHIBIT (g)
<PAGE>
1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Municipal Strategy Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Merrill Lynch
Municipal Strategy Fund, Inc. as of October 31, 1996, the related
statements of operations and changes in net assets, and the
financial highlights for the period November 3, 1995 (commencement
of operations) to October 31, 1996. These financial statements and
the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian and broker. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Municipal Strategy Fund, Inc. as of October 31, 1996,
the results of its operations, the changes in its net assets and the
financial highlights for the period November 3, 1995 to October 31,
1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 9, 1996
<PAGE>
2
Portfolio Abbreviations
To simplify the listings of Merrill Lynch Municipal Strategy Fund,
Inc.'s portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below and at right.
AMT Alternative Minimum Tax (subject to)
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
IRS Inverse Rate Securities
M/F Multi-Family
PCR Pollution Control Revenue Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Alabama--2.4% NR* Aaa $ 2,815 Alabama HFA, S/F Home Mortgage Revenue Bonds, Series A-1,
6.60% due 4/01/2019 $ 2,941
Arizona--0.5% A1+ P1 600 Coconino County, Arizona, Pollution Control Corporation
Revenue Bonds (Arizona Public Service--Navajo Project),
VRDN, AMT, Series A, 3.65% due 10/01/2029 (h) 600
Arkansas--1.0% AAA NR* 1,180 Arkansas State Development Finance Authority, S/F Mortgage
Revenue Bonds (Mortgage Backed Securities Program), AMT,
Series D, 6.80% due 1/01/2022 (f)(g) 1,236
California--5.2% BBB- Baa 5,000 Foothill, California, Eastern Transportation Corridor Agency,
Toll Road Revenue Bonds, Senior Lien, Series A, 6.50% due
1/01/2015 (i) 1,600
AAA Aaa 1,750 Los Angeles, California, Wastewater System Revenue Refunding
Bonds, Series D, 5.20% due 11/01/2021 (b) 1,623
AAA Aaa 3,000 San Diego, California, IDR (San Diego Gas and Electric Co.),
Series A, 6.10% due 9/01/2018 (a) 3,092
Colorado--5.3% NR* Aa 2,000 Colorado HFA, S/F Program, AMT, Series D-1, 7.375% due 6/01/2026 2,185
AAA Aaa 3,840 El Paso County, Colorado, Falcon School District No. 49,
UT, 6.50% due 12/01/2015 (a) 4,258
Connecticut--4.0% AA Aa 3,825 Connecticut State, HFA, Housing Mortgage Finance Program
Revenue Bonds, Sub-Series B-1, 6.125% due 5/15/2018 3,892
BBB- NR* 1,000 Connecticut State Health and Educational Facilities Authority
Revenue Bonds (University of New Haven), Series D, 6.70% due
7/01/2026 1,005
Florida--3.6% AA Aa 1,000 Florida HFA, Refunding (Homeowner Mortgage), Series 1B, 5.95%
due 7/01/2014 1,012
NR* Baa1 1,000 Jacksonville, Florida, Health Facilities Authority, IDR
(National Benevolent--Cypress Village), Series A, 6.25% due
12/01/2026 996
BBB+ Baa2 1,000 Nassau County, Florida, PCR, Refunding (ITT Rayonier Inc.
Project), 6.25% due 6/01/2010 1,016
NR* Baa 750 Palm Bay, Florida, Lease Revenue Refunding Bonds (Florida
Education and Research Foundation Project), Series A, 6.85%
due 9/01/2013 802
A1 VMIG1++ 600 Pinellas County, Florida, Health Facilities Authority, Revenue
Refunding Bonds (Pooled Hospital Loan Program), DATES, 3.65%
due 12/01/2015 (h) 600
Georgia--0.9% AAA Aaa 1,000 Municipal Electric Authority of Georgia (Project One), Sub-Series
A, 6.50% due 1/01/2026 (c) 1,090
Illinois--8.8% NR* NR* 2,000 Beardstown, Illinois, IDR (Jefferson Smurfit Corp. Project),
8% due 10/01/2016 2,121
AAA Aaa 3,630 Illinois Development Finance Authority, PCR, Refunding
(Commerce Edison Company Project), Series D, 6.75% due
3/01/2015 (c) 3,971
AA- Aa3 3,285 Illinois Development Finance Authority Revenue Bonds
(Presbyterian Home Lake), Series B, 6.30% due 9/01/2022 3,367
NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds (Holy Cross
Hospital Project), 6.70% due 3/01/2014 1,284
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
3
<S> <C> <C> <C> <C> <C>
Indiana--4.3% BBB Baa2 4,900 Indianapolis, Indiana, Airport Authority, Special Facilities
Revenue Bonds (Federal Express Corporation Project), AMT, 7.10%
due 1/15/2017 5,240
Maryland--0.9% A- NR* 1,000 Maryland State Energy Financing Administration, Solid Waste
Disposal Revenue Bonds (Wheelabrator Water Projects), AMT, 6.30%
due 12/01/2010 1,039
Massachusetts-- A+ Aa 1,000 Massachusetts State, HFA, S/F Housing Revenue Bonds, Series 41,
5.1% 6.35% due 6/01/2017 1,035
A- NR* 5,000 Massachusetts State Health and Educational Facilities Authority,
Revenue Refunding Bonds (Melrose Wakefield Hospital), Series B,
6.25% due 7/01/2012 5,106
Michigan--6.3% Michigan State Hospital Finance Authority Revenue Bonds:
AAA Aaa 3,100 INFLOS (Sisters of Mercy), 8.717% due 2/15/2022 (d)(e) 3,314
A A 500 Refunding (Detroit Medical Center Obligated Group), Series A,
6.50% due 8/15/2018 522
AAA Aaa 3,600 Western Townships, Michigan, Utilities Authority, Sewer Disposal
System, Crossover Refunding, 6.50% due 1/01/2019 (d) 3,829
Minnesota--0.8% AA+ Aa 1,000 Minnesota State, HFA, S/F Mortgage, Series D, 6% due 1/01/2016 1,012
New Mexico--2.4% BB+ Ba1 2,900 Farmington, New Mexico, PCR, Refunding (Public Service
Company--San Juan Project), Series A, 6.40% due 8/15/2023 2,906
New York--11.7% AAA Aaa 2,000 Metropolitan Transportation Authority, New York, Commuter
Facilities Revenue Bonds, Series A, 6.10% due 7/01/2026 (b) 2,074
BBB+ Baa1 2,500 New York City, New York, GO, Refunding, UT, Series C, 5.875%
due 2/01/2016 2,417
BBB+ Baa1 2,500 New York City, New York, GO, UT, Series F, 5.75% due 2/01/2019 2,365
BB+ Baa2 3,525 New York City, New York, IDA, Special Facility Revenue Bonds
(American Airlines Inc. Project), AMT, 6.90% due 8/01/2024 3,747
A Aa 3,400 New York State Environmental Facilities Corporation, PCR (State
Water Revolving Fund), Series E, 6.50% due 6/15/2014 3,646
North Carolina-- AA Aa 1,500 North Carolina HFA, S/F, Series II, 6.20% due 3/01/2016 1,547
1.3%
Ohio--3.6% BBB- NR* 1,750 Dayton, Ohio, Special Facilities Revenue Refunding Bonds (Emery
Air Freight Corp.--Emery Worldwide Air Inc.), Series F, 6.05%
due 10/01/2009 1,779
NR* Aa 1,000 Franklin County, Ohio, Hospital Revenue Refunding and
Improvement Bonds (Childrens Hospital Project), Series A,
5.875% due 11/01/2025 995
AAA Aaa 1,500 Ohio State, Water Development Authority, Pollution Control
Facilities Revenue Refunding Bonds (Pennsylvania Power Co.
Project), 6.15% due 8/01/2023 (c) 1,559
Oklahoma--1.4% BBB Baa 1,650 Holdenville, Oklahoma, Industrial Authority, Correctional
Facility Revenue Bonds, 6.60% due 7/01/2010 1,689
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
4
<S> <C> <C> <C> <C> <C>
Oregon--1.7% NR* Aa 1,630 Oregon State Housing and Community Services Department, S/F
Mortgage Program Revenue Bonds, AMT, Series E, 7.10% due
7/01/2014 1,709
AAA Aaa 1,000 Portland, Oregon, Arena Gas Tax Revenue Bonds, 6.25% due
6/01/2017 (d)(i) 291
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
Pennsylvania--7.1% AAA Aaa $ 2,950 Keystone Oaks, Pennsylvania, School District, IRS, UT,
Series D, 7.754% due 9/01/2016 (c)(e) $ 2,966
Pennsylvania Economic Development Financing Authority,
Resource Recovery Revenue Bonds:
BBB- NR* 2,500 (Colver Project), AMT, Series D, 7.15% due 12/01/2018 2,619
NR* NR* 2,000 (Northampton Generating), Series A, 6.50% due 1/01/2013 1,961
NR* NR* 1,000 Philadelphia, Pennsylvania, Authority for IDR, Refunding
(Commercial Development--Philadelphia Airport), AMT, 7.75%
due 12/01/2017 1,070
South Carolina-- AAA Aaa 2,000 Fairfield County, South Carolina, PCR (South Carolina Gas and
3.1% Electric Co.), 6.50% due 9/01/2014 (a) 2,188
A- A1 1,500 Richland County, South Carolina, Solid Waste Disposal
Facilities Revenue Bonds (Union Camp Corporation Project),
AMT, Series A, 6.75% due 5/01/2022 1,589
Tennessee--0.5% AA- Aa3 620 Humphreys County, Tennessee, IDB, Solid Waste Disposal Revenue
Bonds (E.I. DuPont de Nemours & Co. Project), AMT, 6.70% due
5/01/2024 664
Texas--10.2% A- A 5,760 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Memorial Hospital Systems Project),
Series A, 6.625% due 6/01/2024 6,036
AAA Aaa 1,000 Harris County, Texas, Refunding (Toll Road), Senior Lien, 5.375%
due 8/15/2020 (b) 958
AAA Aaa 2,600 Red River Authority, Texas, PCR, Refunding (West Texas Utilities
Co.--Public Service Co. of Oklahoma--Central Power and Light
Co.), 6% due 6/01/2020 (a) 2,674
AAA Aaa 2,500 Texas State Municipal Power Agency, Revenue Refunding Bonds,
Series A, 6.75% due 9/01/2012 (c) 2,772
Utah--0.2% NR* P1 200 Salt Lake County, Utah, PCR, Refunding (Service Station
Holdings Project), VRDN, 3.60% due 2/01/2008 (h) 200
Virginia--3.1% NR* NR* 1,700 Richmond, Virginia, IDA, Museum Facilities Revenue Refunding
Bonds (Virginia Historical Society Project), 6.25% due 9/01/2016 1,681
AA+ Aa1 2,000 Virginia State, HDA, M/F Housing, Series B, 5.95% due 5/01/2016 2,019
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5
<S> <C> <C> <C> <C> <C>
Wyoming--1.7% BBB Baa2 2,000 Sweetwater County, Wyoming, Solid Waste Disposal Revenue
Bonds (FMC Corporation Project), AMT, Series A, 7% due 6/01/2024 2,119
Puerto Rico--1.9% BBB+ Baa1 2,500 Puerto Rico Electric Power Authority Revenue Bonds, 5.25% due
7/01/2021 2,290
Total Investments (Cost--$118,383)--99.0% 120,318
Other Assets Less Liabilities--1.0% 1,255
--------
Net Assets--100.0% $121,573
--------
--------
(a)MBIA Insured.
(b)FGIC Insured.
(c)AMBAC Insured.
(d)FSA Insured.
(e)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at October 31, 1996.
(f)FNMA Collateralized.
(g)GNMA Collateralized.
(h)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1996.
(i)Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of October 31, 1996
Assets: Investments, at value (identified cost--$118,382,975) (Note 1a) $120,317,921
Cash 93,817
Receivables:
Interest $ 2,138,178
Capital shares sold 192,616 2,330,794
------------
Deferred organization expenses (Note 1e) 249,048
Prepaid expenses and other assets (Note 1e) 71,191
------------
Total assets 123,062,771
------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
6
<S> <C> <C> <C>
Liabilities: Payables:
Securities purchased 989,690
Dividends to shareholders (Note 1f) 190,131
Administration fees (Note 2) 25,354
Investment advisory fees (Note 2) 15,213 1,220,388
------------
Accrued expenses and other liabilities 269,506
------------
Total liabilities 1,489,894
------------
Net Assets: Net assets $121,572,877
------------
------------
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (1,520 shares of
AMPS* issued and outstanding at $25,000
per share liquidation preference) $ 38,000,000
Common Stock, par value $.10 per share (8,218,896 shares
issued and outstanding) $ 821,890
Paid-in capital in excess of par 81,271,986
Undistributed investment income--net 4,568
Accumulated realized capital losses on investments--net (Note 5) (460,513)
Unrealized appreciation on investments--net 1,934,946
------------
Total--Equivalent to $10.17 net asset value per share of Common Stock 83,572,877
------------
Total capital $121,572,877
------------
------------
*Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
For the Period November 3, 1995++ to October 31, 1996
Investment Interest and amortization of premium and discount earned $ 5,319,253
Income (Note 1d):
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
7
<S> <C> <C> <C>
Expenses: Investment advisory fees (Note 2) $ 446,931
Administrative fees (Note 2) 223,466
Registration fees 87,541
Transfer agent fees 71,704
Amortization of organization expenses (Note 1e) 61,964
Accounting services (Note 2) 60,526
Commission fees 48,107
Professional fees 41,000
Listing fees 34,941
Directors' fees and expenses 24,645
Custodian fees 11,606
Printing and shareholder reports 10,467
Pricing fees 5,974
------------
Total expenses before reimbursement 1,128,872
Reimbursement of expenses (Note 2) (650,746)
------------
Total expenses after reimbursement 478,126
------------
Investment income--net 4,841,127
------------
Realized & Realized loss on investments--net (460,513)
Unrealized Gain Unrealized appreciation on investments--net 1,934,946
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 6,315,560
(Notes 1b, 1d & 3): ------------
------------
++Commencement of Operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
For the Period
Nov. 3, 1995++
Increase (Decrease) in Net Assets: to Oct. 31, 1996
Operations: Investment income--net $ 4,841,127
Realized loss on investments--net (460,513)
Unrealized appreciation on investments--net 1,934,946
------------
Net increase in net assets resulting from operations 6,315,560
------------
Dividends to Investment income--net:
Shareholders Common Stock (4,173,956)
(Note 1f): Preferred Stock (662,603)
------------
Net decrease in net assets resulting from dividends to shareholders (4,836,559)
------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
8
<S> <C> <C>
Capital Stock Proceeds from issuance of Preferred Stock 38,000,000
Transactions Net increase in net assets derived from Common Stock transactions 82,293,876
(Notes 1e & 4): Offering costs resulting from the issuance of Preferred Stock (300,000)
------------
Net increase in net assets derived from capital stock transactions 119,993,876
------------
Net Assets: Total increase in net assets 121,472,877
Beginning of period 100,000
------------
End of period* $121,572,877
------------
------------
*Undistributed investment income--net $ 4,568
------------
------------
++Commencement of Operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Nov. 3, 1995++ to
Increase (Decrease) in Net Asset Value: Oct. 31, 1996
Per Share Net asset value, beginning of period $ 10.00
Performance: ------------
Investment income--net .68
Realized and unrealized gain on investments--net .21
------------
Total from investment operations .89
------------
Less dividends to Common Stock shareholders:
Investment income--net (.59)
------------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.09)
Capital charge resulting from issuance of Preferred Stock (.04)
------------
Total effect of Preferred Stock activity (.13)
------------
Net asset value, end of period $ 10.17
------------
------------
Total Investment Based on net asset value per share 7.81%+++
Return:** ------------
------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
9
<S> <C> <C>
Ratios to Average Expenses, net of reimbursement .53%*
Net Assets:*** ------------
------------
Expenses 1.26%*
------------
------------
Investment income--net 5.40%*
------------
------------
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 83,573
Data: ------------
------------
Preferred Stock outstanding, end of period (in thousands) $ 38,000
------------
------------
Portfolio turnover 234.41%
------------
------------
Leverage: Asset coverage per $1,000 $ 3,199
------------
------------
Dividends Investment income--net $ 564
Per Share on ------------
------------
Preferred Stock
Outstanding:
*Annualized.
**Total investment returns exclude the effects of the early
withdrawal charge, if any. The Fund is a continuously offered,
closed-end fund, the shares of which are offered at net asset value.
Therefore, no separate market exists for such shares.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Commencement of Operations.
++++The Fund's Preferred Stock was issued on March 11, 1996.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
10
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
continuously offered, non-diversified, closed-end management
investment company. The following is a summary of significant
accounting policies followed by the Fund.
<PAGE>
11
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued at
the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers
that make markets in the securities. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
settlement prices as of the close of such exchanges. Options, which
are traded on exchanges, are valued at their last sale price as of
the close of such exchanges or, lacking any sales, at the last
available bid price. Short-term investments with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by a pricing
service retained by the Fund, which may utilize a matrix system for
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.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
<PAGE>
12
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization and offering expenses--Deferred
organization expenses are amortized on a straight-line basis over a
five-year period beginning with the commencement of operations.
Direct expenses relating to the public offering of the Preferred
Stock were charged to capital at the time of issuance. Prepaid
registration fees are charged to expense as the related shares are
issued.
NOTES TO FINANCIAL STATEMENTS (concluded)
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average daily net assets.
<PAGE>
13
The Fund also has entered into an Administrative Services Agreement
with FAM whereby FAM will receive a fee equal to an annual rate of
0.25% of the Fund's average daily net assets, in return for the
perfomance of administrative services (other than investment advice
and related portfolio activities) necessary for the operation of the
Fund. For the period November 3, 1995 to October 31, 1996, FAM
earned fees of $446,931, of which $419,740 was voluntarily waived.
FAM also voluntarily reimbursed the Fund additional expenses of
$231,006.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period November 3, 1995 to October 31, 1996 were
$300,970,894 and $205,009,562, respectively.
Net realized and unrealized gains (losses) as of October 31, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ (1,101,657) $ 1,934,946
Financial futures contracts 641,144 --
------------ ------------
Total $ (460,513) $ 1,934,946
------------ ------------
------------ ------------
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $1,914,325, of which $2,024,224
related to appreciated securities and $109,899 related to
depreciated securities. The aggregate cost of investments at October
31, 1996 for Federal income tax purposes was $118,403,596.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of the holders of Common Stock.
<PAGE>
14
Transactions in Common Stock were as follows:
For the Period
November 3, 1995++ to Dollar
October 31, 1996 Shares Amount
Shares sold 8,321,280 $83,406,334
Shares issued to shareholders in
reinvestment of dividends 87,288 867,654
----------- -----------
Total issued 8,408,568 84,273,988
Shares redeemed (199,672) (1,980,112)
----------- -----------
Net increase 8,208,896 $82,293,876
----------- -----------
----------- -----------
++Prior to November 3, 1995 (commencement of operations), the Fund
issued 10,000 shares to FAM for $100,000.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend periods. The yield in effect at October 31, 1996 was 3.45%.
In connection with the offering of AMPS, the Board of Directors
reclassified 1,520 shares of unissued capital stock as AMPS. As of
October 31, 1996, there were 1,520 AMPS shares authorized, issued
and outstanding with a liquidation preference of $25,000 per share.
The Fund pays commissions to certain broker dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the period November
3, 1995 to October 31, 1996, MLPF&S, an affiliate of FAM, earned
$48,107 as commissions.
5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a net capital loss carryforward of
approximately $355,000, all of which expires in 2004. This amount
will be available to offset like amounts of any future taxable gain.
