MERRILL LYNCH
MUNICIPAL
STRATEGY
FUND, INC.
FUND LOGO
Semi-Annual Report
April 30, 1999
This report, including the financial information herein, is
transmitted to the shareholders of Merrill Lynch Municipal Strategy
Fund, Inc. for their information. It is not a prospectus, circular
or representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a
representation of future performance. The Fund has leveraged its
Common Stock by issuing Preferred Stock to provide the Common Stock
shareholders with a potentially higher rate of return. Leverage
creates risks for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price
of shares of the Common Stock, and the risk that fluctuations in the
short-term dividend rates of the Preferred Stock may affect the
yield to Common Stock shareholders. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Municipal
Strategy Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
The Benefits and
Risks of
Leveraging
Merrill Lynch Municipal Strategy Fund, Inc. utilizes leveraging to
seek to enhance the yield and net asset value of its Common Stock.
However, these objectives cannot be achieved in all interest rate
environments. To leverage, the Fund issues Preferred Stock, which
pays dividends at prevailing short-term interest rates, and invests
the proceeds in long-term municipal bonds. The interest earned on
these investments is paid to Common Stock shareholders in the form
of dividends, and the value of these portfolio holdings is reflected
in the per share net asset value of the Fund's Common Stock.
However, in order to benefit Common Stock shareholders, the yield
curve must be positively sloped; that is, short-term interest rates
must be lower than long-term interest rates. At the same time, a
period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the
risks of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred Stock
for an additional $50 million, creating a total value of $150
million available for investment in long-term municipal bonds. If
prevailing short-term interest rates are approximately 3% and long-
term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock share-holders
are significantly lower than the income earned on the fund's long-
term investments, and therefore the Common Stock shareholders are
the beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock may, as a result,
decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain
securities whose potential income return is inversely related to
changes in a floating interest rate ("inverse floaters"). In
general, interest rates on inverse floaters will decrease when short-
term interest rates increase and increase when short-term interest
rates decrease. Invest-ments in inverse floaters may be
characterized as derivative securities and may subject the Fund to
the risks of reduced or eliminated interest payments and losses of
invested principal. In addition, inverse floaters have the effect of
providing investment leverage and, as a result, the market value of
such securities will generally be more volatile than that of fixed-
rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, therefore, the market value of the Fund's
portfolio and the net asset value of the Fund's shares may also be
more volatile than if the Fund did not invest in these securities.
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
DEAR SHAREHOLDER
For the six months ended April 30, 1999, the Common Stock of Merrill
Lynch Municipal Strategy Fund, Inc. earned $0.308 per share income
dividends. This represents a net annualized yield of 5.85%, based on
a month-end per share net asset value of $10.56. Over the same
period, the total investment return on the Fund's Common Stock was
+1.71%, based on a change in per share net asset value from $10.96
to $10.56, and assuming reinvestment of $0.490 per share ordinary
income dividends and $0.096 per share capital gains distributions.
For the three months ended April 30, 1999, the Fund's total
investment return was +0.09%, based on a change in per share net
asset value from $10.69 to $10.56, and assuming reinvestment of
$0.140 per share income dividends.
For the three months ended April 30, 1999, the Fund's Auction Market
Preferred Stock had an average yield of 3.08%.
The Municipal Market Environment
During the three months ended April 30, 1999, long-term bond yields
generally moved higher. Most of this increase in yields occurred in
February and early March. However, during February, a number of data
releases suggested that US economic growth would likely remain
strong throughout most of 1999. Consequently, long-term US Treasury
bond yields rose more than 60 basis points (0.60%) to 5.70% by early
March. During the remainder of the three-month period, US Treasury
bond yields traded between 5.50% and 5.70% as the lack of
inflationary pressures offset much of the concerns generated by
continued strong economic growth. Long-term uninsured municipal bond
yields rose over 15 basis points to 5.34% by early March, then
declined slightly to close the April quarter at 5.29%, as measured
by the Bond Buyer Revenue Bond Index.
In recent months, the tax-exempt market was better able to withstand
much of the upward pressure on bond yields because of its stronger
technical position. While the continued positive inflationary
environment limited some of the recent increases in taxable bond
yields, a deteriorating supply/demand position helped push taxable
bond yields significantly higher than municipal bond yields. Much of
the US Treasury bond market's underperformance in recent months can
be attributed to the large amounts of taxable corporate issuance.
Large taxable corporate underwritings reduced the demand for US
Government securities in recent months, pushing US Treasury bond
yields higher.
On the other hand, the tax-exempt bond market enjoyed only limited
new-issue supply. During the six months ended April 30, 1999, more
than $123 billion in new long-term tax-exempt securities was
underwritten, a decline of 10% compared to the same period a year
ago. Municipalities issued less than $60 billion in long-term tax-
exempt securities during the three months ended April 30, 1999, a
decline of 25% compared to the April 30, 1998 quarter. More
recently, the rate of new tax-exempt issuance has declined even
further. During April 1999, just over $15 billion in long-term tax-
exempt securities was marketed, a decline of over 33% compared to
April 1998 levels. As municipal bond yields fell and stabilized in
recent quarters, the ability of municipalities to refinance existing
higher-couponed debt declined. This led to a significant decrease in
refunding issuance and an overall drop in new municipal bond supply.
When coupled with ongoing, moderate retail and institutional demand,
the tax-exempt bond market was able to avoid much of the yield
volatility exhibited by US Treasury securities.
Looking ahead, the expected combination of moderate economic growth
in the United States and continued negligible inflation suggests a
relatively stable interest rate environment. However, in recent
years, bond yields reached their annual peaks in early May and
declined for the remainder of the year. A meaningful decline in
fixed-income bond yields would require either evidence of a
significant slowdown in the US economy or the resumption of concerns
regarding renewed shocks to the world's economic system. Currently,
neither condition exists or seems likely in the immediate future. In
our opinion, this suggests a continuation of the narrow trading
ranges seen in recent months.
Portfolio Strategy
During the last several months, we adopted a more neutral investment
strategy, since indicators pointed to a continuation of healthy
domestic economic growth and benign inflation. In addition, we
believed that long-term tax-exempt bond yields would continue to
trade in a relatively narrow range, centered around present levels.
Consequently, we focused on income-producing securities rather than
those issues with the potential for capital gains. Should the tax-
exempt bond market perform as expected, coupon income will become a
more important component of the Fund's performance. Merrill Lynch
Municipal Strategy Fund, Inc. remained fully invested for most of
the past several months. We expect to maintain this position going
forward in order to seek to enhance shareholder income.
Short-term tax-exempt yields exhibited considerable volatility in
recent months. Interest rates paid to the Fund's Preferred Stock
shareholders traded below 3% in December 1998, reflecting heightened
investor demand at year-end. Current short-term interest rate levels
reflect tax season-related pressures, which we expect to abate soon.
During the six-month period ended April 30, 1999, leveraging
generated a significant incremental yield to the Fund's Common Stock
shareholders. Because we believe that the Federal Reserve Board's
monetary policy is likely to remain in a narrow range for the
remainder of the year, we expect short-term tax-exempt interest
rates to remain at, or slightly below, current levels. However,
should the spread between short-term and long-term interest rates
narrow, the benefits of the leverage will decline and, as a result,
reduce the yield to the Fund's Common Stock. (For a complete
explanation of the benefits and risks of leveraging, see page 1 of
this report to shareholders.)
In Conclusion
We appreciate your ongoing interest in Merrill Lynch Municipal
Strategy Fund, Inc., and we look forward to serving your investment
needs in the months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and
Portfolio Manager
(John M. Loffredo)
John M. Loffredo
Vice President and
Portfolio Manager
June 7, 1999
After more than 20 years of service, Arthur Zeikel recently retired
as Chairman of Merrill Lynch Asset Management, L.P. (MLAM). Mr.
Zeikel served as President of MLAM from 1977 to 1997 and as Chairman
since December 1997. Mr. Zeikel is one of the country's most
respected leaders in asset management and presided over the growth
of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500
billion. Mr. Zeikel will remain on Merrill Lynch Municipal Strategy
Fund, Inc.'s Board of Directors. We are pleased to announce that
Terry K. Glenn has been elected President and Director of the Fund.
Mr. Glenn has held the position of Executive Vice President of MLAM
since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors
in wishing him well in his retirement from Merrill Lynch and are
pleased that he will continue as a member of the Fund's Board of
Directors.
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
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)
GO General Obligation Bonds
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alabama--5.5% AAA NR* $ 3,500 Jefferson County, Alabama, Sewer Revenue Bonds, RIB, Series 124,
6.39% due 2/01/2036 (b)(e) $ 3,632
AAA Aaa 6,370 Montgomery, Alabama, BMC Special Care Facilities Financing Authority,
Revenue Refunding Bonds (Baptist Medical Center), Series A, 5.25%
due 5/01/2020 (c) 6,362
Arizona--4.6% B B2 2,000 Apache County, Arizona, IDA, PCR, Refunding (Tucson Electric Power
Company Project), Series A, 5.85% due 3/01/2028 1,981
BB+ Ba1 1,500 Maricopa County, Arizona, Pollution Control Corporation, PCR,
Refunding (Public Service Company), Series A, 5.75% due 11/01/2022 1,501
NR* B1 1,600 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding Bonds (America
West Airlines Inc.), AMT, 6.30% due 4/01/2023 1,668
B B2 2,000 Pima County, Arizona, IDA, Industrial Revenue Refunding Bonds (Tucson
Electric Power Company Project), Series B, 6% due 9/01/2029 2,005
NR* NR* 1,000 Show Low, Arizona, Improvement District No. 5, Special Assessment
Bonds, 6.375% due 1/01/2015 1,056
California AAA NR* 5,250 California Health Facilities Finance Authority, Revenue Refunding
- --8.5% Bonds, RIB, Series 90, 6.535% due 8/15/2028 (a)(e) 5,535
AA- Aa3 2,725 California State, GO, Refunding (Veterans Bonds), AMT, Series BH,
5.60% due 12/01/2032 2,794
San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Second Series, Series 18B (b):
AAA Aaa 3,690 5% due 5/01/2018 3,693
AAA Aaa 3,395 5% due 5/01/2019 3,386
Colorado--6.6% NR* NR* 1,500 Denver, Colorado, Urban Renewal Authority, Tax Increment Revenue Bonds
(Pavilions), AMT, 7.75% due 9/01/2016 1,719
AAA Aaa 8,840 El Paso County, Colorado, School District No. 49, GO (Falcon), 6.50%
due 12/01/2015 (a) 10,201
Connecticut B+ Ba3 5,000 Connecticut State Development Authority, PCR, Refunding (Connecticut
- --7.6% Light & Power Company), Series A, 5.85% due 9/01/2028 5,039
AA- NR* 2,000 Connecticut State Development Authority, Water Facility Revenue Bonds
(Bridgeport Hydraulic Co. Project), AMT, 6.15% due 4/01/2035 2,172
Mashantucket Western Pequot Tribe, Connecticut, Special Revenue Refunding
Bonds:
NR* Baa3 4,000 Sub-Series A, 5.50% due 9/01/2028 3,982
NR* Baa3 2,500 Sub-Series B, 5.75% due 9/01/2027 2,566
Florida--5.9% A- Baa1 4,500 Highlands County, Florida, Health Facilities Authority Revenue Bonds
(Adventist Hospital Health System), 5.25% due 11/15/2020 4,387
BBB- NR* 3,000 Lee County, Florida, IDA, Health Care Facilities, Revenue Refunding
Bonds (Shell Point Village Project), Series A, 5.50% due 11/15/2029 2,949
BBB+ Baa2 1,000 Nassau County, Florida, PCR, Refunding (ITT Rayonier Inc. Project),
6.25% due 6/01/2010 1,050
NR* B1 2,260 Palm Bay, Florida, Lease Revenue Refunding Bonds (Florida Education
and Research Foundation Project), Series A, 6.85% due 9/01/2013 2,222
Georgia--2.2% A1 VMIG1++ 500 Bartow County, Georgia, Development Authority, PCR, Refunding (Georgia
Power Company Plant-Bowen Project), VRDN, 4.25% due 3/01/2024 (j) 500
AAA Aa2 3,250 Georgia State, HFA, S/F Mortgage Revenue Refunding Bonds, Series A,
Sub-Series A-1, 6.125% due12/01/2015 (k) 3,460
Illinois NR* NR* 965 Beardstown, Illinois, IDR (Jefferson Smurfit Corp. Project), 8% due
- --3.4% 10/01/2016 1,096
AA- Aa3 3,285 Illinois Development Finance Authority Revenue Bonds (Presbyterian Home
Lake Project), Series B, 6.30% due 9/01/2022 3,622
NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds (Holy Cross Hospital
Project), 6.70% due 3/01/2014 1,359
Indiana--1.4% AAA Aaa 2,500 Indiana Municipal Power Agency, Power Supply System, Revenue Refunding
Bonds, Series A, 5.30% due 1/01/2023 (a) 2,490
Louisiana B- NR* 4,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain
- --2.2% Company Project), 6.50% due 1/01/2017 3,988
Maryland--1.8% NR* NR* 3,000 Maryland State Energy Financing Administration, Limited Obligation
Revenue Bonds (Cogeneration--AES Warrior Run), AMT, 7.40% due 9/01/2019 3,235
Massachusetts NR* Aaa 3,615 Massachusetts State, HFA, Refunding Bonds, RITR, 6.37% due
- --3.2% 12/01/2028 (a)(e) 3,772
NR* NR* 2,000 Massachusetts State Health and Educational Facilities Authority
Revenue Bonds (Schepens Eye Research Project), Series A, 6.50% due
7/01/2028 1,990
Michigan--2.0% AAA Aaa 3,100 Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
INFLOS, 9.02% due 2/15/2022 (d)(e) 3,561
Mississippi BBB- Ba1 3,000 Mississippi Business Finance Corporation, Mississippi, PCR, Refunding
- --2.5% (System Energy Resources Inc. Project), 5.875% due 4/01/2022 3,010
NR* NR* 1,400 Mississippi Development Bank, Special Obligation Revenue Refunding
Bonds (Diamond Lakes Utilities), Series A, 6.25% due 12/01/2017 1,436
NR* P1 100 Perry County, Mississippi, PCR, Refunding (Leaf River Forest Project),
VRDN, 4.25% due 3/01/2002 (j) 100
Missouri--1.3% AAA NR* 2,145 Missouri State Housing Development Commission, S/F Mortgage Revenue
Bonds, Series C-1, 6.55% due 9/01/2028 (g)(h) 2,376
Nevada--0.9% NR* NR* 1,530 Reno-Sparks Convention and Vistors Authority, Nevada, Limited
Obligation Revenue Refunding Bonds, 6.40% due 11/01/2003 1,632
New Jersey New Jersey Health Care Facilities Financing Authority, Revenue
- --4.3% Refunding Bonds:
BBB Baa2 2,500 (Englewood Hospital and Medical Center), 6.75% due 7/01/2024 2,715
BBB Baa2 1,200 (St. Elizabeth Hospital Obligation Group), 6% due 7/01/2014 1,245
AAA Aaa 3,700 New Jersey State Transportation, Trust Fund Authority Revenue Bonds
(Transportation System), Series A, 5.125% due 12/15/2014 (a) 3,812
</TABLE>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
New Mexico Farmington, New Mexico, PCR, Refunding (Public Service Company--San
- --3.3% Juan Project):
BB+ Ba1 $ 3,000 Series A, 6.30% due 12/01/2016 $ 3,146
BB+ Ba1 1,000 Series D, 6.375% due 4/01/2022 1,063
AAA NR* 1,770 New Mexico Mortgage Finance Authority, S/F Mortgage Revenue Bonds,
AMT, Series E-2, 5.75% due 7/01/2029 (g)(h)(l) 1,828
New York AAA Aaa 6,000 Long Island Power Authority, New York, Electric System Revenue
- --10.7% Bonds, Series A, 5.125% due 12/01/2022 (d) 5,988
A- A3 1,000 New York City, New York, GO, Refunding, Series F, 6% due 8/01/2013 1,086
NR* Aaa 3,000 New York City, New York, Municipal Water Finance Authority, Water
and Sewer System Revenue Bonds, RITR, Series 11, 7.32% due 6/15/2026 (e) 3,469
AAA Aaa 10,000 Port Authority of New York and New Jersey, Consolidated Revenue Bonds,
116th Series, 4.25% due 10/01/2026 (b) 8,712
North AA Aa2 1,840 North Carolina, HFA, S/F Revenue Bonds, Series II, 6.20% due
Carolina--1.1% 3/01/2016 (k) 1,966
Ohio--6.9% BBB NR* 4,875 Dayton, Ohio, Special Facilities Revenue Refunding Bonds (Emery
Air Freight), Series A, 5.625% due 2/01/2018 4,894
NR* Baa3 3,000 Franklin County, Ohio, Hospital Revenue Bonds (Doctors Ohio Health
Corp.), Series A, 5.60% due 12/01/2028 2,928
NR* NR* 3,000 Ohio State, HFA, Mortgage Revenue Bonds, RITR, AMT, Series 15, 6.12% due
9/01/2019 (d)(e) 3,079
NR* NR* 1,400 Ohio State Higher Educational Facility, Commission Revenue Bonds
(University of Findlay Project), 6.125% due 9/01/2016 1,454
Oklahoma AAA NR* 1,650 Holdenville, Oklahoma, Industrial Authority, Correctional Facility
- --1.1% Revenue Bonds, 6.6% due 7/01/2006 (f)(i) 1,927
Oregon--2.7% NR* NR* 3,500 Klamath Falls, Oregon, Electric Revenue Refunding Bonds (Klamath
Cogeneration Project), Senior Lien, 6% due 1/01/2025 3,523
NR* Aa2 1,345 Oregon State Housing and Community Services Department, Mortgage
Revenue Bonds (S/F Mortgage Program), AMT, Series E, 7.10% due 7/01/2014 1,435
Pennsylvania NR* NR* 1,750 Pennsylvania Economic Development Financing Authority, Exempt Facilities
- --1.0% Revenue Bonds (National Gypsum Company), AMT, Series A, 6.25% due
11/01/2027 1,767
South AAA Aaa 1,000 Fairfield County, South Carolina, PCR (South Carolina Electric and
Carolina--0.6% Gas), 6.50% due 9/01/2014 (a) 1,100
Tennessee NR* NR* 1,610 Hardeman County, Tennessee, Correctional Facilities Corporation
- --1.0% Revenue Bonds, 7.75% due 8/01/2017 1,800
Texas--0.1% A1+ VMIG1++ 200 Gulf Coast Waste Disposal Authority, Texas, PCR, Refunding (Amoco
Oil Company Project), VRDN, 4.05% due 10/01/2017 (j) 200
Utah--0.6% NR* NR* 1,000 Tooele County, Utah, PCR, Refunding (Laidlaw Environmental), AMT,
Series A, 7.55% due 7/01/2027 1,093
Virginia NR* NR* 1,500 Dulles Town Center Community Development Authority, Virginia, Special
- --4.5% Assessment Tax (Dulles Town Center Project), 6.25% due 3/01/2026 1,534
AAA NR* 1,810 Newport News, Virginia, Redevelopment and Housing Authority, Revenue
Refunding Bonds, Series A, 5.85% due 12/20/2030 (h) 1,908
NR* NR* 1,750 Peninsula Ports Authority, Virginia, Revenue Refunding Bonds (Port
Facility-Zeigler Coal), 6.90% due 5/02/2022 1,750
Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2031 839
BBB- Baa3 11,600 Senior Series B, 5.906%** due 8/15/2029 1,997
Total Investments (Cost--$172,239)--97.5% 175,785
Other Assets Less Liabilities--2.5% 4,524
--------
Net Assets--100.0% $180,309
========
<FN>
(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 April 30, 1999.
(f)Connie Lee Insured.
(g)FNMA Collateralized.
(h)GNMA Collateralized.
(i)Prerefunded.
(j)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at April 30, 1999.
(k)FHA Insured.
(l)FHLMC Collateralized.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
Quality
Profile
The quality ratings of securities in the Fund as of April 30, 1999
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 42.8%
AA/Aa 6.7
A/A 3.0
BBB/Baa 13.7
BB/Ba 8.2
B/B 7.0
NR (Not Rated) 15.6
Other++ 0.5
[FN]
++Temporary investments in short-term municipal securities.
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of April 30, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$172,239,010) (Note 1a) $175,784,530
Cash 52,854
Receivables:
Securities sold $ 4,581,421
Interest 2,686,958
Capital shares sold 404,275 7,672,654
------------
Deferred organization expenses (Note 1e) 95,294
Prepaid registration fees and other assets (Note 1e) 36,913
------------
Total assets 183,642,245
------------
Liabilities: Payables:
Securities purchased 2,919,167
Dividends to shareholders (Note 1f) 170,536
Investment advisory fees (Note 2) 62,650
Administration fees (Note 2) 39,156 3,191,509
------------
Accrued expenses and other liabilities 142,057
------------
Total liabilities 3,333,566
------------
Net Assets: Net assets $180,308,679
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (2,480 shares of AMPS*
issued and 2,320 shares outstanding at $25,000 per share
liquidation preference) $ 58,000,000
Common Stock, par value $.10 per share (11,585,091 shares
issued and outstanding) $ 1,158,509
Paid-in capital in excess of par 116,989,905
Undistributed investment income--net 20,656
Undistributed realized capital gains on investments--net 594,089
Unrealized appreciation on investments--net 3,545,520
------------
Total--Equivalent to $10.56 net asset value per share of
Common Stock 122,308,679
------------
Total capital $180,308,679
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended April 30, 1999
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 4,891,092
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 429,978
Administrative fees (Note 2) 214,989
Commission fees 68,280
Printing and shareholder reports 62,292
Transfer agent fees 57,893
Professional fees 44,465
Listing fees 32,556
Registration fees 32,505
Accounting services (Note 2) 29,555
Amortization of organization expenses (Note 1e) 29,486
Directors' fees and expenses 12,742
Custodian fees 8,869
Pricing fees 5,469
Other 8,018
------------
Total expenses before reimbursement 1,037,097
Reimbursement of expenses (Note 2) (85,996)
------------
Total expenses after reimbursement 951,101
------------
Investment income--net 3,939,991
------------
Realized & Realized gain on investments--net 1,176,817
Unrealized Gain Change in unrealized appreciation on investments--net (2,108,420)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 3,008,388
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 3,939,991 $ 7,264,212
Realized gain on investments--net 1,176,817 3,377,592
Change in unrealized appreciation on investments--net (2,108,420) (298,794)
------------ ------------
Net increase in net assets resulting from operations 3,008,388 10,343,010
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (3,361,143) (5,962,701)
Shareholders Preferred Stock (558,192) (1,320,711)
(Note 1f): Realized gain on investments--net:
Common Stock (2,910,041) (1,715,643)
Preferred Stock (495,988) (620,698)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (7,325,364) (9,619,753)
------------ ------------
Capital Stock Proceeds from issuance of Preferred Stock 10,000,000 --
Transactions Net proceeds from issuance of Common Stock 11,286,499 13,153,080
(Note 4): ------------ ------------
Net increase in net assets derived from capital stock
transactions 21,286,499 13,153,080
------------ ------------
Net Assets: Total increase in net assets 16,969,523 13,876,337
Beginning of period 163,339,156 149,462,819
------------ ------------
End of period* $180,308,679 $163,339,156
============ ============
<FN>
*Undistributed investment income--net $ 20,656 $ --
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have Period
been derived from information provided in the For the Six November 3,
financial statements. Months Ended For the Year Ended 1995++ to
April 30, October 31, October 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997 1996
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.96 $ 10.87 $ 10.17 $ 10.00
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .36 .73 .75 .68
---------- ---------- ---------- ----------
Realized and unrealized gain (loss) on
investments--net (.08) .35 .70 .21
---------- ---------- ---------- ----------
Total from investment operations .28 1.08 1.45 .89
---------- ---------- ---------- ----------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.31) (.60) (.59) (.59)
Realized gain on investments--net (.27) (.19) -- --
---------- ---------- ---------- ----------
Total dividends and distributions to Common
Stock shareholders (.58) (.79) (.59) (.59)
---------- ---------- ---------- ----------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.05) (.13) (.16) (.09)
Realized gain on investments--net (.05) (.07) -- --
Capital charge resulting from issuance of
Preferred Stock -- -- -- (.04)
---------- ---------- ---------- ----------
Total effect of Preferred Stock activity (.10) (.20) (.16) (.13)
---------- ---------- ---------- ----------
Net asset value, end of period $ 10.56 $ 10.96 $ 10.87 $ 10.17
========== ========== ========== ==========
Total Investment Based on net asset value per share 1.71%+++ 8.28% 13.08% 7.81%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.11%* 1.12% .96% .53%*
Net Assets:*** ========== ========== ========== ==========
Expenses 1.21%* 1.25% 1.28% 1.26%*
========== ========== ========== ==========
Investment income--net 4.58%* 4.61% 5.01% 5.40%*
========== ========== ========== ==========
Supplemental Net assets, net of Preferred Stock, end of
Data: period (in thousands) $ 122,309 $ 115,339 $ 101,463 $ 83,573
========== ========== ========== ==========
Preferred Stock outstanding, end of period
(in thousands) $ 58,000 $ 48,000 $ 48,000 $ 38,000
========== ========== ========== ==========
Portfolio turnover 78.42% 141.53% 144.34% 234.41%
========== ========== ========== ==========
Leverage: Asset coverage per $1,000 $ 3,109 $ 3,403 $ 3,114 $ 3,199
========== ========== ========== ==========
Dividends Investment income--net $ 241 $ 533 $ 897 $ 564
Per Share on ========== ========== ========== ==========
Preferred Stock
Outstanding:
<FN>
*Annualized.
**Total investment returns exclude the effects of the contingent
deferred sales 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.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Commencement of operations.
++++The Fund's Preferred Stock was initially issued on March 11,
1996.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
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 Fund's financial statements are prepared in
accordance with generally accepted accounting principles which may
require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are
of a normal recurring nature. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter 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 written or purchased are
valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-counter- market,
valuation is the last asked price (options written) or the last bid
price (options purchased). 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
financial 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.
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 prepaid registration fees--Deferred
organization expenses are amortized on a straight-line basis over a
period not exceeding five years. In accordance with Statement of
Position 98-5, any unamortized organization expenses will be
expensed on the first day of the next fiscal year beginning after
December 15, 1998. This charge will not have any material impact on
the operations of the Fund. Prepaid registration fees are charged to
expense as the related shares are issued.
(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, including proceeds from the
issuance of Preferred Stock. For the six months ended April 30,
1999, FAM earned fees of $429,978, of which $85,996 was voluntarily
waived.
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
performance of administrative services (other than investment advice
and related porfolio activities) necessary for the operation of the
Fund.
For the six months ended April 30, 1999, Merrill Lynch Funds
Distributor ("MLFD"), a division of Princeton Funds Distributor,
Inc. ("PFD"), earned early withdrawal charges of $27,316 relating to
the tender of the Fund's shares.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended April 30, 1999 were $145,965,826 and
$133,491,549, respectively.
Net realized gains for the the six months ended April 30, 1999 and
net unrealized gains as of April 30, 1999 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 897,517 $ 3,545,520
Financial futures contracts 279,300 --
----------- -----------
Total $ 1,176,817 $ 3,545,520
=========== ===========
As of April 30, 1999, net unrealized appreciation for Federal income
tax purposes aggregated $3,545,520, of which $4,419,238 related to
appreciated securities and $873,718 related to depreciated
securities. The aggregate cost of investments at April 30, 1999 for
Federal income tax purposes was $172,239,010.
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.
Transactions in Common Stock were as follows:
For the Six Months Ended Dollar
April 30, 1999 Shares Amount
Shares sold 1,434,885 $15,330,778
Shares issued to shareholders in
reinvestment of dividends and
distributions 192,687 2,046,588
----------- -----------
Total issued 1,627,572 17,377,366
Shares tendered (566,036) (6,090,867)
----------- -----------
Net increase 1,061,536 $11,286,499
=========== ===========
For the Year Ended Dollar
October 31, 1998 Shares Amount
Shares sold 2,294,432 $25,204,676
Shares issued to shareholders in
reinvestment of dividends and
distributions 200,364 2,192,687
----------- -----------
Total issued 2,494,796 27,397,363
Shares tendered (1,304,258) (14,244,283)
----------- -----------
Net increase 1,190,538 $13,153,080
=========== ===========
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund, with a par value of $.10 per share and a
liquidation preference of $25,000 per share, 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 April
30, 1999 was 3.25%.
In connection with the offering of AMPS, the Board of Directors
reclassified 40,000 shares of unissued capital stock as AMPS. AMPS
shares outstanding during the six months ended April 30, 1999
increased by 400 as a result of shares sold and during the year
ended October 31, 1998 remained constant.
The Fund pays commissions to certain broker dealers at the end of
each auction at an annual rate ranging from 0.25% to 1.00%,
calculated on the proceeds of each auction. For the six months ended
April 30, 1999, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
an affiliate of FAM, earned $66,259 as commissions.
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
John M. Loffredo, Vice President
Donald C. Burke, Vice President and Treasurer
William E. Zitelli, Secretary
Gerald M. Richard, Treasurer of Merrill Lynch Municipal Strategy
Fund, Inc. has recently retired. His colleagues at Merrill Lynch
Asset Management, L.P. join the Fund's Board of Directors in wishing
Mr. Richard well in his retirement.
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agent
Common Stock:
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Preferred Stock:
IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
