<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1999
SECURITIES ACT FILE NO. 333-19479
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)
TERRY K. GLENN
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. WILLIAM E. ZITELLI, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
JULY 20, 1999
(Date Tender Offer First Published,
Sent or Given to Security Holders)
</TABLE>
CALCULATION OF FILING FEE
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- --------------------------------------------------------------------------------
TRANSACTION VALUATION: $20,080,000(a) AMOUNT OF FILING FEE: $4,016(b)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) Calculated as the aggregate estimated maximum purchase price to be paid for
2,000,000 shares in the offer, based upon the net asset value per share
($10.04) at July 15, 1999.
(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: ________________________________________________________________
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<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 June 30, 1999 there were
approximately 11.5 million Shares issued and outstanding.
The Fund is seeking tenders for 2,000,000 Shares (the "Offer"), at net asset
value per Share calculated on the day the tender offer terminates, less any
"Contingent Deferred Sales Charge," upon the terms and subject to the conditions
set forth in the Offer to Purchase dated July 20, 1999 (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 that 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 542,278 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
Exhibits (g)(1), (g)(2) and (g)(3) which are incorporated herein by reference.
(b) Not applicable.
ITEM 8. ADDITIONAL INFORMATION.
(a) None.
(b) None.
(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.
(b)-(f) --Not applicable.
(g)(1) --Audited Financial Statements of the Fund for the fiscal year ended October
31, 1997.
(g)(2) --Audited Financial Statements of the Fund for the fiscal year ended October
31, 1998.
(g)(3) --Unaudited Financial Statements of the Fund for the six month period ending
April 30, 1999.
</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, President
Date: July 20, 1999
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -----------
<S> <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)(1) Audited Financial Statements of the Fund for the fiscal year ended October 31, 1997.
(g)(2) Audited Financial Statements of the Fund for the fiscal year ended October 31, 1998.
(g)(3) Unaudited Financial Statements of the Fund for the six month period ending April 30, 1999.
</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 JULY 20,
1999, 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 2,000,000 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 MONDAY, AUGUST 16, 1999, UNLESS EXTENDED.
Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is offering to
purchase 2,000,000 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 contingent deferred sales charge as of the close of
the New York Stock Exchange on the Expiration Date, August 16, 1999, unless
extended, upon the terms and conditions set forth in the Offer to Purchase dated
July 20, 1999 (the "Offer"). The NAV on July 15, 1999, was $10.04 per share. The
purpose of the Offer is to provide liquidity to stockholders since the Fund is
unaware of any secondary market that exists for the Shares. The Offer is not
conditioned upon the tender of any minimum number of Shares.
If more than 2,000,000 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 that it believes will be sufficient to
accommodate the excess Shares tendered, as well as any Shares tendered during
the extended Offer period, or purchase 2,000,000 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 Monday, August 16, 1999 unless the Offer
is extended, and, if not yet accepted for payment by the Fund, Shares may also
be withdrawn after September 14, 1999.
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. 4355
1-800-637-7455
-----------------------------------
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.
<TABLE>
<S> <C>
NAME _____________ ADDRESS ___________
BUSINESS PHONE __________ CITY _____________
HOME PHONE ______________ STATE ___ ZIP ___
MERRILL LYNCH CLIENTS, PLEASE GIVE THE NAME AND OFFICE
ADDRESS OF YOUR MERRILL LYNCH FINANCIAL CONSULTANT:
____________________________________________________________
4355
July 20, 1999
</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 2,000,000
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 AUGUST 16, 1999, UNLESS EXTENDED.
To the Holders of Shares of
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.:
The Fund is offering to purchase up to 2,000,000 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 Contingent Deferred Sales
Charge, as of the close of the New York Stock Exchange on August 16, 1999, 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
July 15, 1999 was $10.04 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 2,000,000 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 that 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 2,000,000 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, 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 $5.35 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.
July 20, 1999 MERRILL LYNCH MUNICIPAL
STRATEGY FUND, INC.
<TABLE>
<S> <C>
Transfer Agent: Financial Data
Merrill Lynch Response Center Services, Inc.
P.O. Box 30200 Attn: Merrill Lynch Municipal
New Brunswick, New Jersey 08989-0200 Strategy Fund, Inc.
Attn: Merrill Lynch Municipal P.O. Box 45289
Strategy Fund, Inc. Jacksonville, Florida 32232-5289
(800) 637-7455, ext. 4355 (800) 637-3863
</TABLE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
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<C> <S> <C>
1. Price; Number of Shares.......................................................................... 3
2. Procedure for Tendering Shares................................................................... 3
3. Contingent Deferred Sales Charge................................................................. 4
4. Withdrawal Rights................................................................................ 5
5. Payment for Shares............................................................................... 5
6. Certain Conditions of the Offer.................................................................. 5
7. Purpose of the Offer............................................................................. 6
8. Certain Effects of the Offer..................................................................... 6
9. Source and Amount of Funds....................................................................... 6
10. Summary Financial Information.................................................................... 6
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.................................................................................... 9
</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 2,000,000 of its issued and
outstanding Shares that are tendered and not withdrawn prior to 12:00 midnight,
Eastern time, on August 16, 1999 (such time and date being hereinafter called
the "Initial Expiration Date"), unless it determines to accept none of them. 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 purchase price of
the Shares will be their NAV as of the close of the New York Stock Exchange on
the Expiration Date. A Contingent Deferred Sales Charge to recover distribution
expenses will be assessed on Shares accepted for purchase (see Section 3).
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 2,000,000
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 that it believes will be sufficient to
accommodate the excess Shares tendered as well as any Shares tendered during the
extended Offer period or purchase 2,000,000 Shares (or such larger number of
Shares sought) on a pro rata basis.
As of June 30, 1999, there were approximately 11.5 million Shares issued and
outstanding and 60 holders of record of Shares (in addition, Merrill Lynch
maintains accounts for 2,452 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. 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. 4355.
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. 4355 as to any
additional documents that 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
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 $5.35 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.
3
<PAGE>
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, which 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. CONTINGENT DEFERRED SALES CHARGE. The Fund will assess a Contingent
Deferred Sales Charge on Shares accepted for purchase. The charge will be paid
to Merrill Lynch Funds Distributor, a division of Princeton Funds Distributor,
Inc. (the "Distributor"), an affiliate of FAM and the distributor of the Shares,
to recover distribution expenses. The Contingent Deferred Sales 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. In addition, the Contingent Deferred Sales Charge is not imposed
on Shares derived from reinvestments of dividends or capital gains
distributions. The Contingent Deferred Sales Charge imposed will vary depending
on the length of time the Shares have been owned since purchase (separate
purchases shall not be aggregated for these purposes), as set forth in the
following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF TENDER AFTER PURCHASE SALES CHARGE
- -------------------------------------------------------------------- -----------------------
<S> <C>
First............................................................... 3.0%
Second.............................................................. 2.0%
Third............................................................... 1.0%
Fourth and following................................................ 0%
</TABLE>
In determining whether a Contingent Deferred Sales 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 Contingent Deferred Sales Charge will not be applied to
dollar amounts representing an increase in the net asset value since the time of
purchase. The Contingent Deferred Sales Charge will be waived on Shares tendered
following the death of all beneficial owners of such Shares, provided the Shares
are tendered
4
<PAGE>
within one year of death (a death certificate and other applicable documents may
be required). At the time of acceptance of the Offer, the record or succeeding
beneficial owner must notify the Transfer Agent either directly or indirectly
through the Distributor that the Contingent Deferred Sales Charge should be
waived. Upon confirmation of the owner's entitlement, the waiver will be
granted; otherwise, the waiver will be lost.
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 September 14, 1999.
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, which 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 that 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 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 $5.35 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
that is orderly and consistent with the Fund's investment objective and policies
in order to
5
<PAGE>
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 that is material to the Fund, or (e) other event or
condition that 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 Contingent Deferred Sales
Charge. Based on the NAV on July 15, 1999, the aggregate purchase price if
2,000,000 Shares are tendered and accepted for payment pursuant to the Offer
would be approximately $20,080,000. 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
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 fiscal years ended October
31, 1997 and October 31, 1998 and unaudited financial information for the six
month period ended April 30, 1999. The information with respect to the fiscal
years ended October 31, 1997 and 1998 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.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN 000'S EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE FOR THE
ENDED YEAR ENDED YEAR ENDED
APRIL 30, 1999 OCTOBER 31, OCTOBER 31,
(UNAUDITED) 1998 1997
-------------- --------------- -------------
INCOME STATEMENT
<S> <C> <C> <C>
Investment income........................... $ 4,891 $ 9,026 $ 7,862
-------------- --------------- -------------
Total expenses before reimbursement....... 1,037 1,966 1,689
Reimbursement of expenses................. (86) (204) (425)
-------------- --------------- -------------
Total expenses after reimbursement........ 951 1,762 1,264
-------------- --------------- -------------
Investment income--net...................... $ 3,940 $ 7,264 $ 6,598
-------------- --------------- -------------
-------------- --------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized gain on investments--net........... $ 1,777 $ 3,378 $ 2,243
-------------- --------------- -------------
-------------- --------------- -------------
Change in unrealized appreciation on
investments--net.......................... $ (2,108) $ (299) $ 4,018
-------------- --------------- -------------
-------------- --------------- -------------
FINANCIAL HIGHLIGHTS (AT END OF PERIOD)
Total assets................................ $ 183,642 $ 172,835 $ 169,013
Total liabilities........................... 3,333 9,496 19,550
-------------- --------------- -------------
Net assets.................................. $ 180,309 $ 163,339 $ 149,463
-------------- --------------- -------------
-------------- --------------- -------------
Net assets, net of Preferred Stock.......... $ 122,309 $ 115,339 $ 101,463
-------------- --------------- -------------
-------------- --------------- -------------
Preferred Stock outstanding................. $ 58,000 $ 48,000 $ 48,000
-------------- --------------- -------------
-------------- --------------- -------------
Net asset value per share of common stock... $ 10.56 $ 10.96 $ 10.87
Shares of common stock outstanding.......... 11,585 10,524 9,333
PER SHARE
Investment income--net...................... $ 0.36 $ 0.73 $ 0.75
Dividends from net investment income to
common stockholders....................... $ 0.31 $ 0.60 $ 0.59
Distributions from net realized gain on
investments to common stockholders........ $ 0.27 $ 0.19 --
RATIOS
Total expenses, net of reimbursement, to
average net assets........................ 1.11%* 1.12% .96%
Total expenses to average net assets........ 1.21%* 1.25% 1.28%
Investment income--net, to average net
assets.................................... 4.58%* 4.61% 5.01%
</TABLE>
- ------------------------
* 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 that, 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 542,278 Shares at the NAV per Share on the date of each
such sale.
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 that 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. The Commission maintains a web site
(http://www.sec.gov) that contains the Schedule 13e-4 and other information
regarding the Fund.
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 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
8
<PAGE>
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. Under recent legislation, the maximum capital gains rate
applicable to such a sale of shares would be 20%.
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 applicable marginal tax rate
on long-term capital gains (20%).
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., Eastern 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.
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
9
<PAGE>
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.
July 20, 1999
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 JULY 20, 1999
-------------------
THE EXPIRATION DATE AND THE WITHDRAWAL DEADLINE IS 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON MONDAY, AUGUST 16, 1999, UNLESS EXTENDED
-------------------
TRANSFER AGENT:
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 Contingent Deferred Sales Charge, upon
the terms and conditions set forth in the Offer to Purchase dated July 20, 1999,
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 ................ , 1999
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 July 20, 1999 (the
"Offer to Purchase") 2,000,000 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 Contingent Deferred Sales 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 May 21, 1999, through June 17,
1999 based on the amounts actually distributed by the Fund, was 5.48% based on
the June 17, 1999 NAV of $10.11 per share. For the quarter ended June 30, 1999,
the Fund's highest NAV was $10.59 per share and its lowest NAV was $9.96 per
share. The Fund's NAV on July 15, 1999 was $10.04 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. 4355.
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, 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)(1)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Municipal Strategy Fund, Inc.:
We have audited the accompaning statement of assets, liabilities and capital,
including the schedule of investments, of Merrill Lynch Municipal Strategy
Fund, Inc. as of October 31, 1997, the related statements of operations for
the year then ended and changes in net assets, and the financial highlights
for the year then ended and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities owned
at October 31, 1997 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial hightlights present
fairly, in all material respects, the financial position of Merrill Lynch
Municipal Strategy Fund, Inc. as of October 31, 1997, the results of its
operations, the changes in its net assets and the financial highlights for
the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 10, 1997
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., October 31, 1997
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 -- 2.0% NR* Aaa $2,815 Alabama HFA, S/F Home Mortgage Revenue Bonds, Series A-1, 6.60% due 4/01/2019 $3,013
Arizona -- 4.1% A1+ P1 2,200 Maricopa County, Arizona, PCR, Refunding (Arizona Public Service Co.),
VRDN, Series C, 4% due 5/01/2029 (h) 2,200
B B2 2,000 Pima County, Arizona, IDA, Industrial Revenue Bonds (Tucson Power Co. Project),
Series B, 6% due 9/01/2029 2,019
NR* NR* 1,875 Show Low, Arizona, Improvement District No. 5, 6.375% due 1/01/2015 1,877
Arkansas -- 0.8% 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) 1,268
California -- AAA Aaa 2,000 San Diego, California, IDR, RITR, 8.185% due 9/01/2019 (e) 2,270
1.5%
Colorado -- 9.3% NR* Aa2 2,000 Colorado HFA, S/F Program, AMT, Series D-1, 7.375% due 6/01/2026 2,230
NR* NR* 1,500 Denver, Colorado, Urban Renewal Authority, Tax Increment Revenue Bonds
(Downtown Denver), AMT, Series A, 7.75% due 9/01/2016 1,652
AAA Aaa 8,840 El Paso County, Colorado, Falcon School District No. 49, UT, 6.50% due
12/01/2015 (a) 10,058
Connecticut -- BBB- NR* 1,000 Connecticut State Health and Educational Facilities Authority Revenue Bonds
0.7% (University of New Haven), Series D, 6.70% due 7/01/2026 1,070
Florida -- 6.8% AAA Aaa 1,000 Dade County, Florida, Aviation Revenue Bonds (Miami International Airport),
Series C, 5.125% due 10/01/2027 (d) 969
AA- VMIG1+ 500 Dade County, Florida, IDA, Exempt Facilities Revenue Refunding Bonds
(Florida Power and Light Co.), VRDN, 3.65% due 6/01/2021 (h) 500
A1 NR* 200 Escambia County, Florida, PCR, Refunding (Gulf Power Co. Project),
VRDN, 3.75% due 7/01/2022 (h) 200
NR* Baa1 1,000 Jacksonville, Florida, Health Facilities Authority, IDR (National
Benevolent -- Cypress Village), Series A, 6.25% due 12/01/2026 1,057
BBB+ Baa2 1,000 Nassau County, Florida, PCR, Refunding (ITT Rayonier Inc. Project),
6.25% due 6/01/2010 1,052
NR* Baa 2,260 Palm Bay, Florida, Lease Revenue Refunding Bonds (Florida Education and
Research Foundation Project), Series A, 6.85% due 9/01/2013 2,508
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
BBB- NR* 3,140 Santa Rosa Bay, Florida, Bridge Authority, 6.25% due 7/01/2028 3,287
Georgia -- 5.8% AA Aa3 2,000 Atlanta, Georgia, GO, UT, Series A, 6.125% due 12/01/2023 2,161
A1 VMIG1+ 2,500 Burke County, Georgia, Development Authority, PCR (Georgia Power
Company -- Vogtle Project), VRDN, 2nd Series, 3.65% due 4/01/2025 (h) 2,500
AA+ Aa2 3,875 Georgia State Housing & Finance Authority, S/F Mortgage Revenue Bonds,
Sub-Series A-1, 6.125% due 12/01/2015 4,086
Illinois -- 5.2% NR* NR* 980 Beardstown, Illinois, IDR (Jefferson Smurfit Corp. Project), 8% due 10/01/2016 1,114
AAA Aaa 1,630 Illinois Development Finance Authority, PCR, Refunding (Commerce Edison
Company Project), Series D, 6.75% due 3/01/2015 (c) 1,823
AA- Aa3 3,285 Illinois Development Finance Authority Revenue Bonds (Presbyterian Home Lake),
Series B, 6.30% due 9/01/2022 3,528
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., October 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds (Holy Cross Hospital Project),
6.70% due 3/01/2014 1,331
Indiana -- 2.1% NR* NR* 1,500 Indiana Health Facilities Financing Authority Revenue Bonds (Hartsfield
Village Project), Series A, 6.375% due 8/15/2027 1,509
AAA Aaa 1,500 Tippecanoe County, Indiana, School Building Corp. (First Mortgage), 6% due
7/15/2013 (a) 1,583
Louisiana -- 2.8% BB NR* 4,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Co. Project),
6.50% due 1/01/2017 4,232
Maryland -- 2.2% NR* NR* 2,000 Maryland State Energy Financing Administration, Limited Obligation Revenue Bonds
(Cogeneration -- AES Warrior Run), AMT, 7.40% due 9/01/2019 2,195
A- NR* 1,000 Maryland State Energy Financing Administration, Solid Waste Disposal Revenue
Bonds (Wheelabrator Water Projects), AMT, 6.30% due 12/01/2010 1,084
Massachusetts -- A- NR* 5,000 Massachusetts State Health and Educational Facilities Authority, Revenue
3.5% Refunding Bonds (Melrose Wakefield Hospital), Series B, 6.25% due 7/01/2012 5,266
Michigan -- 2.7% Michigan State Hospital Finance Authority Revenue Bonds:
AAA Aaa 3,100 INFLOS (Sisters of Mercy), 8.767% due 2/15/2022 (d)(e) 3,522
A A2 500 Refunding (Detroit Medical Center Obligated Group), Series A, 6.50% due 8/15/2018 539
Missouri -- 1.6% AAA NR* 2,175 Missouri State Housing Development Commission Mortgage Revenue Bonds,
Series C-1, 6.55% due 9/01/2028 (f)(g) 2,376
Montana -- 2.1% AA Aa2 3,000 Montana State Board of Housing, S/F Mortgage Refunding Bonds, Series A-1,
5.95% due 12/01/2027 3,094
Nevada -- 1.1% NR* NR* 1,530 Reno-Sparks Convention and Vistors Authority, Nevada, Limited Obligation
Revenue Refunding Bonds, 6.40% due 11/01/2003 1,616
New Jersey -- AAA Aaa 3,985 New Jersey Environmental Infrastructure Trust (Wastewater Treatment),
8.5% 5% due 9/01/2017 3,906
New Jersey Health Care Facilities Financing Authority, Revenue Refunding Bonds:
BBB Baa2 2,500 (Englewood Hospital & Medical Center), 6.75% due 7/01/2024 2,719
AAA Aaa 4,950 (Kennedy), Series A, 5.125% due 7/01/2027 (a) 4,785
BBB Baa2 1,200 (Saint Elizabeth Hospital Obligation Group), 6% due 7/01/2014 1,239
</TABLE>
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
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
IRS Inverse Rate Securities
RITR Residual Interest Trust Receipts
PCR Pollution Control Revenue Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., October 31, 1997
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New Mexico -- A1+ P1 600 Farmington, New Mexico, PCR, Refunding (Arizona Public Service Co.),
5.6% VRDN, Series B, 3.70% due 9/01/2024 (h) 600
Farmington, New Mexico, PCR, Refunding (Public Service Company --
San Juan Project):
BB+ Ba1 3,000 Series A, 6.30% due 12/01/2016 3,172
BB+ Ba1 2,000 Series D, 6.375% due 4/01/2022 2,124
AAA NR* 2,500 New Mexico Mortgage Finance Authority, S/F Mortgage Revenue Bonds, AMT,
Series E-2, 5.75% due 7/01/2029 (f)(g) 2,508
New York -- 6.9% AAA Aaa 6,000 New York City, New York, Municipal Water Finance Authority, Water and Sewer
System Revenue Bonds, Series B, 5.875% due 6/15/2026 (d) 6,239
BBB+ Baa1 1,000 New York City, New York, Refunding, GO, UT, Series F, 6% due 8/01/2013 1,043
BBB+ Baa1 1,000 New York State Thruway Authority, Service Contract Revenue Bonds (Local
Highway and Bridge), 5.75% due 4/01/2016 1,028
NR* A3 2,000 United Nations Development Corporation of New York, Revenue Refunding Bonds,
Series C, 5.50% due 7/01/2017 2,001
North Carolina -- A+ A1 1,100 North Carolina Medical Care Commission, Hospital Revenue Bonds
2.2% (Rex Hospital Project), 6.25% due 6/01/2017 1,175
AA Aa2 1,970 North Carolina S/F, HFA, Series II, 6.20% due 3/01/2016 2,082
Ohio -- 3.3% 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 1,858
NR* NR* 1,400 Ohio State Higher Educational Facility Commission Revenue Bonds
(University of Findlay Project), 6.125% due 9/01/2016 1,446
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) 1,606
Oklahoma -- 1.2% AAA Baa 1,650 Holdenville, Oklahoma, Industrial Authority, Correctional Facility Revenue
Bonds, 6.60% due 7/01/2010 (j) 1,843
Oregon -- 2.5% AAA Aaa 2,000 Multnomah County, Oregon, Educational Facilities Revenue Refunding
Bonds (University of Portland Project), 5% due 4/01/2018 (c) 1,930
NR* Aa2 1,630 Oregon State Housing and Community Services Department, S/F Mortgage
Program Revenue Bonds, AMT, Series E, 7.10% due 7/01/2014 1,736
Pennsylvania -- AAA Aaa 2,000 Hampton Township, Pennsylvania, School District, UT, 5% due 9/01/2027 (b) 1,908
4.8% AAA Aaa 2,950 Keystone Oaks, Pennsylvania, School District, IRS, UT, Series D,
7.521% due 9/01/2016 (c)(e) 3,145
NR* NR* 2,000 Pennsylvania Economic Development Financing Authority, Resource
Recovery Revenue Bonds (Northampton Generating), AMT, Series A,
6.50% due 1/01/2013 2,073
South Carolina -- AAA Aaa 2,000 Fairfield County, South Carolina, PCR (South Carolina Gas and Electric Co.),
1.5% 6.50% due 9/01/2014 (a) 2,200
Tennessee -- NR* NR* 1,610 Hardeman County, Tennessee, Correctional Facilities Revenue Bonds
1.2% (Correctional Facilities Corp.), 7.75% due 8/01/2017 1,792
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., October 31, 1997
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Texas -- 12.6% Harris County, Texas, Health Facilities Development Corporation, Hospital
Revenue Bonds:
A- A2 3,250 (Memorial Hospital Systems Project), Series A, 6.625% due 6/01/2004 (i) 3,686
A1+ NR* 2,000 (Methodist Hospital), VRDN, 4% due 12/01/2025 (h) 2,000
A1+ NR* 2,700 Refunding (Methodist Hospital), VRDN, 3.70% due 12/01/2026 (h) 2,700
BB Ba2 1,000 Houston, Texas, Airport System Revenue Bonds, Special Facilities
(Continental Airline Terminal Improvement), AMT, Series B, 6.125% due 7/15/2027 1,030
AAA Aaa 6,500 Tarrant County, Texas, Health Facilities Development Corp., Health System
Revenue Bonds (Texas Health Resources), Series A, 5% due 2/15/2026 (a) 6,116
AAA Aaa 3,250 Texas State Department, Housing and Community Affairs, S/F Mortgage Revenue
Teams, Series A, Class 3, AMT, 5.80% due 9/01/2029 (a) 3,275
Utah -- 0.7% NR* NR* 1,000 Tooele County, Utah, PCR, Refunding (Laidlaw Environmental),
AMT, Series A, 7.55% due 7/01/2027 1,095
Virginia AAA NR* 1,160 Newport News, Virginia, Redevelopment and Housing Authority, Revenue
0.8% Refunding Bonds, Series A, 5.85% due 12/20/2030 (g) 1,192
------------
Total Investments (Cost -- $152,688) -- 106.1% 158,641
Liabilities in Excess of Other Assets -- (6.1%) (9,178)
------------
Net Assets -- 100.0% $149,463
============
</TABLE>
(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, 1997.
(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, 1997.
(i) Prerefunded.
(j) Insured by Connie Lee.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte and Touche LLP.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., October 31, 1997
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of October 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $152,688,471) (Note 1a) $158,641,205
Cash 361,988
Receivables:
Securities sold $7,357,733
Interest 2,358,403
Capital shares sold 49,996 9,766,132
-------------
Deferred organization expenses (Note 1e) 186,914
Prepaid expenses and other assets (Note 1e) 56,491
-------------
Total assets 169,012,730
-------------
Liabilities: Payables:
Securities purchased 19,193,580
Dividends to shareholders (Note 1f) 144,015
Investment advisory fees (Note 2) 40,142
Administration fees (Note 2) 33,452 19,411,189
-------------
Accrued expenses and other liabilities 138,722
-------------
Total liabilities 19,549,911
-------------
Net Assets: Net assets $149,462,819
=============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (2,480 shares of AMPS* issued and
1,920 shares outstanding at $25,000 per share liquidation preference) $48,000,000
Common Stock, par value $.10 per share (9,333,017 shares issued and
outstanding) $933,302
Paid-in capital in excess of par 92,775,533
Undistributed investment income -- net 19,200
Undistributed realized capital gains on investments -- net 1,782,050
Unrealized appreciation on investments -- net 5,952,734
-------------
Total -- Equivalent to $10.87 net asset value per share of Common Stock 101,462,819
-------------
Total capital $149,462,819
=============
* Auction Market Preferred Stock.
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1997
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $7,862,361
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $657,929
Administrative fees (Note 2) 328,965
Transfer agent fees 113,071
Commission fees 100,805
Registration fees 90,198
Printing and shareholder reports 73,334
Professional fees 63,810
Amortization of organization expenses (Note 1e) 62,134
Accounting services (Note 2) 61,452
Listing fees 48,341
Directors' fees and expenses 24,596
Custodian fees 14,655
Pricing fees 8,513
Other 41,080
------------
Total expenses before reimbursement 1,688,883
Reimbursement of expenses (Note 2) (424,822)
------------
Total expenses after reimbursement 1,264,061
------------
Investment income -- net 6,598,300
------------
Realized & Realized gain on investments -- net 2,242,563
Unrealized Change in unrealized appreciation on investments -- net 4,017,788
Gain on ------------
Investments -- Net Net Increase in Net Assets Resulting from Operations $12,858,651
(Notes 1b, 1d & 3): ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., October 31, 1997
STATEMENTS OF CHANGES IN NET ASSETS
For the For the Period
Year Ended Nov. 3, 1995+
Increase (Decrease) in Net Assets: Oct. 31, 1997 To Oct. 31, 1996
<S> <C> <C> <C>
Operations: Investment income -- net $6,598,300 $4,841,127
Realized gain (loss) on investments -- net 2,242,563 (460,513)
Change in unrealized appreciation on investments -- net 4,017,788 1,934,946
------------ ------------
Net increase in net assets resulting from operations 12,858,651 6,315,560
------------ ------------
Dividends to Investment income -- net:
Shareholders Common Stock (5,164,727) (4,173,956)
(Note 1f): Preferred Stock (1,418,941) (662,603)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (6,583,668) (4,836,559)
------------ ------------
Capital Stock Proceeds from issuance of Preferred Stock 10,000,000 38,000,000
Transactions Net increase in net assets derived from Common Stock transactions 11,614,959 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 21,614,959 119,993,876
------------ ------------
Net Assets: Total increase in net assets 27,889,942 121,472,877
Beginning of period 121,572,877 100,000
------------ ------------
End of period* $149,462,819 $121,572,877
------------ ------------
* Undistributed investment income -- net $19,200 $4,568
============ ============
+ Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The Following Per Share Data and Ratios Have Been Derived
from Information Provided in the Financial Statements. For the For the Period
Year Ended Nov. 3, 1995+
Increase (Decrease) in Net Asset Value: Oct. 31, 1997 To Oct. 31, 1996
<S> <C> <C> <C>
Per Share Net asset value, beginning of period $10.17 $10.00
Operating -------- --------
Performance: Investment income -- net .75 .68
Realized and unrealized gain on investments -- net .70 .21
-------- --------
Total from investment operations 1.45 .89
-------- --------
Less dividends to Common Stock shareholders:
Investment income -- net (.59) (.59)
-------- --------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net (.16) (.09)
Capital charge resulting from issuance of Preferred Stock -- (.04)
-------- --------
Total effect of Preferred Stock activity (.16) (.13)
-------- --------
Net asset value, end of period $10.87 $10.17
======== ========
Total Investment Based on net asset value per share 13.08% 7.81%++++
Return:** ======== ========
Ratios to Expenses, net of reimbursement .96% .53%*
Average Net ======== ========
Assets:*** Expenses 1.28% 1.26%*
======== ========
Investment income -- net 5.01% 5.40%*
======== ========
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $101,463 $83,573
Data: ======== ========
Preferred Stock outstanding, end of period (in thousands) $48,000 $38,000
======== ========
Portfolio turnover 144.34% 234.41%
======== ========
Leverage: Asset coverage per $1,000 $3,114 $3,199
======== ========
Dividends Per Share Investment income -- net $897 $564
on Preferred Stock ======== ========
Outstanding:
</TABLE>
* Annualized.
** Total investment returns exclude the effects of the contingent deferred
sales charge, if any. The Fund is a continously 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.
<PAGE>
Merrill Lynch Municipal Strategy Fund, Inc., October 31, 1997
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.
(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, 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.
o 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.
o 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 offering expenses -- Deferred organization
expenses are amortized on a straight-line basis over a five-year period.
Direct expenses relating to the public offering of the Common and
Preferred Stock were charged to capital at the time of issuance. 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.
<PAGE>
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. For the year ended October 31, 1997, FAM earned fees of
$657,929, of which $424,822 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.
A contingent deferred sales charge will be imposed on most shares
accepted for tender which have been held for less than three years. For
the year ended October 31, 1997, Merrill Lynch Funds Distributors, Inc.
("MLFD") earned contingent deferred sales charges of $85,662 relating to
the tender of the Fund's shares.
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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended October 31, 1997 were $207,179,298 and $185,239,565,
respectively.
Net realized and unrealized gains (losses) as of October 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains
<S> <C> <C>
Long-term investments $2,544,513 $5,952,734
Financial futures contracts (301,950) --
------------ -----------
Total $2,242,563 $5,952,734
============ ===========
</TABLE>
As of October 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $5,935,894, of which $5,937,994 related to appreciated
securities and $2,100 related to depreciated securities. The aggregate
cost of investments at October 31, 1997, for Federal income tax purposes
was $152,705,311.
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:
<TABLE>
<CAPTION>
For the Year Ended Dollar
October 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 1,457,495 $15,202,668
Shares issued to shareholders
in reinvestment of dividends 128,620 1,344,046
------------ ------------
Total issued 1,586,115 16,546,714
Shares tendered (471,994) (4,931,755)
------------ ------------
Net increase 1,114,121 $11,614,959
============ ============
</TABLE>
<TABLE>
<CAPTION>
For the Period
November 3, 1995+ to Dollar
October 31, 1996 Shares Amount
<S> <C> <C>
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 tendered (199,672) (1,980,112)
------------ ------------
Net increase 8,208,896 $82,293,876
============ =============
</TABLE>
+ 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, 1997 was 3.65%.
In connection with the offering of AMPS, the Board of Directors
reclassified 40,000 shares of unissued capital stock as AMPS. For the year
ended October 31, 1997 and the period ended November 3, 1995 to October
31, 1996, 400 shares and 1,520 shares of Preferred Stock were sold,
respectively. As of October 31, 1997, there were 2,480 AMPS issued and
1,920 shares 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 1.00%, calculated on the
proceeds of each auction. For the year ended October 31, 1997, Merrill
Lynch, Pierce, Fenner & Smith Inc., an affiliate of FAM, earned $100,708
as commissions.
<PAGE>
EXHIBIT (g)(2)
<PAGE>
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, 1998, the related
statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and
the financial highlights for each of the years in the two-year
period then ended and 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
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Municipal Strategy Fund, Inc. as of October 31, 1998,
the results of its operations, the changes in its net assets, and
the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 10, 1998
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
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--1.9% NR* Aaa $ 2,815 Alabama HFA, S/F Home Mortgage Revenue Bonds, Series A-1,
6.60% due 4/01/2019 $ 3,032
Alaska--0.2% A1+ P1 300 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds (Exxon
Pipeline Company Project), VRDN, Series B, 3.30% due 12/01/2033 (j) 300
Arizona--5.1% B B2 2,000 Apache County, Arizona, IDA, PCR, Refunding (Tucson Electric
Power Co. Project), Series A, 5.85% due 3/01/2028 1,992
BB+ Ba1 1,500 Maricopa County, Arizona, Pollution Control Corp., PCR, Refunding
(Public Service Co.), Series A, 5.75% due 11/01/2022 1,528
NR* B1 1,600 Phoenix, Arizona, IDA, Airport Facility Revenue Refunding
Bonds (America West Airlines Inc.), AMT, 6.30% due 4/01/2023 1,659
B B2 2,000 Pima County, Arizona, IDA, Industrial Revenue Bonds (Tucson
Electric Power Co. Project), Series B, 6% due 9/01/2029 2,016
NR* NR* 1,000 Show Low, Arizona, Improvement District No. 5, 6.375% due
1/01/2015 1,068
Arkansas--0.8% AAA NR* 1,155 Arkansas State Development Finance Authority, S/F Mortgage
Revenue Bonds (Mortgage-Backed Securities Program), AMT,
Series D, 6.80% due 1/01/2022 (g)(h) 1,253
California--16.5% AAA Aaa 11,000 Anaheim, California, Public Financing Authority, Lease Revenue
Bonds (Public Improvements Project), Sub-Series C, 5.10%** due
9/01/2031 (d) 2,058
A+ Aa3 2,725 California State Veterans, AMT, Series BH, 5.60% due 12/01/2032 2,808
AAA Aaa 2,895 San Diego, California, Convention Center Expansion Financing
Authority, Leasing Revenue Bonds, Series A, 4.75% due
4/01/2028 (c) 2,784
AAA Aaa 2,000 San Diego, California, IDR, RITR, 8.435% due 9/01/2019 (e) 2,368
AAA Aaa 10,000 San Diego, California, Public Facilities Financing Authority,
Sewer Revenue Bonds, 5% due 5/15/2025 (b) 9,985
AAA Aaa 7,500 San Francisco, California, City and County Airports Commission,
International Airport Revenue Refunding Bonds, Secured
Series--Issue 20, 4.50% due 5/01/2026 (a) 6,975
Colorado--8.5% NR* Aa2 1,835 Colorado HFA, S/F Program, AMT, Series D-1, 7.375% due 6/01/2026 2,008
NR* NR* 1,500 Denver, Colorado, Urban Renewal Authority, Tax Increment
Revenue Bonds (Downtown Denver), AMT, Series A, 7.75% due
9/01/2016 1,679
AAA Aaa 8,840 El Paso County, Colorado, School District No. 49 (Falcon),
UT, 6.50% due 12/01/2015 (a) 10,225
Connecticut--5.1% B+ Ba3 5,000 Conneticut State Developmemt Authority, PCR, Refunding
(Conneticut Light & Power), Series A, 5.85% due 9/01/2028 5,019
A+ NR* 2,000 Connecticut State Development Authority, Water Facility
Revenue Bonds (Bridgeport Hydraulic Co. Project), AMT,
6.15% due 4/01/2035 2,181
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 1,093
Florida--5.9% AAA Aaa 3,000 Florida State Turnpike Authority, Turnpike Revenue Bonds
(Department of Transportation), Series A, 4.50% due 7/01/2027 (b) 2,786
NR* Baa1 1,000 Jacksonville, Florida, Health Facilities Authority, IDR
(National Benevolent--Cypress Village), Series A, 6.25%
due 12/01/2026 1,073
AAA Aaa 5,550 Miami-Dade County, Florida, Special Obligation, Series B,
5.553%** due 10/01/2028 (a) 1,124
BBB+ Baa2 1,000 Nassau County, Florida, PCR, Refunding (ITT Rayonier Inc.
Project), 6.25% due 6/01/2010 1,053
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
NR* NR* 1,250 North Springs Improvement District, Florida, Special
Assessment Revenue Bonds (Heron Bay Project), 7% due 5/01/2019 1,320
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 2,246
Georgia--2.1% AAA Aa2 3,250 Georgia State Housing and Finance Authority, S/F Mortgage
Revenue Bonds, Series A, Sub-Series A-1, 6.125% due 12/01/2015 3,482
Illinois--4.1% NR* NR* 965 Beardstown, Illinois, IDR (Jefferson Smurfit Corp. Project), 8%
due 10/01/2016 1,119
Illinois Development Finance Authority Revenue Bonds, Series B:
AA- Aa3 3,285 (Presbyterian Home Lake), 6.30% due 9/01/2022 3,669
A1+ VMIG1++ 500 (Provena Health), VRDN, 3.70% due 5/01/2028 (a)(j) 500
NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds (Holy Cross
Hospital Project), 6.70% due 3/01/2014 1,364
Louisiana--2.5% B+ NR* 4,000 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain
Co. Project), 6.50% due 1/01/2017 4,106
Maryland--1.9% NR* NR* 3,000 Maryland State Energy Financing Administration, Limited
Obligation Revenue Bonds (Cogeneration--AES Warrior Run),
AMT, 7.40% due 9/01/2019 3,117
Massachusetts AAA Aaa 3,615 Massachusetts State HFA, RITR, Series 29, 7.07% due
- --2.3% 12/01/2028 (a)(e) 3,796
Michigan--3.3% BB- NR* 1,350 Detroit, Michigan, Local Development Finance Authority,
Sub-Tax Increment Bonds Series A, 5.50% due 5/01/2021 1,331
Michigan State Hospital Finance Authority Revenue Bonds:
AAA Aaa 3,100 INFLOS (Sisters of Mercy), 9.02% due 2/15/2022 (d)(e) 3,596
A- A3 500 Refunding (Detroit Medical Center Obligation Group),
Series A, 6.50% due 8/15/2018 547
Mississippi BBB- Ba1 3,000 Mississippi Business Finance Corporation, PCR (System Energy
- --2.7% Resources Inc. Project),
5.875% due 4/01/2022 2,993
NR* NR* 1,400 Mississippi Development Bank, Special Obligation Refunding
Bonds (Diamond Lakes Utilities), Series A, 6.25% due 12/01/2017 1,443
Missouri--1.5% AAA NR* 2,160 Missouri State Housing Development Commission, Mortgage
Revenue Bonds, Series C-1, 6.55% due 9/01/2028 (g)(h) 2,408
Nevada--1.0% NR* NR* 1,530 Reno Sparks Convention and Vistors Authority, Nevada,
Limited Obligation Revenue Refunding Bonds, 6.40% due
11/01/2003 1,647
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
New Jersey--4.4% AAA Aaa $ 3,300 New Jersey Economic Development Authority, Revenue
Refunding Bonds (Educational Testing Service), 4.75%
due 5/15/2025 (a) $ 3,197
New Jersey Health Care Facilities Financing Authority,
Revenue Refunding Bonds:
BBB Baa2 2,500 (Englewood Hospital & Medical Center), 6.75% due 7/01/2024 2,757
BBB Baa2 1,200 (Saint Elizabeth Hospital Obligation Group), 6% due 7/01/2014 1,277
New Mexico--2.6% Farmington, New Mexico, PCR, Refunding (Public Service
Company--San Juan Project):
BB+ Ba1 3,000 Series A, 6.30% due 12/01/2016 3,204
BB+ Ba1 1,000 Series D, 6.375% due 4/01/2022 1,084
New York--6.8% AAA Aaa 3,000 New York City, New York, Municipal Water Finance Authority,
Water and Sewer System Revenue Bonds, RITR, Series 11,
8.02% due 6/15/2026 (d)(e) 3,510
A- A3 1,000 New York City, New York, Refunding, GO, UT, Series F, 6%
due 8/01/2013 1,097
AAA Aaa 5,000 Port Authority of New York and New Jersey, Consolidated
Revenue Bonds, 116th Series, 4.25% due 10/01/2026 (b) 4,453
NR* A3 2,000 United Nations Development Corporation of New York, Revenue
Refunding Bonds, Series C, 5.50% due 7/01/2017 2,018
North AA Aa3 4,345 North Carolina Medical Care Community, Health Care Facilities
Carolina--3.9% Revenue Bonds (Duke University Health System), Series B,
5% due 6/01/2028 4,240
AA Aa2 1,940 North Carolina S/F, HFA, Series II, 6.20% due 3/01/2016 2,088
Ohio--5.8% BBB NR* 4,875 Dayton, Ohio, Special Facilities Revenue Refunding Bonds
(Emery Air Freight), Series A, 5.625% due 2/01/2018 4,941
AAA Aaa 3,000 Ohio HFA, Mortgage Revenue Bonds, RITR, AMT, Series 15, 6.82%
due 9/01/2019 (d)(e)(h) 3,102
NR* NR* 1,400 Ohio State Higher Educational Facility Commission Revenue
Bonds (University of Findlay Project), 6.125% due 9/01/2016 1,469
Oklahoma--1.2% AAA Baa 1,650 Holdenville, Oklahoma, Industrial Authority, Correctional
Facility Revenue Bonds, 6.60% due 7/01/2006 (f)(i) 1,950
Oregon--1.1% NR* Aa2 1,615 Oregon State Housing and Community Services Department, S/F
Mortgage Program Revenue Bonds, AMT, Series E, 7.10% due
7/01/2014 1,734
Pennsylvania AAA Aaa 2,950 Keystone Oaks, Pennsylvania, School District, IRS, UT,
- --2.7% Series D, 7.876% due 9/04/2002 (c)(e)(i) 3,474
NR* NR* 1,000 Lehigh County, Pennsylvania, General Purpose Authority,
Revenue Refunding Bonds (Kidspeace Obligation Group), 6%
due 11/01/2023 1,001
South AAA Aaa 1,000 Fairfield County, South Carolina, PCR (South Carolina Gas
Carolina--0.7% & Electric Co.), 6.50% due 9/01/2014 (a) 1,108
Tennessee--1.1% NR* NR* 1,610 Hardeman County, Tennessee, Correctional Facilities Revenue
Bonds (Correctional Facilities Corp.), 7.75% due 8/01/2017 1,815
Texas--0.6% BB Ba2 1,000 Houston, Texas, Airport System Revenue Bonds, Special
Facilities (Continental Airline Terminal Improvement),
AMT, Series B, 6.125% due 7/15/2027 1,029
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
Utah--0.7% NR* NR* 1,000 Tooele County, Utah, PCR, Refunding (Laidlaw Environmental),
AMT, Series A, 7.55% due 7/01/2027 1,110
Virginia--3.7% NR* NR* 1,500 Dulles Town Center Community Development Authority, Virginia,
Special Assessment Tax Bonds (Dulles Town Center Project),
6.25% due 3/01/2026 1,540
AAA NR* 1,910 Newport News, Virginia, Redevelopment and Housing Authority,
Revenue Refunding Bonds, Series A, 5.85% due 12/20/2030 (h) 2,005
Pocahontas Parkway Association, Virginia, Connector Toll
Road Revenue Bonds (Route 895):
NR* Ba1 6,200 (First Tier), Sub-Series C, 6.25%** due 8/15/2031 825
BBB- Baa3 10,000 Senior-Series B, 5.90%** due 8/15/2029 1,686
Wyoming--0.9% NR* P1 1,500 Uinta County, Wyoming, PCR, Refunding (Chevron USA Inc.
Project), VRDN, 3.30% due 8/15/2020 (j) 1,500
Total Investments (Cost--$160,311)--101.6% 165,965
Liabilities in Excess of Other Assets--(1.6%) (2,626)
--------
Net Assets--100.0% $163,339
========
<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 October 31, 1998.
(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 October 31, 1998.
* 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.
Ratings of issues shown have not been audited by Deloitte and Touche
LLP.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of October 31, 1998
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$160,311,294) (Note 1a) $165,965,234
Cash 43,356
Receivables:
Securities sold $ 3,863,900
Interest 2,362,470
Capital shares sold 467,988 6,694,358
------------
Deferred organization expenses (Note 1e) 124,780
Prepaid registration fees and other assets (Note 1e) 7,427
------------
Total assets 172,835,155
------------
Liabilities: Payables:
Securities purchased 9,008,469
Dividends to shareholders (Note 1f) 205,470
Investment advisory fees (Note 2) 57,284
Administration fees (Note 2) 35,803 9,307,026
------------
Accrued expenses and other liabilities 188,973
------------
Total liabilities 9,495,999
------------
Net Assets: Net assets $163,339,156
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (2,480 shares of
AMPS* issued and 1,920 shares outstanding at $25,000 per share
liquidation preference) $ 48,000,000
Common Stock, par value $.10 per share (10,523,555 shares
issued and outstanding) $ 1,052,355
Paid-in capital in excess of par 105,809,560
Undistributed realized capital gains on investments--net 2,823,301
Unrealized appreciation on investments--net 5,653,940
------------
Total--Equivalent to $10.96 net asset value per share of
Common Stock 115,339,156
------------
Total capital $163,339,156
============
<FN>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
STATEMENT OF OPERATIONS
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $ 9,025,997
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 787,978
Administrative fees (Note 2) 393,989
Transfer agent fees 134,859
Registration fees 129,990
Commission fees 121,766
Professional fees 106,678
Printing and shareholder reports 86,940
Accounting services (Note 2) 65,847
Amortization of organization expenses (Note 1e) 62,134
Directors' fees and expenses 28,715
Custodian fees 16,817
Pricing fees 11,771
Listing fees 5,235
Other 13,443
------------
Total expenses before reimbursement 1,966,162
Reimbursement of expenses (Note 2) (204,377)
------------
Total expenses after reimbursement 1,761,785
------------
Investment income--net 7,264,212
------------
Realized & Realized gain on investments--net 3,377,592
Unrealized Change in unrealized appreciation on investments--net (298,794)
(Gain) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 10,343,010
(Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <C> <C> <C>
Operations: Investment income--net $ 7,264,212 $ 6,598,300
Realized gain on investments--net 3,377,592 2,242,563
Change in unrealized appreciation on investments--net (298,794) 4,017,788
------------ ------------
Net increase in net assets resulting from operations 10,343,010 12,858,651
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (5,962,701) (5,164,727)
Shareholders Preferred Stock (1,320,711) (1,418,941)
(Note 1f): Realized gain on investments--net:
Common Stock (1,715,643) --
Preferred Stock (620,698) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (9,619,753) (6,583,668)
------------ ------------
Capital Stock Proceeds from issuance of Preferred Stock -- 10,000,000
Transactions Net proceeds from issuance of Common Stock 13,153,080 11,614,959
(Note 4): ------------ ------------
Net increase in net assets derived from capital stock
transactions 13,153,080 21,614,959
------------ ------------
Net Assets: Total increase in net assets 13,876,337 27,889,942
Beginning of year 149,462,819 121,572,877
------------ ------------
End of year* $163,339,156 $149,462,819
============ ============
<FN>
*Undistributed investment income--net $ -- $ 19,200
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For the
The following per share data and ratios have Period
been derived from information provided in the November 3,
financial statements. For the Year Ended 1995++ to
October 31, October 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.87 $ 10.17 $ 10.00
Operating ------------ ------------ ------------
Performance: Investment income--net .73 .75 .68
Realized and unrealized gain on investments--net .35 .70 .21
------------ ------------ ------------
Total from investment operations 1.08 1.45 .89
------------ ------------ ------------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net (.60) (.59) (.59)
Realized gain on investments--net (.19) -- --
------------ ------------ ------------
Total dividends and distributions to Common Stock
shareholders (.79) (.59) (.59)
------------ ------------ ------------
Effect of Preferred Stock activity:++++
Dividends and distributions to Preferred Stock
shareholders:
Investment income--net (.13) (.16) (.09)
Realized gain on investments--net (.07) -- --
Capital charge resulting from issuance of
Preferred Stock -- -- (.04)
------------ ------------ ------------
Total effect of Preferred Stock activity (.20) (.16) (.13)
------------ ------------ ------------
Net asset value, end of period $ 10.96 $ 10.87 $ 10.17
============ ============ ============
Total Investment Based on net asset value per share 8.28% 13.08% 7.81%+++
Return:** ============ ============ ============
Ratios to Average Expenses, net of reimbursement 1.12% .96% .53%*
Net Assets:*** ============ ============ ============
Expenses 1.25% 1.28% 1.26%*
============ ============ ============
Investment income--net 4.61% 5.01% 5.40%*
============ ============ ============
Supplemental Net assets, net of Preferred Stock, end of
Data: period (in thousands) $ 115,339 $ 101,463 $ 83,573
============ ============ ============
Preferred Stock outstanding, end of period
(in thousands) $ 48,000 $ 48,000 $ 38,000
============ ============ ============
Portfolio turnover 141.53% 144.34% 234.41%
============ ============ ============
Leverage: Asset coverage per $1,000 $ 3,403 $ 3,114 $ 3,199
============ ============ ============
Dividends Investment income--net $ 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>
<PAGE>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
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.
(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-the-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.
<PAGE>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
* 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.
<PAGE>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
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 year ended October 31, 1998, FAM
earned fees of $787,978, of which $204,377 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 portfolio activities) necessary for the operation of the
Fund.
For the year ended October 31, 1998, Merrill Lynch Funds
Distributors ("MLFD"), a division of Princeton Funds Distributor,
Inc. ("PFD"),earned early withdrawal charges of $146,028 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 year ended October 31, 1998 were $233,575,979 and
$220,747,936, respectively.
Net realized gains (losses) for the the year ended October 31, 1998
and net unrealized gains as of October 31, 1998 were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains
<S> <C> <C>
Long-term investments $ 3,557,017 $ 5,653,940
Financial futures contracts (179,425) --
----------- -----------
Total $ 3,377,592 $ 5,653,940
=========== ===========
</TABLE>
As of October 31, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $5,637,444, of which $6,392,697
related to appreciated securities and $755,253 related to
depreciated securities. The aggregate cost of investments at October
31, 1998 for Federal income tax purposes was $160,327,790.
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>
Merrill Lynch Municipal Strategy Fund, Inc. October 31, 1998
Transactions in Common Stock were as follows:
<TABLE>
<CAPTION>
For the Year Ended Dollar
October 31, 1998 Shares Amount
<S> <C> <C>
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
============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended Dollar
October 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 1,457,495 $15,202,668
Shares issued to shareholders in
reinvestment of dividends 128,620 1,344,046
------------ -----------
Total issued 1,586,115 16,546,714
Shares tendered (471,994) (4,931,755)
------------ -----------
Net increase 1,114,121 $11,614,959
============ ===========
</TABLE>
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 October
31, 1998 was 3.10%.
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 year ended October 31, 1998 remained
constant and during the year ended October 31, 1997 increased by 400
as a result of shares sold.
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 year ended
October 31, 1998, Merrill Lynch, Pierce, Fenner & Smith Inc., an
affiliate of FAM, earned $120,839 as commissions.
<PAGE>
EXHIBIT (g)(3)
<PAGE>
Municipal Strategy
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
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
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--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>
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <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
========
</TABLE>
(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.
<PAGE>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
Quality
Profile
The quality ratings of securities in the Fund as of April 30, 1999
were as follows:
<TABLE>
<CAPTION>
Percent of
S&P Rating/Moody's Rating Net Assets
<S> <C>
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
</TABLE>
++Temporary investments in short-term municipal securities.
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of April 30, 1999
<S> <C> <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
============
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Six Months Ended April 30, 1999
<S> <C> <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): ==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 1999
STATEMENTS OF CHANGES IN NET ASSETS
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 1999 1998
<S> <C> <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
============ ============
*Undistributed investment income--net $ 20,656 $ --
============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
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> <C> <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:
</TABLE>
* 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.
<PAGE>
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.
<PAGE>
* 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.
<PAGE>
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:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
<S> <C> <C>
Long-term investments $897,517 $3,545,520
Financial futures contracts 279,300 --
----------- -----------
Total $1,176,817 $3,545,520
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
For the Six Months Ended Dollar
April 30, 1999 Shares Amount
<S> <C> <C>
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
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended Dollar
October 31, 1998 Shares Amount
<S> <C> <C>
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
=========== ===========
</TABLE>
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.
