MERRILL LYNCH
MUNICIPAL
STRATEGY
FUND, INC.
FUND LOGO
Semi-Annual Report
April 30, 2000
Merrill Lynch Municipal Strategy Fund, Inc. seeks to provide
shareholders with as high a level of current income exempt from
Federal income taxes as is consistent with its investment policies
by investing primarily in a portfolio of long-term, investment-grade
municipal obligations the interest on which, in the opinion of bond
counsel to the issuer, is exempt from Federal income taxes.
This report, including the financial information herein, is
transmitted to shareholders of Merrill Lynch Municipal Strategy
Fund, Inc. for their information. It is not a prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. The Fund has leveraged its
Common Stock by issuing Preferred Stock to provide the Common Stock
shareholders with a potentially higher rate of return. Leverage
creates risks for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price
of shares of the Common Stock, and the risk that fluctuations in the
short-term dividend rates of the Preferred Stock may affect the
yield to Common Stock shareholders. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Municipal
Strategy Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
The Benefits and
Risks of
Leveraging
Merrill Lynch Municipal Strategy Fund, Inc. utilizes lever-aging to
seek to enhance the yield and net asset value of its Common Stock.
However, these objectives cannot be achieved in all interest rate
environments. To leverage, the Fund issues Preferred Stock, which
pays dividends at prevailing short-term interest rates, and invests
the proceeds in long-term municipal bonds. The interest earned on
these investments is paid to Common Stock shareholders in the form
of dividends, and the value of these portfolio holdings is reflected
in the per share net asset value of the Fund's Common Stock.
However, in order to benefit Common Stock shareholders, the yield
curve must be positively sloped; that is, short-term interest rates
must be lower than long-term interest rates. At the same time, a
period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the
risks of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred Stock
for an additional $50 million, creating a total value of $150
million available for investment in long-term municipal bonds. If
prevailing short-term interest rates are approximately 3% and long-
term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders
are significantly lower than the income earned on the fund's long-
term investments, and therefore the Common Stock shareholders are
the beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock may, as a result,
decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain
securities whose potential income return is inversely related to
changes in a floating interest rate ("inverse floaters"). In
general, income on inverse floaters will decrease when short-term
interest rates increase and increase when short-term interest rates
decrease. Invest-ments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses of invested
principal. In addition, inverse floaters have the effect of
providing investment leverage and, as a result, the market value of
such securities will generally be more volatile than that of fixed-
rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the
net asset value of the Fund's shares may also be more volatile than
if the Fund did not invest in these securities.
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 2000
DEAR SHAREHOLDER
For the six-months ended April 30, 2000, the Common Stock of Merrill
Lynch Municipal Strategy Fund, Inc. earned $0.261 per share income
dividends. This represents a net annualized yield of 6.05%, based on
a month-end net asset value of $8.65. Over the same period, the
total investment return on the Fund's Common Stock was +0.25%, based
on a change in net asset value from $8.89 to $8.65, and assuming
reinvestment of $0.266 per share income dividends.
For the six-month period ended April 30, 2000, the Fund's Auction
Market Preferred Stock had an average yield of 3.72%.
The Municipal Market
Environment
From October 1999 through mid-January 2000, fixed-income bond yields
rose steadily higher. US economic growth, in part intensified by
Year 2000 preparations, grew at a 7.3% rate in the fourth quarter of
1999 and at a 4.2% annual rate for all of 1999. Initial estimates
for the first quarter of 2000 were reported at 5.4%. However,
despite these significant growth rates, no price measure indicator
has shown any considerable signs of future price pressures at the
consumer level, despite the lowest unemployment rates since January
1970. Given no signs of an economic slowdown, the Federal Reserve
Board continued to raise short-term interest rates in November 1999
and again in February and March 2000. In each instance, the Federal
Reserve Board cited both the continued growth of US employment and
the impressive strength of the US equity markets as reasons for
attempting to moderate US economic growth before inflationary price
increases are realized. By mid-January 2000, US Treasury bond yields
rose 60 basis points (0.60%) to 6.75%. Similarly, as measured by the
Bond Buyer Revenue Bond Index, long-term tax-exempt bond yields rose
approximately 20 basis points to 6.35%.
Since mid-January, fixed-income markets have largely ignored strong
economic fundamentals and concentrated on positive technical supply
factors. Declining bond issuance, both current, and more
importantly, expected future issuance, helped push bond yields lower
from mid-January to mid-April 2000. In late January and early
February 2000, the US Treasury announced its intention to reduce the
number of issues to be auctioned in the quarterly Treasury note and
bond auctions. Furthermore, budgetary surpluses would allow the US
Treasury to repurchase outstanding, higher-couponed Treasury issues,
primarily in the 15-year and longer-term maturity sectors. Both
these actions would result in a significant reduction in the
outstanding supply of long-term US Treasury debt. Domestic and
international investors quickly began to accumulate what was
expected to become a scarce commodity and bond prices quickly rose.
By mid-April 2000, US Treasury bond yields had declined over 100
basis points to 5.67%. However, bond yields rose somewhat during the
last two weeks of the period as economic statistics were released,
indicating that the economic strength seen in late 1999 was
continuing into early 2000. The decline in long-term US Treasury
bond yields resulted in an inverted taxable yield curve as short-
term and intermediate-term interest rates have not fallen
proportionately since the Federal Reserve Board is expected to
continue to raise short-term interest rates. The current inversion
has had much more to do with debt reduction and Treasury buybacks
than with investor expectations of slower economic growth. Over the
last six months, long-term US Treasury bond yields have fallen
almost 20 basis points to close the six-month period ended April 30,
2000 at 5.96%.
Tax-exempt bond yields have also declined in recent months. The
decline has largely been in response to the rally in US Treasury
securities, as well as a continued positive technical supply
environment. States such as California and Maryland have announced
that their large current and anticipated future budget surpluses
will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers have also initiated tenders to
repurchase existing debt, reducing the supply of tax-exempt bonds in
the secondary market as well. Since their recent peak in January
2000, long-term municipal bond yields declined over 25 basis points
to finish the six-month period ended April 30, 2000 at 6.07%. During
the last six months, municipal bond yields declined just 10 basis
points overall.
The relative underperfomance of the municipal bond market in recent
months has been especially disappointing given the strong technical
position the tax-exempt bond market enjoyed. The issuance of long-
term tax-exempt securities has dramatically declined. Over the last
year, $203 billion in new long-term municipal securities was issued,
a decline of almost 25% compared to the same period a year earlier.
For the six months ended April 30, 2000, approximately $90 billion
in new tax-exempt bonds was underwritten, a decline of more than 25%
compared to the same period in 1999. Although investors received
over $30 billion in coupon payments, bond maturities and the
proceeds from early bond redemptions, coupled with the highest
municipal bond yields in three years, overall investor demand has
diminished. Long-term municipal bond mutual funds have seen
consistent outflows in recent months as the yields of individual
securities have risen faster than those of larger, more diverse
mutual funds. Over the last four months, tax-exempt mutual funds
have had net redemptions of more than $8 billion. Also, the demand
from property and casualty insurance companies has weakened as a
result of the losses and anticipated losses incurred from a series
of damaging storms across much of the eastern United States.
Additionally, many institutional investors who have in recent years
been attracted to the municipal bond market by historically
attractive tax-exempt bond yield ratios of over 90% found other
asset classes even more attractive. Even with a favorable supply
position, tax-exempt municipal bond yields have underperformed their
taxable counterparts.
Any significantly lower municipal bond yields are still likely to
require weaker US employment growth and consumer spending. The
actions taken in recent months by the Federal Reserve Board should
eventually slow US economic growth. The recent declines in US home
sales are perhaps the first sign that consumer spending is being
slowed by higher interest rates. Until further signs develop, it is
likely that the municipal bond market's current favorable technical
position will dampen significant tax-exempt interest rate volatility
and provide a stable environment for eventual improvement in
municipal bond prices.
Portfolio Strategy
For the six months ended April 30, 2000, we focused our strategy on
seeking to enhance the level of tax-exempt income to our Common
Stock shareholders by maintaining a fully invested position and
using leverage. (For an explanation of the benefits and risks of
leveraging, see page 1 of this report to shareholders.) The fixed-
income marketplace has been subject to above-average price
volatility resulting from continuously strong economic growth and
uncertainty surrounding the magnitude of future monetary tightening
by the Federal Reserve Board. Our fully invested position, coupled
with our use of leverage, subjected the Fund's net asset value to
the volatility that accompanies such a drastic rise and fall in
interest rates, although we were able to achieve a very competitive
yield. During the period, our primary focus was on the purchase of
bonds in the 15-year - 20-year maturity range, with premium coupons.
This strategy allowed us to invest in issues with an attractive
yield and less interest rate risk.
In Conclusion
We appreciate your ongoing interest in Merrill Lynch Municipal
Strategy Fund, Inc., and we look forward to serving your investment
needs in the months and years to come.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and Portfolio Manager
(John M. Loffredo)
John M. Loffredo
Vice President and Portfolio Manager
May 31, 2000
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <S> <S> <C> <S> <C>
Arizona--3.9% Phoenix, Arizona, IDA, Airport Facility Revenue
Refunding Bonds (America West Airlines Inc. Project), AMT:
NR* B1 $ 2,000 6.25% due 6/01/2019 $ 1,767
NR* B1 1,600 6.30% due 4/01/2023 1,409
B+ Ba3 2,000 Pima County, Arizona, IDA, Industrial Revenue
Refunding Bonds (Tucson Electric Power Company Project),
Series B, 6% due 9/01/2029 1,752
NR* NR* 970 Show Low, Arizona, Improvement District No. 5, Special
Assessment Bonds, 6.375% due 1/01/2015 971
California--7.7% AAA NR* 5,250 California Health Facilities Finance Authority,
Revenue Refunding Bonds, RIB, Series 90, 5.465% due
8/15/2028 (a)(e) 4,357
AA- Aa3 6,725 California State, GO, Refunding (Veterans Bonds), AMT,
Series BH, 5.60% due 12/01/2032 6,306
Los Angeles County, California, Schools Regionalized
Business Services, COP, Pooled Financing, Series A (c):
AAA Aaa 1,430 5.90%** due 8/01/2019 460
AAA Aaa 2,510 6%** due 8/01/2029 428
Colorado--1.0% NR* NR* 1,500 Denver, Colorado, Urban Renewal Authority, Tax Increment
Revenue Bonds (Pavilions), AMT, 7.75% due 9/01/2016 1,587
Connecticut NR* NR* 750 Connecticut State Development Authority, IDR (AFCO Cargo
--5.2% BDL-LLC Project), AMT, 7.35% due 4/01/2010 748
AAA Aaa 4,355 Connecticut State Special Tax Obligation Revenue Bonds,
Transportation Infrastructure, Series A, 6% due 12/01/2018 (b) 4,471
AAA Aaa 2,545 University of Connecticut, GO, Series A, 5.75% due
3/01/2016 (b) 2,596
Florida--6.9% AAA Aaa 2,610 Miami-Dade County, Florida, Aviation Revenue Bonds
(Miami International Airport), Series B, 5.75% due
10/01/2019 (b) 2,617
NR* NR* 2,500 Orange County, Florida, School Board, COP, RIB,
Series 130, 5.07% due 8/01/2023 (a)(e) 2,068
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 2,101
A1+ VMIG1++ 3,700 Saint Lucie County, Florida, PCR, Refunding (Florida
Power and Light Company Project), VRDN, 5.80% due 1/01/2026 (g) 3,700
Georgia--2.2% AAA Aa2 3,250 Georgia State, HFA, S/F Mortgage Revenue Refunding
Bonds, Series A, Sub-Series A-1, 6.125% due 12/01/2015 (h) 3,267
Illinois--3.7% NR* NR* 935 Beardstown, Illinois, IDR (Jefferson Smurfit Corp.
Project), 8% due 10/01/2016 977
AAA Aaa 3,285 Illinois Development Finance Authority Revenue Bonds
(Presbyterian Home Lake Project), Series B, 6.30% due
9/01/2022 (d) 3,338
NR* Baa1 1,250 Illinois Health Facilities Authority Revenue Bonds
(Holy Cross Hospital Project), 6.70% due 3/01/2014 1,249
Indiana--2.0% BBB- Baa2 3,000 Indiana State Development Finance Authority, Environmental
Revenue Refunding and Improvement Bonds (USX Corporation
Project), 6.15% due 7/15/2022 2,775
A1+ VMIG1++ 200 Princeton, Indiana, PCR, Refunding (PSI Energy
Incorporated Project), VRDN, 6.05% due 4/01/2022 (g) 200
Louisiana--3.8% A1+ VMIG1++ 2,000 Louisiana State Offshore Terminal Authority, Deepwater
Port Revenue Refunding Bonds (First Stage A-Loop Inc.),
VRDN, 5.85% due 9/01/2008 (g) 2,000
CC NR* 4,000 Port New Orleans, Louisiana, IDR, Refunding (Continental
Grain Company Project), 6.50% due 1/01/2017 3,770
Maryland--2.0% NR* NR* 3,000 Maryland State Energy Financing Administration, Limited
Obligation Revenue Bonds (Cogeneration-AES Warrior Run),
AMT, 7.40% due 9/01/2019 3,057
Massachusetts-- A NR* 2,000 Massachusetts State Health and Educational Facilities
1.3% Authority Revenue Bonds (Schepens Eye Research Project),
Series A, 6.50% due 7/01/2028 2,030
Michigan--2.1% AAA Aaa 3,100 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds, INFLOS, 8.412% due 2/15/2022 (d)(e) 3,135
Minnesota--1.3% NR* Aa1 2,050 Robbinsdale, Minnesota, Independent School District
Number 281, GO, 5.50% due 2/01/2017 2,021
Mississippi-- BBB- Ba1 5,000 Mississippi Business Finance Corporation, Mississippi,
3.7% PCR, Refunding (System Energy Resources Inc. Project),
5.875% due 4/01/2022 4,324
NR* NR* 1,300 Mississippi Development Bank, Special Obligation
Revenue Refunding Bonds (Diamond Lakes Utilities),
Series A, 6.25% due 12/01/2017 1,223
Nevada--1.0% NR* NR* 1,530 Reno-Sparks Convention and Visitors Authority, Nevada,
Limited Obligation Revenue Refunding Bonds, 6.40% due
11/01/2003 1,550
New Jersey New Jersey Health Care Facilities Financing Authority,
--2.2% Revenue Refunding Bonds:
BBB- Baa3 2,500 (Englewood Hospital and Medical Center), 6.75%
due 7/01/2024 2,283
BBB- Baa3 1,200 (Saint Elizabeth Hospital Obligation Group), 6%
due 7/01/2014 1,032
New Mexico--2.6% Farmington, New Mexico, PCR, Refunding (Public Service
Company-San Juan Project):
BBB- Baa3 3,000 Series A, 6.30% due 12/01/2016 2,910
BBB- Baa3 1,000 Series D, 6.375% due 4/01/2022 955
New York--16.0% NR* Aaa 3,000 New York City, New York, City Municipal Water
Finance Authority, Water and Sewer System
Revenue Bonds, RITR, Series 11, 6.22% due 6/15/2026 (d)(e) 2,948
New York City, New York, GO, Refunding, Series G:
AAA Aaa 2,090 5.75% due 2/01/2014 (a) 2,116
AAA Aaa 2,000 5.75% due 2/01/2014 (b) 2,025
AAA NR* 1,505 New York City, New York, GO, Series H, 5% due 3/15/2029 (d) 1,285
A A3 2,500 New York City, New York, IDA, Special Facility Revenue
Bonds (Terminal One Group Association Project), AMT,
6% due 1/01/2019 2,491
</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)
COP Certificates of Participation
EDA Economic Development Authority
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
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <S> <S> <C> <S> <C>
New York New York State Thruway Authority, Highway and Bridge
(concluded) Trust Fund Revenue Bonds, Series A (d):
AAA Aaa $ 2,850 6% due 4/01/2015 $ 2,963
AAA Aaa 2,625 6% due 4/01/2016 2,718
AAA Aaa 10,000 Port Authority of New York and New Jersey,
Consolidated Revenue Bonds, 116th Series,
4.25% due 10/01/2026 (b) 7,608
North Carolina BBB Baa3 2,000 North Carolina Eastern Municipal Power Agency,
--2.5% Power System Revenue Bonds, Series D, 6.70% due 1/01/2019 2,019
AA Aa2 1,795 North Carolina HFA, S/F Revenue Bonds, Series II,
6.20% due 3/01/2016 (h) 1,811
Ohio--2.3% NR* Baa3 3,000 Franklin County, Ohio, Hospital Revenue Bonds
(Doctors of Ohio Health Corp.), Series A, 5.60%
due 12/01/2028 2,157
NR* NR* 1,400 Ohio State Higher Educational Facility, Commission
Revenue Bonds (University of Findlay Project),
6.125% due 9/01/2016 1,400
Oklahoma--1.2% AAA NR* 1,650 Holdenville, Oklahoma, Industrial Authority,
Correctional Facility Revenue Bonds, 6.6% due
7/01/2006 (f)(i) 1,786
Pennsylvania NR* NR* 1,750 Pennsylvania Economic Development Financing
--5.5% Authority, Exempt Facilities Revenue Bonds (National
Gypsum Company), AMT, Series A, 6.25% due 11/01/2027 1,591
AAA Aaa 6,000 Philadelphia, Pennsylvania, Airport Revenue Refunding
Bonds, AMT, 5.375% due 6/15/2015 (b) 5,693
NR* NR* 1,000 Philadelphia, Pennsylvania, Authority for IDR, Refunding,
Commercial Development (Doubletree), Series A, 6.50%
due 10/01/2027 949
South Carolina AAA Aaa 1,000 Fairfield County, South Carolina, PCR (South Carolina
--0.7% Electric and Gas), 6.50% due 9/01/2014 (a) 1,055
Tennessee--1.1% NR* NR* 1,610 Hardeman County, Tennessee, Correctional Facilities
Corporation Revenue Bonds, 7.75% due 8/01/2017 1,646
Texas--2.3% BB Baa3 2,000 Lower Colorado River Authority, Texas, PCR (Samsung
Austin Semiconductor), AMT, 6.95% due 4/01/2030 1,985
NR* NR* 1,500 North Central Texas, Health Facility Development
Corporation, Retirement Facility Revenue Bonds
(Northwest Senior Housing), Series A, 7.50% due 11/15/2029 1,430
Utah--3.1% NR* NR* 1,000 Tooele County, Utah, PCR, Refunding (Laidlaw
Environmental), AMT, Series A, 7.55% due 7/01/2027 150
AAA Aaa 4,495 Utah State, HFA, S/F Mortgage Revenue Refunding Bonds,
AMT, Series C-2, Class I, 6.05% due 7/01/2022 4,467
Virginia--8.2% NR* NR* 1,500 Dulles Town Center, Virginia, Community Development
Authority, Special Assessment Tax (Dulles Town Center
Project), 6.25% due 3/01/2026 1,392
AAA Aaa 5,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue
Refunding Bonds, AMT, Series A, 6.10% due 2/01/2011 (c) 5,292
AAA Aaa 2,150 Norfolk, Virginia, Water Revenue Bonds, 5.875%
due 11/01/2020 (a) 2,158
NR* NR* 1,750 Peninsula Ports Authority, Virginia, Revenue Refunding
Bonds (Port Facility-Zeigler Coal), 6.90% due 5/02/2022 1,428
Pocahontas Parkway Association, Virginia, Toll Road
Revenue Bonds:
NR* Ba1 6,200 First Tier, Sub-Series C, 6.25%** due 8/15/2031 574
BBB- Baa3 11,960 Senior Series B, 5.95%** due 8/15/2029 1,485
Washington AAA Aaa 2,135 Grant County, Washington, Public Utility District
--1.4% Number 002, Wanapum Hydro Electric Revenue Bonds, AMT,
Second Series, Series B, 5.90% due 1/01/2021 (a) 2,094
Wyoming--1.7% AA NR* 2,500 Wyoming Student Loan Corporation, Student Loan
Revenue Refunding Bonds, Series A, 6.20% due 6/01/2024 2,508
Total Investments (Cost--$155,517)--98.6% 148,658
Other Assets Less Liabilities--1.4% 2,156
--------
Net Assets--100.0% $150,814
========
(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, 2000.
(f)Connie Lee Insured.
(g)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, 2000.
(h)FHA Insured.
(i)Prerefunded.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
Quality
Profile
The quality ratings of securities in the Fund as of April 30, 2000
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 45.7%
AA/Aa 8.4
A/A 3.0
BBB/Baa 15.4
BB/Ba 1.5
B/B 3.5
CC/Ca 2.5
NR(Not Rated) 14.7
Other++ 3.9
++Temporary investments in short-term municipal securities.
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 2000
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of April 30, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$155,516,589) $148,658,281
Cash 40,798
Receivables:
Interest $ 2,382,219
Capital shares sold 87,634
Securities sold 35,362 2,505,215
------------
Deferred organization expenses 62,645
Prepaid registration fees and other assets 11,190
------------
Total assets 151,278,129
------------
Liabilities: Payables:
Dividends to shareholders 98,761
Investment advisory fees 46,529
Administration fees 29,080 174,370
------------
Accrued expenses and other liabilities 289,306
------------
Total liabilities 463,676
------------
Net Assets: Net assets $150,814,453
============
Capital: Capital Stock (200,000,000 shares authorized):
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 (10,732,507 shares
issued and outstanding) $ 1,073,251
Paid-in capital in excess of par 109,394,253
Undistributed investment income--net 22,091
Accumulated realized capital losses on investments--net (7,410,804)
Accumulated distributions in excess of realized capital
gains on investments--net (3,406,030)
Unrealized depreciation on investments--net (6,858,308)
------------
Total--Equivalent to $8.65 net asset value per share
of Common Stock 92,814,453
------------
Total capital $150,814,453
============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended April 30, 2000
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 4,809,137
Income:
Expenses: Investment advisory fees $ 381,385
Administrative fees 190,693
Commission fees 74,072
Professional fees 66,495
Transfer agent fees 60,258
Printing and shareholder reports 54,240
Amortization of organization expenses 31,356
Registration fees 25,668
Accounting services 24,400
Directors' fees and expenses 13,651
Custodian fees 7,047
Pricing fees 4,437
Other 17,779
------------
Total expenses before reimbursement 951,481
Reimbursement of expenses (76,277)
------------
Total expenses after reimbursement 875,204
------------
Investment income--net 3,933,933
------------
Realized & Realized loss on investments--net (6,270,225)
Unrealized Change in unrealized appreciation/depreciation on investments--net 3,677,986
Gain (Loss) on ------------
Investments--Net: Net Increase in Net Assets Resulting from Operations $ 1,341,694
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 2000
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 3,933,933 $ 7,955,477
Realized loss on investments--net (6,270,225) (3,963,881)
Change in unrealized appreciation/depreciation on
investments--net 3,677,986 (16,190,234)
------------ ------------
Net increase (decrease) in net assets resulting
from operations 1,341,694 (12,198,638)
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (2,857,155) (6,440,369)
Shareholders: Preferred Stock (1,075,018) (1,494,777)
In excess of realized gain on investments--net:
Common Stock -- (2,910,041)
Preferred Stock -- (495,989)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (3,932,173) (11,341,176)
------------ ------------
Capital Stock Proceeds from issuance of Preferred Stock -- 10,000,000
Transactions: Net proceeds from issuance of Common Stock (6,768,878) 10,374,468
------------ ------------
Net increase (decrease)in net assets derived from
capital stock transactions (6,768,878) 20,374,468
------------ ------------
Net Assets: Total decrease in net assets (9,359,357) (3,165,346)
Beginning of period 160,173,810 163,339,156
------------ ------------
End of period* $150,814,453 $160,173,810
============ ============
*Undistributed investment income--net $ 22,091 $ 20,331
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
For the Period
The following per share data and ratios have been derived Six Months Nov. 3,
from information provided in the financial statements. Ended For the Year Ended 1995++ to
April 30, October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.89 $ 10.96 $ 10.87 $ 10.17 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .36 .71 .73 .75 .68
Realized and unrealized gain (loss)
on investments--net (.24) (1.75) .35 .70 .21
-------- -------- -------- -------- --------
Total from investment operations .12 (1.04) 1.08 1.45 .89
-------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.26) (.58) (.60) (.59) (.59)
Realized gain on investments--net -- -- (.19) -- --
In excess of realized gain on
investments--net -- (.27) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders (.26) (.85) (.79) (.59) (.59)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends and distributions to
Preferred Stock shareholders:
Investment income--net (.10) (.13) (.13) (.16) (.09)
Realized gain on investments--net -- -- (.07) -- --
In excess of realized gain on
investments--net -- (.05) -- -- --
Capital charge resulting from
issuance of Preferred Stock -- -- -- -- (.04)
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.10) (.18) (.20) (.16) (.13)
-------- -------- -------- -------- --------
Net asset value, end of period $ 8.65 $ 8.89 $ 10.96 $ 10.87 $ 10.17
======== ======== ======== ======== ========
Total Investment Based on net asset value per share .25%+++ (11.94%) 8.28% 13.08% 7.81%+++
Return:** ======== ======== ======== ======== ========
Ratios Based on Total expenses, net of reimbursement*** 1.84%* 1.75% 1.61% 1.37% .68%*
Average Net ======== ======== ======== ======== ========
Assets of Total expenses*** 2.00%* 1.90% 1.80% 1.83% 1.60%*
Common Stock: ======== ======== ======== ======== ========
Total investment income--net*** 8.27%* 6.98% 6.65% 7.14% 6.86%*
======== ======== ======== ======== ========
Amount of dividends to Preferred Stock
shareholders 2.26%* 1.31% 1.21% 1.53% .94%*
======== ======== ======== ======== ========
Investment income--net, to Common Stock
shareholders 6.01%* 5.67% 5.44% 5.61% 5.92%*
======== ======== ======== ======== ========
Ratios Based on Total expenses, net of reimbursement 1.14%* 1.17% 1.12% .96% .53%*
Total Average Net ======== ======== ======== ======== ========
Assets:***++++++ Total expenses 1.24%* 1.27% 1.25% 1.28% 1.26%*
======== ======== ======== ======== ========
Total investment income--net 5.14%* 4.66% 4.61% 5.01% 5.40%*
======== ======== ======== ======== ========
Ratios Based on Dividends to Preferred Stock
Average Net Shareholders 3.72%* 2.63% 2.75% 3.58% 3.49%*
Assets of ======== ======== ======== ======== ========
Preferred Stock:
Supplemental Net assets, net of Preferred Stock,
Data: end of period (in thousands) $ 92,814 $102,174 $115,339 $101,463 $ 83,573
======== ======== ======== ======== ========
Preferred Stock outstanding,
end of period (in thousands) $ 58,000 $ 58,000 $ 48,000 $ 48,000 $ 38,000
======== ======== ======== ======== ========
Portfolio turnover 49.62% 158.57% 141.53% 144.34% 234.41%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 2,600 $ 2,762 $ 3,403 $ 3,114 $ 3,199
Dividends Per ======== ======== ======== ======== ========
Share On Investment income--net $ 463 $ 644 $ 533 $ 897 $ 564
Preferred Stock ======== ======== ======== ======== ========
Outstanding:
*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. The Fund's Investment Adviser
voluntarily waived a portion of its management fee. Without such
waiver, the Fund's performance would have been lower.
***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.
++++++Includes Common and Preferred Stock average net assets.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 2000
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 accounting principles generally accepted in the
United States of America, 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 investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization and prepaid registration fees--Deferred
organization expenses are amortized on a straight-line basis over a
period not exceeding five years. In accordance with Statement of
Position 98-5, any unamortized organization expenses will be
expensed on the first day of the next fiscal year beginning after
December 15, 1998. This charge will not have any material impact on
the operations of the Fund. Prepaid registration fees are charged to
expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions.
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 .50% of
the Fund's average daily net assets, including proceeds from the
issuance of Preferred Stock. For the six months ended April 30,
2000, FAM earned fees of $381,385, of which $76,277 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
.25% of the Fund's average daily net assets, in return for the
performance of administrative services (other than investment advice
and related porfolio activities) necessary for the operation of the
Fund.
For the six months ended April 30, 2000, Merrill Lynch Funds
Distributors ("MLFD"), a division of Princeton Funds Distributor,
Inc. ("PFD"), earned early withdrawal charges of $63,328 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 six months ended April 30, 2000 were $70,995,775 and
$75,221,565, respectively.
Net realized losses for six months ended April 30, 2000
and net unrealized losses as of April 30, 2000, were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(6,270,225) $(6,858,308)
----------- -----------
Total $(6,270,225) $(6,858,308)
=========== ===========
As of April 30, 2000, net unrealized depreciation for Federal income
tax purposes aggregated $6,858,308, of which $1,096,018 related to
appreciated securities and $7,954,326 related to depreciated
securities. The aggregate cost of investments at April 30, 2000 for
Federal income tax purposes was $155,516,589.
Merrill Lynch Municipal Strategy Fund, Inc., April 30, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of the holders of Common Stock.
Transactions in Common Stock were as follows:
For the Six Months Ended Dollar
April 30, 2000 Shares Amount
Shares sold 470,715 $ 4,112,243
Shares issued to shareholders in
reinvestment of dividends 102,599 894,186
------------ ------------
Total issued 573,314 5,006,429
Shares tendered (1,340,063) (11,775,307)
------------ ------------
Net decrease (766,749) $ (6,768,878)
============ ============
For the Year Ended Dollar
October 31, 1999 Shares Amount
Shares sold 2,518,676 $ 26,054,342
Shares issued to shareholders in
reinvestment of dividends and
distributions 295,128 3,036,851
------------ ------------
Total issued 2,813,804 29,091,193
Shares tendered (1,838,103) (18,716,725)
------------ ------------
Net increase 975,701 $ 10,374,468
============ ============
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, 2000 was 4.35%.
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, 2000
remained constant and during the year ended October 31, 1999
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 .25% to 1.00%,
calculated on the proceeds of each auction. For the six months ended
April 30, 2000, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
an affiliate of FAM, earned $66,476 as commissions.
5. Capital Loss Carryforward:
At October 31, 1999, the Fund had a net capital loss carryforward of
approximately $4,320,000, all of which expires in 2007. This amount
will be available to offset like amounts of any future taxable
gains.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
John M. Loffredo, Vice President
Donald C. Burke, Vice President and Treasurer
William E. Zitelli, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agent
Common Stock:
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
