As filed with the Securities and Exchange Commission on July 17, 2001
Securities Act File No. 333-________
Investment Company Act File No. 811-06435
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
/ / Pre-Effective Amendment No.
/ / Post-Effective Amendment No.
(Check appropriate box or boxes)
--------------------
MuniYield Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
--------------------
(609) 282-2800
(Area Code and Telephone Number)
--------------------
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)
--------------------
Terry K. Glenn
MuniYield Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
--------------------
Copies to:
Frank P. Bruno, Esq. Michael J. Hennewinkel, Esq.
SIDLEY AUSTIN BROWN & WOOD LLP FUND ASSET MANAGEMENT, L.P.
One World Trade Center 800 Scudders Mill Road
New York, New York 10048-0557 Plainsboro, New Jersey 08543-9011
--------------------
Approximate Date of Proposed Public Offering: As soon as practicable
after the Registration Statement becomes effective under the Securities Act of
1933.
--------------------
Calculation of Registration Fee Under the Securities Act of 1933
======================================================= =============== =============== ================ =============
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Amount being Offering Price Offering Registration
Title Of Securities Being Registered Registered (1) Per Unit(1) Price (1) Fee (3)
- ------------------------------------------------------- --------------- ----------- ---------------- -------------
Common Stock ($.10 par value).................... 6,356,590 $13.37 $84,987,605.63 $21,246.90
- ------------------------------------------------------- --------------- ----------- ---------------- -------------
Auction Market Preferred Stock, Series F ($.10 par
value)........................................... 1,720 $25,000(2) $43,000,000 $10,750
======================================================= =============== ============ ================ =============
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Represents the liquidation preference of a share of preferred stock after
the reorganization.
(3) Paid by wire transfer to the designated lockbox of the Securities and
Exchange Commission in Pittsburgh, Pennsylvania.
--------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
==============================================================================
==============================================================================
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
--------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on October 24, 2001
--------------------
TO THE STOCKHOLDERS OF
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Meeting") of Merrill Lynch Municipal Strategy Fund, Inc. ("Municipal
Strategy") will be held at the offices of Fund Asset Management, L.P., 800
Scudders Mill Road, Plainsboro, New Jersey on Wednesday, October 24, 2001 at
9:30 a.m. Eastern time for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan") contemplating (i) the acquisition of substantially all
of the assets and the assumption of substantially all of the liabilities of
Municipal Strategy by MuniYield Fund, Inc. ("MuniYield"), in return solely for
an equal aggregate value of newly issued shares of common stock of MuniYield
and shares of a newly created series of Auction Market Preferred Stock
("AMPS") of MuniYield to be designated Series F, and (ii) the distribution by
Municipal Strategy of the shares of MuniYield common stock to the holders of
common stock of Municipal Strategy (plus cash in lieu of fractional shares)
and the shares of Series F AMPS of MuniYield to the holders of Series A AMPS
of Municipal Strategy. A vote in favor of this proposal also will constitute a
vote in favor of the liquidation and dissolution of Municipal Strategy under
Maryland corporate law and the termination of Municipal Strategy's
registration under the Investment Company Act of 1940, as amended; and
(2) To transact such other business as properly may come before the
Meeting or any adjournment thereof.
The Board of Directors of Municipal Strategy has fixed the close of
business on August 27, 2001 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof.
A complete list of the stockholders of Municipal Strategy entitled to
vote at the Meeting will be available and open to the examination of any
stockholder of Municipal Strategy for any purpose germane to the Meeting
during ordinary business hours from and after October 10, 2001, at the offices
of Municipal Strategy, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meeting. Stockholders who do not
expect to attend the Meeting in person are requested to complete, date and
sign the enclosed form of proxy and return it promptly in the envelope
provided for that purpose. If you have been provided with the opportunity on
your proxy card or voting instruction form to provide voting instructions via
telephone or the Internet, please take advantage of these prompt and efficient
voting options. The enclosed proxy is being solicited on behalf of the Board
of Directors of Municipal Strategy.
If you have any questions regarding the enclosed proxy material or need
assistance in voting your shares of common stock or shares of AMPS, please
contact our proxy solicitor, Georgeson Shareholder Communications Inc., at
1-800- .
By Order of the Board of Directors,
ALICE A. PELLEGRINO
Secretary
Plainsboro, New Jersey
Dated: September ___, 2001
The information in this proxy statement and prospectus is not complete and may
be changed. We may not use this proxy statement and prospectus to sell
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This proxy statement and prospectus is not
an offer to sell these securities and is not soliciting an offer to buy these
securities in any State where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED JULY 17, 2001
PROXY STATEMENT OF
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
FOR USE AT A SPECIAL MEETING OF STOCKHOLDERS
To Be Held on October 24, 2001
------------------
PROSPECTUS OF
MUNIYIELD FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
------------------
This Proxy Statement and Prospectus is furnished to you because you are
stockholder of Merrill Lynch Municipal Strategy Fund, Inc. ("Municipal
Strategy"). A special meeting of the stockholders of Municipal Strategy will
be held on October 24, 2001 (the "Meeting") to consider the items listed below
and discussed in greater detail in this Proxy Statement and Prospectus. The
Board of Directors of Municipal Strategy is requesting the stockholders of
Municipal Strategy to submit a proxy to be used at the Meeting to vote the
shares held by the stockholder submitting the proxy.
Municipal Strategy has outstanding shares of common stock ("Municipal
Strategy Common Stock"), par value $.10 per share, and shares of Auction
Market Preferred Stock ("AMPS"), designated Series A ("Municipal Strategy
Series A AMPS"), with a par value of $.10 per share and a liquidation
preference of $25,000 per share.
Stockholders are being asked to consider the following proposal:
1. To approve or disapprove an Agreement and Plan of Reorganization
between Municipal Strategy and MuniYield Fund Inc. ("MuniYield").
2. To transact such other business as may properly come before the
Meeting thereof.
The Agreement and Plan of Reorganization that you are being asked to
consider involves a transaction that will be referred to in this Proxy
Statement and Prospectus as the "Reorganization." The Reorganization involves
the combination of two funds into one. The two funds are:
MuniYield, which will be the surviving fund, and
Municipal Strategy.
MuniYield and Municipal Strategy are sometimes referred to herein
collectively as the "Funds" and individually as a "Fund," as the context
requires. The fund resulting from the Reorganization is sometimes referred to
herein as the "Combined Fund."
In the Reorganization, MuniYield will acquire substantially all of the
assets and liabilities of Municipal Strategy in return for newly issued shares
of common stock of MuniYield ("MuniYield Common Stock") with a par value of
$.10 per share, and shares of a newly created series of AMPS, with a par value
of $.10 per share and a liquidation preference of $25,000 per share, to be
designated Series F ("MuniYield Series F AMPS"). Municipal Strategy will
distribute the MuniYield Common Stock and MuniYield Series F AMPS received in
the Reorganization to its stockholders and will then liquidate and dissolve
under Maryland law and terminate its registration under the Investment Company
Act of 1940, as amended (the "Investment Company Act"). MuniYield will
continue to operate as a registered, non-diversified, closed-end investment
company with the investment objective and policies described in this Proxy
Statement and Prospectus.
(continued on next page)
------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Proxy Statement and
Prospectus. Any representation to the contrary is a criminal
offense.
------------------
The date of this Proxy Statement and Prospectus is _____, 2001.
In the Reorganization, MuniYield will issue shares of its common stock to
Municipal Strategy based on the value of the assets transferred to MuniYield
by Municipal Strategy. These shares will then be distributed by Municipal
Strategy to its stockholders based on the value of the shares held by each
stockholder just prior to the Reorganization. A holder of Municipal Strategy
Common Stock will receive MuniYield Common Stock (plus cash in lieu of
fractional shares). A holder of Municipal Strategy Series A AMPS will receive
MuniYield Series F AMPS. All references to the Municipal Strategy Common Stock
will include shares of common stock representing Dividend Reinvestment Plan
shares held in the book deposit accounts of holders of Municipal Strategy
Common Stock.
This Proxy Statement and Prospectus serves as a prospectus of MuniYield
in connection with the issuance of MuniYield Common Stock and MuniYield Series
F AMPS in the Reorganization.
This Proxy Statement and Prospectus sets forth the information about the
Funds that stockholders of Municipal Strategy should know before considering
the Reorganization and should be retained for future reference. The Board of
Directors of Municipal Strategy authorized the solicitation of proxies in
connection with the Reorganization solely on the basis of this Proxy Statement
and Prospectus and the accompanying documents.
The address of the principal executive offices of MuniYield and Municipal
Strategy is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the
telephone number is 1-609-282-2800.
The MuniYield Common Stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "MYD" and may be bought or sold at the then
prevailing market price on each day the NYSE is open for trading. Municipal
Strategy engages in a continuous offering of Municipal Strategy Common Stock
and Municipal Strategy Series A AMPS. Municipal Strategy Common Stock is not
listed on any exchange and no secondary market presently exists for Municipal
Strategy Common Stock, nor is it currently expected that a secondary market
will develop. Municipal Strategy Series A AMPS are not traded on any stock
exchange or automated quotation system. Municipal Strategy Series A AMPS can
be purchased at an auction or through broker-dealers who maintain a secondary
market in the AMPS.
After the Reorganization, MuniYield Common Stock will continue to be
listed on the NYSE under the symbol "MYD." MuniYield Series F AMPS will not be
traded on any stock exchange or automated quotation system. MuniYield Series F
AMPS will be available for purchase at an auction or through broker-dealers
who maintain a secondary market in the AMPS. Reports, proxy materials and
other information concerning MuniYield may be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005. Reports, proxy materials and
other information concerning Municipal Strategy may be inspected at its
principal executive office.
Table of Contents
Page
----
INTRODUCTION......................................................................................................1
SUMMARY...........................................................................................................1
What Will Be the Result of the Reorganization................................................................1
Reasons for the Reorganization...............................................................................2
Pro Forma Fee Table..........................................................................................4
RISK FACTORS AND SPECIAL CONSIDERATIONS..........................................................................13
Trading at a Discount.......................................................................................13
Secondary Market............................................................................................13
Non-Diversified Status......................................................................................13
Interest Rate and Credit Risk...............................................................................14
High Yield or "Junk Bonds"..................................................................................14
Private Activity Bonds......................................................................................14
Rating Agency Guidelines....................................................................................14
Indexed and Inverse Floating Rate Securities................................................................14
Options and Futures Transactions............................................................................15
Antitakeover Provisions.....................................................................................15
Leverage....................................................................................................15
Portfolio Management and Other Considerations...............................................................16
COMPARISON OF THE FUNDS..........................................................................................17
Investment Objective and Policies...........................................................................21
Description of Municipal Bonds..............................................................................23
Other Investment Policies...................................................................................24
Information Regarding Options and Futures Transactions......................................................25
Investment Restrictions.....................................................................................28
Rating Agency Guidelines....................................................................................29
Portfolio Composition.......................................................................................30
Portfolio Transactions......................................................................................31
Portfolio Turnover..........................................................................................32
Net Asset Value.............................................................................................32
Capital Stock...............................................................................................33
Certain Provisions of the Charters..........................................................................34
Management of the Funds.....................................................................................35
Code of Ethics..............................................................................................38
Voting Rights...............................................................................................38
Stockholder Inquiries.......................................................................................39
Dividends and Distributions.................................................................................39
Automatic Dividend Reinvestment Plan........................................................................40
Mutual Fund Investment Option...............................................................................42
Liquidation Rights of Holders of AMPS.......................................................................42
Tax Rules Applicable to the Funds and Their Stockholders....................................................43
Tax Treatment of Options and Futures Transactions...........................................................46
AGREEMENT AND PLAN OF REORGANIZATION.............................................................................46
General.....................................................................................................46
Procedure...................................................................................................47
Terms of the Agreement and Plan of Reorganization...........................................................48
Potential Benefits to Stockholders as a Result of the Reorganization........................................49
Surrender and Exchange of Stock Certificates................................................................51
Tax Consequences of the Reorganization......................................................................52
Capitalization..............................................................................................54
INFORMATION CONCERNING THE MEETING...............................................................................55
Solicitation, Revocation and Use of Proxies.................................................................55
Record Date and Outstanding Shares..........................................................................55
Security Ownership of Certain Beneficial Owners and Management..............................................55
Voting Rights and Required Vote.............................................................................55
Appraisal Rights............................................................................................56
ADDITIONAL INFORMATION...........................................................................................56
CUSTODIAN........................................................................................................57
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR..........................................................57
ACCOUNTING SERVICES PROVIDER.....................................................................................57
LEGAL OPINIONS...................................................................................................57
EXPERTS..........................................................................................................58
LEGAL PROCEEDINGS................................................................................................58
STOCKHOLDER PROPOSALS............................................................................................59
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
APPENDIX I INFORMATION PERTAINING TO EACH FUND.................................................................I-1
APPENDIX II AGREEMENT AND PLAN OF REORGANIZATION..............................................................II-1
APPENDIX III RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER.................................................III-1
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Municipal
Strategy for use at the Meeting to be held at the offices of Fund Asset
Management, L.P. ("FAM"), 800 Scudders Mill Road, Plainsboro, New Jersey on
Wednesday, October 24, 2001, at 9:30 a.m., Eastern time. The mailing address
for each of the Funds is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
approximate mailing date of this Proxy Statement and Prospectus is September __,
2001.
Any person giving a proxy may revoke it at any time prior to its exercise
(1) by executing a superseding proxy, (2) by giving written notice of the
revocation to the Secretary of Municipal Strategy at the address indicated
above, or (3) by voting in person at the Meeting. All properly executed
proxies received prior to the Meeting will be voted at the Meeting in
accordance with the instructions marked thereon or otherwise as provided
therein. Unless instructions to the contrary are marked, properly executed
proxies will be voted "FOR" Item 1 to approve the Agreement and Plan of
Reorganization between MuniYield and Municipal Strategy (the "Agreement and
Plan").
With respect to Item 1, assuming the required quorum is present at the
Meeting, approval of the Agreement and Plan will require the affirmative vote
of a majority of the outstanding shares of (1) Municipal Strategy Common Stock
and Municipal Strategy Series A AMPS, voting together as a single class, and
(ii) Municipal Strategy Series A AMPS, voting separately as a class. See
"Information Concerning the Meeting."
The Board of Directors of Municipal Strategy has fixed the close of
business on August 27, 2001 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of and to vote at the Meeting
and at any adjournment thereof. On the Record Date, stockholders of Municipal
Strategy will be entitled to one vote for each share of stock held, with no
shares of stock having cumulative voting rights. As of the Record Date,
Municipal Strategy had outstanding _____ shares of common stock and 1,720
shares of Series A AMPS. To the knowledge of the management of Municipal
Strategy, no person or entity owns beneficially 5% or more of the outstanding
shares of capital stock of Municipal Strategy as of the Record Date.
The Board of Directors of Municipal Strategy knows of no business other
than that discussed above which will be presented for consideration at the
Meeting. If any other matter is properly presented, it is the intention of the
persons named in the enclosed proxy to vote in accordance with their best
judgment.
This Proxy Statement and Prospectus serves as a prospectus of MuniYield
under the Securities Act, in connection with the issuance of shares of
MuniYield Common Stock and MuniYield Series F AMPS to Municipal Strategy
pursuant to the terms of the Agreement and Plan.
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus (including documents incorporated by
reference) and is qualified in its entirety by reference to the more complete
information contained in this Proxy Statement and Prospectus and in the
Agreement and Plan attached hereto as Appendix II.
The Reorganization
At separate meetings of the Boards of Directors of Municipal Strategy and
MuniYield held on June 7, 2001 and June 20, 2001, respectively, each Board
unanimously approved the transaction whereby (i) MuniYield would acquire
substantially all of the assets and would assume substantially all of the
liabilities of Municipal Strategy, (ii) MuniYield would simultaneously issue
to Municipal Strategy shares of MuniYield Common Stock and MuniYield Series F
AMPS, (iii) the shares of MuniYield Common Stock would be subsequently
distributed to the holders of Municipal Strategy Common Stock (plus cash in
lieu of fractional shares), (iv) the shares of MuniYield Series F AMPS would
be subsequently distributed to the holders of Municipal Strategy Series A
AMPS, and (v) Municipal Strategy would be deregistered and dissolved, as
described below.
What Will Be the Result of the Reorganization
If the Agreement and Plan is approved and the Reorganization is
completed:
o MuniYield will acquire substantially all of the assets and assume
substantially all of the liabilities of Municipal Strategy;
o Stockholders of Municipal Strategy will become stockholders of
MuniYield;
o Stockholders of Municipal Strategy Common Stock will receive full
shares of MuniYield Common Stock (plus cash in lieu of fractional
shares) equal to the aggregate net asset value of the shares of
Municipal Strategy Common Stock currently owned by such
stockholders; and
o Stockholders of Municipal Strategy Series A AMPS will receive shares
of MuniYield Series F AMPS equal to the aggregate liquidation
preference (and aggregate value) of the Municipal Strategy Series A
AMPS currently owned by such stockholders.
The Reorganization will be structured as a tax-free transaction for
federal tax purposes. Neither Fund will recognize gain or loss in the
Reorganization and no stockholder of Municipal Strategy will recognize gain or
loss upon the exchange of his or her shares for MuniYield Common Stock or
MuniYield Series F AMPS, as applicable, in the Reorganization (except to the
extent that a holder of Municipal Strategy Common Stock receives cash
representing an interest in fractional shares of MuniYield Common Stock).
Stockholders should consult their tax advisers regarding the effect of the
Reorganization in light of their individual circumstances.
Reasons for the Reorganization
The Boards of Directors of Municipal Strategy and MuniYield have approved
the Agreement and Plan. The Board of Directors of Municipal Strategy
recommends that you vote to approve the Agreement and Plan.
Municipal Strategy
The Board of Directors of Municipal Strategy has determined that
Municipal Strategy common stockholders are likely to benefit from the
Reorganization and believe that it is in the best interests of Municipal
Strategy and its common stockholders.
In reaching its decision the Board considered a number of factors
including the following:
o After the Reorganization, Municipal Strategy common stockholders
will be invested in a substantially larger non-diversified,
leveraged, closed-end fund with an investment objective and policies
substantially similar to Municipal Strategy's investment objective
and policies. As of May 31, 2001 the net assets of Municpal Strategy
(including assets attributable to Municipal Strategy Series A AMPS)
were approximately $119 million. Assuming that the Reorganization
had taken place on May 31, 2001, the Combined Fund (including assets
attributable to AMPS) would have had net assets of approximately $875
million;
o After the Reorganization, Municipal Strategy common stockholders
should experience lower expenses per share, economies of scale and
greater flexibility in portfolio management;
o After the Reorganization, Municipal Strategy common stockholders
will benefit from the fact that the Combined Fund will not pay the
administrative fee currently paid by Municipal Strategy;
o After the Reorganization, Municipal Strategy common stockholders
will no longer be subject to the expenses associated with Municipal
Strategy's required yearly prospectus updates;
o After the Reorganization, Municipal Strategy common stockholders
will no longer be subject to the expenses of conducting quarterly
tender offers;
o After the Reorganization, Municipal Strategy common stockholders
will no longer be subject to a contingent deferred sales charge
("CDSC") upon the sale of shares held for less than three years;
o After the Reorganization, Municipal Strategy common stockholders
will be able to sell their shares on each day that the NYSE is open
for trading at the market price; the market price may be at a
discount from or premium above the net asset value of the shares and
transactions in shares will be subject to brokerage commissions; and
o After the Reorganization, subject to certain limitations, the
stockholders of Municipal Strategy may benefit from the ability of
the Combined Fund to use the net realized capital losses of each
Fund to offset future net realized capital gains of the Combined
Fund, if any. As of May 31, 2001, each Fund had net realized capital
losses that can, subject to certain limitations, be shared by the
stockholders of the Combined Fund.
MuniYield
Although the pro forma total operating expense ratio of the Combined Fund
is not expected to be significantly lower than MuniYield's current operating
expense ratio, MuniYield stockholders will not be adversely affected by the
Reorganization since FAM has agreed to bear all Reorganization expenses
attributable to MuniYield and MuniYield may otherwise benefit from an increase
in the Combined Fund's level of net assets.
It is not anticipated that the Reorganization will directly benefit the
holders of shares of any series of AMPS of either Fund. However, the
Reorganization will not adversely affect the holders of shares of any series
of AMPS of either Fund. The expenses of the Reorganization will not be borne
by the holders of shares of AMPS of either Fund.
See "Pro Forma Fee Tables" below and "The Reorganization -- Potential
Benefits to Stockholders as a Result of the Reorganization."
If all of the requisite approvals are obtained, it is anticipated that
the Reorganization will occur as soon as practicable after such approval,
provided that the Funds have obtained prior to that time a favorable opinion
of counsel concerning the tax consequences of the Reorganization as set forth
in the Agreement and Plan. Under the Agreement and Plan, however, the Board of
Directors of either Fund may cause the Reorganization to be postponed or
abandoned in certain circumstances should such Board determine that it is in
the best interest of the stockholders of that Fund to do so. The Agreement and
Plan may be terminated, and the Reorganization abandoned, whether before or
after approval by the Municipal Strategy stockholders, at any time prior to
the Closing Date (as defined below), (i) by mutual consent of the Boards of
Directors of the Funds, or (ii) by the Board of Directors of either Fund, if
any condition to that Fund's obligations has not been fulfilled or waived by
such Fund's Board of Directors.
Pro Forma Fee Table
Fee Table for Common Stockholders of MuniYield,
Municipal Strategy and the Pro Forma Combined Fund*
as of April 30, 2001 (Unaudited)(a)
This table illustrates, based on average net assets attributable to
common stock, the expenses incurred by each Fund individually and the
estimated pro forma expenses to be incurred by the Combined Fund after the
Reorganization:
Actual Pro Forma
---------------------------------------- -----------
Combined
MuniYield Municipal Strategy Fund
-------------- ------------------------ ----------
Common Stockholder Transaction Expenses
Maximum Sales Load (as a percentage of the
offering price) imposed on purchases of
common stock.................................. None(b) None None(c)
Dividend Reinvestment and Cash Purchase Plan
Fees......................................... None None None
Contingent Deferred Sales Charge 3.0% during the first
(as a percentage of original purchase year, decreasing 1.0%
price or net asset value at the annually thereafter to
time of repurchase)(d)....................... None 0.0% after the third year None
Annual Expenses (as a percentage of average
net assets attributable to common stock
for the six months ended April 30, 2001(e))
Investment Advisory Fees(f).................. 0.75% 0.76% 0.75%
Other Expenses............................... 0.25% 1.29%(g) 0.24%
---- ---- ----
Total Annual Expenses(h).......................... 1.00% 2.05% 0.99%
==== ==== ====
- ----------------------
* The expenses for the Combined Fund represent the estimated annualized
expenses as of April 30, 2001 assuming MuniYield had acquired the assets
and assumed the liabilities of Municipal Strategy as of that date.
(a) No information is presented with respect to AMPS because no Fund's
operating expenses are, and the expenses of the Reorganization will not
be, borne by the holders of AMPS of either Fund. Generally, AMPS are sold
at a fixed liquidation preference of $25,000 per share and investment
return is set at an auction.
(b) Shares of common stock purchased in the secondary market may be subject
to brokerage commissions or other charges.
(c) No sales load will be charged on the issuance of shares in the
Reorganization. Shares of common stock are not available for purchase
from the Combined Fund but may be purchased through a broker-dealer
subject to individually negotiated commission rates.
(d) No CDSC will apply to shares of MuniYield Common Stock issued to
Municipal Strategy in the Reorganization, nor will any CDSC be due on
shares of Municipal Strategy Common Stock in connection with the
Reorganization.
(e) The pro forma annual operating expenses for the Combined Fund are
projections for a 12-month period.
(f) Based on average net assets for the six months ended April 30, 2001
of each Fund and the Combined Fund (excluding assets attributable to
AMPS). If assets attributable to AMPS are included, the Investment
Advisory Fee for each Fund and the Combined Fund would be 0.50% of the
average net assets.
(g) Includes the administrative fee paid by Municipal Strategy at the rate of
0.25% of average daily net assets including the proceeds from the
issuance of AMPS.
(h) Based on average net assets (excluding assets attributable to AMPS) for
the six months ended April 30, 2001 of Municipal Strategy, MuniYield and
the Combined Fund and excludes FAM's voluntary waiver of a portion of the
advisory fee and/or reimbursement of certain other expenses with respect
to Municipal Strategy. Including such fee waiver and/or expense
reimbursement applicable to Municipal Strategy, the Total Annual Expenses
for Municipal Strategy would have been 1.90%. If assets attributable to
AMPS are included, the Total Annual Expenses for MuniYield, Municipal
Strategy (excluding the advisory fee waiver and/or expense reimbursement
applicable to Municipal Strategy) and the Combined Fund would be 0.67%,
1.34% and 0.66%, respectively. If assets attributable to AMPS and the
above described advisory fee waiver and/or expense reimbursement
applicable to Municipal Strategy are included, the Total Annual Expenses
for Municipal Strategy would have been 1.24%. It is not anticipated that
FAM will waive its advisory fee or reimburse expenses with respect to the
Combined Fund on an ongoing basis after the Reorganization.
Examples:
Cumulative Expenses Paid on Shares of Common Stock for the Periods Indicated:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
An investor would pay the following expenses on
a $1,000 investment assuming (1) the
operating expense ratio for each Fund set
forth above and (2) a 5% annual return
throughout the period:
MuniYield..................................... $10 $32 $ 55 $122
Municipal Strategy*........................... $21 $64 $110 $238
Combined Fund**............................... $10 $32 $ 55 $121
- -------------------
* Assumes that the investor is not tendering at the end of the period.
** Assumes that the Reorganization had taken place on April 30, 2001.
The foregoing Fee Table and Examples are intended to assist investors
in understanding the costs and expenses that a MuniYield or Municipal Strategy
stockholder bears directly or indirectly as compared to the costs and expenses
that would be borne by such investors taking into account the Reorganization.
The Examples set forth above assume that all dividends were reinvested and
uses a 5% annual rate of return as mandated by Commission regulations. The
Examples should not be considered a representation of past or future expenses
or annual rates of return. Actual expenses or annual rates of return may be
more or less than those assumed for purposes of the Examples. See "Summary,"
"Comparison of the Funds" and "The Reorganization -- Potential Benefits to
Stockholders as a Result of the Reorganization."
MuniYield............................................ MuniYield was incorporated under the laws of the State
of Maryland on September 20, 1991, and commenced
operations on November 20, 1991.
MuniYield currently has outstanding common stock and five
series of AMPS, designated Series A, Series B, Series C,
Series D and Series E (collectively, the "MuniYield
AMPS").
As of May 31, 2001, MuniYield had net assets (including
assets attributable to MuniYield AMPS) of approximately
$756 million.
Municipal Strategy................................... Municipal Strategy was incorporated under the laws of
the State of Maryland on July 13, 1994, and commenced
operations on November 3, 1995.
Municipal Strategy has outstanding common stock and one
series of AMPS, designated Series A.
As of May 31, 2001, Municipal Strategy had net assets
(including assets attributable to Municipal Strategy
Series A AMPS) of approximately $119 million.
Comparison of the Funds.............................. Investment Objectives and Policies. Each Fund is a
non-diversified, leveraged, closed-end, management
investment company. The Funds have substantially similar
investment objectives and policies. Each Fund seeks to
provide stockholders with as high a level of current
income exempt from Federal income tax as is consistent
with its investment policies.
Each Fund seeks to achieve its investment objective by
investing primarily in a portfolio of long-term
investment grade municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is
exempt from Federal income taxes ("Municipal Bonds").
Under normal circumstances, at least 80% of each Fund's
total assets will be invested in such municipal
obligations.
Investment Grade Municipal Obligations. Each Fund
generally will invest at least 75% of its total assets in
Municipal Bonds that are rated investment grade by
Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's ("S&P") or Fitch, Inc. ("Fitch"). See Appendix III
-- "Ratings of Municipal Bonds and Commercial Paper." The
Funds may also buy unrated securities that are considered
by FAM to be of comparable quality.
High Yield Securities or "Junk" Bonds. Each Fund may
invest up to 25% of its total assets in Municipal Bonds
rated in lower, non-investment grade categories by
Moody's, S&P or Fitch or in comparable unrated bonds. These
so-called "junk bonds" have the potential to generate high
current income for shareholders, but also subject each
Fund and its shareholders to greater credit and overall
market risk. In addition, these bonds are frequently
traded only in markets where the number of potential
purchasers and sellers, if any, is very limited. See
Appendix III -- "Ratings of Municipal Bonds and Commercial
Paper."
Private Activity Bonds. Each Fund may invest in certain
tax-exempt securities that are classified as "private
activity bonds" that may subject certain investors to a
Federal alternative minimum tax.
Leverage. Each Fund seeks to enhance the yield to its
common stockholders by issuing AMPS. See "Risk Factors and
Special Considerations -- Leverage."
Portfolio Maturity. Each Fund intends to invest primarily
in long-term Municipal Bonds with maturities of more than
ten years. As of May 31, 2001, the weighted average
maturity of the portfolio of MuniYield and Municipal
Strategy was 19.10 years and 19.11 years, respectively.
The average maturity of each Fund's portfolio securities,
and therefore each Fund's portfolio as a whole, will vary
based upon FAM's assessment of economic and market
conditions. See "Comparison of the Funds -- Investment
Objective and Policies."
Capital Stock. Each Fund has outstanding common stock and
at least one series of AMPS that are sold principally at
auction. The voting and dividend rights of holders of
common stock of each Fund are equivalent.
As of May 31, 2001, (i) the net asset value per share of
MuniYield Common Stock was $12.87 and the market price per
share was $13.47; and (ii) the net asset value per share
of Municipal Strategy Common Stock was $8.85.
Each series of AMPS of each Fund has a liquidation
preference of $25,000 per share plus accumulated but
unpaid dividends and is sold principally at auction. See
"Comparison of the Funds -- Capital Stock."
Auctions generally have been held and will be held every
seven days for MuniYield Series E AMPS and Municipal
Strategy Series A AMPS, and every 28 days for Series A, B,
C and D AMPS of MuniYield.
The auctions for MuniYield Series F AMPS to be issued in
the Reorganization will be held every seven days with the
same auction and payment dates as the Municipal Strategy
Series A AMPS. See "Comparison of the Funds -- Capital
Stock" below. The applicable dividend for a particular
dividend period for each series of AMPS of each Fund will
be determined by an auction conducted by the auction agent
on the business day next preceding the start of that
dividend period. The auction agent for each Fund is The
Bank of New York ("BONY").
The following table provides information about the
dividend rates for each series of AMPS of each Fund as of
a recent auction date:
Dividend Dividend
Auction Date Fund Period Series Rate
------------ ---- ------ ------ ----
July 10, 2001 MuniYield 28 days A 2.59%
June 19, 2001 MuniYield 28 days B 2.85%
July 3, 2001 MuniYield 28 days C 2.70%
July 3, 2001 MuniYield 28 days D 2.70%
July 10, 2001 MuniYield 7 days E 2.60%
July 11, 2001 Municipal 7 days A 2.59%
Strategy
Liquidity. MuniYield Common Stock is listed on the NYSE
and may be bought or sold at market price on each day the
NYSE is open for trading. On any given day, the market
price for MuniYield Common Stock on the NYSE may be higher
or lower than the net asset value of the MuniYield Common
Stock.
Municipal Strategy engages in a continuous offering of
Municipal Strategy Common Stock. Municipal Strategy Common
Stock is not listed on any exchange and no secondary
market presently exists for Municipal Strategy Common
Stock, nor is it currently expected that a secondary
market will develop. To provide liquidity for stockholders
of Municipal Strategy, the Fund's Board of Directors
considers, on a quarterly basis, whether the Fund should
make a tender offer for its common stock. In a tender
offer, the Fund repurchases outstanding Municipal Strategy
Common Stock at the Fund's net asset value (less any
applicable CDSC) on the last day of the offer.
Municipal Strategy's Board of Directors is not required to
authorize the making of a tender offer and there can be no
assurance that a tender offer will be made during any
particular quarter. If a tender offer is not made,
stockholders may be unable to sell their shares. Since the
inception of Municipal Strategy, however, the Board has
authorized a tender offer each quarter.
Contingent Deferred Sales Charge. Stockholders of
MuniYield do not pay any CDSC because the Fund's common
stock trades on the NYSE. If common stockholders of
Municipal Strategy sell their stock back to the Fund
during a tender offer and they have held those shares for
less than three years when the tender offer begins, they
may have to pay a CDSC. This charge varies depending on
how long a shareholder has owned the tendered shares. The
amount of the charge is based on how much the shareholder
paid for the tendered shares or their net asset value,
whichever amount is less.
If the Reorganization is consummated, the tender offer of
Municipal Strategy that concluded on August 20, 2001 will
have been the final tender offer.
Portfolio Management. The investment adviser for each Fund
is FAM. Mr. Roberto W. Roffo currently manages the
investment portfolio of each Fund and will manage the
Combined Fund after the Reorganization.
Advisory and Administrative Fees. FAM is responsible for
the management of each Fund's investment portfolio and for
providing administrative services to each Fund.
Pursuant to a separate investment advisory agreement
between FAM and each Fund, each Fund pays FAM a monthly
advisory fee at the annual rate of 0.50% of each Fund's
average net assets, including proceeds from the issuance
of AMPS. The fee paid by MuniYield is computed on average
weekly net assets. In comparison, Municipal Strategy's fee
is calculated on average daily net assets.
Municipal Strategy also pays FAM a monthly administrative
fee at the annual rate of 0.25% of its average daily net
assets, including proceeds from the issuance of AMPS.
MuniYield does not pay an administrative fee to FAM and
the Combined Fund will not pay a separate administrative
fee to FAM.
Since the commencement of operations of Municipal Strategy
to the present, FAM has waived a portion of the advisory
fee due from Municipal Strategy and/or reimbursed certain
other expenses. The fee waiver and/or expense
reimbursement with respect to Municipal Strategy is
voluntary and may be reduced or discontinued by FAM at any
time without notice to stockholders. It is not anticipated
that FAM will waive any portion of its advisory fee and/or
reimburse expenses with respect to the Combined Fund after
the Reorganization. See "Comparison of the Funds --
Management of the Funds."
Overall Expense Ratio. As stated above, since the
commencement of operations of Municipal Strategy, FAM has
voluntarily waived a portion of its advisory fee and/or
reimbursed certain other expenses with respect to
Municipal Strategy.
FAM has not waived fees or reimbursed expenses with
respect to MuniYield. It is not anticipated that FAM will
waive its advisory fee and/or reimburse expenses with
respect to the Combined Fund on an ongoing basis.
The table below summarizes the total annualized operating
expense ratio for MuniYield, Municipal Strategy (excluding
any advisory fee waivers and/or expense reimbursements)
and the Combined Fund based on their respective average
net assets (excluding assets attributable to AMPS) for the
six month period ended April 30, 2001.
Average Net Assets
(Excluding Assets
Attributable to
AMPS) for the Six
Month Total Annualized
Period Ended Operating
April 30, 2001 Expense Ratio
------------------ ---------------
MuniYield $507,503,509 1.00%
Municipal Strategy $ 81,220,051 2.05%*
Combined Fund** $588,723,560 0.99%
---------------
* Including fee waivers and/or expense reimbursements
applicable to Municipal Strategy, the total annualized
operating expense ratio for Municipal Strategy would have
been 1.90%.
** Assumes that the Reorganization had taken place on
April 30, 2001.
The table below summarizes the total annualized operating
expense ratio for MuniYield, Municipal Strategy (excluding
any advisory fee waivers and/or expense reimbursements)
and the Combined Fund based on their respective average
net assets (including assets attributable to AMPS) for the
six month period ended April 30, 2001.
Average Net
Assets
(Including Assets
Attributable to
AMPS) for the
Six Month Total Annualized
Period Ended Operating
April 30, 2001 Expense Ratio
---------------- ----------------
MuniYield $757,503,509 0.67%
Municipal Strategy $124,220,051 1.34%*
Combined Fund** $881,723,560 0.66%
---------------
* Including fee waivers and/or expense reimbursements
applicable to Municipal Strategy, the total annualized
operating expense ratio for Municipal Strategy would have
been 1.24%.
** Assumes that the Reorganization had taken place on
April 30, 2001.
Purchases and Sales of Common Stock and AMPS. Investors
typically purchase and sell shares of MuniYield Common
Stock through a registered broker-dealer on each day that
the NYSE is open for trading, and may incur a brokerage
commission set by the broker-dealer. Alternatively,
investors may purchase or sell shares of MuniYield Common
Stock through privately negotiated transactions with
existing stockholders.
Investors typically can purchase shares of Municipal
Strategy Common Stock from FAM Distributors, Inc., other
selected securities dealers or other financial
intermediaries, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The Fund offers its
common stock on a best efforts basis at a price equal to
the next determined net asset value per share without a
front-end sales charge. Shares are sold subject to certain
minimum initial and subsequent purchase requirements.
Municipal Strategy Common Stock is not listed on any
exchange and no secondary market presently exists for
Municipal Strategy Common Stock, nor is it currently
expected that a secondary market will develop. To provide
liquidity for stockholders of Municipal Strategy, the
Fund's Board of Directors considers, on a quarterly basis,
whether the Fund should make a tender offer for its common
stock. See "Liquidity" above.
Purchase and sale procedures for the AMPS of each Fund are
identical. Such AMPS generally are purchased and sold at
separate auctions conducted on a regular basis by The Bank
of New York ("BONY"), as the auction agent for each Fund's
AMPS (in such capacity, the "Auction Agent"). Unless
otherwise permitted by the Funds, existing and potential
holders of AMPS may participate in auctions only through
their broker-dealers. Broker-dealers submit the orders of
their respective customers who are existing and potential
holders of AMPS to the Auction Agent. On or prior to each
auction date for the AMPS (the business day next preceding
the first day of each dividend period), each holder may
submit orders to buy, sell or hold AMPS to its
broker-dealer.
Outside of these auctions, shares of AMPS may be purchased
or sold through broker-dealers for the AMPS in a secondary
trading market maintained by the broker-dealers. However,
no assurance can be given that a secondary market will
develop, or, if it does develop, that it will provide
holders with a liquid trading market for the AMPS of
either Fund.
Ratings of AMPS. The AMPS of each Fund have been assigned
a rating of AAA from S&P and "aaa" from Moody's. See
"Comparison of the Funds -- Rating Agency Guidelines."
Portfolio Transactions. The portfolio transactions in
which the Funds may engage are substantially similar, as
are the procedures for such transactions. See "Comparison
of the Funds-- Portfolio Transactions."
Dividends and Distributions. The methods of dividend
payment and distributions are identical with respect to
the common stock and the AMPS of each Fund. See
"Comparison of the Funds-- Dividends and Distributions."
Net Asset Value. MuniYield determines its net asset value
per share of common stock as of the close of business on
the NYSE (generally, 4:00 p.m., Eastern time) (the "NYSE
close of business") on the last business day of each week.
Municipal Strategy determines its net asset value as of
the NYSE close of business once daily on each day the NYSE
is open for trading.
For purposes of determining the net asset value of a share
of common stock of each Fund, the value of the securities
held by the Fund plus any cash or other assets (including
interest accrued but not yet received) minus all
liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding shares of AMPS of the
Fund is divided by the total number of shares of common
stock of the Fund outstanding at such time. Expenses,
including fees payable to FAM, are accrued daily. See
"Comparison of the Funds -- Net Asset Value."
Voting Rights. The corresponding voting rights of the
holders of shares of each Fund's common stock are
substantially similar. The corresponding voting rights of
the holders of shares of each Fund's AMPS are also
substantially similar. See "Comparison of the Funds--
Capital Stock."
Stockholder Services. An automatic dividend reinvestment
plan is available to holders of shares of common stock of
each Fund. See "Comparison of the Funds -- Automatic
Dividend Reinvestment Plan." Other stockholder services,
including the provision of annual and semi-annual reports,
are the same for each Fund.
Outstanding Securities of MuniYield and Municipal Strategy as of May 31, 2001
Amount
Amount Outstanding
Held By Exclusive of
Fund for Amount Shown
Amount Its Own in Previous
Title of Class Authorized Account Column
- -------------- ------------- -------- ------------
MuniYield
Common Stock....................................... 199,990,000 0 38,560,928
AMPS
Series A........................ 1,800 0 1,800
Series B................ 1,800 0 1,800
Series C........................ 1,800 0 1,800
Series D................ 1,800 0 1,800
Series E................ 2,800 0 2,800
Municipal Strategy
Common Stock............................ 199,960,000 0 8,434,658
AMPS
Series A....................... 8,000 0 1,720
Series B...................................... 8,000 0 0
Series C...................................... 8,000 0 0
Series D...................................... 8,000 0 0
Series E...................................... 8,000 0 0
Tax Considerations................................... The Funds will receive an opinion of counsel with respect
to the Reorganization to the effect that, among other
things, neither Fund will recognize gain or loss on the
transaction and no stockholder of Municipal Strategy will
recognize gain or loss upon the exchange of his or her
shares for MuniYield Common Stock or MuniYield Series F
AMPS, as applicable, in the Reorganization (except to the
extent that a holder of Municipal Strategy Common Stock
receives cash representing an interest in fractional
shares of MuniYield Common Stock in the Reorganization).
The consummation of the Reorganization is subject to the
receipt of such opinion of counsel.
The Reorganization will not affect the status of MuniYield
as a regulated investment company. Municipal Strategy will
liquidate pursuant to the Reorganization. See "The
Reorganization -- Tax Consequences of the Reorganization."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The investment objective, policies and restrictions of MuniYield and
Municipal Strategy are substantially similar. Therefore, many of the
investment risks associated with an investment in MuniYield are substantially
similar to the investment risks associated with an investment in Municipal
Strategy. These investment risks will also apply to an investment in the
Combined Fund after the Reorganization. The principal difference in risk
between MuniYield and Municipal Strategy results from the fact that MuniYield
common stock trades at market value on the NYSE and shares may often trade at
a discount from the net asset value of the shares. Conversely, Municipal
Strategy Common Stock is not listed on any exchange and no secondary market
presently exists for its common stock, nor is it currently expected that a
secondary market will develop. Investors have been able, however, to tender
their shares to the Fund for repurchase at net asset value on a quarterly
basis.
The risk factors to which an investment in MuniYield is subject are
summarized below. It is expected that the Reorganization itself will not
adversely affect the rights of holders of shares of common stock or of any
series of AMPS of either Fund or create any additional risks.
Except where noted, each Fund is subject to the following risks:
Trading at a Discount
Closed-end funds that are listed on an exchange, such as MuniYield,
are subject to the risk that the market price of their common stock may trade
at a price that is lower than their net asset value, commonly referred to
as "trading at a discount." Shares may also trade at a premium above net asset
value. Each Fund is designed primarily for long-term investors and should not
be considered a vehicle for trading purposes.
Municipal Strategy Common Stock is not listed on any exchange and no
secondary market presently exists for its common stock, nor is it expected
that a secondary market will develop. As long as there is no secondary market
for Municipal Strategy Common Stock, the Fund is not subject to the risk that
its shares will trade at a discount from net asset value. To provide liquidity
to shareholders, the Fund's Board of Directors considers making tender offers
once each quarter to repurchase the Fund's shares at net asset value. However,
shares of Municipal Strategy Common Stock are less liquid than shares of funds
traded on a stock exchange, and shareholders who tender shares of Municipal
Strategy Common Stock held for less than three years may pay a CDSC. The Board
of Directors of Municipal Strategy is not obligated to authorize any tender
offer, and there may be quarters in which no tender offer is made. If the
Board does not authorize a tender offer, shareholders may be unable to sell
their shares. Since the inception of Municipal Strategy, however, the Board
has authorized a tender offer each quarter. The most recent tender offer for
shares of Municipal Strategy Common Stock concluded on August 20, 2001. If the
Reorganization is consummated, that will have been the Fund's final tender
offer.
Secondary Market
Broker-dealers intend to maintain a secondary trading market in the AMPS
of each Fund outside of the auctions; however, they have no obligation to do
so and there can be no assurance that a secondary market for the AMPS of each
Fund will develop or, if it does develop, that it will provide AMPS holders
with a liquid trading market. Neither Fund's AMPS will be registered on any
stock exchange or on any automated quotation system. An increase in the level
of interest rates likely will have an adverse effect on the secondary market
price of the AMPS of each Fund, and a selling stockholder may sell AMPS
between auctions at a price per share of less than $25,000.
Non-Diversified Status
Each Fund is registered as a "non-diversified" investment company. This
means that each Fund may invest a greater percentage of its assets in the
obligations of a single issuer than a diversified investment company. Since
either Fund may invest a relatively high percentage of its assets in a limited
number of issuers, it may be more exposed to the effects of a single economic,
political or regulatory occurrence than a Fund that invests more widely. Even
as a non-diversified fund, each Fund must meet the diversification
requirements of applicable Federal income tax laws.
Interest Rate and Credit Risk
Each Fund invests primarily in long-term municipal bonds that are subject
to interest rate and credit risk. Interest rate risk is the risk that prices
of municipal bonds generally increase when interest rates decline and decrease
when interest rates increase. Prices of longer-term securities generally
change more in response to interest rate changes than prices of shorter-term
securities. Credit risk is the risk that the issuer of a security owned by a
Fund will be unable to pay the interest or principal when due. The degree of
credit risk depends on both the financial condition of the issuer and the
terms of the obligation.
High Yield or "Junk Bonds"
Each Fund may invest up to 25% of its total assets in debt securities
commonly known as "junk bonds." Investments in high yield securities entail a
higher level of credit risk (loss of income and/or principal) than investments
in higher rated securities. Securities rated in the lower rating categories
are considered to be predominantly speculative with respect to capacity to pay
interest and repay principal. Issuers of high yield securities may be highly
leveraged and may not have available to them more traditional methods of
financing. New issuers also may be inexperienced in managing their debt
burden. The issuer's ability to service its debt obligations may be adversely
affected by business developments unique to the issuer, the issuer's inability
to meet specific projected business forecasts or the inability of the issuer
to obtain additional financing. High yield securities may be unsecured and may
be subordinated to other creditors of the issuer.
Private Activity Bonds
Each Fund may invest in certain tax-exempt securities classified as
"private activity bonds." These bonds may subject certain investors in a Fund
to a Federal alternative minimum tax.
Rating Agency Guidelines
Each Fund has received ratings of AAA from S&P and "aaa" from Moody's
with respect to its AMPS. In order to maintain these ratings, the Funds are
required to maintain portfolio holdings that meet the specified guidelines of
such rating agencies. These guidelines may impose asset coverage or portfolio
composition requirements that are stricter than those imposed by the
Investment Company Act. The Funds do not expect these requirements or
guidelines to prevent the investment adviser from managing each Fund's
portfolio in accordance with each Fund's investment objective and policies.
See Appendix III -- "Ratings of Municipal Bonds and Commercial Paper."
The Board of Directors of each Fund, without stockholder approval, may
amend, alter or repeal certain definitions or restrictions that have been
adopted by a Fund pursuant to the rating agency guidelines, if a Fund receives
confirmation from the rating agencies that any such amendment, alteration or
repeal would not impair the ratings then assigned to shares of AMPS.
Indexed and Inverse Floating Rate Securities
Each Fund may invest in securities whose potential returns are directly
related to changes in an underlying index or interest rate, known as indexed
securities. The return on indexed securities will rise when the underlying
index or interest rate rises and fall when the index or interest rate falls.
Each Fund may also invest in securities whose return is inversely related to
changes in an 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. Investments in inverse floaters may
subject a Fund to the risks of reduced or eliminated interest payments and
losses of principal. In addition, certain indexed securities and inverse
floaters may increase or decrease in value at a greater rate than the
underlying interest rate, which effectively leverages a Fund's investment. As
a result, the market value of such securities will generally be more volatile
than that of fixed rate, tax exempt securities. Both indexed securities and
inverse floaters are derivative securities and can be considered speculative.
Options and Futures Transactions
Each Fund may engage in certain options and futures transactions to
reduce its exposure to interest rate movements. If a Fund incorrectly
forecasts market value, interest rates or other factors, that Fund's
performance could suffer. Each Fund also may suffer a loss if the other party
to the transaction fails to meet its obligations. The Funds are not required
to use hedging and each Fund may choose not to do so. The Funds cannot
guarantee that any hedging strategies that they use will work.
Antitakeover Provisions
The Articles of Incorporation of each Fund (in each case, a "Charter")
and Maryland law include provisions that could limit the ability of other
entities or persons to acquire control of that Fund or to change the
composition of its Board of Directors. Such provisions could limit the ability
of stockholders to sell their shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of the
Fund.
Leverage
Issuance of Preferred Stock. Each Fund is leveraged through the issuance
of AMPS. The preferred stock may represent up to approximately 35% of a Fund's
capital, including the capital raised by issuing the preferred stock.
The issuance and ongoing expenses of the preferred stock are borne by
each of the Funds and reduce the net asset value of that Fund's common stock.
In addition, at times when a Fund is required to allocate taxable income to
preferred stockholders, the AMPS may require, and it is expected that the
terms of any other preferred stock may also require, that Fund to make an
additional distribution to its preferred stockholders (an "Additional
Distribution"). The amount of this Additional Distribution approximately
equals the tax liability resulting from the allocation and the additional
distribution.
Risks. The use of leverage creates certain risks for common stockholders,
including higher volatility of both the net asset value and the market value
of the common stock. Since any decline in the value of a Fund's investments
will affect only the common stockholders, the use of leverage will cause a
Fund's net asset value and market price to decrease more than if the Fund was
not leveraged. In addition, fluctuations in dividend rates paid on, and the
amount of taxable income allocable to any holder of AMPS and any other
preferred stockholder will affect the yield to common stockholders. There can
be no assurance that the Fund will earn a higher return on its investments
than the then current dividend rate (and any Additional Distribution) it pays
on the preferred stock.
Under certain conditions, the benefits of leverage to common stockholders
will be reduced, and the Fund's leveraged capital structure could result in a
lower rate of return to common stockholders than if the Fund were not
leveraged. During times of rising interest rates, the value of the Fund's
portfolio and the net assets value of its shares may decline. The Fund's
leverage structure may exaggerate any such decline. In addition, the Fund may
invest in securities that create investment leverage, such as inverse floating
obligations, which may further exaggerate any decline.
In an extreme case, a decline in net asset value could affect a Fund's
ability to pay dividends on its common stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Federal tax laws. See "Taxes." However, each Fund
intends to take all measures necessary to continue to make common stock
dividend payments. If a Fund's current investment income were not sufficient
to meet dividend requirements on either the common stock or the preferred
stock, it could be necessary for the Fund to liquidate certain of its
investments.
Each Fund has the authority to redeem its AMPS for any reason. Redemption
of the preferred stock or insufficient investment income to make dividend
payments may reduce the net asset value of the common stock and require a Fund
to liquidate a portion of its investments at a time when it may be
disadvantageous, in the absence of such extraordinary circumstances, to do so.
Portfolio Management and Other Considerations
The portfolio management strategies of the Funds are substantially
similar. In the event of an increase in short-term or medium-term rates or
other change in market conditions to the point where a Fund's leverage could
adversely affect holders of common stock as noted above, or in anticipation of
such changes, each Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of its common stock. Each Fund also may attempt to reduce
the degree to which it is leveraged by redeeming AMPS pursuant to the
provisions of the applicable Articles Supplementary that establish the rights
and preferences of each series of AMPS or otherwise purchasing shares of AMPS.
Purchases and sales or redemptions of AMPS, whether on the open market or in
negotiated transactions, are subject to limitations under the Investment
Company Act. In determining whether or not it is in the best interest of a
Fund and its stockholders to redeem or repurchase outstanding preferred stock,
its Board of Directors will take into account a variety of factors, including
market conditions, the ratio of preferred stock to common stock, and the
expenses associated with such redemptions or repurchase. If market conditions
subsequently change, each Fund may sell previously unissued shares of AMPS or
shares of AMPS that the Fund previously issued but later repurchased or
redeemed.
Under the Investment Company Act, a Fund is not permitted to issue shares
of preferred stock unless immediately after such issuance the net asset value
of a Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred stock (expected to equal the original purchase price of
the outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated and unpaid Additional Distributions). In
addition, a Fund is not permitted to declare any cash dividend or other
distribution on its common stock unless, at the time of such declaration, the
net asset value of a Fund's portfolio (determined after deducting the amount
of such dividend or distribution) is at least 200% of such liquidation value.
As of May 31, 2001, MuniYield's capital structure included 10,000 shares of
AMPS representing approximately 33% of the Fund's capital, and the asset
coverage with respect to the AMPS was approximately 302% and Municipal
Strategy's capital structure included 1,720 shares of AMPS representing
approximately 36% of the Fund's capital, and the asset coverage with respect
to the AMPS was approximately 276%. To the extent possible, each Fund intends
to purchase or redeem shares of preferred stock from time to time to maintain
asset coverage of preferred stock of at least 200%.
COMPARISON OF THE FUNDS
Financial Highlights
MuniYield
The financial information in the table below has been audited in
conjunction with the annual audit of the financial statements of MuniYield by
_____________, independent auditors. The financial information for the six
month period ended April 30, 2001 is unaudited and has been provided by FAM.
The following per share data and ratios have been derived from information
provided in the financial statements of MuniYield.
For the
Six Months
Ended
April 30, For the Year Ended October 31,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------
(Unaudited)
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
- ---------------------------------------------------
Net asset value, beginning of period............... $13.08 $13.21 $16.27 $16.09 $15.68 $15.47
- --------------------------------------------------- ----------- ----------- ---------- ---------- ---------- ----------
Investment income-- net............................ .52 . 1.09 1.12 1.19 1.24 1.26
- ---------------------------------------------------
Realized and unrealized gain (loss)
on investments-- net............................... (.17) (.08) (2.34) .49 .65 .23
- --------------------------------------------------- ----------- ----------- ---------- ---------- ---------- ----------
Total from investment operations................... .35 1.01 (1.22) 1.68 1.89 1.49
- --------------------------------------------------- ----------- ----------- ---------- ---------- ---------- ----------
Less dividends and distributions to
Common Stock shareholders:
Investment income-- net.......................... (.43) (.87) (.95) (.97) (1.00) (1.04)
Realized gain on investments-- net............... -- -- (.38) (.26) (.22) --
In excess of realized gain on -- -- (.27) -- (.01) --
investments-- net................................
----------- ----------- ---------- ---------- ---------- ----------
Total dividends and distributions to
Common Stock shareholders.......................... (.43) (.87) (1.60) (1.23) (1.23) (1.04)
----------- ----------- ---------- ---------- ---------- ----------
Capital charge resulting from
issuance of Common Stock........................... -- -- -- -- -- --
- --------------------------------------------------- ----------- ----------- ---------- ---------- ---------- ----------
Effect of Preferred Stock activity:++++
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net........................ (.13) (.27) (.17) (.18) (.20) (.24)
Realized gain on investments-- net............. -- -- (.04) (.09) (.05) --
In excess of realized gain on
investments-- net............................ -- -- (.03) -- -- +++++ --
Capital charge resulting from
issuance of Preferred Stock..................... -- -- -- -- -- --
- --------------------------------------------------- ----------- ----------- ---------- ---------- ---------- ----------
Total effect of Preferred Stock activity........... (.13) (.27) (.24) (.27) (.25) (.24)
- --------------------------------------------------- ----------- ----------- ---------- ---------- ---------- ----------
Net asset value, end of period..................... $12.87 $13.08 $13.21 $16.27 $16.09 $15.68
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Market price per share, end of period.............. $13.45 $12.625 $12.875 $16.875 $15.875 $14.875
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Total Investment Return:**
- ---------------------------------------------------
Based on market price per share.................... 10.05%+++ 5.26% (15.35%) 14.74% 15.56% 10.88%
=========== =========== ========== ========== ========== ==========
For the
Period
November 29,
1991++ to
October 31,
--------------------------------------------------
1995 1994 1993 1992
------ ------ ------ ------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
- ---------------------------------------------------
Net asset value, beginning of period............... $14.35 $16.80 $14.69 $14.18
- --------------------------------------------------- ---------- ---------- ---------- -----------
Investment income-- net............................ 1.27 1.29 1.31 1.18
- ---------------------------------------------------
Realized and unrealized gain (loss)
on investments-- net............................... 1.34 (2.23) 2.27 .57
- --------------------------------------------------- ---------- ---------- ---------- -----------
Total from investment operations................... 2.61 (.94) 3.58 1.75
- --------------------------------------------------- ---------- ---------- ---------- -----------
Less dividends and distributions to
Common Stock shareholders:
Investment income-- net.......................... (1.00) (1.07) (1.11) (.89)
Realized gain on investments-- net............... (.22) (.23) (.16) --
In excess of realized gain on -- -- -- --
investments-- net................................
---------- ---------- ---------- -----------
Total dividends and distributions to
Common Stock shareholders.......................... (1.22) (1.30) (1.27) (.89)
---------- ---------- ---------- -----------
Capital charge resulting from
issuance of Common Stock........................... -- -- -- (.02)
- --------------------------------------------------- ----------- ----------- ---------- ----------
Effect of Preferred Stock activity
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net........................ (.23) (.18) (.17) (.19)
Realized gain on investments-- net............. (.04) (.03) (.03) --
In excess of realized gain on
investments-- net............................ -- -- -- --
Capital charge resulting from
issuance of Preferred Stock...................... -- -- -- (.14)
- --------------------------------------------------- ---------- ---------- ---------- -----------
Total effect of Preferred Stock activity........... (.27) (.21) (.20) (.33)
- --------------------------------------------------- ---------- ---------- ---------- -----------
Net asset value, end of period..................... $15.47 $14.35 $16.80 $14.69
- --------------------------------------------------- ========== ========== =========== ===========
Market price per share, end of period.............. $14.375 $12.125 $16.75 $15.125
- --------------------------------------------------- ========== ========== =========== ===========
Total Investment Return:**
- ---------------------------------------------------
Based on market price per share.................... 29.76% (20.94%) 19.91% 7.06%+++
========== ========== =========== ===========
(continued on next page)
For the
Six Months
Ended
April 30, For the Year Ended October 31,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------
(Unaudited)
- ---------------------------------------------------
Based on net asset value per share................. 1.64%+++ 6.28% (9.92%) 9.15% 11.11% 8.61%
=========== =========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common
Stock:
- ---------------------------------------------------
Total expenses***.................................. 1.00%* .99% .93% .89% .91% --
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Total investment income-- net***................... 7.87%* 8.35% 7.42% 7.43% 7.81% --
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Amount of dividends to Preferred Stock
shareholders....................................... 1.91%* 2.07% 1.11% 1.10% 1.28% --
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Investment income-- net, to
Common Stock shareholders.......................... 5.96%* 6.28% 6.31% 6.33% 6.53% --
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Ratios Based on Total Average
Net Assets: ***+
- ---------------------------------------------------
Total expenses, net of reimbursement............... .67%* .66% .65% .63% .64% .64%
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Total expenses..................................... .67%* .66% .65% .63% .64% .64%
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Total investment income-- net...................... 5.27%* 5.56% 5.17% 5.26% 5.48% 5.64%
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Ratios Based on Average Net Assets
of Preferred Stock:
- ---------------------------------------------------
Dividends to Preferred Stock shareholders.......... 3.88%* 4.12% 2.55% 2.66% 3.02% --
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Supplemental Data:
- ---------------------------------------------------
Net assets, net of Preferred Stock,
end of period (in thousands)....................... $495,409 $501,361 $506,030 $611,222 $596,320 $581,124
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Preferred Stock outstanding,
end of period (in thousands)....................... $250,000 $250,000 $250,000 $250,000 $250,000 $250,000
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Portfolio turnover................................. 36.66% 103.44% 78.42% 91.63% 111.45% 96.74%
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Leverage:
- ---------------------------------------------------
Asset coverage per $1,000.......................... $2,982 $3,005 $3,024 $3,445 $3,385 $3,324
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Dividends Per Share on Preferred Stock
Outstanding:++++++
Series A-- Investment income-- net................ $ 450 $1,052 $ 588 $ 694 $ 747 $ 894
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Series B-- Investment income-- net................. $ 542 $1,009 $ 595 $ 687 $ 751 $ 897
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Series C-- Investment income-- net...................$ 466 $1,032 $ 687 $ 643 $ 763 $ 998
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Series D-- Investment income-- net ..................$ 468 $1,035 $ 694 $ 637 $ 762 $ 888
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
Series E-- Investment income-- net ..................$ 481 $1,038 $ 627 $ 656 $ 752 $ 875
- --------------------------------------------------- =========== =========== ========== ========== ========== ==========
For the
Period
November 29,
1991++ to
October 31,
--------------------------------------------------
1995 1994 1993 1992
------ ------ ------ ------
- ---------------------------------------------------
Based on net asset value per share................. 18.00% (6.71%) 23.83% 9.99%+++
========== ========== =========== ===========
Ratios Based on Average Net Assets of Common
Stock:
- ---------------------------------------------------
Total expenses***.................................. -- -- -- --
- ---------------------------------------------------========== ========== =========== ===========
Total investment income-- net***................... -- -- -- --
- ---------------------------------------------------========== ========== =========== ===========
Amount of dividends to Preferred Stock
shareholders....................................... -- -- -- --
- ---------------------------------------------------========== ========== =========== ===========
Investment income-- net, to
Common Stock shareholders.......................... -- -- -- --
- ---------------------------------------------------========== ========== =========== ===========
Ratios Based on Total Average
Net Assets: ***+
- ---------------------------------------------------
Total expenses, net of reimbursement............... .66% .66% .64% .58%*
- ---------------------------------------------------========== ========== =========== ===========
Total expenses..................................... .66% .66% .64% .65%*
- ---------------------------------------------------========== ========== =========== ===========
Total investment income-- net...................... 5.91% 5.76% 5.72% 6.08%*
- ---------------------------------------------------========== ========== =========== ===========
Ratios Based on Average Net Assets
of Preferred Stock:
- ---------------------------------------------------
Dividends to Preferred Stock shareholders.......... -- -- -- --
- ---------------------------------------------------========== ========== =========== ===========
Supplemental Data:
- ---------------------------------------------------
Net assets, net of Preferred Stock,
end of period (in thousands)....................... $573,400 $531,657 $619,775 $526,287
- ---------------------------------------------------========== ========== =========== ===========
Preferred Stock outstanding,
end of period (in thousands)....................... $250,000 $250,000 $250,000 $250,000
- ---------------------------------------------------========== ========== =========== ===========
Portfolio turnover................................. 52.99% 44.27% 25.58% 66.45%
- ---------------------------------------------------========== ========== =========== ===========
Leverage:
- ---------------------------------------------------
Asset coverage per $1,000.......................... $3,294 $3,127 $3,479 $3,105
- ---------------------------------------------------========== ========== =========== ===========
Dividends Per Share on Preferred Stock
Outstanding:++++++
Series A-- Investment income-- net................ $ 887 $ 598 $ 560 $ 680
- ---------------------------------------------------========== ========== =========== ===========
Series B-- Investment income-- net................. $ 850 $ 733 $ 554 $ 690
- ---------------------------------------------------========== ========== =========== ===========
Series C-- Investment income-- net................. $ 827 $ 647 $ 566 $ 685
- ---------------------------------------------------========== ========== =========== ===========
Series D-- Investment income-- net ................ $ 897 $ 659 $ 556 $ 688
- ---------------------------------------------------========== ========== =========== ===========
Series E-- Investment income-- net ................ $ 759 $ 707 $ 542 $ 688
- ---------------------------------------------------========== ========== =========== ===========
- ------------------------------------------------------------------------------
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may
result in substantially different returns. Total investment returns
exclude the effects of sales charges.
*** Do not reflect the effect of dividends to Preferred Stock
shareholders.
+ Includes Common and Preferred Stock average net assets.
++ Commencement of operations.
+++ Aggregate total investment return.
++++ MuniYield's Preferred Stock was issued on December 23, 1991.
+++++ Amount is less than $0.1 per share.
++++++ Dividends per share have been adjusted to reflect a two-for-one stock
split that occurred on December 1, 1994.
Municipal Strategy
The financial information in the table below has been audited in
conjunction with the annual audit of the financial statements of Municipal
Strategy by _______________, independent auditors. The financial information
for the six month period ended April 30, 2001 is unaudited and has been
provided by FAM. The following per share data and ratios have been derived
from information provided in the financial statements of Municipal Strategy.
For the
Period
November
3, 1995++
For the Six to
Months Ended October
April 30, For the Year Ended October 31, 31,
-------------- ----------------------------------------- -----------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
(Unaudited)
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
- -------------------------------------------------------
Net asset value, beginning of period................... $8.75 $8.89 $10.96 $10.87 $10.17 $10.00
- ------------------------------------------------------- ------------ ---------- ---------- ---------- ---------- -----------
Investment income-- net................................ .31 .72 .71 .73 .75 .68
- -------------------------------------------------------
Realized and unrealized gain
(loss) on investments-- net............................ .10 (.14) (1.75) .35 .70 .21
- ------------------------------------------------------- ------------ ---------- ---------- ---------- ---------- -----------
Total from investment operations....................... .41 .58 (1.04) 1.08 1.45 .89
------------ ---------- ---------- ---------- ---------- -------------
Less dividends and distributions to
Common Stock shareholders:
Investment income-- net................................ (.23) (.49) (.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..................................... (.23) (.49) (.85) (.79) (.59) (.59)
------------ ---------- ---------- ---------- ---------- -------------
Effect of Preferred Stock activity: ++++
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net............................ (.08) (.23) (.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............... (.08) (.23) (.18) (.20) (.16) (.13)
- ------------------------------------------------------- ------------ ---------- ---------- ---------- ---------- -------------
Net asset value, end of period......................... $8.85 $8.75 $8.89 $10.96 $10.87 $10.17
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Total Investment Return:**
- -------------------------------------------------------
Based on net asset value per share..................... 3.73%+++ 4.09% (11.94%) 8.28% 13.08% 7.81%+++
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Ratios Based on Average Net Assets of Common
Stock:
- -------------------------------------------------------
Total expenses, net of reimbursement***................ 1.90%* 1.88% 1.75% 1.61% 1.37% .68%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Total expenses***...................................... 2.05%* 2.04% 1.90% 1.80% 1.83% 1.60%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Total investment income-- net***....................... 6.99%* 8.14% 6.98% 6.65% 7.14% 6.86%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Amount of dividends to
Preferred Stock shareholders........................... 1.84%* 2.56% 1.31% 1.21% 1.53% .94%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Investment income-- net,
to Common Stock shareholders........................... 5.15%* 5.58% 5.67% 5.44% 5.61% 5.92%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Ratios Based on Total Average Net Assets:
***+++++
- -------------------------------------------------------
Total expenses, net of reimbursement................... 1.24%* 1.15% 1.17% 1.12% .96% .53%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Total expenses......................................... 1.34%* 1.25% 1.27% 1.25% 1.28% 1.26%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Total investment income-- net.......................... 4.57%* 4.99% 4.66% 4.61% 5.01% 5.40%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Ratios Based on Average Net Assets
of Preferred Stock:
- -------------------------------------------------------
Dividends to Preferred Stock shareholders.............. 3.47%* 4.05% 2.63% 2.75% 3.58% 3.49%*
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Supplemental Data:
- -------------------------------------------------------
Net assets, net of Preferred Stock,
end of period (in thousands)........................... $78,479 $85,394 $102,174 $115,339 $101,463 $83,573
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
(continued on next page)
For the
Period
November
3, 1995++
For the Six to
Months Ended October
April 30, For the Year Ended October 31, 31,
-------------- ----------------------------------------- -----------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
(Unaudited)
Preferred Stock outstanding,
end of period (in thousands)........................... $43,000 $44,900 $58,000 $48,000 $48,000 $38,000
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Portfolio turnover..................................... .20.49% 115.52% 158.57% 141.53% 144.34% 234.41%
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Leverage:
- -------------------------------------------------------
Asset coverage per $1,000.............................. $2,825 $2,902 $2,762 $3,403 $3,114 $3,199
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
Dividends Per Share on
Preferred Stock Outstanding:
Investment income-- net................................ $431 $1,015 $644 $533 $897 $564
- ------------------------------------------------------- ============ ========= ========== ========== ========== =============
- -----------------
* Annualized.
** Total investment returns exclude the effects of the CDSC, if any.
(Municipal Strategy is a continuously offered closed-end fund, the
shares of which are offered by the Fund at net asset value. No
secondary market exists for the purchase of these shares.) FAM
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.
+++ Aggregate total investment return.
++++ Municipal Strategy's Preferred Stock was initially issued on March
11, 1996.
+++++ Includes Common and Preferred Stock average net assets.
# Amount is less than $.01 per share.
Per Share Data for Common Stock (Unaudited)
MuniYield (Traded on NYSE)
Premium
(Discount)
to Net
Market Price** Net Asset Value Asset Value
------------------- --------------------- ----------------------
High Low High Low High Low
-------- -------- -------- ------- --------- --------
Quarter
Ended* $ $ $ $ % %
-------
January 31, 1999........................ 17.187 16.062 16.36 15.40 8.34 2.06
April 30, 1999.......................... 16.25 15.187 15.58 15.32 4.37 (1.25)
July 31, 1999........................... 15.625 14.00 15.35 14.52 1.79 (4.37)
October 31, 1999........................ 14.188 12.375 14.53 13.02 (1.22) (7.42)
January 31, 2000........................ 13.00 11.25 13.55 12.51 (2.51) (12.38)
April 30, 2000.......................... 12.25 11.125 13.24 12.50 (2.50) (13.49)
July 31, 2000........................... 12.625 11.375 13.18 12.49 (3.63) (9.58)
October 31, 2000........................ 13.063 12.25 13.45 13.03 (1.37) (7.27)
January 31, 2001........................ 14.11 12.313 13.46 12.84 6.57 (5.00)
April 30, 2001.......................... 13.94 13.28 13.51 12.87 4.58 (.15)
July 31, 2001........................... [o] [o] [o] [o] [o] [o]
- -----------------
* Calculations are based on shares of common stock outstanding at the
end of each quarter.
** As reported in the consolidated transaction operating system.
As shown above, since November 1, 1998, share prices for MuniYield's
Common Stock have fluctuated between a maximum premium of approximately
[ o%] and a maximum discount of approximately ([o]%). Although there is no
reason to believe that this pattern should be affected by the Reorganization,
it is not possible to predict whether shares of the Combined Fund will trade
at a premium above or discount from net asset value following the
Reorganization, or what the magnitude of any such premium or discount might
be.
Municipal Strategy
Quarter High Low
Ended* -------- ---------
$ $
January 31, 1999........................ 11.00 10.52
April 30, 1999.......................... 10.66 10.48
July 31, 1999........................... 10.55 9.90
October 31, 1999........................ 9.89 8.76
January 31, 2000........................ 9.11 8.39
April 30, 2000.......................... 8.89 8.39
July 31, 2000........................... 8.81 8.31
October 31, 2000........................ 8.96 8.71
January 31, 2001........................ 9.22 8.07
April 30, 2001.......................... 9.23 8.85
July 31, 2001........................... [o] [o]
- ------------------
* Calculations are based on shares of common stock outstanding at the
end of each quarter.
Investment Objective and Policies
The structure, organization and investment policies of the Funds are
substantially similar. Each Fund seeks as high a level of current income
exempt from Federal income tax as is consistent with its investment policies.
Each Fund's investment objective is a fundamental policy that may not be
changed without a vote of a majority of a Fund's outstanding voting
securities, as defined below under "Investment Restrictions."
Each Fund seeks to achieve its investment objective by investing
primarily in a portfolio of long-term, investment grade Municipal Bonds issued
by or on behalf of states, territories and possessions of the United States
and their political subdivisions, agencies or instrumentalities that pay
interest which, in the opinion of bond counsel to the issuer, is exempt from
Federal income taxes. Each Fund at all times, except during interim and
temporary periods, will invest at least 80% of its total assets in Municipal
Bonds. Each Fund at all times, except during temporary defensive periods, will
maintain at least 75% of its total assets in Municipal Bonds that are rated
investment grade by a nationally recognized statistical rating organization
or, if unrated, are considered to be of comparable quality by FAM.
Additionally, each Fund may invest up to 25% of its total assets in Municipal
Bonds that are rated below investment grade by a nationally recognized
statistical rating organization or are unrated but considered by FAM to be of
comparable quality. Neither Fund has established a minimum percentage of
assets that must be invested in such lower quality Municipal Bonds. Such lower
quality Municipal Bonds are frequently traded only in markets where the number
of potential purchasers and sellers, if any, is very limited.
Ordinarily, neither Fund intends to realize significant interest income
that is subject to Federal income tax. Each Fund will not invest more than 25%
of its total assets (taken at market value) in Municipal Bonds whose issuers
are located in the same state. Each Fund may invest all or a portion of its
assets in certain tax-exempt securities classified as "private activity bonds"
(in general, bonds that benefit non-governmental entities) that may subject
certain investors in a Fund to a Federal alternative minimum tax. Each Fund
also may invest in securities not issued by or on behalf of a state or
territory or by an agency or instrumentality thereof, if a Fund nevertheless
believes such securities pay interest or distributions that are exempt from
Federal income taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal
Tax-Exempt Securities may include securities issued by other investment
companies that invest in Municipal Bonds, to the extent such investments are
permitted by the Investment Company Act. Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term Municipal Bonds. Certain Non-Municipal
Tax-Exempt Securities may be characterized as derivative instruments.
Non-Municipal Tax-Exempt Securities that pay interest exempt from federal
income taxes will be considered "Municipal Bonds" for purposes of each Fund's
investment objective and policies. At times, each Fund may seek to hedge its
portfolio through the use of futures transactions and options to reduce
volatility in the net asset value of its shares of common stock.
The investment grade Municipal Bonds in which each Fund primarily invests
are those Municipal Bonds rated at the date of purchase in the four highest
rating categories of S&P, Moody's or Fitch or, if unrated, are considered to
be of comparable quality by FAM. In the case of long-term debt, the investment
grade rating categories are AAA through BBB for S&P and Fitch, and Aaa through
Baa for Moody's. In the case of short-term notes, the investment grade rating
categories are SP-l+ through SP-3 for S&P, MIG-1 through MIG-3 for Moody's and
F-1+ through F-3 for Fitch. In the case of tax-exempt commercial paper, the
investment grade rating categories are A-1+ through A-3 for S&P, Prime-1
through Prime-3 for Moody's and F-1+ through F-3 for Fitch. Obligations ranked
in the lowest investment grade rating category (BBB, SP-3 and A-3 for S&P;
Baa, MIG-3 and Prime-3 for Moody's; and BBB and F-3 for Fitch), while
considered "investment grade," have certain speculative characteristics. There
may be sub-categories or gradations indicating relative standing within the
rating categories set forth above. See Appendix III to this Proxy Statement
and Prospectus for a description of S&P's, Moody's and Fitch's ratings of
Municipal Bonds. Certain Municipal Bonds may be entitled to the benefit of
insurance as well as letters of credit or similar credit enhancements issued
by municipal bond issuers or other financial institutions. In such instances,
the Board of Directors and FAM will take into account in assessing the quality
of such bonds not only the creditworthiness of the issuer of such bonds but
also the creditworthiness of the financial institution that provided such
insurance or credit enhancement.
As noted above, each Fund may invest up to 25% of its assets in Municipal
Bonds that are rated below investment grade or, if unrated, are considered to
be of comparable quality by FAM. These high yield bonds are commonly referred
to as "junk bonds" and are regarded as predominantly speculative as to the
issuer's ability to make payments of principal and interest. Consequently,
although such bonds can be expected to provide higher yields and be less
subject to interest rate fluctuations, they may be subject to greater market
price fluctuations and risk of loss of principal than lower yielding, higher
rated fixed income securities. Such securities are particularly vulnerable to
adverse changes in the issuer's industry and in general economic conditions.
Issuers of high yield bonds may be highly leveraged and may not have available
to them more traditional methods of financing. The risk of loss due to default
by the issuer is significantly greater for the holders of these bonds because
such securities may be unsecured and may be subordinated to other creditors of
the issuer. In addition, while the high yield bonds in which the Funds may
invest normally will not include securities that, at the time of investment,
are in default or the issuers of which are in bankruptcy, there can be no
assurance that such events will not occur after a Fund purchases a particular
security, in which case that Fund may experience losses and incur costs.
High yield bonds frequently have call or redemption features that permit
an issuer to repurchase such bonds from a Fund, which may decrease the net
investment income to a Fund and dividends to shareholders in the event that a
Fund is required to replace a called security with a lower yielding security.
Each Fund may have difficulty disposing of certain high yield bonds because
there may be a thin trading market for such securities. Reduced secondary
market liquidity may have an adverse impact on market price and each Fund's
ability to dispose of particular issues when necessary to meet that Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations are generally available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Each Fund may invest in variable rate demand obligations ("VRDOs") and
VRDOs in the form of participation interests ("Participating VRDOs") in
variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank. The VRDOs in which each Fund may invest are
tax-exempt obligations, in the opinion of counsel to the issuer, that contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand on the part of the holder thereof to receive payment of the
unpaid principal balance plus accrued interest on a notice period not to
exceed seven days. Participating VRDOs provide a Fund with a specified
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility
that because of default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. Each Fund has been advised by its
counsel that a Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
The average maturity of each Fund's portfolio securities will vary based
upon FAM's assessment of economic and market conditions. The net asset value
of the shares of common stock of closed-end investment companies, such as the
Funds, which invest primarily in fixed-income securities, changes as the
general levels of interest rates fluctuate. When interest rates decline, the
value of a fixed-income portfolio generally can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio
generally can be expected to decline. Prices of longer-term securities
generally fluctuate more in response to interest rate changes than do
short-term or medium-term securities. These changes in net asset value are
likely to be greater in the case of a fund having a leveraged capital
structure, such as that used by the Funds. See "Risk Factors and Special
Considerations -- Leverage."
Each Fund intends to invest primarily in long-term Municipal Bonds with
maturities of more than ten years. Also, each Fund may invest in
intermediate-term Municipal Bonds with maturities of between three years and
ten years. Each Fund may invest in short-term, tax-exempt securities,
short-term U.S. Government securities, repurchase agreements or cash.
Investments in such short-term securities or cash will not exceed 20% of a
Fund's total assets except during interim periods pending investment of the
net proceeds of public offerings of that Fund's securities or in anticipation
of the repurchase or redemption of that Fund's securities and temporary
periods when, in the opinion of FAM, prevailing market or economic conditions
warrant. The Funds do not ordinarily intend to realize significant interest
income not exempt from Federal income taxes.
Each Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Funds are not limited by the
Investment Company Act in the proportion of their respective assets that they
may invest in securities of a single issuer. However, each Fund's investments
will be limited so as to qualify the Fund for the special tax treatment
afforded regulated investment companies ("RICs") under the Federal tax laws.
See "Comparison of the Funds -- Tax Rules Applicable to the Funds and Their
Stockholders." Requirements for qualification as a RIC include, among others,
limiting its investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Fund's total assets
will be invested in the securities (other than U.S. Government securities) of
a single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities (other than U.S. Government securities) of a single
issuer. A fund that elects to be classified as "diversified" under the
Investment Company Act must satisfy, among other requirements, the foregoing
5% requirement with respect to 75% of its total assets. To the extent that a
Fund assumes large positions in the securities of a small number of issuers,
that Fund's yield may fluctuate to a greater extent than that of a diversified
investment company as a result of changes in the financial condition or in the
market's assessment of the issuers.
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of private activity bonds ("PABs") are
issued by or on behalf of public authorities to finance various privately
operated facilities, including airports, public ports, mass commuting
facilities, multifamily housing projects, as well as facilities for water
supply, gas, electricity, sewage or solid waste disposal. For purposes of this
Proxy Statement and Prospectus, such obligations are Municipal Bonds if the
interest paid thereon is exempt from Federal income tax even though such bonds
may be PABs as discussed below. Also, for purposes of this Proxy Statement and
Prospectus, Non-Municipal Tax-Exempt Securities that pay interest that is
exempt from Federal income tax will be considered Municipal Bonds.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds, which latter category includes PABs
and, for bonds issued on or before August 15, 1986, industrial development
bonds or "IDBs." General obligation bonds are secured by the issuer's pledge
of faith, credit and taxing power for the repayment of principal and the
payment of interest. Revenue or special obligation bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific
revenue source such as from the user of the facility being financed. PABs are
in most cases revenue bonds and do not generally constitute the pledge of the
credit or taxing power of the issuer of such bonds. The payment of principal
and interest when due on revenue bonds depends solely on the ability of the
user of the facility financed by the bonds to meet its financial obligations
and the pledge, if any, of real and personal property so financed as security
for such payment. Municipal Bonds may also include "moral obligation" bonds,
which are normally issued by special purpose public authorities. If an issuer
of moral obligation bonds is unable to meet its obligations, the repayment of
such bonds becomes a moral commitment but not a legal obligation of the state
or municipality in question.
Each Fund may purchase Municipal Bonds classified as PABs. Interest
received on certain PABs is treated as an item of "tax preference" for
purposes of the Federal alternative minimum tax and may impact the overall tax
liability of investors in a Fund. There is no limitation on the percentage of
each Fund's assets that may be invested in Municipal Bonds the interest on
which is treated as an item of "tax preference" for purposes of the Federal
alternative minimum tax. See "Comparison of the Funds -- Tax Rules Applicable
to the Funds and Their Stockholders."
Also included within the general category of Municipal Bonds are
certificates of participation ("COPs") executed and delivered for the benefit
of government authorities or entities to finance the acquisition or
construction of equipment, land and/or facilities. COPs represent
participation interests in a lease, an installment purchase contract or a
conditional sales contract (hereinafter collectively referred to as "lease
obligations") relating to such equipment, land or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
issuer's unlimited tax power is pledged, a lease obligation frequently is
backed by the issuer's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses, which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease obligations are secured by the lease property,
disposition of such property in the event of foreclosure might prove to be
difficult and the proceeds thereof may not be sufficient to pay principal and
interest when due on such obligations.
Federal tax legislation has limited the types and volume of bonds
qualifying for the Federal income tax exemption of interest. As a result, this
legislation and legislation that may be enacted in the future may affect the
availability of Municipal Bonds for investment by the Funds.
Other Investment Policies
Each Fund has adopted certain other policies as set forth below:
Borrowings. Each Fund is authorized to borrow money in amounts of up to
5% of the value of its total assets at the time of such borrowings; provided,
however, that MuniYield is authorized to borrow moneys in excess of 5% of the
value of its total assets for the purpose of repurchasing its own common stock
or redeeming shares of preferred stock and Municipal Strategy is authorized to
borrow moneys in amounts of up to 33 1/3% of the value of its total assets at
the time of such borrowings to finance the repurchase of its own common stock
pursuant to tender offers or otherwise to redeem or repurchase shares of
preferred stock or for temporary, extraordinary or emergency purposes.
Borrowings by each Fund (commonly known, as with the issuance of preferred
stock, as "leveraging") create an opportunity for greater total return since
the Funds will not be required to sell portfolio securities to repurchase or
redeem shares but, at the same time, such borrowings increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that
may offset or exceed the return earned on the borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. Each Fund may
purchase or sell Municipal Bonds on a delayed delivery basis or on a
when-issued basis at fixed purchase or sale terms. These transactions arise
when securities are purchased or sold by a Fund with payment and delivery
taking place in the future. The purchase will be recorded on the date a Fund
enters into the commitment, and the value of the obligation will thereafter be
reflected in the calculation of that Fund's net asset value. The value of the
obligation on the delivery day may be more or less than its purchase price. A
separate account of a Fund will be established with its custodian, consisting
of cash, cash equivalents or liquid Municipal Bonds having a market value at
all times at least equal to the amount of the commitment.
Indexed and Inverse Floating Obligations. Each Fund may invest in
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) yielding a return
based on a particular index of value or interest rates. For example, each Fund
may invest in Municipal Bonds that pay interest based upon maturity of certain
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) and on the value of
an index. To the extent a Fund invests in these types of Municipal Bonds, that
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index including reduced or eliminated interest
payments and losses of invested principal. Also, each Fund may invest in
so-called "inverse floating obligations" or "residual interest bonds" on which
the interest rates typically vary inversely with a short-term floating rate
(which may be reset periodically by a Dutch auction, a remarketing agent, or
by reference to a short-term tax-exempt interest rate index). Each Fund may
purchase synthetically-created inverse floating rate bonds evidenced by
custodial or trust receipts. Generally, income on inverse floating rate bonds
will decrease when short-term interest rates increase, and will increase when
short-term interest rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates
at a rate that is a multiple (typically two) of the rate at which fixed-rate,
long-term, tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities generally will be
more volatile than the market values of fixed-rate tax-exempt securities. To
seek to limit the volatility of these securities, each Fund may purchase
inverse floating obligations with shorter-term maturities or limitations on
the extent to which the interest rate may vary. FAM believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for each Fund that allows FAM to vary the degree of investment
leverage relatively efficiently under different market conditions.
Call Rights. Each Fund may purchase a Municipal Bond issuer's right to
call all or a portion of such Municipal Bond for mandatory tender for purchase
(a "Call Right"). A holder of a Call Right may exercise such right to require
a mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related Municipal Bond will expire without value. The economic effect
of holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security.
Repurchase Agreements. Each Fund may invest in Municipal Bonds and U.S.
Government securities pursuant to repurchase agreements. Repurchase agreements
may be entered into only with a member bank of the Federal Reserve System or a
primary dealer in U.S. Government securities or an affiliate thereof. Under
such agreements, the seller agrees, upon entering into the contract, to
repurchase the security at a mutually agreed-upon time and price, thereby
determining the yield during the term of the agreement. A Fund may not invest
in repurchase agreements maturing in more than seven days if such investments,
together with all other illiquid investments, would exceed 15% of that Fund's
net assets. In the event of default by the seller under a repurchase
agreement, a Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the underlying securities. In general, for
Federal income tax purposes, repurchase agreements are treated as
collateralized loans secured by the securities "sold." Therefore, amounts
earned under such agreements will not be considered tax-exempt interest.
Information Regarding Options and Futures Transactions
Each Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts and options thereon. While each Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of the common stock, the net asset value of the common stock will fluctuate.
There can be no assurance that a Fund's hedging transactions will be
effective. In addition, because of the leveraged nature of the common stock,
hedging transactions will result in a larger impact on the net asset value of
the common stock than would be the case if the common stock were not
leveraged. Furthermore, a Fund may only engage in hedging activities from time
to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur. Neither Fund is required to enter into
hedging transactions and each may choose not to do so.
Gains from transactions in options and futures contracts distributed to
stockholders are taxable as ordinary income or, in certain circumstances, as
long-term capital gains to stockholders. See "Comparison of the Funds -- Tax
Rules Applicable to the Funds and Their Stockholders -- Tax Treatment of
Options and Futures Transactions." In addition, in order to obtain ratings of
the AMPS from one or more nationally recognized statistical rating
organizations, a Fund may be required to limit its use of hedging techniques
in accordance with the specified guidelines of such rating organizations. See
"Rating Agency Guidelines" below.
The following is a description of the options and futures transactions in
which each Fund may engage, limitations on the Fund's use of such transactions
and risks associated with these transactions. The investment policies with
respect to the hedging transactions of a Fund are not fundamental policies and
may be modified by the Board of Directors of that Fund without the approval of
that Fund's stockholders.
Writing Covered Call Options. Each Fund is authorized to write (i.e.,
sell) covered call options with respect to Municipal Bonds it owns, thereby
giving the holder of the option the right to buy the underlying security
covered by the option from a Fund at the stated exercise price until the
option expires. Each Fund writes only covered call options, which means that
so long as a Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option. Neither Fund may write covered
call options on underlying securities in an amount exceeding 15% of the market
value of its total assets.
Each Fund receives a premium from writing a call option, which increases
a Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as that Fund's
obligation as a writer continues. Covered call options serve as a partial
hedge against a decline in the price of the underlying security. Each Fund may
engage in closing transactions in order to terminate outstanding options that
it has written.
Purchase of Options. Each Fund may purchase put options in connection
with its hedging activities. By buying a put, a Fund has a right to sell the
underlying security at the exercise price, thus limiting its risk of loss
through a decline in the market value of the security until the put expires.
The amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be sold
in a closing sale transaction; profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out a Fund's position as the purchaser of an option by means of an offsetting
sale of an identical option prior to the expiration of the option it has
purchased. In certain circumstances, a Fund may purchase call options on
securities held in its portfolio on which it has written call options, or on
securities which it intends to purchase. Neither Fund will purchase options on
securities if, as a result of such purchase, the aggregate cost of all
outstanding options on securities held by that Fund would exceed 5% of the
market value of that Fund's total assets.
Financial Futures Contracts and Options. Each Fund is authorized to
purchase and sell certain financial futures contracts and options thereon
solely for the purposes of hedging its investments in Municipal Bonds against
declines in value and hedging against increases in the cost of securities it
intends to purchase. A financial futures contract obligates the seller of a
contract to deliver and the purchaser of a contract to take delivery of the
type of financial instrument covered by the contract or, in the case of
index-based financial futures contracts, to make and accept a cash settlement,
at a specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts or
options. A purchase of financial futures contracts may provide a hedge against
an increase in the cost of securities intended to be purchased, because such
appreciation may be offset, in whole or in part, by an increase in the value
of the position in the financial futures contracts.
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or
received. Instead, an amount of cash or securities acceptable to the broker
equal to approximately 5% of the contract amount must be deposited with the
broker. This amount is known as initial margin. Subsequent payments to and
from the broker, called variation margin, are made on a daily basis as the
price of the financial futures contract fluctuates making the long and short
positions in the financial futures contract more or less valuable.
Each Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value
of 40 large tax-exempt issues, and purchase and sell put and call options on
such financial futures contracts for the purpose of hedging Municipal Bonds
that a Fund holds or anticipates purchasing against adverse changes in
interest rates. Each Fund also may purchase and sell financial futures
contracts on U.S. Government securities and purchase and sell put and call
options on such financial futures contracts for such hedging purposes. With
respect to U.S. Government securities, currently there are financial futures
contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA
Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by its Board of Directors, each Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if FAM should determine that there is normally sufficient correlation between
the prices of such financial futures contracts and the Municipal Bonds in
which a Fund invests to make such hedging appropriate.
Over-The-Counter Options. Each Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC option transactions are two-party contracts with price and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC Options.
Restrictions on OTC Options. Each Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Funds are considered to be illiquid. The illiquidity of such options or
assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that otherwise might be
realized.
Risk Factors in Financial Futures Contracts and Options Thereon.
Utilization of futures transactions involves the risk of imperfect correlation
in movements in the price of financial futures contracts and movements in the
price of the security that is the subject of the hedge. If the price of the
financial futures contract moves more or less than the price of the security
that is the subject of the hedge, a Fund will experience a gain or loss that
will not be completely offset by movements in the price of such security.
There is a risk of imperfect correlation where the securities underlying
financial futures contracts have different maturities, ratings, geographic
compositions or other characteristics different from those of the security
being hedged. In addition, the correlation may be affected by additions to or
deletions from the index that serves as a basis for a financial futures
contract. Finally, in the case of financial futures contracts on U.S.
Government securities and options on such financial futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the futures or options and Municipal Bonds may be
adversely affected by economic, political, legislative or other developments
which have a disparate impact on the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission, the
futures trading activities described herein will not result in a Fund being
deemed a "commodity pool," as defined under such regulations, provided that
such Fund adheres to certain restrictions. In particular, a Fund may purchase
and sell financial futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of that Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes,
if, immediately thereafter the sum of the amount of initial margin deposits on
that Fund's existing futures positions and option premiums entered into for
non-hedging purposes do not exceed 5% of the market value of the liquidation
value of that Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When a Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of cash,
cash equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with that Fund's custodian, so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Although certain risks are involved in options and futures transactions,
FAM believes that, because the Funds will engage in options and futures
transactions only for hedging purposes, the options and futures portfolio
strategies of the Funds will not subject them to certain risks associated with
speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to Municipal
Bond options may be limited, and it is impossible to predict the amount of
trading interest that may exist in such options. In addition, no assurance can
be given that viable exchange markets will continue.
Each Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an option or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by a Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which that Fund has an open position in
an option or financial futures contract.
The liquidity of a secondary market in a financial futures contract may
be adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.
If it is not possible to close a financial futures position entered into
by a Fund, that Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of
FAM to forecast correctly the direction and extent of interest rate and
foreign exchange rate movements within a given time frame. To the extent these
rates remain stable during the period in which a financial futures contract is
held by a Fund or move in a direction opposite to that anticipated, that Fund
may realize a loss on the hedging transaction that is not fully or partially
offset by an increase in the value of portfolio securities. As a result, a
Fund's total return for such period may be less than if it had not engaged in
the hedging transaction. Furthermore, a Fund will only engage in hedging
transactions from time to time and may not necessarily be engaging in hedging
transactions when movements in interest rates occur.
Investment Restrictions
The Funds have similar investment restrictions. The following are
fundamental investment restrictions of MuniYield and may not be changed
without the approval of the holders of a majority of the outstanding shares of
common stock and the outstanding shares of AMPS and any other preferred stock,
voting together as a single class, and a majority of the outstanding shares of
AMPS and any other preferred stock, voting separately as a class. These
fundamental restrictions will also be the fundamental restrictions of the
Combined Fund. (For this purpose and under the Investment Company Act, for the
common stock and AMPS voting together as a single class "majority" means the
lesser of (i) 67% of the shares of each class of capital stock represented at
a meeting at which more than 50% of the outstanding shares of each class of
capital stock are represented or (ii) more than 50% of the outstanding shares
of each class of capital stock, but for the AMPS voting separately as a single
class, "majority" means more than 50% of the outstanding AMPS.) MuniYield may
not:
1. Make investments for the purpose of exercising control or management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies and only if immediately thereafter not more than 10% of
MuniYield's total assets would be invested in such securities.
3. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies that invest in real estate or interests therein and MuniYield may
purchase and sell financial futures contracts and options thereon.
4. Issue senior securities other than preferred stock or borrow amounts
in excess of 5% of its total assets taken at market value; provided,
however, that MuniYield is authorized to borrow moneys in excess of 5% of
the value of its total assets for the purpose of repurchasing shares of
common stock or redeeming shares of preferred stock.
5. Underwrite securities of other issuers except insofar as MuniYield may
be deemed an underwriter under the Securities Act in selling portfolio
securities.
6. Make loans to other persons, except that MuniYield may purchase
Municipal Bonds and other debt securities in accordance with its investment
objective, policies and limitations.
7. Purchase any securities on margin, except that MuniYield may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by MuniYield of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
8. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that MuniYield may write,
purchase and sell options and futures on Municipal Bonds, U.S. Government
obligations and related indices or otherwise in connection with bona fide
hedging activities.
9. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
For purposes of restriction (9), the exception for states, municipalities
and their political subdivisions applies only to tax-exempt securities issued
by such entities.
Municipal Strategy's fundamental investment restrictions are the same as
MuniYield's fundamental investment restrictions (1), (3), (4), (5), (6) and
(9) above. Municipal Strategy is subject to certain non-fundamental investment
restrictions set forth below. Two of those restrictions (b. and c.) are
similar to restrictions (7) and (8) of MuniYield.
An additional investment restriction adopted by each Fund, which may be
changed by the Board of Directors without shareholder appoval, provides that
neither Fund may mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by such Fund except as
may be necessary in connection with borrowings mentioned in investment
restriction (4) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.
Municipal Strategy has also adopted the following additional
non-fundamental investment restrictions, which may be changed by its Board of
Directors without shareholder approval. These restrictions provide that the
Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law.
Applicable law currently prohibits the Fund from purchasing the
securities of other investment companies except if immediately
thereafter not more than (i) 3% of the total outstanding voting
stock of such company is owned by the Fund, (ii) 5% of the Fund's
total assets, taken at market value, would be invested in any one
such company, (iii) 10% of the Fund's total assets, taken at market
value, would be invested in such securities, and (iv) the Fund,
together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more
than 10% of the total outstanding stock of any one closed-end
investment company.
b. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities (the deposit or payment
by the Fund of initial or variation margin in connection with
financial futures contracts and options thereon is not considered
the purchase of a security on margin).
c. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the
Fund may write, purchase and sell options and futures on Municipal
Bonds, U.S. Government obligations and related indices or otherwise
in connection with bona fide hedging activities and may purchase and
sell Call Rights to require mandatory tender for the purchase of
related Municipal Bonds.
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
For so long as shares of AMPS are rated by Moody's, no Fund will change
these additional investment restrictions unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of AMPS by Moody's.
FAM and Merrill Lynch are owned and controlled by Merrill Lynch & Co.,
Inc. ("ML & Co."). Because of the affiliation of Merrill Lynch with FAM, each
Fund is prohibited from engaging in certain transactions involving Merrill
Lynch except pursuant to an exemptive order or otherwise in compliance with
the provisions of the Investment Company Act and the rules and regulations
thereunder. Included among such restricted transactions will be purchases from
or sales to Merrill Lynch of securities in transactions in which it acts as
principal. An exemptive order has been obtained that permits the Funds to
effect principal transactions with Merrill Lynch in high quality, short-term,
tax-exempt securities subject to conditions set forth in such order.
Rating Agency Guidelines
Each Fund intends that, so long as shares of its AMPS are outstanding,
the composition of its portfolio will reflect guidelines established by
Moody's and S&P in connection with a Fund's receipt of a rating for such
shares on or prior to their date of original issue of at least "aaa" from
Moody's and AAA from S&P. Moody's and S&P, which are nationally recognized
statistical rating organizations, issue ratings for various securities
reflecting the perceived creditworthiness of such securities. The guidelines
for rating AMPS have been developed by Moody's and S&P in connection with
issuances of asset-backed and similar securities, including debt obligations
and variable rate preferred stock, generally on a case-by-case basis through
discussions with the issuers of these securities. The guidelines are designed
to ensure that assets underlying outstanding debt or preferred stock will be
sufficiently varied and of sufficient quality and amount to justify investment
grade ratings. The guidelines do not have the force of law but have been
adopted by each Fund in order to satisfy current requirements necessary for
Moody's and S&P to issue the above-described ratings for shares of AMPS, which
ratings generally are relied upon by institutional investors in purchasing
such securities. The guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the Investment Company
Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the shares of AMPS, at any time, may
change or withdraw any such rating. As set forth in the Articles Supplementary
of each Fund, the Board of Directors, without stockholder approval, may modify
certain definitions or restrictions that have been adopted by a Fund pursuant
to the rating agency guidelines, provided the Board of Directors has obtained
written confirmation from Moody's and S&P that any such change would not
impair the ratings then assigned by Moody's and S&P to the AMPS. See "Summary
- -- Risk Factors and Special Considerations -- Ratings Considerations."
For so long as any shares of a Fund's AMPS are rated by Moody's or S&P,
as the case may be, a Fund's use of options and financial futures contracts
and options thereon will be subject to certain limitations mandated by the
rating agencies.
Portfolio Composition
There are differences in concentration among the types of securities held
in the portfolio of each Fund. For MuniYield, as of April 30, 2001,
approximately 76.1%, 22.6% and 1.3% of its portfolio was invested in revenue
bonds, general obligation bonds and cash equivalents, respectively; for
Municipal Strategy, approximately 84.8%, 14.5% and 0.7% of its portfolio was
invested in revenue bonds, general obligation bonds and cash equivalents,
respectively.
Although the investment portfolios of the Funds must satisfy the same
standards with respect to credit quality, the actual securities owned by each
Fund will not be identical. As a result, there are certain differences in the
composition of the two investment portfolios. The tables below set forth
ratings information as of April 30, 2001 for the Municipal Bonds held by each
Fund.
MuniYield
As of April 30, 2001, approximately 97.4% and 2.6% of the market value of
MuniYield's portfolio was invested in long-term municipal obligations and
short-term municipal obligations, respectively. The following table sets forth
certain information with respect to the composition of MuniYield's long-term
municipal obligation investment portfolio as of April 30, 2001.
Value
S&P Moody's Number of Issues (in Thousands) Percent
- ----------------------- ---------------- --------------------- -------------------- ------------------
AAA Aaa 50 $317,363 44.3%
AA Aa 25 107,929 15.1
A A 4 39,183 5.4
BBB Baa 21 108,656 15.2
NR NR 25 143,054 20.0
-- ------- ----
Total 125 $716,185 100.0%
=== ======== =======
- --------------
* Ratings: Using the higher of S&P's or Moody's rating on MuniYield's
municipal obligations. S&P's rating categories may be modified further by
a plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating
categories may be modified further by a 1, 2 or 3 in Aa, A and Baa
ratings. See Appendix III -- "Ratings of Municipal Bonds and Commercial
Paper."
Municipal Strategy
As of April 30, 2001, approximately 97.0% and 3.0% of the market value of
Municipal Strategy's portfolio was invested in long-term municipal obligations
and short-term municipal obligations, respectively. The following table sets
forth certain information with respect to the composition of Municipal
Strategy's long-term municipal obligation investment portfolio as of April 30,
2001.
Value
S&P Moody's Number of Issues (in Thousands) Percent
- ----------------------- ---------------- --------------------- -------------------- ------------------
AAA Aaa 25 $ 63,605 54.3%
AA Aa 9 20,121 17.2
A A 1 2,526 2.2
BBB Baa 5 8,249 7.0
NR NR 15 22,545 19.3
-- ------ ----
Total 55 $117,046 100.0%
== ======== =======
- --------------
* Ratings: Using the higher of S&P's or Moody's rating on Municipal Strategy's
municipal obligations. S&P's rating categories may be modified further by a
plus (+) or minus (-) in AA, A and BBB ratings. Moody's rating categories may
be modified further by a 1, 2 or 3 in Aa, A and Baa ratings. See Appendix III
- -- "Ratings of Municipal Bonds and Commercial Paper."
Performance. The table below details for each Fund the yield and tax
equivalent yield for the 30 days ended May 31, 2001 and the average annual
total return for one, five and ten years ended May 31, 2001.
------------------- -------------------------------------------------------------
Average Annual Total Return
-------------------------------------------------------------
Tax
Equivalent
Yield-30 days Yield-30 days Five Years Since
ended ended One Year ended ended Inception to
May 31, 2001 May 31, 2001+ May 31, 2001 May 31, 2001 May 31, 2001
----------- --------------- -------------- ---------------- ------------ -------------
Municipal
Strategy 5.27% [o]% 12.26% 4.91% 4.52%*
----------- --------------- --------------- ---------------- ------------ -------------
MuniYield 6.40% [o]% 10.87% 5.17% 7.40%**
(31 Days)
----------- --------------- --------------- ---------------- ------------ -------------
- --------------------
+ Assumes a 28% Federal income tax rate.
* Municipal Strategy commenced operations on November 3, 1995.
** MuniYield commenced operations on November 29, 1991.
Portfolio Transactions
The procedures for engaging in portfolio transactions are the same for
each Fund. Subject to policies established by the Board of Directors of each
Fund, FAM is primarily responsible for the execution of each Fund's portfolio
transactions. In executing such transactions, FAM seeks to obtain the best
results for each Fund, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved and
the firm's risk in positioning a block of securities. While FAM generally
seeks reasonably competitive commission rates, the Funds do not necessarily
pay the lowest commission or spread available.
Neither Fund has any obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provide supplemental
investment research to FAM, including Merrill Lynch, may receive orders for
transactions by a Fund. Information so received will be in addition to, and
not in lieu of, the services required to be performed by FAM under its
investment advisory agreements with the Funds, and the expenses of FAM will
not be reduced as a result of the receipt of such supplemental research
information.
Each Fund invests in securities that are primarily traded in the
over-the-counter markets, and each Fund normally deals directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Under
the Investment Company Act, except as permitted by exemptive order, persons
affiliated with a Fund are prohibited from dealing with the Fund as principals
in the purchase and sale of securities. Since transactions in the
over-the-counter markets usually involve transactions with dealers acting as
principals for their own account, the Funds do not deal with affiliated
persons, including Merrill Lynch and its affiliates, in connection with such
transactions, except that, pursuant to an exemptive order obtained by FAM, a
Fund may engage in principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities. An affiliated person of a Fund may serve as
its broker in over-the-counter transactions conducted on an agency basis.
Each Fund also may purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers of such securities. Because an active
trading market may not exist for such securities, the prices that a Fund may
pay for these securities or receive on their resale may be lower than that for
similar securities with a more liquid market.
The Board of Directors of each Fund has considered the possibility of
recapturing for the benefit of the Funds brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions, by conducting portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by
Merrill Lynch could be offset against the investment advisory fees paid by the
Fund to FAM. After considering all factors deemed relevant, the Directors of
each Fund made a determination not to seek such recapture. The Directors will
reconsider this matter from time to time.
Portfolio Turnover
Generally, neither Fund purchases securities for short-term trading
profits. However, either Fund may dispose of securities without regard to the
time that they have been held when such action, for defensive or other
reasons, appears advisable to FAM. (The portfolio turnover rate is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by a Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.) A high portfolio turnover rate
results in greater transaction costs, which are borne directly by a Fund, and
also has certain tax consequences for stockholders. The portfolio turnover
rate for each Fund for the periods indicated is set forth below:
For the Six Month Period
Ended April 30, 2001 For the Year Ended
(Unaudited) October 31,
------------------------------ -------------------------------
2000 1999
---- ----
MuniYield 36.66% 103.44% 78.42%
---------
For the Six Month Period
Ended April 30, 2001 For the Year Ended
(Unaudited) October 31,
------------------------------ -------------------------------
2000 1999
---- ----
Municipal Strategy 20.49% 115.52% 158.57%
------------------
Net Asset Value
MuniYield determines the net asset value per share of its common stock as
of the NYSE close of business on the last business day of each week. Municipal
Strategy determines its net asset value as of the NYSE close of business once
daily on each day the NYSE is open for trading. The NYSE generally closes at
4:00 p.m. Eastern time. For purposes of determining the net asset value of a
share of common stock of each Fund, the value of the securities held by a Fund
plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding shares of AMPS is divided by the total
number of shares of common stock outstanding at such time. Expenses, including
the fees payable to FAM, are accrued daily.
The Municipal Bonds in which each Fund invests are traded primarily in
the over-the-counter markets. In determining net asset value, each Fund uses
the valuations of portfolio securities furnished by a pricing service approved
by its Board of Directors. The pricing service typically values portfolio
securities at the bid price or the yield equivalent when quotations are
readily available. Market illiquidity may make it difficult for the Funds to
obtain accurate quotations for its holdings of high yield Municipal Bonds.
Municipal Bonds for which quotations are not readily available are valued at
fair market value on a consistent basis as determined by the pricing service
using a matrix system to determine valuations. The procedures of the pricing
service and its valuations are reviewed by the officers of each Fund under the
general supervision of the Board of Directors of that Fund. The Board of
Directors of each Fund has determined in good faith that the use of a pricing
service is a fair method of determining the valuation of portfolio securities.
Positions in futures contracts are valued at closing prices for such contracts
established by the exchange on which they are traded, or if market quotations
are not readily available, are valued at fair value on a consistent basis
using methods determined in good faith by the Board of Directors of each Fund.
MuniYield determines and makes available for publication weekly the net
asset value of its common stock. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
Capital Stock
Each Fund has outstanding both common stock and AMPS. The MuniYield
Common Stock is listed on the NYSE and may be bought or sold at market price
on each day the NYSE is open for trading. The shares of MuniYield Common Stock
commenced trading on the NYSE on November 29, 1991. As of May 31, 2001, the
net asset value per share of MuniYield Common Stock was $12.87 and the market
price per share was $13.47. Municipal Strategy engages in a continuous
offering of its common stock and Series A AMPS. Municipal Strategy Common
Stock is not listed on any exchange and no secondary market presently exists
for Municipal Strategy Common Stock, nor is it currently expected that a
secondary market will develop. As of May 31, 2001, the net asset value per
share of Municipal Strategy Common Stock was $8.85.
Each Fund is authorized to issue 200,000,000 shares of capital stock, all
of which shares initially were classified as common stock. The Board of
Directors of each Fund is authorized to classify or reclassify any unissued
shares of capital stock by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. In connection with each
Fund's offering of shares of AMPS, MuniYield reclassified 10,000 shares of
unissued capital stock as AMPS (in connection with the Reorganization,
MuniYield intends to reclassify an additional 1,720 shares of unissued capital
stock as AMPS), and Municipal Strategy reclassified 40,000 shares of unissued
capital stock as AMPS.
Common Stock
Holders of each Fund's common stock are entitled to share equally in
dividends declared by a Fund's Board of Directors payable to holders of the
common stock and in the net assets of a Fund available for distribution to
holders of the common stock after payment of the preferential amounts payable
to holders of any outstanding preferred stock. See "Voting Rights" and
"Liquidation Rights of Holders of AMPS" below. Holders of a Fund's common
stock do not have preemptive or conversion rights and shares of a Fund's
common stock are not redeemable. The outstanding shares of common stock of
each Fund are fully paid and nonassessable.
So long as any shares of a Fund's AMPS or any other preferred stock are
outstanding, holders of that Fund's common stock will not be entitled to
receive any dividends of or other distributions from that Fund unless all
accumulated dividends on outstanding shares of that Fund's AMPS and any other
preferred stock have been paid, and unless asset coverage (as defined in the
Investment Company Act) with respect to such AMPS and any other preferred
stock would be at least 200% after giving effect to such distributions.
The market price for MuniYield Common Stock on the NYSE may be at a
premium above or a discount from the net asset value of the MuniYield Common
Stock. Conversely, Municipal Strategy engages in a continuous offering of its
common stock. In order to provide liquidity for stockholders of Municipal
Strategy, the Board of Directors of the Fund considers, on a quarterly basis,
whether the Fund should make a tender offer for its common stock. In a tender
offer, the Fund repurchases outstanding common stock at the Fund's net asset
value (less any applicable CDSC) on the last day of the offer.
The Board of Directors of Municipal Strategy is not required to authorize
the making of a tender offer and there can be no assurance that a tender offer
will be made during any particular quarter. If a tender offer is not made,
stockholders may be unable to sell their shares. Since the inception of
Municipal Strategy, however, the Board has authorized a tender offer each
quarter.
Contingent Deferred Sales Charge
Stockholders of MuniYield do not pay any CDSC because the Fund's common
stock trades on the NYSE. If common stockholders of Municipal Strategy sell
their stock back to the Fund during a tender offer and they have held those
shares for less than three years when the tender offer begins, they may have
to pay a CDSC. This charge varies depending on how long a shareholder has
owned the tendered shares. The amount of the charge is based on how much the
shareholder paid for the tendered shares or their net asset value, whichever
amount is less.
If the Reorganization is consummated, the tender offer that concluded on
August 20, 2001 will have been the final tender offer for Municipal Strategy
Common Stock.
Preferred Stock
MuniYield currently has outstanding five series of AMPS and Municipal
Strategy has outstanding one series of AMPS. The AMPS of each Fund have a
similar structure. The AMPS of a Fund are shares of preferred stock of that
Fund that entitle their holders to receive dividends when, as and if declared
by the Board of Directors, out of funds legally available therefor, at a rate
per annum that may vary for the successive dividend periods. The AMPS of each
Fund have a liquidation preference of $25,000 per share; the AMPS of the Funds
are not traded on any stock exchange or automated quotation system. Each
Fund's AMPS can be purchased at an auction or through broker-dealers who
maintain a secondary market in the AMPS.
Auctions generally have been held and will be held every seven days for
Series E AMPS of MuniYield and Municipal Strategy Series A AMPS and every
twenty-eight days for Series A, B, C and D AMPS of MuniYield, unless the
applicable Fund elects, subject to certain limitations, to have a special
dividend period. The following table provides information about the dividend
rates for each series of AMPS of each Fund as of a recent auction.
Auction Date Fund Dividend Period Series Dividend Rate
- ------------ ---- --------------- ------ -------------
July 10, 2001 MuniYield 28 days A 2.59%
June 19, 2001 MuniYield 28 days B 2.85%
July 3, 2001 MuniYield 28 days C 2.70%
July 3, 2001 MuniYield 28 days D 2.70%
July 10, 2001 MuniYield 7 days E 2.60%
July 11, 2001 Municipal Strategy 7 days A 2.59%
Periodic auctions are conducted for the AMPS of each Fund by the Auction
Agent for the Funds. The auctions require the participation of one or more
broker-dealers, each of whom enters into an agreement with the Auction Agent.
After each auction, the Auction Agent pays a service charge, from funds
provided by the issuing Fund, to each broker-dealer at the annual rate of
0.25% calculated on the basis of the purchase price of shares of the relevant
AMPS placed by such broker-dealer at such auction.
Under the Investment Company Act, each Fund is permitted to have
outstanding more than one series of preferred stock as long as no single
series has priority over another series as to the distribution of assets of
the Fund or the payment of dividends. Holders of a Fund's preferred stock do
not have preemptive rights to purchase any shares of AMPS or any other
preferred stock that might be issued. The net asset value per share of a
Fund's AMPS equals its liquidation preference plus accumulated dividends per
share.
The redemption provisions pertaining to the AMPS of each Fund are
substantially similar. It is anticipated that shares of AMPS of each Fund will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference of $25,000 plus accumulated but unpaid dividends
(whether or not earned or declared) to the date of redemption plus, under
certain circumstances, a redemption premium. Shares of AMPS will also be
subject to mandatory redemption at a price equal to their liquidation
preference plus accumulated but unpaid dividends to the date of redemption
upon the occurrence of certain specified events, such as the failure of the
Fund to maintain the asset coverage for the AMPS specified by Moody's and S&P
in connection with their issuance of ratings on the AMPS.
Certain Provisions of the Charters
Each Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of a Fund
or to change the composition of its Board of Directors and could have the
effect of depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director may be removed from office
with or without cause by vote of the holders of at least 66 2/3% of the votes
entitled to be voted on the matter. A Director elected by all of the holders
of capital stock may be removed only by action of such holders, and a Director
elected by the holders of AMPS and any other preferred stock may be removed
only by action of the holders of AMPS and any other preferred stock.
In addition, the Charter of each Fund requires the favorable vote of the
holders of at least 66 2/3% of all of a Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
o a merger or consolidation or statutory share exchange of the Fund
with any other corporation or entity, or
o a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
o a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by stockholders of the Fund, voting as
a single class, is required. Such approval, adoption or authorization of the
foregoing also would require the favorable vote of at least a majority of the
Fund's shares of preferred stock then entitled to be voted thereon, including
the AMPS, voting as a separate class.
In addition, conversion of a Fund to an open-end investment company would
require an amendment to that Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
stockholders. Such an amendment would require the affirmative vote of the
holders of at least 66 2/3% of a Fund's outstanding shares of capital stock
(including the AMPS and any other preferred stock) entitled to be voted on the
matter, voting as a single class (or a majority of such shares if the
amendment was previously approved, adopted or authorized by at least
two-thirds of the total number of Directors fixed in accordance with the
by-laws), and the affirmative vote of at least a majority of outstanding
shares of preferred stock of that Fund (including the AMPS), voting as a
separate class. Such a vote also would satisfy a separate requirement in the
Investment Company Act that the change be approved by the stockholders.
Stockholders of an open-end investment company may require the company to
redeem their shares of common stock at any time (except in certain
circumstances as authorized by or under the Investment Company Act) at their
net asset value, less such redemption charge, if any, as might be in effect at
the time of a redemption. All redemptions will be made in cash. If the Fund is
converted to an open-end investment company, it could be required to liquidate
portfolio securities to meet requests for redemption and the Common Stock no
longer would be listed on a stock exchange. Conversion to an open-end
investment company would also require redemption of all outstanding shares of
preferred stock (including the AMPS) and would require changes in certain of a
Fund's investment policies and restrictions, such as those relating to the
issuance of senior securities, the borrowing of money and the purchase of
illiquid securities.
The Board of Directors of each Fund has determined that the 66 2/3%
voting requirements described above, which are greater than the minimum
requirements under the Investment Company Act, are in the best interests of
stockholders generally. Reference should be made to the Charter of each Fund
on file with the Commission for the full text of these provisions.
Management of the Funds
Directors and Officers. The Board of Directors of MuniYield currently
consists of six persons, five of whom are not "interested persons," as defined
in the Investment Company Act, of MuniYield. The Board of Directors of
Municipal Strategy currently consists of eight persons, seven of whom are not
"interested persons" of Municipal Strategy. Terry K. Glenn serves as a
Director and President of each Fund. The Directors of each Fund are
responsible for the overall supervision of the operations of the Fund and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act and under applicable Maryland law. The Funds share
some of the same officers. For further information regarding the Directors and
officers of each Fund, see Appendix I -- "Information Pertaining to Each
Fund."
Roberto W. Roffo currently manages the investment portfolio of each Fund
and will manage the Combined Fund after the Reorganization. The portfolio
manager is primarily responsible for the day to day management of the
applicable Fund's portfolio. Biographical information about Mr. Roffo is
contained in Appendix I to this Proxy Statement and Prospectus.
Advisory and Administrative Arrangements. FAM, which is owned and
controlled by Merrill Lynch & Co., Inc. ("ML & Co."), serves as the investment
adviser for MuniYield and Municipal Strategy pursuant to separate investment
advisory agreements that are substantially similar, except for certain
provisions in the investment advisory agreement for MuniYield relating to FAM's
provision of administrative services to MuniYield. FAM provides each Fund with
the same investment advisory and management services. As of May 2001, FAM and
its affiliates had a total of approximately $545 billion in investment
company and other portfolio assets under management (approximately $30.4
billion of which were invested in municipal securities). This amount includes
assets managed for certain affiliates of FAM. FAM was organized as an
investment adviser in 1977 and offers investment advisory services to more
than 50 registered investment companies. The principal business address of FAM
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
Each Fund's investment advisory agreement with FAM (each, an "Investment
Advisory Agreement") provides that, subject to the supervision of the Board of
Directors of each Fund, FAM is responsible for the actual management of each
Fund's portfolio. The responsibility for making decisions to buy, sell or hold
a particular security for each Fund rests with FAM, subject to review by the
Board of Directors of that Fund.
FAM provides the portfolio management for each Fund. Such portfolio
management considers analyses from various sources (including brokerage firms
with which each Fund does business), makes the necessary investment decisions,
and places orders for transactions accordingly. FAM also is responsible for
the performance of certain administrative and management services for each
Fund.
For the investment advisory services pursuant to each Fund's Investment
Advisory Agreement, each Fund pays a monthly fee at an annual rate of 0.50% of
its average net assets. MuniYield's average net assets are computed on a
weekly basis and Municipal Strategy's average net assets are computed on a
daily basis (i.e., the average weekly or daily value, as applicable, of the
total assets of a Fund, including assets acquired from the sale of preferred
stock, minus the sum of accrued liabilities of the Fund and accumulated
dividends on its shares of preferred stock). For purposes of this calculation,
average weekly or daily net assets, as applicable, are determined at the end
of each month on the basis of the average net assets of the Fund for each week
or day, as applicable during the month. The assets for each weekly period are
determined by averaging the net assets at the last business day of a week with
the net assets at the last business day of the prior week. The average daily
net assets are determined at the end of each month on the basis of the average
net assets of Municipal Strategy for each day during the month.
Since the commencement of operations of Municipal Strategy to the
present, FAM has waived a portion of its advisory fee and/or reimbursed
certain other expenses. The fee waiver and/or expense reimbursement with
respect to Municipal Strategy is voluntary and may be reduced or discontinued
by FAM at any time without notice to stockholders. After the Reorganization,
the Combined Fund is expected to pay FAM a monthly fee at the annual rate of
0.50% of its average weekly net assets, including proceeds from the issuance
of AMPS, as described above.
For the fiscal years ended October 31, 1998, 1999 and 2000, the fees paid
by MuniYield to FAM pursuant to the Investment Advisory Agreement were
$4,261,373, $4,104,482 and $3,743,649, respectively (such fees based on
average weekly net assets of approximately $854.2 million, $825.2 million and
$748.9 million, respectively). For the fiscal years ended October 31, 1998,
1999 and 2000, the fees paid by Municipal Strategy to FAM pursuant to the
Investment Advisory Agreement were $787,978, $852,812 and $746,301,
respectively (such fees based on average daily net assets of approximately
$158.0 million, $171.0 million and $149.3 million, respectively). For the
fiscal years ended October 31, 1998, 1999 and 2000, FAM voluntarily waived
$204,377, $170,562 and $149,260, respectively, of the fees paid by Municipal
Strategy pursuant to its Investment Advisory Agreement.
Administrative Services and Fees. Under the terms of the administration
agreement between Municipal Strategy and FAM (the "Administration Agreement"),
FAM also performs or arranges for the performance of the administrative
services (i.e., services other than investment advice and related portfolio
activities) necessary for the operation of Municipal Strategy, including
administering shareholder accounts and handling shareholder relations.
Pursuant to the MuniYield Investment Advisory Agreement, FAM provides similar
services for MuniYield.
For administrative services, Municipal Strategy pays FAM a monthly fee at
an annual rate of 0.25% of the Fund's average daily net assets determined in
the same manner as the fee payable by the Fund under the Investment Advisory
Agreement. FAM may pay a portion of the fee received pursuant to the
Administration Agreement to its affiliate, Merrill Lynch, for administrative
services rendered in connection with the AMPS or other preferred stock of the
Fund. MuniYield does not pay a separate administrative fee to FAM. After the
Reorganization, the Combined Fund also will not pay a separate administrative
fee to FAM.
For the fiscal years ended October 31, 1998, 1999 and 2000 the fees paid
by Municipal Strategy pursuant to the Administration Agreement were $393,989,
$426,406 and $373,150, respectively (such fees based on average daily net
assets of approximately $158.0 million, $171.0 million and $149.3 million,
respectively).
Payment of Fund Expenses. Each Fund's Investment Advisory Agreement
obligates FAM to provide investment advisory services and, in the case of
MuniYield, administrative services to the Fund. Under MuniYield's Investment
Advisory Agreement, FAM pays all compensation of and furnishes office space
for officers and employees of MuniYield connected with investment and economic
research, trading and investment management of MuniYield, as well as the
compensation of all Directors of MuniYield who are affiliated persons of FAM
or any of its affiliates. Under Municipal Strategy's Investment Advisory
Agreement, FAM pays all compensation of officers and employees of the Fund as
well as the fees of all Directors who are affiliated persons of ML & Co. or
its subsidiaries.
Each Fund pays all other expenses incurred in the operation of the Fund,
including, among other things, expenses for legal and auditing services,
taxes, costs of printing proxies, listing fees, if any, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, dividend
disbursing agent and registrar, fees and expenses with respect to the issuance
of AMPS, Commission fees, fees and expenses of unaffiliated Directors,
accounting and pricing costs, insurance, interest, brokerage costs, litigation
and other extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund.
Accounting Services. Each Fund entered into a separate agreement with
State Street Bank and Trust Company ("State Street"), effective January 1,
2001, pursuant to which State Street provides certain accounting services to
each Fund. Each Fund pays a fee for these services. Prior to January 1, 2001,
FAM provided accounting services to each Fund and was reimbursed by each Fund
in connection with such services. FAM continues to provide certain accounting
services to each Fund and MuniYield and Municipal Strategy reimburse FAM for
these services.
The table below shows the amounts paid by each Fund to State Street and
to FAM for the periods indicated.
MuniYield
Period Paid to State Street Paid to FAM
------ -------------------- -----------
Fiscal year ended October 31, N/A $ 86,625
1998..................................
Fiscal year ended October 31, N/A $103,026
1999..................................
Fiscal year ended October 31, N/A $115,121
2000..................................
For the six months ended April 30, $70,706* $ 54,031
2001..................................
* Represents payments pursuant to the agreement with State Street commencing
January 1, 2001.
Municipal Strategy
Period Paid to State Street Paid to FAM
------ -------------------- -----------
Fiscal year ended October 31, N/A
1998.................................. $65,847
Fiscal year ended October 31, N/A
1999.................................. $55,031
Fiscal year ended October 31, N/A
2000.................................. $86,990
For the six months ended April 30, $11,318*
2001.................................. $ 8,000
* Represents payments pursuant to the agreement with State Street commencing
January 1, 2001.
Duration and Termination of Investment Advisory and Administration
Agreements. Unless earlier terminated as described below, the Investment
Advisory Agreement between each Fund and FAM will continue from year to year
if approved annually (a) by the Board of Directors of the Fund or by a
majority of the outstanding shares of a Fund's Common Stock and AMPS, voting
together as a single class, and (b) by a majority of the Directors of a Fund
who are not parties to such contract or "interested persons," as defined in
the Investment Company Act, of any such party. The contract is not assignable
and it may be terminated without penalty on 60 days' written notice at the
option of either party thereto or by the vote of the stockholders of the Fund.
Municipal Strategy's Administration Agreement is subject to the same duration
and termination requirements.
Municipal Strategy's Administration Agreement will continue in effect
until terminated. The agreement is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto.
Securities held by a Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which FAM or
its affiliates act as an adviser. Because of different objectives or other
factors, a particular security may be bought for an advisory client when other
clients are selling the same security. If purchases or sales of securities by
FAM for a Fund or other funds for which it acts as investment adviser or for
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. Transactions
effected by FAM (or its affiliates) on behalf of more than one of its clients
during the same period may increase the demand for securities being purchased
or the supply of securities being sold, causing an adverse effect on price.
Code of Ethics
The Board of Directors of each Fund has adopted a Code of Ethics pursuant
to Rule 17j-1 under the Investment Company Act that covers each Fund, its
adviser and its distributor. The Code of Ethics establishes procedures for
personal investing and restricts certain transactions. Employees subject to
the Code of Ethics may invest in securities for their personal investment
accounts, including securities that may be purchased or held by a Fund.
Voting Rights
Voting rights are identical for the holders of shares of each Fund's
common stock. Holders of each Fund's common stock are entitled to one vote for
each share held and will vote with the holders of any outstanding shares of
the Fund's AMPS or other preferred stock on each matter submitted to a vote of
holders of common stock, except as set forth below.
Voting rights of the holders of each Fund's AMPS are identical. Except as
otherwise indicated below, and except as otherwise required by applicable law,
holders of shares of a Fund's AMPS will be entitled to one vote per share on
each matter submitted to a vote of a Fund's stockholders and will vote
together with the holders of shares of a Fund's common stock as a single
class.
The shares of each Fund's common stock, AMPS and any other preferred
stock do not have cumulative voting rights, which means that the holders of
more than 50% of the shares of a Fund's common stock, AMPS and any other
preferred stock voting for the election of Directors can elect all of the
Directors standing for election by such holders, and, in such event, the
holders of the remaining shares of a Fund's common stock, AMPS and any other
preferred stock will not be able to elect any of such Directors.
In connection with the election of a Fund's Directors, holders of shares
of a Fund's AMPS, voting separately as a class, shall be entitled at all times
to elect two of that Fund's Directors, and the remaining Directors will be
elected by holders of shares of that Fund's common stock and shares of that
Fund's AMPS and any other preferred stock, voting together as a single class.
In addition, if at any time dividends on outstanding shares of a Fund's AMPS
shall be unpaid in an amount equal to at least two full years' dividends
thereon or if at any time holders of any shares of a Fund's preferred stock
are entitled, together with the holders of shares of that Fund's AMPS, to
elect a majority of the Directors of that Fund under the Investment Company
Act, then the number of Directors constituting the Board of Directors
automatically shall be increased by the smallest number that, when added to
the two Directors elected exclusively by the holders of shares of AMPS and any
other preferred stock as described above, would constitute a majority of the
Board of Directors as so increased by such smallest number, and at a special
meeting of stockholders which will be called and held as soon as practicable,
and at all subsequent meetings at which Directors are to be elected, the
holders of shares of that Fund's AMPS and any other preferred stock, voting
separately as a class, will be entitled to elect the smallest number of
additional Directors that, together with the two Directors which such holders
in any event will be entitled to elect, constitutes a majority of the total
number of Directors of the Fund as so increased. The terms of office of the
persons who are Directors at the time of that election will continue. If a
Fund thereafter shall pay, or declare and set apart for payment in full, all
dividends payable on all outstanding shares of AMPS and any other preferred
stock for all past dividend periods, the additional voting rights of the
holders of shares of AMPS and any other preferred stock as described above
shall cease, and the terms of office of all of the additional Directors
elected by the holders of shares of AMPS and any other preferred stock (but
not of the Directors with respect to whose election the holders of shares of
common stock were entitled to vote or the two Directors the holders of shares
of AMPS and any other preferred stock have the right to elect in any event)
will terminate automatically.
The affirmative vote of the holders of a majority of the outstanding
shares of a Fund's AMPS, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation, (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock, (iii) approve any plan of
reorganization adversely affecting such AMPS or (iv) take any action to change
a Fund's investment policies requiring a vote of stockholders under Section
13(a) of the Investment Company Act.
Stockholder Inquiries
Stockholder inquiries with respect to any Fund may be addressed to such
Fund by telephone at 1-609-282-2800 or at the address set forth on the cover
page of this Proxy Statement and Prospectus.
Dividends and Distributions
The Funds' current policies with respect to dividends and distributions
relating to shares of their common stock are identical. Each Fund intends to
distribute substantially all its net investment income monthly to holders of a
Fund's common stock. As long as any preferred stock is outstanding, monthly
distributions to holders of a Fund's common stock normally consist of all or a
portion of its net investment income remaining after the payment of dividends
(and any Additional Distribution) on the Fund's AMPS. All net realized
long-term or short-term capital gains, if any, are distributed pro rata at
least annually to holders of shares of a Fund's common stock and AMPS. While
any shares of a Fund's AMPS are outstanding, that Fund may not declare any
cash dividend or other distribution on its common stock, unless at the time of
such declaration (1) all accumulated dividends on its AMPS, including any
Additional Distribution, have been paid, and (2) the net asset value of its
portfolio (determined after deducting the amount of such dividend or other
distribution) is at least 200% of the liquidation value of the outstanding
shares of AMPS (expected to equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated but unpaid Additional Distribution). If
a Fund's ability to make distributions on its common stock is limited, such
limitation could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company,
which would have adverse tax consequences for holders of common stock and
AMPS. See "Comparison of the Funds -- Tax Rules Applicable to the Funds and
Their Stockholders."
Similarly, the Funds' current policies with respect to dividends and
distributions on shares of their AMPS are identical. The holders of shares of
a Fund's AMPS are entitled to receive, when, as and if declared by the Fund's
Board of Directors, out of funds legally available therefor, cumulative cash
dividends on their shares. Dividends on a Fund's shares of AMPS so declared
and payable shall be paid (i) in preference to and in priority over any
dividends so declared and payable on that Fund's common stock, and (ii) to the
extent permitted under the Internal Revenue Code of 1986, as amended (the
"Code") and to the extent available, out of net tax-exempt income earned on
the Fund's investments. Dividends for each Fund's AMPS are paid through The
Depository Trust Company ("DTC") (or a successor securities depository) on
each dividend payment date. DTC's normal procedures now provide for it to
distribute dividends in same-day funds to agent members, who in turn are
expected to distribute such dividends to the person for whom they are acting
as agent in accordance with the instructions of such person. Prior to each
dividend payment date, the relevant Fund is required to deposit with the
Auction Agent sufficient funds for the payment of such declared dividends.
Neither of the Funds intends to establish any reserves for the payment of
dividends, and no interest will be payable in respect of any dividend payment
or payment on the shares of a Fund's AMPS which may be in arrears.
Dividends paid by each Fund, to the extent paid from tax-exempt income
earned on Municipal Bonds, are exempt from Federal income tax, subject to the
possible application of a Federal alternative minimum tax. However, each Fund
is required to allocate net capital gains and other income subject to regular
Federal income tax, if any, proportionately between shares of its common stock
and shares of its AMPS in accordance with the current position of the IRS
described herein. See "Tax Rules Applicable to the Funds and Their
Stockholders" below. Each Fund notifies the Auction Agent of the amount of any
net capital gains or other taxable income to be included in any dividend on
shares of AMPS prior to the auction establishing the applicable rate for such
dividend. The Auction Agent in turn notifies each broker-dealer whenever it
receives any such notice from a Fund, and each broker-dealer then notifies its
customers who are holders of the Fund's AMPS. Each Fund also may include such
income in a dividend on shares of its AMPS without giving advance notice
thereof if it increases the dividend by an additional amount to offset the tax
effect thereof. The amount of taxable income allocable to shares of a Fund's
AMPS will depend upon the amount of such income realized by the Fund and other
factors, but generally is not expected to be significant.
For information concerning the manner in which dividends and
distributions to holders of each Fund's common stock may be reinvested
automatically in shares of a Fund's common stock, see "Automatic Dividend
Reinvestment Plan" below. Dividends and distributions will be subject to the
tax treatment discussed below, whether they are reinvested in shares of a Fund
or received in cash.
If a Fund retroactively allocates any net capital gains or other income
subject to regular Federal income tax to shares of its AMPS without having
given advance notice thereof as described above, which only may happen when
such allocation is made as a result of the redemption of all or a portion of
the outstanding shares of its AMPS or the liquidation of the Fund, such Fund
will make certain payments to holders of shares of its AMPS to which such
allocation was made to offset substantially the tax effect thereof. In no
other instances will a Fund be required to make payments to holders of shares
of its AMPS to offset the tax effect of any reallocation of net capital gains
or other taxable income.
Automatic Dividend Reinvestment Plan
Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, a
"Plan"), unless a holder of a Fund's common stock is ineligible or elects
otherwise, all dividends and distributions are automatically reinvested by
either BONY, as agent for MuniYield stockholders in administering the Plan, or
Financial Data Services, Inc. ("FDS"), as agent for stockholders of Municipal
Strategy in administering the Plan (each, a "Plan Agent"), in additional
shares of the applicable Fund's common stock. Certain provisions of each Plan
are different because only MuniYield shares are exchange-listed while
Municipal Strategy shares are continuously offered by Municipal Strategy.
After the Reorganization, the Combined Fund will use the MuniYield Plan and
BONY will be the Plan Agent. Stockholders whose shares are held in the name of
a broker or nominee should contact such broker or nominee to confirm that they
are eligible to participate in a Fund's dividend reinvestment plan. Holders of
a Fund's common stock who are ineligible or elect not to participate in a Plan
receive all distributions in cash paid by check mailed directly to the
stockholder of record (or, if the shares are held in street or other nominee
name, then to such nominee) by BONY or FDS, as applicable, as dividend paying
agent. Such stockholders may elect not to participate in a Plan and to receive
all distributions of dividends and capital gains in cash by sending written
instructions to BONY or FDS, as applicable, as dividend paying agent, at the
addresses set forth below. Participation in each Plan is completely voluntary
and may be terminated or resumed at any time without penalty by written notice
if received by the applicable Plan Agent not less than ten days prior to any
dividend record date; otherwise, such termination or resumption will be
effective with respect to any subsequently declared dividend or capital gains
distribution.
The applicable Plan Agent maintains all stockholders' accounts in a Plan
and furnishes written confirmation of all transactions in the account,
including information needed by stockholders for tax records. Shares in the
account of each Plan participant are held by the applicable Plan Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy includes those shares purchased or received pursuant to a Plan. The
applicable Plan Agent will forward all proxy solicitation materials to
participants and vote proxies for shares held pursuant to a Plan in accordance
with the instructions of the participants.
In the case of stockholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the applicable Plan Agent
will administer a Plan on the basis of the number of shares certified from
time to time by the record stockholders as representing the total amount
registered in the record stockholder's name and held for the account of
beneficial owners who are to participate in that Plan.
The automatic reinvestment of dividends and distributions does not
relieve participants of any Federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. See "Comparison of the
Funds -- Tax Rules Applicable to the Funds and Their Stockholders."
There are no brokerage charges with respect to shares issued directly by
either Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant in the MuniYield Plan
pays a pro rata share of brokerage commissions incurred with respect to any
open-market purchases by the Plan Agent in connection with the reinvestment of
dividends as described below.
Each Fund reserves the right to amend or terminate its Plan. There is no
direct service charge to participants in a Plan; however, each Fund reserves
the right to amend its Plan to include a service charge payable by the
participants.
MuniYield
Under the MuniYield Plan, whenever MuniYield declares an ordinary income
dividend or a capital gain dividend (collectively referred to as "dividends")
payable either in shares or in cash, non-participants in its Plan receive
cash, and participants in the Plan receive the equivalent in shares of the
Fund's common stock. The shares are acquired by the Plan Agent for the
participant's account, depending upon the circumstances described below,
either (i) through receipt of additional unissued but authorized shares of
MuniYield Common Stock from MuniYield ("newly issued shares") or (ii) by
purchase of outstanding shares of MuniYield Common Stock on the open market
("open-market purchases"), on the NYSE or elsewhere. If on the payment date
for the dividend, the net asset value per share of MuniYield Common Stock is
equal to or less than the market price per share of MuniYield Common Stock
plus estimated brokerage commissions (such condition being referred to herein
as "market premium"), the Plan Agent invests the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares
of MuniYield Common Stock to be credited to the participant's account is
determined by dividing the dollar amount of the dividend by the net asset
value per share on the date the shares are issued, provided that the maximum
discount from the then current market price per share on the date of issuance
may not exceed 5%. If on the dividend payment date, the net asset value per
share is greater than the market value (such condition being referred to
herein as "market discount"), the Plan Agent invests the dividend amount in
shares acquired on behalf of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan
Agent has until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. MuniYield intends to pay monthly
income dividends. Therefore, the period during which open-market purchases can
be made exists only from the payment date on the dividend through the date
before the next "ex-dividend" date, which typically is approximately ten days.
If, before the Plan Agent has completed its open-market purchases, the market
price of a share of MuniYield Common Stock exceeds the net asset value per
share, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of MuniYield shares, resulting in the acquisition of fewer
shares than if the dividend had been paid in newly issued shares on the
dividend payment date. Because of the foregoing difficulty with respect to
open market purchases, MuniYield's Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open market purchases during the
purchase period or if the market discount shifts to a market premium during
the purchase period, the Plan Agent ceases making open-market purchases and
invests the uninvested portion of the dividend amount in newly-issued shares
at the close of business on the last purchase date.
Stockholders participating in the Plan may receive benefits not available
to stockholders not participating in the Plan. If the market price (plus
commissions) of shares of MuniYield Common Stock is higher than the net asset
value of such shares, participants in the Plan receive shares of MuniYield
Common Stock at less than they otherwise could purchase them and have shares
with a cash value greater than the value of any cash distribution they would
have received on their shares. If the market price plus commissions is lower
than the net asset value of such shares, participants receive distributions of
shares with a net asset value greater than the value of any cash distribution
they would have received on their shares. However, there may be insufficient
shares available in the market to make distributions of shares at prices below
the net asset value. Also, since MuniYield normally does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Comparison of the Funds -- Tax Rules Applicable to the Funds and Their
Stockholders" for a discussion of the tax consequences of each Plan.
Municipal Strategy
Under the Municipal Strategy Plan, Municipal Strategy always issues newly
issued shares at net asset value. No CDSC is imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions. After the Reorganization, Municipal Strategy common
stockholders will own shares of MuniYield and will be subject to the MuniYield
Plan.
After the Reorganization, a holder of shares of Municipal Strategy who
has elected to receive dividends in cash will continue to receive dividends in
cash; all other holders will have their dividends automatically reinvested in
shares of the Combined Fund. However, if a stockholder owns shares in
Municipal Strategy and in MuniYield, after the Reorganization, the
stockholder's election with respect to the dividends of MuniYield will control
unless the stockholder specifically elects a different option at that time.
Following the Reorganization, all correspondence should be directed to the
Plan Agent for MuniYield as follows: The Bank of New York, 101 Barclay Street,
New York, New York 10286.
Mutual Fund Investment Option
A holder of MuniYield Common Stock, who purchased his or her shares
through Merrill Lynch in the initial public offering of MuniYield Common
Stock, has the right to reinvest the net proceeds from a sale of such shares
in Class A shares of certain eligible Merrill Lynch-sponsored open-end funds
at their net asset value, without the imposition of an initial sales charge,
if certain conditions are satisfied. A holder of Municipal Strategy Common
Stock has an investment option consisting of the right to reinvest the net
proceeds from a sale of shares of Municipal Strategy Common Stock in a tender
offer by Municipal Strategy in Class D shares of certain eligible Merrill
Lynch-sponsored open-end funds at their net asset value, without the
imposition of a sales charge, if certain conditions are met. If the
Reorganization is consummated, a holder of Municipal Strategy Common Stock
will have the same investment option as a holder of MuniYield Common Stock who
purchased his or her shares through Merrill Lynch in the initial public
offering of MuniYield Common Stock as described above.
Liquidation Rights of Holders of AMPS
Upon any liquidation, dissolution or winding up of either Fund, whether
voluntary or involuntary, the holders of shares of that Fund's AMPS will be
entitled to receive, out of the assets of the Fund available for distribution
to stockholders, before any distribution or payment is made upon any shares of
that Fund's common stock or any other capital stock of the Fund ranking junior
in right of payment upon liquidation to AMPS, $25,000 per share together with
the amount of any dividends accumulated but unpaid (whether or not earned or
declared) thereon to the date of distribution, and after such payment the
holders of AMPS will be entitled to no other payments except for any
additional dividends. If the assets of a Fund shall be insufficient to make
the full liquidation payment on the AMPS and liquidation payments on any other
outstanding class or series of preferred stock of the Fund ranking on a parity
with the AMPS as to payment upon liquidation, then such assets will be
distributed among the holders of shares of AMPS and the holders of shares of
such other class or series ratably in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of liquidation distribution to which they are entitled, the holders of
shares of a Fund's AMPS will not be entitled to any further participation in
any distribution of assets by that Fund except for any additional dividends. A
consolidation, merger or share exchange of a Fund with or into any other
entity or entities or a sale, whether for cash, shares of stock, securities or
properties, of all or substantially all or any part of the assets of that Fund
shall not be deemed or construed to be a liquidation, dissolution or winding
up of that Fund for this purpose.
Tax Rules Applicable to the Funds and Their Stockholders
The tax consequences of investing in shares of common stock or AMPS of
each Fund are substantially similar. The Funds have elected and qualified
since inception for the special tax treatment afforded RICs under the Code. As
a result, in any taxable year in which they distribute an amount equal to at
least 90% of taxable net income and 90% of tax-exempt net income (see below),
the Funds (but not their stockholders) are not subject to Federal income tax
to the extent that they distribute their net investment income and net
realized capital gains. In all taxable years through the taxable year of the
Reorganization, each Fund has distributed substantially all of its income.
MuniYield intends to continue to distribute substantially all of its income
following the Reorganization.
Each Fund is qualified to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section, if, at the close of each
quarter of its taxable year, at least 50% of the value of a Fund's total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), that Fund is qualified to
pay exempt-interest dividends to its stockholders. Exempt-interest dividends
are dividends or any part thereof paid by a Fund which are attributable to
interest on tax-exempt obligations and designated by a Fund as exempt-interest
dividends in a written notice mailed to stockholders within 60 days after the
close of its taxable year. To the extent that the dividends distributed to a
Fund's stockholders are derived from interest income exempt from Federal
income tax under Code Section 103(a) and are properly designated as
exempt-interest dividends, they are excludable from a stockholder's gross
income for Federal income tax purposes. Exempt-interest dividends are
included, however, in determining the portion, if any, of a person's social
security benefits and railroad retirement benefits subject to Federal income
taxes. A tax adviser should be consulted with respect to whether
exempt-interest dividends retain the exclusion under Code Section 103(a) if a
stockholder would be treated as a "substantial user" or "related person" under
Code Section 147(a) with respect to property financed with the proceeds from
an issue of IDBs or PABs, if any, held by a Fund.
The IRS, in a revenue ruling, held that certain AMPS would be treated as
stock for Federal income tax purposes. The terms of the currently outstanding
AMPS of each Fund, as well as the MuniYield Series F AMPS to be issued by
MuniYield, are substantially similar, but not identical, to the AMPS discussed
in the revenue ruling. In the opinion of Sidley Austin Brown & Wood LLP,
counsel to the Funds, the shares of each Fund's currently outstanding AMPS, as
well as the MuniYield Series F AMPS to be issued by MuniYield, constitute
stock, and distributions with respect to shares of such AMPS (other than
distributions in redemption of shares of AMPS subject to Section 302(b) of the
Code) will constitute dividends to the extent of current and accumulated
earnings and profits as calculated for Federal income tax purposes.
Nevertheless, the IRS could take a contrary position, asserting, for example,
that the shares of AMPS constitute debt. If this position were upheld, the
discussion of the treatment of distributions below would not apply to holders
of shares of AMPS. Instead, distributions by each Fund to holders of shares of
its AMPS would constitute interest, whether or not they exceeded the earnings
and profits of the Fund, would be included in full in the income of the
recipient and taxed as ordinary income. Counsel believes that such a position,
if asserted by the IRS, would be unlikely to prevail.
To the extent that a Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
are considered taxable ordinary income for Federal income tax purposes.
Distributions, if any, from an excess of net long-term capital gains over net
short-term capital losses derived from the sale of securities or from certain
transactions in futures or options ("capital gain dividends") are taxable as
long-term capital gains for Federal income tax purposes, regardless of the
length of time the stockholder has owned Fund shares. Certain categories of
capital gains are taxable at different rates for Federal income tax purposes.
Generally not later than 60 days after the close of its taxable year, a Fund
provides its stockholders with a written notice designating the amounts of any
exempt-interest dividends and capital gain dividends, as well as any amount of
capital gain dividends in the different categories of capital gain referred to
above. Distributions by a Fund, whether from exempt-interest income, ordinary
income or capital gains, are not eligible for the dividends received deduction
for corporations under the Code.
A loss realized on a sale or exchange of shares of a Fund is disallowed
if other Fund shares are acquired (whether under the Automatic Dividend
Reinvestment Plan or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
All or a portion of a Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by stockholders. Any loss upon the sale or
exchange of Fund shares held for six months or less is treated as long-term
capital loss to the extent of exempt-interest dividends received by the
stockholder. In addition, such loss is disallowed to the extent of any capital
gain dividends received by the stockholder. Distributions in excess of a
Fund's earnings and profits first will reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). If a Fund pays a dividend in January which was declared in the
previous October, November or December to stockholders of record on a
specified date in one of such months, then such dividend is treated for tax
purposes as paid by the Fund and received by its stockholders on December 31
of the year in which such dividend was declared.
The IRS has taken the position in a revenue ruling that if a RIC has two
or more classes of shares it may designate distributions made to each class in
any year as consisting of no more than such class' proportionate share of
particular types of income, including exempt-interest dividends and capital
gain dividends. A class's proportionate share of a particular type of income
is determined according to the percentage of total dividends paid by the RIC
during such year that was paid to such class. Consequently, when common stock
and one or more series of AMPS are outstanding, each Fund designates
distributions made to the classes as consisting of particular types of income
in accordance with each class's proportionate share of such income. After the
Reorganization, MuniYield will, likewise, so designate distributions with
respect to its common stock and its AMPS, Series A, B, C, D, E and F. Each
Fund may notify the Auction Agent of the amount of any net capital gains and
other taxable income to be included in any dividend on shares of its AMPS
prior to the auction establishing the applicable rate for such dividend.
Except for the portion of any dividend that a Fund informs the Auction Agent
will be treated as capital gains or other taxable income, the dividends paid
on the shares of AMPS constitute exempt-interest dividends. Alternatively,
each Fund may include such income in a dividend on shares of its AMPS without
giving advance notice thereof if it increases the dividend by an additional
amount to offset the tax effect thereof. The amount of net capital gains and
ordinary income allocable to shares of a Fund's AMPS (the "taxable
distribution") depends upon the amount of such gains and income realized by
that Fund and the total dividends paid on shares of its common stock and
shares of its AMPS during a taxable year, but the taxable distribution
generally is not significant.
In the opinion of Sidley Austin Brown & Wood LLP, counsel to both Funds,
under current law the manner in which each Fund allocates, and MuniYield will
allocate, items of tax-exempt income, net capital gains, and other taxable
income, if any, among shares of common stock and outstanding AMPS (including,
for MuniYield, its Series A, Series B, Series C, Series D and Series E AMPS
and, after the Reorganization, the newly issued Series F AMPS) will be
respected for Federal income tax purposes. However, the tax treatment of
additional dividends may affect a Fund's calculation of each class' allocable
share of capital gains and other taxable income. In addition, there is
currently no direct guidance from the IRS or other sources specifically
addressing whether a Fund's method for allocating tax-exempt income, net
capital gains and other taxable income among shares of common stock and the
outstanding series of AMPS will be respected for Federal income tax purposes,
and it is possible that the IRS could disagree with counsel's opinion and
attempt to reallocate a Fund's net capital gains or other taxable income. In
the event of a reallocation, some of the dividends identified by a Fund as
exempt-interest dividends to holders of shares of its AMPS could be
recharacterized as additional capital gains or other taxable income. In the
event of such recharacterization, a Fund is not required to make payments to
the affected stockholders to offset the tax effect of such reallocation. In
addition, a reallocation could cause a Fund to be liable for income tax and
excise tax on all reallocated taxable income. Sidley Austin Brown & Wood LLP
has advised each Fund that, in its opinion, if the IRS were to challenge in
court its allocations of income and gain, the IRS would be unlikely to
prevail. The opinion of Sidley Austin Brown & Wood LLP, however, represents
only its best legal judgment and is not binding on the IRS or the courts.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent it does not distribute during each calendar year 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally does
not apply to the tax-exempt income of RICs, such as the Funds, that pay
exempt-interest dividends.
The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The alternative minimum tax
applies to interest received on "activity bonds" issued after August 7, 1986.
As set forth above, "private activity bonds" are bonds which, although
tax-exempt, are used for purposes other than those generally performed by
governmental units and which benefit non-governmental entities (e.g., bonds
used for industrial development or housing purposes). Income received on such
bonds is classified as an item of "tax preference" which could subject
investors in such bonds, including stockholders of the Funds, to an increased
Federal alternative minimum tax. Each Fund purchases such "private activity
bonds" and reports to stockholders within 60 days after calendar year-end the
portion of its dividends declared during the year which constitutes an item of
tax preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to a Federal alternative minimum tax based, in
part, on certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings" which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by a Fund is included in adjusted current earnings, a corporate
stockholder may be required to pay a Federal alternative minimum tax on
exempt-interest dividends paid by such Fund.
Each Fund may invest in high yield securities or junk bonds. Furthermore,
the Funds may also invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These investments may be subject to special
tax rules under which a Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such junk bonds and/or
nontraditional instruments could be recharacterized as taxable ordinary
income.
If at any time when shares of AMPS are outstanding a Fund does not meet
the asset coverage requirements of the Investment Company Act, that Fund will
be required to suspend distributions to holders of its common stock until the
asset coverage is restored. See "Dividends and Distributions." This may
prevent a Fund from distributing at least 90% of its net investment income and
may, therefore, jeopardize that Fund's qualification for taxation as a RIC. If
a Fund were to fail to qualify as a RIC, some or all of the distributions paid
by that Fund would be fully taxable to stockholders for Federal income tax
purposes. Upon any failure to meet the asset coverage requirements of the
Investment Company Act, a Fund, in its sole discretion, may redeem shares of
AMPS in order to maintain or restore the requisite asset coverage and avoid
the adverse consequences to that Fund and its stockholders of failing to
qualify as a RIC. No assurance can be given, however, that any such action
would achieve such objectives.
As noted above, a Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred stock that the Funds have issued and that
MuniYield contemplates issuing may raise a question as to whether
distributions on such preferred stock are "preferential" under the Code and,
therefore, not eligible for the dividends paid deduction. Counsel has advised
the Funds that the outstanding preferred stock and the preferred stock to be
issued by MuniYield will not result in the payment of a preferential dividend.
If a Fund ultimately relies solely on a legal opinion when it issues such
preferred stock, no assurance can be given that the IRS would agree that
dividends on the preferred stock are not preferential. If the IRS successfully
disallowed the dividends paid deduction for dividends on the preferred stock,
the Funds could be disqualified as RICs. In this case, dividends paid by the
Funds on the common stock and the AMPS would not be exempt from Federal income
taxes. Additionally, the Funds would be subject to a Federal alternative
minimum tax.
Under certain circumstances when a Fund is required to allocate taxable
income to the AMPS, it will pay Additional Distributions to holders of shares
of AMPS. The Federal income tax consequences of Additional Distributions under
existing law are uncertain. The Funds treat and MuniYield intends to continue
to treat a holder as receiving a dividend distribution in the amount of any
Additional Distribution only as and when such Additional Distribution is paid.
An Additional Distribution generally is designated by a Fund as an
exempt-interest dividend except as otherwise required by applicable law.
However, the IRS may assert that all or part of an Additional Distribution is
a taxable dividend either in the taxable year for which the allocation of
taxable income is made or in the taxable year in which the Additional
Distribution is paid.
The value of shares acquired pursuant to a Fund's dividend reinvestment
plan is generally excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, at a time when a
Fund's shares are trading at a premium over net asset value, MuniYield issues
shares pursuant to the dividend reinvestment plan that have a greater fair
market value than the amount of cash reinvested, it is possible that all or a
portion of such discount (which may not exceed 5% of the fair market value of
such Fund's shares) could be viewed as a taxable distribution. If the discount
is viewed as a taxable distribution, it is also possible that the taxable
character of this discount would be allocable to all of the stockholders,
including stockholders who do not participate in a Fund's dividend
reinvestment plan. Thus, stockholders who do not participate in the dividend
reinvestment plan of a Fund, as well as dividend reinvestment plan
participants, might be required to report as ordinary income a portion of
their distributions equal to the allocable share of the discount.
Under certain provisions of the Code, some stockholders may be subject to
a withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
stockholders subject to backup withholding will be those for whom no taxpayer
identification number is on file with a Fund or who, to that Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that
such stockholder is not otherwise subject to backup withholding.
Ordinary income dividends paid to stockholders who are nonresident aliens
or foreign entities are subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident stockholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
The Code provides that every stockholder required to file a tax return
must include for information purposes on such return the amount of
exempt-interest dividends received from all sources (including the Funds)
during the taxable year.
Tax Treatment of Options and Futures Transactions
Each Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. Each Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to a
Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year (i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year), and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by a Fund
may alter the timing and character of distributions to stockholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by a Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of a Fund's sales of securities and transactions in financial futures
contracts and related options. Under Section 1092, a Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in financial futures contracts or
the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations, are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Stockholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local tax consequences of an
investment in a Fund.
AGREEMENT AND PLAN OF REORGANIZATION
General
Under the Agreement and Plan (attached hereto as Appendix II), MuniYield
will acquire substantially all of the assets, and will assume substantially
all of the liabilities, of Municipal Strategy in return solely for shares of
MuniYield Common Stock and MuniYield Series F AMPS to be issued by MuniYield.
The number of full shares of MuniYield Common Stock issued to Municipal
Strategy will have an aggregate net asset value equal to the aggregate net
asset value of the outstanding shares of Municipal Strategy Common Stock, and
the number of shares of MuniYield Series F AMPS issued to Municipal Strategy
will have an aggregate liquidation preference and value equal to the aggregate
liquidation preference and value of the outstanding shares of Municipal
Strategy Series A AMPS. Upon receipt by Municipal Strategy of such shares,
Municipal Strategy will (i) distribute the shares of MuniYield Common Stock to
the holders of Municipal Strategy Common Stock (plus cash in lieu of
fractional shares) in return for their shares of Municipal Strategy Common
Stock, and (ii) distribute the shares of MuniYield Series F AMPS to the
holders of Municipal Strategy Series A AMPS in return for their shares of
Municipal Strategy Series A AMPS. MuniYield will file Articles Supplementary
establishing the powers, rights and preferences of the MuniYield Series F AMPS
with the State Department of Assessments and Taxation of Maryland (the
"Maryland Department") prior to the closing of the Reorganization. As soon as
practicable after the date that the Reorganization takes place (the "Closing
Date"), Municipal Strategy will file Articles of Dissolution with the Maryland
Department to effect the formal dissolution of such Fund, and will dissolve
and deregister as an investment company under the Investment Company Act.
Municipal Strategy will distribute the shares of MuniYield Common Stock
(plus cash in lieu of fractional shares) and the shares of MuniYield Series F
AMPS received by it pro rata to its holders of record of common stock and
AMPS, as applicable, in return for such stockholders' shares in Municipal
Strategy. Such distribution will be accomplished by opening new accounts on
the books of MuniYield in the names of the common and preferred stockholders
of Municipal Strategy and transferring to those stockholder accounts the
MuniYield Common Stock or MuniYield Series F AMPS previously credited on those
books to the accounts of Municipal Strategy. Each newly-opened account on the
books of MuniYield for the previous holders of Municipal Strategy Common Stock
would represent the respective pro rata number of shares of MuniYield Common
Stock (rounded down, in the case of fractional shares, to the next largest
number of whole shares) due such holder of common stock. No fractional shares
of MuniYield Common Stock will be issued. In lieu thereof, MuniYield's
Transfer Agent will aggregate all fractional shares of MuniYield Common Stock
and sell the resulting whole shares on the NYSE for the account of all holders
of fractional interests, and each such holder will be entitled to the pro rata
share of the proceeds from such sale upon surrender of the stock certificates
representing shares of Municipal Strategy Common Stock. Similarly, each
newly-opened account on the books of MuniYield for the previous holders of
Municipal Strategy AMPS would represent the respective pro rata number of
shares of MuniYield Series F AMPS due such holder of AMPS. See "Surrender and
Exchange of Stock Certificates" below for a description of the procedures to
be followed by the stockholders of Municipal Strategy to obtain their
MuniYield Common Stock (and cash in lieu of fractional shares, if any).
Because AMPS are held in "street name" by DTC, all transfers with respect to
AMPS are accomplished by book entry.
Accordingly, as a result of the Reorganization, every holder of Municipal
Strategy Common Stock would own shares of MuniYield Common Stock that (except
for cash payments received in lieu of fractional shares) would have an
aggregate net asset value immediately after the Closing Date equal to the
aggregate net asset value of that stockholder's Municipal Strategy Common
Stock immediately prior to the Closing Date. Since the MuniYield Common Stock
would be issued at net asset value and the shares of Municipal Strategy Common
Stock would be valued at net asset value for the purposes of the exchange, the
interests of common stockholders of neither Fund will be diluted as a result
of the Reorganization. Similarly, since the MuniYield Series F AMPS would be
issued at a liquidation preference and value per share equal to the
liquidation preference and value per share of the AMPS of Municipal Strategy,
the interests of the AMPS stockholders of neither Fund will be diluted as
result of the Reorganization. However, as a result of the Reorganization,
stockholders of both Funds likely will hold a reduced percentage of ownership
in the Combined Fund than he or she held in MuniYield or Municipal Strategy.
Procedure
At separate meetings of the Boards of Directors of Municipal Strategy and
MuniYield, each Board, including all of the Directors who are not "interested
persons" of the applicable Fund, unanimously approved the Agreement and Plan.
The Board of Directors of Municipal Strategy, including all of the Directors
who are not "interested persons" also approved the submission of such
Agreement and Plan to the Municipal Strategy stockholders for approval.
The Board of Directors of MuniYield approved the filing of Articles
Supplementary establishing the powers, rights and preferences of the MuniYield
Series F AMPS in order that they may be distributed to holders of AMPS of
Municipal Strategy as part of the Reorganization.
As a result of such Board approvals, Municipal Strategy has filed this
proxy statement with the Commission soliciting a vote of the Municipal
Strategy stockholders to approve the Reorganization. The costs of such
solicitation will be deducted from the assets of Municipal Strategy as of the
Valuation Time as defined below. A special meeting of Municipal Strategy
stockholders will be held on October 24, 2001. If the stockholders of
Municipal Strategy approve the Reorganization, the Reorganization will take
place as soon as practicable after such approval, provided that the Funds have
obtained prior to that time an opinion of counsel concerning the tax
consequences of the Reorganization as set forth in the Agreement and Plan.
The Board of Directors of Municipal Strategy recommends that the
stockholders of Municipal Strategy approve the Agreement and Plan.
Terms of the Agreement and Plan of Reorganization
The following is a summary of the significant terms of the Agreement and
Plan. This summary is qualified in its entirety by reference to the Agreement
and Plan, attached hereto as Appendix II.
Valuation of Assets and Liabilities. The respective assets of each Fund
will be valued on the business day prior to the Closing Date (the "Valuation
Date"). The valuation procedures are the same for each Fund: the net asset
value per share of the common stock of each Fund will be determined as of the
close of business on the NYSE (generally, 4:00 p.m., Eastern time) on the
Valuation Date (the "Valuation Time"). For the purpose of determining the net
asset value of a share of common stock of each Fund, the value of the
securities held by the issuing Fund plus any cash or other assets (including
interest accrued but not yet received) minus (i) all liabilities (including
accrued expenses) and (ii) the aggregate liquidation value of the outstanding
shares of AMPS of the issuing Fund, is divided by the total number of shares
of common stock of the issuing Fund outstanding at such time. Daily expenses,
including the fees payable to FAM, will accrue on the Valuation Date.
The Municipal Bonds in which each Fund invests are traded primarily in
the over-the-counter markets. In determining net asset value on the Valuation
Date, each Fund will use the valuations of portfolio securities furnished by a
pricing service approved by the Boards of Directors of the Funds. The pricing
service typically values portfolio securities at the bid price or the yield
equivalent when quotations are readily available. Municipal Bonds for which
quotations are not readily available will be valued at fair market value on a
consistent basis as determined by the pricing service using a matrix system to
determine valuations. The Boards of Directors of the Funds have determined in
good faith that the use of a pricing service is a fair method of determining
the valuation of portfolio securities. Positions in financial futures
contracts will be valued on the Valuation Date at closing prices for such
contracts established by the exchange on which they are traded, or if market
quotations are not readily available, will be valued at fair value on a
consistent basis using methods determined in good faith by each Board of
Directors.
Distribution of MuniYield Common Stock and MuniYield Series F AMPS. On
the Closing Date, MuniYield will issue to Municipal Strategy a number of full
shares of MuniYield Common Stock the aggregate net asset value of which will
equal the aggregate net asset value of shares of Municipal Strategy Common
Stock on the Valuation Date. Each holder of Municipal Strategy Common Stock
will receive the number of full shares of MuniYield Common Stock (plus cash in
lieu of fractional shares) corresponding to his or her proportionate interest
in the respective aggregate net asset value of the Municipal Strategy Common
Stock.
On the Closing Date, MuniYield also will issue to Municipal Strategy a
number of shares of MuniYield Series F AMPS, the aggregate liquidation
preference and value of which will equal the aggregate liquidation preference
and value of Municipal Strategy Series A AMPS on the Valuation Date. Each
holder of Municipal Strategy Series A AMPS will receive the number of shares
of MuniYield Series F AMPS corresponding to his or her proportionate interest
in the aggregate liquidation preference and value of the Municipal Strategy
Series A AMPS. No sales charge or fee of any kind will be charged to
stockholders of Municipal Strategy in connection with their receipt of
MuniYield Common Stock or MuniYield Series F AMPS in the Reorganization. No
CDSC will apply to shares of MuniYield Common Stock issued to Municipal
Strategy in the Reorganization, nor will any CDSC be due on the shares of
Municipal Strategy Common Stock in connection with the Reorganization. It is
anticipated that the auction for MuniYield Series F AMPS will be held on
Wednesday. The auction procedures for all of the AMPS are substantially
similar. As a result of the Reorganization, the last dividend period for the
AMPS of Municipal Strategy prior to the Closing Date will be shorter than the
dividend period for such AMPS determined as set forth in the applicable
Articles Supplementary.
Expenses. The expenses of the Reorganization that are directly
attributable to Municipal Strategy and the conduct of its business will be
deducted from the assets of Municipal Strategy as of the Valuation Time. These
expenses are expected to include transfer agent fees, the expenses incurred in
preparing, printing and mailing the proxy materials to be used in connection
with the Meeting, the expenses related to the solicitation of proxies to be
voted at the Meeting and a portion of the expenses incurred in printing the
registration statement on Form N-14 of which this Proxy Statement and
Prospectus is a part (the "N-14 Registration Statement"). FAM has agreed to
bear the expenses of the Reorganization that are directly attributable to
MuniYield and the conduct of its business. The expenses attributable to
MuniYield include fees, if any, of the rating agencies with respect to the
MuniYield Series F AMPS, the costs of printing stock certificates, transfer
agent fees, and a portion of the expenses incurred in printing the N-14
Registration Statement. Certain other expenses of the Reorganization,
including expenses in connection with obtaining an opinion of counsel as to
certain tax matters, the preparation of the Agreement and Plan, legal fees,
stock exchange fees and audit fees, will be borne equally by Municipal
Strategy and by FAM, which has agreed to bear such expenses on behalf of
MuniYield.
As of May 31, 2001, the expenses of the Reorganization attributable to
Municipal Strategy are estimated to be approximately $125,800 and the expenses
of the Reorganization attributable to MuniYield are estimated to be
approximately $95,400.
Required Approvals. Under the Charter of Municipal Strategy (including
Articles Supplementary establishing the powers, rights and preferences of the
Municipal Strategy Series A AMPS) and relevant Maryland law, stockholder
approval of the Agreement and Plan requires the affirmative vote of
stockholders of Municipal Strategy representing more than 50% of the
outstanding shares of Municipal Strategy Common Stock and Municipal Strategy
Series A AMPS, voting together as a single class, and more than 50% of the
outstanding shares of Municipal Strategy Series A AMPS, voting separately as a
class.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of Municipal Strategy and the distribution of shares of MuniYield
Common Stock and MuniYield Series F AMPS to Municipal Strategy stockholders,
in accordance with the foregoing, Municipal Strategy will terminate its
registration under the Investment Company Act and its incorporation under
Maryland law and will withdraw its authority to do business in any state where
it is required to do so.
Amendments and Conditions. The Agreement and Plan may be amended at any
time prior to the Closing Date with respect to any of the terms therein. The
obligations of each Fund pursuant to the Agreement and Plan are subject to
various conditions, including the N-14 Registration Statement being declared
effective by the Commission, approval by the stockholders of Municipal
Strategy as described above, an opinion of counsel being received with respect
to certain tax matters, an opinion of counsel being received as to securities
matters and the continuing accuracy of various representations and warranties
of the Funds being confirmed by the respective parties.
Postponement, Termination. Under the Agreement and Plan, the Board of
Directors of either Fund may cause the Reorganization to be postponed or
abandoned under certain circumstances should such Board determine that it is
in the best interests of the stockholders of its respective Fund to do so. The
Agreement and Plan may be terminated, and the Reorganization abandoned at any
time (whether before or after adoption thereof by the stockholders of either
Fund) prior to the Closing Date, or the Closing Date may be postponed: (i) by
mutual consent of the Boards of Directors of the Funds and (ii) by the Board
of Directors of either Fund if any condition to that Fund's obligations set
forth in the Agreement and Plan has not been fulfilled or waived by such
Board.
Potential Benefits to Stockholders as a Result of the Reorganization
In approving the Reorganization, the Board of Directors of Municipal
Strategy identified certain potential benefits for Municipal Strategy common
stockholders that are likely to result from the Reorganization, including that
(i) Municipal Strategy common stockholders will be invested in a substantially
larger non-diversified, leveraged, closed-end fund with an investment
objective and investment policies substantially similar to Municipal
Strategy's investment objective and policies, (ii) Municipal Strategy common
stockholders will experience lower expenses per share, economies of scale and
greater flexibility in portfolio management, (iii) the Combined Fund will not
pay the administrative fee currently paid by Municipal Strategy, (iv)
Municipal Strategy common stockholders will no longer be subject to the
expenses associated with Municipal Strategy's required yearly prospectus
updates, (v) Municipal Strategy common stockholders will no longer be subject
to the expenses of conducting quarterly tender offers, (vi) Municipal Strategy
common stockholders will no longer be subject to a CDSC that currently applies
upon the sale of shares held for less than three years, and (vii) Municipal
Strategy common stockholders will be able to sell their shares on each day
that the NYSE is open for trading, although any such sales will be made at the
then current market price, which may be at a premium above or a discount from
the Combined Fund's net asset value and may be subject to brokerage
commissions. While Municipal Strategy stockholders may currently sell their
shares at net asset value on a quarterly basis, the Directors believe the
potential benefits of the Reorganization make it in the best interests of
Municipal Strategy and its stockholders.
The Board of Directors of Municipal Strategy also considered that
Municipal Strategy common stockholders should experience an additional benefit
because certain fixed costs, such as the costs of printing stockholder
reports, legal expenses, audit fees, mailing costs and other expenses will be
spread across a larger asset base, resulting in an expense ratio for the
Combined Fund that is lower than Municipal Strategy's current expense ratio.
Due to the larger asset base, the Combined Fund may also experience economies
of scale and greater flexibility in portfolio management.
Although the pro forma total operating expense ratio of the Combined Fund
is not expected to be significantly lower than MuniYield's current operating
expense ratio, MuniYield common stockholders will not be adversely affected by
the Reorganization since FAM has agreed to bear all Reorganization expenses
attributable to MuniYield and MuniYield may otherwise benefit from an increase
in the Combined Fund's level of net assets.
It is not anticipated that the Reorganization will directly benefit the
holders of shares of any series of AMPS of either Fund. However, the
Reorganization will not adversely affect the holders of shares of any series
of AMPS of either Fund. The expenses of the Reorganization will not be borne
by the holders of shares of AMPS of either Fund.
The Boards considered the possible risks and costs of combining the
Funds, and examined the relative credit strength, maturity characteristics,
mix of type and purpose, and yield of the Funds' portfolios of Municipal Bonds
and the costs involved in a transaction such as the Reorganization. The Boards
noted the many similarities between the Funds, including their substantially
similar investment objectives and investment policies, their use of
substantially the same management personnel and their similar portfolios of
Municipal Bonds. The Boards also considered the relative tax positions of the
portfolios of the Funds. As of May 31, 2001, each Fund had net realized
capital losses that, subject to certain limitations, can be shared by the
stockholders of the Combined Fund. Please see "Pro Forma Combined Statement of
Assets and Liabilities." As a result of the Reorganization and subject to
certain limitations, the stockholders of each Fund may benefit from the
ability of the Combined Fund to use the net realized capital losses of the
Funds to offset future net realized capital gains of the Combined Fund, if
any. Based on these factors, among others, the Board of Directors of Municipal
Strategy concluded that the Reorganization will potentially benefit the
stockholders of Municipal Strategy in that it (i) presents no significant
risks that would outweigh the benefits discussed above, (ii) involves minimal
costs (including relatively minor legal, accounting and administrative costs)
and (iii) does not adversely affect the stockholders of Municipal Strategy
Series A AMPS. The Board of Directors of MuniYield concluded that, although
the pro forma total operating expense ratio of the Combined Fund is not
expected to be significantly lower than MuniYield's current operating expense
ratio, (i) MuniYield common stockholders will not be adversely affected by the
Reorganization since (a) FAM has agreed to bear all Reorganization expenses
attributable to MuniYield, and (b) MuniYield may otherwise benefit from an
increase in the Combined Fund's level of net assets, and (ii) does not
adversely affect the stockholders of MuniYield AMPS.
In the past, FAM has voluntarily waived a portion of its advisory fee
and/or reimbursed certain other expenses with respect to Municipal Strategy.
FAM has not waived fees or reimbursed expenses with respect to MuniYield and
it is not anticipated that FAM will waive its advisory fee and/or reimburse
expenses with respect to the Combined Fund on an ongoing basis. Total
annualized operating expense ratios for MuniYield, Municipal Strategy
(excluding advisory fee waivers and/or expense reimbursements) and the
Combined Fund based on their respective average net assets (excluding assets
attributable to AMPS) for the six month period ended April 30, 2001 are
summarized below.
Average Net Assets
(Excluding Assets
Attributable to AMPS)
for the Six Month
Period ended Total Annualized Operating
April 30, 2001 Expense Ratio
-------------- -------------
MuniYield $507,503,509 1.00%
Municipal Strategy $ 81,220,051 2.05%*
Combined Fund** $588,723,560 0.99%
- --------------
* Including fee waivers and/or expense reimbursements applicable to
Municipal Strategy, the total annualized operating expense ratio for
Municipal Strategy would have been 1.90%.
** Assumes that the Reorganization had taken place on April 30, 2001.
Total annualized operating expense ratios for MuniYield, Municipal
Strategy (excluding advisory fee waivers and/or expense reimbursements) and
the Combined Fund based on their respective average net assets (including
assets attributable to AMPS) for the six month period ended April 30, 2001 are
summarized below.
Average Net Assets
(Including Assets
Attributable to AMPS)
for the Six Month
Period ended Total Annualized Operating
April 30, 2001 Expense Ratio
-------------- -------------
MuniYield $757,503,509 0.67%
Municipal Strategy $124,220,051 1.34%*
Combined Fund** $881,723,560 0.66%
- --------------
* Including fee waivers and/or expense reimbursements applicable to
Municipal Strategy, the total annualized operating expense ratio for
Municipal Strategy would have been 1.24%.
** Assumes that the Reorganization had taken place on April 30, 2001.
Although, as indicated above, the pro forma total operating expense ratio
of the Combined Fund is not expected to be significantly lower than
MuniYield's current operating expense ratio, MuniYield stockholders will not
be adversely affected by the Reorganization since FAM has agreed to bear all
Reorganization expenses attributable to MuniYield.
MuniYield may otherwise benefit from an increase in its level of net
assets. It is estimated that the Combined Fund will have net assets in excess
of $860 million upon completion of the Reorganization. A larger asset base
should provide benefits in portfolio management. After the Reorganization, the
Combined Fund should be able to purchase larger amounts of Municipal Bonds at
more favorable prices than either Fund separately and, with this greater
purchasing power, request improvements in the terms of the Municipal Bonds
(e.g., added indenture provisions covering call protection, sinking funds and
audits for the benefit of large holders) prior to purchase.
In approving the Reorganization, the Board of Directors of each Fund
determined that the Reorganization is in the best interests of the
stockholders of that Fund because the Reorganization presents no significant
risks or costs (including legal, accounting and administrative costs) that
would outweigh the potential benefits discussed above and because, with
respect to net asset value, the interests of existing stockholders of that
Fund would not be diluted as a result of the Reorganization.
Surrender and Exchange of Stock Certificates
After the Closing Date, each holder of an outstanding certificate or
certificates formerly representing shares of Municipal Strategy Common Stock
will be entitled to receive, upon surrender of their certificate or
certificates, a certificate or certificates representing the number of shares
of MuniYield Common Stock distributable with respect to such holder's shares
of Municipal Strategy Common Stock, together with cash in lieu of any
fractional shares of common stock. Promptly after the Closing Date, the
transfer agent for MuniYield Common Stock will mail to each holder of
certificates formerly representing shares of Municipal Strategy Common Stock a
letter of transmittal for use in surrendering their certificates for
certificates representing shares of MuniYield Common Stock and cash in lieu of
any fractional shares of common stock.
Shares of AMPS are held in "street name" by DTC, and all transfers will
be accomplished by book entry. Surrender of physical certificates for AMPS is
not required.
If Prior To The Reorganization You Held: After The Reorganization, You Will Hold:
- --------------------------------------- ---------------------------------------
Municipal Strategy Common Stock MuniYield Common Stock
Municipal Strategy Series A AMPS MuniYield Series F AMPS
Please do not send in any stock certificates at this time. Upon
consummation of the Reorganization, Municipal Strategy common stockholders
will be furnished with instructions for exchanging their stock certificates
for MuniYield stock certificates and, if applicable, cash in lieu of
fractional shares of MuniYield Common Stock.
From and after the Closing Date, certificates formerly representing
shares of Municipal Strategy Common Stock will be deemed for all purposes to
evidence ownership of the number of full shares of MuniYield Common Stock
distributable with respect to the shares of Municipal Strategy held before the
Reorganization as described above and as shown in the table above, provided
that, until such stock certificates have been so surrendered, no dividends
payable to the holders of record of Municipal Strategy Common Stock as of any
date subsequent to the Closing Date will be paid to the holders of such
outstanding stock certificates. Dividends payable to holders of record of
shares of MuniYield Common Stock, as of any date after the Closing Date and
prior to the exchange of certificates by any stockholder of Municipal
Strategy, will be paid to such stockholder, without interest, at the time such
stockholder surrenders the stock certificates for exchange.
From and after the Closing Date, there will be no transfers on the stock
transfer books of Municipal Strategy. If, after the Closing Date, certificates
representing shares of Municipal Strategy Common Stock are presented to
MuniYield, they will be canceled and exchanged for certificates representing
MuniYield Common Stock, and cash in lieu of fractional shares of common stock,
if any, distributable with respect to such common stock in the Reorganization.
Tax Consequences of the Reorganization
General. The Reorganization has been structured with the intention that
it qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Each Fund has elected and qualified since
inception for the special tax treatment afforded RICs under the Code, and
MuniYield intends to continue to so qualify after the Reorganization. The
Reorganization is conditioned upon the receipt of an opinion of counsel that
for Federal income tax purposes (i) the transfer of assets by Municipal
Strategy for MuniYield Common Stock and MuniYield Series F AMPS, as described
above, will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and Municipal Strategy and MuniYield each will be
deemed a "party" to a reorganization within the meaning of Section 368(b) of
the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss
will be recognized to Municipal Strategy as a result of the Reorganization or
on the distribution of MuniYield Common Stock and MuniYield Series F AMPS to
the respective stockholders of Municipal Strategy under Section 361(c)(1) of
the Code; (iii) under Section 1032 of the Code, no gain or loss will be
recognized to MuniYield as a result of the Reorganization; (iv) in accordance
with Section 354(a)(1) of the Code, no gain or loss will be recognized to the
stockholders of Municipal Strategy on their respective receipt of MuniYield
Common Stock and MuniYield Series F AMPS in return for their corresponding
shares of Municipal Strategy Common Stock or AMPS (except to the extent that
common stockholders receive cash representing an interest in fractional shares
of MuniYield Common Stock in the Reorganization); (v) in accordance with
Section 362(b) of the Code, the tax basis of the assets of Municipal Strategy
in the hands of MuniYield will be the same as the tax basis of such assets in
the hands of Municipal Strategy immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the MuniYield Common Stock and
MuniYield Series F AMPS received by the stockholders of Municipal Strategy in
the Reorganization will be equal to the tax basis of the Municipal Strategy
Common Stock or AMPS surrendered in return; (vii) in accordance with Section
1223 of the Code, a stockholder's holding period for the MuniYield Common
Stock and MuniYield Series F AMPS will be determined by including the period
for which such stockholder held the Municipal Strategy Common Stock or AMPS
exchanged therefor, provided, that such shares were held as a capital asset;
(viii) in accordance with Section 1223 of the Code, MuniYield's holding period
with respect to the assets of Municipal Strategy transferred will include the
period for which such assets were held by Municipal Strategy; (ix) the payment
of cash to common stockholders of Municipal Strategy in lieu of fractional
shares of MuniYield Common Stock will be treated as though the fractional
shares were distributed as part of the Reorganization and then redeemed by
MuniYield, with the result that such stockholders will have short- or
long-term capital gain or loss to the extent that the cash distribution
differs from the stockholder's basis allocable to the MuniYield fractional
shares; and (x) the taxable year of Municipal Strategy will end on the
effective date of the Reorganization, and pursuant to Section 381(a) of the
Code and regulations thereunder, MuniYield will succeed to and take into
account, subject to limitation, certain tax attributes of Municipal Strategy,
such as earnings and profits, capital loss carryovers and method of
accounting.
As noted in the discussion under "Comparison of the Funds -- Tax Rules
Applicable to the Funds and Their Stockholders," a Fund must distribute
annually at least 90% of its net taxable and tax-exempt income. A distribution
will only be counted for this purpose if it qualifies for the dividends paid
deduction under the Code. In the opinion of Sidley Austin Brown & Wood LLP,
the issuance of MuniYield Series F AMPS pursuant to the Agreement and Plan in
addition to the already existing MuniYield Series A, Series B, Series C,
Series D and Series E AMPS will not cause distributions on any series of
MuniYield AMPS to be treated as preferential dividends ineligible for the
dividends paid deduction. It is possible, however, that the IRS may assert
that, because there are several series of AMPS, distributions on such shares
are preferential under the Code and therefore not eligible for the dividends
paid deduction. If the IRS successfully disallowed the dividends paid
deduction for dividends on the AMPS, MuniYield could lose the special tax
treatment afforded RICs. In this case, dividends on the shares of MuniYield
Common Stock and MuniYield AMPS would not be exempt from Federal income tax.
Additionally, MuniYield would be subject to a Federal alternative minimum tax.
Under Section 381(a) of the Code, MuniYield will succeed to and take into
account certain tax attributes of Municipal Strategy, including, but not
limited to, earnings and profits, any net operating loss carryovers, any
capital loss carryovers and method of accounting. The Code, however, contains
special limitations with regard to the use of net operating losses, capital
losses and other similar items in the context of certain reorganizations,
including tax-free reorganizations pursuant to Section 368(a)(1)(C) of the
Code, which could reduce the benefit of these attributes to MuniYield.
Stockholders should consult their tax advisers regarding the effect of
the Reorganization in light of their individual circumstances. As the
foregoing relates only to Federal income tax consequences, stockholders also
should consult their tax advisers as to the foreign, state and local tax
consequences of the Reorganization.
Regulated Investment Company Status. The Funds have elected and qualified
since inception for taxation as RICs under Sections 851-855 of the Code, and
after the Reorganization MuniYield intends to continue to so qualify.
Capitalization
The following table sets forth as of April 30, 2001 (i) the
capitalization of MuniYield, (ii) the capitalization of Municipal Strategy,
and (iii) the capitalization of the Combined Fund as adjusted to give effect
to the Reorganization.
Capitalization of MuniYield, Municipal Strategy,
and the Combined Fund as of April 30, 2001
(unaudited)
Combined
Municipal Pro Forma Fund
MuniYield Strategy Adjustment as Adjusted(a)
-------------- -------------- ---------------- ------------------
Net Assets:
Net Assets Attributable to
Common Stock....................... $495,408,940 $78,478,891 $(6,833,262) $567,054,569
Net Assets Attributable to AMPS...... $250,000,000 $43,000,000 $293,000,000
-----
Shares Outstanding:
Common Stock......................... 38,482,330 8,871,713 (2,705,008) 44,649,035(b)
AMPS
Series A........................... 1,800 1,720 (1,720) 1,800
Series B........................... 1,800 ------ ----- 1,800
Series C........................... 1,800 ------ ----- 1,800
Series D........................... 1,800 ------ ----- 1,800
Series E........................... 2,800 ------ ----- 2,800
Series F........................... ----- ------ 1,720 1,720(b)
Net Asset Value Per Share:
Common Stock....................... $ 12.87 $ 8.85 ----- $ 12.70(c)
AMPS............................... $ 25,000 $ 25,000 ----- $ 25,000
- --------------
(a) The adjusted balances are presented as if the Reorganization had been
consummated on April 30, 2001 and are for informational purposes only.
Assumes distribution of undistributed net investment income and accrual
of estimated Reorganization expenses of approximately $125,800
attributable to MuniYield. No assurance can be given about how many
shares of MuniYield Common Stock will be received by holders of common
stock of Municipal Strategy on the Closing Date, and the foregoing should
not be relied upon to reflect the number of shares of MuniYield Common
Stock that actually will be received on or after such date.
(b) Assumes the issuance of 6,166,705 shares of MuniYield Common Stock and
one newly created series of AMPS consisting of 1,720 Series F shares, in
return for the net assets of Municipal Strategy. The estimated number of
shares issued was based on the net asset value of the Fund, net of
distributions, on April 30, 2001.
(c) Net Asset Value Per Share of common stock net of Reorganization-related
expenses of $125,800 attributable to MuniYield and distribution of
undistributed net investment income of $6,673,054 for MuniYield and
$34,408 for Municipal Strategy.
INFORMATION CONCERNING THE MEETING
Date, Time and Place of Meeting
The Meeting will be held on October 24, 2001 at the offices of Fund Asset
Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey at 9:30 a.m.,
Eastern time.
Solicitation, Revocation and Use of Proxies
A stockholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of Municipal Strategy or by
voting at the Meeting. Although mere attendance at the Meeting will not revoke
a proxy, a stockholder present at the Meeting may withdraw his or her proxy
and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been superseded or revoked, will be voted at the Meeting in
accordance with the directions on the proxies; if no direction is indicated on
a properly executed proxy, such shares will be voted "FOR" the approval of the
Agreement and Plan.
It is not anticipated that any other matters will be brought before the
Meeting. If, however, any other business properly is brought before the
Meeting, proxies will be voted in accordance with the judgment of the persons
designated on such proxies.
Record Date and Outstanding Shares
Only the stockholders of record of shares of Municipal Strategy Common
Stock and Municipal Strategy Series A AMPS at the close of business on the
Record Date are entitled to vote at the Meeting or any adjournment thereof. At
the close of business on the Record Date, there were ____ shares of Municipal
Strategy Common Stock outstanding and 1,720 shares of Municipal Strategy
Series A AMPS outstanding.
Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the management of Municipal Strategy, no person or
entity owns beneficially 5% or more of the outstanding shares of the Municipal
Strategy Common Stock or Municipal Strategy Series A AMPS as of the Record
Date.
As of the Record Date, the Directors and officers of MuniYield as a group
(11 persons) owned an aggregate of less than 1% of the outstanding shares of
MuniYield Common Stock and owned no MuniYield AMPS.
As of the Record Date, the Directors and officers of Municipal Strategy
as a group (13 persons) owned an aggregate of less than 1% of the outstanding
shares of Municipal Strategy Common Stock and owned no Municipal Strategy
AMPS.
On the Record Date, Mr. Glenn, a Director and an officer of each Fund,
and the other Directors and officers of each Fund owned an aggregate of less
than 1% of the outstanding shares of common stock of ML & Co.
Voting Rights and Required Vote
For purposes of this Proxy Statement and Prospectus, each share of
Municipal Strategy Common Stock and Municipal Strategy Series A AMPS is
entitled to one vote. Approval of the Agreement and Plan requires the approval
of the affirmative vote of stockholders representing (i) a majority of the
outstanding shares of Municipal Strategy Common Stock and Municipal Strategy
Series A AMPS, voting together as a single class, and (ii) a majority of the
outstanding shares of Municipal Strategy Series A AMPS, voting separately as a
class.
For purposes of the Meeting, a quorum consists of a majority of the
outstanding shares of Municipal Strategy's Common Stock and a majority of the
outstanding shares of Municipal Strategy's Series A AMPS. If, by the time
scheduled for the Meeting, a quorum of the applicable Municipal Strategy
stockholders is not present, or if a quorum is present but sufficient votes to
take action upon the Agreement and Plan are not received from the stockholders
of Municipal Strategy, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies from
stockholders. Any such adjournment will require the affirmative vote of a
majority of the shares of Municipal Strategy present in person or by proxy and
entitled to vote at the session of the Meeting to be adjourned. The persons
named as proxies will vote in favor of any such adjournment if they determine
that adjournment and additional solicitation are reasonable and in the
interests of the Municipal Strategy's stockholders. Notice of any such
adjournment is not required to be sent to stockholders.
Appraisal Rights
Under Maryland law, since Municipal Strategy Common Stock and Municipal
Strategy Series A AMPS are not publicly traded, Municipal Strategy
stockholders will be entitled to appraisal rights upon the consummation of the
Reorganization.
Under Maryland law, a holder of Municipal Strategy Common Stock or
Municipal Strategy Series A AMPS desiring to receive payment of the fair value
of their stock (an "objecting stockholder") (i) must file with Municipal
Strategy a written objection to the Reorganization at or before the Meeting,
(ii) must not vote in favor of the Reorganization (although a vote against the
Reorganization is not required), and (iii) must make written demand on
MuniYield for payment of their stock, stating the number and class of shares
for which such stockholder demands payment, within 20 days after the Maryland
Department accepts for filing the Articles of Transfer with respect to the
Reorganization (MuniYield is required promptly to give written notice to all
objecting stockholders of the date that the Articles of Transfer are accepted
for record). A vote against the Reorganization will not be sufficient to
satisfy the requirement of a written demand described in clause (iii). An
objecting stockholder who fails to adhere to this procedure will be bound by
the terms of the Reorganization. An objecting stockholder ceases to have any
rights of a stockholder except the right to receive fair value for their
shares and has no right to receive any dividends or distribution payable to
such holders on a record date after the close of business on the date on which
fair value is to be determined, which, for these purposes, will be the Meeting
date. A demand for payment of fair market value may not be withdrawn, except
upon the consent of MuniYield. Within 50 days after the Articles of Transfer
have been accepted for filing, an objecting stockholder who has not received
payment for his or her shares may petition a court located in Baltimore,
Maryland for an appraisal to determine the fair value of the stock.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus that
are directly attributable to Municipal Strategy will be borne by Municipal
Strategy.
Municipal Strategy likewise will reimburse banks, brokers and others for
their reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of Municipal Strategy Common Stock and Municipal
Strategy Series A AMPS and certain persons that Municipal Strategy may employ
for their reasonable expenses in assisting in the solicitation of proxies from
such beneficial owners of shares of capital stock of Municipal Strategy.
In order to obtain the necessary quorum at the Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of Municipal Strategy. Municipal Strategy has retained Georgeson
Shareholder Communications Inc., 17 State Street, New York, New York 10004 to
aid in the solicitation of proxies, at a cost to be borne by Municipal
Strategy of approximately $____________, plus aggregate out-of-pocket expenses
of approximately $_______.
Broker-dealer firms, including Merrill Lynch, holding Municipal Strategy
shares in "street name" for the benefit of their customers and clients will
request the instructions of such customers and clients on how to vote their
shares on each proposal before the Meeting. With respect to shares of
Municipal Strategy Common Stock, broker-dealer firms, including Merrill Lynch,
will not be permitted to grant voting authority without instructions with
respect to the approval of the Agreement and Plan. Shares of Municipal
Strategy Series A AMPS held in "street name," however, may be voted by
broker-dealer firms without instructions from the broker-dealer's customers
and clients under certain conditions with respect to the approval of the
Agreement and Plan and will be counted for purposes of establishing a quorum
of Municipal Strategy shareholders if no instructions are received one
business day before the Meeting or, if adjourned, one business day before the
day to which the Meeting is adjourned. These conditions include, among others,
that (i) at least 30% of the outstanding Municipal Strategy Series A AMPS have
voted on the Agreement and Plan, (ii) less than 10% of the outstanding
Municipal Strategy Series A AMPS outstanding have voted against the Agreement
and Plan, and (iii) holders of Municipal Strategy Common Stock have voted to
approve the Agreement and Plan. In such instances, the broker-dealer firm will
vote such uninstructed shares of Municipal Strategy Series A AMPS in the same
proportion as the votes cast by all holders of Municipal Strategy Series A
AMPS who voted on the Agreement and Plan. Municipal Strategy will include
shares held of record by broker-dealers as to which such authority has been
granted in its tabulation of the total number of shares present for purposes
of determining whether the necessary quorum of stockholders of Municipal
Strategy exists. Proxies that are returned to Municipal Strategy but that are
marked "abstain" or on which a broker-dealer has declined to vote on any
proposal ("broker non-votes") will be counted as present for the purposes of
determining a quorum. Abstentions and broker non-votes will not be counted as
votes cast. Abstentions and broker non-votes will have the same effect as a
vote against the Agreement and Plan.
This Proxy Statement and Prospectus does not contain all of the
information set forth in the N-14 Registration Statement and the exhibits
relating thereto that MuniYield has filed with the Commission under the
Securities Act of 1933, as amended, and the Investment Company Act, to which
reference is hereby made.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act and in
accordance therewith are required to file reports and other information with
the Commission. Reports, proxy statements, registration statements and other
information filed by MuniYield and Municipal Strategy can be inspected and
copied at the public reference facilities of the Commission in Washington D.C.
and at the New York Regional Office of the Commission at Seven World Trade
Center, New York, New York, 10048. Copies of such materials also can be
obtained by mail from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Washington D.C.
20549, at prescribed rates. The Commission maintains a web site
(http:/www.sec.gov) that contains a prospectus relating to MuniYield Common
Stock, dated November 21, 1991, a prospectus relating to MuniYield AMPS dated
December 18, 1991, a prospectus relating to Municipal Strategy Common Stock,
dated February 27, 2001, a prospectus relating to Municipal Strategy AMPS,
dated February 27, 2001, and a statement of additional information relating to
Municipal Strategy AMPS, dated February 27, 2001 and other information
regarding the Funds. Reports, proxy materials and other information concerning
MuniYield may also be inspected at the offices of the NYSE, 20 Broad Street,
New York, New York 10005.
CUSTODIAN
BONY acts as the custodian for cash and securities of MuniYield and
Municipal Strategy and will serve as custodian for the Combined Fund after the
Reorganization. The principal business address of BONY in such capacity is 90
Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
BONY serves as the transfer agent, dividend disbursing agent and
registrar with respect to the MuniYield Common Stock and AMPS and Municipal
Strategy AMPS, pursuant to a registrar, transfer agency and service agreement
with MuniYield. The principal business address of BONY in such capacity is 101
Barclay Street, New York, New York 10286. It is anticipated that BONY will
continue to provide these services to the Combined Fund after the
Reorganization.
FDS serves as the transfer agent, dividend disbursing agent and registrar
with respect to Municipal Strategy Common Stock, pursuant to a registrar,
transfer agency and service agreement with Municipal Strategy. The principal
business address of FDS in such capacity is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
ACCOUNTING SERVICES PROVIDER
State Street provides certain accounting services for MuniYield and
Municipal Strategy and will provide the same services to the Combined Fund
after the Reorganization. The principal business address of State Street in
such capacity is 500 College Road East, Princeton, New Jersey 08540.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be
passed upon for the Funds by Sidley Austin Brown & Wood LLP, New York, New
York.
EXPERTS
_____________________, independent auditors, have audited the financial
statements and financial highlights of MuniYield and Municipal Strategy as of
October 31, 2000 as set forth in their reports which appear in this Proxy
Statement and Prospectus. The financial statements and financial highlights of
the Funds are included in reliance upon their reports, given on their
authority as experts in accounting and auditing.
_____________________ will serve as the independent auditors for the
Combined Fund after the Reorganization. The principal business address of
_____________________ is ________________, _____________________.
LEGAL PROCEEDINGS
On June 21, 1996, a putative class action titled Jack Green, et al. v.
Fund Asset Management, L.P., et al. was filed in the United States District
Court for the District of Massachusetts. Among the named defendants in the
action are seven of the leveraged closed-end municipal bond funds (including
MuniYield) for which FAM serves as the investment adviser. In addition to the
named defendants, plaintiffs also purport to assert claims against a defendant
class consisting of all other publicly traded, closed-end investment companies
for which FAM serves as investment adviser and which, among other things, have
issued AMPS. The named plaintiffs, who claim to be investors in the seven
named funds, purport to bring the action on behalf of a class consisting of
all holders of the common stock of the subject funds.
Plaintiffs claim, among other things, that the registration statements,
annual reports and other documents filed by the funds with the Commission were
misleading because such documents allegedly failed to disclose that proceeds
arising from the issuance of AMPS would be included in a fund's net assets for
the purposes of calculating the investment advisory fee payable to FAM. In
addition, plaintiffs allege that a conflict of interest existed because it
would always be in the defendants' interest to keep the funds fully leveraged
to maximize the advisory fees and collateral compensation notwithstanding
adverse market conditions. Plaintiffs also allege an additional conflict of
interest arising from the receipt by such affiliates of underwriting
discounts, or other revenues in connection with the sale of the AMPS by the
funds. The complaint also attempted to assert claims under Sections 8(e),
34(b), 36(a) and 36(b) of the Investment Company Act and the common law.
Plaintiffs seek unspecified monetary damages as well as injunctive relief.
On September 17, 1997, defendants moved to dismiss plaintiffs' complaint
on the ground that plaintiffs had failed to state a claim upon which relief
could be granted. On February 23, 1998, the District Court granted defendants'
motion in substantial part and dismissed plaintiffs' claims under Sections
8(e), 34(b) and 36(a) of the Investment Company Act with prejudice, but
declined to dismiss plaintiffs' claims under section 36(b) and state law.
On February 4, 1999, defendants moved to dismiss plaintiffs' state law
claims for breach of fiduciary duty and deceit on the ground that they are
preempted by Section 36(b) of the Investment Company Act. On June 14, 1999,
the District Court granted defendants' motion and dismissed plaintiffs' state
law claims. At the same time, the District Court granted plaintiffs permission
to immediately file an interlocutory appeal to the United States Court of
Appeals for the Third Circuit. On March 16, 2001, the Third Circuit reversed
the District Court's decision and reinstated plaintiffs' state law claims.
On February 5, 2001, while plaintiffs' appeal before the Third Circuit
was still pending, defendants moved in the District Court for summary judgment
as to plaintiffs' remaining federal claim under Section 36(b). On March 16,
2001, plaintiffs cross-moved for partial summary judgment on liability. On
June 5, 2001, the District Court granted defendants' motion for summary
judgment, denied plaintiffs' motion for partial summary judgment, and
dismissed the case in its entirety. In doing so, the Court refused to exercise
supplemental jurisdiction over plaintiffs' remaining (and recently reinstated)
state law claims.
Plaintiffs have filed a Notice of Appeal seeking review of the District
Court's decision before the U.S. Court of Appeals for the Third Circuit.
Defendants believe that the plaintiffs' allegations are without merit and
intend to continue to defend the action vigorously.
FAM has agreed to indemnify the named defendant funds (including
MuniYield) for any liabilities or expenses that they may incur in connection
with this litigation.
STOCKHOLDER PROPOSALS
A stockholder proposal intended to be presented at any subsequent meeting
of stockholders of Municipal Strategy must be received by Municipal Strategy
in a reasonable time before Municipal Strategy begins to print and mail the
proxy solicitation materials to be used in connection with such meeting in
order to be considered in Municipal Strategy's proxy statement and form of
proxy relating to the meeting. Any stockholder who desires to present any
proposal at any subsequent meeting of stockholders of Municipal Strategy,
without including such proposal in Municipal Strategy's proxy statement
relating to the meeting also must send their written proposal to Municipal
Strategy within a reasonable time before the Board of Directors' solicitation
relating to such meeting is to be made. Written proposals should be sent to
the Secretary of Municipal Strategy at the offices of Municipal Strategy.
By Order of the Board of Directors
ALICE A. PELLEGRINO
Secretary
Plainsboro, New Jersey
Dated: September __, 2001
INDEX TO FINANCIAL STATEMENTS
Page
Audited Financial Statements for MuniYield Fund, Inc. for the Year Ended
October 31, 2000.............................................................................................F-2
Unaudited Financial Statements for MuniYield Fund, Inc. for the Six Months
Ended April 30, 2001.........................................................................................F-3
Audited Financial Statements for Merrill Lynch Municipal Strategy Fund, Inc.
for the Year Ended October 31, 2000..........................................................................F-4
Unaudited Financial Statements for Merrill Lynch Municipal Strategy Fund, Inc.
for the Six Months Ended April 30, 2001......................................................................F-5
Pro Forma Unaudited Financial Statements for the Combined Fund as of April 30, 2001.............................F-6
Audited Financial Statements for
MuniYield Fund, Inc.
for the Year Ended October 31, 2000
[To Be Filed By Amendment]
Unaudited Financial Statements for
MuniYield Fund, Inc.
for the Six Months Ended April 30, 2001
[To Be Filed By Amendment]
Audited Financial Statements for
Merrill Lynch Municipal Strategy Fund, Inc.
for the Year Ended October 31, 2000
[To Be Filed By Amendment]
Unaudited Financial Statements for
Merrill Lynch Municipal Strategy Fund, Inc.
for the Six Months Ended April 30, 2001
[To Be Filed By Amendment]
Pro Forma Unaudited Financial Statements for
the Combined Fund
as of April 30, 2001
[To Be Filed By Amendment]
APPENDIX I
INFORMATION PERTAINING TO EACH FUND
General Information Pertaining to Each Fund
Defined Term Fiscal State of Meeting
Fund Used in Appendix I Year End Incorporation Time
- ---- --------------------- ---------- --------------- ----------
MuniYield Fund, Inc..................... MuniYield 10/31 Maryland N/A
Merrill Lynch Municipal Strategy Fund, Inc. Municipal Strategy 10/31 Maryland 9:30 a.m.
Shares of Capital Stock Outstanding
as of the Record Date
-----------------------------------
Fund Common Stock AMPS
- ---- ------------------ ------------
MuniYield............................................................... 10,000
Municipal Strategy...................................................... 1,720
Information Pertaining to Directors of MuniYield
Set forth in the table below is information regarding board of directors
and audit committee meetings held and the aggregate fees and expenses paid by
MuniYield to non-interested Directors during the most recently completed
fiscal year.
Board of Directors Audit Committee
-------------------------------------- -------------------------
# Meetings Annual Fee Per Meeting # Meetings Per Meeting Aggregate Fees
Fund Held* ($)** Fee ($)*** Held* Fee ($)*** and Expenses ($)
- ---- ---------- ---------- ----------- ---------- ----------- ----------------
MuniYield................ 4 227 1,491 4 114 52,397
- ---------------
* Includes meetings held via teleconferencing equipment.
** Each non-interested Director receives an aggregate annual retainer of
$100,000 for his or her services to certain funds advised by Fund Asset
Management, L.P. ("FAM") and its affiliate, Merrill Lynch Investment Managers,
L.P. ("MLIM") ("Affiliate-Advised Funds"). The portion of the annual retainer
allocated to each Affiliate-Advised Fund is determined quarterly based on the
relative net assets of each fund.
*** The fee is payable for each meeting attended in person. A fee is not
paid for telephonic meetings. The annual per meeting fees paid to each
non-interested Director aggregate $60,000 for all Affiliate-Advised Funds for
which the Director serves and are allocated equally among those funds.
Set forth in the table below is information regarding compensation paid
by MuniYield to the non-interested Directors during the most recently
completed fiscal year.
Fund Bodurtha London May Perold Ramo
- ---- -------- ------ --- ------ ----
MuniYield*............ $7,142 $7,142 $7,142 $7,142 $13,779
- ---------------
* No pension or retirement benefits are accrued as part of the expenses
of MuniYield.
Set forth in the table below is information regarding the aggregate
compensation paid by all registered investment companies advised by Fund Asset
Management, L.P. ("FAM") and its affiliate, Merrill Lynch Investment Managers,
L.P. ("MLIM") (collectively, "Affiliate-Advised Funds"), including MuniYield,
to the non-interested Directors for the year ended December 31, 2000.
Aggregate Compensation from Affiliate-Advised
Name of MuniYield Director Funds Paid to Directors($)*
---------------------------------------------
James H. Bodurtha....................................... $132,250
Herbert I. London....................................... $132,250
Joseph L. May........................................... $132,250
Andre F. Perold......................................... $132,250
Roberta Cooper Ramo..................................... $169,000
- ---------------
* The Directors serve on the boards of Affiliate-Advised Funds as follows:
Mr. Bodurtha (30 registered investment companies consisting of 42
portfolios); Mr. London (30 registered investment companies consisting of
42 portfolios); Mr. May (30 registered investment companies consisting of
42 portfolios); Mr. Perold (30 registered investment companies consisting
of 42 portfolios); and Ms. Ramo (30 registered investment companies
consisting of 42 portfolios).
Information Pertaining to Directors of Municipal Strategy
Set forth in the table below is information regarding board of
directors and Nominating and Oversight Committee (the "Audit Committee")
meetings held and the aggregate fees and expenses paid by Municipal Strategy
to non-interested Directors during the most recently completed fiscal year.
Board of Directors Audit Committee
-------------------------------- ------------------------------------
Per Per Aggregate
# Meetings Annual Fee Meeting # Meetings Meeting Fees and
Fund Held* ($)** Fee ($)*** Held* Fee ($)+ Expenses
- ---- ---------- ---------- ---------- ---------- -------- ---------
Municipal Strategy.... 4 4,400 200 4 200*** 31,324
- ---------------
* Includes meetings held via teleconferencing equipment.
** The Annual Fee is the combined fee for the Board of Directors and its Nominating and Oversight Committee (the
"Audit Committee").
*** The Co-Chairmen of the Audit Committee each receive an additional annual fee of $1,000.
+ The fee is payable for each meeting attended in person. A fee is not paid for telephonic meetings.
Set forth in the table below is information regarding compensation
paid by Municipal Strategy to the non-interested Directors during the most
recently completed fiscal year.
Fund Forbes++ Montgomery Reilly++ Ryan Suddarth+ West Zinbarg+
- ---- -------- ---------- -------- ---- --------- ---- --------
Municipal
Strategy*............ $6,400 $5,400 $6,400 $5,400 $1,275 $5,400 $1,275
- ---------------
* No pension or retirement benefits are accrued as part of the expenses of Municipal Strategy.
+ Mr. Suddarth and Mr. Zinbarg were elected Directors of the Fund on July 10, 2000.
++ Effective July 2001, Mr. Forbes and Mr. Reilly are Co-Chairmen of the Audit Committee, each receiving
$1,000 annually for serving in such position.
Set forth in the table below is information regarding the aggregate
compensation paid by all Affiliate-Advised Funds, including Municipal
Strategy, to the non-interested Directors for the year ended December 31,
2000.
Aggregate Compensation from Affiliate-Advised Funds
Name of Municipal Strategy Director Paid to Directors($)(*)
- ----------------------------------- ---------------------------------------------------
Ronald W. Forbes........................................ $295,008
Cynthia A. Montgomery................................... $264,008
Charles C. Reilly....................................... $352,050
Kevin A. Ryan........................................... $264,008
Roscoe S. Suddarth...................................... $193,977
Richard R. West......................................... $373,000
Edward D. Zinbarg....................................... $242,435
- ---------------
* The Directors serve on the boards of Affiliate-Advised Funds as follows: Mr. Forbes (51 registered investment companies
consisting of 58 portfolios); Ms. Montgomery (51 registered investment companies consisting of 58 portfolios); Mr.
Reilly (51 registered investment companies consisting of 58 portfolios); Mr. Ryan (51 registered investment companies
consisting of 58 portfolios); Mr. Suddarth (51 registered investment companies consisting of 58 portfolios); Mr. West
(66 registered investment companies consisting of 72 portfolios); and Mr. Zinbarg (51 registered investment companies
consisting of 58 portfolios).
Information Pertaining to Directors of MuniYield and Municipal Strategy
Director Since
----------------------------------------
Name, Address and Biography Age MuniYield Municipal Strategy
- --------------------------- --- --------- ------------------
James H. Bodurtha................................. 57 1995 N/A
36 Popponesset Road, Cotuit, Massachusetts
02635. Director and Executive Vice President,
The China Business Group, Inc. since 1996;
Chairman and Chief Executive Officer, China
Enterprise Management Corporation from 1993
to 1996; Chairman, Berkshire Corporation
since 1980; Partner, Squire, Sanders &
Dempsey from 1980 to 1993.
Ronald W. Forbes................................. 60 N/A 1996
1400 Washington Avenue, Albany, New York
12222. Professor Emeritus of Finance, School
of Business, State University of New York at
Albany since 2000 and Professor thereof from
1989 to 2000; International Consultant, Urban
Institute, Washington, D.C. since 1999.
Terry K. Glenn................................... 60 1999 1999
P.O. Box 9011, Princeton, New Jersey
08543-9011. Executive Vice President of FAM
and its affiliate MLIM (which terms as used
herein include their corporate predecessors)
since 1983; Executive Vice President and
Director of Princeton Services, Inc.
("Princeton Services") since 1993; President
of FAM Distributors, Inc. ("FAMD") since 1986
and Director thereof since 1991; President of
Princeton Administrators, L.P. ("Princeton
Administrators") since 1988; Director of
Financial Data Services, Inc. ("FDS") since
1985.
Herbert I. London................................. 62 1991 N/A
2 Washington Square Village, New York, New
York 10012. John M. Olin Professor of
Humanities, New York University since 1993
and Professor since 1980; President, Hudson
Institute since 1997 and Trustee thereof
since 1980; Dean, Gallatin Division of New
York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985; Director,
Damon Corp. from 1991 to 1995; Overseer,
Center for Naval Analyses from 1983 to 1993;
Limited Partner, Hypertech LP since 1996.
Director Since
----------------------------------------
Name, Address and Biography Age MuniYield Municipal Strategy
- --------------------------- --- --------- ------------------
Joseph L. May...................................... 71 1991 N/A
424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice
since 1984; President, May and Athens Hosiery
Mills Division, Wayne-Gossard Corporation
from 1954 to 1983; Vice President,
Wayne-Gossard Corporation from 1972 to 1983;
Chairman, The May Corporation (personal
holding company) from 1972 to 1983; Director,
Signal Apparel Co. from 1972 to 1989.
Cynthia A. Montgomery............................ 48 N/A 1996
Harvard Business School, Soldiers Field Road,
Boston, Massachusetts 02163. Professor,
Harvard Business School since 1989; Associate
Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985
to 1989; Assistant Professor, Graduate School
of Business Administration, The University of
Michigan from 1979 to 1985; Director
UnumProvident Corporation since 1990 and
Director of Newell Rubbermaid Inc. since
1995.
Andre F. Perold.................................. 48 1991 N/A
Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Harvard Business School:
George Gund Professor of Finance and Banking
since 2000, Finance Area Chair since 1996,
Sylvan C. Coleman Professor of Financial
Management from 1993 to 2000; Trustee, The
Common Fund since 1989; Director, Genbel
Securities Limited and Gensec Bank since
1999; Director, Gensec Asset Management since
2000; Director, Bulldogresearch.com since
2000; Director, Stockback.com since 2000;
Director, Quantec Limited from 1991 to 1999;
Director, TIBCO from 1994 to 1996.
Director Since
----------------------------------------
Name, Address and Biography Age MuniYield Municipal Strategy
- --------------------------- --- --------- ------------------
Roberta Cooper Ramo.............................. 58 1999 N/A
P.O. Box 2168, 500 Fourth Street, N.W.,
Albuquerque, New Mexico 87103. Shareholder,
Modrall, Sperling, Roehl, Harris & Sisk, P.A.
since 1993; President, American Bar
Association from 1995 to 1996 and Member of
the Board of Governors thereof from 1994 to
1997; Partner, Poole, Kelly & Ramo, Attorneys
at Law, P.C. from 1977 to 1993; Director,
Coopers, Inc. since 1999; Director, United
New Mexico Bank (now Wells Fargo) from 1983
to 1988; Director, First National Bank of New
Mexico (now First Security) from 1975 to
1976.
Charles C. Reilly................................ 69 N/A 1996
9 Hampton Harbor Road, Hampton Bays, New York
11946. Self-employed financial consultant
since 1990; President and Chief Investment
Officer of Verus Capital, Inc. from 1979 to
1990; Senior Vice President of Arnhold and S.
Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate
School of Business from 1990 to 1991; Adjunct
Professor, Wharton School, University of
Pennsylvania from 1989 to 1990; Partner,
Small Cities Cable Television from 1986 to
1997.
Kevin A. Ryan.................................... 68 N/A 1996
127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02467. Founder and currently
Director Emeritus of The Boston University
Center for the Advancement of Ethics and
Character and Director thereof from 1989
until 1999; Professor from 1982 to 1999 and
currently Professor Emeritus of Education at
Boston University; formerly taught on the
faculties of The University of Chicago,
Stanford University and Ohio State
University.
Director Since
----------------------------------------
Name, Address and Biography Age MuniYield Municipal Strategy
- --------------------------- --- --------- ------------------
Roscoe S. Suddarth............................... 65 N/A 2000
7403 MacKenzie Court, Bethesda, Maryland
20817. President, Middle East Institute, from
1995 to 2001; Foreign Service Officer, United
States Foreign Service, from 1961 to 1995;
Career Minister, from 1989 to 1995; U.S.
Ambassador to the Hashemite Kingdom of
Jordan, from 1987 to 1990; Deputy Inspector
General, U.S. Department of State, from 1991
to 1994
Richard R. West.................................. 63 N/A 1996
Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, Dean from 1984 to 1993,
and currently Dean Emeritus of New York
University, Leonard N. Stern School of
Business Administration; Director of Bowne &
Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding
company) and Alexander's Inc. (real estate
company).
Edward D. Zinbarg................................ 66 N/A 2000
5 Hardwell Road, Short Hills, New Jersey
07078-2117. Self-employed financial
consultant since 1994; Executive Vice
President of The Prudential Insurance Company
of America from 1988 to 1994; former Director
of Prudential Reinsurance Company and former
Trustee of the Prudential Foundation.
Information Pertaining to Officers of MuniYield and Municipal Strategy
Set forth in the table below is information about the officers of
MuniYield and Municipal Strategy.
Officer Since
------------------------------------
Name, Address and Biography* Age Office MuniYield Municipal Strategy
- --------------------------- --- ------ --------- ------------------
Terry K. Glenn................................... 60 President 1991** 1995**
Executive Vice President of MLIM and FAM since
1983; Executive Vice President and Director of
Princeton Services since 1993; President of FAMD
since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P. since
1988; Director of FDS since 1985.
Vincent R. Giordano.............................. 56 Senior Vice 1991 1995
Managing Director of MLIM since 2001; Senior Vice President
President of FAM and MLIM from 1984 to 2000;
Senior Vice President of Princeton Services since
1993.
Kenneth A. Jacob................................. 50 Vice 1991 1995
First Vice President of MLIM since 1997; Vice President
President of MLIM from 1984 to 1997; Vice
President of FAM since 1984.
Donald C. Burke.................................. . 40 Vice 1993 1995
First Vice President of MLIM and FAM since 1997 President;
and Treasurer thereof since 1999; Senior Vice Treasurer
President and Treasurer of Princeton Services 1999
1999 since 1999; Vice President of FAMD since
1999; Vice President of MLIM from 1990 to 1997;
Director of Taxation of MLIM since 1990.
John M. Loffredo, CFA............................ 37 Vice N/A 1997
First Vice President of MLIM since 1997; Vice t President
President of MLIM from 1991 to 1997.
Roberto W. Roffo.................................. 35 Vice 2000 2000
Vice President of MLIM since 1996 and a Portfolio President
Manager thereof since 1992.
Alice A. Pellegrino............................... 41 Secretary 1999 2001
Vice President of MLIM since 1999; Attorney
associated with MLIM since 1997; Associate with
Kirkpatrick & Lockhart LLP from 1992 to 1997.
- -----------------
* The address of each officer is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
** Mr. Glenn was elected President of each Fund in 1999. Prior to that he served as Executive Vice President of each Fund.
APPENDIX II
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made
as of the ______ day of ____________, 2001, by and between Merrill Lynch
Municipal Strategy Fund, Inc., a Maryland corporation ("Municipal Strategy"),
and MuniYield Fund, Inc., a Maryland corporation ("MuniYield"). Municipal
Strategy and MuniYield are sometimes referred to herein collectively as the
"Funds" and individually as a "Fund," as the context requires.
The reorganization will constitute the following:
(1) the acquisition by MuniYield of substantially all of the assets,
and the assumption by MuniYield of substantially all of the liabilities of
Municipal Strategy in return solely for an equal aggregate value of newly
issued full shares of (A) common stock, with a par value of $0.10 per share,
of MuniYield ("MuniYield Common Stock") and (B) auction market preferred stock
("AMPS") of MuniYield, with a par value of $0.10 per share and a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared), designated Series F
("MuniYield Series F AMPS"), and
(2) the subsequent distribution by Municipal Strategy to Municipal
Strategy stockholders of (A) all of the full shares MuniYield Common Stock
received by Municipal Strategy in return for Municipal Strategy stockholders'
shares of common stock, with a par value of $0.10 per share, including shares
of common stock of Municipal Strategy representing the Dividend Reinvestment
Plan ("DRIP") shares held in the book deposit accounts of the holders of
common stock of Municipal Strategy ("Municipal Strategy Common Stock") (plus
cash in lieu of fractional shares), and (B) all of the MuniYield Series F AMPS
received by Municipal Strategy in return for Municipal Strategy stockholders'
shares of AMPS, with a par value of $0.10 per share and a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared), designated Series A
("Municipal Strategy AMPS");
all upon and subject to the terms hereinafter set forth (collectively, the
"Reorganization").
In the course of the Reorganization, MuniYield Common Stock and
MuniYield Series F AMPS will be distributed to the stockholders of Municipal
Strategy as follows:
(1) each holder of Municipal Strategy Common Stock will be entitled
to receive a number of full shares of MuniYield Common Stock, plus cash in
lieu of fractional shares, equal to the aggregate net asset value of Municipal
Strategy Common Stock owned by such stockholder on the Closing Date (as
defined in Section 7(a) below); and (2) each holder of Municipal Strategy AMPS
will be entitled to receive a number of shares of MuniYield Series F AMPS
equal to the aggregate liquidation preference (and aggregate value) of the
Municipal Strategy AMPS owned by such stockholder on the Closing Date.
It is intended that the Reorganization described in this Agreement
shall be a reorganization within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended (the "Code"), and any successor
provision.
Prior to the Closing Date, Municipal Strategy shall declare a
dividend or dividends which, together with all such previous dividends, shall
have the effect of distributing to its stockholders all of its respective net
investment company taxable income to and including the Closing Date, if any
(computed without regard to any deduction for dividends paid), and all of its
net capital gain, if any, realized to and including the Closing Date. In this
regard and in connection with the Reorganization, the last dividend period for
the Municipal Strategy AMPS prior to the Closing Date may be shorter than the
dividend period for such AMPS determined as set forth in the Articles
Supplementary to Municipal Strategy's Articles of Incorporation establishing
the powers, rights and preferences of the Municipal Strategy AMPS.
Articles Supplementary to MuniYield's Articles of Incorporation
establishing the powers, rights and preferences of the MuniYield Series F AMPS
will have been filed with the State Department of Assessments and Taxation of
Maryland (the "Maryland Department") prior to the Closing Date.
As promptly as practicable after the consummation of the
Reorganization, Municipal Strategy shall be dissolved in accordance with the
laws of the State of Maryland and will terminate its registration under the
Investment Company Act of 1940, as amended (the "1940 Act").
AGREEMENT
---------
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, each Fund hereby agrees as follows:
1. Representations and Warranties of MuniYield.
MuniYield represents and warrants to, and agrees with, Municipal
Strategy that:
(a) MuniYield is a corporation duly organized, validly existing and
in good standing in conformity with the laws of the State of Maryland, and has
the power to own all of its assets and to carry out this Agreement. MuniYield
has all necessary Federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) MuniYield is duly registered under the 1940 Act as a
non-diversified, closed-end management investment company (File No.
811-06435), and such registration has not been revoked or rescinded and is in
full force and effect. MuniYield has elected and qualified for the special tax
treatment afforded regulated investment companies ("RICs") under Sections
851-855 of the Code at all times since its inception and intends to continue
to so qualify until consummation of the Reorganization and thereafter.
(c) Municipal Strategy has been furnished with MuniYield's Annual
Report to Stockholders for the fiscal year ended October 31, 2000, and the
audited financial statements appearing therein, having been examined by
Deloitte & Touche LLP, independent public accountants, fairly present the
financial position of MuniYield as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(d) Municipal Strategy has been furnished with MuniYield's
Semi-Annual Report to Stockholders for the period ended April 30, 2001, and
the unaudited financial statements appearing therein, fairly present the
financial position of MuniYield as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(e) An unaudited statement of assets, liabilities and capital of
MuniYield and an unaudited schedule of investments of MuniYield, each as of
the Valuation Time (as defined in Section 3(d) of this Agreement), will be
furnished to Municipal Strategy, at or prior to the Closing Date for the
purpose of determining the number of shares of MuniYield Common Stock and
MuniYield Series F AMPS to be issued pursuant to Section 4 of this Agreement;
each will fairly present the financial position of MuniYield as of the
Valuation Time in conformity with generally accepted accounting principles
applied on a consistent basis.
(f) MuniYield has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary
action of its Board of Directors, and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(g) There are no material legal, administrative or other
proceedings pending or, to the knowledge of MuniYield, threatened against it
which assert liability on the part of MuniYield or which materially affect its
financial condition or its ability to consummate the Reorganization. MuniYield
is not charged with or, to the best of its knowledge, threatened with any
violation or investigation of any possible violation of any provisions of any
Federal, state or local law or regulation or administrative ruling relating to
any aspect of its business.
(h) MuniYield is not obligated under any provision of its Articles
of Incorporation, as amended, or its by-laws, as amended, or a party to any
contract or other commitment or obligation, and is not subject to any order or
decree which would be violated by its execution of or performance under this
Agreement, except insofar as the Funds have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation as
a condition precedent to the Reorganization.
(i) There are no material contracts outstanding to which MuniYield
is a party that have not been disclosed in the N-14 Registration Statement (as
defined in subsection (l) below) or will not otherwise be disclosed to
Municipal Strategy prior to the Valuation Time.
(j) MuniYield has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets,
liabilities and capital referred to above, those incurred in the ordinary
course of its business as an investment company since April 30, 2001; and
those incurred in connection with the Reorganization. As of the Valuation
Time, MuniYield will advise Municipal Strategy in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the ordinary
course of business, existing or accrued as of such time.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MuniYield of the
Reorganization, except such as may be required under the Securities Act of
1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act") and the 1940 Act or state securities laws (which term
as used herein shall include the laws of the District of Columbia and Puerto
Rico).
(l) The registration statement filed by MuniYield on Form N-14
which includes the proxy statement of Municipal Strategy with respect to the
transactions contemplated herein and the prospectus of MuniYield relating to
the MuniYield Common Stock and MuniYield Series F AMPS to be issued pursuant
to this Agreement, (the "Proxy Statement and Prospectus"), and any supplement
or amendment thereto or to the documents therein (as amended or supplemented,
the "N-14 Registration Statement"), on its effective date, at the time of the
stockholder's meeting of Municipal Strategy referred to in Section 6(a) of
this Agreement and at the Closing Date, insofar as it relates to MuniYield (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; and the Proxy
Statement and Prospectus included therein did not or will not contain any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by MuniYield for
use in the N-14 Registration Statement as provided in Section 6(e) of this
Agreement.
(m) MuniYield is authorized to issue 200,000,000 shares of capital
stock, of which 1,800 shares have been designated as Series A AMPS, 1,800
shares have been designated as Series B AMPS, 1,800 shares have been
designated as Series C AMPS, 1,800 shares have been designated as Series D
AMPS and 2,800 shares have been designated as Series E AMPS, (the Series A
AMPS of MuniYield, the Series B AMPS of MuniYield, the Series C AMPS of
MuniYield, the Series D AMPS of MuniYield and the Series E AMPS of MuniYield
being collectively referred to herein as the "MuniYield AMPS"), each with a
par value of $0.05, and 199,990,000 shares have been designated as common
stock, par value $0.10 per share; each outstanding share of which is fully
paid and nonassessable and has full voting rights.
(n) The shares of MuniYield Common Stock and MuniYield Series F
AMPS to be issued to Municipal Strategy pursuant to this Agreement will have
been duly authorized and, when issued and delivered pursuant to this
Agreement, will be legally and validly issued and will be fully paid and
nonassessable and will have full voting rights, and no stockholder of
MuniYield will have any preemptive right of subscription or purchase in
respect thereof.
(o) At or prior to the Closing Date, the MuniYield Common Stock to
be transferred to Municipal Strategy for distribution to the stockholders of
Municipal Strategy on the Closing Date will be duly qualified for offering to
the public in all states of the United States in which the sale of shares of
Municipal Strategy presently are qualified, and there will be a sufficient
number of such shares registered under the 1933 Act and, as may be necessary,
with each pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Closing Date, the shares of MuniYield
Series F AMPS to be transferred to Municipal Strategy on the Closing Date will
be duly qualified for offering to the public in all states of the United
States in which the sale of Municipal Strategy AMPS presently are qualified,
and there are a sufficient number of MuniYield Series F AMPS registered under
the 1933 Act and with each pertinent state securities commission to permit the
transfers contemplated by this Agreement to be consummated.
(q) At or prior to the Closing Date, MuniYield will have obtained
any and all regulatory, Director and stockholder approvals necessary to issue
the MuniYield Common Stock and MuniYield Series F AMPS to Municipal Strategy.
2. Representations and Warranties of Municipal Strategy.
Municipal Strategy represents and warrants to, and agrees with,
MuniYield that:
(a) Municipal Strategy is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. Municipal Strategy has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
(b) Municipal Strategy is duly registered under the 1940 Act as a
continuously offered, non-diversified, closed-end management investment
company (File No. 811-07203), and such registration has not been revoked or
rescinded and is in full force and effect. Municipal Strategy has elected and
qualified for the special tax treatment afforded RICs under Sections 851-855
of the Code at all times since its inception, and intends to continue to so
qualify through its taxable year ending upon liquidation.
(c) As used in this Agreement, the term "Municipal Strategy
Investments" shall mean (i) the investments of Municipal Strategy shown on the
schedule of its investments as of the Valuation Time furnished to MuniYield;
and (ii) all other assets owned by Municipal Strategy or liabilities incurred
as of the Valuation Time.
(d) Municipal Strategy has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(e) MuniYield has been furnished with Municipal Strategy's Annual
Report to Stockholders for the fiscal year ended October 31, 2000, and the
audited financial statements appearing therein, having been audited by
Deloitte & Touche LLP, independent auditors, fairly present the financial
position of Municipal Strategy as of the respective dates indicated, in
conformity with accounting principles generally accepted in the United States
of America applied on a consistent basis.
(f) MuniYield has been furnished with Municipal Strategy's
Semi-Annual Report to Stockholders for the period ended April 30, 2001 and the
unaudited financial statements appearing therein, fairly present the financial
position of Municipal Strategy as of the respective dates indicated, in
conformity with generally accepted accounting principles applied on a
consistent basis.
(g) An unaudited statement of assets, liabilities and capital of
Municipal Strategy and an unaudited schedule of investments of Municipal
Strategy, each as of the Valuation Time, will be furnished to MuniYield at or
prior to the Closing Date for the purpose of determining the number of shares
of MuniYield Common Stock and MuniYield Series F AMPS to be issued to
Municipal Strategy pursuant to Section 4 of this Agreement; each will fairly
present the financial position of Municipal Strategy as of the Valuation Time
in conformity with generally accepted accounting principles applied on a
consistent basis.
(h) There are no material legal, administrative or other
proceedings pending or, to the knowledge of Municipal Strategy, threatened
against it which assert liability on the part of Municipal Strategy or which
materially affect its financial condition or its ability to consummate the
Reorganization. Municipal Strategy is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which Municipal
Strategy is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to MuniYield prior to the
Valuation Time.
(j) Municipal Strategy is not obligated under any provision of its
Articles of Incorporation, as amended, or its by-laws, as amended, or a party
to any contract or other commitment or obligation, and is not subject to any
order or decree which would be violated by its execution of or performance
under this Agreement, except insofar as the Funds have mutually agreed to
amend such contract or other commitment or obligation to cure any potential
violation as a condition precedent to the Reorganization.
(k) Municipal Strategy has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since April 30, 2001
and those incurred in connection with the Reorganization. As of the Valuation
Time, Municipal Strategy will advise MuniYield in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the ordinary
course of business, existing or accrued as of such time.
(l) Municipal Strategy has filed, or has obtained extensions to
file, all Federal, state and local tax returns which are required to be filed
by it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Closing Date
occurs. All tax liabilities of Municipal Strategy have been adequately
provided for on its books, and no tax deficiency or liability of Municipal
Strategy has been asserted and no question with respect thereto has been
raised by the Internal Revenue Service or by any state or local tax authority
for taxes in excess of those already paid, up to and including the taxable
year in which the Closing Date occurs.
(m) At both the Valuation Time and the Closing Date, Municipal
Strategy will have full right, power and authority to sell, assign, transfer
and deliver the Municipal Strategy Investments. At the Closing Date, subject
only to the obligation to deliver the Municipal Strategy Investments as
contemplated by this Agreement, Municipal Strategy will have good and
marketable title to all of the Municipal Strategy Investments, and MuniYield
will acquire all of the Municipal Strategy Investments free and clear of any
encumbrances, liens or security interests and without any restrictions upon
the transfer thereof (except those imposed by the Federal or state securities
laws and those imperfections of title or encumbrances as do not materially
detract from the value or use of the Municipal Strategy Investments or
materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Municipal Strategy
of the Reorganization, except such as may be required under the 1933 Act, the
1934 Act, the 1940 Act or state securities laws.
(o) The N-14 Registration Statement, on its effective date, at the
time of the stockholder's meeting of Municipal Strategy referred to in Section
6(a) of this Agreement and on the Closing Date, insofar as it relates to
Municipal Strategy (i) complied or will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules
and regulations thereunder, and (ii) did not or will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading; and
the Proxy Statement and Prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Municipal
Strategy for use in the N-14 Registration Statement as provided in Section
6(e) of this Agreement.
(p) Municipal Strategy is authorized to issue 200,000,000 shares
of capital stock, of which 8,000 shares have been designated as Series A AMPS,
8,000 shares have been designated as Series B AMPS, 8,000 shares have been
designated as Series C AMPS, 8,000 shares have been designated as Series D
AMPS, 8,000 shares have been designated as Series E AMPS and 199,960,000
shares have been designated as common stock, par value $.10 per share; each
outstanding share of which is fully paid and nonassessable and has full voting
rights. Series A AMPS are the only issued and outstanding AMPS of Municipal
Strategy.
(q) All of the issued and outstanding shares of Municipal Strategy
Common Stock and Municipal Strategy AMPS were offered for sale and sold in
conformity with all applicable Federal and state securities laws.
(r) The books and records of Municipal Strategy made available to
MuniYield and/or its counsel are substantially true and correct and contain no
material misstatements or omissions with respect to the operations of
Municipal Strategy.
(s) Municipal Strategy will not sell or otherwise dispose of any
of the shares of MuniYield Common Stock or MuniYield Series F AMPS to be
received in the Reorganization, except in distribution to the stockholders of
Municipal Strategy, as provided in Section 3 of this Agreement.
3. The Reorganization.
(a) Subject to receiving the requisite approvals of the
stockholders of each Fund, and to the other terms and conditions contained
herein, Municipal Strategy agrees to convey, transfer and deliver to MuniYield
and MuniYield agrees to acquire from Municipal Strategy on the Closing Date,
all of the Municipal Strategy Investments (including interest accrued as of
the Valuation Time on debt instruments) and assume substantially all of the
liabilities of Municipal Strategy in return solely for that number of full
shares of MuniYield Common Stock and MuniYield Series F AMPS provided in
Section 4 of this Agreement.
Pursuant to this Agreement, as soon as practicable after the
Closing Date Municipal Strategy will distribute all of the full shares of
MuniYield Common Stock (plus cash in lieu of fractional shares) and MuniYield
Series F AMPS received by it to its stockholders in return for their shares of
Municipal Strategy Common Stock and Municipal Strategy AMPS, respectively.
Such distributions shall be accomplished by the opening of stockholder
accounts on the stock ledger records of MuniYield in the amounts due the
stockholders of Municipal Strategy based on their holdings in Municipal
Strategy as of the Valuation Time.
(b) Prior to the Closing Date, Municipal Strategy shall declare a
dividend or dividends which, together with all such previous dividends, shall
have the effect of distributing to its stockholders all of its net investment
company taxable income to and including the Closing Date, if any (computed
without regard to any deduction for dividends paid), and all of their net
capital gain, if any, realized to and including the Closing Date. In this
regard and in connection with the Reorganization, the last dividend period for
Municipal Strategy AMPS prior to the Closing Date may be shorter than the
dividend period for such AMPS determined as set forth in the Articles
Supplementary.
(c) Municipal Strategy will pay or cause to be paid to MuniYield
any interest Municipal Strategy receives on or after the Closing Date with
respect to any of the Municipal Strategy Investments transferred to MuniYield
hereunder.
(d) The Valuation Time shall be 4:00 p.m., Eastern time, on
[______o_______], 2001, or such earlier or later day and time as may be
mutually agreed upon in writing (the "Valuation Time").
(e) Recourse for liabilities assumed from Municipal Strategy by
MuniYield in the Reorganization will be limited to the net assets of Municipal
Strategy acquired by MuniYield. The known liabilities of Municipal Strategy,
as of the Valuation Time, shall be confirmed in writing to MuniYield pursuant
to Sections 2(k) of this Agreement.
(f) The Funds will jointly file Articles of Transfer with the
Maryland Department and any other such instrument as may be required by the
State of Maryland to effect the transfer of the Municipal Strategy
Investments.
(g) Municipal Strategy will be dissolved following the Closing
Date by filing Articles of Dissolution with the Maryland Department.
(h) MuniYield will file with the Maryland Department Articles
Supplementary to its Articles of Incorporation establishing the powers, rights
and preferences of the MuniYield Series F AMPS prior to the closing of the
Reorganization.
(i) As promptly as practicable after the liquidation of Municipal
Strategy pursuant to the Reorganization, Municipal Strategy shall terminate
its registration under the 1940 Act.
4. Issuance and Valuation of MuniYield Common Stock and MuniYield
Series F AMPS in the Reorganization.
Full shares of MuniYield Common Stock and MuniYield Series F AMPS of
an aggregate net asset value or liquidation preference, as the case may be,
equal (to the nearest one ten thousandth of one cent) to the value of the
assets of Municipal Strategy acquired in the Reorganization determined as
hereinafter provided, reduced by the amount of liabilities of Municipal
Strategy assumed by MuniYield in the Reorganization, shall be issued by
MuniYield to Municipal Strategy in return for such assets of Municipal
Strategy. MuniYield will issue to Municipal Strategy (a) a number of shares of
MuniYield Common Stock the aggregate net asset value of which will equal the
aggregate net asset value of the shares of Municipal Strategy Common Stock,
determined as set forth below, and (b) a number of shares of MuniYield Series
F AMPS, the aggregate liquidation preference and value of which will equal the
aggregate liquidation preference and value of Municipal Strategy AMPS,
determined as set forth below.
The net asset value of each Fund and the liquidation preference and
value of the AMPS of each Fund shall be determined as of the Valuation Time in
accordance with the procedures described in the N-14 Registration Statement to
be filed by MuniYield in connection with the Reorganization and no formula
will be used to adjust the net asset value so determined of either Fund to
take into account differences in realized and unrealized gains and losses.
Values in all cases shall be determined as of the Valuation Time. The value of
the Municipal Strategy Investments to be transferred to MuniYield shall be
determined by MuniYield pursuant to the procedures utilized by MuniYield in
valuing its own assets and determining its own liabilities for purposes of the
Reorganization. Such valuation and determination shall be made by MuniYield in
cooperation with Municipal Strategy and shall be confirmed in writing by
MuniYield to Municipal Strategy. The net asset value per share of the
MuniYield Common Stock and the liquidation preference and value per share of
the MuniYield Series F AMPS shall be determined in accordance with such
procedures and MuniYield shall certify the computations involved. For purposes
of determining the net asset value of a share of Common Stock of each Fund,
the value of the securities held by the Fund plus any cash or other assets
(including interest accrued but not yet received) minus all liabilities
(including accrued expenses) and the aggregate liquidation value of the
outstanding shares of AMPS of that Fund is divided by the total number of
shares of Common Stock of that Fund outstanding at such time.
MuniYield shall issue to Municipal Strategy separate certificates or
share deposit receipts for the MuniYield Common Stock and the MuniYield Series
F AMPS, each registered in the name of Municipal Strategy. Municipal Strategy
then shall distribute the MuniYield Common Stock and the MuniYield Series F
AMPS to the holders of Municipal Strategy Common Stock and Municipal Strategy
AMPS by redelivering the certificates or share deposit receipts evidencing
ownership of (i) the MuniYield Common Stock to The Bank of New York ("BONY"),
as the transfer agent and registrar for the MuniYield Common Stock for
distribution to the holders of Municipal Strategy Common Stock on the basis of
such holder's proportionate interest in the aggregate net asset value of the
Common Stock of Municipal Strategy and (ii) the MuniYield Series F AMPS to
BONY as the transfer agent and registrar for the MuniYield Series F AMPS for
distribution to the holders of Municipal Strategy AMPS on the basis of such
holder's proportionate interest in the aggregate liquidation preference and
value of Municipal Strategy AMPS. With respect to any Municipal Strategy
stockholder holding certificates evidencing ownership of either Municipal
Strategy Common Stock or Municipal Strategy AMPS as of the Closing Date, and
subject to MuniYield being informed thereof in writing by Municipal Strategy,
MuniYield will not permit such stockholder to receive new certificates
evidencing ownership of the MuniYield Common Stock or MuniYield Series F AMPS,
exchange MuniYield Common Stock or MuniYield Series F AMPS credited to such
stockholder's account for shares of other investment companies managed by Fund
Asset Management, L.P. ("FAM") or any of its affiliates, or pledge or redeem
such MuniYield Common Stock or MuniYield Series F AMPS, in any case, until
notified by Municipal Strategy or its agent that such stockholder has
surrendered his or her outstanding certificates evidencing ownership of
Municipal Strategy Common Stock or, in the event of lost certificates, posted
adequate bond. Municipal Strategy, at its own expense, will request its
stockholders to surrender their outstanding certificates evidencing ownership
of Municipal Strategy Common Stock or post adequate bond therefor.
Dividends payable to holders of record of shares of MuniYield Common
Stock and MuniYield Series F AMPS, as of any date after the Closing Date and
prior to the receipt of certificates in connection with the Reorganization by
any stockholder of Municipal Strategy, shall be payable to such stockholder
without interest; however, such dividends shall not be paid unless and until
such stockholder surrenders the stock certificates representing shares of
common stock or AMPS of Municipal Strategy, as the case may be, in return for
shares of common stock or AMPS of MuniYield, as the case may be.
No fractional shares of MuniYield Common Stock will be issued to
holders of Municipal Strategy Common Stock. In lieu thereof, MuniYield's
transfer agent, BONY, will aggregate all fractional shares of MuniYield Common
Stock and sell the resulting full shares on the New York Stock Exchange at the
current market price for shares of MuniYield Common Stock for the account of
all holders of fractional interests, and each such holder will receive such
holder's pro rata share of the proceeds of such sale upon surrender of such
holder's certificates representing Municipal Strategy Common Stock.
5. Payment of Expenses.
(a) The expenses of the Reorganization that are directly
attributable to Municipal Strategy and the conduct of its business will be
deducted from the assets of Municipal Strategy as of the Valuation Time. These
expenses are expected to include transfer agent fees, the expenses incurred in
preparing, printing and mailing the proxy materials to be utilized in
connection with the special meeting of the stockholders of Municipal Strategy
to consider the Reorganization, the expenses related to the solicitation of
proxies to be voted at that meeting and a portion of the expenses of printing
the N-14 Registration Statement. FAM has agreed to bear the expenses of the
Reorganization that are directly attributable to MuniYield and the conduct of
its business. The expenses attributable to MuniYield include fees, if any, of
the rating agencies with respect to MuniYield Series F AMPS, the costs of
printing stock certificates, transfer agent fees and a portion of the expenses
incurred in printing the N-14 Registration Statement. Certain other expenses
of the Reorganization, including expenses in connection with obtaining an
opinion of counsel as to certain tax matters, the preparation of this
Agreement, legal fees, stock exchange fees and audit fees, will be borne
equally by Municipal Strategy and FAM, which has agreed to bear such expenses
on behalf of MuniYield.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.
6. Covenants of the Funds.
(a) Municipal Strategy agrees to hold a special meeting of its
stockholders as soon as is practicable after the effective date of the N-14
Registration Statement for the purpose of considering the Reorganization as
described in this Agreement.
(b) Each Fund covenants to operate its business as presently
conducted between the date hereof and the Closing Date.
(c) Municipal Strategy agrees that following the consummation of
the Reorganization, it will dissolve in accordance with the laws of the State
of Maryland and any other applicable law, it will not make any distributions
of any shares of MuniYield Common Stock and MuniYield Series F AMPS, as
applicable, other than to its respective stockholders and without first paying
or adequately providing for the payment of all of its respective liabilities
not assumed by MuniYield, if any, and on and after the Closing Date it shall
not conduct any business except in connection with its dissolution.
(d) Municipal Strategy undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section 8(f) of the 1940
Act for an order declaring that Municipal Strategy has ceased to be a
registered investment company.
(e) MuniYield will file the N-14 Registration Statement with the
Securities and Exchange Commission (the "Commission") and will use its best
efforts to provide that the N-14 Registration Statement becomes effective as
promptly as practicable. Each Fund agrees to cooperate fully with the other,
and each will furnish to the other the information relating to itself to be
set forth in the N-14 Registration Statement as required by the 1933 Act, the
1934 Act, the 1940 Act, and the rules and regulations thereunder and the state
securities laws.
(f) MuniYield has no plan or intention to sell or otherwise
dispose of the Municipal Strategy Investments, except for dispositions made in
the ordinary course of business.
(g) Each Fund agrees that by the Closing Date all of its Federal
and other tax returns and reports required to be filed on or before such date
shall have been filed and all taxes shown as due on said returns either have
been paid or adequate liability reserves have been provided for the payment of
such taxes. In connection with this covenant, the Funds agree to cooperate
with each other in filing any tax return, amended return or claim for refund,
determining a liability for taxes or a right to a refund of taxes or
participating in or conducting any audit or other proceeding in respect of
taxes. MuniYield agrees to retain for a period of ten (10) years following the
Closing Date all returns, schedules and work papers and all material records
or other documents relating to tax matters of Municipal Strategy for such
Fund's taxable period first ending after the Closing Date and for all prior
taxable periods. Any information obtained under this subsection shall be kept
confidential except as otherwise may be necessary in connection with the
filing of returns or claims for refund or in conducting an audit or other
proceeding. After the Closing Date, Municipal Strategy shall prepare, or cause
its agents to prepare, any Federal, state or local tax returns, including any
Forms 1099, required to be filed by such fund with respect to its final
taxable year ending with its complete liquidation and for any prior periods or
taxable years and further shall cause such tax returns and Forms 1099 to be
duly filed with the appropriate taxing authorities. Notwithstanding the
aforementioned provisions of this subsection, any expenses incurred by
Municipal Strategy (other than for payment of taxes) in connection with the
preparation and filing of said tax returns and Forms 1099 after the Closing
Date shall be borne by such Fund to the extent such expenses have been accrued
by such Fund in the ordinary course without regard to the Reorganization; any
excess expenses shall be borne by FAM at the time such tax returns and Forms
1099 are prepared.
(h) Municipal Strategy agrees to mail to its stockholders of
record entitled to vote at the special meeting of its stockholders at which
action is to be considered regarding this Agreement, in sufficient time to
comply with requirements as to notice thereof, a combined proxy statement and
prospectus which complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act,
and the rules and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, MuniYield
will stay in existence and continue its business as a non-diversified,
closed-end management investment company registered under the 1940 Act.
7. Closing Date.
(a) Delivery of the assets of Municipal Strategy to be transferred
and the shares of MuniYield Common Stock and MuniYield Series F AMPS to be
issued as provided in this Agreement, shall be made at the offices of Sidley
Austin Brown & Wood LLP, One World Trade Center, New York, New York 10048, at
9:00 a.m. on the next full business day following the Valuation Time, or at
such other place, time and date agreed to by the Funds, the date and time upon
which such delivery is to take place being referred to herein as the "Closing
Date." To the extent that any Municipal Strategy Investments, for any reason,
are not transferable on the Closing Date, Municipal Strategy shall cause such
Municipal Strategy Investments to be transferred to MuniYield's account with
BONY at the earliest practicable date thereafter.
(b) Municipal Strategy will deliver to MuniYield on the Closing
Date confirmations or other adequate evidence as to the tax basis of each of
its respective Municipal Strategy Investments delivered to MuniYield
hereunder, certified by Deloitte & Touche LLP.
(c) As soon as practicable after the close of business on the
Closing Date, Municipal Strategy shall deliver to MuniYield a list of the
names and addresses of all of the stockholders of record of Municipal Strategy
on the Closing Date and the number of shares of Municipal Strategy Common
Stock and AMPS owned by each such stockholder, certified to the best of their
knowledge and belief by the transfer agent for Municipal Strategy or by its
President.
8. Conditions of Municipal Strategy.
The obligations of Municipal Strategy hereunder shall be subject to
the following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of (i) the
Board of Directors of MuniYield, and (ii) at least two-thirds of the members
of the Board of Directors of Municipal Strategy, and by the affirmative vote
of (A) a majority of the shares Municipal Strategy Common Stock and Municipal
Strategy AMPS, voting together as a single class, and (B) a majority of the
shares of Municipal Strategy AMPS, voting separately as a class, in each case
issued and outstanding and entitled to vote thereon. MuniYield shall have
delivered to MuniYield Strategy a copy of the resolution approving this
Agreement adopted by such Fund's Board of Directors.
(b) That Municipal Strategy shall have received from MuniYield a
statement of assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of such
Fund's investments, all as of the Valuation Time, certified on MuniYield's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by MuniYield's President (or any Vice President) and its
Treasurer, dated as of the Closing Date, certifying that as of the Valuation
Time and as of the Closing Date there has been no material adverse change in
the financial position of MuniYield since the date of such Fund's most recent
Annual or Semi-Annual Report, as applicable, other than changes in its
portfolio securities since that date or changes in the market value of its
portfolio securities.
(c) That MuniYield shall have furnished to Municipal Strategy a
certificate signed by MuniYield's President (or any Vice President) and its
Treasurer, dated as of the Closing Date, certifying that, as of the Valuation
Time and as of the Closing Date all representations and warranties of
MuniYield made in this Agreement are true and correct in all material respects
with the same effect as if made at and as of such dates, and that MuniYield
has complied with all of the agreements and satisfied all of the conditions on
its part to be performed or satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Municipal Strategy shall have received an opinion of
Sidley Austin Brown & Wood LLP, as counsel to the Funds, in form and substance
satisfactory to Municipal Strategy and dated the Closing Date, to the effect
that (i) each Fund is a corporation duly organized, validly existing and in
good standing in conformity with the laws of the State of Maryland; (ii) the
shares of MuniYield Common Stock and MuniYield Series F AMPS to be issued
pursuant to this Agreement are duly authorized and, upon delivery, will be
validly issued and outstanding and fully paid and nonassessable by MuniYield,
and no stockholder of MuniYield has any preemptive right to subscription or
purchase in respect thereof (pursuant to the Articles of Incorporation or the
by-laws of MuniYield or the state law of Maryland, or to the best of such
counsel's knowledge, otherwise); (iii) this Agreement has been duly
authorized, executed and delivered by the Funds, and represents a valid and
binding contract, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws pertaining to the enforcement of creditors' rights
generally and court decisions with respect thereto; provided, such counsel
shall express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity; (iv) the execution
and delivery of this Agreement does not, and the consummation of the
Reorganization will not, violate any material provisions of Maryland law or
the Articles of Incorporation, as amended, the by-laws, as amended, or any
agreement (known to such counsel) to which either Fund is a party or by which
a Fund is bound, except insofar as the parties have agreed to amend such
provision as a condition precedent to the Reorganization; (v) Municipal
Strategy has the power to sell, assign, transfer and deliver the assets
transferred by it hereunder and, upon consummation of the Reorganization in
accordance with the terms of this Agreement, Municipal Strategy will have duly
transferred such assets and liabilities in accordance with this Agreement;
(vi) to the best of such counsel's knowledge, no consent, approval,
authorization or order of any United States federal or Maryland state court or
governmental authority is required for the consummation by the Funds of the
Reorganization, except such as have been obtained under the 1933 Act, the 1934
Act and the 1940 Act and the published rules and regulations of the Commission
thereunder and under Maryland law and such as may be required under state
securities laws; (vii) the N-14 Registration Statement has become effective
under the 1933 Act, no stop order suspending the effectiveness of the N-14
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the 1933 Act, and
the N-14 Registration Statement, and each amendment or supplement thereto, as
of their respective effective dates, appear on their face to be appropriately
responsive in all material respects to the requirements of the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder; (viii) the descriptions in the N-14 Registration
Statement of statutes, legal and governmental proceedings and contracts and
other documents are accurate and fairly present the information required to be
shown; (ix) the information in the Proxy Statement and Prospectus under
"Comparison of the Funds -- Tax Rules Applicable to the Funds and their
Stockholders" and "Agreement and Plan of Reorganization -- Tax Consequences of
the Reorganization," to the extent that it constitutes matters of law,
summaries of legal matters or legal conclusions, has been reviewed by such
counsel and is correct in all material respects as of the date of the Proxy
Statement and Prospectus; (x) such counsel does not know of any statutes,
legal or governmental proceedings or contracts or other documents related to
the Reorganization of a character required to be described in the N-14
Registration Statement which are not described therein or, if required to be
filed, filed as required; (xi) neither Fund, to the knowledge of such counsel,
is required to qualify to do business as a foreign corporation in any
jurisdiction except as may be required by state securities laws, and except
where it has so qualified or the failure so to qualify would not have a
material adverse effect on the Fund or its respective stockholders; (xii)
except as disclosed in the N-14 Registration Statement, such counsel does not
have actual knowledge of any material suit, action or legal or administrative
proceeding pending or threatened against the Fund, the unfavorable outcome of
which would materially and adversely affect the Fund; (xiii) all corporate
actions required to be taken by the Funds to authorize this Agreement and to
effect the Reorganization have been duly authorized on the part of the Funds;
and (xiv) such opinion is solely for the benefit of the Funds and their
respective Directors and officers. Such opinion also shall state that (A)
while such counsel cannot make any representation as to the accuracy or
completeness of statements of fact in the N-14 Registration Statement or any
amendment or supplement thereto, nothing has come to their attention that
would lead them to believe that, on the respective effective dates of the N-14
Registration Statement and any amendment or supplement thereto, (1) the N-14
Registration Statement or any amendment or supplement thereto contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and (2) the prospectus included in the N-14 Registration Statement
contained any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (B) such counsel
does not express any opinion or belief as to the financial statements or other
financial or statistical data relating to either Fund contained or
incorporated by reference in the N-14 Registration Statement. In giving the
opinion set forth above, Sidley Austin Brown & Wood LLP may state that it is
relying on certificates of officers of the Funds with regard to matters of
fact and certain certificates and written statements of governmental officials
with respect to the organization and good standing of the Funds.
(f) That Municipal Strategy shall have received an opinion of
Sidley Austin Brown & Wood LLP, to the effect that for Federal income tax
purposes (i) the transfer by Municipal Strategy of substantially all of its
assets to MuniYield in exchange solely for shares of MuniYield Common Stock
and MuniYield Series F AMPS as provided in this Agreement will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Municipal Strategy and MuniYield will each be deemed to be a "party" to a
reorganization within the meaning of Section 368(b); (ii) in accordance with
Section 361(a) of the Code, no gain or loss will be recognized to Municipal
Strategy as a result of the asset transfer solely in exchange for shares of
MuniYield Common Stock and MuniYield Series F AMPS or on the distribution of
MuniYield Common Stock and MuniYield Series F AMPS to stockholders of
Municipal Strategy under Section 361(c)(1); (iii) under Section 1032 of the
Code, no gain or loss will be recognized to MuniYield on the receipt of assets
of Municipal Strategy in exchange for its shares; (iv) in accordance with
Section 354(a)(1) of the Code, no gain or loss will be recognized to the
stockholders of Municipal Strategy on their respective receipt of shares of
MuniYield Common Stock and MuniYield Series F AMPS in exchange for their
shares of Municipal Strategy (except to the extent that Municipal Strategy
common stockholders receive cash representing an interest in fractional shares
of MuniYield Common Stock in the Reorganization); (v) in accordance with
Section 362(b) of the Code, the tax basis of Municipal Strategy's assets in
the hands of MuniYield will be the same as the tax basis of such assets in the
hands of Municipal Strategy immediately prior to the consummation of the
Reorganization; (vi) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the shares of MuniYield Common
Stock and MuniYield Series F AMPS received by the stockholders of Municipal
Strategy in the Reorganization will be equal to the tax basis of the shares of
Municipal Strategy surrendered in exchange; (vii) in accordance with Section
1223 of the Code, a stockholder's holding period for the shares of MuniYield
will be determined by including the period for which such stockholder held the
Municipal Strategy shares returned therefor, provided, that such shares were
held as a capital asset; (viii) in accordance with Section 1223 of the Code,
MuniYield's holding period with respect to Municipal Strategy's assets
transferred will include the period for which such assets were held by
Municipal Strategy; (ix) the payment of cash to common stockholders of
Municipal Strategy in lieu of fractional shares of MuniYield Common Stock will
be treated as though the fractional shares were distributed as part of the
Reorganization and then redeemed by MuniYield, with the result that such
stockholders will have short- or long-term capital gain or loss to the extent
that the cash distribution differs from the stockholder's basis allocable to
the MuniYield fractional shares; and (x) the taxable year of Municipal
Strategy will end on the effective date of the Reorganization, and pursuant to
Section 381(a) of the Code and regulations thereunder, MuniYield will succeed
to and take into account, subject to limitation, certain tax attributes of
Municipal Strategy, such as earnings and profits, capital loss carryovers and
method of accounting.
(g) That all proceedings taken by Municipal Strategy and its
counsel in connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to the others.
(h) That the N-14 Registration Statement shall have become
effective under the 1933 Act, and no stop order suspending such effectiveness
shall have been instituted or, to the knowledge of MuniYield, be contemplated
by the Commission.
(i) That Municipal Strategy shall have received from _________ a
letter dated within three days prior to the effective date of the N-14
Registration Statement and a similar letter dated within five days prior to
the Closing Date, in form and substance satisfactory to them, to the effect
that (i) they are independent public accountants with respect to MuniYield
within the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; (ii) in their opinion, the financial statements and
supplementary information of MuniYield included or incorporated by reference
in the N-14 Registration Statement and reported on by them comply as to form
in all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations thereunder; (iii) on the
basis of limited procedures agreed upon by the Funds and described in such
letter (but not an examination in accordance with generally accepted auditing
standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of MuniYield included in
the N-14 Registration Statement, and inquiries of certain officials of
MuniYield responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as to
form in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity with
generally accepted accounting principles, applied on a basis substantially
consistent with that of the audited financial statements, or (c) such
unaudited supplementary information is not fairly stated in all material
respects in relation to the unaudited financial statements taken as a whole;
and (iv) on the basis of limited procedures agreed upon by the Funds and
described in such letter (but not an examination in accordance with generally
accepted auditing standards), the information relating to MuniYield appearing
in the N-14 Registration Statement, which information is expressed in dollars
(or percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records of
MuniYield or from schedules prepared by officials of MuniYield having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
(j) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of MuniYield or would prohibit
the Reorganization.
(k) That Municipal Strategy shall have received from the
Commission such orders or interpretations as Sidley Austin Brown & Wood LLP,
as counsel to Municipal Strategy, deems reasonably necessary or desirable
under the 1933 Act and the 1940 Act in connection with the Reorganization,
provided, that such counsel shall have requested such orders as promptly as
practicable, and all such orders shall be in full force and effect.
9. Conditions of MuniYield.
The obligations of MuniYield hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of Directors of each of
the Funds and by the stockholders of Municipal Strategy as set forth in
Section 8(a); and that Municipal Strategy shall have delivered to MuniYield a
copy of the resolution approving this Agreement adopted by such Fund's Board
of Directors, and a certificate setting forth the vote of the stockholders of
Municipal Strategy obtained at the special meeting of its stockholders,
certified by its Secretary.
(b) That Municipal Strategy shall have furnished to MuniYield a
statement of its assets, liabilities and capital, with values determined as
provided in Section 4 of this Agreement, together with a schedule of
investments with their respective dates of acquisition and tax costs, all as
of the Valuation Time, certified on such Fund's behalf by its President (or
any Vice President) and its Treasurer, and a certificate signed by such Fund's
President (or any Vice President) and its Treasurer, dated as of the Closing
Date, certifying that as of the Valuation Time and as of the Closing Date
there has been no material adverse change in the financial position of
Municipal Strategy since the date of such Fund's most recent Annual Report or
Semi-Annual Report, as applicable, other than changes in the Municipal
Strategy Investments since that date or changes in the market value of the
Municipal Strategy Investments.
(c) That Municipal Strategy shall have furnished to MuniYield a
certificate signed by such Fund's President (or any Vice President) and its
Treasurer, dated the Closing Date, certifying that as of the Valuation Time
and as of the Closing Date all representations and warranties of Municipal
Strategy made in this Agreement are true and correct in all material respects
with the same effect as if made at and as of such dates and Municipal Strategy
has complied with all of the agreements and satisfied all of the conditions on
its part to be performed or satisfied at or prior to such dates.
(d) That Municipal Strategy shall have delivered to MuniYield a
letter from ___________, dated the Closing Date, stating that such firm has
performed a limited review of the Federal, state and local income tax returns
of Municipal Strategy for the period ended October 31, 2000 (which returns
originally were prepared and filed by Municipal Strategy), and that based on
such limited review, nothing came to their attention which caused them to
believe that such returns did not properly reflect, in all material respects,
the Federal, state and local income taxes of Municipal Strategy for the period
covered thereby; and that for the period from November 1, 2000, to and
including the Closing Date and for any taxable year of Municipal Strategy
ending upon the liquidation of Municipal Strategy, such firm has performed a
limited review to ascertain the amount of applicable Federal, state and local
taxes, and has determined that either such amount has been paid or reserves
have been established for payment of such taxes, this review to be based on
unaudited financial data; and that based on such limited review, nothing has
come to their attention which caused them to believe that the taxes paid or
reserves set aside for payment of such taxes were not adequate in all material
respects for the satisfaction of Federal, state and local taxes for the period
from November 1, 2000, to and including the Closing Date and for any taxable
year of Municipal Strategy, ending upon the liquidation of such Fund or that
such Fund would not qualify as a regulated investment company for Federal
income tax purposes for the tax years in question.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That MuniYield shall have received an opinion of Sidley Austin
Brown & Wood LLP, as counsel to the Funds, in form and substance satisfactory
to MuniYield and dated the Closing Date, with respect to the matters specified
in Section 8(e) of this Agreement and such other matters as MuniYield
reasonably may deem necessary or desirable.
(g) That MuniYield shall have received an opinion of Sidley Austin
Brown & Wood LLP with respect to the matters specified in Section 8(f) of this
Agreement.
(h) That MuniYield shall have received from Deloitte & Touche LLP
a letter dated within three days prior to the effective date of the N-14
Registration Statement and a similar letter dated within five days prior to
the Closing Date, in form and substance satisfactory to MuniYield, to the
effect that (i) they are independent public accountants with respect to
Municipal Strategy within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder; (ii) in their opinion, the
financial statements and supplementary information of Municipal Strategy
included or incorporated by reference in the N-14 Registration Statement and
reported on by them (if applicable) comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder; (iii) on the basis of limited procedures
agreed upon by the Funds and described in such letter (but not an examination
in accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of Municipal Strategy included in the N-14
Registration Statement, and inquiries of certain officials of Municipal
Strategy responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as to
form in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity with
generally accepted accounting principles, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to the
unaudited financial statements taken as a whole; and (iv) on the basis of
limited procedures agreed upon by the Funds and described in such letter (but
not an examination in accordance with generally accepted auditing standards),
the information relating to Municipal Strategy appearing in the N-14
Registration Statement, which information is expressed in dollars (or
percentages derived from such dollars) (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records of
Municipal Strategy or from schedules prepared by officials of Municipal
Strategy having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations made
therefrom.
(i) That the Municipal Strategy Investments to be transferred to
MuniYield shall not include any assets or liabilities which MuniYield, by
reason of charter limitations or otherwise, may not properly acquire or
assume.
(j) That the N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order suspending such effectiveness
shall have been instituted or, to the knowledge of Municipal Strategy, be
contemplated by the Commission.
(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Municipal Strategy or would
prohibit the Reorganization.
(l) That MuniYield shall have received from the Commission such
orders or interpretations as Sidley Austin Brown & Wood LLP, as counsel to
MuniYield, deems reasonably necessary or desirable under the 1933 Act and the
1940 Act in connection with the Reorganization, provided, that such counsel
shall have requested such orders as promptly as practicable, and all such
orders shall be in full force and effect.
(m) That all proceedings taken by Municipal Strategy and its
respective counsel in connection with the Reorganization and all documents
incidental thereto shall be satisfactory in form and substance to MuniYield.
(n) That prior to the Closing Date, Municipal Strategy shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to its stockholders all of
its net investment company taxable income for the period to and including the
Closing Date, if any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to and including the
Closing Date. In this regard, the last dividend period for Municipal Strategy
AMPS may be shorter than the dividend period for such AMPS determined as set
forth in the applicable Articles Supplementary.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the Reorganization abandoned at
any time (whether before or after adoption thereof by the stockholders of the
Funds) prior to the Closing Date, or the Closing Date may be postponed, (i) by
mutual consent of the Boards of Directors of the Funds, (ii) by the Board of
Directors of Municipal Strategy if any condition of Municipal Strategy's
obligations set forth in Section 8 of this Agreement has not been fulfilled or
waived by such Board; or (iii) by the Board of Directors of MuniYield if any
condition of MuniYield's obligations set forth in Section 9 of this Agreement
has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not
been consummated by June 30, 2002, this Agreement automatically shall
terminate on that date, unless a later date is mutually agreed to by the
Boards of Directors of the Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Fund or persons who are
their directors, trustees, officers, agents or stockholders in respect of this
Agreement.
(d) At any time prior to the Closing Date, any of the terms or
conditions of this Agreement may be waived by the Board of Directors of either
Fund (whichever is entitled to the benefit thereof), if, in the judgment of
such Board after consultation with its counsel, such action or waiver will not
have a material adverse effect on the benefits intended under this Agreement
to the stockholders of their respective Fund, on behalf of which such action
is taken. In addition, the Boards of Directors of the Funds have delegated to
FAM the ability to make non-material changes to the transaction if it deems it
to be in the best interests of the Funds to do so.
(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement shall expire with, and be terminated by,
the consummation of the Reorganization, and no Fund nor any of its officers,
directors, trustees, agents or stockholders shall have any liability with
respect to such representations or warranties after the Closing Date. This
provision shall not protect any officer, director, trustee, agent or
stockholder of either Fund against any liability to the entity for which that
officer, director, trustee, agent or stockholder so acts or to its
stockholders, to which that officer, director, trustee, agent or stockholder
otherwise would be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Closing Date and shall impose any terms
or conditions which are determined by action of the Boards of Directors of the
Funds to be acceptable, such terms and conditions shall be binding as if a
part of this Agreement without further vote or approval of the stockholders of
Municipal Strategy, unless such terms and conditions shall result in a change
in the method of computing the number of shares of MuniYield Common Stock and
MuniYield Series F AMPS to be issued to Municipal Strategy, as applicable, in
which event, unless such terms and conditions shall have been included in the
proxy solicitation materials furnished to the stockholders of Municipal
Strategy prior to the meetings at which the Reorganization shall have been
approved, this Agreement shall not be consummated and shall terminate unless
Municipal Strategy promptly shall call a special meeting of stockholders at
which such conditions so imposed shall be submitted for approval.
11. Indemnification.
(a) Municipal Strategy hereby agrees to indemnify and hold
MuniYield harmless from all loss, liability and expenses (including reasonable
counsel fees and expenses in connection with the contest of any claim), as
incurred, which MuniYield may incur or sustain by reason of the fact that (i)
MuniYield shall be required to pay any corporate obligation of Municipal
Strategy, whether consisting of tax deficiencies or otherwise, based upon a
claim or claims against Municipal Strategy which were omitted or not fairly
reflected in the financial statements to be delivered to MuniYield in
connection with the Reorganization; (ii) any representations or warranties
made by Municipal Strategy in this Agreement should prove to be false or
erroneous in any material respect; (iii) any covenant of Municipal Strategy
has been breached in any material respect; or (iv) any claim is made alleging
that (a) the N-14 Registration Statement included any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or (b) the
Proxy Statement and Prospectus delivered to the stockholders of Municipal
Strategy and forming a part of the N-14 Registration Statement included any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except with respect to (iv)(a) and
(b) herein insofar as such claim is based on written information furnished to
Municipal Strategy by MuniYield.
(b) MuniYield hereby agrees to indemnify and hold Municipal
Strategy harmless from all loss, liability and expenses (including reasonable
counsel fees and expenses in connection with the contest of any claim), as
incurred, which Municipal Strategy may incur or sustain by reason of the fact
that (i) any representations or warranties made by MuniYield in this Agreement
should prove false or erroneous in any material respect, (ii) any covenant of
MuniYield has been breached in any material respect, or (iii) any claim is
made alleging that (a) the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading
or (b) the Proxy Statement and Prospectus delivered to stockholders of
Municipal Strategy and forming a part of the N-14 Registration Statement
included any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except with respect
to (iii)(a) and (b) herein insofar as such claim is based on written
information furnished to MuniYield by Municipal Strategy.
(c) In the event that any claim is made against MuniYield in
respect of which indemnity may be sought by MuniYield from Municipal Strategy
under Section 11(a) of this Agreement, or in the event that any claim is made
against Municipal Strategy in respect of which indemnity may be sought by
Municipal Strategy from MuniYield under Section 11(b) of this Agreement, then
the party seeking indemnification (the "Indemnified Party"), with reasonable
promptness and before payment of such claim, shall give written notice of such
claim to the other party (the "Indemnifying Party"). If no objection as to the
validity of the claim is made in writing to the Indemnified Party by the
Indemnifying Party within thirty (30) days after the giving of notice
hereunder, then the Indemnified Party may pay such claim and shall be entitled
to reimbursement therefor, pursuant to this Agreement. If, prior to the
termination of such thirty-day period, objection in writing as to the validity
of such claim is made to the Indemnified Party, the Indemnified Party shall
withhold payment thereof until the validity of such claim is established (i)
to the satisfaction of the Indemnifying Party, or (ii) by a final
determination of a court of competent jurisdiction, whereupon the Indemnified
Party may pay such claim and shall be entitled to reimbursement thereof,
pursuant to this Agreement, or (iii) with respect to any tax claims, within
seven (7) calendar days following the earlier of (A) an agreement between
MuniYield and Municipal Strategy that an indemnity amount is payable, (B) an
assessment of a tax by a taxing authority, or (C) a "determination" as defined
in Section 1313(a) of the Code. For purposes of this Section 11, the term
"assessment" shall have the same meaning as used in Chapter 63 of the Code and
Treasury Regulations thereunder, or any comparable provision under the laws of
the appropriate taxing authority. In the event of any objection by the
Indemnifying Party, the Indemnifying Party promptly shall investigate the
claim, and if it is not satisfied with the validity thereof, the Indemnifying
Party shall conduct the defense against such claim. All costs and expenses
incurred by the Indemnifying Party in connection with such investigation and
defense of such claim shall be borne by it. These indemnification provisions
are in addition to, and not in limitation of, any other rights the parties may
have under applicable law.
12. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection
with the issuance of any shares to any person who at the time of the
Reorganization is, to its knowledge, an affiliate of a party to the
Reorganization pursuant to Rule 145(c), MuniYield will cause to be affixed
upon the certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED EXCEPT TO MUNIYIELD FUND, INC. (OR ITS STATUTORY
SUCCESSOR), OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER
THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT
REQUIRED.
and, further, that stop transfer instructions will be issued to MuniYield's
transfer agent with respect to such shares. Municipal Strategy will provide
MuniYield on the Closing Date with the name of any stockholder of Municipal
Strategy who is to the knowledge of Municipal Strategy an affiliate of
Municipal Strategy on such date.
(b) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant to this Agreement
shall be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be made by hand
delivery, prepaid certified mail or overnight service, addressed to either
Fund, at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Terry K.
Glenn, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, and
Articles Supplementary, as amended, of each Fund are on file with the Maryland
Department and notice is hereby given that this instrument is executed on
behalf of the Directors of each Fund.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MUNIYIELD FUND, INC.
By:
---------------------------------------
Name:
Title:
Attest:
_____________________________
Secretary
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
By:
---------------------------------------
Name:
Title:
Attest:
_____________________________
Secretary
APPENDIX III
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
Description of Moody's Investors Service, Inc.'s ("Moody's")
Municipal Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate for
the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: Those bonds in the Aa, A to Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Short-Term Notes: The three ratings of Moody's for short-term notes are
MIG-1/VMIG-1, MIG-2/ VMIG-2 and MIG-3/VMIG-3; MIG-1/VMIG-1 denotes "best
quality...strong protection by established cash flows"; MIG-2/VMIG-2 denotes
"high quality" with ample margins of protection; MIG-3/ VMIG-3 notes are of
"favorable quality...but...lacking the undeniable strength of the preceding
grades."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior ability for repayment of short-term promissory obligations. Prime-1
repayment ability will often be evidenced by the following characteristics:
leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structure with moderate
reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable ability for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's
("Standard & Poor's") Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation.
The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for sources other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of payment-capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with
the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
AA Debt rated "AA" differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the least
CCC degree of speculation and "C" the highest degree of speculation.
CC While such bonds will likely have some quality and protective
C characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's Commercial Paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into several categories, ranging from
"A-1" for the highest quality obligations to "D" for the lowest. These
categories are as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
(+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
a for issues designated "A-1."
A-3 Issues carrying this designation have an adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard
& Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
Description of Standard & Poor's Short-Term Issue Credit Ratings
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment.
-- Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
-- Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus
"+" designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
c The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below
an investment-grade level and/or the issuer's bonds are deemed
taxable.
p The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
financed by the debt being rated and indicates that payment of the
debt service requirements is largely or entirely dependent upon the
successful, timely completion of the project. this rating, however,
while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r The "r" highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks.
Examples of such obligations are securities with principal or
interest return indexed to equities, commodities, or currencies;
certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility
or variability in total return.
Description of Fitch, Inc.'s ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact
on these bonds, and therefore impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) or Minus ( - ): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive" indicating
a potential upgrade, "Negative" for potential downgrade, or "Evolving" where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within three to 12 months.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can
be identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremelyspeculative and should be valued on the basis of
D their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on
these bonds, and "D" represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the "DDD," "DD," or
"D" categories.
Description of Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-4 Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
[Proxy Card Front]
COMMON STOCK
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the shares of common stock of Merrill
Lynch Municipal Strategy Fund, Inc. (the "Fund") held of record by the
undersigned on August 27, 2001 at the Special Meeting of Stockholders of the
Fund to be held on October 24, 2001, or any adjournment thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" Item 1. to approve the Agreement and Plan of
Reorganization.
By signing and dating the reverse side of this card, you authorize the
proxies to vote the proposal as marked, or if not marked, to vote "FOR" the
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return this card
at once in the enclosed envelope.
You may also vote your shares by touch-tone phone by calling
1-800-690-6903 or through the internet at www.proxyvote.com.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
-
Please mark boxes /X/ or /X/ in blue or black ink.
-
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Fund, Inc.
For | | Against | | Abstain | |
2. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When
signing as attorney or as executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized persons.
Dated:
--------------------------------
X
-------------------------------------
Signature
X
-------------------------------------
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
[Proxy Card Front]
AUCTION MARKET
PREFERRED STOCK
MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Alice
A. Pellegrino as proxies, each with the power to appoint his or her
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the shares of Auction Market
Preferred Stock of Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund")
held of record by the undersigned on August 27, 2001 at the Special Meeting of
Stockholders of the Fund to be held on October 24, 2001, or any adjournment
thereof.
This proxy when properly executed will be voted in the manner herein
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted "FOR" Item 1. to approve the Agreement and Plan of
Reorganization.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return this card
at once in the enclosed envelope.
You may also vote your shares by touch-tone phone by calling
1-800-690-6903 or through the internet at www.proxyvote.com.
(Continued and to be signed on the reverse side)
[Proxy Card Reverse]
-
Please mark boxes /X/ or /X/ in blue or black ink.
-
1. To consider and act upon a proposal to approve the Agreement and Plan of
Reorganization between the Fund and MuniYield Fund, Inc.
For | | Against | | Abstain | |
2. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
If the undersigned is a broker-dealer, it hereby instructs the proxies,
pursuant to Rule 452 of the New York Stock Exchange, to vote any uninstructed
Auction Market Preferred Stock, in the same proportion as votes cast by
holders of Auction Market Preferred Stock, who have responded to this proxy
solicitation.
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When
signing as attorney or as executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized persons.
Dated:
--------------------------------
X
-------------------------------------
Signature
X
--------------------------------------
Signature, if held jointly
Sign, date, and return the Proxy Card promptly using the enclosed envelope.
PART C. OTHER INFORMATION
Item 15. Indemnification.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's By-Laws, filed as Exhibit 2 hereto, and the
Investment Advisory Agreement, a form of which is filed as Exhibit 6 hereto,
provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be provided to directors,
officers and controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in connection with any
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
Reference is made to (i) Section 6 of the Purchase Agreement relating to
the Registrant's Common Stock, a form of which is filed as Exhibit 7(a)
hereto, and (ii) Section 7 of the Purchase Agreement relating to the
Registrant's Auction Market Preferred Stock ("AMPS"), a form of which is filed
as Exhibit 7(b) hereto, for provisions relating to the indemnification of the
underwriter.
Item 16. Exhibits.
1 (a) -- Articles of Incorporation of the Registrant, dated September 20, 1991.
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated November 15, 1991.
(c) -- Form of Articles Supplementary creating the Registrant's Five Series of AMPS. (a)
(d) -- Articles of Amendment to Articles Supplementary creating the Registrant's Five Series of AMPS,
dated November 13, 1992.
(e) -- Articles of Amendment to Articles Supplementary creating the Registrant's Five Series of AMPS,
dated November 30, 1994.
(f) -- Articles of Amendment to Articles Supplementary creating the Registrant's Five Series of AMPS,
dated November 30, 1994.
(g) -- Articles of Amendment to Articles Supplementary creating the Registrant's Five Series of AMPS,
dated June 23, 1999.
(h) -- Form of Articles Supplementary creating the Registrant's Series F AMPS.
2 -- By-Laws of the Registrant.
3 -- Not Applicable.
4 -- Form of Agreement and Plan of Reorganization among the Registrant and Merrill Lynch Municipal
Strategy Fund, Inc. ("Municipal Strategy") (included as Appendix II to the Proxy Statement and
Prospectus contained in this Registration Statement).
5 (a) -- Copies of instruments defining the rights of stockholders, including the relevant portions of the
Articles of Incorporation and the By-Laws of the Registrant. (b)
(b) -- Form of specimen certificate for the Common Stock of the Registrant. (a)
(c) -- Form of specimen certificate for the AMPS of the Registrant. (a)
6 -- Investment Advisory Agreement between Registrant and Fund Asset Management, L.P. ("FAM").
7 (a) -- Form of Purchase Agreement for the Common Stock of the Registrant. (a)
(b) -- Form of Purchase Agreement for the AMPS of the Registrant. (a)
(c) -- Form of Merrill Lynch Standard Dealer Agreement.(a)
8 -- Not applicable.
9 -- Custodian Contract between the Registrant and The Bank of New York ("BONY"). (a)
10 -- Form of Terms and Conditions of Amended Automatic Dividend Reinvestment Plan.
11 -- Opinion and Consent of Sidley Austin Brown & Wood LLP, counsel for the Registrant. (a)
12 -- Opinion of Sidley Austin Brown & Wood LLP, relating to certain tax matters. (a)
13 (a) -- Form of Registrar, Transfer Agency and Service Agreement between the Registrant and BONY.(a)
(b) -- Form of Auction Agent Agreement between the Registrant and BONY. (a)
(c) -- Form of Broker-Dealer Agreement. (a)
(d) -- Form of Letter of Representations. (a)
14 -- Consent of ___________________, independent auditors for the Registrant. (a)
15 -- Not applicable.
16 -- Not applicable.
17 -- Not applicable.
- -----------------
(a) To be filed by amendment to this Registration Statement.
(b) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and
6), Article VII, Article VIII, Article X, Article XI, Article XII
and Article XIII of the Registrant's Articles of Incorporation,
filed as Exhibit 1(a) hereto, to Article II, Article III (sections
1, 2, 3, 5 and 17), Article VI, Article VII, Article XII, Article
XIII and Article XIV of the Registrant's By-Laws, filed as Exhibit 2
hereto, and to the Form of Articles Supplementary relating to the
Registrant's Five Series of AMPS, filed as Exhibit 1(c) hereto.
Reference is also made to the Form of Articles Supplementary
relating to the Registrant's Series F AMPS, filed as Exhibit 1(h)
hereto.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part
of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities
Act of 1933, as amended, the reoffering prospectus will contain
information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in addition to
the information called for by other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment shall be deemed
to be a new registration statement for the securities offered therein,
and the offering of securities at that time shall be deemed to be the
initial bona fide offering of them.
(3) The Registrant undertakes to file, by post-effective amendment, an
opinion of counsel as to certain tax matters within a reasonable time
after receipt of such opinion.
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 17th day of July, 2001.
MUNIYIELD FUND, INC.
(Registrant)
By: /s/ TERRY K. GLENN
------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke and Alice A. Pellegrino, or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendments to this Registration Statement
(including post-effective amendments) and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/s/ TERRY K. GLENN President and Director July 17, 2001
- ---------------------------------------------- (Principal Executive Officer)
(Terry K. Glenn)
/s/ DONALD C. BURKE Vice President and July 17, 2001
- ---------------------------------------------- Treasurer (Principal Financial
(Donald C. Burke) and Accounting Officer)
/s/ JAMES H. BODURTHA Director July 17, 2001
- ----------------------------------------------
(James H. Bodurtha)
/s/ HERBERT I. LONDON Director July 17, 2001
- ----------------------------------------------
(Herbert I. London)
/s/ JOSEPH L. MAY Director July 17, 2001
- ----------------------------------------------
(Joseph L. May)
/s/ ANDRE F. PEROLD Director July 17, 2001
- ----------------------------------------------
(Andre F. Perold)
/s/ ROBERTA COOPER RAMO Director July 17, 2001
- ----------------------------------------------
(Roberta Cooper Ramo)
INDEX TO EXHIBITS
Exhibit Number
1 (a) -- Articles of Incorporation of the Registrant, dated September 20, 1991.
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated November 15, 1991.
(d) -- Articles of Amendment to Articles Supplementary creating the Registrant's Five Series of AMPS,
-- dated November 30, 1992.
(e) -- Articles of Amendment to Articles Supplementary creating the Registrant's Five Series of AMPS,
-- dated November 30, 1994.
(f) -- Articles of Amendment to Articles Supplementary creating the Registrant's Five Series of AMPS, dated
-- November 30, 1994.
(g) -- Articles of Amendment to Articles Supplementary creating the Registrant's Five Series of AMPS, dated
-- June 23, 1999.
(h) -- Form of Articles Supplementary creating the Registrant's Series F AMPS.
2 -- By-laws of the Registrant.
6 -- Investment Advisory Agreement between Registrant and FAM.
10 -- Form of Terms and Conditions of Amended Automatic Dividend Reinvestment Plan.