-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ANFvwC+XThx4gJZ0baQxxqPI1AwgvroErxUT1JtY8SfDSvwRgy5Tyu73EUcoCLZP lZzOvdgEEwqCBH2uRefmPQ== 0000950112-95-000278.txt : 19950501 0000950112-95-000278.hdr.sgml : 19950501 ACCESSION NUMBER: 0000950112-95-000278 CONFORMED SUBMISSION TYPE: N-14/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950207 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUNIASSETS FUND INC CENTRAL INDEX KEY: 0000901243 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-14/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-55365 FILM NUMBER: 95505736 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 N-14/A 1 MUNIASSETS FUND, INC. AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1995 REGISTRATION NO. 33-55365 811-7642 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ PRE-EFFECTIVE AMENDMENT NO. 2 /X/ POST-EFFECTIVE AMENDMENT NO. / / (check appropriate box or boxes) ------------------- MUNIASSETS FUND, INC. (Exact name of Registrant as Specified in Charter) ------------------- 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536 (Address of Principal Executive Offices) (609) 282-2000 (Registrant's Telephone Number, including Area Code) ------------------- MARK B. GOLDFUS MUNIASSETS FUND, INC. 800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536 MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011 (Name and Address of Agent for Service) ------------------- Copies to: THOMAS R. SMITH, JR., ESQ. LEONARD B. MACKEY, JR., ESQ. BROWN & WOOD ROGERS & WELLS ONE WORLD TRADE CENTER 200 PARK AVENUE NEW YORK, NEW YORK 10048 NEW YORK, NEW YORK 10166
------------------- Approximate date of proposed public offering: As soon as practicable after the effective date of this Registration Statement. ------------------- CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 [CAPTION] PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING PRICE REGISTRATION BEING REGISTERED REGISTERED PER SHARE (1) (1) FEE (2) Common Stock ($.10 par value) 7,000,000 $10.6875 $74,812,500 $25,797.60
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, based on the average of the high and low sales prices reported on the New York Stock Exchange on November 17, 1994. (2) $27,495.00 previously paid. 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET (AS REQUIRED BY RULE 481(A))
ITEM NO. ITEM CAPTION JOINT PROXY STATEMENT--PROSPECTUS CAPTION - --------- --------------------------- ----------------------------------------------------- PART A Item 1. Beginning of Registration Statement and Outside Front Cover Page of Prospectus................. Cover Page Item 2. Beginning and Outside Back Cover Page of Prospectus... Table of Contents; Available Information Item 3. Synopsis and Risk Factors.................... Summary; Special Considerations Regarding the Reorganization Item 4. Information about the Transaction................ Proposal No. 1--The Reorganization Item 5. Information about the Registrant................. Available Information; The Reorganization; Election of Directors; Additional Information About the Funds; Management of the Funds Item 6. Information about the Company Being Acquired................. Available Information; The Reorganization; Election of Directors; Additional Information About the Funds; Management of the Funds Item 7. Voting Information......... The Annual Meetings; The Reorganization; Election of Directors Item 8. Interest of Certain Persons and Experts................ Not Applicable Item 9. Additional Information Required for Reoffering by Persons Deemed to be Underwriters............... Not Applicable PART B JOINT PROXY STATEMENT--PROSPECTUS CAPTION(1) ----------------------------------------------------- Cover Page................. Not Applicable Item 10. Table of Contents.......... Not Applicable Item 11. Additional Information Item 12. about the Registrant....... Election of Directors; Additional Information About the Funds; Management of the Funds; Experts; Index to Financial Statements Additional Information Item 13. about the Company Being Acquired................... Election of Directors; Additional Information About the Funds; Management of the Funds; Experts; Index to Financial Statements Financial Statements....... Financial Statements Item 14. PART C
Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement. - ------------ (1) All of the information required to be included in Part B is contained in the Joint Proxy Statement Prospectus. Accordingly, there is no separate Statement of Additional Information. MUNIASSETS FUND, INC. January 31, 1995 Dear Stockholder: We are pleased to invite you to the Annual Meeting of the Stockholders of MuniAssets Fund, Inc. The meeting is scheduled for Friday, March 10, 1995 at 9:00 a.m. at the offices of Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey. We hope you will be able to attend. At the meeting you will be asked to consider and approve a very important proposal. Subject to stockholder approval, your Fund would acquire substantially all the assets and assume substantially all the liabilities of the MuniBond Income Fund, Inc. in exchange for newly issued shares of the Fund's Common Stock, which would then be distributed to MuniBond stockholders. The MuniBond Income Fund, Inc. is similar to your Fund in virtually every respect: both are exchange-traded, non-diversified, closed-end management investment companies and have the same investment objectives and comparable investment portfolios. The Board of Directors of each Fund has unanimously approved the transaction and recommends stockholders vote for the proposal. The combination of the two Funds should lead to efficiencies of scale, such as reduced administrative expenses, resulting in lower expenses per share and increased net earnings rates, greater efficiency and flexibility in portfolio management and a more liquid trading market. The combination strengthens management's ability to maintain tax-free dividends that you seek. YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN. AFTER REVIEWING THE ENCLOSED MATERIALS, PLEASE TAKE A MOMENT TO COMPLETE, DATE AND SIGN YOUR PROXY CARD AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE TODAY. IF YOU PLAN TO ATTEND THE MEETING, WE LOOK FORWARD TO SEEING YOU ON MARCH 10. We appreciate your continued support and confidence, and I thank you for your goodwill. Very truly yours, ARTHUR ZEIKEL Chairman of the Board MUNIBOND INCOME FUND, INC. January 31, 1995 Dear Stockholder: We are pleased to invite you to the Annual Meeting of the Stockholders of the MuniBond Income Fund, Inc. The meeting is scheduled for Friday, March 10, 1995 at 9:00 a.m. at the offices of Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey. We hope you will be able to attend. At the meeting you will be asked to consider and approve a very important proposal. Subject to stockholder approval, your Fund would transfer substantially all its assets and liabilities to the MuniAssets Fund, Inc. in exchange for newly issued shares of that Fund, which would then be distributed to MuniBond stockholders. If the transfer is approved, you will become a stockholder of MuniAssets Fund, Inc., which is similar to your Fund in virtually every respect: both are exchange-traded, non-diversified, closed-end management investment companies and have the same investment objectives and comparable investment portfolios. The Board of Directors of each Fund has unanimously approved the transaction and recommends stockholders vote for the proposal. The combination of the two Funds should lead to efficiencies of scale, such as reduced administrative expenses, resulting in lower expenses per share and increased net earnings rates, greater efficiency and flexibility in portfolio management and a more liquid trading market. The combination strengthens management's ability to maintain the tax-free dividends that you seek. YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN. AFTER REVIEWING THE ENCLOSED MATERIALS, PLEASE TAKE A MOMENT TO COMPLETE, DATE AND SIGN YOUR PROXY CARD AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE TODAY. IF YOU PLAN TO ATTEND THE MEETING, WE LOOK FORWARD TO SEEING YOU ON MARCH 10. We appreciate your continued support and confidence, and I thank you for your goodwill. Very truly yours, ARTHUR ZEIKEL Chairman of the Board MUNIASSETS FUND, INC. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 ------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS MARCH 10, 1995 ------------------- TO THE STOCKHOLDERS OF MUNIASSETS FUND, INC.: Notice is hereby given that the Annual Meeting of Stockholders (the "Meeting") of MuniAssets Fund, Inc. (the "Fund") will be held at the offices of Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on Friday, March 10, 1995 at 9:00 A.M. for the following purposes: (1) To approve or disapprove an Agreement and Plan of Reorganization between the Fund and MuniBond Income Fund, Inc. (the "Acquired Fund") whereby the Fund would acquire substantially all of the assets, and assume substantially all of the liabilities, of the Acquired Fund. (2) To elect a Board of Directors. (3) To consider and act upon a proposal to ratify the selection of Deloitte & Touche LLP to serve as independent auditors of the Fund for its current fiscal year. (4) To transact such other business as may properly come before the Meeting or any adjournment thereof. The Board of Directors has fixed the close of business on January 31, 1995 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 the Fund entitled to vote at the Meeting will be available and open to the examination of any stockholder of the Fund for any purpose germane to the Meeting during ordinary business hours from and after January 31, 1995, at the office of the Fund, 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 this purpose. The enclosed proxy is being solicited on behalf of the Board of Directors of the Fund. By Order of the Board of Directors MARK B. GOLDFUS Secretary Plainsboro, New Jersey Dated: January 31, 1995 MUNIBOND INCOME FUND, INC. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 ------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS MARCH 10, 1995 ------------------- TO THE STOCKHOLDERS OF MUNIBOND INCOME FUND, INC.: Notice is hereby given that the Annual Meeting of Stockholders (the "Meeting") of MuniBond Income Fund, Inc. (the "Fund") will be held at the offices of Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on Friday, March 10, 1995 at 9:00 A.M. for the following purposes: (1) To approve or disapprove an Agreement and Plan of Reorganization between the Fund and MuniAssets Fund, Inc. (the "Acquiring Fund") whereby the Acquiring Fund would acquire substantially all of the assets, and assume substantially all of the liabilities, of the Fund. (2) To elect a Board of Directors. (3) To consider and act upon a proposal to ratify the selection of Deloitte & Touche LLP to serve as independent auditors of the Fund for its current fiscal year. (4) To transact such other business as may properly come before the Meeting or any adjournment thereof. The Board of Directors has fixed the close of business on January 31, 1995 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 the Fund entitled to vote at the Meeting will be available and open to the examination of any stockholder of the Fund for any purpose germane to the Meeting during ordinary business hours from and after January 31, 1995, at the office of the Fund, 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 this purpose. The enclosed proxy is being solicited on behalf of the Board of Directors of the Fund. By Order of the Board of Directors MARK B. GOLDFUS Secretary Plainsboro, New Jersey Dated: January 31, 1995 SUBJECT TO COMPLETION--DATED FEBRUARY 7, 1995 MUNIASSETS FUND, INC. AND MUNIBOND INCOME FUND, INC. JOINT PROXY STATEMENT ANNUAL MEETINGS OF STOCKHOLDERS TO BE HELD MARCH 10, 1995 ------------------- MUNIASSETS FUND, INC. PROSPECTUS ------------------- This Joint Proxy Statement--Prospectus is being furnished to the stockholders of MuniAssets Fund, Inc. (the "Acquiring Fund") in connection with the solicitation of proxies by the Board of Directors of the Acquiring Fund from holders of the Acquiring Fund's outstanding shares of common stock for use at the Annual Meeting of Stockholders of the Acquiring Fund (the "Acquiring Fund Annual Meeting") to be held on Friday, March 10, 1995, at 9:00 a.m., and at any and all adjournments thereof. At the Acquiring Fund Annual Meeting, stockholders of the Acquiring Fund will be asked to approve a proposal to issue up to 7,000,000 shares of common stock, $.10 par value per share (the (cover continued on following page) ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT--PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS JOINT PROXY STATEMENT--PROSPECTUS IS FEBRUARY 7, 1995. (cover continued from previous page) "Acquiring Fund Shares"), in connection with an Agreement and Plan of Reorganization, dated as of November 17, 1994 (the "Agreement"), between the Acquiring Fund and MuniBond Income Fund, Inc. (the "Acquired Fund" and, together with the Acquiring Fund, the "Funds") whereby the Acquiring Fund would acquire substantially all of the assets, and assume substantially all of the liabilities, of the Acquired Fund. The number of shares of the Acquiring Fund to be issued to the Acquired Fund would be that number having an aggregate net asset value equal to the aggregate value of the net assets of the Acquired Fund transferred to the Acquiring Fund. This Joint Proxy Statement Prospectus is also being furnished to stockholders of the Acquired Fund in connection with the solicitation of proxies by the Board of Directors of the Acquired Fund from holders of the Acquired Fund's outstanding shares of common stock for use in the Annual Meeting of Stockholders of the Acquired Fund (the "Acquired Fund Annual Meeting" and, together with the Acquiring Fund Annual Meeting, the "Annual Meetings") to be held on Friday, March 10, 1995 at 9:00 a.m., and at any and all adjournments thereof. At the Acquired Fund Annual Meeting, stockholders will be asked to approve the Reorganization (as defined below). Following receipt of the Acquiring Fund Shares, the Acquired Fund would be dissolved and the Acquiring Fund Shares would be distributed pro rata to the stockholders of the Acquired Fund. This transaction, consisting of the transfer to the Acquiring Fund of substantially all of the assets of the Acquired Fund in exchange for the Acquiring Fund Shares and the Acquiring Fund's assumption of substantially all of the liabilities of the Acquired Fund, and the subsequent distribution of the Acquiring Fund Shares in dissolution of the Acquired Fund, is referred to herein as the "Reorganization." The terms and conditions of the Reorganization and related transactions are more fully described in this Joint Proxy Statement--Prospectus and in the Agreement, a copy of which is attached as Appendix I hereto. In addition, at the Annual Meetings, stockholders of each Fund will be asked to consider and vote upon the election of directors and the ratification of independent accountants for their respective Fund. The stockholders of the Acquired Fund are being asked to vote on these additional matters in case the Reorganization is not approved and the Acquired Fund remains a separate entity; if the Reorganization is approved, the Acquired Fund's directors will cease to serve, and its Investment Management Agreement will terminate, upon the dissolution of the Acquired Fund pursuant to the Agreement. The Funds are substantially similar non-diversified, closed-end management investment companies having identical objectives; the investment objective of both Funds is high current income exempt from Federal income taxes by investing in a portfolio of medium to lower grade or unrated municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes. Fund Asset Management, L.P. acts as the investment adviser and manager for both Funds, and the same individuals constitute the Boards of Directors of both Funds. The principal executive office of each Fund is located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2000. This Joint Proxy Statement--Prospectus sets forth concisely the information that stockholders of the Funds should know before voting on the proposals described above and should be retained for future reference. ii INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE. TABLE OF CONTENTS PAGE ---- AVAILABLE INFORMATION................ 1 SUMMARY.............................. 2 THE ANNUAL MEETINGS.................. 7 General............................ 7 Voting; Proxies.................... 7 THE REORGANIZATION................... 9 General............................ 9 Reasons for the Proposed Reorganization....................... 11 Vote Required...................... 12 Description of Shares To Be Issued by the Acquiring Fund................ 13 General.......................... 13 Dividends and Distributions...... 13 Automatic Dividend Reinvestment Plan................................. 13 Certain Provisions in the Acquiring Fund's Articles of Incorporation..... 15 Comparison of Rights of Holders of Shares of the Acquiring Fund and the Acquired Fund.................... 16 Surrender and Exchange of Acquired Fund Share Certificates.............. 16 Expenses Associated with the Reorganization....................... 17 Federal Income Tax Consequences of the Reorganization................... 18 Pro Forma Financial Information.... 19 ELECTION OF DIRECTORS................ 21 SELECTION OF INDEPENDENT AUDITORS.... 26 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.................. 27 ADDITIONAL INFORMATION ABOUT THE FUNDS................................ 27 Financial Highlights............... 27 General Information and History.... 29 INVESTMENT OBJECTIVE AND POLICIES.... 31 Description of Municipal Bonds..... 32 Other Investment Policies.......... 37 Options and Futures Transactions... 39 INVESTMENT RESTRICTIONS.............. 43 PAGE ---- DIRECTORS AND OFFICERS............... 45 INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS......................... 45 PORTFOLIO TRANSACTIONS............... 46 Portfolio Turnover................. 47 DIVIDENDS AND DISTRIBUTIONS.......... 47 TAXES................................ 48 General............................ 48 Tax Treatment of Options and Futures Transactions................. 50 State and Local Taxes.............. 51 NET ASSET VALUE...................... 52 DESCRIPTION OF CAPITAL STOCK......... 52 Certain Provisions of the Articles of Incorporation................. 53 CUSTODIAN............................ 53 TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR................ 53 LEGAL PROCEEDINGS.................... 53 LEGAL OPINIONS....................... 54 EXPERTS.............................. 54 STOCKHOLDER PROPOSALS................ 54 INTERIM FINANCIAL STATEMENTS OF MUNIASSETS FUND, INC. Statement of Assets, Liabilities and Capital (Unaudited)............ F-1 MUNIASSETS FUND, INC. STATEMENT OF OPERATIONS (Unaudited)............. F-2 MUNIASSETS FUND, INC. STATEMENT OF CHANGES IN NET ASSETS (Unaudited).......................... F-3 MUNIASSETS FUND, INC. FINANCIAL HIGHLIGHTS (Unaudited)............. F-4 iii PAGE ---- MUNIASSETS FUND, INC. NOTES TO INTERIM FINANCIAL STATEMENTS....... F-5 INDEPENDENT AUDITORS' REPORT......... F-8 FINANCIAL STATEMENTS OF MUNIASSETS FUND, INC. Statement of Assets, Liabilities and Capital........................ F-9 MUNIASSETS FUND, INC. STATEMENT OF OPERATIONS............ F-10 MUNIASSETS FUND, INC. STATEMENT OF CHANGES IN NET ASSETS......................... F-11 MUNIASSETS FUND, INC. FINANCIAL HIGHLIGHTS............... F-12 MUNIASSETS FUND, INC. NOTES TO FINANCIAL STATEMENTS...... F-13 INTERIM FINANCIAL STATEMENTS OF MUNIBOND INCOME FUND, INC. Statement of Assets, Liabilities and Capital (Unaudited)............ F-16 MUNIBOND INCOME FUND, INC. STATEMENT OF OPERATIONS (Unaudited).......... F-17 MUNIBOND INCOME FUND, INC. STATEMENT OF CHANGES IN NET ASSETS (Unaudited).......................... F-18 MUNIBOND INCOME FUND, INC. FINANCIAL HIGHLIGHTS (Unaudited)............. F-19 MUNIBOND INCOME FUND, INC. NOTES TO INTERIM FINANCIAL STATEMENTS....... F-20 INDEPENDENT AUDITORS' REPORT......... F-23 FINANCIAL STATEMENTS OF MUNIBOND INCOME FUND, INC. Statement of Assets, Liabilities and Capital........................ F-24 PAGE ---- MUNIBOND INCOME FUND, INC. STATEMENT OF OPERATIONS............ F-25 MUNIBOND INCOME FUND, INC. STATEMENT OF CHANGES IN NET ASSETS......................... F-26 MUNIBOND INCOME FUND, INC. FINANCIAL HIGHLIGHTS............... F-27 MUNIBOND INCOME FUND, INC. NOTES TO FINANCIAL STATEMENTS...... F-28 FINANCIAL STATEMENTS OF MUNIASSETS FUND, INC. AND MUNIBOND INCOME FUND, INC. Combined Statement of Assets, Liabilities and Capital (Unaudited).. F-31 FINANCIAL STATEMENTS OF MUNIASSETS FUND, INC. AND MUNIBOND INCOME FUND, INC. Combined Schedule of Investments (Unaudited)........................ F-32 MUNIASSETS FUND, INC. AND MUNIBOND INCOME FUND, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited)... F-40 INDEPENDENT AUDITORS' REPORT......... F-42 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET................................ F-43 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET...................... F-44 APPENDIX I AGREEMENT AND PLAN OF REORGANIZATION....................... I-1 APPENDIX II RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER................. II-I iv AVAILABLE INFORMATION Both Funds are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Investment Company Act of 1940, as amended (the "1940 Act"), and in accordance therewith are required to file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Any such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the Commission's New York Regional Office, Seven World Trade Center, New York, New York 10048 and Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The shares of common stock of both Funds are listed on the New York Stock Exchange (the "NYSE"), and such reports, proxy statements and other information concerning the Funds can also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. The Acquiring Fund has filed with the Commission a registration statement on Form N-14 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). This Joint Proxy Statement--Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Acquiring Fund Shares issuable pursuant to the Reorganization, reference is hereby made to the Registration Statement. The information in this Joint Proxy Statement--Prospectus concerning the Acquiring Fund has been furnished by the Acquiring Fund, and the information concerning the Acquired Fund has been furnished by the Acquired Fund. This Joint Proxy Statement--Prospectus constitutes a prospectus of the Acquiring Fund with respect to the shares of the Acquiring Fund to be issued in connection with the Reorganization. 1 SUMMARY The following is a summary of certain information contained elsewhere in this Joint Proxy Statement--Prospectus. This summary is qualified in its entirety by the more detailed information contained herein. Stockholders should read the entire Joint Proxy Statement--Prospectus. Certain capitalized terms in this summary are defined elsewhere in this Joint Proxy Statement--Prospectus. THE ANNUAL MEETINGS This Joint Proxy Statement--Prospectus is being furnished to the stockholders of the Acquiring Fund and the Acquired Fund in connection with the solicitation by the Boards of Directors of the Funds of proxies to be voted at the Funds' Annual Meetings to be held on Friday, March 10, 1995 at the offices of Merrill Lynch Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey. Holders of record of shares of each Fund as of the close of business on January 31, 1995 will be entitled to notice of and to vote at their Fund's Annual Meeting, as described elsewhere in this Joint Proxy Statement--Prospectus. Stockholders of the Acquiring Fund will be asked to vote on the approval of the issuance of additional shares of the Acquiring Fund in connection with the Reorganization, on the election of six nominees for director and on the ratification of the Acquiring Fund's selection of independent accountants. Stockholders of the Acquired Fund will be asked to vote on the approval of the Reorganization, on the election of six nominees for director and on the ratification of the Acquired Fund's selection of independent accountants. Stockholders of the Acquired Fund will be asked to vote on these additional matters in the event the Reorganization is not approved and the Acquired Fund remains a separate entity. The details of each proposal to be voted on by the stockholders of each Fund and the vote required for approval of each proposal (other than the ratification of the Funds' selections of independent accountants) are set forth under the description of each proposal in this Joint Proxy Statement-- Prospectus. THE REORGANIZATION The Boards of Directors of the Acquiring Fund and the Acquired Fund, which consist of the same individuals, have approved the proposed Reorganization pursuant to which the Acquiring Fund would acquire substantially all of the assets of the Acquired Fund in exchange for the issuance of Acquiring Fund Shares and the assumption by the Acquiring Fund of substantially all of the Acquired Fund's liabilities. Following receipt of the Acquiring Fund Shares, the Acquired Fund would be dissolved and the Acquiring Fund Shares received would be distributed to the stockholders of the Acquired Fund. The number of Acquiring Fund Shares to be issued to the Acquired Fund would be that number having an aggregate net asset value equal to the aggregate value of the Acquired Fund's assets transferred to, net of the liabilities assumed by, the Acquiring Fund as of the time such assets and liabilities are transferred 2 and assumed (such time being referred to as the "Exchange Date"). If approved by the Funds' stockholders, the Exchange Date is expected to be the close of business on March 13, 1995. The Agreement may be terminated and the Reorganization abandoned, whether before or after approval by the Funds' stockholders, at any time prior to the Exchange Date (a) by the mutual written consent of the Boards of Directors of the Funds or (b) by either Fund if the conditions to that Fund's obligations have not been satisfied or waived. As a result of the Reorganization, the assets of the Funds would be combined and the stockholders of the Acquired Fund would become stockholders of the Acquiring Fund. The investment objectives and policies, directors, officers and general portfolio characteristics of the larger combined entity would be virtually identical to that of each of the separate Funds. The Board of Directors of each Fund, including the directors of each Fund who are not "interested persons" as that term is defined by the 1940 Act, has concluded that the Reorganization would be in the best interests of the stockholders of each respective Fund and that the interests of those stockholders would not be diluted as a result of the Reorganization. Each Board of Directors approved the Reorganization because it believes that the Reorganization should result in lower administrative expenses for the combined Fund than is currently the case for either of the separate Funds, greater efficiency and flexibility in portfolio management and a more liquid trading market for the shares of the combined Fund. The Boards also recognized the substantial similarities between the Funds. The Funds have virtually identical investment objectives and policies; common directors, officers and investment managers; and similar portfolio composition and trading histories. Based on these factors, the Boards concluded that the Reorganization presents no significant risks that would outweigh the benefits of the Reorganization. ACCORDINGLY, THE BOARD OF EACH FUND RECOMMENDS THAT STOCKHOLDERS OF THE FUND VOTE FOR THE APPROVAL OF THE PROPOSAL RELATING TO THE REORGANIZATION. See "The Reorganization" and "Additional Information About the Funds." FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION The Funds have jointly requested a ruling from the Internal Revenue Service (the "IRS") with respect to the Reorganization to the effect that, among other things, no stockholder of either Fund will recognize taxable gain or loss upon the issuance of Acquiring Fund Shares in the Reorganization. The consummation of the Reorganization is subject to receipt of such ruling. Accordingly, neither Fund will recognize gain or loss in connection with the Reorganization. In addition, stockholders of the Acquired Fund who receive Acquiring Fund Shares pursuant to the Reorganization will recognize no gain or loss, except with respect to the cash received for a fractional share interest, if any. See "The Reorganization--Federal Income Tax Consequences of the Reorganization." 3 COMPARISON OF THE ACQUIRING FUND AND THE ACQUIRED FUND GENERAL The Acquiring Fund and the Acquired Fund are both non-diversified, closed-end management investment companies organized under the laws of the State of Maryland. The shares of the Acquiring Fund and of the Acquired Fund are listed and trade on the NYSE under the symbols MUA and MBD, respectively. The shares of the Funds are identical except for their trading prices. All of the shares of both Funds have equal non-cumulative voting rights and equal rights with respect to dividends, assets and dissolution. The Funds' shares are fully paid and non-assessable and have no preemptive, conversion or exchange rights. For more detailed information about the general business and management of the Funds, see "Additional Information About the Funds." For financial information regarding the Funds, see "Index to Financial Statements." INVESTMENT OBJECTIVE AND POLICIES The investment objective and policies of the Funds are virtually identical. Each Fund's investment objective is to provide stockholders with high current income exempt from Federal income tax by investing primarily in a portfolio of medium to lower rated or comparable unrated municipal obligations, the interest on which, in the opinion of bond counsel to issuer, is exempt from Federal income taxes. Each Fund seeks to achieve its investment objective by investing at least 80% of its total assets, except during temporary defensive periods, in a portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities and paying interest which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes ("Municipal Bonds"). The Acquired Fund seeks to achieve its objective by investing in Municipal Bonds with remaining maturities of greater than one year, while the Acquiring Fund is not subject to any such maturity limitations. Each Fund at all times, except during temporary defensive periods, will maintain at least 65% of its total assets in Municipal Bonds which are rated in any one of the medium and lower rating categories of a nationally recognized statistical rating organization or are unrated, in the case of the Acquiring Fund, or unrated securities of comparable quality, in the case of the Acquired Fund. In the case of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rating Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"), these ratings are currently Baa (Moody's) or BBB (S&P or Fitch) or lower, respectively. There can be no assurance that the investment objective of each Fund will be realized. See "Additional Information About the Funds--Investment Objective and Policies." MANAGEMENT OF THE FUNDS The Acquiring Fund and the Acquired Fund have the same directors and the same officers. In addition, Fund Asset Management, L.P. (the "Investment Adviser" or "FAM") acts as the investment 4 adviser for, and manages the investment and reinvestment of the assets of, both Funds. Pursuant to the Investment Management Agreements between the Adviser and each of the Funds, each Fund has agreed to pay the Adviser a monthly fee at an annual rate of 0.55% of each Fund's average weekly net assets for the services and facilities furnished by the Adviser. See "Management of the Funds-- Investment Adviser." DIVIDENDS AND DISTRIBUTIONS The Funds have identical dividend policies. Each Fund's present policy, which may be changed by its Board of Directors, is to pay dividends monthly and to distribute substantially all of its net investment income to holders of common stock. Net capital gains, if any, will be distributed annually to holders of common stock. See "The Reorganization--Description of Shares To Be Issued by the Acquiring Fund--Distributions" and "Additional Information About the Funds--Federal Income Tax Matters Associated with Investment in the Funds." AUTOMATIC DIVIDEND REINVESTMENT PLAN All dividend and capital gain distributions will be reinvested automatically in additional shares unless a stockholder elects to receive cash. Stockholders whose shares are held in the name of a broker or nominee should contact such broker or nominee to confirm that they may participate in each Fund's dividend reinvestment plan. See "The Reorganization--Description of Shares To Be Issued by the Acquiring Fund--Automatic Dividend Reinvestment Plan." SPECIAL CONSIDERATIONS REGARDING THE REORGANIZATION The close identity between the Acquiring Fund and the Acquired Fund that results from both Funds having the same investment objective and Investment Adviser and similar portfolio composition and yield should minimize any risks that might otherwise be associated with the Reorganization. Nevertheless, the following factors should be taken into consideration by stockholders of each Fund in their evaluation of the Reorganization: 1. Although the investment portfolios of both Funds must satisfy the same standards of credit quality and diversification, the actual securities owned by each Fund are different, as a result of which there are certain differences in the composition of the two investment portfolios. Of the securities owned by the Acquiring Fund as of May 31, 1994, 53.4% were rated in the medium grades by Moody's or S&P, 17.8% were rated in the lowest grades and 28.8% were unrated. The comparable percentages for the Acquired Fund were 79.7% in the medium grades, 10.4% in the lowest grades and 9.9% unrated. 2. There are small differences in concentration among the categories of issuers of the securities held in the portfolios of the Funds. For the Acquiring Fund, as of May 31, 1994, the highest concentration of securities was in the health care, general obligation and electric revenue categories, accounting for 30.1%, 18.8% and 10.0% of the Fund's portfolio, respectively, whereas 5 for the Acquired Fund, the highest concentration was in the health care, investor-owned utilities and industrial development categories, accounting for 28.2%, 20.3% and 12.6% of the portfolio. 3. During the periods since the inception of the Funds, shares of both Funds have generally traded at a premium and a discount to net asset value. Since the termination of share price stabilization following each Fund's initial public offering, share prices for the Acquiring Fund have fluctuated between a maximum premium of 6.16% and a maximum discount of 20.48%, and share prices for the Acquired Fund have fluctuated between a maximum premium of 5.35% and a maximum discount of 19.92%. Although there is no reason to believe that this pattern should be affected by the Reorganization, it is not possible to state whether shares of the Acquiring Fund will trade at a premium or discount to net asset value following the Reorganization, or what the extent any such premium or discount might be. 6 THE ANNUAL MEETINGS GENERAL This Joint Proxy Statement--Prospectus is furnished in connection with the solicitation by the Boards of Directors of the Acquiring Fund and the Acquired Fund of proxies to be voted at the Acquiring Fund Annual Meeting and the Acquired Fund Annual Meeting, respectively, each to be held at the offices of Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on Friday, March 10, 1995 at 9:00 a.m., and at any and all adjournments of such meetings. The cost of preparing, printing and mailing the enclosed proxy, accompanying notice and Joint Proxy Statement--Prospectus, and all other costs in connection with the solicitation of proxies, will be paid by the Funds pro rata, based on their relative assets. Additional solicitation may be made by letter, telephone or telegraph by officers of the Funds, by officers or employees of Merrill Lynch & Co. or the Investment Adviser, or by dealers and their representatives. The Funds have engaged Tritech Services, an affiliate of ML & Co., to assist in the solicitation of proxies at a total estimated cost of $3,000 for the Acquiring Fund and $3,000 for the Acquired Fund. The Board of Directors of each Fund has fixed the close of business on January 31, 1995 as the record date (the "Record Date") for determining holders of that Fund's shares of common stock entitled to notice of and to vote at each respective Fund's Annual Meeting. Each stockholder will be entitled to one vote for each Share held. At the close of business on the Record Date, there were outstanding 4,787,055 Shares of the Acquiring Fund and 5,752,965 Shares of the Acquired Fund. This Joint Proxy Statement--Prospectus is first being mailed to stockholders of the Funds on or about February 7, 1995. VOTING; PROXIES The Shares of the Acquiring Fund that are entitled to vote at the Acquiring Fund Annual Meeting and that are represented by properly executed proxies will, unless such proxies have been revoked, be voted in accordance with the stockholder's instructions indicated on such proxies. If no contrary instructions are indicated, such shares will be voted FOR approval of the issuance of additional shares of the Acquiring Fund in connection with the Reorganization, FOR the election of the six nominees for director and FOR ratification of the Acquiring Fund's selection of independent accountants, as described in this Joint Proxy Statement--Prospectus. The Shares of the Acquired Fund that are entitled to vote at the Acquired Fund Annual Meeting and that are represented by properly executed proxies will, unless such proxies have been revoked, be voted in accordance with the stockholder's instructions indicated on such proxies. If no contrary instructions are indicated, such Shares will be voted FOR approval of the Reorganization, FOR the election of the six nominees for director and FOR ratification of the Acquired Fund's selection of independent accountants, as described in this Joint Proxy Statement--Prospectus. A quorum of stockholders is required to take action at each Annual Meeting. A majority of the shares entitled to vote at each Annual Meeting, represented in person or by proxy, will constitute a quorum of stockholders at that Annual Meeting. Votes cast by proxy or in person at each Annual Meeting will be tabulated by the inspectors of elections appointed for that Annual Meeting. The 7 inspectors of election will determine whether or not a quorum is present at the Annual Meeting. The inspectors of election will treat abstentions as shares that are present and entitled to vote for purposes of determining a quorum. For purposes of determining the approval of the matters submitted to the stockholders for a vote, abstentions will be treated as shares voted against approval of the proposal relating to the Reorganization. Broker non-votes will have the same effect as a vote against the proposal relating to the Reorganization. The details of each proposal to be voted on by the stockholders of each Fund and the vote required for approval of each proposal (other than the ratification of the Fund's selection of independent accountants) are set forth under the description of each proposal below. Stockholders of either Fund who execute proxies may revoke them at any time before they are voted by filing with their Fund a written notice of revocation, by delivering a duly executed proxy bearing a later date, or by attending the meeting and voting in person. 8 THE REORGANIZATION The terms and conditions under which the proposed Reorganization may be consummated are set forth in the Agreement and Plan of Reorganization. Significant provisions of the Agreement are summarized below; however, this summary is qualified in its entirety by reference to the Agreement, a copy of which is attached as Appendix I to this Joint Proxy Statement--Prospectus. GENERAL The Agreement contemplates a proposed Reorganization under which (a) the Acquiring Fund would acquire substantially all of the assets of the Acquired Fund in exchange for the Acquiring Fund's assumption of substantially all of the liabilities of the Acquired Fund and the issuance of Acquiring Fund Shares to the Acquired Fund; (b) the Acquiring Fund Shares would be distributed to the stockholders of the Acquired Fund; and (c) the Acquired Fund would be dissolved and liquidated and its registration under the 1940 Act would be terminated. The assets of the Acquired Fund to be acquired by the Acquiring Fund consist primarily of Municipal Bonds, cash and other securities held in the Acquired Fund's portfolio. The number of Acquiring Fund Shares to be issued to the Acquired Fund would be that number having an aggregate net asset value equal to the aggregate value of the Acquired Fund's assets transferred to, net of the liabilities assumed by, the Acquiring Fund as of the time such assets and liabilities are transferred and assumed (the "Exchange Date"). If the proposals relating to the Reorganization are approved, the Exchange Date is expected to be the close of business on March 13, 1995, the first business day following the Annual Meetings. If the Reorganization is approved, the assets of the Funds would be combined and the investment objective and policies and general portfolio characteristics of the larger combined entity would be virtually identical to that of each of the separate Funds. The Boards of Directors of the Funds believe that this will provide benefits to stockholders of both Funds as described below under "Reasons for the Proposed Reorganization." The result of the Reorganization would be that (a) the Acquiring Fund would add to its gross assets substantially all of the assets of the Acquired Fund, other than cash to be used to pay expenses of the Acquired Fund and to make a final distribution of ordinary income and capital gains to the stockholders of the Acquired Fund as of the Exchange Date and (b) the stockholders of the Acquired Fund as of the Exchange Date would become stockholders of the Acquiring Fund. See "Description of Shares To Be Issued by the Acquiring Fund" and "Comparison of Rights of Holders of Shares of the Acquiring Fund and the Acquired Fund" for a description of the rights of such stockholders. For Federal income tax reasons, the Acquired Fund must distribute all of its income and capital gains prior to the end of its fiscal year, which would occur at the Exchange Date. 9 If the stockholders of the Funds approve the proposals relating to the Reorganization, the assets of the Acquired Fund to be acquired by the Acquiring Fund will include without limitation all cash (except as necessary to pay the liabilities retained by the Acquired Fund or described in the next sentence), cash equivalents, Municipal Bonds and other securities, receivables and other property owned by the Acquired Fund. The Acquiring Fund will assume from the Acquired Fund all debts, liabilities, obligations and duties of the Acquired Fund, other than (a) certain expenses incurred by the Acquired Fund in connection with the Reorganization and (b) the Acquired Fund's obligation to distribute any ordinary income and capital gains accrued as of the Exchange Date. The value of the Acquired Fund's assets to be acquired and the liabilities to be assumed by the Acquiring Fund and the net asset value per share for the shares to be issued by the Acquiring Fund will be determined by The Bank of New York ("BONY"), the custodian for both of the Funds, as of the Exchange Date. To determine the net asset value per share for the Funds, the value of the securities held by each Fund plus any cash or other assets (including interest and dividends accumulated but not yet received) minus all liabilities (including accrued expenses) is divided by the total number of shares outstanding at such time. Expenses, including the fees payable to the Investment Adviser, are accrued daily. The number of Acquiring Fund Shares to be issued to the Acquired Fund pursuant to the Reorganization will be calculated based on the determinations of BONY. As soon as practicable after the Exchange Date, the Acquired Fund would dissolve and distribute the Acquiring Fund Shares received by it pro rata to its stockholders of record in exchange for such stockholders' interests in the Acquired Fund. Such dissolution and distribution would be accomplished by opening accounts on the books of the Acquiring Fund in the names of the stockholders of the Acquired Fund and transferring to those stockholder accounts the Acquiring Fund Shares previously credited on those books to the account of the Acquired Fund. Each stockholder account would represent the respective pro rata number of Acquiring Fund Shares (rounded down, in the case of fractional Shares, to the next largest number of whole Shares) due such Acquired Fund stockholder. No fractional Shares will be issued. In lieu thereof, the Acquired Fund's transfer agent, The Bank of New York, will aggregate all fractional shares 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 his or her pro rata share of the proceeds of such sale upon surrender of his or her Acquired Fund Share certificates. See "Surrender and Exchange of Acquired Fund Share Certificates" for a description of the procedures to be followed by Acquired Fund stockholders to obtain their Acquiring Fund Shares (and cash in lieu of fractional Shares, if any). Accordingly, as a result of the Reorganization, every stockholder of the Acquired Fund would own Acquiring Fund Shares that, except for cash payments received in lieu of fractional shares, would have an aggregate net asset value immediately after the Exchange Date equal to the aggregate net asset value of that stockholder's Acquired Fund Shares immediately prior to the Exchange Date. Since the Acquiring Fund Shares would be issued at net asset value in exchange of net assets of the Acquired Fund having a value equal to the aggregate net asset value of those shares, the net asset value per share of the Acquiring Fund Shares should remain virtually unchanged by the Reorganization. Thus, the 10 Reorganization should result in virtually no dilution of net asset value of any stockholder's holdings, other than to reflect the cost to effect the Reorganization. See "Pro Forma Financial Information." However, as a result of the Reorganization, a stockholder of either Fund would likely hold a reduced percentage of ownership in the larger combined entity than he or she did in either of the constituent Funds. The Agreement may be terminated and the Reorganization abandoned, whether before or after approval by the Funds' stockholders, at any time prior to the Exchange Date (a) by the mutual written consent of the Boards of Directors of the Funds or (b) by either Fund if the conditions to that Fund's obligations under the Agreement have not been satisfied or waived and it reasonably appears that such conditions will not be satisfied. Under Maryland law and each Fund's Articles of Incorporation/By-Laws, stockholders of the Funds do not have appraisal rights with respect to the Reorganization. REASONS FOR THE PROPOSED REORGANIZATION The Board of Directors of the Acquiring Fund and the Board of Directors of the Acquired Fund, which consist of the same directors, each believes that the Reorganization is in the best interests of the stockholders of its respective Fund and unanimously recommends that the stockholders of that Fund vote FOR approval of the proposal relating to the Reorganization. In approving the Reorganization, the Boards identified certain benefits that are likely to result from combining the Funds, including lower expenses per share, greater efficiency and flexibility in portfolio management and a more liquid trading market for the shares of the combined Fund. The Boards also considered the possible risks and costs of combining the Funds and determined that the Reorganization is likely to provide benefits to the stockholders of both Funds that outweigh the costs and that there are no significant risks. The larger Fund that would result from the Reorganization would have a much larger asset base than either Fund has currently. Based on data presented by the Investment Adviser, the Boards believe that administrative expenses for a larger combined Fund will be less than the aggregate expenses for the two smaller Funds, resulting in a lower expense ratio for the combined Fund and higher earnings for stockholders. Management projections estimate that the Acquiring Fund will have net assets in excess of $150 million upon completion of the Reorganization. A larger asset base should provide benefits in portfolio management. The Acquiring Fund after the Reorganization should be able to purchase large amounts of Municipal Bonds at more favorable prices than either of the Funds separately and, with this greater purchasing power, request improvements in the terms of Municipal Bonds (e.g., added indenture provisions covering call protection, sinking funds, audits for the benefit of large holders) prior to purchase. 11 In approving the Reorganization, the Boards of Directors of the Funds determined that the interests of existing stockholders of the Funds would not be diluted as a result of the Reorganization. See "Pro Forma Financial Information." Although the Reorganization is expected to result in a reduction in net asset value per Acquiring Fund Share (and per Acquired Fund Share equivalent) of approximately $.02 as a result of the estimated costs of the Reorganization, management of the Funds advised the Boards that it expects that such costs will be recovered within 18 months after the Exchange Date. See "Expenses Associated with the Reorganization." In approving the Reorganization, the Boards considered the fact that the Reorganization should not be expected to have an adverse effect on the financial status and ongoing performance of each Fund. The Boards also 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 virtually identical investment objectives and investment policies, their common management and their similar portfolios of Municipal Bonds. Based on these factors, the Boards concluded that the Reorganization presents no significant risks and minimal costs (including relatively minor legal, accounting and administrative costs, most of which have already been incurred in evaluating and analyzing the Reorganization) that would outweigh the benefits discussed above. VOTE REQUIRED Consummation of the Reorganization requires the approval of the stockholders of both Funds. Stockholders of the Acquiring Fund are being asked to approve the issuance of additional shares of the Acquiring Fund in connection with the Reorganization. Adoption of this proposal will require the affirmative vote of the holders of at least a majority of the Acquiring Fund Shares voting on the proposal, provided that the total vote cast on the proposal represents over 50% in interest of all shares of the Acquiring Fund entitled to vote on the proposal. Stockholders of the Acquired Fund are being asked to approve the Reorganization, whereby (a) the Acquired Fund would transfer substantially all of its assets to the Acquiring Fund in exchange for shares of the Acquiring Fund and the assumption of substantially all of the Acquired Fund's liabilities by the Acquiring Fund; and (b) the Acquiring Fund Shares received by the Acquired Fund would be distributed to stockholders of the Acquired Fund in dissolution of the Acquired Fund. Adoption of this proposal will require the affirmative vote of the holders of at least a majority of the shares of the Acquired Fund entitled to vote on the proposal. 12 DESCRIPTION OF SHARES TO BE ISSUED BY THE ACQUIRING FUND GENERAL The Articles of Incorporation of the Acquiring Fund (the "Acquiring Fund's Articles") authorizes the issuance of 200,000,00 shares of capital stock in a single class, par value $.10 per share. As of January 31, 1995, there were issued and outstanding 4,787,055 Acquiring Fund Shares. If the Reorganization is approved, at the Exchange Date the Acquiring Fund will issue additional Acquiring Fund Shares. The number of such additional Acquiring Fund Shares will be based on the relative net asset values of the Funds as of the Exchange Date; based on the relative net asset values as of November 30, 1994, the Acquiring Fund would have issued approximately 5,703,979 additional Acquiring Fund Shares if the Reorganization had occurred as of that date. The terms of the Shares to be issued pursuant to the Reorganization will be identical to the terms of the Acquiring Fund Shares that are outstanding. All of the Acquiring Fund's Shares have equal non-cumulative voting rights and equal rights with respect to dividends, assets and dissolution. The Acquiring Fund Shares are fully paid and non-assessable and have no preemptive, conversion or exchange rights. DIVIDENDS AND DISTRIBUTIONS It is the Acquiring Fund's present policy, which may be changed by the Board of Directors, to pay dividends monthly and to distribute substantially all of its net investment income to holders of common stock. Net capital gains, if any, will be distributed annually to holders of common stock. The Acquiring Fund's distribution level is determined by the Board of Directors of the Acquiring Fund after giving consideration to a number of factors, including the Acquiring Fund's undistributed net investment income and historical and projected investment income and expenses. Net income of the Acquiring Fund consists of all interest income accrued on portfolio assets, less all expenses of the Acquiring Fund. Expenses of the Acquiring Fund are accrued each day. AUTOMATIC DIVIDEND REINVESTMENT PLAN Pursuant to the Acquiring Fund's Automatic Dividend Reinvestment Plan (the "Plan"), unless a stockholder otherwise elects, all dividend and capital gain distributions will be automatically reinvested by The Bank of New York, as agent for stockholders in administering the Plan (the "Plan Agent"), in additional shares of Common Stock of the Acquiring Fund. Stockholders who elect not to participate in the Plan will 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 The Bank of New York, as dividend paying agent. Whether such participants may elect not to participate in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by written notice if received by the Plan Agent not less than ten days prior to any dividend record date; otherwise such termination will be effective with respect to any subsequently declared dividend or distribution. Whenever the Acquiring Fund declares an income dividend or a capital gains distribution (collectively referred to as "dividends") payable either in shares or in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in shares of Common Stock. The shares will be 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 13 of Common Stock from the Acquiring Fund ("newly issued shares") or (ii) by purchase of outstanding shares of 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 the Common Stock is equal to or less than the market price per share of the Common Stock plus estimated brokerage commissions (such condition being referred to herein as "market premium"), the Plan Agent will invest the dividend amount in newly issued shares on behalf of the participant. The number of newly issued shares of Common Stock to be credited to the participant's account will be 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 will invest 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 will have 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. It is contemplated that the Acquiring Fund will pay monthly income dividends. Therefore, the period during which open-market purchases can be made will exist only from the payment date of the dividend through the date before the next "ex-dividend" date which typically will be approximately ten days. If, before the Plan Agent has completed its open-market purchases, the market price of a share of 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 the Acquiring Fund's 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, the 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 will cease making open-market purchases and will invest the uninvested portion of the dividend amount in newly issued shares at the close of business on the last purchase date. The Plan Agent maintains all stockholders' accounts in the 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 will be held by the Plan Agent in non-certificated form in the name of the participant, and each stockholder's proxy will include those shares purchased or received pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote proxies for shares held pursuant to the Plan in accordance with the instructions of the participants. In the case of stockholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Agent will administer the 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 the Plan. There will be no brokerage charges with respect to shares issued directly by the Acquiring Fund as a result of dividends or capital gains distributions payable either in shares or in cash. However, each 14 participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open-market purchases in connection with the reinvestment of dividends. Stockholders participating in the Plan may receive benefits not available to stockholders not participating in the Plan. If the market price plus commissions of the Acquiring Fund's shares is above the net asset value, participants in the Plan will receive shares of the Acquiring Fund at less than they could otherwise purchase them and will 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 below the net asset value, participants will receive distributions on shares with a net asset value greater than the value of any cash distributions they would have received on their shares. However, there may be insufficient shares available in the market to make distributions in shares at prices below the net asset value. Also, since the Acquiring Fund does not redeem its shares, the price on resale may be more or less than the net asset value. See "Taxes" for a discussion of tax consequences of the Plan. Experience under the Plan may indicate that changes are desirable. Accordingly, the Acquiring Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Acquiring Fund reserves the right to amend the Plan to include a service charge payable by the participants. All correspondence concerning the Plan should be directed to the Plan Agent at 101 Barclay Street, New York, New York 10286. CERTAIN PROVISIONS IN THE ACQUIRING FUND'S ARTICLES OF INCORPORATION The Acquiring Fund's Articles of Incorporation include provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Acquiring 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 Acquiring Fund. A director may be removed from office with or without cause and only by a vote of the holders of at least 66 2/3% of the votes entitled to be voted on the matter. In addition, the Articles of Incorporation require the favorable vote of the holders of at least 66 2/3% of the Acquiring Fund's shares of capital stock, then entitled to be voted, voting as a single class, to approve, adopt or authorize the following: (i) a merger or consolidation or statutory share exchange of the Acquiring Fund with other corporations, (ii) a sale of all or substantially all of the Acquiring Fund's assets (other than in the regular course), (iii) a liquidation or dissolution of the Acquiring 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 the Acquiring Fund's shares of capital stock is required. 15 In addition, the conversion of the Acquiring Fund to an open-end investment company would require an amendment to the Acquiring Fund's Articles of Incorporation. 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 favorable vote of the holders of at least 66 2/3 of the Acquiring Fund's outstanding shares of capital 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). Such a vote also would satisfy a separate requirement in the 1940 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 1940 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 Acquiring 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 would no longer be listed on a stock exchange. The Board of Directors has determined that the 66 2/3 voting requirements described under "Certain Provisions in the Acquiring Fund's Articles of Incorporation," which are greater than the minimum requirements under Maryland law or the 1940 Act, are in the best interests of stockholders generally. Reference should be made to the Acquiring Fund's Articles of Incorporation on file with the Securities and Exchange Commission for the full text of these provisions. COMPARISON OF RIGHTS OF HOLDERS OF SHARES OF THE ACQUIRING FUND AND THE ACQUIRED FUND The terms of the Acquiring Fund Shares to be issued in the Reorganization, as described above, are identical to the terms of the outstanding shares of the Acquired Fund. Moreover, each of the Funds is organized as a management investment company under the laws of the State of Maryland pursuant to virtually identical Articles of Incorporation. Therefore, the rights of holders of the Acquiring Fund Shares to be received by Acquired Fund stockholders in the Reorganization will be identical to their rights as holders of Acquired Fund Shares. The shares will simply represent an equity ownership in a larger combined entity after the Reorganization. The full text of each Fund's Articles of Incorporation is on file with the Commission and may be obtained as described under "Available Information." The terms of the Acquiring Fund's Automatic Dividend Reinvestment Plan also are identical to the terms of the Acquired Fund's Automatic Dividend Reinvestment Plan. SURRENDER AND EXCHANGE OF ACQUIRED FUND SHARE CERTIFICATES After the Exchange Date, each holder of an outstanding certificate or certificates formerly representing shares of the Acquired Fund will be entitled to receive, upon surrender of his or her certificates, a certificate or certificates representing the number of Acquiring Fund Shares distributable with respect to such holder's shares of the Acquired Fund, together with cash in lieu of any fractional shares. Promptly after the Exchange Date, the Transfer Agent will mail to each holder of certificates formerly representing shares of the Acquired Fund a letter of transmittal for use in surrendering his or 16 her certificates for certificates representing shares of the Acquiring Fund and cash in lieu of any fractional shares. PLEASE DO NOT SEND IN ANY SHARE CERTIFICATES AT THIS TIME. UPON CONSUMMATION OF THE REORGANIZATION, ACQUIRED FUND STOCKHOLDERS WILL BE FURNISHED INSTRUCTIONS FOR EXCHANGING THEIR ACQUIRED FUND SHARE CERTIFICATES FOR ACQUIRING FUND SHARE CERTIFICATES AND, IF APPLICABLE, CASH IN LIEU OF FRACTIONAL SHARES. From and after the Exchange Date, certificates formerly representing shares of the Acquired Fund will be deemed for all Fund purposes to evidence ownership of the number of full Acquiring Fund Shares distributable with respect to such shares of the Acquired Fund in the Reorganization, provided that until such Acquired Fund certificates have been so surrendered, no dividends payable to the holders of record of Acquiring Fund Shares as of any date subsequent to the Exchange Date will be paid to the holders of such outstanding Acquired Fund Share certificates. Dividends payable on Acquiring Fund Shares to holders of record as of any date after the Exchange Date and prior to the exchange of certificates by any Acquired Fund stockholder will be paid to such stockholder, without interest, at the time such stockholder surrenders his or her Acquired Fund Share certificates for exchange. From and after the Exchange Date, there will be no transfers on the stock transfer books of the Acquired Fund. If, after the Exchange Date, certificates representing shares of the Acquired Fund are presented to the Acquired Fund, they will be cancelled and exchanged for certificates representing the Acquiring Fund Shares and the cash in lieu of fractional shares, if any, distributable with respect to such Acquired Fund Shares in the Reorganization. EXPENSES ASSOCIATED WITH THE REORGANIZATION In evaluating the proposed Reorganization, management of the Funds estimated the amount of additional expenses the Funds would incur, including additional NYSE listing fees, Commission registration fees, legal and accounting fees and increased proxy and distribution costs. These estimates were based in part on historical expense information regarding expenses incurred by other funds managed by the Fund's management in preparation for previous stockholder meetings. The aggregate amount of estimated expenses, excluding Commission registration fees and annual NYSE fees which will be borne by the Acquiring Fund after the Reorganization, was then allocated to the Acquired Fund and the Acquiring Fund based on their respective asset size. Reorganization expenses of the Acquiring Fund and the Acquired Fund will be expensed subsequent to the Exchange Date. Management of the Funds expects that reduced administrative expenses resulting from the Reorganization should allow the Acquiring Fund to recover the projected costs of the Reorganization within approximately 18 months after the Exchange Date. 17 FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION The Funds have jointly requested a ruling from the IRS with respect to the Reorganization to the effect that, among other things, no stockholder of the Acquired Fund will recognize taxable gain or loss upon the issuance of Acquiring Fund Shares in the Reorganization. The consummation of the Reorganization is subject to receipt of such ruling. Based upon representations by the Acquired Fund that the Acquired Fund has qualified, and by the Acquiring Fund that the Acquiring Fund has qualified, as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code") for the taxable period up to and including the business day prior to the date on which the Reorganization takes place, the status of each Fund as a regulated investment company will not be affected as a result of the Reorganization, except that upon the liquidation of the Acquired Fund in connection with the Reorganization its regulated investment company status will terminate. The following discussion summarizes the anticipated federal income tax treatment to stockholders of the Acquired Fund. Exchange of Acquired Fund Shares Solely for Acquiring Fund Shares. A stockholder of the Acquired Fund who receives Acquiring Fund Shares pursuant to the Reorganization will recognize no gain or loss, except with respect to the cash received for a fractional share interest, if any. See "Fractional Share Interests" below. The aggregate basis of the Acquiring Fund Shares received by a stockholder of the Acquired Fund (including any fractional share interest to which he or she may be entitled) will be the same as the stockholder's aggregate basis in the Acquired Fund Shares surrendered in exchange therefor, decreased by any cash received and increased by the amount of gain recognized on the exchange. The holding period of the Acquiring Fund Shares received by a stockholder of the Acquired Fund (including any fractional share interest to which he or she may be entitled) will include the period during which the stockholder's Acquired Fund Shares were held, provided such Acquired Fund Shares were held as a capital asset at the Exchange Date. Fractional Share Interests. No fractional Acquiring Fund Shares will be issued in the Reorganization. Cash payments received by Acquired Fund stockholders in lieu of a fractional Acquiring Fund Share will be treated as received by such stockholders as a distribution in redemption by the Acquiring Fund of that fractional share interest and will be treated as a distribution in full payment in exchange for the fractional share interest, resulting in a capital gain or loss assuming the Acquired Fund Shares exchanged for cash in lieu of the fractional shares were held as a capital asset at the Exchange Date. THE FOREGOING IS INTENDED TO BE ONLY A SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION AND SHOULD NOT BE CONSIDERED TO BE TAX ADVICE. THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE SERVICE WILL CONCUR ON ALL OR ANY OF THE ISSUES DISCUSSED ABOVE. ACQUIRED FUND STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES WITH RESPECT TO THE FOREGOING MATTERS AND ANY OTHER CONSIDERATIONS WHICH MAY BE APPLICABLE TO THEM. 18 PRO FORMA FINANCIAL INFORMATION The following tables set forth the unaudited capitalization and income of the Funds as of and for the period ending November 30, 1994 and as adjusted to give effect to the Reorganization discussed herein. PRO FORMA CAPITALIZATION AS OF NOVEMBER 30, 1994 (UNAUDITED)
ACQUIRING FUND ACQUIRED FUND PRO FORMA ACQUIRING FUND (ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED) -------------- ------------- ----------- -------------- Net assets........................ $ 59,622,761 $ 71,046,215 $ (948,467)(1) $ 129,720,509 -------------- ------------- ----------- -------------- -------------- ------------- ----------- -------------- Shares Outstanding................ 4,787,055 5,752,965 (48,986)(2) 10,491,034 -------------- ------------- ----------- -------------- -------------- ------------- ----------- -------------- Net asset value per share: As of November 30, 1994......... $ 12.45 $ 12.35 -------------- ------------- -------------- ------------- After distribution of ordinary income(3)..................... $ 12.38 $ 12.28 -------------- ------------- -------------- ------------- After Reorganization-related expenses and distribution of ordinary income .............. $ 12.36 $ 12.26 $ 12.36 -------------- ------------- -------------- -------------- ------------- --------------
- ------------ (1) The adjusted balances are presented as if the Reorganization were effective as of the beginning of the period ending November 30, 1994 for information purposes only. The actual Exchange Date of the Reorganization is expected to be March 13, 1995, at which time the results would be reflective of the actual composition of stockholders' equity at that date. Assumes distributions of ordinary income and accrual of estimated Reorganization- related expenses of $200,000. (2) Assumes the issuance of 5,703,979 Acquiring Fund Shares in exchange for the net assets of the Acquired Fund, which number is based on the net asset value of the Acquiring Fund Shares, and the net asset value of the Acquired Fund, as of November 30, 1994, after adjustment for the distributions referred to in (3) below. The issuance of such number of Acquiring Fund Shares would result in the distribution of .991485 Acquiring Fund Shares for each Acquired Fund Share upon liquidation of the Acquired Fund. Based on the issuance of 5,703,979 additional Acquiring Fund Shares and the cancellation of 5,752,965 Acquired Fund Shares. (3) Assumes the Acquired Fund distributes all its undistributed net investment income to its stockholders and the Acquiring Fund distributes all of its undistributed net investment income to its stockholders. 19 PRO FORMA CONDENSED INCOME STATEMENT INCEPTION(1) THROUGH NOVEMBER 30, 1994 (UNAUDITED)
ACQUIRED ACQUIRING ACQUIRING FUND FUND PRO FORMA FUND (ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED) -------------- ----------- ----------- ------------- Investment Income: Interest income..................... $ 2,233,873 $ 2,656,231 $ 4,890,104 -------------- ----------- ------------- Expenses Management fees................... 174,139 218,448 392,587 All other expenses................ 109,412 124,496 121,332 (2) 355,240 -------------- ----------- ----------- ------------- Total expenses................ 283,551 342,944 121,332 747,827 -------------- ----------- ----------- ------------- Total Expenses after reimbursement.... 172,735 124,496 121,332 418,563 -------------- ----------- ----------- ------------- Net investment income................. 2,061,138 2,531,735 (121,332) 4,471,541 -------------- ----------- ----------- ------------- Realized Net Loss on Investments: Net realized loss from investments........................... (1,160,475) (2,514,281) (3,674,756) Net unrealized depreciation of investments........................... (3,352,413) (3,233,306) (6,585,719) -------------- ----------- ------------- Net decrease in net assets from operations............................ $ (2,451,750) $(3,215,852) $ (121,332) (5,788,934) -------------- ----------- ----------- ------------- -------------- ----------- ----------- -------------
- ------------ EXPLANATORY NOTES (1) The Acquiring Fund was organized in April 1993 and commenced operations on June 25, 1993. The Acquired Fund was organized in August 1993 and commenced operations on October 29, 1993. (2) Reflects the charge for estimated reorganization expenses of $200,000 net of the $78,668 estimated reduction in operating expenses, including audit, legal, custodian, stock exchange and report printing. The Acquiring Fund (As Adjusted) would have a much larger asset base than either Fund currently has. Certain operating expenses would have been reduced had they been applied to the larger asset base for one Fund, rather than to two smaller separate Funds. 20 ELECTION OF DIRECTORS At the Meeting, the Board of Directors of each of the Funds will be elected to serve for terms ending on the dates of subsequent Annual Meetings of Stockholders as follows--Class I in 1995, Class II in 1996, and Class III in 1997--or until their successors are duly elected and qualified, or in the case of the Acquired Fund, until the earlier dissolution of the Acquired Fund. It is the intention of the persons named in the accompanying form of Proxy to vote, on behalf of the stockholders, for the election of the six nominees listed below as Directors of each Fund, divided into three classes as follows: CLASS I CLASS II CLASS III ------------- ------------ ------------------- Arthur Zeikel Joe Grills Melvin R. Seiden Harry Woolf Walter Mintz Stephen B. Swensrud All of the Directors have been members of the Board of Directors since each Fund's initial public offering in 1993, except Joe Grills, who has been a member of the Board of Directors of the Acquiring Fund since January 1994. Each of the nominees for Director has consented to be named in this Proxy Statement and to serve as a Director if elected. The members of the Board of Directors and the nominees for election to the Board are the same for both Funds. The Board of Directors knows of no reason why any of these nominees will be unable to serve, but in the event of any such unavailability, the proxies received will be voted for such substitute nominee or nominees as the Board of Directors may recommend. If the Reorganization is approved, the Directors of the Acquired Fund will cease to serve as Directors of the Acquired Fund upon the dissolution of the Acquired Fund pursuant to the Agreement. 21 Certain information concerning the nominees is set forth as follows:
SHARES OF COMMON STOCK BENEFICIALLY OWNED AT JANUARY 31, 1995 --------------------- PRINCIPAL OCCUPATIONS THE THE NAME AND ADDRESS DURING PAST FIVE YEARS AND DIRECTOR ACQUIRING ACQUIRED OF NOMINEES AGE PUBLIC DIRECTORSHIPS SINCE FUND FUND - ----------------------------- --- ----------------------------- -------- --------- -------- Arthur Zeikel(1)(3).......... 62 President and Chief 1993 0 0 P.O. Box 9011 Investment Officer of FAM Princeton, New Jersey since 1977; President of 08543-9011 MLAM since 1977 and Chief Investment Officer since 1976; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Executive Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") since 1990; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Senior Vice President of Merrill Lynch from 1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc. ("MLFD"). Walter Mintz(1)(2)........... 65 Special Limited Partner of 1993 0 0 1114 Avenue of the Americas Cumberland Associates New York, New York (investment partnership) 10036 since 1982. Melvin R. Seiden(1)(2)....... 64 President of Silbanc 1993 0 0 780 Third Avenue Properties, Ltd. (real Suite 2502 estate investment and New York, New York consulting) since 1987; 10017 Chairman and President of Seiden & de Cuevas, Inc. (private investment firm) from 1964 to 1987. Stephen B. Swensrud(1)(2).... 61 Principal of Fernwood 1993 0 0 24 Federal Street Associates (financial Boston, Massachusetts consultants); Director, 02110 Hitchiner Manufacturing Company.
22
SHARES OF COMMON STOCK BENEFICIALLY OWNED AT JANUARY 31, 1995 --------------------- PRINCIPAL OCCUPATIONS THE THE NAME AND ADDRESS DURING PAST FIVE YEARS AND DIRECTOR ACQUIRING ACQUIRED OF NOMINEES AGE PUBLIC DIRECTORSHIPS SINCE FUND FUND - ----------------------------- --- ----------------------------- -------- --------- -------- Joe Grills(1)................ 59 Member of the Committee on 1994 0 0 183 Soundview Lane Investment of Employee New Canaan, Connecticut Benefit Assets of the 06840 Financial Executives Institute ("CIEBA") since 1986, member of CIEBA's Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Corporation ("IBM") and Chief Investment Officer of the IBM Retirement Funds from 1986 to 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund; Director, Duke Management Company and Winthrop Financial Associates (real estate management). Harry Woolf(1)(2)............ 71 Professor and former Director 1993 0 0 Institute for Advanced of the Institute for Study Advanced Study since 1976; Olden Lane Director, Alex. Brown Princeton, New Jersey 08540 Mutual Funds, Advanced Technology Laboratories, Family Health International and SpaceLabs Medical (medical equipment, manufacturing and marketing).
- ------------ (1) Each of the nominees is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLAM acts as investment adviser. See "Merrill Lynch Investment Company Directorships" below. (2) Member of Audit Committee of the Board of Directors. (3) Interested person, as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), of the Fund. 23 Committees and Board of Directors' Meetings. Each Fund has a standing Audit Committee, which consists of the Directors who are not "interested persons" of the Fund within the meaning of the 1940 Act. The principal purpose of the Audit Committee is to review the scope of the annual audit conducted by the Fund's independent auditors and the evaluation by such auditors of the accounting procedures followed by the Fund. The members of the audit committee for both Funds are Messrs. Grills, Mintz, Seiden, Woolf and Swensrud. The non-interested Directors have retained independent legal counsel to assist them in connection with these duties. Neither Fund has a nominating committee. During the fiscal year ended May 31, 1994, the Board of Directors of each Fund held four meetings and the respective Audit Committee held four meetings. Each of the Directors attended at least 75% of the total number of meetings of the Board of Directors held while he was a Director during such period. All members of the Audit Committee attended at least 75% of the meetings of the Audit Committee held while he was a Director during such period. Interested Persons. The Fund considers Mr. Zeikel to be an "interested person" of the Fund within the meaning of Section 2(a)(19) of the 1940 Act as a result of the position he holds with FAM and its affiliates. Mr. Zeikel is the President of both Funds and the President and a Director of FAM and MLAM. Compensation of Directors. FAM, the investment adviser, pays all compensation of all officers and Directors of the Funds who are affiliated with ML & Co. or its subsidiaries. Prior to January 19, 1994, the Acquiring Fund paid each Director not affiliated with the investment adviser a fee of $2,500 per year plus $500 per regular meeting attended, together with such Director's actual out-of-pocket expenses relating to attendance at meetings. Also prior to January 19, 1994, the Acquiring Fund paid each member of its Audit Committee a fee of $250 per year plus $125 per meeting attended, together with such Director's actual out-of-pocket expenses relating to attendance at meetings. As of January 19, 1994, each Fund pays each Director not affiliated with the investment adviser a fee of $2,600 per year, plus $250 per regular meeting attended. The Funds also pay each member of its Audit Committee an annual fee of $800 plus a fee of $150 for each Audit Committee meeting attended together with such Director's actual out-pocket-expenses. For the fiscal period ended May 31, 1994, these fees and expenses aggregated $19,565 for the Acquiring Fund and $18,960 for the Acquired Fund. Set forth below is a chart showing the aggregate compensation paid by the Funds to each of its Directors, as well as the total compensation paid to each Director of the Funds by each Fund and by other investment companies advised by the Investment Adviser or MLAM (collectively, the "Fund Complex") for their services as Directors or Trustees of such investment companies.
AGGREGATE AGGREGATE PENSION OR TOTAL COMPENSATION COMPENSATION COMPENSATION RETIREMENT BENEFITS FROM THE FUNDS AND FROM THE FROM THE ACCRUED AS PART FUND COMPLEX PAID NAME OF DIRECTOR ACQUIRING FUND ACQUIRED FUND OF THE FUNDS' EXPENSES TO DIRECTORS - ------------------------------------- ---------------------- ------------- ------------------- ------------------ Walter Mintz(1)...................... $ 4,775 $ 4,950 None $ 141,450 Melvin R. Seiden(1).................. 4,775 4,950 None 146,450 Stephen B. Swensrud(1)............... 4,775 4,950 None 141,450 Joe Grills(1)........................ 1,900 2,067 None 89,234 Harry Woolf(1)....................... 4,775 4,950 None 146,450
(Footnotes on following page) 24 (Footnotes for preceding page) - ------------ (1) The Directors serve on the boards of other FAM/MLAM Advisory Funds as follows: Walter Mintz (17 boards), Melvin R. Seiden (17 boards), Stephen B. Swensrud (18 boards) and Harry Woolf (17 boards). Merrill Lynch Investment Company Directorships. FAM and its parent, MLAM, act as the investment adviser for more than 100 other registered investment companies. Mr. Zeikel is a trustee or director of each of these companies except for Merrill Lynch Series Fund, Inc., Merrill Lynch Institutional Intermediate Fund, and Merrill Lynch Funds for Institutions Series. Messrs. Grills, Mintz, Seiden, Swensrud and Wolf are trustees or directors of Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Financial Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Variable Series Fund, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., MuniInsured Fund, Inc., and MuniYield Insured Fund, Inc. Mr. Swensrud is also a director of Merrill Lynch Series Fund, Inc. Officers of the Funds. The Acquiring Fund and the Acquired Fund have the same executive officers. The Board of Directors has elected eight officers of the Funds. The principal business address of each officer is 800 Scudders Mill Road, Plainsboro, New Jersey 08536. The following sets forth information concerning each of these officers:
OFFICER NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE - ---------------------------------------------------------------- -------------- ---- ------- Arthur Zeikel................................................... President 62 1993 President and Chief Investment Officer of FAM since 1977; President of MLAM since 1977 and Chief Investment Officer since 1976; Executive Vice President of ML & Co. since 1990; Executive Vice President of Merrill Lynch since 1990 and Senior Vice President from 1985 to 1990; President and Director of Princeton Services since 1993; Director of MLFD since 1991. Terry K. Glenn.................................................. Executive Vice 54 1993 Executive Vice President of FAM and MLAM since 1983; President President of MLFD since 1986 and Director since 1991; President of Princeton Administrators, L.P. since 1988; Executive Vice President of Princeton Services since 1993. Vincent R. Giordano............................................. Senior Vice 50 1993 Senior Vice President of FAM and MLAM since 1984 and Vice President President of MLAM from 1980 to 1984; Portfolio Manager of FAM and MLAM since 1977; Senior Vice President of Princeton Services since 1993. Kenneth A. Jacob................................................ Vice President 43 1993 Vice President of FAM and MLAM since 1984; employed by MLAM since 1978; Portfolio Manager of the Funds since 1993. Donald C. Burke................................................. Vice President 34 1993 Vice President of MLAM and Director of Taxation since 1990; Employee of Deloitte & Touche LLP from 1982 to 1990.
25
OFFICER NAME AND PRINCIPAL OCCUPATION OFFICE AGE SINCE - ---------------------------------------------------------------- -------------- ---- ------- Gerald M. Richard............................................... Treasurer 45 1993 Senior Vice President and Treasurer of FAM and MLAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President since 1981. Mark B. Goldfus................................................. Secretary 48 1993 Vice President of FAM and MLAM since 1985. Robert E. Putney, III........................................... Assistant 34 1993 Attorney associated with FAM and MLAM since 1991; and attorney Secretary in private practice from 1985 to 1991.
Stock Ownership. At January 31, 1995, the Directors and officers of the Funds as a group (thirteen persons) owned an aggregate of less than 1/4 of 1% of the Common Stock of the Funds outstanding at such date. At such date, Mr. Zeikel, a Director of the Funds, and the officers of the Funds owned an aggregate of less than 1% of the outstanding shares of common stock of ML & Co. Section 30(f) of the 1940 Act and Section 16(a) of the Exchange Act require the Funds' officers and Directors, investment adviser, affiliated persons of the investment adviser and persons who own more than ten percent of a registered class of either Fund's equity securities to file forms reporting their affiliation with that Fund and reports of ownership and changes in ownership of that Fund's Shares with the Commission and the NYSE. These persons and entities are required by Commission regulation to furnish each Fund with copies of all Section 16(a) forms they file. Based on a review of these forms furnished to each Fund, both of the Funds believe that for the period from each Fund's respective date of organization through May 31, 1994, all Section 16(a) filing requirements applicable to the Funds' officers and trustees, investment adviser and affiliated persons of the investment adviser were complied with. To the knowledge of each Fund, there are no greater than ten-percent stockholders of either Fund. SELECTION OF INDEPENDENT AUDITORS The Board of Directors of each Fund, including a majority of the Directors who are not interested persons of the Funds, has selected the firm of Deloitte & Touche LLP ("D&T"), Independent Auditors, to examine the financial statements of each Fund for the current fiscal year. The Funds know of no direct or indirect financial interest of D&T in each Fund. Such appointment is subject to ratification or rejection by the stockholders of the Funds. Unless a contrary specification is made, the accompanying proxy will be voted in favor of ratifying the selection of such auditors. D&T also acts as independent auditors for ML & Co. and all of its subsidiaries and for a majority of the investment companies for which FAM or MLAM acts as investment adviser. The fees received by D&T from these other entities are substantially greater, in the aggregate, than the total fees received by it from the Fund. The Board of Directors of the Fund considered the fact that D&T has been retained as the independent auditors for ML & Co. and the other entities described above in its evaluation of the independence of D&T with respect to the Funds. Representatives of D&T are expected to be present at the meeting and will have the opportunity to make a statement if they so desire and to respond to questions from stockholders. 26 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS To the knowledge of the Acquiring Fund's management, no person owned beneficially more than five percent of the Acquiring Fund's outstanding shares at January 31, 1995. ADDITIONAL INFORMATION ABOUT THE FUNDS FINANCIAL HIGHLIGHTS The table below sets forth certain specified information for a share of Acquiring Fund Stock and Acquired Fund Stock outstanding throughout each period presented. This information is derived from the financial and accounting records of each Fund. The selected per share data and ratios of the Acquiring Fund for the six months ended November 30, 1994 have not been audited by Deloitte & Touche LLP, independent accountants to the Acquiring Fund. The selected per share data and ratios of the Acquiring Fund for the period from June 25, 1993 to May 31, 1994 have been audited by Deloitte & Touche LLP, independent accountants, whose report thereon was unqualified. The report of independent accountants of the Acquiring Fund for the fiscal year ended May 31, 1994 is attached hereto on page F-8. The selected per share data and ratios of the Acquired Fund for the six months ended November 30, 1994 have not been audited by Deloitte & Touche LLP, independent accountants to the Acquired Fund. The selected per share data and ratios of the Acquired Fund for the period from October 29, 1993 to May 31, 1994 have been audited by Deloitte & Touche LLP, independent accountants, whose report thereon was unqualified. The report of independent accountants of the Acquired Fund for the fiscal year ended May 31, 1994 is attached hereto on page F-23. The information should be read in conjunction with the financial statements and notes contained in each Fund's Semi-Annual and Annual Report which are available from the Fund's Transfer Agent, The Bank of New York, upon request. 27 SELECTED PER SHARE DATA AND RATIOS (FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
ACQUIRING FUND ACQUIRING FUND ACQUIRED FUND ACQUIRED FUND ----------------- --------------- ----------------- ------------------ FOR THE FOR THE SIX MONTHS FOR THE PERIOD SIX MONTHS FOR THE PERIOD ENDED JUNE 25, 1993** ENDED OCTOBER 29, 1993** NOVEMBER 30, 1994 TO MAY 31, 1994 NOVEMBER 30, 1994 TO MAY 31, 1994 ----------------- --------------- ----------------- ------------------ (UNAUDITED) (UNAUDITED) PER SHARE OPERATING PERFORMANCE Net Asset Value, Beginning of Period................................ $ 13.40 14.18 $ 13.36 14.18 ------- ------- ------- ------- Net Investment Income.............. .43 .81 .43 .45 Net Losses on Securities (Both Realized and Unrealized).................. (.95) (.66) (1.01) (.86) ------- ------- ------- ------- Total From Investment Operations..... (.52) .15 (.58) (.41) ------- ------- ------- ------- Less Dividends and Distributions: Dividends (from Net Investment Income)............................... (.43) (.74) (.43) (.38) Distributions (from Capital Gains)................................ -- (.15) -- -- ------- ------- ------- ------- Total Dividends and Distributions.... (.43) (.89) (.43) (.38) ------- ------- ------- ------- Organization and Offering Costs...... -- (.04) -- (.03) ------- ------- ------- ------- Net Asset Value, End of Period....... $ 12.45 $ 13.40 $ 12.35 $ 13.36 ------- ------- ------- ------- ------- ------- ------- ------- Per Share Market Value, End of Period............................. $11.375 $ 12.25 $11.375 $ 12.125 ------- ------- ------- ------- ------- ------- ------- ------- Total Investment Return*** Based on Net Asset Value per Share.............................. (3.66%)+ 0.83%+ (4.17%)+ (3.07%)+ ------- ------- ------- ------- ------- ------- ------- ------- Based on Market Price per Share.... (3.72%) + (12.87%)+ (2.75%)+ (16.84%)+ ------- ------- ------- ------- ------- ------- ------- ------- Ratios/Supplemental Data: Net Assets, End of Period (In Thousands)............................ $59,623 $64,154 $71,046 $ 88,879 ------- ------- ------- ------- ------- ------- ------- ------- Ratio of Expenses, Net of Reimbursement, to Average Net Assets................................ .54%* 0.20%* .31%* 0.03%* ------- ------- ------- ------- ------- ------- ------- ------- Ratio of Expenses to Average Net Assets................................ .89% 0.85%* .86%* 0.80%* ------- ------- ------- ------- ------- ------- ------- ------- Ratio of Net Investment Income to Average Net Assets.................... 6.49%* 6.12%* 6.32%* 5.44%* ------- ------- ------- ------- Portfolio Turnover Rate............... 23.42% 101.59% 24.17% 37.15% ------- ------- ------- ------- ------- ------- ------- -------
- ------------ * Annualized ** Commencement of operations *** Total investment returns exclude the effects of sales load + Aggregate total investment return. 28 GENERAL INFORMATION AND HISTORY The Acquiring Fund and the Acquired Fund are both non-diversified, closed-end management investment companies organized under the laws of the State of Maryland on April 15, 1993 and on August 24, 1993, respectively. Both of the Funds are registered under the 1940 Act. The principal office of the Acquiring Fund and the Acquired Fund is located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536 and their telephone number is (609) 282-2000. In June 1993, the Acquiring Fund issued 4,588,800 shares of common stock, $.10 par value per share, pursuant to the initial public offering thereof and commenced operations. In October 1993, the Acquired Fund issued 6,400,000 Shares, $.10 par value per share, pursuant to the initial public offering thereof and commenced operations. The following table sets forth the number of outstanding shares of each Fund as of January 31, 1995.
(3) AMOUNT HELD (4) BY FUND FOR AMOUNT OUTSTANDING (1) (2) ITS OWN EXCLUSIVE OF AMOUNT TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT SHOWN UNDER(3) - --------------------------------------------- ----------------- ------------ ------------------- Acquiring Fund Shares of Common Stock........ 200,000,000 -0- 4,787,055 Acquired Fund Shares of Common Stock......... 200,000,000 -0- 5,752,965
The shares of the Acquiring Fund are listed and trade on the NYSE under the symbol MUA. The shares of the Acquired Fund are listed and trade on the NYSE under the symbol MBD. The following tables set forth the high and low sales prices for each Fund's Shares as reported on the consolidated transaction reporting system for the periods indicated. PER SHARE DATA FOR ACQUIRING FUND COMMON STOCK TRADED ON THE NEW YORK STOCK EXCHANGE
MARKET PRICE NET ASSET VALUE ------------------ ------------------ FOR THE PERIOD HIGH LOW HIGH LOW - ------------------------------------------------------ ------- ------- ------- ------- June 25, 1993* to August 31, 1993..................... $15.00 $14.25 $ 14.74 $ 14.13 September 1, 1993 to November 30, 1993................ 14.875 13.75 14.99 14.42 December 1, 1993 to February 28, 1994................. 14.375 13.25 14.76 14.25 March 1, 1994 to May 31, 1994......................... 13.875 12.125 14.22 12.97 June 1, 1994 to August 31, 1994....................... 12.875 11.75 13.78 13.19 September 1, 1994 to November 30, 1994................ 12.375 10.125 13.68 12.26 December 1, 1994 to January 31, 1995.................. 12.00 10.875 13.03 12.50
- ------------ * Commencement of operations 29 PER SHARE DATA FOR ACQUIRED FUND COMMON STOCK TRADED ON THE NEW YORK STOCK EXCHANGE
MARKET PRICE NET ASSET VALUE ----------------- ---------------- FOR THE PERIOD HIGH LOW HIGH LOW - --------------------------------------------------------- ------- ------ ------ ------ October 29, 1993* to November 30, 1993................... $14.875 $14.75 $14.18 $14.05 December 1, 1993 to February 28, 1994.................... 14.875 13.00 14.48 14.04 March 1, 1994 to May 31, 1994............................ 13.625 12.00 14.00 12.90 June 1, 1994 to August 31, 1994.......................... 13.25 11.75 13.70 13.17 September 1, 1994 to November 30, 1994................... 12.375 10.00 13.45 12.15 December 1, 1994 to January 31, 1995..................... 11.63 10.75 12.75 12.33
- ------------ * Commencement of operations During the period since the inception of the Funds, the Acquiring Fund's Common Stock and the Acquired Fund's Common Stock have traded at premiums and discounts to net asset value. Although there is no reason to believe that this pattern should be affected by the Reorganization, it is not possible to state whether shares of the Acquiring Fund will trade at a premium or discount to net asset value following the Reorganization, or the extent of any such premium or discount. On January 31, 1995, the closing sale prices of shares of the Acquiring Fund and shares of the Acquired Fund were $12.00 and $11.625, respectively. These prices represent a discount to net asset value of the Acquiring Fund of 7.90% and a discount to net asset value of the Acquired Fund of 8.82%. 30 INVESTMENT OBJECTIVE AND POLICIES Each Fund's investment objective is to provide its stockholders with high current income exempt from Federal income taxes by investing primarily in a portfolio of medium to lower grade or unrated municipal obligations the interest on which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes. Each Fund seeks to achieve its objective by investing at least 80% of its assets, except during temporary defensive periods, in a portfolio of obligations, issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities paying interest which, in the opinion of bond counsel to the issuer, is exempt from Federal income taxes ("Municipal Bonds"). While the Acquiring Fund is not restricted as to the duration of Municipal Bonds it may invest in, the Acquired Fund's investment objective restricts its investment in Municipal Bonds to those that have remaining maturities of greater than one year. Each Fund, at all times, except during temporary defensive periods, maintains at least 65% of its assets in Municipal Bonds which are rated in any one of the medium and lower rating categories of a nationally recognized statistical rating organization or are unrated. For the Acquiring Fund, if such Municipal Bonds are unrated, they will possess creditworthiness comparable, in the opinion of the Investment Adviser, to securities rated in the medium and lower categories. In the case of Moody's, S&P or Fitch, these ratings are currently Baa (Moody's) or BBB (S&P or Fitch) or lower, respectively. These are fundamental policies of each Fund and, therefore, may not be changed without a vote of a majority of the outstanding shares of each Fund. Neither Fund presently contemplates that it will invest more than 25% of its total assets (taken at market value) in Municipal Bonds whose issuers are located in the same state. However, the Acquired Fund may invest 25% or more of its total assets in obligations of issuers in the health care industry. There can be no assurance that the investment objective of each Fund will be realized. Investment in shares of the Acquiring Fund offers several benefits. The Acquiring Fund offers investors the opportunity to receive income exempt from Federal income taxes by investing in a professionally managed portfolio of high-yielding Municipal Bonds. Since interest received on Municipal Bonds is exempt from Federal income taxes, the yields on Municipal Bonds tend to compare favorably with the net yield, after taxes, on many taxable debt securities. Additionally, investment research and credit analysis relating to the municipal securities in which the Acquiring Fund seeks to invest are not readily available. Moreover, many of these securities are not widely traded and the execution of transactions in such securities requires expertise. Consequently, the professional portfolio management which is provided by the Investment Adviser is particularly important in the sector of the municipal securities market in which the Acquiring Fund invests. The Acquiring Fund also relieves the investor of the burdensome administrative details involved in managing a portfolio of Municipal Bonds. The benefits are at least partially offset by the expenses involved in operating an investment company. Such expenses primarily consist of the advisory and administrative fees and operational costs. Investments in lower rated or comparable unrated Municipal Bonds generally provide a higher yield than higher rated tax-exempt securities of similar maturity but are subject to greater market risk and are also subject to a greater degree of risk with respect to the ability of the issuer to meet its principal and interest obligations. See Appendix II to this Prospectus for a description of Moody's, S&P's and Fitch's ratings of Municipal Bonds. 31 Each Fund seeks to reduce risk through diversification, credit analysis and monitoring of current developments and trends in both the economy and financial markets. The Investment Adviser uses various means to research the stability and/or potential for improvement of various municipal issuers in connection with the purchase of their securities by each Fund. Evaluation of each Municipal Bond may include the analysis of financial performance, debt structure, economic factors and the administrative structure of the issuer. Additionally, the priority of liens and the overall structure of the particular issue may be factors which will determine suitability for purchase. Further investigation may be performed and may include, among other things, discussions with project management, corporate officers and industry experts, as well as site inspections, area analysis, and project and financial projection analysis. All purchases and sales also may be subject to the review of market data, economic projections and the performance of the financial markets. Certain economic indicators also may be monitored. Additionally, the Investment Adviser may vary the average maturity of each Fund's portfolio securities, or may engage in hedging transactions, based upon the Investment Adviser's assessment of economic and market conditions. Each Fund is classified as non-diversified within the meaning of the 1940 Act, which means that each Fund is not limited by such Act in the proportion of its assets that it may invest in securities of a single issuer. However, the Funds' investments will be limited so as to qualify each Fund as a "regulated investment company" for purposes of the Code. See "Taxes." To qualify, among other requirements, each Fund will limit its investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of its 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 and the Acquired Fund will not own more than 10% of the outstanding voting securities of a single issuer. A fund which elects to be classified as "diversified" under the 1940 Act must satisfy the foregoing 5% requirement and 10% requirement with respect to 75% of its total assets. To the extent that each Fund assumes large positions in the securities of a small number of issuers, its net asset value may fluctuate to a greater extent than that of a diversified 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 primarily debt obligations, issued to obtain funds for various public purposes, including construction and equipping of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public or private institutions for the construction of facilities. For the Acquired Fund, the Municipal Bonds it invests in have remaining maturities of greater than one year. In addition, certain types of industrial development bonds are issued by or on behalf of public authorities to finance various privately operated facilities and certain local facilities, including pollution control facilities. For purposes of this Prospectus, such obligations are Municipal Bonds if the interest paid thereon is exempt from Federal income tax, even though such bonds may be "private activity bonds" as discussed below. 32 The two principal classifications of Municipal Bonds are "general obligation" and "revenue" or "special obligation" bonds. General obligation bonds are secured by the issuer's pledge of faith, credit and taxing power for the payment of principal and interest. The taxing power of any governmental entity may be limited, however, by provisions of state constitutions or laws, and an entity's credit will depend on many factors, including potential erosion of the tax base due to population declines, natural disasters, declines in the state's industrial base or inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes, and the extent to which the entity relies on Federal or state aid, access to capital markets or other factors beyond the state's or entity's control. 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. Industrial development bonds are, in most cases, revenue bonds and generally are not secured by a pledge of the credit or taxing power of the issuer of such bonds. The payment of the principal and interest on such industrial development 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 also may include "moral obligation" bonds which normally are 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. The Funds may purchase Municipal Bonds classified as "private activity bonds" (in general, bonds that benefit non-governmental entities). Interest received on certain tax-exempt securities which are classified as "private activity bonds" may subject certain investors in the Fund to an alternative minimum tax. There is no limitation on the percentage of the Fund's assets that may be invested in Municipal Bonds which may subject certain investors to an alternative minimum tax. See "Taxes." 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 which may be enacted in the future may affect the availability of Municipal Bonds for investment by the Funds. Each Fund may invest a relatively high percentage of its assets in Municipal Bonds issued by entities which may be located in the same geographic area, or which may pay their interest obligations from the revenues derived from similar projects such as hospitals, multifamily housing, nursing homes, continuing care facilities, commercial facilities (including hotels), electric utility systems or industrial companies. This may make the Funds more susceptible to similar economic, political or regulatory occurrences. As the similarity in issuers increases, the potential for fluctuation of the net asset value of shares of the Funds also increases. Also, it is anticipated that a significant percentage of the Municipal Bonds in each Fund's portfolio will be issued by entities or secured by facilities with a relatively short operating history. Therefore, investors should also be aware of the risks which these investments might entail, as discussed below. See also "Industrial Development Bonds" below. Health Care Revenue Bonds. These securities include Municipal Bonds issued to finance hospitals, nursing homes and continuing care facilities and which are generally secured by the revenues of particular facilities. The ability of the issuers of such securities to meet their obligations is dependent 33 upon, among other things, the revenues, costs and occupancy levels of the subject facilities and the competitive nature of these industries. In addition, a major portion of hospital and nursing home revenues typically is derived from Federal or state programs such as Medicare and Medicaid and from various insurers. Changes in the compensation and reimbursement formulae of these governmental programs or in the rates paid by insurers may reduce revenues available for the payment of principal of or interest on such bonds. New governmental legislation or regulations and other factors, such as the inability to obtain sufficient malpractice insurance, may also adversely affect the revenues or costs of these issuers. Moreover, in the case of life care facilities, since a portion of housing, medical care and other services may be financed by an initial lump-sum deposit paid by occupants of the facility, there may be risk if the facility does not maintain adequate financial resources to secure estimated actuarial liabilities. A number of legislative proposals concerning health care have been introduced in Congress in recent years or have been reported to be under consideration. In addition, the Clinton administration has proposed a comprehensive health care plan. These proposals include a wide range of topics, including cost controls, national health insurance, incentives for competition in the provision of health care services, tax incentives and penalties related to health care insurance premiums, and promotion of prepaid health care plans. The Funds are unable to predict the effect of any of these proposals, if enacted. Single Family Housing Bonds and Multifamily Housing Bonds. Single family housing bonds and multifamily housing bonds are obligations of state and local housing authorities that have been issued in connection with a variety of single and multifamily housing projects. Economic developments, including fluctuations in interest rates, increasing construction and operating costs, increasing real estate taxes and declining occupancy rates, and real estate investment risks may have an adverse effect upon the revenues of such projects and such housing authorities. Multifamily housing bonds may be subject to mandatory redemption prior to maturity, including redemption from non-completion of the project or upon receipt of FHA or certain other insurance proceeds. Bonds issued by state or local units of authorities and payable from revenues from single family residential mortgages may be subject to mandatory redemption prior to maturity, including redemption from mortgage loan prepayments and undisbursed bond proceeds reserved for the purpose of purchasing mortgage loans. Housing bonds may also be subject to changes in creditworthiness due to potential weaknesses of mortgage insurance companies providing various policies; fluctuations in the valuation of invested funds and the strengths of banks and other entities which may provide investment agreements; and smaller than expected mortgage portfolios due to the inability to originate mortgages. To the extent the Funds invest in housing bonds issued by an entity or entities located in the same geographic area, the Funds may be subject to the risks associated with the general economy of such area. Public Power Revenue Bonds. General problems of the electric utility industry include difficulty in financing large construction programs during an inflationary period; restrictions on operations and increased costs and delays attributable to environmental considerations; the difficulty of the capital markets in absorbing utility debt and equity securities; the availability of fuel for electric generation at reasonable prices, including, among other considerations, the potential rise in fuel costs and the costs associated with conversion to alternate fuel sources; technical costs factors and other problems 34 associated with construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive waste; and the effects of energy conservation. Certain of the issuers of these bonds may own or operate nuclear generating facilities. Federal, state and municipal governmental authorities may from time to time review and revise existing requirements and impose additional requirements governing the licensing, construction and operation of nuclear power plants. In addition, the licensing of certain nuclear power plants nearing completion of construction or constructed has been delayed indefinitely by the refusal of state and local officials to cooperate in emergency planning exercises that are a prerequisite to licensing. Each of the problems referred to above could adversely affect the ability of the issuer of public power revenue bonds to make payments of principal and/or interest on such bonds. Certain municipal utilities or agencies may have entered into contractual arrangements with investor-owned utilities and large industrial users and consequently may be dependent in varying degrees on the performance of such contracts for payment of bond debt service. Also, the enforceability against municipalities of "take-and-pay" and "take-or-pay" contracts which contracts secure bonds issued by other municipal issuers has been successfully challenged in recent years. Transportation Revenue Bonds. Bonds in this category include bonds issued for airport facilities, bridges, turnpikes, port facilities, railroad systems or mass transit systems. Generally, airport facility revenue bonds are payable from and secured by the revenues derived from the ownership and operation of a particular airport. Payment on other transportation bonds is often dependent primarily or solely on revenues from financed facilities, including user fees, charges, tolls and rents. Such revenues may be adversely affected by increased construction and maintenance costs or taxes, decreased use, competition from alternative facilities, scarcity of fuel, reduction or loss of rents or the impact of environmental considerations. Other transportation bonds may be dependent primarily or solely on Federal, state or local assistance including motor fuel and motor vehicle taxes, fees and licenses, and therefore may be subject to fluctuations in such assistance. Water and Sewage Revenue Bonds. Bonds in this category include securities issued to finance public water supply, treatment and distribution facilities, and sewage collection, treatment and disposal facilities. Repayment of these bonds is dependent primarily on revenues derived from the billing of residential, commercial and industrial customers for water and sewer services, as well as, in some instances, connection fees and hook-up charges. Such revenue bonds may be adversely affected by the lack of availability of Federal and state grants and by decisions of Federal and state regulatory bodies and courts. Solid Waste and Resource Recovery Revenue Bonds. Bonds in this category include securities issued to finance facilities for removal and disposal of solid waste. Repayment of these bonds is dependent on factors which may include revenues from appropriations from a governmental entity, the financial condition of the private project corporation* and revenues derived from the collection of charges for disposal of solid waste. In addition, construction of such facilities may be subject to cost overruns and the actual costs of operating such facilities may exceed the costs anticipated at the time - ------------ * For purposes of the description of users of facilities, all references to "corporations" are deemed to include any other nongovernmental person or entity. 35 the bonds were issued. Repayment of resource recovery bonds may also be dependent to various degrees on revenues from the sale of electric energy or steam. Bonds in this category may be subject to mandatory redemption in the event of project noncompletion, if the project is rendered uneconomical, if the project fails to meet certain performance criteria, or if it is considered an environmental hazard. Pollution Control Facility Revenue Bonds. Bonds in the pollution control facilities category include securities issued on behalf of private corporations including utilities, to provide facilities for the treatment of air, water and solid waste pollution. Repayment of these bonds is dependent upon income from the specified pollution control facility and/or the financial condition of the project corporation. In addition, governmental entities may from time to time impose additional restrictions or regulations which could adversely affect the cost or operation of the facility. Educational Facility Revenue Bonds. Educational facility revenue bonds include debt of state and private colleges, universities and systems, and parental and student loan obligations for dormitories, classrooms, libraries, research and training facilities and student aid. The ability of universities and colleges to meet their obligations is dependent on various factors, including the revenues, costs and enrollment levels of the institutions. In addition, their ability may be affected by declines in Federal, state and alumni financial support, fluctuations in interest rates and construction costs, increased maintenance and energy costs, failure or inability to raise tuition or room charges and adverse results of endowment fund investments. Tax Increment Bonds. Tax increment bonds are issued to finance various public improvements and redevelopment projects in blighted areas. Interest on such bonds is payable from increases in real property taxes attributable to increases in assessed value resulting from the redevelopment of the blighted project area. Repayment risks include, among other things, a reduction in taxable value in the project areas, reduction in tax rates, delinquencies in tax payments or a general shortfall in forecasted tax revenues. Commercial Facility Revenue Bonds. The Funds may also invest in bonds for other commercial facilities (including hotels) and industrial enterprises. The viability of such facilities depends on, among other things, general economic factors affecting those industries and affecting those geographic areas in which such facilities are situated, as well as the ability of the individual management of those facilities to maximize earnings and to remain competitive within its service area. Industrial Development Bonds ("IDBs"). Each Fund reserves the right to invest a portion of its assets in IDBs. IDBs are tax-exempt securities issued by states, municipalities or public authorities and are issued to provide funds, usually through a loan or lease arrangement, to a private corporation for the purpose of financing construction or improvement of a facility to be used by the corporation. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the corporation which may or may not be guaranteed by a parent company or otherwise secured. In view of this, an investor should be aware that repayment of such bonds depends on the revenues of a private corporation and be aware of the risks that such an investment may entail. Continued ability of a corporation to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors, including the size of the corporation, capital structure, demand for 36 products or services, competition, general economic conditions, government regulation and the corporation's dependence for revenues on the operation of the particular facility being financed. IDBs are often issued to provide funds for corporations from the industries described above and, consequently, are subject to similar risks. IDBs are also issued to provide funds to industrial companies. Investment in particular industries may expose the Fund to risks associated with such industries. Lease Obligations. Also included within the general category of Municipal Bonds are participation certificates issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. The certificates represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called "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 taxing power is pledged, a lease obligation is frequently 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 leased property, disposition of the property in the event of foreclosure might prove difficult. These securities represent a relatively new type of financing that has not yet developed the depth of marketability associated with more conventional securities. Non-Municipal Tax-Exempt Securities. Each Fund may also invest in securities not issued by or on behalf of a state or territory or by an agency or instrumentality thereof, if it nevertheless believes such securities to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt Securities could include trust certificates or other instruments evidencing interests in one or more long-term municipal securities. Non-Municipal Tax-Exempt Securities also may include securities issued by other investment companies that invest in Municipal Bonds, to the extent such investments are permitted by the 1940 Act. OTHER INVESTMENT POLICIES Each Fund has the authority to invest as much as 35% of its assets in Municipal Bonds in the higher rating categories of nationally recognized statistical rating organizations (ratings of A or higher by Moody's, S&P or Fitch or in comparable unrated securities). In addition, each Fund reserves the right to temporarily invest more than 20% of its assets in short-term municipal securities, or short-term taxable money market securities (including commercial paper, certificates of deposit and repurchase agreements) for defensive purposes when, in the opinion of the Investment Adviser, prevailing market or financial conditions warrant. Taxable commercial paper must be rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, F-1+ or F-1 by Fitch or have credit characteristics equivalent to such ratings in the opinion of the Investment Adviser. The short-term tax-exempt municipal obligations will also be in the highest rating categories as determined either by Moody's (currently, MIG1 and MIG2 for notes and P-1 for commercial paper), S&P (currently, SP-1 and SP-2 for notes and A-1 for commercial paper), or Fitch (currently, F-1 and F-2 for notes and F-1 for commercial paper), except that each Fund 37 may invest in lower rated or unrated short-term tax-exempt obligations to the extent that such investments do not exceed 20% of its assets. Certificates of deposit must be issued by depository institutions with total assets of at least $1 billion, except that the Funds may invest in certificates of deposit of smaller institutions if such certificates of deposit are Federally insured. When-Issued Securities and Delayed Delivery Transactions. The Funds may purchase or sell Municipal Bonds on a delayed basis or when-issued basis at fixed purchase or sale terms. These transactions arise when securities are purchased or sold by the Funds 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 its 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 each Fund will be established with its custodian consisting of cash, cash equivalents or liquid high grade Municipal Bonds having a market value at all times at least equal to the amount of the forward commitment. Indexed and Inverse Floating Obligations. The Funds may invest in Municipal Bonds the return on which is based on a particular index of value or interest rates. For example, each Fund may invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates or based on the value of gold or some other product. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of an index. To the extent each Fund invests in Municipal Bonds of these sorts, its return on such Municipal Bonds will be subject to risk with respect to the value of the particular index. Also, the Funds 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). The Funds may purchase original issue inverse floating rate bonds in both the primary and secondary markets and may also purchase in the secondary market synthetically created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, interest rates on inverse floating rate bonds will decrease when short-term rates increase, and will increase when short-term 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 which 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 will generally be more volatile than the market values of fixed-rate tax-exempt securities. To seek to limit the volatility of these securities, the Funds may purchase inverse floating obligations with shorter term maturities or which contain limitations on the extent to which the interest rate may vary. The Investment Adviser believes that indexed and inverse floating obligations represent a flexible portfolio management instrument for the Funds which allows the Investment Adviser to vary the degree of investment leverage relatively efficiently under different market conditions. Call Rights. The Funds 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 during the maturity of the related 38 Municipal Bond will expire without value. The economic effect of holding both a Call Right and the related Municipal Bond is identical to holding a Municipal Bond as a non-callable security. 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 certain financial futures contracts ("financial futures contracts") and options thereon. While the Funds' use of hedging strategies is intended to reduce the volatility of the net asset value of shares of the Funds' Common Stock, the net asset value of such shares will fluctuate. There can be no assurance that a Fund's hedging transactions will be effective. Furthermore, the Funds only engage in hedging activities when movements in interest rates occur from time to time and not necessarily when movements in interest rates occur. Certain Federal income tax requirements may limit the Funds' ability to engage in hedging transactions. Gains from transactions in options and futures contracts distributed to stockholders will be taxable as ordinary income or, in certain circumstances, as long-term capital gains to stockholders. See "Taxes--Tax Treatment of Options and Futures Transactions." The following is a description of the transactions involving financial futures contracts or options thereon in which the Funds may engage, limitations on the use of such transactions and risks associated therewith. The investment policies with respect to the hedging transactions of each Fund are not fundamental policies and may be modified by the Board of Directors of each Fund without the approval of its stockholders. Writing Covered Call Options. Each Fund may 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 it at the stated exercise price until the option expires. Each Fund writes only covered options, which means that so long as it is obligated as the writer of a call option, it will own the underlying securities subject to the option. The Funds may not write covered call options on underlying securities in an amount exceeding 15% of the market value of their total assets. The Funds will receive a premium from writing a call option, which increases their return on the underlying security in the event the option expires unexercised or is closed out at profit. By writing a call, each 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 its 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. The Funds may purchase put options in connection with its hedging activities. By buying a put the Fund has a right to sell the underlying security at the exercise price, thus limiting the Fund's 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, 39 a put option may be terminated by entering into 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 the 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, the 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. The Fund will not purchase options on securities if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund's total assets. Financial Futures Contracts and Options Thereon. The Fund is authorized to purchase and sell certain financial futures contracts and options thereon solely for the purpose of hedging its investments in Municipal Bonds against declines in value and to hedge 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 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. 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 or options thereon. Distributions, if any, of net long-term capital gains from certain transactions in futures or options are taxable at long-term capital gains rates for Federal income tax purposes, regardless of the length of time the stockholder has owned the Fund shares. See "Taxes." The purchase or sale of a financial futures contract or option thereon 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 futures contract fluctuates making the long and short positions in the futures contract more or less valuable. The Funds 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 recently issued tax-exempt bonds, and purchase and sell put and call options on such futures contracts for the purpose of hedging Municipal Bonds which each Fund holds or anticipates purchasing against adverse changes in interest rates. The Funds also may purchase and sell financial futures contracts on U.S. Government securities and purchase and sell put and call options on such 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. 40 Subject to policies adopted by its Board of Directors, each Fund may also engage in transactions in other financial futures contracts and options thereon, such as financial futures contracts or options on other municipal bond indices which may become available, if the Investment Adviser should determine that there is normally sufficient correlation between the prices of such futures contracts and the Municipal Bonds in which it invests to make such hedging appropriate. Over-the-Counter Options. The Funds may engage in options and futures transactions on exchanges and in over-the-counter markets. 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. Over-the-counter options ("OTC Options") 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. The Funds engage in OTC options only with member banks of the Federal Reserve System and primary dealers in U.S. Government securities or with affiliates of such banks or dealers which have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. OTC options and assets used to cover OTC options written by the Funds are considered by the staff of the Securities and Exchange Commission 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 a sale, or reduce the amount of proceeds that might otherwise be realized. Risk Factors in Options and Futures Transactions. Utilization of financial futures transactions and options thereon involve the risk of imperfect correlation in movements in the price of financial futures contracts or options thereon and movements in the price of the security which is the subject of the hedge. If the price of the financial futures contract or option thereon moves more or less than the price of the security that is the subject of the hedge, the Fund will experience a gain or loss which 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 than the security being hedged. In addition, the correlation may be affected by additions to or deletions from the index which serves as a basis for a financial futures contract or option thereon. Finally, in the case of 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 financial 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 ("CFTC"), the futures trading activities described herein will not result in the Funds being deemed a "commodity pool," as defined under such regulations, provided that each Fund adheres to certain restrictions. In particular, each Fund may (1) purchase and sell financial futures contracts and options thereon solely for bona fide hedging purposes, as defined under CFTC regulations, and, in addition (2) purchase or sell any other financial futures contracts or options if, immediately thereafter, the sum of the amount of initial margin deposit on its existing futures position and premiums paid for outstanding options, if any, not entered for 41 hedging purposes would not exceed 5% of the market value of its net assets. Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market. When each 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 short-term, high-grade, fixed-income securities in a segregated account with its 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 futures contract, thereby ensuring that the use of such futures contract is unleveraged. Although certain risks are involved in financial futures contracts and options thereon the Investment Adviser believes that, because the Funds engage in options and futures transactions only for hedging purposes, the options and futures portfolio strategies of the Funds do not subject the Funds to certain risks frequently associated with speculation in financial futures contracts and options thereon. The Funds must meet certain Federal income tax requirements under the Code in order to qualify for the special tax treatment afforded regulated investment companies, including a requirement that less than 30% of its gross income in each taxable year be derived from the sale or other disposition of securities held for less than three months. See "Taxes--Tax Treatment of Options and Futures Transactions." The volume of trading on 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, there can be no assurance that viable exchange markets will continue. The Funds intend to enter into options and financial 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 a financial futures transaction or the related option. The inability to close financial futures positions or the related option also could have an adverse impact on a Fund's ability to effectively hedge its portfolio. There is also the risk of loss by each Fund of margin deposits or collateral in the event of bankruptcy of a broker with which it has an open position in an option or futures contract. The liquidity of a secondary market in a financial futures contract or option thereon may be adversely affected by "daily price fluctuations limits" established by commodity exchanges which limit the amount of fluctuation in a financial futures contract or option price during a single trading day. Once the daily limit has been reached in the contract or option, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open financial futures positions or related options. 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 or related option entered into by a Fund, the Fund would be required to make daily cash payments of variation margin in the event of adverse price movements. In such a situation, if the 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. 42 The successful use of these transactions also depends on the ability of the Investment Adviser to forecast correctly the direction and extent of interest 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 moves in a direction opposite to that anticipated, the Fund may realize a loss on the hedging transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, its total return for such period may be less than if it had not engaged in the hedging transaction. INVESTMENT RESTRICTIONS The following are fundamental investment restrictions of each Fund and may not be changed without the approval of the holders of a majority of each Fund's outstanding voting securities (which, for this purpose and under the 1940 Act, means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). Neither Fund may: 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 the Fund'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 the Fund may purchase and sell financial futures contracts and options thereon. 4. Issue senior securities or borrow amounts in excess of 5% of its total assets taken at market value. 5. Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. 6. Make loans to other persons, except that the Fund may purchase Municipal Bonds and other debt securities and enter into repurchase agreements in accordance with its investment objective, policies and limitations. 7. 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 except that the Fund will invest 25% or more of its assets in Municipal Bonds issued to finance projects in the health care industry. (For purposes of this restriction, states, municipalities and their political subdivisions are not considered to be part of any industry.) 43 Additional investment restrictions adopted by each Fund, which may be changed by its Board of Directors, provided that each Fund may not: 1. Invest more than 25% of its total assets (taken at market value at the time of each investment) in the Municipal Bonds of any one state. 2. Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (4) above or except as may be necessary in connection with transactions in financial futures contracts and options thereon. 3. 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). 4. 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 a mandatory tender for the purchase of related Municipal Bonds. If a percentage restriction on investment policies or the investment on 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. The Investment Adviser and Merrill Lynch share a common parent, ML&Co. Because of the affiliation of Merrill Lynch with the Funds, the Funds are prohibited from engaging in certain transactions involving Merrill Lynch except pursuant to an exemptive order of the Securities and Exchange Commission or otherwise in compliance with the provisions of the 1940 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 which 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. See "Portfolio Transactions." 44 DIRECTORS AND OFFICERS The Acquiring Fund and the Acquired Fund have the same six Directors, five of whom are not "interested persons," as defined in the 1940 Act, of either Fund. The Directors are responsible for the overall supervision of the operations of the Funds and perform various duties imposed on the directors of investment companies by the 1940 Act and under applicable Maryland law. The Acquiring Fund and the Acquired Fund also have the same executive officers. For further information regarding the Directors and officers of each Fund, see "Election of Directors." INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS The Investment Adviser (the general partner of which is Princeton Services, a wholly-owned subsidiary of ML&Co.), is an affiliate of MLAM and is owned and controlled by ML&Co. The Investment Adviser provides the Acquiring Fund and the Acquired Fund with investment advisory, management and administrative services. The Investment Adviser, or MLAM, acts as the investment adviser for over 100 other registered investment companies. The Investment Adviser also offers portfolio management and portfolio analysis services to individuals and institutions. As of December 31, 1994, the Investment Adviser and MLAM had a total of approximately $163.8 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of the Investment Adviser. The principal business address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey 08536. The Investment Advisory Agreements between the Investment Adviser and each of the Funds (the "Investment Advisory Agreements") provide that, subject to the direction of the Board of Directors of each Fund, the Investment Adviser is responsible for the actual management of each Fund's portfolio. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser, subject to review by the Board of Directors. The Investment Adviser provides the portfolio management for the Acquiring Fund and the Acquired 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. The Investment Adviser also is responsible for the performance of certain administrative and management services for each of the Funds. For the services provided by the Investment Adviser under the Investment Advisory Agreements, each Fund currently pays a monthly fee at an annual rate of 0.55% of its average weekly net assets (i.e., the average weekly value of its total assets, minus the sum of its accrued liabilities). For purposes of this calculation, average weekly net assets is determined at the end of each month on the basis of the average net assets of each Fund for each week 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 Investment Advisory Agreements obligate the Investment Adviser to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Acquiring Fund and the Acquired Fund connected with investment and economic research, trading 45 and investment management of each Fund, as well as the compensation of all Directors of each Fund who are affiliated persons of the Investment Adviser or any of its affiliates. Each Fund pays all other expenses incurred in its operation, including, among other things, expenses for legal and auditing services, taxes, costs of printing proxies, listing fees, stock certificates and stockholder reports, charges of the Custodian and the Transfer Agent, Dividend Disbursing Agent and Registrar, expenses of portfolio transactions, fees and expenses with respect to any issuance of preferred stock or any borrowing, Securities and Exchange Commission fees, fees and expenses of unaffiliated Directors, accounting and pricing costs (including the weekly calculation of the net asset value), insurance, interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, mailing and other expenses properly payable by each Fund. Accounting services will be provided to each Fund by the Investment Adviser, and each Fund will reimburse the Investment Adviser for its costs in connection with such services. Unless earlier terminated as described below, the Investment Advisory Agreements with the Acquiring Fund and the Acquired Fund will remain in effect until June 18, 1995 and July 31, 1995, respectively, and from year to year thereafter if approved annually (a) by each Fund's Board of Directors or by a majority of the outstanding shares of each Fund and (b) by a majority of the Directors who are not parties to such contract or interested persons (as defined in the 1940 Act) of any such party. Such contract is not assignable and 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 each Fund. PORTFOLIO TRANSACTIONS Subject to policies established by each Fund's Board of Directors, the Investment Adviser is primarily responsible for the execution of each Fund's portfolio transactions. In executing such transactions, the Investment Adviser 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 the Investment Adviser generally seeks reasonably competitive commission rates, the Funds do not necessarily pay the lowest commission or spread available. The Funds have no obligation to deal with any broker or dealer in execution of transactions in portfolio securities. Subject to obtaining the best price and execution, securities firms which provided supplemental investment research to the Investment Adviser, including Merrill Lynch, may receive orders for transactions by the Funds. Information so received will be in addition to and not in lieu of the services required to be performed by the Investment Adviser under the Investment Advisory Agreements and the expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such supplemental information. The securities in which the Funds primarily invest are traded in the over-the-counter markets, and the Funds deal 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 1940 Act, except as permitted by exemptive order, persons affiliated with either Fund are prohibited from dealing with that Fund as principal in the purchase and sale of securities. Since transactions in the over-the-counter 46 market usually involve transactions with dealers acting as principal 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 from the Securities and Exchange Commission obtained by the Investment Adviser, the Funds may engage in principal transactions with Merrill Lynch in high quality, short-term, tax-exempt securities. See "Investment Restrictions." Affiliated persons of either Fund may serve as its broker in over-the-counter transactions conducted on an agency basis. No brokerage commissions were paid by the Acquiring Fund for the period from commencement of investment operations on June 25, 1993 to May 31, 1994. The Funds may also purchase securities from tax-exempt issuers in individually negotiated transactions with the issuer. Because an active trading market may not exist for such securities, the price that the Funds may pay for these securities or receive on their resale may be lower than that for similar securities with a more liquid market. PORTFOLIO TURNOVER Generally, the Funds do not purchase securities for short-term trading profits. However, the Funds may dispose of securities without regard to the time they have been held when such action, for defensive or other reasons, appears advisable to the Investment Adviser. Each Fund's annual portfolio turnover rate, under normal circumstances is less than 100%. 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 each of the Funds 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. DIVIDENDS AND DISTRIBUTIONS The Acquiring Fund and the Acquired Fund intend to distribute substantially all of their net investment income. Dividends from such net investment income are declared and paid monthly. All net realized long- or short-term capital gains, if any, are distributed to each Fund's stockholders at least annually. See "Automatic Dividend Reinvestment Plan" for information concerning the manner in which dividends and distributions may be automatically reinvested in shares of Common Stock of each Fund. Dividends and distributions may be taxable to stockholders under certain circumstances as discussed below, whether they are reinvested in shares of each Fund or received in cash. 47 TAXES GENERAL The Funds qualify for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). So qualifying, in any taxable year in which it distributes at least 90% of its taxable net income and 90% of its tax-exempt net income (see below), each Fund is not subject to Federal income tax to the extent that it distributes its net investment income and realized capital gains. The Funds currently distribute substantially all of such income. The Funds qualify 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 its 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), each Fund shall be qualified to pay exempt-interest dividends to its stockholders. Exempt-interest dividends are dividends or any part thereof (other than a capital gain dividend) paid by a Fund which are attributable to interest on tax-exempt obligations and designated by the Fund as exempt-interest dividends in a written notice mailed to the Fund's stockholders within 60 days after the close of its taxable year. In general, exempt-interest dividends may be treated by stockholders for all purposes as items of interest excludable from their gross income under Code Section 103(a). 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 the Fund during the taxable year. Stockholders are advised to consult their tax adviser, however, with respect to whether exempt-interest dividends retain the exclusion under Code Section 103(a) if such stockholders would be treated as "substantial users" or "related persons" under Code Section 147(a) with respect to some or all of the tax-exempt obligations held by the Funds. The Code provides that interest on indebtedness used to purchase or carry shares of the Funds is not deductible to the extent attributable to exempt-interest dividends. Since the Funds will not invest in the stock of domestic corporations, stockholders will not be entitled to the dividends received deduction for corporations. At present, the highest marginal Federal income tax rate for individuals is 39.6%. The Funds may realize capital gains, which will constitute taxable income. To the extent that the Funds' 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, such distributions will be considered ordinary income for Federal income tax purposes. In order to avoid taxation on its net long-term capital gains, the Funds may elect to distribute "capital gain dividends" to its stockholders. Distributions, if any, of net long-term capital gains from the sale of securities or from certain transactions in futures or options designated as capital gain dividends in a written notice mailed to stockholders not later than 60 days after the close of the taxable year are taxable at long-term capital gains rates for Federal income tax purposes, regardless of the length of time the stockholder has owned Fund shares. For Federal income tax purposes, any loss upon the sale or exchange of Fund shares held for six months or less will be treated as long-term capital loss to the extent of any long-term capital gains distributions received by the stockholder. In addition, such loss will be disallowed to the extent of any exempt-interest dividends received by the stockholder. If Fund pays a dividend in January which was declared in the previous 48 October, November or December to stockholders of record on a specified date in one of such months, then such dividend or distribution will be treated for tax purposes as being paid by that Fund and received by its stockholders on December 31 of the year in which the dividend was declared. The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not distribute 98% of its investment company taxable income, with certain adjustments, 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, will generally not apply to the tax-exempt income of RICs such as the Funds that pay exempt-interest dividends. The Funds anticipate that they will make sufficient timely distributions of taxable income so as to avoid imposition of the excise tax. The Code subjects interest received on certain otherwise tax-exempt securities to an alternative minimum tax. The alternative minimum tax will apply to interest received on "private activity bonds" issued after August 7, 1986. Private activity bonds are bonds which, although tax-exempt, are used for purposes other than those generally performed by government 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 alternative minimum tax. However, an individual stockholder filing a joint return who does not have any tax preference items subject to the alternative minimum tax other than income received from the Funds derived from private activity bonds would have to receive more than $40,000 of such income before becoming subject to the alternative minimum tax. The Funds intend to purchase such "private activity bonds" and will report to stockholders within 60 days after its taxable year-end the portion of the Funds' 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 an 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 reflects a corporation's economic income). Because an exempt-interest dividend paid by the Funds will be included in adjusted current earnings, whether or not such dividend is attributable to private activity bonds, a corporate stockholder may be required to pay an alternative minimum tax on exempt-interest dividends paid by the Fund. In addition, the Code imposes a deductible tax (the "Environmental Tax") on a corporation's alternative minimum taxable income (computed without regard to the alternative tax net operating loss deduction or the environmental tax deduction) at a rate of $12 per $10,000 (0.12%) of alternative minimum taxable income in excess of $2,000,000. The Environmental Tax will be imposed for taxable years beginning after December 31, 1986 and before January 1, 1996. The Environmental Tax will be imposed even if the corporation is not required to pay an alternative minimum tax, because the corporation's regular income tax liability exceeds its minimum tax liability. The Code provides, however, that RICs, such as the Funds, are not subject to the Environmental Tax. However, exempt-interest dividends paid by the Funds that increase alternative minimum taxable income for corporate stockholders (as described above) will be included in the Environmental Tax calculation. 49 The value of shares acquired pursuant to the Funds' dividend reinvestment plan will generally be excluded from gross income to the extent that the cash amount reinvested would be excluded from gross income. If, when the Funds' shares are trading at a premium over net asset value, the Funds issue shares pursuant to the dividend reinvestment plan which 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 the 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 the stockholders, including stockholders who do not participate in the dividend reinvestment plan. Thus, stockholders who do not participate in the dividend reinvestment plan might be required to report as ordinary income a portion of their distributions equal to their allocable share of the discount. Under certain Code provisions, some taxpayers may be subject to a 31% withholding tax on reportable dividends, capital gains distributions and redemption payments ("backup withholding"). Backup withholding is not required with respect to dividends representing "exempt interest." Generally, taxpayers subject to backup withholding will be those for whom a taxpayer identification number is not on file with the Funds or who, to the Funds' 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 investor is not subject to backup withholding. Distributions of ordinary income and short-term capital gains to stockholders who are non-resident aliens will be 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. Non-resident stockholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS The Funds may write, purchase or sell municipal bond index futures contracts and interest rate futures contracts on U.S. Government securities ("financial futures contracts"). The Funds may also purchase and write call and put options on such financial futures contracts. Unless the Funds are eligible to make and makes a special election, such options and 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 option or futures contract will be treated as sold for its fair market value on the last day of the taxable year. In general, unless the special election referred to in the previous sentence is made, gain or loss from transactions in options and futures contracts will be 60% long-term and 40% short-term capital gain or loss. Code Section 1092, which applies to certain "straddles", may affect the taxation of the Funds' transactions in options and futures contracts. Under Section 1092, the Funds may be required to postpone recognition for tax purposes of losses incurred in certain closing transactions in options and futures. One of the requirements for qualification as RICs is that less than 30% of the Funds' gross income may be derived from gains from the sale or other disposition of securities held for less than three months. Accordingly, the Funds may be restricted in effecting closing transactions within three months 50 after entering into an option for futures contract. Proposed legislation, if enacted in its current form, would eliminate this requirement. STATE AND LOCAL TAXES The exemption from Federal income tax for exempt-interest dividends does not necessarily result in an exemption for such dividends under the income or other tax laws of any state or local taxing authority. Stockholders are advised to consult their own tax advisers concerning state and local tax matters. Depending upon the extent of the Funds' activities in those states and localities in which its offices are maintained or in which its agents are located, the Funds may be subject to the tax laws of such states or localities. ------------------- 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 these Treasury Regulations are subject to change by legislative 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 taxes. 51 NET ASSET VALUE Net asset value per share of Common Stock of the Acquiring Fund and the Acquired Fund is determined at 4:15 P.M., New York time, on the last business day in each week. For purposes of determining the net asset value of a share of Common Stock, the value of the securities held by the Funds plus any cash or other assets (including interest and dividends accumulated but not yet received) minus all liabilities (including accrued expenses) is divided by the total number of shares of Common Stock outstanding at such time. Expenses, including the fees payable to the Investment Adviser, are accrued daily. The Municipal Bonds in which the Funds invest are traded primarily in the over-the-counter markets. In determining net asset value, the Funds utilize the valuations of portfolio securities furnished by a pricing service approved by the Board of Directors. 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 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. 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. Bonds with remaining maturities of 60 days or less are valued at amortized cost, unless this method no longer produces fair valuations. 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. The Funds determine and make available for publication the net asset value of their Common Stock weekly. 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 edition of The New York Times. DESCRIPTION OF CAPITAL STOCK The Funds are each authorized to issue 200,000,000 shares of capital stock, par value $.10 per share, all of which shares are initially classified as Common Stock. Each Fund's Board of Directors is authorized, however, 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. Shares of Common Stock, when issued and outstanding, will be fully paid and non-assessable. Stockholders are entitled to share pro rata in the net assets of each Fund available for distribution to stockholders upon liquidation of a Fund. Stockholders are entitled to one vote for each share held. Each Fund will send unaudited reports at least semi-annually and audited financial statements to all of its stockholders. 52 CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION Each Fund's Articles of Incorporation include identical provisions that could have the effect of limiting the ability of other entities or persons to acquire control of each 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. For a description of these provisions of the Acquiring Fund, which are identical to those of the Acquired Fund, see "The Reorganization--Certain Provisions in the Acquiring Fund's Articles of Incorporation." Reference should be made to the Funds' Articles of Incorporation on file with the Securities and Exchange Commission for the full text of these provisions. CUSTODIAN The Acquiring Fund's and the Acquired Fund's securities and cash will be held under a Custodial Agreement with The Bank of New York, 90 Washington Street, 12th Floor, New York, New York 10286. TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR The transfer agent, dividend disbursing agent and registrar for the shares of Common Stock of the Acquiring Fund and the Acquired Fund is The Bank of New York, 101 Barclay Street, 12W, New York, New York 10286. LEGAL PROCEEDINGS There are no material legal proceedings to which the Acquiring Fund or the Acquired Fund is a party. 53 LEGAL OPINIONS Certain legal matters in connection with the Acquiring Fund Shares to be issued pursuant to the Reorganization will be passed upon by Rogers & Wells, New York, New York. Rogers & Wells will rely as to matters of Maryland law on the opinion of Galland, Kharasch, Morse & Garfinkle, P.C., Washington, D.C. EXPERTS The statement of assets, liabilities and capital of the Funds and the consolidated balance sheet of Fund Asset Management, Inc. included in this Joint Proxy Statement-Prospectus has been so included in reliance on the report of Deloitte & Touche LLP, independent auditors, and on their authority as experts in auditing and accounting. The principal business address of Deloitte & Touche LLP is 117 Campus Drive, Princeton, New Jersey 08540. STOCKHOLDER PROPOSALS If a stockholder intends to present a proposal at the next Annual Meeting of Stockholders of either Fund, which is anticipated to be held in September 1995, and desires to have the proposal included in the Fund's proxy statement and form of proxy for that meeting, the stockholder must deliver the proposal to the offices of the Fund by June 30, 1995. By Order of the Board of Directors MARK B. GOLDFUS Secretary Date: January 31, 1995 54 INTERIM FINANCIAL STATEMENTS OF MUNIASSETS FUND, INC. STATEMENT OF ASSETS, LIABILITIES AND CAPITAL (UNAUDITED) NOVEMBER 30, 1994 ASSETS: Investments, at value (identified cost $65,315,496)(Note 1a)...... $58,443,999 Cash.............................................................. 128,659 Interest receivable............................................... 1,218,502 Deferred organization expenses (Note 1e).......................... 61,892 Prepaid expenses and other assets................................. 22,543 ----------- Total Assets...................................................... 59,875,595 ----------- LIABILITIES: Payables: Dividends to shareholders (Note 1f)............................. $ 134,378 Variation margin (Note 1b)...................................... 57,750 Investment adviser (Note 2)..................................... 9,823 201,951 ---------- Accrued expenses and other liabilities............................ 50,883 ----------- Total Liabilities................................................. 252,834 ----------- NET ASSETS: Net Assets........................................................ $59,622,761 ----------- ----------- CAPITAL: Common Stock, par value $0.10 per share; 200,000,000 shares authorized; 4,787,055 shares issued and outstanding............... $ 478,706 Paid-in capital in excess of par.................................. 67,187,000 Undistributed investment income--net.............................. 340,073 Accumulated realized capital losses on investments--net (Note 5)................................................................ (1,530,771) Unrealized depreciation on investments--net....................... (6,852,247) ----------- Total Capital--Equivalent to $12.45 net asset value per share of Common Stock (market price--$11.375) (Note 4)..................... $59,622,761 ----------- -----------
See Notes to Financial Statements. F-1 MUNIASSETS FUND, INC. STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1994 ------------------------ INVESTMENT INCOME (NOTE 1D) Interest and amortization of premium and discount earned........... $ 2,233,873 EXPENSES: Investment advisory fees (Note 2).................................. $ 174,139 Professional fees.................................................. 25,373 Printing and shareholder reports................................... 16,674 Accounting services (Note 2)....................................... 13,272 Directors' fees and expenses....................................... 13,195 Transfer agent fees (Note 2)....................................... 12,363 Listing fees....................................................... 8,403 Amortization of organization expenses (Note 1e).................... 7,900 Custodian fees..................................................... 3,906 Pricing fees....................................................... 3,490 Other.............................................................. 4,836 --------- Total expenses before reimbursement................................ 283,551 Reimbursement of expenses (Note 2)................................. (110,816) --------- Total expenses after reimbursement................................. 172,735 ----------- Investment income--net............................................. 2,061,138 ----------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS--NET (NOTES 1D & 3) Realized loss on investments....................................... (1,160,475) Change in unrealized depreciation on investments--net.............. (3,352,413) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $(2,451,750) ----------- -----------
- ------------ See Notes to Financial Statements. F-2 MUNIASSETS FUND, INC. STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE PERIOD FOR THE SIX JUNE 25, 1993+ MONTHS ENDED TO NOVEMBER 30, 1994 MAY 31, 1994 ----------------- -------------- OPERATIONS: Net investment income......................................... $ 2,061,138 $ 3,917,327 Net realized gain (loss) on investments....................... (1,160,475) 365,341 Net change in unrealized depreciation on investments.......... (3,352,413) (3,499,834) ----------------- -------------- Net increase (decrease) in net assets resulting from operations.................................................... (2,451,750) 782,834 ----------------- -------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F): Net investment income......................................... (2,079,544) (3,558,848) Realized gain on investments.................................. -- (735,637) ----------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders................................. (2,079,544) (4,294,485) ----------------- -------------- COMMON STOCK TRANSACTIONS (NOTE 4): Net proceeds from issuance of common stock.................... -- 67,756,500 Offering and underwriting costs resulting from issuance of common stock................................................ -- (190,799) ----------------- -------------- Net increase in net assets derived from common stock transactions................................................ -- 67,565,701 ----------------- -------------- NET ASSETS: Total increase (decrease) in net assets....................... (4,531,294) 64,054,050 Beginning of period........................................... 64,154,055 100,005 ----------------- -------------- End of period*................................................ $59,622,761 $ 64,154,055 ----------------- -------------- ----------------- -------------- *Undistributed net investment income.......................... $ 340,073 $ 358,479 ----------------- -------------- ----------------- --------------
- ------------ + Commencement of operations See Notes to Financial Statements. F-3 MUNIASSETS FUND, INC. FINANCIAL HIGHLIGHTS (UNAUDITED) THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS.
FOR THE PERIOD FOR THE SIX JUNE 25, MONTHS ENDED 1993+ NOVEMBER 30, TO 1994 MAY 31, 1994 ------------ ------------ Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period......................... $ 13.40 $ 14.18 ------------ ------------ Investment income--net..................................... .43 .81 Realized and unrealized loss on investments--net........... (.95) (.66) ------------ ------------ Total from investment operations............................. (.52) .15 ------------ ------------ Less dividends and distributions: Investment income--net..................................... (.43) (.74) Realized gain on investments--net.......................... -- (.15) ------------ ------------ Total dividends and distributions............................ (.43) (.89) ------------ ------------ Capital charge resulting from issuance of Common Stock....... -- (.04) ------------ ------------ Net asset value, end of period............................... $ 12.45 $ 13.40 ============ ============ Market price per share, end of period........................ $ 11.375 $ 12.25 ============ ============ TOTAL INVESTMENT RETURN:** Based on net asset value per share........................... (3.66%)++ 0.83%++ ============ ============ Based on market price per share.............................. (3.72%)++ (12.87%)++ ============ ============ RATIOS OF AVERAGE NET ASSETS: Expenses, net of reimbursement............................... .54%* .20%* ------------ ------------ ------------ ------------ Expenses..................................................... .89%* .85%* ------------ ------------ ------------ ------------ Investment income--net....................................... 6.49%* 6.12%* ------------ ------------ ------------ ------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)..................... $ 59,623 $ 64,154 ------------ ------------ ------------ ------------ Portfolio turnover........................................... 23.42% 101.59% ============ ============
- ------------ + Commencement of Operations. ++ Aggregate total investment return. * Annualized. ** Total investment returns based on market value, which can be significantly greater or less than the net asset value, may result in substantially different returns. Total investment returns exclude the effect of sales loads. See Notes to Financial Statements. F-4 MUNIASSETS FUND, INC. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES: MuniAssets Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a newly organized, non-diversified, closed-end management investment company. These unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature. The Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol MUA. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Municipal bonds are traded primarily in the over-the-counter markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained by the Fund's pricing service from one or more dealers that make markets in the securities. Financial futures contracts, which are traded on exchanges, are valued at their closing prices as of the close of such exchanges. Options, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges or, lacking any sales, at the last available bid price. Short- term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. (b) Financial futures contracts--The Fund may purchase or sell interest rate futures contracts. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Original issue discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) Deferred organization and offering expenses--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period, beginning with the commencement of operations F-5 of the Fund. Direct expenses relating to the public offering of the Fund's shares of Common Stock were charged to capital at the time of issuance of the shares. (f) Dividends and distributions--Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. (g) Non-income producing investments--Written and purchased options are non-income producing investments. 2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."). The limited partners are ML & Co. and FAM, which is also an indirect wholly-owned subsidiary of ML & Co. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee of 0.55% based upon the average weekly value of the Fund's net assets. For the six months ended November 30, 1994, FAM earned fees of $174,139, of which $110,816 was voluntarily waived. Financial Data Services, Inc. ("FDS"), an indirect wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, FDS, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), and/or ML & Co. 3. INVESTMENTS: Purchases and sales of investments, excluding short-term securities, for the six months ended November 30, 1994 were $13,991,358 and $15,973,594, respectively. Net realized and unrealized gains (losses) as of November 30, 1994 were as follows:
REALIZED UNREALIZED LOSSES GAINS (LOSSES) ----------- -------------- Long-term investments............................................. $(1,107,572) $ (6,871,497) Financial futures contracts....................................... (52,903) 19,250 ----------- -------------- Total............................................................. $(1,160,475) $ (6,852,247) ----------- -------------- ----------- --------------
As of November 30, 1994, net unrealized depreciation for Federal income tax purposes aggregated $6,871,497, of which $4,585 related to appreciated securities and $6,876,082 related to depreciated securities. The aggregate cost of investments at November 30, 1994 for Federal income tax purposes was $65,315,496. F-6 4. COMMON STOCK TRANSACTIONS: At November 30, 1994, the Fund had one class of shares of Common Stock, par value $.10 per share, of which 200,000,000 shares were authorized. During the six months ended November 30, 1994, shares issued and outstanding remained constant at 4,787,055. At November 30, 1994, total paid-in capital amounted to $67,665,706. 5. SUBSEQUENT EVENT: On December 9, 1994, the Fund's Board of Directors declared an ordinary income dividend to Common Stock shareholders in the amount of $.071040 payable on December 29, 1994 to shareholders of record as of December 19, 1994. 6. REORGANIZATION PLAN: On July 13, 1994, the Board of Directors approved an Agreement and Plan of Reorganization between the Fund and MuniBond Income Fund, Inc. ("MuniBond Income") pursuant to which the Fund would acquire substantially all of the assets and liabilities of MuniBond Income in exchange for newly issued shares of the Fund. MuniBond Income is a registered, non-diversified, closed-end management investment company, with a similar investment objective to the Fund, and is managed by FAM. F-7 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, MUNIASSETS FUND, INC.: We have audited the accompanying statement of assets, liabilities, and capital including the schedule of investments, of MuniAssets Fund, Inc. as of May 31, 1994, the related statements of operations and changes in net assets, and the financial highlights for the period June 25, 1993 (commencement of operations) to May 31, 1994. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at May 31, 1994 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of MuniAssets Fund, Inc. as of May 31, 1994, the results of its operations, the changes in its net assets, and the financial highlights for the period June 25, 1993 to May 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Princeton, New Jersey July 13, 1994 F-8 FINANCIAL STATEMENTS OF MUNIASSETS FUND, INC. STATEMENT OF ASSETS, LIABILITIES AND CAPITAL MAY 31, 1994 ASSETS: Investments, at value (identified cost $66,435,489)(Note 1a)...... $62,935,655 Cash.............................................................. 27,617 Receivables: Securities sold................................................. $2,969,056 Interest........................................................ 1,201,037 Investment adviser (Note 2)..................................... 63,919 4,234,012 ---------- Deferred organization expenses (Note 1e).......................... 61,892 Prepaid expenses and other assets................................. 22,543 ----------- Total Assets...................................................... 67,281,719 ----------- LIABILITIES: Payables: Securities purchased............................................ 2,884,461 Capital shares redeemed......................................... 157,015 3,041,476 ---------- Accrued expenses and other liabilities............................ 86,188 ----------- Total Liabilities................................................. 3,127,664 ----------- NET ASSETS: Net Assets........................................................ $64,154,055 ----------- ----------- CAPITAL: Common Stock, par value $0.10 per share; 200,000,000 shares authorized; 4,787,055 shares issued and outstanding............. $ 478,706 Paid-in Capital in excess of par.................................. 67,187,000 Undistributed investment income--net.............................. 358,479 Accumulated realized capital losses--net.......................... (370,296) Unrealized depreciation on investments--net....................... (3,499,834) ----------- Total Capital--Equivalent to $13.40 net asset value per share of Common Stock (market price--$12.25)............................. $64,154,055 ----------- -----------
See Notes to Financial Statements. F-9 MUNIASSETS FUND, INC. STATEMENT OF OPERATIONS
JUNE 25, 1993* TO MAY 31, 1994 ------------------------ INVESTMENT INCOME (NOTE 1D) Interest and amortization of premium discount...................... $ 4,043,883 EXPENSES: Investment advisory fees (Note 2).................................. $ 351,471 Professional fees.................................................. 40,898 Accounting services (Note 2)....................................... 37,016 Directors' fees and expenses....................................... 19,565 Printing and shareholder reports................................... 16,462 Transfer agent fees (Note 2)....................................... 15,149 Amortization of organization expenses (Note 1e).................... 14,212 Listing fees....................................................... 13,968 Custodian fees..................................................... 7,834 Other.............................................................. 25,371 --------- Total expenses before reimbursement................................ 541,946 Reimbursement of expenses (Note 2)................................. (415,390) --------- Total expenses after reimbursement................................. 126,556 ----------- Investment income--net............................................. 3,917,327 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES 1D & 3) Realized gain on investments....................................... 365,341 Unrealized depreciation on investments--net........................ (3,499,834) ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $ 782,834 ----------- -----------
- ------------ * Commencement of operations See Notes to Financial Statements. F-10 MUNIASSETS FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
JUNE 25, 1993+ TO MAY 31, 1994 -------------- OPERATIONS: Net investment income......................................................... $ 3,917,327 Net realized gain on investments.............................................. 365,341 Net unrealized depreciation on investments.................................... (3,499,834) -------------- Net increase in net assets resulting from operations.......................... 782,834 -------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F): Net investment income......................................................... (3,558,848) Realized gain on investments.................................................. (735,637) -------------- Net decrease in net assets resulting from dividends and distributions to shareholders................................................................ (4,294,485) -------------- COMMON STOCK TRANSACTIONS (NOTE 4): Net proceeds from issuance of common stock.................................... 67,756,500 Offering and underwriting costs resulting from issuance of common stock....... (190,799) -------------- Net increase in net assets derived from common stock transactions............. 67,565,701 -------------- NET ASSETS: Total increase in net assets.................................................. 64,054,050 Beginning of period........................................................... 100,005 -------------- End of period*................................................................ $ 64,154,055 -------------- -------------- *Undistributed net investment income.......................................... $ 358,479 -------------- --------------
- ------------ + Commencement of operations See Notes to Financial Statements. F-11 MUNIASSETS FUND, INC. FINANCIAL HIGHLIGHTS THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS.
FOR THE PERIOD JUNE 25, 1993+ TO MAY 31, 1994 ------------ Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period..................................... $ 14.18 ------------ Investment income--net................................................. .81 Realized and unrealized loss on investments--net....................... (.66) ------------ Total from investment operations......................................... .15 ------------ Less dividends and distributions: Investment income--net................................................. (.74) Realized gain on investments--net...................................... (.15) ------------ Total dividends and distributions........................................ (.89) ------------ Capital charge resulting from issuance of Common Stock................... (.04) ------------ Net asset value, end of period........................................... $ 13.40 ------------ ------------ Market price per share, end of period.................................... $ 12.25 ------------ ------------ TOTAL INVESTMENT RETURN:** Based on net asset value per share....................................... 0.83%++ ------------ ------------ Based on market price per share.......................................... (12.87%)++ ------------ ------------ RATIOS OF AVERAGE NET ASSETS: Expenses, net of reimbursement........................................... .20%* ------------ ------------ Expenses................................................................. .85%* ------------ ------------ Investment income--net................................................... 6.12%* ------------ ------------ SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................................. $ 64,154 ------------ ------------ Portfolio turnover....................................................... 101.59% ------------ ------------
- ------------ + Commencement of Operations. ++ Aggregate total investment return. * Annualized. ** Total investment returns based on market value, which can be significantly greater or less than the net asset value, result in substantially different returns. Total investment returns exclude the effects of sales loads. See Notes to Financial Statements. F-12 MUNIASSETS FUND, INC. NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: MuniAssets Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a newly organized, non-diversified, closed-end management investment company. Prior to commencement of operations on June 25, 1993, the Fund had no operations other than those relating to organizational matters and the sale of 7,055 shares of Common Stock on June 11, 1993 to Fund Asset Management, L.P. ("FAM") for $100,005. The Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol MUA. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Municipal bonds are traded primarily in the over-the-counter markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained by the Fund's pricing service from one or more dealers that make markets in the securities. Financial futures contracts, which are traded on exchanges, are valued at their closing prices as of the close of such exchanges. Options, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges or, lacking any sales, at the last available bid price. Short- term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. (b) Financial futures contracts--The Fund may purchase or sell interest rate futures contracts. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Original issue discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) Deferred organization and offering expenses--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period, beginning with the commencement of operations of the Fund. Direct expenses relating to the public offering of the Fund's shares of Common Stock were charged to capital at the time of issuance of the shares. F-13 (f) Dividends and distributions--Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. (g) Non-income producing investments--Written and purchased options are non-income producing investments. 2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The Fund has entered into an Investment Advisory Agreement with FAM. Effective January 1, 1994, the investment advisory business of FAM was reorganized from a corporation to a limited partnership. Both prior to and after the reorganization, ultimate control of FAM was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of ML & Co. The limited partners are ML & Co. and FAM, which is also an indirect wholly-owned subsidiary of ML & Co. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee of 0.55% based upon the average weekly value of the Fund's net assets. For the period June 25, 1993 to May 31, 1994, FAM earned fees of $351,471, of which $330,746 was voluntarily waived. In addition, FAM voluntarily reimbursed the Fund $84,644 in additional expenses. Financial Data Services, Inc. ("FDS"), an indirect wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, FDS, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), and/or ML & Co. 3. INVESTMENTS: Purchases and sales of investments, excluding short-term securities, for the period ended May 31, 1994 were $129,265,910 and $61,898,985, respectively. Net realized and unrealized gains (losses) as of May 31, 1994 were as follows: REALIZED UNREALIZED GAINS LOSSES -------- ----------- Long-term investments.............................. $ 43,590 $(3,193,585) Short-term investments............................. 61,757 (306,249) Financial futures contracts........................ 259,994 -- -------- ----------- Total.............................................. $365,341 $(3,499,834) -------- ----------- -------- ----------- As of May 31, 1994, net unrealized depreciation for Federal income tax purposes aggregated $3,499,834, of which $145,217 related to appreciated securities and $3,645,051 related to depreciated securities. The aggregate cost of investments at May 31, 1994 for Federal income tax purposes was $66,435,489. F-14 4. COMMON STOCK TRANSACTIONS: At May 31, 1994, the Fund had one class of shares of Common Stock, par value $.10 per share, of which 200,000,000 shares were authorized. During the period June 25, 1993 to May 31, 1994, the Fund sold 4,780,000 shares of Common Stock. At May 31, 1994, total paid-in capital amounted to $67,665,706. 5. SUBSEQUENT EVENT: On June 10, 1994, the Fund's Board of Directors declared an ordinary income dividend to Common Stock shareholders in the amount of $.074885 payable on June 29, 1994 to shareholders of record as of June 20, 1994. 6. REORGANIZATION PLAN: On July 13, 1994, the Board of Directors approved an Agreement and Plan of Reorganization between the Fund and MuniBond Income Fund, Inc. ("MuniBond Income") pursuant to which the Fund would acquire substantially all of the assets and liabilities of MuniBond Income in exchange for newly issued shares of the Fund. MuniBond Income is a registered, non-diversified, closed-end management investment company, with a similar investment objective to the Fund, and is managed by FAM. F-15 INTERIM FINANCIAL STATEMENTS OF MUNIBOND INCOME FUND, INC. STATEMENT OF ASSETS, LIABILITIES AND CAPITAL (UNAUDITED) NOVEMBER 30, 1994 ASSETS: Investments, at value (identified cost $79,081,331) (Note 1a)..... $69,804,543 Cash.............................................................. 74,556 Interest receivable............................................... 1,360,624 Deferred organization expenses (Note 1e).......................... 69,721 ----------- Total Assets...................................................... 71,309,444 ----------- LIABILITIES: Payables: Dividends to shareholders (Note 1f)............................. $ 136,014 Variation margin (Note 1b)...................................... 68,906 204,920 ---------- Accrued expenses and other liabilities............................ 58,309 ----------- Total Liabilities................................................. 263,229 ----------- NET ASSETS: Net Assets........................................................ $71,046,215 ----------- ----------- CAPITAL: Common Stock, par value $0.10 per share; 200,000,000 shares authorized; 5,752,965 shares issued and outstanding............... $ 575,297 Paid-in capital in excess of par.................................. 81,508,112 Undistributed investment income--net.............................. 408,394 Undistributed realized capital losses on investments--net......... (2,191,769) Unrealized depreciation on investments--net....................... (9,253,819) ----------- Total Capital--Equivalent to $12.35 net asset value per share of Common Stock (market price--$11.375) (Note 4)..................... $71,046,215 ----------- -----------
See Notes to Financial Statements. F-16 MUNIBOND INCOME FUND, INC. STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1994 ------------------------ INVESTMENT INCOME: (NOTE 1D) Interest and amortization of premium discount...................... $ 2,656,231 EXPENSES: Investment advisory fees (Note 2).................................. $ 218,448 Professional fees.................................................. 28,442 Printing and shareholder reports................................... 22,548 Accounting services (Note 2)....................................... 17,826 Listing fees....................................................... 13,177 Directors' fees and expenses....................................... 12,888 Transfer agent fees (Note 2)....................................... 10,830 Amortization of organization expenses (Note 1e).................... 6,528 Custodian fees..................................................... 4,082 Pricing Fees....................................................... 3,092 Other.............................................................. 5,083 --------- Total expenses before reimbursement................................ 342,944 Reimbursement of expenses (Note 2)................................. (218,448) --------- Total expenses after reimbursement................................. 124,496 ----------- Investment income--net............................................. 2,531,735 ----------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS--NET (NOTES 1D & 3) Realized loss on investments--net.................................. (2,514,281) Change in unrealized depreciation on investments--net.............. (3,233,306) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $(3,215,852) ----------- -----------
See Notes to Financial Statements. F-17 MUNIBOND INCOME FUND, INC. STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE FOR THE PERIOD SIX MONTHS OCTOBER 29, 1993+ ENDED TO NOVEMBER 30, 1994 MAY 31, 1994 ----------------- ----------------- OPERATIONS: Net investment income...................................... $ 2,531,735 $ 2,961,345 Net realized gain (loss) on investments.................... (2,514,281) 322,512 Net change in unrealized depreciation on investments....... (3,233,306) (6,020,513) ----------------- ----------------- Net decrease in net assets resulting from operations..... (3,215,852) (2,736,656) ----------------- ----------------- DIVIDENDS TO SHAREHOLDERS (NOTE 1F): Investment income--net..................................... (2,588,710) (2,495,976) ----------------- ----------------- Net decrease in net assets resulting from dividends to shareholders............................................. (2,588,710) (2,495,976) ----------------- ----------------- COMMON STOCK TRANSACTIONS (NOTE 4): Net proceeds from issuance of common stock................. -- 94,221,225 Offering and underwriting costs resulting from the issuance of common stock.......................................... -- (210,017) Value of shares tendered................................... (12,027,804) -- Net increase (decrease) in net assets derived from common stock transactions....................................... (12,027,804) 94,011,208 ----------------- ----------------- NET ASSETS: Total increase (decrease) in net assets.................... (17,832,366) 88,778,576 Beginning of period........................................ 88,878,581 100,005 ----------------- ----------------- End of period*............................................. $ 71,046,215 $ 88,878,581 ----------------- ----------------- ----------------- ----------------- *Undistributed investment income--net...................... $ 408,394 $ 465,369 ----------------- ----------------- ----------------- -----------------
- ------------ + Commencement of operations. See Notes to Financial Statements F-18 MUNIBOND INCOME FUND, INC. FINANCIAL HIGHLIGHTS (Unaudited) THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS.
FOR THE SIX MONTHS FOR THE PERIOD ENDED OCTOBER 29, 1993+ NOVEMBER 30, 1994 TO MAY 31, 1994 ----------------- ---------------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....................... $ 13.36 $ 14.18 -------- ----------------- Investment income--net..................................... .43 .45 Realized and unrealized loss on investments--net........... (1.01) (.86) -------- ----------------- Total from investment operations........................... (.58) (.41) -------- ----------------- Less dividends: Investment income--net................................... (.43) (.38) -------- ----------------- Capital charge resulting from issuance of Common Stock..... -- (.03) -------- ----------------- Net asset value, end of period............................. $ 12.35 $ 13.36 -------- ----------------- -------- ----------------- Market price per share, end of period...................... $11.375 $ 12.125 -------- ----------------- -------- ----------------- TOTAL INVESTMENT RETURN:** Based on net asset value per share......................... (4.17%)++ (3.07%)++ -------- ----------------- -------- ----------------- Based on market value per share............................ (2.75%)++ (16.84%)++ -------- ----------------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement............................. .31%* .03%* -------- ----------------- -------- ----------------- Expenses................................................... .86%* .80%* -------- ----------------- -------- ----------------- Investment income--net..................................... 6.32%* 5.44%* -------- ----------------- -------- ----------------- SUPPLEMENTAL DATA: Net assets, end of period (in thousands)................... $71,046 $ 88,879 -------- ----------------- -------- ----------------- Portfolio turnover......................................... 24.17% 37.15% -------- ----------------- -------- -----------------
- ------------ + Commencement of Operations. ++ Aggregate total investment return. * Annualized. ** Total investment returns based on market value, which can be significantly greater or less than the net asset value, may result in substantially different returns. Total investment returns exclude the effect of sales loads. See Notes to Financial Statements. F-19 MUNIBOND INCOME FUND, INC. NOTES TO INTERIM FINANICAL STATMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES: MuniBond Income Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a newly organized, non-diversified, closed-end, management investment company. These unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature. The Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol MBD. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Municipal bonds and other portfolio securities in which the Fund invests are traded primarily in the over-the-counter markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained by the Fund's pricing service from one or more dealers that make markets in the securities. Financial futures contracts, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges. Options on futures contracts on US Government securities, which are traded on exchanges, are valued at their last bid price in the case of options purchased and their last asked price in the case of options written. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. (b) Financial futures contracts--The Fund may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. F-20 (e) Deferred organization and offering expenses--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period beginning with the commencement of operations of the Fund. Direct expenses relating to the public offering of the Fund's shares of Common Stock were charged to capital at the time of issuance of the shares. (f) Dividends and distributions--Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. (g) Non-income producing investments--Written and purchased options are non-income producing investments. 2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."). The limited partners are ML & Co. and FAM, which is also an indirect wholly-owned subsidiary of ML & Co. The Fund has entered into a Distribution Agreement and a Distribution Plan with Merrill Lynch Fund Distributor, Inc. ("MLDF" or "Distributor") a wholly-owned subsidiary of ML & Co. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee of 0.55% based upon the average daily value of the Fund's net assets. For the six months ended November 30, 1994, FAM earned fees of $218,448, all of which was voluntarily waived. Financial Data Services, Inc. ("FDS"), an indirect wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, PSI, MLFD, FDS, Merrill Lynch, Pierce, Fenner & Smith Inc., ("MLPF & S") and/or ML & Co. 3. INVESTMENTS: Purchases and sales of investments, excluding short-term securities, for the six month period ended November 30, 1994 were $17,406,085 and $25,176,762, respectively. Net realized and unrealized gains (losses) as of November 30, 1994 were as follows: UNREALIZED REALIZED GAINS LOSSES (LOSSES) ----------- ----------- Long-term investments............................ $(2,498,557) $(9,276,788) Financial futures contracts...................... (15,724) 22,969 ----------- ----------- Total............................................ $(2,514,281) $(9,253,819) ----------- ----------- ----------- ----------- F-21 As of November 30, 1994, net unrealized depreciation for Federal income tax purposes aggregated $9,276,788, of which $3,335 related to appreciated securities and $9,280,123 related to depreciated securities. The aggregate cost of investments at November 30, 1994 for Federal income tax purposes was $79,801,331. 4. CAPITAL STOCK TRANSACTIONS: At November 30, 1994, the Fund had one class of shares of Common Stock, par value $.10 per share, of which 200,000,000 shares were authorized. During the six months ended November 30, 1994, the Fund offered to purchase its shares of Common Stock from all beneficial holders of the Fund's Common Stock at a price per share equal to the net asset value of the Common Stock determined at the close of business on the day the offer terminated (the "Tender Offer"). On August 3, 1994, the Tender Offer was terminated, and 901,090 shares of Common Stock were redeemed at $13.35. For the six months ended November 30, 1994, shares issued and outstanding decreased by 901,090 as a result of the Tender Offer. At November 30, 1994, total paid-in capital amounted to $82,083,409. 5. SUBSEQUENT EVENT: On December 9, 1994, the Fund's Board of Directors declared an ordinary income dividend to Common Stock shareholders in the amount of $0.070988 per share, payable on December 29, 1994 to shareholders of record as of December 19, 1994. 6. REORGANIZATION PLAN: On July 13, 1994, The Board of Directors approved a plan of reorganization, subject to shareholder approval and certain other conditions, whereby MuniAssets Fund, Inc. ("MuniAssets") would acquire substantially all of the assets and liabilities of the Fund in exchange for newly issued shares of MuniAssets. MuniAssets is a registered, non-diversified, closed-end management investment company with a similar investment objective to the Fund, and is managed by FAM. F-22 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of MUNIBOND INCOME FUND, INC.: We have audited the accompanying statement of assets, liabilities and capital, including the schedule of investments, of MuniBond Income Fund, Inc. as of May 31, 1994, the related statements of operations and changes in net assets, and the financial highlights for the period October 29, 1993 (commencement of operations) to May 31, 1994. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at May 31, 1994 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of MuniBond Income Fund, Inc. as of May 31, 1994, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated period in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Princeton, New Jersey July 13, 1994 F-23 FINANCIAL STATEMENTS OF MUNIBOND INCOME FUND, INC. STATEMENT OF ASSETS, LIABILITIES AND CAPITAL MAY 31, 1994 ASSETS: Investments, at value (identified cost $93,466,012) (Note 1a)..... $87,445,499 Cash.............................................................. 83,754 Receivables: Interest........................................................ $1,417,392 Securities sold................................................. 967,160 Investment Adviser (Note 2)..................................... 118,940 2,503,492 ---------- Deferred organization expenses (Note 1e).......................... 69,721 ----------- Total Assets...................................................... 90,102,466 ----------- LIABILITIES: Payables: Securities purchased............................................ 962,917 Dividends to shareholders (Note 1f)............................. 181,511 1,144,428 ---------- Accrued expenses and other liabilities............................ 79,457 ----------- Total Liabilities................................................. 1,223,885 ----------- NET ASSETS: Net Assets........................................................ $88,878,581 ----------- ----------- CAPITAL: Common Stock, par value $0.10 per share; 200,000,000 shares authorized; 6,654,055 shares issued and outstanding............. $ 665,405 Paid-in capital in excess of par.................................. 93,445,808 Undistributed investment income--net.............................. 465,369 Undistributed realized capital gains--net......................... 322,512 Unrealized depreciation on investments--net....................... (6,020,513) ----------- Total Capital--Equivalent to $13.36 net asset value per share of Common Stock (market price--$12.125)............................ $88,878,581 ----------- -----------
See Notes to Financial Statements. F-24 MUNIBOND INCOME FUND, INC. STATEMENT OF OPERATIONS
OCTOBER 29, 1993* TO MAY 31, 1994 ------------------------ INVESTMENT INCOME: (NOTE 1D) Interest and amortization of premium discount...................... $ 2,976,799 EXPENSES: Investment advisory fees (Note 2).................................. $ 298,995 Accounting services (Note 2)....................................... 28,463 Professional fees.................................................. 23,024 Directors' fees and expenses....................................... 18,960 Printing and shareholder reports................................... 13,380 Transfer agent fees (Note 2)....................................... 11,839 Listing fees (Note 1e)............................................. 8,546 Amortization of organization expenses (Note 1e).................... 7,528 Custodian fees..................................................... 6,496 Other.............................................................. 16,158 --------- Total expenses before reimbursement................................ 433,389 Reimbursement of expenses (Note 2)................................. (417,935) --------- Total expenses after reimbursement................................. 15,454 ----------- Investment income--net............................................. 2,961,345 ----------- REALIZED GAIN AND UNREALIZED LOSS ON INVESTMENTS--NET (NOTES 1D & 3) Realized gain on investments--net.................................. 322,512 Unrealized depreciation on investments--net........................ (6,020,513) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $(2,736,656) ----------- -----------
- ------------ * Commencement of operations. See Notes to Financial Statements. F-25 MUNIBOND INCOME FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
OCTOBER 29, 1993+ TO MAY 31, 1994 ----------------- OPERATIONS: Net investment income....................................................... $ 2,961,345 Net realized gain on investments............................................ 322,512 Net unrealized depreciation on investments.................................. (6,020,513) ----------------- Net decrease in net assets resulting from operations...................... (2,736,656) ----------------- DIVIDENDS TO SHAREHOLDERS (NOTE 1F): Investment income--net...................................................... (2,495,976) ----------------- Net decrease in net assets resulting from dividends to shareholders......... (2,495,976) ----------------- COMMON STOCK TRANSACTIONS (NOTE 4): Net proceeds from issuance of common shares................................. 94,221,225 Offering and underwriting costs resulting from the issuance of common stock..................................................................... (210,017) ----------------- Net increase in net assets derived from common stock transactions........... 94,011,208 ----------------- NET ASSETS: Total increase in net assets................................................ 88,778,576 Beginning of period......................................................... 100,005 ----------------- End of period*.............................................................. $ 88,878,581 ----------------- ----------------- *Undistributed investment income--net....................................... $ 465,369 ----------------- -----------------
- ------------ + Commencement of operations. See Notes to Financial Statements F-26 MUNIBOND INCOME FUND, INC. FINANCIAL HIGHLIGHTS THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS.
FOR THE PERIOD OCTOBER 29, 1993+ TO MAY 31, 1994 Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period........................................ $ 14.18 ----------------- Investment income--net...................................................... .45 Realized and unrealized loss on investments--net............................ (.86) ----------------- Total from investment operations............................................ (.41) ----------------- Less dividends: Investment income--net.................................................... (.38) ----------------- Capital charge resulting from issuance of Common Stock...................... (.03) ----------------- Net asset value, end of period.............................................. $ 13.36 ----------------- ----------------- Market price per share, end of period....................................... $ 12.125 ----------------- ----------------- TOTAL INVESTMENT RETURN:** Based on net asset value per share.......................................... (3.07%)++ ----------------- Based on market value per share............................................. (16.84%)++ ----------------- RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement.............................................. .03%* ----------------- Expenses.................................................................... .80%* ----------------- Investment income--net...................................................... 5.44%* ----------------- SUPPLEMENTAL DATA: Net assets, end of period (in thousands).................................... $ 88,879 ----------------- ----------------- Portfolio turnover.......................................................... 37.15% ----------------- -----------------
- ------------ + Commencement of Operations. ++ Aggregate total investment return. * Annualized. ** Total investment returns exclude the effects of sales loads. Total investment returns based on market value, which can be significantly greater or less than the net asset value, result in substantially different returns. See Notes to Financial Statements. F-27 MUNIBOND INCOME FUND, INC. NOTES TO FINANICAL STATMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: MuniBond Income Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a newly organized, non-diversified, closed-end, management investment company. Prior to commencement of operations on October 29, 1993, the Fund had no operations other than those relating to organizational matters and the sale of 7,055 shares of Common Stock on October 15, 1993 to Fund Asset Management, L.P. ("FAM") for $100,005. The Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol MBD. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Municipal bonds and other portfolio securities in which the Fund invests are traded primarily in the over-the-counter markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained by the Fund's pricing service from one or more dealers that make markets in the securities. Financial futures contracts, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges. Options on futures contracts on US Government securities, which are traded on exchanges, are valued at their last bid price in the case of options purchased and their last asked price in the case of options written. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. (b) Financial futures contracts--The Fund may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. F-28 (e) Deferred organization and offering expenses--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period beginning with the commencement of operations of the Fund. Direct expenses relating to the public offering of the Fund's shares of Common Stock were charged to capital at the time of issuance of the shares. (f) Dividends and distributions--Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. (g) Non-income producing investments--Written and purchased options are non-income producing investments. 2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The Fund has entered into an Investment Advisory Agreement with FAM. Effective January 1, 1994, the investment advisory business of FAM was reorganized from a corporation to a limited partnership. Both prior to and after the reorganization, ultimate control of FAM was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of ML & Co. The limited partners are ML & Co. and FAM, which is also an indirect wholly-owned subsidiary of ML & Co. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee of 0.55% based upon the average daily value of the Fund's net assets. From October 29, 1993 to May 31, 1994, FAM earned fees of $298,995, all of which was voluntarily waived. In addition, FAM voluntarily elected to reimburse the Fund $118,940 in additional expenses. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, MLIM, Merrill Lynch, Pierce, Fenner & Smith Inc., and/or ML & Co. 3. INVESTMENTS: Purchases and sales of investments, excluding short-term securities, for the period October 29, 1993 to May 31, 1994 were $114,400,688 and $27,015,741, respectively. Net realized and unrealized gains (losses) as of May 31, 1994 were as follows: REALIZED GAINS UNREALIZED (LOSSES) LOSSES -------------- ----------- Long-term investments......................... $ (612,507) $(6,020,513) Short-term investments........................ 5,100 -- Financial futures contracts................... 929,919 -- -------------- ----------- Total......................................... $ 322,512 $(6,020,513) -------------- ----------- -------------- ----------- F-29 As of May 31, 1994, net unrealized depreciation for Federal income tax purposes aggregated $6,020,513, of which $61,098 related to appreciated securities and $6,081,611 related to depreciated securities. The aggregate cost of investments at May 31, 1994 for Federal income tax purposes was $93,466,012. 4. CAPITAL STOCK TRANSACTIONS: At May 31, 1994, the Fund had one class of shares of Common Stock, par value $.10 per share, of which 200,000,000 shares were authorized. During the period October 29, 1993 to May 31, 1994, 6,647,000 shares were sold. At May 31, 1994, total paid-in capital amounted to $94,111,213. 5. SUBSEQUENT EVENT: On June 10, 1994, the Fund's Board of Directors declared an ordinary income dividend to Common Stock shareholders in the amount of $.069938 per share, payable on June 29, 1994 to shareholders of record as of June 20, 1994. 6. REORGANIZATION PLAN: On July 13, 1994, The Board of Directors approved a plan of reorganization, subject to shareholder approval and certain other conditions, whereby MuniAssets Fund, Inc. ("MuniAssets") would acquire substantially all of the assets and liabilities of the Fund in exchange for newly issued shares of MuniAssets. MuniAssets is a registered, non-diversified, closed-end management investment company with a similar investment objective to the Fund, and is managed by FAM. F-30 FINANCIAL STATEMENTS OF MUNIASSETS FUND, INC. AND MUNIBOND INCOME FUND, INC. COMBINED STATEMENT OF ASSETS, LIABILITIES AND CAPITAL (UNAUDITED) NOVEMBER 30, 1994
PRO FORMA ACQUIRING ACQUIRED FOR FUND FUND COMBINED (ACTUAL) (ACTUAL) ADJUSTMENTS FUND ----------- ----------- ----------- ------------ ASSETS: Investments, at value (Note 1a).............. $58,443,999 $69,804,543 $128,248,542 Cash......................................... 128,659 74,556 203,215 Receivables: Interest................................... 1,218,502 1,360,624 2,579,126 Investment adviser (Note 2)................ -- -- $ 69,721 69,721 Deferred organization expenses (Note 1e)..... 61,892 69,721 (69,721) 61,892 Prepaid expenses and other assets............ 22,543 -- -- 22,543 ----------- ----------- ----------- ------------ Total assets................................. 59,875,595 71,309,444 0 131,185,039 ----------- ----------- ----------- ------------ LIABILITIES Payables: Dividends to shareholders (Note 1g)........ 134,378 136,014 748,467(A) 1,018,859 Variation Margin (Note 1b)................. 57,750 68,906 -- 126,656 Investment adviser......................... 9,823 -- -- 9,823 Accrued expenses and other liabilities....... 50,883 58,309 200,000(B) 309,192 ----------- ----------- ----------- ------------ Total liabilities............................ 252,834 263,229 948,467 1,464,530 ----------- ----------- ----------- ------------ NET ASSETS: Net assets................................... $59,622,761 $71,046,215 $ (948,467) $129,720,509 ----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------ CAPITAL: Common Stock par value $.10 per share; 200,000,000 shares authorized; 10,491,034 shares issued and outstanding; 4,787,055 shares of Acquiring Fund Common Stock and 5,752,965 shares of Acquired Fund Common Stock issued and outstanding; 10,491,034 shares for the Combined Fund (as adjusted).... $ 478,706 $ 575,297 $ (4,899) $ 1,049,104 Paid-in capital in excess of par............. 67,187,000 81,508,112 (195,101) 148,500,011 Undistributed investment income--net......... 340,073 408,394 (748,467) -- Undistributed realized capital losses--net... (1,530,771) (2,191,769) -- (3,722,540) Unrealized depreciation on investments--net.............................. (6,852,247) (9,253,819) -- (16,106,066) ----------- ----------- ----------- ------------ Total capital-equivalent to $12.45 net asset value per share of Acquiring Fund Common Stock and $12.35 net asset value per share of Acquired Fund Common Stock and $12.36 for the Combined Fund (as adjusted)........... $59,622,761 $71,046,215 $ (948,467) $129,720,509 ----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
- ------------ (A) Assumes the distribution of undistributed investment income. (B) Reflects the charge for estimated reorganization expenses of $200,000. See Notes to the Financial Statements. F-31 FINANCIAL STATEMENTS OF MUNIASSETS FUND, INC AND MUNIBOND INCOME FUND, INC. COMBINED SCHEDULE OF INVESTMENTS (UNAUDITED) NOVEMBER 30, 1994
S&P MOODY'S FACE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) - -------------------- ------- ----- ------ ------------------------------------ -------------- (IN THOUSANDS) Alabama--1.8% NR* B2 $1,000 Birmingham, Alabama, Industrial Development Board, PCR (USG Interiors), 7.50% due 4/01/2002 $ 970 B+ NR* 1,420 Brewton, Alabama, Industrial Development Board, PCR, Refunding (Container Corporation of America Project), 8% due 4/01/2009 1,370 - ---------------------------------------------------------------------------------------------------------- Arizona--1.2% BB Ba2 1,000 Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding (Public Service Company-Palo Verde), Series A, 6.375% due 8/15/2023 830 AA P1 700 Pinal County, Arizona, IDA, PCR, (Magma Copper/Newmont Mining Corp.), VRDN, 3.65% due 12/01/2009(a) 700 - ---------------------------------------------------------------------------------------------------------- Arkansas--0.7% NR* NR* 1,000 Pine Bluff, Arkansas, IDR, Refunding (Coltec Industries Incorporated), 6.50% due 2/15/2009 909 - ---------------------------------------------------------------------------------------------------------- California--5.9% Long Beach, California, Redevelopment Agency, M/F Housing Revenue Bonds (Pacific Court Apartments), AMT, Issue B: NR* NR* 1,805 6.80% due 9/01/2013 1,662 NR* NR* 1,500 Refunding 6.80% due 9/01/2013 1,381 AA Aa 2,000 Metropolitan Water District, Southern California, Waterworks Revenue Bonds, RIB, 7,811% due 8/05/2022(d) 1,393 AAA Aaa 2,500 Northern California Transmission Revenue Bonds, RIB, 6.457% due 4/29/2024(b)(d) 1,459 NR* NR* 1,960 Pleasanton, California, Joint Powers Financing Authority, Reassessment Subordinated Revenue Bonds, Series B, 6.60% due 9/02/2008 1,848 - ---------------------------------------------------------------------------------------------------------- Colorado--5.9% Denver, Colorado, City and County Airport Revenue Bonds, AMT: BB Baa 1,000 Series A, 8% due 11/15/2025 960 BB Baa 2,500 Series B, 7.25% due 11/15/2023(c) 2,236 BB Baa 1,500 Series C, 6.75% due 11/15/2022 1,258
F-32
S&P MOODY'S FACE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) - -------------------- ------- ----- ------ ------------------------------------ -------------- (IN THOUSANDS) Colorado (continued) NR* NR* $1,460 Mountain Village Metropolitan District, Colorado, San Miguel County, Revenue Bonds, 7.40% due 12/15/2013 $ 1,398 NR* NR* 2,000 San Miguel County, Colorado, Revenue Bonds (Mountain Village Metropolitan District), 7.40% due 12/15/2013 1,916 - ---------------------------------------------------------------------------------------------------------- Connecticut--1.3% NR* NR* 1,920 Eastern Connecticut, State Regional Educational Service Center Revenue Bonds, 6.50% due 5/15/2009 1,768 - ---------------------------------------------------------------------------------------------------------- Florida--1.7% A1+ VMIGI 200 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project), VRDN, 3.45% due 5/15/2018(a) 200 BBB- NR* 2,500 Largo, Florida, Sun Coast Health Systems, Revenue Refunding Bonds, 6.30% due 3/01/2020 2,010 - ---------------------------------------------------------------------------------------------------------- Georgia--2.8% BBB+ NR* 4,500 Georgia Tri-City Hospital Authority Revenue Bonds (South Fulton Medical Center), 6.375% due 7/01/2016 3,714 - ---------------------------------------------------------------------------------------------------------- Illinois--8.3% Illinois Health Facilities Authority Revenue Bonds(c): BBB+ NR* 2,000 (Community Hospital of Ottawa), 6.85% due 8/15/2024 1,728 NR* Baa1 1,150 (Holy Cross Hospital Project), 6.70% due 3/01/2014 1,014 Illinois Health Facilities Authority, Revenue Refunding Bonds: A- A 2,000 (Illinois Masonic Medical Center), 5.50% due 10/01/2019 1,527 A+ A 4,450 (Lutheran General Health), Series C, 6% due 4/01/2018 3,715 BBB- NR* 1,485 (St. Elizabeth's Hospital of Chicago), 7.625% due 7/01/2010 1,436 A+ A1 1,500 Illinois Housing Development Authority, M/F Program, Series 5, 6.75% due 9/01/2023 1,391 - ---------------------------------------------------------------------------------------------------------- Indiana--2.5% NR* NR* 2,500 Burns Harbor, Indiana, Solid Waste Disposal Facilities Revenue Bonds (Bethlehem Steel Corporation Project), AMT, 8% due 4/01/2024 2,373 BB- B1 1,000 East Chicago, Indiana, Economic Development Revenue Bonds (U.S. Gypsum Company Project), 7.25% due 5/01/2014 931 - ---------------------------------------------------------------------------------------------------------- Iowa--3.0% BB- NR* 1,000 Des Moines County, Iowa, IDR, Refunding (U.S. Gypsum Company Project), 7.20% due 11/01/2007 959
F-33
S&P MOODY'S FACE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) - -------------------- ------- ----- ------ ------------------------------------ -------------- (IN THOUSANDS) Iowa (continued) NR* NR* $ 800 Iowa Finance Authority, Health Care Facilities Revenue Bonds (Mercy Health Initiatives Project), 9.95% due 7/01/2019 $ 841 BBB+ NR* 2,500 Ottumwa, Iowa, Hospital Facility Revenue Refunding and Improvement Bonds (Ottumwa Regional Health), 6% due 10/01/2010(c) 2,094 - ---------------------------------------------------------------------------------------------------------- Kentucky 0.7% NR* NR* 1,000 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ International Project), AMT, 7% due 6/01/2024 886 - ---------------------------------------------------------------------------------------------------------- Louisiana--3.8% NR* Baa1 4,195 Lafourche Parish, Louisiana, Revenue Bonds (Hospital Service District No. 003), 6% due 10/01/2012(c) 3,484 BB- NR* 1,600 New Orleans, Louisiana, Industrial Development Board, IDR, Refunding (U.S. Gypsum Company Project), 7.20% due 10/01/2007 1,538 - ---------------------------------------------------------------------------------------------------------- Massachusetts--7.5% Massachusetts State Industrial Finance Agency Revenue Bonds: NR* B1 3,000 (Bay Cove Human Services Inc.), 8.375% due 4/01/2019 2,792 BB+ Ba1 2,000 (Vinfen Corporation), 7.10% due 11/15/2018 1,750 NR* NR* 1,000 Massachusetts State Industrial Finance Agency, Solid Waste Disposal Revenue Bonds (Molten Metal Technology Project), 8.25% due 8/01/2014 948 NR* NR* 4,000 Massachusetts State Port Authority, Special Project Revenue Bonds (Harborside Hyatt Project), AMT, 10% due 3/01/2026 4,272 - ---------------------------------------------------------------------------------------------------------- Michigan--2.0% Michigan State Hospital Finance Authority, Revenue Refunding Bonds: A- A 2,000 (Detroit Medical Center), Series B, 5.50% due 8/15/2023 1,514 BBB Baa1 1,500 (Pontiac Osteopathic), Series A, 6% due 2/01/2024 1,131 - ---------------------------------------------------------------------------------------------------------- Minnesota--0.7% AA+ Aa 1,000 Minnesota State, HFA, S/F Mortgage Revenue Bonds Series Q, 6.70% due 1/01/2017 942 - ---------------------------------------------------------------------------------------------------------- Mississippi--1.2% NR* P1 600 Perry County, Mississippi, PCR, Refunding (Leaf River Forest Project), VRDN, 3.45% due 3/01/2002(a) 600 NR* Baa3 1,000 Warren County, Mississippi, PCR, Refunding (Mississippi Power and Light Company Project), 7% due 4/01/2022 921 - ---------------------------------------------------------------------------------------------------------- Missouri--0.5% NR* B1 700 Clay County, Missouri, IDA, IDR, Refunding (U.S. Gypsum Corporate Project), 7.25% due 5/01/2014 649
F-34
S&P MOODY'S FACE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) - -------------------- ------- ----- ------ ------------------------------------ -------------- (IN THOUSANDS) - ---------------------------------------------------------------------------------------------------------- Montana--2.1% BBB+ Baal $2,300 Forsyth, Montana, PCR, Refunding (The Montana Power Company), Series B, 5.90% due 12/01/2023 $ 1,849 NR* NR* 1,000 Montana State Board Investment, Resource Recovery Revenue Bonds (Yellowstone Energy LP Project), AMT, 7% due 12/31/2019 878 - ---------------------------------------------------------------------------------------------------------- New Jersey--1.5% AAA Aaa 2,000 New Jersey State Housing and Mortgage Finance Agency Revenue Bonds (Home Buyer), AMT, Series M, 6.95% due 10/01/2022(b)(c) 1,940 - ---------------------------------------------------------------------------------------------------------- New Mexico--2.6% A1+ VMIG1 800 Albuquerque, New Mexico, Hospital Revenue Bonds (Sisters of Charity at Saint Joseph's Church), VRDN, 3.85% due 5/15/2022(a) 800 A1+ NR* 700 Eddy County, New Mexico, PCR, Refunding (IMC Fertilizer Inc. Project), VRDN, 3.70% due 2/01/2003(a) 700 A1+ P1 800 Farmington, New Mexico, PCR, (Arizona Public Services Co.) VRDN, AMT, Series C, 3.65% due 9/01/2024(a) 800 BB Ba2 1,250 Farmington, New Mexico, PCR, Refunding (Public Service Company-- San Juan Project), Series A, 6.40% due 8/15/2023 1,045 - ---------------------------------------------------------------------------------------------------------- New York--1.6% A1 VMIG1 500 New York City, New York, GO, VRDN (a): Series E, 3.60% due 5/15/1996 500 A1+ VMIG1 200 Series H, Subseries H-6, 3.50% due 8/01/2012 (b) 200 BB+ Ba1 1,500 New York State Energy Research and Development Authority, Electric Facilities Revenue Bonds (Long Island Lighting), AMT, Series A, 7.15% due 6/01/2020 1,353 - ---------------------------------------------------------------------------------------------------------- Ohio--8.0% Ohio State Air Quality Development Authority, PCR, Refunding: BB Baa2 3,500 (Cleveland Electric Company), AMT, 6.85% due 7/01/2023 2,958 BBB- Baa2 4,500 (Ohio-Edison), Series A, 5.95% due 5/15/2029 3,540 BB Ba2 3,500 Ohio State Water Development Authority, Pollution Control Facilities Revenue Bonds (Toledo Edison Project), AMT, Series A, 7.40% due 11/01/2022 3,173 BBB- Baa 1,000 Stark County, Ohio, Hospital Revenue Bonds (Doctors Hospital Inc.), 6% due 4/01/2024 768 - ---------------------------------------------------------------------------------------------------------- Oregon--2.4% A-1 NR* 300 Port St. Helen's, Oregon, PCR (Portland General Electric Company Project), VRDN, AMT, Series A, 3.70% due 8/01/2014(a) 300
F-35
S&P MOODY'S FACE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) - -------------------- ------- ----- ------ ------------------------------------ -------------- (IN THOUSANDS) Oregon (Continued) NR* NR* $1,000 Western Generation Agency, Oregon, Revenue Bonds (Wauna Cogeneration Project), Series A, 7.125% due 1/01/2021 $ 899 B+ NR* 2,000 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint Corporation Project), 8% due 12/01/2003 1,954 - ---------------------------------------------------------------------------------------------------------- Pennsylvania--13.3% BB+ Baa3 1,750 Alleghany County, Pennsylvania, IDA, Environmental Improvement, Revenue Refunding Bonds (USX Corporation), Series A, 6.70% due 12/01/2020(c) 1,549 NR* Ba 1,500 Montgomery County, Pennsylvania, IDA, Revenue Bonds (Pennsburg Nursing and Rehabilitation Center), 7.625% due 7/01/2018 1,378 BBB NR* 3,935 Northeastern Pennsylvania Hospital and Educational Authority, University Revenue Refunding Bonds (Wilkes University), 5.625% due 10/01/2018 3,139 BB Ba 4,500 Pennsylvania Convention Center Authority, Revenue Refunding Bonds, GO, Series A, 6.75% due 9/01/2019 4,039 BBB- NR* 1,000 Pennsylvania Economic Development Financing Authority, Resource Recovery Revenue Bonds (Colver Project), AMT, Series D, 7.15% due 12/01/2018 921 BBB Baa1 2,000 Philadelphia, Pennsylvania, Gas Works Revenue Refunding Bonds, Fourteenth-Series A, 6.375% due 7/01/2014 1,813 BBB+ Baa1 1,000 Philadelphia, Pennsylvania, Hospitals and Higher Educational Facilities Authority Revenue Bonds (Graduate Health System), Series A, 6.25% due 7/01/2018 816 BBB Baa 2,175 Ridley Park, Pennsylvania, Hospital Authority, Revenue Refunding Bonds (Taylor Hospital), Series A, 6% due 12/01/2013 1,787 NR* NR* 2,000 Washington County, Pennsylvania, Hospital Authority, Revenue Refunding Bonds (Canonsburg General Hospital Project), 7.35% due 6/01/2013 1,877 - ---------------------------------------------------------------------------------------------------------- Rhode Island--1.4% West Warwick, Rhode Island, GO, UT, Series A: NR* Ba 995 6.80% due 7/15/1998 1,008 NR* Ba 910 7.30% due 7/15/2008 887 - ---------------------------------------------------------------------------------------------------------- South Carolina--1.0% A- Baa1 1,500 Aiken County, South Carolina, IDR, Refunding (Beloit Corporation Project), 6% due 12/01/2011 1,288 - ----------------------------------------------------------------------------------------------------------
F-36
S&P MOODY'S FACE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) - -------------------- ------- ----- ------ ------------------------------------ -------------- (IN THOUSANDS) Tennessee--1.9% NR* NR* $2,400 Knox County, Tennessee, Health, Educational and Housing Facilities Board, Hospital Facilities Revenue Bonds (Baptist Health Systems of East Tennessee), 8.60% due 4/15/2016 $ 2,451 - ---------------------------------------------------------------------------------------------------------- Texas--1.5% BB Ba1 1,000 Dallas-Fort Worth, Texas, International Airport Facility Improvement, Corporate Revenue Refunding Bonds (Delta Airlines, Inc.), 6.25% due 11/01/2013 827 NR* NR* $1,250 Gulf Coast Waste Disposal Authority, Texas, PCR, Solid Waste Disposal (Diamond Shamrock Corporate Project), 6.75% due 6/01/2009 1,151 - ---------------------------------------------------------------------------------------------------------- Vermont--6.0% BBB NR* 1,450 Swanton Village, Vermont, Electric System Revenue Bonds, 6.70% due 12/01/2023 1,323 Vermont Educational and Health Buildings, Financing Agency Revenue Refunding Bonds NR* NR* 3,065 (College of St. Joseph's Project), 8.50% due 11/01/2024 3,050 NR* Baa 4,080 (Norwich University Project), 6% due 9/01/2013 3,487 - ---------------------------------------------------------------------------------------------------------- Virginia--2.5% NR* NR* 1,000 Pittsylvania County, Virginia, IDA, Multitrade Revenue Bonds, AMT, Series A, 7.55% due 1/01/2019 927 AA+ Aa1 2,375 Virginia State Housing Development Authority, Commonwealth Mortgage, AMT, Series A, Subseries A-4, 7.80% due 7/01/2028 2,410 - ---------------------------------------------------------------------------------------------------------- Puerto Rico--0.8% A Baa 1,000 Puerto Rico Commonwealth, Aqueduct and Sewer Authority Revenue Bonds, Series A, 7.875% due 7/01/2017 1,046 - ---------------------------------------------------------------------------------------------------------- Total Investments (Cost--$144,396)--98.1% 128,249 Variation Margin on Futures Contracts **--(0.1)% (127) Other Assets Less Liabilities--2.0% 1,599 -------------- Net Assets--100.0% $129,721 -------------- -------------- - ----------------------------------------------------------------------------------------------------------
(a) The interest rate is subject to change periodically based upon the prevailing market rate. The interest rate shown is the rate in effect at November 30, 1994. (b) MBIA Insured. (c) Portion of security held in connection with open futures contracts. (d) The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rates in effect at November 30, 1994. * Not Rated ** Financial futures contracts sold as of November 30, 1994 were as follows:
VALUE NUMBER OF EXPIRATION (IN THOUSANDS) CONTRACTS ISSUE DATE (NOTE 1A) - ---------- ----------------- ---------- -------------- 193 US Treasury Bonds March 1995 $(18,927) -------- (Total Contract Price--$18,969) $(18,927) ========
See Notes to Financial Statements. F-37 PORTFOLIO ABBREVIATIONS: AMT Alternative Minimum Tax (subject to) GO General Obligation Bonds To simplify the listings of MuniAssets HFA Housing Finance Authority Fund, Inc.'s and MuniBond Income Fund, IDA Industrial Development Authority Inc.'s portfolio holdings in the IDR Industrial Development Revenue Bonds Schedule M/F Multi-Family of Investments, we have abbreviated PCR Pollution Control Revenue Bonds the names of many of the securities RIB Residual Interest Bonds according to the list at right. S/F Single-Family UT Unlimited Tax VRDN Variable Rate Demand Notes
F-38 Summary Ratings* Portfolio of Investments (Excluding Temporary Investments):
NUMBER MARKET S&P MOODY'S OF ISSUES VALUE PERCENT - ------------------- ---------------------- --------- -------- ------- A or Better A or Better 11 $ 18,625 15% BBB+, BBB, BBB- Baa1, Baa, Baa2, Baa3 23 42,978 35 BB+, BB, BB- Ba1, Ba, Ba2, Ba3 14 22,676 18 B+, B, B- B1, B, B2, B3 5 7,735 6 Rated Lower Than B Rated Lower Than B -- -- -- Non-rated Non-rated 19 31,435 26 -- - ------------------- ---------------------- -------- ------- Total 72 $123,449 100% -- -- - ------------------- ---------------------- -------- ------- - ------------------- ---------------------- -------- -------
- ------------ * Ratings: Using the higher of S&P or Moody's rating. N/R--Investment is not rated. (p) Rating is provisional. A provisional rating assumes the successful completion of the project being financed by the issuance of the bonds being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. + The security has a maturity of more than one year but has variable rate and demand features which qualify it as a short-term security. The rate disclosed is that currently in effect. This rate changes periodically based on market conditions or a specified market index. F-39 MUNIASSETS FUND, INC. AND MUNIBOND INCOME FUND, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES: MuniBond Income Fund, Inc. and MuniAssets Fund, Inc. (collectively, the "Funds") are registered under the Investment Company Act of 1940 as non-diversified, closed-end management investment companies. The Funds determine and make available for publication the net asset value of their Common Stock on a weekly basis. The Common Stock of MuniBond Income and MuniAssets are listed on the New York Stock Exchange under the symbols MBD and MUA, respectively. The following is a summary of significant accounting policies followed by the Funds. (a) Valuation of investments--Municipal bonds and other portfolio securities in which the Funds invest are traded primarily in the over-the-counter markets and are valued at the last available bid price in the over-the-counter markets or yield equivalent as obtained by the Funds' pricing service from dealers that make markets in such securities. Financial futures contracts, which are traded on exchanges, are valued at their closing prices as of the close of such exchanges. Options, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges or, lacking any sales, at the last available bid price. Securities with remaining maturities for sixty days or less are valued at amortized cost which approximate market value. Securities and assets for which market quotations are not readily available are valued at their fair value as determined in good faith by or under the direction of the Boards of Directors of the Funds. (b) Financial futures contracts--The Funds may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and a specific price or yield. Upon entering into a contract, the Funds deposit and maintain as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Funds agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Funds as unrealized gains or losses. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the policy of the Funds to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of their taxable income to their shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. F-40 (e) Deferred organization and offering expenses--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period beginning with the commencement of operations of each Fund. Direct expenses relating to the public offering of the Funds' shares of Common Stock were charged at the time of issuance of the shares. (f) Dividends and distributions--Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. (g) Non-income producing investments--Written and purchased options are non-income producing investments. 2. Investment Advisory Agreement and Transactions with Affiliates Each Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). Effective January 1, 1994, the investment advisory business of FAM was reorganized from a corporation to a limited partnership. Both prior to and after the reorganization, ultimate control of FAM was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co. The limited partner is ML & Co. FAM is responsible for the management of each Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Funds. For such services, each Fund pays a monthly fee at an annual rate of .55% of the respective Fund's average weekly net assets. Financial Data Services, Inc. ("FDS"), an indirect wholly-owned subsidiary of ML & Co., is the Funds' transfer agent. Accounting services are provided to the Funds by FAM at cost. Certain officers and/or directors of the Funds are officers and/or directors of FAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") and/or ML & Co. F-41 INDEPENDENT AUDITORS' REPORT FUND ASSET MANAGEMENT, INC.: We have audited the accompanying consolidated balance sheet of Fund Asset Management, Inc. and subsidiary (the "Company") as of December 31, 1993. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on the balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated balance sheet presents fairly, in all material respects, the financial position of the Company at December 31, 1993 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 28, 1994 F-42 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1993 ASSETS Cash........................................................................ $ 996,680 Receivable from affiliated companies: Lease transactions........................................................ 24,501,523 Sale of leased investment................................................. 48,312,532 Fund management fees receivable............................................. 28,927,938 Investments in Leases: Leveraged leases.......................................................... 57,431,668 Sales-type lease.......................................................... 3,362,521 Investments in affiliated investment companies (market: $19,731,088)........ 18,181,262 Investment in affiliated limited partnership................................ 31,109,264 ------------- TOTAL ASSETS................................................................ $ 212,823,388 ------------- ------------- LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Payable to Merrill Lynch & Co., Inc. and affiliates......................... $ 21,554,955 Deferred income taxes: Arising from leveraged leases............................................. 52,938,886 Arising from sales-type lease............................................. 1,351,622 Other..................................................................... 15,838,124 Other....................................................................... 8,501 ------------- Total liabilities........................................................... 91,692,088 ------------- STOCKHOLDER'S EQUITY: Common stock, par value $1.00 per share authorized 25,000 shares; outstanding 1,000 shares.................................................. 1,000 Additional paid-in capital.................................................. 686,215,876 Retained earnings........................................................... 119,029,472 Proceeds receivable from Merrill Lynch & Co., Inc. from sale of subsidiaries.............................................................. (684,115,048) ------------- Total stockholder's equity.................................................. 121,131,300 ------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................. $ 212,823,388 ------------- -------------
See Notes to Consolidated Balance Sheet. F-43 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993 ORGANIZATION Fund Asset Management, Inc. and subsidiary (the "Company"), a wholly-owned subsidiary of Merrill Lynch Investment Management, Inc. (the "Parent" or "MLIM"), which is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), serves as an investment adviser to various registered open-end investment companies. The Company is also a lessor participant in certain leveraged and sales-type lease agreements. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES--The results of the operations of the Company are included in the consolidated Federal and combined state and local income tax returns filed by ML & Co. It is the policy of ML & Co. to allocate the tax associated with such operating results to each respective subsidiary in a manner which approximates the separate company method. In 1992, ML & Co. adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which requires an asset and liability method in recording income taxes on all transactions that have been recognized in the financial statements. SFAS 109 provides that deferred taxes be adjusted to reflect tax rates at which future tax liabilities or assets are expected to be settled or realized. TRANSACTIONS WITH AFFILIATES The Company serves as an investment adviser for certain affiliated investment companies. The Company maintains investments in certain of these investment companies. Such investments are carried at the lower of cost or market value. Market value is determined based upon quoted market prices. The Company has an arrangement with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") an affiliate, which provides that the Company, which receives revenue as investment adviser to certain investment companies (the "Funds"), reimburse MLPF&S for certain costs incurred in processing transactions involving shares of the Funds. ML & Co. is the holder of the Company's excess cash, which is available on demand to meet current liabilities. ML & Co. credits the Company for interest at a floating rate approximating ML & Co.'s average borrowing rate, based on the Company's average daily balances due to/from ML & Co. F-44 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 TRANSACTIONS WITH AFFILIATES--(CONTINUED) The "Receivable from affiliated companies" arising from lease transactions is summarized as follows: Monies advanced to fund lease transactions................. $(103,476,954) Tax benefits allocated to the Company by ML & Co........... 88,699,254 Other...................................................... 39,279,223 ------------- Total...................................................... $ 24,501,523 ------------- ------------- The Company has a 49 percent limited partnership interest in ML Plainsboro Limited Partnership ("MLP") whose general partner is an affiliate. Profits and losses are allocated to the Company based on its percentage interest. During 1992, the Company sold its investment in Merrill Lynch Interfunding, Inc., and Merlease Leasing Corp., to an affiliate at book value, resulting in a receivable from ML & Co. This receivable is reflected as a reduction to stockholder's equity. INVESTMENTS IN LEASES The Company is a lessor participant in leveraged leases. Pertinent information relating to the Company's investments in leveraged leases is summarized as follows: ESTIMATED LENGTH OF RESIDUAL VALUE LEASE EQUITY OF LEASED TYPE OF PROPERTY (YEARS) INVESTMENT PROPERTY - ----------------------------------- --------- ---------- -------------- Generating plant................... 24-25 34.06% 15.0% Financing beyond the Company's equity interest in the purchase price of the properties was furnished by outside parties in the form of long-term debt that provides for no recourse against the Company and is secured by a first lien on the properties and related rentals. At the end of the respective lease terms, ownership of the properties remains with the Company. F-45 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 INVESTMENTS IN LEASES--(CONTINUED) The Company's net investment in leveraged leases is summarized as follows: Rentals receivable (net of principal and interest on nonrecourse debt)......................................... $ 66,075,030 Estimated residual values of leased assets.................. 18,964,143 Less: Unearned and deferred income.............................. (26,617,505) Allowance for uncollectables.............................. (990,000) ------------ Investment in leveraged leases.............................. 57,431,668 Less deferred taxes arising from leveraged leases........... (52,938,886) ------------ Net investment in leveraged leases.......................... $ 4,492,782 ------------ ------------ During 1993, the Company sold its equity interest in the chemical tanker previously accounted for as a leveraged lease. The sale resulted in an after-tax gain of $112,000. The Company's investment in the sales-type leases consisted of the following elements at December 31, 1993. Minimum lease payments receivable.............................. $3,672,000 Less: Unearned income.............................................. (59,479) Allowance for uncollectibles................................. (250,000) ---------- Investment in sales-type leases................................ $3,362,521 ---------- ---------- At December 31, 1993 minimum lease payments receivable are $3,672,000 for 1994. For Federal income tax purposes, the Company receives the investment tax credit and has the benefit of tax deductions for (i) depreciation on the entire amount of leased assets and (ii) interest on the outstanding long-term debt. For state and local tax purposes, the Company also receives the benefits of tax deductions from (i) and (ii) above. Since, during the early years of the leases, those deductions exceed the Company's lease rental income, substantial excess deductions are available to be applied against the Company's other income and the consolidated income of ML & Co. In the later years of these leases, rental income will exceed the related deductions and taxes will be payable (to the extent that net deductions arising from additional leveraged lease transactions do not offset such net lease income). Deferred taxes have been provided to reflect these temporary differences. F-46 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 INVESTMENTS IN LEASES--(CONTINUED) INCOME TAXES As part of the consolidated group, the Company transfers its current Federal and state tax liabilities to MLIM. No such amounts were due to MLIM at December 31, 1993. PENSION PLAN The Company participates in the ML & Co. Comprehensive Retirement Program (the "Program") consisting of the Retirement Accumulation Plan ("RAP") and the Employee Stock Ownership Plan (the "ESOP"). Under the program, cash contributions made by the Company and the ML & Co. stock held by the ESOP will be allocated quarterly to participants' accounts. Allocations will be based on years of service, age and eligible compensation. Actuarial data regarding the Company's Plan participants is not separately available. NAME CHANGE Effective December 28, 1991, the Company's Parent, through an amendment of its certificate of incorporation, changed its name to Merrill Lynch Investment Management, Inc. ("MLIM"). MLIM does business under the name "Merrill Lynch Asset Management." SUBSEQUENT EVENT Effective January 1, 1994, Fund Asset Management, Inc. contributed certain net investment advisory assets to Fund Management Asset, L.P., a newly formed Delaware limited partnership, in exchange for a 49.5% limited partnership interest. The general partner, Princeton Services, Inc. (a wholly-owned subsidiary of Merrill Lynch & Co., Inc.) contributed 1% of the value of the net investment advisory assets in exchange for its 1% general partnership interest. The partnership's profits and losses are to be allocated in proportion to the capital contributions of the partners. F-47 APPENDIX I AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of the 17th day of November, 1994, by and between MuniBond Income Fund, Inc., a Maryland corporation ("MuniBond"), and MuniAssets Fund, Inc., a Maryland corporation ("MuniAssets"). PLAN OF REORGANIZATION The reorganization will comprise the acquisition by MuniAssets of substantially all of the assets, and the assumption of all of the liabilities, of MuniBond in exchange solely for an equal aggregate value of MuniAssets's shares of common stock, with a par value of $0.10 per share ("MuniAssets Common Stock"), and the subsequent distribution to MuniBond stockholders in liquidation of MuniBond of all of the MuniAssets Common Stock received in exchange for their corresponding shares of common stock of MuniBond, with a par value of $0.10 per share ("MuniBond Common Stock"), upon and subject to the terms hereinafter set forth (the "Reorganization"). In the course of the Reorganization, MuniAssets Common Stock will be distributed to MuniBond stockholders as follows: each holder of MuniBond Common Stock will be entitled to receive the number of shares of MuniAssets Common Stock to be received by MuniBond equal to the aggregate net asset value of the MuniBond Common Stock owned by such stockholder on the Exchange Date (as defined in Section 7 of this Agreement). In consideration therefor, on the Exchange Date MuniAssets shall assume all of MuniBond's obligations and liabilities then existing, whether absolute, accrued, contingent or otherwise. It is intended that the Reorganization described in this Plan shall be a reorganization within the meaning of Section 368(a) (l) (D) of the Internal Revenue Code of 1986, as amended (the "Code"), and any successor provision. As promptly as practicable after the liquidation of MuniBond pursuant to the Reorganization, MuniBond 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 premises and the covenants and agreements hereinafter set forth, and intending to be legally bound, MuniBond and MuniAssets hereby agree as follows: 1. Representations and Warranties of MuniBond. MuniBond represents and warrants to, and agrees with, MuniAssets that: (a) MuniBond 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 I-1 carry out this Agreement. MuniBond 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) MuniBond is duly registered under the 1940 Act as a non-diversified, closed-end management investment company (File No. 811-07081), and such registration has not been revoked or rescinded and is in full force and effect. MuniBond has elected to qualify and has qualified as a regulated investment company under Sections 851-855 of the Code as of its taxable year ended May 31, 1994, has been a regulated investment company at all times since its inception and meets the requirements for and intends to continue to qualify as a regulated investment company for its taxable year ending upon the liquidation of MuniBond. (c) As used in this Agreement, the term "Investments" shall mean (i) the investments of MuniBond shown on the schedule of its investments as of the Valuation Time (as defined in Section 3(c) of this Agreement) furnished to MuniAssets, with such additions thereto and deletions therefrom as may have arisen in the course of MuniBond's business up to the Valuation Time; and (ii) all other assets owned by MuniBond or liabilities incurred as of the Valuation Time, except that MuniBond shall retain cash, bank deposits or cash equivalent securities in an estimated amount necessary to (1) discharge its unpaid liabilities on its books at the Valuation Time (including, but not limited to, its income dividends and capital gains distributions, if any, payable for the period prior to the Valuation Time), and (2) pay such contingent and other liabilities as the Directors of MuniBond reasonably shall deem to exist against the Fund, if any, at the Valuation Time, for which contingent and other appropriate liability reserves shall be established on MuniBond's books. MuniBond also shall retain any and all rights which it may have over and against any other person which may have accrued up to the Valuation Time. Any unexpended portion of the foregoing funds so retained by MuniBond shall be disbursed by MuniBond pro rata to its stockholders upon dissolution of the Fund as a final liquidating dividend. (d) MuniBond 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) MuniAssets has been furnished with a statement of assets, liabilities and capital and a schedule of investments of MuniBond, each as of May 31, 1994, said financial statements having been audited by Deloitte & Touche LLP, independent public accountants. An unaudited statement of assets, liabilities and capital of MuniBond and an unaudited schedule of investments of MuniBond, each as of the Valuation Time, will be furnished to MuniAssets at or prior to the Exchange Date for the purpose of determining the number of shares of MuniAssets Common Stock to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial position of MuniBond as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis. I-2 (f) MuniAssets has been furnished with (i) the prospectus of MuniBond, dated October 22, 1993, relating to the MuniBond Common Stock (the "MuniBond Common Stock Prospectus") and said prospectus does 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. (g) There are no material legal, administrative or other proceedings pending or, to the knowledge of MuniBond, threatened against MuniBond which assert liability on the part of MuniBond or which materially affect its financial condition or its ability to consummate the Reorganization. MuniBond 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) There are no material contracts outstanding to which MuniBond is a party that have not been disclosed in the N-14 Registration Statement (as defined in subsection (o) below) or will not otherwise be disclosed to MuniAssets prior to the Valuation Time. (i) MuniBond is not a party to or obligated under any provision of its Articles of Incorporation, as amended, or its by-laws, as amended, or 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. (j) MuniBond 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 May 31, 1994 and those incurred in connection with the Reorganization. As of the Valuation Time, MuniBond will advise MuniAssets 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) MuniBond 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 Exchange Date occurs. All tax liabilities of MuniBond have adequately been provided for on its books, and no tax deficiency or liability of MuniBond 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 Exchange Date occurs. (l) At both the Valuation Time and the Exchange Date, MuniBond will have full right, power and authority to sell, assign, transfer and deliver the Investments. At the Exchange Date, subject only to the delivery of the Investments as contemplated by this Agreement, MuniBond will have good and marketable title to all of the Investments, and MuniAssets will acquire all of the 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 Investments or materially affect title thereto). I-3 (m) No registration under the Securities Act of 1933, as amended (the "1933 Act"), of any of the Investments would be required if they were, as of the time of such transfer, the subject of a public distribution by MuniAssets. (n) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by MuniBond of the Reorganization, except such as may be required under 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). (o) The registration statement filed by MuniAssets on Form N-14 relating to the MuniAssets Common Stock to be issued pursuant to this Agreement, and any supplement or amendment thereto or to the documents therein (as amended, the "N-14 Registration Statement"), on the effective date of the N-14 Registration Statement, at the time of the stockholders' meetings referred to in Section 6(a) of this Agreement and on the Exchange Date, insofar as it relates to MuniBond (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 prospectus and statement of additional information 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 MuniBond for use in the N-14 Registration Statement as provided in Section 7 of this Agreement. (p) MuniBond is authorized to issue 200,000,000 shares of capital stock, par value $0.10 per share, each outstanding share of which is fully paid, nonassessable and has full voting rights. (q) All of the issued and outstanding shares of MuniBond Common Stock were offered for sale and sold in conformity with all applicable Federal and state securities laws. (r) The books and records of MuniBond made available to MuniAssets and/or its counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of MuniBond. (s) MuniBond will not sell or otherwise dispose of any of the shares of MuniAssets to be received in the Reorganization, except in distribution to the stockholders of MuniBond. 2. Representations and Warranties of MuniAssets. MuniAssets represents and warrants to, and agrees with, MuniBond that: (a) MuniAssets 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. MuniAssets 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. I-4 (b) MuniAssets is duly registered under the 1940 Act as a non-diversified, closed-end management investment company (File No. 811-7642), and such registration has not been revoked or rescinded and is in full force and effect. MuniAssets has elected to qualify and has qualified as a regulated investment company under Sections 851-855 of the Code as of its taxable year ending May 31, 1994, and has been a regulated investment company at all times since its inception. (c) MuniBond has been furnished with a statement of assets, liabilities and capital and a schedule of investments of MuniAssets, each as of May 31, 1994, said financial statements having been examined by Deloitte & Touche LLP, independent public accountants. An unaudited statement of assets, liabilities and capital of MuniAssets and an unaudited schedule of investments of MuniAssets, each as of the Valuation Time, will be furnished to MuniBond at or prior to the Exchange Date for the purpose of determining the number of shares of MuniAssets Common Stock to be issued pursuant to Section 4 of this Agreement; each will fairly present the financial position of MuniAssets as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis. (d) MuniBond has been furnished with (i) the prospectus of MuniAssets, dated June 18, 1993, relating to the MuniAssets Common Stock (the "MuniAssets Common Stock Prospectus") and said prospectus does 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. (e) MuniAssets 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. (f) There are no material legal, administrative or other proceedings pending or, to the knowledge of MuniAssets, threatened against MuniAssets which assert liability on the part of MuniAssets or which materially affect its financial condition or its ability to consummate the Reorganization. MuniAssets 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. (g) MuniAssets is not a party to or obligated under any provision of its Articles of Incorporation, as amended, or its by-laws, as amended, or 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. (h) There are no material contracts outstanding to which MuniAssets is a party that have not been disclosed in the N-14 Registration Statement or will not otherwise be disclosed to MuniBond prior to the Valuation Time. (i) MuniAssets has no known liabilities of a material amount, contingent or otherwise, other than those shown on MuniAssets's statements of assets, liabilities and capital referred to above, I-5 those incurred in the ordinary course of its business as an investment company since May 31, 1994 and those incurred in connection with the Reorganization. As of the Valuation Time, MuniAssets will advise MuniBond 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. (j) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by MuniAssets of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act or state securities laws. (k) The N-14 Registration Statement, on its effective date, at the time of the stockholders' meetings referred to in Section 6(a) of this Agreement and at the Exchange Date, insofar as it relates to MuniAssets (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 prospectus and statement of additional information 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 MuniAssets for use in the N-14 Registration Statement as provided in Section 7 of this Agreement. (l) MuniAssets is authorized to issue 200,000,000 shares of capital stock, par value $0.10 per share, each outstanding share of which is fully paid, nonassessable and has full voting rights. (m) The MuniAssets Common Stock to be issued to MuniBond 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 MuniAssets will have any preemptive right of subscription or purchase in respect thereof. (n) At or prior to the Exchange Date, the MuniAssets Common Stock to be transferred to MuniBond on the Exchange Date will be duly qualified for offering to the public in all states of the United States in which the sale of shares of MuniAssets presently are qualified, and there are a sufficient number of such shares registered under the 1933 Act and with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated. (o) At or prior to the Exchange Date, MuniAssets will have obtained any and all regulatory, Director and stockholder approvals necessary to issue the MuniAssets Common Stock to MuniBond. 3. The Reorganization. (a) Subject to the requisite approvals of the stockholders of each of MuniBond and MuniAssets being given, and to the other terms and conditions contained herein, MuniBond agrees to convey, transfer and deliver to MuniAssets for the benefit of MuniAssets, and MuniAssets agrees to acquire from MuniBond for the benefit of MuniAssets, on the Exchange Date all of the Investments (including interest accrued as of the Valuation Time on debt instruments) of I-6 MuniBond, and assume all of the liabilities of MuniBond, in exchange solely for that number of shares of MuniAssets Common Stock provided in Section 4 of this Agreement. Pursuant to this Agreement, as soon as practicable MuniBond will distribute all MuniAssets Common Stock received by it to its stockholders in exchange for their corresponding MuniBond Common Stock. Such distribution shall be accomplished by the opening of stockholder accounts on the stock ledger records of MuniAssets in the amounts due the stockholders of MuniBond based on their respective holdings in MuniBond as of the Valuation Time. (b) MuniBond will pay or cause to be paid any interest it receives on or after the Exchange Date with respect to the Investments transferred to MuniAssets hereunder. (c) The Valuation Time shall be 4:00 P.M., New York time, on December 19, 1994, or such earlier or later day and time as mutually may be agreed upon in writing (the "Valuation Time"). (d) MuniAssets will acquire substantially all of the assets of, and assume all of the known liabilities of, MuniBond, except that recourse for such liabilities will be limited to MuniAssets. The known liabilities of MuniBond as of the Valuation Time shall be confirmed in writing to MuniAssets by MuniBond pursuant to Section 1(k) of this Agreement. 4. Issuance and Valuation of MuniAssets Common Stock in the Reorganization. Full shares of MuniAssets Common Stock 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 MuniBond acquired determined as hereinafter provided, reduced by the amount of liabilities assumed by MuniAssets, shall be issued by MuniAssets in exchange for such assets of MuniBond. The assets of MuniBond and MuniAssets shall be determined in accordance with the procedures described in the MuniAssets Common Stock Prospectus as of the Valuation Time, and no formula will be used to adjust the net asset value so determined of either MuniBond or MuniAssets 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 Investments of MuniBond to be transferred to MuniAssets shall be determined by MuniAssets pursuant to the procedures utilized by MuniAssets in valuing its own assets and determining its own liabilities for purposes of the Reorganization. Such valuation and determination shall be made by MuniAssets in cooperation with MuniBond and shall be confirmed in writing to MuniAssets by MuniBond. The net asset value per share of the MuniAssets Common Stock shall be determined in accordance with such procedures and MuniAssets shall certify the computations involved. MuniAssets shall issue to MuniBond separate certificates or share deposit receipts for the MuniAssets Common Stock registered in the name of MuniBond. MuniBond then shall distribute the MuniAssets Common Stock to its corresponding stockholders of MuniBond Common Stock by redelivering the certificates or share deposit receipts evidencing ownership of the MuniAssets Common Stock to The Bank of New York, as the transfer agent and registrar for the MuniAssets Common Stock. With respect to any MuniBond stockholder holding certificates evidencing ownership of the MuniBond Common Stock as of the Exchange Date, and subject to MuniAssets being informed thereof in writing by MuniBond, MuniAssets will not permit such stockholder to receive new certificates evidencing ownership of the MuniAssets Common Stock, exchange MuniAssets Common Stock credited to such stockholder's account for shares of other investment companies managed by Merrill Lynch Asset Management, L.P. or any of its affiliates, or pledge or redeem such MuniAssets Common Stock, in any case, until notified I-7 by MuniBond or its agent that such stockholder has surrendered his or her outstanding certificates evidencing ownership of the MuniBond Common Stock or, in the event of lost certificates, posted adequate bond. MuniBond, at its own expense, will request its stockholders to surrender their outstanding certificates evidencing ownership of the MuniBond Common Stock, as the case may be, or post adequate bond therefor. 5. Payment of Expenses. (a) With respect to expenses incurred in connection with the Reorganization, MuniAssets shall pay, subsequent to the Exchange Date, all expenses incurred in connection with the Reorganization, including, but not limited to, all costs related to the preparation and distribution of the N-14 Registration Statement and the fees of special counsel to the Reorganization. Such fees and expenses shall include legal, accounting and state securities or blue sky fees, printing costs, filing fees, stock exchange fees, portfolio transfer taxes (if any), and any similar expenses incurred in connection with the Reorganization. Neither MuniBond nor MuniAssets shall pay any expenses of its respective stockholders arising out of or in connection with the Reorganization. (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 MuniBond and MuniAssets. (a) MuniBond and MuniAssets each agrees to call a meeting of its respective 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. As a condition to the obligations of each of the parties hereto, the holders of (i) more than fifty percent of the shares of MuniBond Common Stock, and (ii) more than fifty percent of the MuniAssets Common Stock in each case issued and outstanding and entitled to vote thereon, shall have approved this Agreement at such a meeting at or prior to the Valuation Time. (b) MuniBond and MuniAssets each covenants to operate its respective business as presently conducted between the date hereof and the Exchange Date. (c) MuniBond agrees that following the consummation of the Reorganization, it will liquidate and dissolve in accordance with the laws of the State of Maryland and any other applicable law, it will not make any distributions of any MuniAssets Common Stock other than to the stockholders of MuniBond and without first paying or adequately providing for the payment of all of MuniBond's liabilities not assumed by MuniAssets, if any, and on and after the Exchange Date it shall not conduct any business except in connection with its liquidation and dissolution. (d) MuniBond 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 MuniBond has ceased to be a registered investment company. (e) MuniBond and MuniAssets jointly will file the N-14 Registration Statement with the Securities and Exchange Commission (the "Commission") and will use their best efforts to provide that the N-14 Registration Statement becomes effective as promptly as practicable. MuniBond and MuniAssets agree to cooperate fully with each 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, 1934 Act, the 1940 Act, and the rules and regulations thereunder and the state securities or blue sky laws. I-8 (f) MuniAssets agrees to advise MuniBond promptly in writing if at any time prior to the Exchange Date the assets of MuniBond include any assets which MuniAssets is not permitted, or reasonably believes to be unsuitable for it, to acquire, including without limitation any security which, prior to its acquisition by MuniBond, MuniAssets has informed MuniBond is unsuitable for MuniAssets to acquire. Moreover, MuniAssets has no plan or intention to sell or otherwise dispose of the assets of MuniBond to be acquired in the Reorganization, except for dispositions made in the ordinary course of business. (g) MuniBond and MuniAssets each agrees that by the Exchange 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. MuniAssets agrees to retain for a period of ten years following the Exchange Date all returns, schedules and work papers and all material records or other documents relating to tax matters of MuniBond for its taxable period first ending after the Exchange 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 Exchange Date, MuniBond shall prepare, or cause it agents to prepare, any Federal, state or local tax returns, including any Forms 1099, required to be filed by MuniBond with respect to MuniBond's 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 MuniBond (other than for payment of taxes) in connection with the preparation and filing of said tax returns and Forms 1099 after the Exchange Date shall be borne by MuniBond to the extent such expenses have been accrued by MuniBond in the ordinary course without regard to the Reorganization; any excess expenses shall be borne by Fund Asset Management, L.P. ("FAM") at the time such tax returns and Forms 1099 are prepared. (h) MuniBond and MuniAssets each agrees to mail to each of its respective stockholders of record entitled to vote at the meeting of 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, MuniAssets expects to stay in existence and continue its business as a closed-end management investment company registered under the 1940 Act. I-9 7. Exchange Date. (a) Delivery of the assets of MuniBond to be transferred, together with any other Investments, and the MuniAssets Common Stock to be issued, shall be made at the offices of Rogers & Wells, 200 Park Avenue, New York, New York 10166, at 10:00 A.M. on the next full business day following the Valuation Time, or at such other place, time and date agreed to by MuniBond and MuniAssets, the date and time upon which such delivery is to take place being referred to herein as the "Exchange Date". To the extent that any Investments, for any reason, are not transferable on the Exchange Date, MuniBond shall cause such Investments to be transferred to MuniAssets's account with The Bank of New York at the earliest practicable date thereafter. (b) MuniBond will deliver to MuniAssets on the Exchange Date confirmations or other adequate evidence as to the tax basis of each of the Investments delivered to MuniAssets hereunder, certified by Deloitte & Touche LLP. (c) MuniAssets shall have made prior arrangements for the delivery on the Exchange Date of the Investments to The Bank of New York as the custodian for MuniAssets. (d) As soon as practicable after the close of business on the Exchange Date, MuniBond shall deliver to MuniAssets a list of the names and addresses of all of the stockholders of record of MuniBond on the Exchange Date and the number of shares of MuniBond Common Stock owned by each such stockholder, certified by its transfer agent for the MuniBond Common Stock, as applicable or by its President to the best of their knowledge and belief. 8. MuniBond Conditions. The obligations of MuniBond 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 the holders of more than fifty percent of the MuniAssets Common Stock, issued and outstanding and entitled to vote thereon; and that MuniAssets shall have delivered to MuniBond a copy of the resolution approving this Agreement adopted by MuniAssets's Board of Directors, certified by the Secretary of MuniAssets. (b) That MuniAssets shall have furnished to MuniBond a statement of MuniAssets's assets, liabilities and capital, with values determined as provided in Section 4 of this Agreement, together with a schedule of its investments, all as of the Valuation Time, certified on MuniAssets's behalf by its President (or any Vice President) and its Treasurer, and a certificate signed by MuniAssets's President (or any Vice President) and its Treasurer, dated as of the Exchange Date, certifying that as of the Valuation Time and as of the Exchange Date there has been no material adverse change in the financial position of MuniAssets since May 31, 1994, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities. (c) That MuniAssets shall have furnished to MuniBond a certificate signed by MuniAssets's President (or any Vice President) and its Treasurer, dated as of the Exchange Date, certifying that all representations and warranties of MuniAssets made in this Agreement are true and correct in all material respects with the same effect as if made at and as of the Exchange Date, and that MuniAssets 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 date. I-10 (d) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement. (e) That MuniBond shall have received an opinion of Galland, Kharasch, Morse & Garfinkle, P.C., Maryland counsel to MuniAssets, in form satisfactory to MuniBond and dated the Exchange Date, to the effect that (i) MuniAssets is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland; (ii) the MuniAssets Common Stock to be delivered to MuniBond stockholders as provided for by this Agreement is duly authorized and, upon delivery, will be validly issued and outstanding and fully paid and nonassessable by MuniAssets, and no stockholder of MuniAssets has any preemptive right to subscription or purchase in respect thereof (pursuant to the Articles of Incorporation, as amended, or the by-laws of MuniAssets or, to the best of such counsel's knowledge, otherwise); (iii) this Agreement has been duly authorized, executed and delivered by MuniAssets, and represents 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; provided, that 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 did not, and the consummation of the Reorganization will not, violate the Articles of Incorporation, as amended, or the by-laws of MuniAssets; (v) no consent, approval, authorization or order of any Maryland court or governmental authority is required for the consummation by MuniAssets of the Reorganization, except such as have been obtained under Maryland law; and (vi) such opinion is solely for the benefit of MuniBond and its Directors and officers. (f) That MuniBond shall have received an opinion of Rogers & Wells, as counsel to MuniAssets, in form satisfactory to MuniBond and dated the Exchange Date, to the effect that (i) no consent, approval, authorization or order of any United States Federal court or governmental authority is required for the consummation by MuniBond and MuniAssets 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 such as may be required under state securities or blue sky laws; (ii) 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; (iii) 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; and (iv) such counsel do 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; (v) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate any material provision of any agreement (known to such counsel) to which I-11 MuniAssets is a party or by which MuniAssets is bound; (vi) MuniAssets, to the knowledge of such counsel, is not required to qualify to do business as a foreign corporation in any jurisdiction except as may be required by state securities or blue sky laws, and except where it has so qualified or the failure so to qualify would not have a material adverse effect on MuniAssets, or its stockholders; (vii) such counsel does not have actual knowledge of any material suit, action or legal or administrative proceeding pending or threatened against MuniAssets, the unfavorable outcome of which would materially and adversely affect MuniAssets; and (viii) all corporate actions required to be taken by MuniAssets to authorize this Agreement and to effect the Reorganization have been duly authorized by all necessary corporate actions on the part of MuniAssets. Such opinion also shall state that (x) 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 and statement of additional information 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 (y) such counsel do not express any opinion or belief as to the financial statements, other financial data, statistical data or information relating to MuniAssets contained or incorporated by reference in the N-14 Registration Statement. In giving the opinion set forth above, Rogers & Wells may state that it is relying on certificates of officers of MuniAssets with regard to matters of fact and certain certificates and written statements of governmental officials with respect to the good standing of MuniAssets and on the opinion of Galland, Kharasch, Morse & Garfinkle, P.C. as to matters of Maryland law. (g) That MuniBond shall have received either (a) a private letter ruling from the Internal Revenue Service or (b) an opinion of Rogers & Wells, to the effect that for Federal income tax purposes (i) the transfer of substantially all of the Investments of MuniBond to MuniAssets in exchange solely for MuniAssets Common Stock as provided in this Agreement will constitute a reorganization within the meaning of Section 368(a) (1) (D) of the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized to MuniBond as a result of the Reorganization; (iii) no gain or loss will be recognized to MuniAssets 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 MuniBond on the distribution to them by MuniBond of MuniAssets Common Stock in exchange for their corresponding MuniBond Common Stock, and in accordance with Section 356(a) of the Code gain, if any, will be recognized with respect to any cash or property other than MuniAssets Common Stock received; (v) in accordance with Section 1032 of the Code, no gain or loss will be recognized by the stockholders of MuniAssets upon the issuance of MuniAssets Common Stock and the distribution of such MuniAssets Common Stock to MuniBond stockholders in the Reorganization; (vi) in accordance with Section 362(b) of the Code, the basis to MuniAssets of the Investments will be the same as the basis of the Investments in the hands of I-12 MuniBond immediately prior to the consummation of the Reorganization, except for any necessary adjustment on account of cash or property received; (vii) in accordance with Section 1223 of the Code, a stockholder's holding period for his MuniAssets Common Stock will be determined by including the period for which he or she held the MuniBond Common Stock exchanged therefor, provided that he or she held such MuniBond shares as a capital asset; (viii) in accordance with Section 1223 of the Code, MuniAssets's holding period with respect to the Investments will include the period for which such Investments were held by MuniBond; and (ix) no gain or loss will be recognized to MuniBond or its stockholders upon the liquidation of MuniBond in connection with the Reorganization. In addition, such opinion shall state that, without any independent investigation having been made with respect to the qualification of either MuniBond or MuniAssets as a regulated investment company under the Code and based upon certain representations by MuniBond and MuniAssets, the status of MuniBond and MuniAssets as regulated investment companies under Sections 851-855 of the Code will not be affected as a result of the Reorganization, except that upon the liquidation of MuniBond in connection with the Reorganization its regulated investment company status will terminate. (h) That all proceedings taken by MuniAssets and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to MuniBond. (i) 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 MuniAssets, contemplated by the Commission. (j) That MuniBond shall have received from Deloitte & Touche LLP a letter dated as of the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Exchange Date, in form and substance satisfactory to MuniBond, to the effect that (i) they are independent public accountants with respect to MuniAssets 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 MuniAssets 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 MuniBond 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 MuniAssets included in the N-14 Registration Statement, and inquiries of certain officials of MuniAssets 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 MuniBond I-13 and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to MuniAssets 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 MuniAssets or from schedules prepared by officials of MuniAssets having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom. (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, no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of MuniAssets or would prohibit the Reorganization. (j) That MuniBond shall have received from the Commission such orders or interpretations as Brown & Wood, as counsel to MuniBond, 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. MuniAssets Conditions. The obligations of MuniAssets 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 the holders of more than fifty percent of the MuniBond Common Stock issued and outstanding and entitled to vote thereon; and that MuniBond shall have delivered to MuniAssets a copy of the resolution approving this Agreement adopted by MuniBond's Board of Directors, certified by the Secretary of MuniBond. (b) That MuniBond shall have furnished to MuniAssets a statement of MuniBond's 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 MuniBond's behalf by its President (or any Vice President) and its Treasurer, and a certificate of both such officers, dated the Exchange Date, certifying that there has been no material adverse change in the financial position of MuniBond since May 31, 1994, other than changes in the Investments since that date or changes in the market value of the Investments. (c) That MuniBond shall have furnished to MuniAssets a certificate signed by MuniBond's President (or any Vice President) and its Treasurer, dated the Exchange Date, certifying that as of the Valuation Time and as of the Exchange Date all representations and warranties of MuniBond made in this Agreement are true and correct in all material respects as if made at and as of such date and MuniBond 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 MuniBond shall have delivered to MuniAssets a letter from Deloitte & Touche LLP, dated the Exchange Date, stating that such firm has performed a limited review of the Federal, I-14 state and local income tax returns of MuniBond for the period ended May 31, 1994 (which returns originally were prepared and filed by MuniBond), 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 MuniBond for the period covered thereby; and that for the period from May 31, 1994 to and including the Exchange Date 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 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 May 31, 1994 to and including the Exchange Date and for any taxable year of MuniBond ending upon the liquidation of MuniBond or that MuniBond would not continue to qualify as a regulated investment company for Federal income tax purposes. (e) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement. (f) That MuniAssets shall have received an opinion of Galland, Kharasch, Morse & Garfinkle, P.C., Maryland counsel to MuniBond, in form satisfactory to MuniAssets and dated the Exchange Date, to the effect that (i) MuniBond is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland; (ii) this Agreement has been duly authorized, executed and delivered by MuniBond, and represents 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, provided, that such counsel shall express no opinion with respect to the application of equitable principles in any proceeding, whether at law or in equity; (iii) MuniBond 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, MuniBond will have duly transferred such assets and liabilities in accordance with this Agreement; (iv) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate the Articles of Incorporation, as amended, or the by-laws of MuniBond; (v) no consent, approval, authorization or order of any Maryland court or governmental authority is required for the consummation by MuniBond of the Reorganization, except such as have been obtained under Maryland law; and (vi) such opinion is solely for the benefit of MuniAssets and its Directors and officers. (g) That MuniAssets shall have received an opinion of Brown & Wood, as counsel to MuniBond, in form satisfactory to MuniAssets and dated the Exchange Date, with respect to the matters specified in Section 8 (f) of this Agreement and such other matters as MuniAssets reasonably may deem necessary or desirable. (h) That MuniAssets shall have received a private letter ruling from the Internal Revenue Service or opinion of Rogers & Wells with respect to the matters specified in Section 8(g) of this Agreement. I-15 (i) That MuniAssets shall have received from Deloitte & Touche LLP a letter dated as of the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Exchange Date, in form and substance satisfactory to MuniAssets, to the effect that (i) they are independent public accountants with respect to MuniBond 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 MuniBond 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 MuniAssets 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 MuniBond included in the N-14 Registration Statement, and inquiries of certain officials of MuniBond 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 MuniAssets and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to MuniBond 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 MuniBond or from schedules prepared by officials of MuniBond having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom. (j) That the Investments to be transferred to MuniAssets shall not include any assets or liabilities which MuniAssets, by reason of charter limitations or otherwise, may not properly acquire or assume. (k) 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 MuniBond, contemplated by the Commission. (l) 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, no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of MuniBond or would prohibit the Reorganization. (m) That MuniAssets shall have received from the Commission such orders or interpretations as Rogers & Wells, as counsel to MuniAssets, deems reasonably necessary or desirable under the I-16 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. (n) That all proceedings taken by MuniBond and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to MuniAssets. (o) That prior to the Exchange Date, MuniBond shall have declared a dividend or dividends which, together with all previous such dividends, shall have the effect of distributing to its stockholders all of its net investment company taxable income for the period from November 1, 1993 to and including the Exchange Date, if any (computed without regard to any deduction or dividends paid), and all of its net capital gain, if any, realized for the period from November 1, 1993 to and including the Exchange Date. 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 each of MuniBond and MuniAssets) prior to the Exchange Date, or the Exchange Date may be postponed, (i) by mutual written consent of the Boards of Directors of MuniBond and MuniAssets; (ii) by the Board of Directors of MuniBond if any condition of MuniBond'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 MuniAssets if any condition of MuniAssets'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 December 31, 1994, this Agreement automatically shall terminate on that date, unless a later date is mutually agreed to by the Boards of Directors of MuniBond and MuniAssets. (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 MuniBond or MuniAssets or persons who are their directors, trustees, officers, agents or stockholders in respect of this Agreement. (d) At any time prior to the Exchange Date, any of the terms or conditions of this Agreement may be waived by the Board of Directors of either MuniBond or MuniAssets, respectively (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 Board of Directors of both MuniBond and MuniAssets hereby delegate to FAM the ability to make non-material changes to the transaction if it deems it to be in the best interests of both MuniBond and MuniAssets 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 neither MuniBond nor MuniAssets nor any of their officers, directors or trustees, agents or stockholders shall have any liability with respect to such representations or warranties after the Exchange Date. This I-17 provision shall not protect any officer, director or trustee, agent or stockholder of MuniBond or MuniAssets against any liability to the entity for which that officer, director or trustee, agent or stockholder so acts or to its stockholders to which that officer, director or 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 Exchange Date and shall impose any terms or conditions which are determined by action of the Boards of Directors of MuniBond and MuniAssets 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 MuniBond and MuniAssets, unless such terms and conditions shall result in a change in the method of computing the number of shares of MuniAssets Common Stock to be issued to MuniBond in which event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the stockholders of MuniBond and MuniAssets prior to the meeting at which the Reorganization shall have been approved, this Agreement shall not be consummated and shall terminate unless MuniBond and MuniAssets promptly shall call special meetings of stockholders at which such conditions so imposed shall be submitted for approval. 11. Indemnification. (a) MuniBond hereby agrees to indemnify and hold MuniAssets harmless from all loss, liability and expense (including reasonable counsel fees and expenses in connection with the contest of any claim) which MuniAssets may incur or sustain by reason of the fact that (i) MuniAssets shall be required to pay any corporate obligation of MuniBond, whether consisting of tax deficiencies or otherwise, based upon a claim or claims against MuniBond which were omitted or not fairly reflected in the financial statements to be delivered to MuniAssets in connection with the Reorganization; (ii) any representations or warranties made by MuniBond in this Agreement should prove to be false or erroneous in any material respect; (iii) any covenant 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 MuniBond 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 insofar as such claim is based on written information furnished to MuniBond by MuniAssets. (b) MuniAssets hereby agrees to indemnify and hold MuniBond harmless from all loss, liability and expenses (including reasonable counsel fees and expenses in connection with the contest of any claim) which MuniBond may incur or sustain by reason of the fact that (i) any representations or warranties made in this Agreement should prove false or erroneous in any material respect, (ii) any covenant 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 the stockholders of MuniAssets 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 I-18 which they were made, not misleading, except insofar as such claim is based on written information furnished to MuniAssets by MuniBond. (c) In the event that any claim is made against MuniAssets in respect of which indemnity may be sought by MuniAssets from MuniBond under Section 11(a) of this Agreement, or in the event that any claim is made against MuniBond in respect of which indemnity may be sought by MuniBond from MuniAssets 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 calendar days following the earlier of (A) an agreement between MuniBond and MuniAssets 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), MuniAssets 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 MUNIASSETS FUND, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS PRICING 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 MuniAssets's transfer agent with respect to such shares. MuniBond will provide MuniAssets on the Exchange Date with the name of any MuniBond stockholder who is to the knowledge of MuniBond an affiliate of it on such date. I-19 (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 deemed to have been given if delivered or mailed, first class postage prepaid, addressed to MuniBond or MuniAssets, in either case at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Arthur Zeikel, 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, of MuniBond and MuniAssets are on file with the Department of Assessments and Taxation of the State of Maryland 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. MUNIBOND INCOME FUND, INC. By: Attest: MUNIASSETS FUND, INC. By: Attest: I-20 EXTENSION AGREEMENT THIS EXTENSION AGREEMENT (this "Agreement"), is made as of the 30th day of December, 1994 by and between MuniBond Income Fund, Inc., a Maryland corporation and MuniAssets Fund, Inc., (collectively, the "Funds"). RECITALS The Funds, have entered into an agreement and plan of reorganization dated as of November 17, 1994 (the "Plan of Reorganization"). In connection therewith, the Funds deem it necessary and advisable that the Plan of Reorganization be extended beyond December 31, 1994 pursuant to this Agreement. NOW, THEREFORE, the Funds hereby agree as follows: 1. The transactions contemplated by the Plan of Reorganization have not been fully consummated. 2. The Plan of Reorganization shall not automatically terminate, pursuant to its terms, on December 31, 1994. 3. If the transactions contemplated by the Plan of Reorganization have not been fully consummated by June 30, 1995, the Plan of Reorganization shall automatically terminate on that date, unless a later date is mutually agreed to by the Boards of Directors of the respective Funds. 4. The Valuation Time, as defined in Section 3(c) of the Plan of Reorganization, shall be 4:00 P.M., New York time, on March 10, 1995, or such earlier or later day and time as mutually may be agreed upon in writing. 5. This Agreement may be signed in counterparts, which together shall constitute one and the same instrument. 6. This Agreement shall be governed and construed in all respects in accordance with the laws of the State of New York. IN WITNESS WHEREOF, this Agreement has been executed as of the date and year first above written by the undersigned for themselves and for the Funds as set forth above. MUNIBOND INCOME FUND, INC. ...................................... By: Title: MUNIASSETS FUND, INC. ...................................... By: Title: I-21 APPENDIX II 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 payment 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 bonds 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. Rating Refinements: Moody's may apply numerical modifiers, l, 2 and 3 in each generic rating classification from Aa through B in its municipal bond rating system. The modifier 1 indicates that the II-1 security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Short-term Notes. The four ratings of Moody's for short-term notes are MIG-1, MIG-2, MIG-3, and MIG-4; MIG-1 denotes "best quality, enjoying strong protection by established cash flows"; MIG-2 denotes "high quality" with ample margins of protection; MIG-3 notes are of "favorable quality ... but lacking the undeniable strength of the preceding grades"; MIG-4 notes are of "adequate quality, carrying specific risk but having protection ... and not distinctly or predominantly speculative". 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 capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins in earning 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 capacity 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, will 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 capacity 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 the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. If an issuer represents to Moody's that its Commercial Paper obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within parentheses beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the indicated affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representations and gives no opinion on the legal validity or enforceability of any support arrangement. You are cautioned to review with your counsel any questions regarding particular support arrangements. II-2 DESCRIPTION OF STANDARD & POOR'S RATING GROUP'S ("STANDARD & POOR'S") MUNICIPAL DEBT RATINGS A Standard & Poor's municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, 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 other reasons. The ratings are based, in varying degrees, on the following considerations: I. Likelihood of default--capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; II. Nature of and provisions of the obligation; 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. Capacity to pay interest and repay principal is extremely strong. AA--Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest-rated issues only in small degree. A--Debt rated "A" has a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher-rated categories. Debt rated BB, B, CCC, CC and C are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. BB--Debt rated "BB" has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial or II-3 economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. B--Debt rated "B" has a greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. CCC--Debt rated "CCC" has a current identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC--The rating "CC" is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. C--The rating "C" is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed but debt service payments are continued. CI--The rating "CI" is reserved to income bonds on which no interest is being paid. D--Debt rated "D" is in default. The D rating category is also used when interest payments or principal repayments are expected to be in default at the payment date, and payment of interest and/or repayment of principal is in arrears. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood or risk of default upon failure of such completion. The investor should exercise judgment with respect to such likelihood and risk. L: The letter "L" indicates that the rating persons to the principal amount of those bonds to the extent that the underlying deposit collateral is insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance Corp. and interest is adequately collateralized. *: Continuance of the rating is contingent upon Standard & Poor's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows. II-4 NR: Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Debt Obligations of Issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties. BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations issued by the Comptroller of the Currency, bonds rated in the top four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade" ratings) are generally regarded as eligible for bank investment. In addition, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies and fiduciaries generally. 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 four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Ratings are applicable to both taxable and tax-exempt commercial paper. The three designations in the "A" category are as follows: A--Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designation 1, 2 and 3 to indicate the relative degree of safety. A-1--This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess extremely strong safety characteristics are denoted with a "+" designation. A-2--Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated "A-1". A-3--Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. The 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 and 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. II-5 Commencing on July 27, 1984, Standard & Poor's instituted a new rating category with respect to certain municipal note issues with a maturity of less than three years. The new note ratings and symbols are: SP-1 A very strong, or strong, capacity to pay principal and interest. Issues that possess overwhelming safety characteristics will be given a "+" designation. SP-2 A satisfactory capacity to pay principal and interest. SP-3 A speculative capacity to pay principal and interest. Standard & Poor's may continue to rate issues with a maturity greater than three years in accordance with the same rating scale currently employed for municipal bond ratings. Unrated: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue. Should no rating be assigned, the reason may be one of the following: 1. An application for rating was not received or accepted. 2. The issue or issuer belongs to a group of securities that are not rated as a matter of policy. 3. There is a lack of essential data pertaining to the issue or issuer. 4. The issue was privately placed, in which case the rating is not published in Standard & Poor's publications. Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date information to permit a judgment to be formed; if a bond is called for redemption; or for other reasons. DESCRIPTION OF FITCH INVESTORS SERVICE, 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 ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current condition and operating performance of the issuer and of any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. 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. 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. II-6 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. 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. Trend Indicator: Trend indicators show whether credit fundamentals are improving, stable, declining, or uncertain as follows: ^ Improving | Stable <--> Declining | v ^ Uncertain | v Trend indicators are not predictions that any rating change will occur. 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. Withdrawn. A rating may be withdrawn when an issue matures or is called or refinanced or, 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 12 months. Once Fitch completes its analysis of the event, appropriate rating action will be taken and the issue will be removed from FitchAlert. Ratings will also be placed on FitchAlert to notify investors of an upcoming event that is likely to result in a rating change (e.g., court or regulatory action that could result in material liability of an issuer or impair the enforceability of debt obligations). In these instances, FitchAlert will indicate the effect that various possible results might have on the rating. II-7 DESCRIPTION OF FITCH HIGH YIELD BOND RATINGS Fitch high yield bond ratings provide a guide to investors in determining the credit risk associated with a security. The rating is an assessment of the likelihood of timely payment of principal and interest in accordance with the terms of obligation for bond issues not in default. Bonds in default are rated "DDD", "DD", or "D". The rating takes into consideration special features of the issue, the 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. It should be noted that revenues that have the same 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 that 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, DD, and D Bonds are in actual or imminent default of interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of 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 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. Although the credit analysis is similar to Fitch's bond rating analysis, the investment grade short-term rating places greater emphasis than bond ratings on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. II-8 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 carrying 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 carrying this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial 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. INS The symbol "INS" indicates that the rating is based on an insurance policy or financial guaranty issued by an insurance company.
II-9 PART C--OTHER INFORMATION ITEM 15. INDEMNIFICATION Section 2-418 of the General Corporation Law of the State of Maryland, Article VI of the Acquiring Fund's Bylaws and the Investment Advisory Agreement provide for indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be provided to directors, officers and controlling persons of the Acquiring Fund, pursuant to the foregoing provisions or otherwise, the Acquiring Fund has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Acquiring Fund of expenses incurred or paid by a director, officer or controlling person of the Fund in the 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 Acquiring Fund 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 Act and will be governed by the final adjudication of such issue. Reference is made to Section 6 of the Purchase Agreement, a form of which is filed as Exhibit (7)(a) hereto, for provisions relating to the indemnification of the Underwriter. ITEM 16. EXHIBITS (1) (a) --Articles of Incorporation* (b) --Amendment to Articles of Incorporation** (2) --By-Laws*** (3) --Not applicable (4) (a) --Agreement and Plan of Reorganization**** (b) --Extension Agreement***** (5) --Specimen certificate for Common Stock, par value $.10 per share*** (6) --Form of Investment Advisory Agreement between the Fund and the Investment Adviser*** (7) (a) --Form of Purchase Agreement** (b) --Form of Merrill Lynch Standard Dealer Agreement** (8) --Not applicable (9) --Form of Custodian Agreement between the Fund and The Bank of New York*** (10) --Not applicable (11) (a) --Opinion and consent of Rogers & Wells**** (b) --Opinion and consent of Galland, Kharasch, Morse & Garfinkle, P.C.**** (12) --Not applicable (13) --Form of Transfer Agency and Service Agreement between the Fund and The Bank of New York*** (14) (a) --Consent of Deloitte & Touche LLP, independent accountants for MuniAssets Fund, Inc.***** (b) --Consent of Deloitte & Touche LLP, independent accountants for MuniBond Income Fund, Inc.***** (c) --Consent of Deloitte & Touch LLP, independent accountants for Fund Asset Management, Inc.***** (15) --Not applicable (16) --Not Applicable
(Footnotes on following page) C-1 (17) --Not Applicable (Footnotes for preceding page) - ------------ * Incorporated by reference to the Fund's Registration Statement on Form N-2 (File Nos. 33-61150; 811-7642) filed on April 16, 1993. ** Incorporated by reference to Pre-Effective Amendment No. 1 to the Fund's Registration Statement on Form N-2 (File Nos. 33-61150; 811-7642) filed on May 13, 1993. *** Incorporated by reference to Pre-Effective Amendment No. 2 to the Fund's Registration Statement on Form N-2 (File Nos. 33-61150; 811-7642) filed on June 18, 1993. **** Previously filed. ***** Filed herewith. ITEM 17. UNDERTAKINGS (a) Registrant undertakes to suspend offering of the shares of Common Stock covered hereby until it amends its Prospectus contained herein if (1) subsequent to the effective date of this Registration Statement, its net asset value per share of Common Stock declines more than 10 percent from its net asset value per share of Common Stock as of the effective date of this Registration Statement, or (2) its net asset value per share of Common Stock increases to an amount greater than its net proceeds as stated in the Prospectus contained herein. (b) Registrant undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. C-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 31st day of January, 1995. MUNIASSETS FUND, INC. By /s/ ARTHUR ZEIKEL ................................... (Arthur Zeikel, President) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS TO THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - -------------------------------------- ----------------------------- -------------------- /s/ ARTHUR ZEIKEL President and Director January 31, 1995 ...................................... (Principal Executive (Arthur Zeikel) Officer) * Director January 31, 1995 ...................................... (Joe Grills) * Director January 31, 1995 ...................................... (Walter Mintz) * Director January 31, 1995 ...................................... (Melvin R. Seiden) * Director January 31, 1995 ...................................... (Harry Woolf) * Director January 31, 1995 ...................................... (Stephen B. Swensrud) * Treasurer (Principal January 31, 1995 ...................................... Financing and (Gerald M. Richard) Accounting Officer) *By /s/ MARK B. GOLDFUS January 31, 1995 ........................... (Mark B. Goldfus, Attorney-in-fact)
C-3 EXHIBIT INDEX
EXHIBIT NUMBER PAGE NO. - ------- --------- 4(b) --Extension Agreement 14(a) --Consent of Deloitte & Touche LLP, independent accountants for MuniAssets Fund, Inc. (b) --Consent of Deloitte & Touche LLP, independent accountants for MuniBond Income Fund, Inc. (c) --Consent of Deloitte & Touche LLP, independent accountants for Fund Asset Management, Inc.
EX-4.(B) 2 EXHIBIT 4(B) EXTENSION AGREEMENT THIS EXTENSION AGREEMENT (this "Agreement"), is made as of the 30th day of December, 1994 by and between MuniBond Income Fund, Inc., a Maryland corporation and MuniAssets Fund, Inc., (collectively, the "Funds"). RECITALS The Funds, have entered into an agreement and plan of reorganization dated as of November 17, 1994 (the "Plan of Reorganization"). In connection therewith, the Funds deem it necessary and advisable that the Plan of Reorganization be extended beyond December 31, 1994 pursuant to this Agreement. NOW, THEREFORE, the Funds hereby agree as follows: 1. The transactions contemplated by the Plan of Reorganization have not been fully consummated. 2. The Plan of Reorganization shall not automatically terminate, pursuant to its terms, on December 31, 1994. 3. If the transactions contemplated by the Plan of Reorganization have not been fully consummated by June 30, 1995, the Plan of Reorganization shall automatically terminate on that date, unless a later date is mutually agreed to by the Boards of Directors of the respective Funds. 4. The Valuation Time, as defined in Section 3(c) of the Plan of Reorganization, shall be 4:00 P.M., New York time, on March 10, 1995, or such earlier or later day and time as mutually may be agreed upon in writing. 5. This Agreement may be signed in counterparts, which together shall constitute one and the same instrument. 6. This Agreement shall be governed and construed in all respects in accordance with the laws of the State of New York. IN WITNESS WHEREOF, this Agreement has been executed as of the date and year first above written by the undersigned for themselves and for the Funds as set forth above. MUNIBOND INCOME FUND, INC. ...................................... By: Title: MUNIASSETS FUND, INC. ...................................... By: Title: EX-14.(A) 3 EXHIBIT 14(A) INDEPENDENT AUDITOR'S CONSENT MUNIASSETS FUND, INC.: We consent to the use in this Registration Statement on Form N-14 of our report dated July 13, 1994 appearing in the Proxy Statement and Prospectus, which is a part of such Registration Statement, and to the reference to us under the caption "Experts" also appearing in such Proxy Statement and Prospectus. DELOITTE & TOUCHE LLP Princeton, New Jersey February 6, 1995 EX-14.(B) 4 EXHIBIT 14(B) INDEPENDENT AUDITOR'S CONSENT MUNIBOND INCOME FUND, INC.: We consent to the use in this Registration Statement on Form N-14 of our report dated July 13, 1994 appearing in the Proxy Statement and Prospectus, which is a part of such Registration Statement, and to the reference to us under the caption "Experts" also appearing in such Proxy Statement and Prospectus. DELOITTE & TOUCHE LLP Princeton, New Jersey February 6, 1995 EX-14.(C) 5 EXHIBIT 14(C) INDEPENDENT AUDITOR'S CONSENT FUND ASSET MANAGEMENT, INC.: We consent to the use in this Registration Statement on Form N-14 of our report dated February 28, 1994 appearing in the Proxy Statement and Prospectus, which is a part of such Registration Statement, and to the reference to us under the caption "Experts" also appearing in such Proxy Statement and Prospectus. DELOITTE & TOUCHE LLP Princeton, New Jersey February 6, 1995 -----END PRIVACY-ENHANCED MESSAGE-----